-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4sU+MePAoQh6oWjbnTORsdEkIx+WlufVDxHVe39kkojfpuhSs390IDtEi1VN12e GgqAO+yZjdf66eXY7T2Xhw== 0000012927-02-000007.txt : 20020507 0000012927-02-000007.hdr.sgml : 20020507 ACCESSION NUMBER: 0000012927-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOEING CO CENTRAL INDEX KEY: 0000012927 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] IRS NUMBER: 910425694 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00442 FILM NUMBER: 02637008 BUSINESS ADDRESS: STREET 1: P O BOX 3707 MS 1F 31 CITY: SEATTLE STATE: WA ZIP: 98124 BUSINESS PHONE: 2066552121 MAIL ADDRESS: STREET 1: 100 N RIVERSIDE PLZ CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: BOEING AIRPLANE CO DATE OF NAME CHANGE: 19730725 10-Q 1 b-q0302.txt 1Q 2002 10Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 1-442 ----- THE BOEING COMPANY ------------------ (Exact name of registrant as specified in its charter) Delaware 91-0425694 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 N. Riverside, Chicago, IL 60606-1596 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (312) 544-2000 -------------------------- (Registrant's telephone number, including area code) P.O. Box 3707, Seattle, WA 98124 ------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of April 30, 2002, there were 799,017,148 shares of common stock, $5.00 par value, issued and outstanding. 1 2 THE BOEING COMPANY FORM 10-Q For the Quarter Ended March 31, 2002 INDEX Part I. Financial Information Page Item 1. Financial Statements Statements of Operations 3 Statements of Financial Position 4 Statements of Cash Flows 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Part II. Other Information Item 1. Legal Proceedings 40 Item 4. Submission of Matters to a Vote of Security Holders 43 Item 6. Exhibits and Reports on Form 8-K 47 Signature 50 2 3 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) Three months ended March 31 - ------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------ Sales and other operating revenues $13,821 $13,293 Cost of products and services 11,571 11,070 - ------------------------------------------------------------------------------ 2,250 2,223 Equity in income from joint ventures 11 22 General and administrative expense 672 523 Research and development expense 459 422 Share-based plans expense 104 82 Special charges due to events of September 11, 2001 34 - ------------------------------------------------------------------------------ Earnings from operations 992 1,218 Other income, principally interest 12 235 Interest and debt expense (172) (148) - ------------------------------------------------------------------------------ Earnings before income taxes 832 1,305 Income taxes 254 69 - ------------------------------------------------------------------------------ Net earnings before cumulative effect of accounting change 578 1,236 Cumulative effect of accounting change, net of tax (1,827) 1 - ------------------------------------------------------------------------------ Net earnings (loss) $(1,249) $ 1,237 ============================================================================== Basic earnings per share before cumulative effect of accounting change $ 0.72 $1.48 Cumulative effect of accounting change, net of tax (2.28) - ------------------------------------------------------------------------------ Basic earnings (loss) per share $(1.56) $1.48 ============================================================================== Diluted earnings per share before cumulative effect of accounting change $ 0.72 $1.45 Cumulative effect of accounting change, net of tax (2.26) - ------------------------------------------------------------------------------ Diluted earnings (loss) per share $(1.54) $1.45 ============================================================================== Cash dividends paid per share $0.17 $0.17 ============================================================================== See notes to condensed consolidated financial statements. 3 4 THE BOEING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollars in millions except per share data) March 31 December 31 2002 2001 - ------------------------------------------------------------------------------ Assets (Unaudited) - ------------------------------------------------------------------------------ Cash and cash equivalents $ 643 $ 633 Accounts receivable 5,696 5,156 Current portion of customer and commercial financing 1,107 1,053 Deferred income taxes 2,543 2,444 Inventories, net of advances and progress billings 6,084 6,635 - ------------------------------------------------------------------------------ Total current assets 16,073 15,921 Customer and commercial financing 9,991 9,345 Property, plant and equipment, net 8,444 8,459 Goodwill 2,751 5,127 Other acquired intangibles, net 1,144 1,320 Prepaid pension expense 5,996 5,838 Other assets 2,152 2,048 - ------------------------------------------------------------------------------ $46,551 $48,058 ============================================================================== Liabilities and Shareholders' Equity - ------------------------------------------------------------------------------ Accounts payable and other liabilities $13,691 $13,872 Advances in excess of related costs 3,588 4,021 Income taxes payable 385 909 Short-term debt and current portion of long-term debt 1,551 1,399 - ------------------------------------------------------------------------------ Total current liabilities 19,215 20,201 Deferred income taxes 236 177 Accrued retiree health care 5,420 5,367 Deferred lease income 602 622 Long-term debt 11,325 10,866 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 2,421 1,975 Treasury shares, at cost - 173,164,773 and 174,289,720 (8,454) (8,509) Retained earnings 13,091 14,340 Accumulated other comprehensive income (446) (485) Unearned compensation (2) (3) ShareValue Trust shares - 39,832,429 and 39,691,015 (1,916) (1,552) - ------------------------------------------------------------------------------ Total shareholders' equity 9,753 10,825 - ------------------------------------------------------------------------------ $46,551 $48,058 ============================================================================== See notes to condensed consolidated financial statements. 4 5 THE BOEING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited) Three months ended March 31 - ------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------ Cash flows - operating activities: Net earnings (loss) $(1,249) $1,237 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Cumulative effect of accounting change, net 1,827 (1) Share-based plans 104 82 Depreciation 294 315 Amortization of intangibles and goodwill 28 69 Customer and commercial financing valuation provision 8 4 Changes in assets and liabilities - Accounts receivable (525) 404 Inventories, net of advances and progress billings 551 (1,227) Accounts payable and other liabilities (41) 343 Advances in excess of related costs (433) 426 Income taxes payable and deferred 104 (128) Deferred lease income (20) Prepaid pension expense (158) (249) Accrued retiree health care 53 53 Other (44) (238) - ------------------------------------------------------------------------------ Net cash provided by operating activities 499 1,090 - ------------------------------------------------------------------------------ Cash flows - investing activities: Customer financing and properties on lease, additions (1,064) (470) Customer financing and properties on lease, reductions 410 264 Property, plant and equipment, net additions (223) (240) Proceeds from dispositions 68 - ------------------------------------------------------------------------------ Net cash used by investing activities (877) (378) - ------------------------------------------------------------------------------ Cash flows - financing activities: New borrowings 740 850 Debt repayments (244) (770) Common shares purchased (131) Stock options exercised, other 34 29 Dividends paid (142) (148) - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities 388 (170) - ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 10 542 Cash and cash equivalents at beginning of year 633 1,010 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of 1st quarter $ 643 $1,552 ============================================================================== See notes to condensed consolidated financial statements. 5 6 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 Boeing Company and subsidiaries (the "Company") without audit. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the interim financial statements. Such adjustments are of a normal and recurring nature. The results of operations for the period ended March 31, 2002, 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 2001 Annual Report. Certain reclassifications have been made to prior periods to conform with current reporting. Note 2 - Accounting for the Impact of the September 11, 2001 Terrorist Attacks On September 11, 2001, the United States was the target of severe terrorist attacks that involved the use of U.S. commercial aircraft manufactured by the Company. These attacks resulted in a significant loss of life and property and caused major disruptions in business activities and in the U.S. economy overall. To address the widespread financial impact of the attacks, the Emerging Issues Task Force (EITF) released Issue No. 01-10, "Accounting for the Impact of Terrorist Attacks of September 11, 2001." This issue specifically prohibits treating costs and losses resulting from the events of September 11, 2001, as extraordinary items; however, it observes that any portion of these costs and losses deemed to be unusual or infrequently occurring should be presented as a separate line item in income from continuing operations. As of December 31, 2001, the Company completed an assessment of the impact due to events of September 11, 2001 and recorded liabilities totaling $542. Of this amount, $402 related to liabilities to be primarily settled in cash and the remaining $140 was recorded as asset impairments on used aircraft purchase contracts. During the first quarter of 2002, the Company identified and recorded a further charge of $34 attributable to the events of September 11, 2001. Of this charge, $12 was associated with guarantee commitments and $22 related to a further decrease in used airplane values. Three used airplanes on purchase contracts were returned from customers during the quarter, resulting in an inventory write-down and a reduction to the liability of $19. The Company will continue to assess other potential losses and costs it might incur in relation to the attacks. These future costs are not yet accruable; however, the Company expects that such costs may be incurred throughout 2002. Any costs or adjustments in estimates will continue to be recognized as a separate component of earnings from operations entitled 'Special charges due to events of September 11, 2001.' 6 7 Note 2 - Accounting for the Impact of the September 11, 2001 Terrorist Attacks (continued) Liabilities to be primarily settled in cash attributable to September 11, 2001 as of March 31, 2002 and December 31, 2001, were as follows: December 31 Change in March 31 2001 Payments Estimate 2002 - ------------------------------------------------------------------------------- Employee severance $285 $(73) $ - $212 Vendor penalties 68 (11) 57 Guarantees 49 12 61 - ------------------------------------------------------------------------------- $402 $(84) $12 $330 =============================================================================== Note 3 - Goodwill and Acquired Intangibles Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related operations that have goodwill assigned to them. The Company estimates the fair values of the related operations using discounted cash flows, subject to adjustments based upon the Company's market capitalization at the date of evaluation. If fair value is determined to be less than book value, a second step is performed to compute the amount of impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment. Upon adoption, goodwill and indefinite-lived intangible assets ceased being amortized, and were tested for impairment. Using the SFAS No. 142 approach described above, the Company recorded a transitional goodwill impairment charge of $2,410 ($1,827 net of tax), presented as a cumulative effect of accounting change. This charge relates to the Company's segments as follows: Space and Communications $1,586; Commercial Airplanes $430; and Other $394. The Other segment charge relates to Connexion by BoeingSM and Air Traffic Management. The transitional impairment charge resulted from application of the new impairment methodology introduced by SFAS No. 142. Previous accounting rules incorporated a comparison of book value to undiscounted cash flows, whereas new rules require a comparison of book value to discounted cash flows, which are lower. Under previous requirements, no goodwill impairment would have been recorded on January 1, 2002. 7 8 Note 3 - Goodwill and Acquired Intangibles (continued) The following tables reconcile net earnings (loss), basic earnings (loss) per share and diluted earnings (loss) per share adjusted for SFAS No. 142. Net earnings (loss): Quarter ended March 31, 2002 2001 - ------------------------------------------------------------------------------- Net earnings before cumulative effect of accounting change $ 578 $1,236 Add back: Goodwill and assembled workforce amortization, net of tax 36 Add back: Tradename amortization, net of tax 1 - ------------------------------------------------------------------------------- Adjusted net earnings before cumulative effect of accounting change 578 1,273 Cumulative effect of accounting change, net of tax (1,827) 1 - ------------------------------------------------------------------------------- Adjusted net earnings (loss) $(1,249) $1,274 =============================================================================== Basic earnings (loss) per share: Quarter ended March 31, 2002 2001 - ------------------------------------------------------------------------------- Basic earnings per share before cumulative effect of accounting change $ 0.72 $1.48 Add back: Goodwill and assembled workforce amortization, net of tax 0.04 - ------------------------------------------------------------------------------- Adjusted basic earnings per share before cumulative effect of accounting change 0.72 1.52 Cumulative effect of accounting change, net of tax (2.28) - ------------------------------------------------------------------------------- Adjusted basic earnings (loss) per share $(1.56) $1.52 =============================================================================== Diluted earnings (loss) per share: Quarter ended March 31, 2002 2001 - ------------------------------------------------------------------------------- Diluted earnings per share before cumulative effect of accounting change $ 0.72 $1.45 Add back: Goodwill and assembled workforce amortization, net of tax 0.04 - ------------------------------------------------------------------------------- Adjusted diluted earnings per share before cumulative effect of accounting change 0.72 1.49 Cumulative effect of accounting change, net of tax (2.26) - ------------------------------------------------------------------------------- Adjusted diluted earnings (loss) per share $(1.54) $1.49 =============================================================================== 8 9 Note 3 - Goodwill and Acquired Intangibles (continued) The balance of goodwill subsequent to the recognition of the transitional impairment charge discussed above was $2,751. Included in goodwill are certain claims submitted to Hughes for resolution as contractual purchase price contingencies relating to the acquisition of Hughes Electronics Corporation space and communications and related businesses in October 2000. The Company anticipates finalizing the Hughes purchase price allocation during 2002 or early 2003, at the conclusion of arbitration procedures related to these contingencies. As a result of the adoption of SFAS No. 142 and the transition provisions of SFAS No. 141, "Business Combinations," the Company has reclassified assembled workforce with goodwill, ceased amortization of goodwill and recorded an impairment loss. The changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2002, were as follows: Reclassifi- cation of December 31 Goodwill(1) Assembled Impairment March 31 2001 Adjustments Workforce Losses 2002 - ------------------------------------------------------------------------------- Space and Communications $3,264 $(115) $133 $(1,586) $1,696 Commercial Airplanes 1,032 (5) 21 (430) 618 Military Aircraft and Missile Systems 434 434 Other 397 (394) 3 - ------------------------------------------------------------------------------- Total(2) $5,127 $(120) $154 $(2,410) $2,751 =============================================================================== (1) The goodwill adjustments primarily represent post-acquisition adjustments of deferred tax assets established in purchase accounting relating to the Hughes acquisition. (2) Boeing Capital Corporation, one of the Company's reporting segments, did not have a goodwill balance as of March 31, 2002 and December 31, 2001. In conjunction with the adoption of SFAS No. 142, the Company reassessed the useful lives and the classification of its finite-lived acquired intangible assets and determined that no revisions were necessary. The gross carrying amount and accumulated amortization of the Company's acquired intangible assets as of March 31, 2002 and December 31, 2001 were as follows: March 31, 2002 December 31, 2001 --------------------- --------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization - ------------------------------------------------------------------------------- Developed technology $ 566 $ 90 $ 566 $ 75 Product know-how 308 15 308 13 Assembled workforce 172 18 Other 201 23 201 18 - ------------------------------------------------------------------------------- Total $1,075 $128 $1,247 $124 =============================================================================== 9 10 Note 3 - Goodwill and Acquired Intangibles (continued) Amortization expense for acquired intangible assets during the first quarter of 2002 was $22. Estimated amortization expense for the remainder of 2002 and the five succeeding years are as follows: Estimated Amortization Expense ------------ 2002 (remainder) $65 2003 $86 2004 $86 2005 $83 2006 $76 2007 $76 As of March 31, 2002 and December 31, 2001, the Company had one indefinite- lived intangible asset, a trademark, with a carrying amount of $197. Note 4 - Earnings per Share The weighted average number of shares outstanding (in millions) used to compute earnings per share are as follows: Three months ended March 31 - ------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------ Basic shares 798.5 835.1 Diluted shares 807.8 852.2 - ------------------------------------------------------------------------------ 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 and stock unit plans computed using the treasury stock method, plus contingently issuable shares from other share- based plans on an as-if converted basis. Note 5 - General and Administrative Expense The Company has issued 7,865,285 stock units as of March 31, 2002, that are convertible to either stock or a cash equivalent, of which 6,774,055 are vested, and the remainder vest with employee service. These stock units principally represent a method of deferring employee compensation by which a liability is established based upon the current stock price. An expense or reduction to expense is recognized associated with the change in that liability balance and is recorded in general and administrative expense. For the three months ended March 31, 2002 and 2001, general and administrative expense (reduction to expense) related to deferred stock compensation was $62 and $(55). 10 11 Note 6 - Income Taxes The effective tax rate of 30.5% for the first three months of 2002 differs from the federal statutory rate of 35% due primarily to Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion tax benefits, tax credits, and state income taxes. Income tax payments, net of refunds and settlements, were $137 and $4 for the three months ended March 31, 2002 and 2001. In December 1996, The Boeing Company filed suit in the U.S. District Court for the Western District of Washington for the refund of over $400 in federal income taxes and related interest. The suit challenged the Internal Revenue Service (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 for the years 1979 through 1987. In September 1998, the District Court granted the Company's motion for summary judgment. The U.S. Department of Justice appealed this decision. On August 2, 2001, the United States Court of Appeals for the Ninth Circuit reversed the District Court's summary judgment. The Company filed a petition for rehearing with the Ninth Circuit Court of Appeals and was denied such rehearing. The Company filed a petition for writ of certiorari with the United States Supreme Court and is awaiting the Court's decision on whether to grant hearing of this case before the Court. The Company has fully provided for any potential earnings impact that may result from this decision. If the Company were to prevail, the refund would include interest computed to the payment date. Note 7 - Accounts Receivable Accounts receivable consisted of the following: March 31 December 31 2002 2001 - ------------------------------------------------------------------------------- U.S. Government contracts $3,060 $2,597 Commercial Airplanes segment customers 750 679 Other 1,951 1,944 Less valuation allowance (65) (64) - ------------------------------------------------------------------------------- $5,696 $5,156 =============================================================================== 11 12 Note 8 - Inventories Inventories consisted of the following: March 31 December 31 2002 2001 - ------------------------------------------------------------------------------- Commercial aircraft programs $ 8,902 $ 10,138 Long-term contracts in progress 8,467 7,329 Commercial spare parts, used aircraft, general stock materials and other 2,546 2,629 - ------------------------------------------------------------------------------- 19,915 20,096 Less advances and progress billings (13,831) (13,461) - ------------------------------------------------------------------------------- $ 6,084 $ 6,635 =============================================================================== Inventory costs at March 31, 2002, included unamortized tooling of $770 and $277 relating to the 777 and Next Generation 737 programs, and excess deferred production costs of $823 and $182 relating to the 777 and Next Generation 737 programs. There were no significant deferred production costs or unamortized tooling associated with the 717 program. Used aircraft in inventory totaled $339 as of March 31, 2002. Note 9 - Property, Plant and Equipment Property, plant and equipment consisted of the following: March 31 December 31 2002 2001 - ------------------------------------------------------------------------------- Property, plant and equipment $ 20,958 $ 20,828 Less accumulated depreciation (12,514) (12,369) - ------------------------------------------------------------------------------- $ 8,444 $ 8,459 =============================================================================== 12 13 Note 10 - Customer and Commercial Financing Customer and commercial financing consisted of the following: March 31 December 31 2002 2001 - ------------------------------------------------------------------------------- Aircraft financing Notes receivable $ 1,932 $ 1,398 Investment in sales-type/financing leases 2,861 2,796 Operating lease equipment, at cost, less accumulated depreciation of $382 and $337 3,947 3,846 Commercial equipment financing Notes receivable 957 1,008 Investment in sales-type/financing leases 791 776 Operating lease equipment, at cost, less accumulated depreciation of $90 and $85 751 716 - ------------------------------------------------------------------------------- Less valuation allowance (141) (142) - ------------------------------------------------------------------------------- $11,098 $10,398 =============================================================================== The change in the valuation allowance for the first three months of 2002 consisted of the following: Valuation Allowance - ------------------------------------------------------------------------------- Beginning balance - December 31, 2001 $(142) Charged to costs and expenses (8) Reduction in customer and commercial financing assets 9 - ------------------------------------------------------------------------------- Ending balance - March 31, 2002 $(141) =============================================================================== Commercial equipment financing consists principally of executive aircraft, machine tools and production equipment, containers and marine equipment, chemical, oil and gas equipment, and other equipment that the Company expects will maintain strong collateral and residual values. Aircraft financing and commercial equipment financing operating lease equipment is recorded at cost and depreciated over its useful life to an estimated salvage value, primarily on a straight-line basis. Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral. The operating lease aircraft category includes new and used jet and commuter aircraft engines and spare parts. As of March 31, 2002 and December 31, 2001, the net book value of aircraft financing operating lease equipment held for lease totaled $546 and $513. 13 14 Note 11 - Investments Investments included in other assets consisted of the following: March 31, 2002 December 31, 2001 - ------------------------------------------------------------------------------- Gross Gross Esti- Gross Esti- Unreal- Unreal- mated Unreal- mated Amortized ized ized Fair Amortized ized Fair Cost Gain Loss Value Cost Loss Value - ------------------------------------------------------------------------------- Available-for-Sale Equity $ 22 $- $ 7 $ 15 $ 44 $24 $ 20 Debt 264 4 268 4 4 Held-to-Maturity Debt 163 77 86 158 74 84 - ------------------------------------------------------------------------------- $449 $4 $84 $369 $206 $98 $108 =============================================================================== Debt maturities at March 31, 2002, were as follows: Available-for-Sale Held-to-Maturity ------------------------ --------------------- Esimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------- Due in 1 year or less $ - $ - $ - $ - Due from 1 to 5 years 260 264 3 2 Due from 5 to 10 years Due after 10 years 4 4 160 84 - ------------------------------------------------------------------------------- $264 $268 $163 $86 =============================================================================== There were no gross unrealized gains as of December 31, 2001. As of March 31, 2002 and December 31, 2001, $20 of unrealized loss was recorded in accumulated other comprehensive income related to an investment that was previously classified as available-for-sale. At December 31, 2001, that investment was reclassified to held-to-maturity at its fair value. As of March 31, 2002, $24 of unrealized loss was reclassified from accumulated other comprehensive income to net earnings related to an available-for-sale investment that was revalued due to a business combination of the investee. Included in held-to-maturity investments carried at amortized cost as of March 31, 2002 and December 31, 2001, were $132 and $128 of Equipment Trust Certificates, of which $54 and $52 were Enhanced Equipment Trust Certificates. Included in available-for-sale investments as of March 31, 2002, were $263 of Enhanced Equipment Trust Certificates carried at estimated fair value. There were no Enhanced Equipment Trust Certificates classified as available-for-sale investments at December 31, 2001. 14 15 Note 11 - Investments (continued) The Company also held securities of $219 and $274 at March 31, 2002 and December 31, 2001, which were recorded at a cost basis that approximated the fair value of those investments. Note 12 - Accounts Payable and Other Liabilities Accounts payable and other liabilities consisted of the following: March 31 December 31 2002 2001 - ------------------------------------------------------------------------------- Accounts payable $ 5,006 $ 4,793 Accrued compensation and employee benefit costs 3,653 3,890 Lease and other deposits 538 354 Dividends payable 143 Other 4,494 4,692 - ------------------------------------------------------------------------------- $13,691 $13,872 =============================================================================== Accounts payable included $698 and $351 as of March 31, 2002 and December 31, 2001, attributable to checks written but not yet cleared by the bank. Other liabilities as of March 31, 2002, included $473 attributable to the special charges due to the events of September 11, 2001, as described in Note 2. Note 13 - Deferred Lease Income In 2001, the Company delivered four C-17 transport aircraft to the United Kingdom Royal Air Force (UKRAF), which were accounted for as operating leases. The lease term is seven years, at the end of which the UKRAF has the right to purchase the aircraft for a stipulated value, continue the lease for two additional years, or return the aircraft. Concurrent with the negotiation of this lease, the Company and the UKRAF arranged to assign the contractual lease payments to an independent financial institution. The Company received proceeds from the financial institution in consideration of the assignment of the future lease receivables from the UKRAF. The assignment of lease receivables is non-recourse to the Company. The initial proceeds represented the present value of the assigned total lease receivables discounted at a rate of 6.6%. As of March 31, 2002, the balance of $602 represents the present value of the remaining deferred lease income. 15 16 Note 14 - Debt Short- and long-term debt consisted of the following: March 31 December 31 2002 2001 - ------------------------------------------------------------------------------- Non-recourse debt and notes Enhanced equipment trust $ 593 $ 593 9.9% - 14.3% notes due through 2010 13 14 Unsecured debentures and notes $46, 7.565% due Mar. 30, 2002 46 46 $120, 9.25% due Apr. 1, 2002 120 120 $300, 6 3/4% due Sep. 15, 2002 300 300 $300, 6.35% due Jun. 15, 2003 300 300 $200, 7 7/8% due Feb. 15, 2005 204 204 $300, 6 5/8% due Jun. 1, 2005 296 295 $250, 6.875% due Nov. 1, 2006 249 249 $175, 8 1/10% due Nov. 15, 2006 175 175 $350, 9.75% due Apr. 1, 2012 348 348 $400, 8 3/4% due Aug. 15, 2021 398 398 $300, 7.95% due Aug. 15, 2024 300 300 $250, 7 1/4% due Jun. 15, 2025 247 247 $250, 8 3/4% due Sep. 15, 2031 248 248 $175, 8 5/8% due Nov. 15, 2031 173 173 $300, 6 5/8% due Feb. 15, 2038 300 300 $100, 7.50% due Aug. 15, 2042 100 100 $175, 7 7/8% due Apr. 15, 2043 173 173 $125, 6 7/8% due Oct. 15, 2043 125 125 Senior debt securities 2.1% - 7.4% due through 2012 4,836 4,782 Senior medium-term notes 2.1% - 7.6% due through 2017 2,339 2,109 Subordinated notes 4.3% - 8.3% due through 2012 24 24 Capital lease obligations due through 2021 453 460 Retail notes 6.0% due through 2009 21 Commercial paper 360 43 Other notes 135 139 - ------------------------------------------------------------------------------- $12,876 $12,265 =============================================================================== Of the debt balances reported above, $7,903 and $7,295 are attributed to Boeing Capital Corporation (BCC), a wholly owned subsidiary of the Company, for March 31, 2002 and December 31, 2001. The above table includes a note valued at $46 with a maturity date of March 30, 2002, which was paid by the Company on April 1, 2002, the first business day following the maturity date. 16 17 Note 14 - Debt (continued) The Company has $4,500 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 $174 and $158 for the three months ended March 31, 2002 and 2001. Interest payments were $240 and $192 for the same respective periods. On February 16, 2001, BCC filed with the Securities and Exchange Commission (SEC) a Form S-3 Registration Statement for a public shelf registration of $5,000 of debt securities. Effective October 31, 2001, $1,000 was allocated to BCC's Series XI medium-term note program. In March 2002, BCC issued $100 of fixed rate medium-term notes due 2004 at an interest rate of 4.13% and $296 of variable rate medium-term notes due through 2005. Subsequent to March 31, 2002, BCC issued $100 of variable rate medium-term notes due through 2005. After inception to date issuances, an aggregate amount of $1,288 remains available under this Registration Statement for potential debt issuance. On February 22, 2002, BCC filed with the SEC a Form S-3 Registration Statement for a public shelf registration of $5,000 of debt securities, which was declared effective on March 4, 2002. BCC allocated $1,000 to a new retail medium-term note program. In March 2002, BCC issued $21 of fixed rate notes due 2009 at an interest rate of 6.0%. Subsequent to March 31, 2002, BCC issued $91 of fixed rate notes due through 2017 at interest rates ranging from 5.7% to 6.8%. After the above issuances, the aggregate amount of $4,888 remains available under this Registration Statement for potential debt issuance. On May 24, 2001, American Airlines issued Enhanced Equipment Trust Certificates (EETC), and the Company through BCC received proceeds attributable to 32 MD-83 aircraft owned by BCC and on lease to American Airlines. The effective interest rates of these non-recourse borrowings range from 6.82% to 7.69%. Short-term debt and the current portion of long-term debt as of March 31, 2002, consisted of the following: $588 of senior debt securities, senior medium-term notes, subordinated notes, $360 of commercial paper, $469 of unsecured debentures and notes, $61 of capital lease obligations, $36 of non- recourse debt and notes, and $37 of other notes. 17 18 Note 15 - Shareholders' Equity Changes in shareholders' equity for the three month periods ended March 31, 2002 and 2001, consisted of the following: - ------------------------------------------------------------------------------- 2002 2001 (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 - March 31 1,011,870 $ 5,059 1,011,870 $ 5,059 =============================================================================== Additional paid-in capital Beginning balance - January 1 $ 1,975 $ 2,693 Share-based compensation 104 82 Treasury shares issued for stock plans, net (27) (20) Tax benefit related to stock plans 5 8 ShareValue Trust market value adjustment 364 (382) - ------------------------------------------------------------------------------- Ending balance - March 31 $ 2,421 $ 2,381 =============================================================================== Treasury stock Beginning balance - January 1 174,290 $(8,509) 136,385 $(6,221) Treasury shares issued for stock plans, net (1,125) 55 (1,004) 45 Treasury shares acquired 2,223 (131) - ------------------------------------------------------------------------------- Ending balance - March 31 173,165 $(8,454) 137,604 $(6,307) =============================================================================== Retained earnings Beginning balance - January 1 $14,340 $12,090 Net earnings (loss) (1,249) 1,237 - ------------------------------------------------------------------------------- Ending balance - March 31 $13,091 $13,327 =============================================================================== Accumulated other comprehensive income Beginning balance - January 1 $ (485) $ (2) Reclassification adjustment for loss realized in net earnings, net of tax 15 Gain (Loss) on derivative instruments, net of tax 20 (18) Foreign currency translation adjustment 4 (6) - ------------------------------------------------------------------------------- Ending balance - March 31 $ (446) $ (26) =============================================================================== Unearned compensation Beginning balance - January 1 $ (3) $ (7) Amortization and forfeitures 1 1 - ------------------------------------------------------------------------------- Ending balance - March 31 $ (2) $ (6) =============================================================================== ShareValue Trust Beginning balance - January 1 39,691 $(1,552) 39,156 $(2,592) Shares acquired from dividend reinvestment, net of fees 141 110 Market value adjustment (364) 382 - ------------------------------------------------------------------------------- Ending balance - March 31 39,832 $(1,916) 39,266 $(2,210) =====================================18======================================== 19 Note 15 - Shareholders' Equity (continued) For the three months ended March 31, 2002 and 2001, the Company did not incur items to be reported in comprehensive income that were not already included in reported net earnings (loss), except for the $20 and $(18) on derivative instruments and the $4 and $(6) on foreign currency translation adjustments. Note 16 - Share-Based Compensation Share-based plans expense consisted of the following: Three months ended March 31 - ------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------ Performance Shares $ 67 $46 ShareValue Trust 18 18 Stock options, other 19 18 - ------------------------------------------------------------------------------ $104 $82 ============================================================================== Note 17 - Derivative Financial Instruments Derivative and hedging activities As adopted January 1, 2001, the Company accounts for derivatives pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This standard requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. The Company is exposed to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates, and commodity prices. These exposures are managed, in part, with the use of derivatives. The following is a summary of the Company's risk management strategies and the effect of these strategies on the consolidated financial statements. Fair value hedges Fair value hedges used by the Company include certain interest rate swaps, including forward-starting interest rate swap agreements. The Company holds forward-starting interest rate swap agreements to fix the cost of funding a firmly committed lease for which payment terms are determined in advance of funding. This hedge relationship mitigates the changes in fair value of the hedged portion of the firm commitment caused by changes in interest rates. The net change in fair value of the swap and the hedged portion of the firm commitment is reported in earnings. For the three months ended March 31, 2002, $1 of gain related to the basis adjustment of certain terminated interest rate swaps was recorded in other income. There were no basis adjustment gains or losses for the three months ended March 31, 2001. 19 20 Note 17 - Derivative Financial Instruments (continued) Cash flow hedges Cash flow hedges used by the Company include certain interest rate swaps, foreign currency forward contracts, and commodity purchase contracts. Portions of the Company's contracts for the purchase of electricity and natural gas do not qualify for cash flow hedge treatment, which resulted in a gain of $1 recorded in other income for the three months ended March 31, 2002. As of March 31, 2002 and December 31, 2001, net unrecognized losses of $140 ($88 net of tax) and $172 ($108 net of tax) were recorded in accumulated other comprehensive income associated with the Company's cash flow hedging transactions. A net unrecognized loss of $27 ($17 net of tax) was due to the Company's transition adjustment upon implementation of SFAS No. 133, at January 1, 2001. For the three months ended March 31, 2002 and 2001, unrecognized losses included in accumulated other comprehensive income of $4 and $1 (net of tax) were reclassified to other income. During the next twelve months, the Company expects to reclassify to other income a loss of $42 (net of tax) from the amount recorded in accumulated other comprehensive income. Derivative financial instruments not receiving hedge treatment The Company holds interest exchange agreements and related interest rate swaps. The intent of these interest rate swaps is to economically hedge the exposures created by the interest exchange agreements. However, because the exposures being hedged are derivative instruments, this relationship does not qualify for hedge accounting under SFAS No. 133. As a result, changes in fair value of both instruments are immediately recognized in other income. For the three months ended March 31, 2002 and 2001, the interest exchange agreements resulted in a loss of $4 and a gain of $5 and the related interest rate swaps resulted in a gain of $3 and a loss of $6. The Company also holds a forward- starting interest rate swap that is not accounted for as a hedge. As of March 31, 2002, the conversion features of certain convertible debt and warrants were reflected in other assets at their combined fair values of $10. For the three months ended March 31, 2002, the conversion feature of the convertible debt and warrants recorded in other assets had a decrease in fair value, resulting in a reduction of other income of $2. The Company did not hold convertible debt or warrants as of March 31, 2001. As of March 31, 2002, the Company had foreign currency forward contracts carried at fair value that did not qualify for hedge accounting. The Company realized a pretax gain of $9 and a pretax loss of $5 within other income attributable to these forward contracts during the three months ended March 31, 2002 and 2001. Upon adoption of SFAS No. 133, the Company recorded an unrecognized net gain of $9 ($6 net of tax) in accumulated other comprehensive income attributable to derivatives not receiving hedge treatment. The components of this transition adjustment are being amortized to other income, with a net loss of $1 expected to be reclassified to other income during the next twelve months. As of March 31, 2002, the unamortized balance in accumulated other comprehensive income was a net gain of $9 ($6 net of tax). 20 21 Note 17 - Derivative Financial Instruments (continued) Interest rate swap contracts and foreign currency forward contracts are entered into with a number of major financial institutions in order to minimize counterparty credit risk. The Company generally does not require collateral or other security supporting derivative contracts with its counterparties. The Company believes that it is unlikely that any of its counterparties will be unable to perform under the terms of derivative financial instruments. Note 18 - Arrangements with Off-Balance-Sheet Risk Financial instruments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk include financing commitments, credit guarantees, asset value guarantees, and participations in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables. Irrevocable financing commitments related to aircraft on order, including options, scheduled for delivery through 2007 totaled $4,712 as of March 31, 2002. The Company anticipates that not all of these commitments will be utilized and that it will be able to arrange for third-party investors to assume a portion of the remaining commitments, if necessary. The Company has additional commitments to arrange for commercial equipment financing totaling $507 as of March 31, 2002. During the first quarter of 2002, there have been no significant changes in participations in customer financing receivables with third-party investors that involve interest rate terms different from underlying receivables, the Company's maximum exposure to losses associated with credit or asset value guarantees, or the amounts recorded in accounts payable and other liabilities attributable to risks associated with credit or asset value guarantees. Other arrangements During the first quarter of 2002, there have been no significant changes in future lease commitments on aircraft not recorded on the Condensed Consolidated Statements of Financial Position, commitments to purchase used aircraft under trade-in agreements, or the amounts recorded in accounts payable and other liabilities attributable to adverse commitments under these arrangements. The maximum potential exposure in excess of the asset value of Equipment Trust Certificates due to certain liquidity obligations of the Company to other parties in the event of default by the lessee has not changed significantly. Note 19 - 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. 21 22 Note 19 - Contingencies (continued) The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings. Such accruals as of March 31, 2002, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends. The Company is subject to U.S. Government investigations 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. 22 23 Note 19 - Contingencies (continued) In 1991, the U.S. Navy notified McDonnell Douglas (now a subsidiary of 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 March 31, 2002, inventories included approximately $583 of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350. The amount of the provision, which was established in 1990, was based on McDonnell Douglas's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, and that the upper range of possible loss on termination for convenience was $350. On August 31, 2001, the U.S. Court of Federal Claims issued a decision after trial upholding the Government's default termination of the A-12 contract on the ground that the Team could not meet the revised contract schedule unilaterally imposed by the Government after the Government had waived the original schedule. The court did not, however, enter a judgment for the Government on its claim that the Team be required, as a consequence of the alleged default, to repay progress payments that had not been formally liquidated by deliveries at the time of termination. These unliquidated progress payments total $1,350. On October 4, 2001, the court confirmed that it would not be entering judgment in favor of the Government in the amount of these unliquidated progress payments. This is the latest decision relating to long-running litigation resulting from the A-12 contract termination in 1991, and follows an earlier trial court decision in favor of the contractors and reversal of that initial decision on appeal. The Company believes, supported by an opinion of outside counsel, that the trial court's rulings with respect to the enforceability of the unilateral schedule and the termination for default are contrary to law and fact. The Company believes the decision raises valid issues for appeal and is pursuing its appeal. If, contrary to the Company's belief, the decision of the trial court on termination were sustained on appeal, the Company would incur an additional loss of approximately $275, consisting principally of remaining inventory costs and adjustments. And if, contrary to the Company's belief, the appeals court further held that a money judgment should be entered against the Team in the amount of the unliquidated progress payments, the Team would be required to pay the Government $1,350 plus statutory interest from February 1991 (currently totaling approximately $970). Under this outcome, the Company would be obligated to pay one half of these amounts. The additional loss to the Company would total approximately $1,430 in pretax charges, consisting principally of the repayment obligations and the remaining inventory costs and adjustments. The Company believes that the loss provision established by McDonnell Douglas in 1990 continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process as of March 31, 2002. Final resolution of the A-12 litigation will depend upon the outcome of further proceedings or possible negotiations with the Government. 23 24 Note 19 - Contingencies (continued) On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington, in Seattle. The lawsuit names as defendants the Company and three of its 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 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 sought compensatory damages and treble damages. On September 17, 2001, the Company reached agreement with class counsel to settle the lawsuit for $92.5. The settlement will have no effect on the Company's earnings, cash flow or financial position, as it is within insurance limits. The settlement is conditioned on notice to the class members and Court approval, which is expected to occur in 2002. 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, 2000, 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." Plaintiffs' motion for class certification was filed in May 2001. The class they sought included salaried employees in Puget Sound, Wichita, St. Louis, and Long Beach, and hourly employees in Puget Sound, Wichita, and St. Louis. On October 19, 2001, the court granted class certification to a segment of the population sought by the plaintiffs. The court ruled that the action could proceed on the basis of two limited subclasses: a. all non-executive salaried women (including engineers) in the Puget Sound area, and b. all hourly women covered by the Machinists' Bargaining Agreement in the Puget Sound area. The claims to be litigated are alleged gender discrimination in compensation and promotion. The court also held that the plaintiffs could not seek back pay. Rather, should liability be found, the potential remedies include some form of injunctive relief as well as punitive damages. The U.S. Ninth Circuit Court of Appeals has accepted the Company's interlocutory appeal of the class certification decision, particularly the ruling that leaves open the possibility of punitive damages. 24 25 Note 19 - Contingencies (continued) In January 2002 and March 2002, four other gender discrimination class actions were filed in locations that were originally part of the Beck case but subsequently excluded from the class certified by the district court. The four new cases cover females employed in California, Missouri, Kansas, and Oklahoma. Many of the named plaintiffs in these new cases were also named plaintiffs in Beck. Like Beck, these new cases focus on compensation and promotion decisions. The Company intends to continue its aggressive defense of these cases. It is not possible to predict what impact, if any, these cases could have on the financial statements. 25 26 Note 20 - Business Segment Data Segment information for revenues, earnings, and research and development consisted of the following: Three months ended March 31 - ------------------------------------------------------------------------------- 2002 2001 - ------------------------------------------------------------------------------- Revenues: Commercial Airplanes $ 8,313 $ 8,443 Military Aircraft and Missile Systems 2,972 2,427 Space and Communications 2,332 2,246 Boeing Capital Corporation 228 161 Other 126 116 Accounting differences/eliminations (150) (100) - ------------------------------------------------------------------------------- Operating revenues $13,821 $13,293 =============================================================================== Earnings from operations: Commercial Airplanes $ 973 $ 860 Military Aircraft and Missile Systems 363 246 Space and Communications 42 84 Boeing Capital Corporation 156 113 Other (52) (22) Accounting differences/eliminations (265) 25 Share-based plans (104) (82) Unallocated expense (121) (6) - ------------------------------------------------------------------------------- Earnings from operations 992 1,218 - ------------------------------------------------------------------------------- Other income, principally interest 12 235 Interest and debt expense Boeing Capital Corporation (90) (73) Other (82) (75) - ------------------------------------------------------------------------------- Earnings before income taxes 832 1,305 Income taxes 254 69 - ------------------------------------------------------------------------------- Net earnings before cumulative effect of accounting change $ 578 $ 1,236 =============================================================================== Research and development: Commercial Airplanes $ 223 $ 195 Military Aircraft and Missile Systems 82 53 Space and Communications 128 123 Other 26 51 - ------------------------------------------------------------------------------- Total research and development expense $ 459 $ 422 =============================================================================== 26 27 Note 20 - Business Segment Data (continued) In the first quarter of 2002, the segment formerly identified as Customer and Commercial Financing was reclassified as Boeing Capital Corporation (BCC). Financing activities other than Boeing Capital Corporation, consisting principally of four C-17 transport aircraft under lease to the United Kingdom Royal Air Force, are included within the 'Other' segment classification. In the first quarter of 2001, the Company established an 'Other' segment classification which principally includes the activities of Connexion by BoeingSM, a two-way data communications service for global travelers; Air Traffic Management, a business unit developing new approaches to a global solution to address air traffic management issues; and Boeing Technology, an advanced research and development organization focused on innovative technologies, improved processes and the creation of new products. The 2001 results have been reclassified to conform to the revised segment classifications. BCC segment revenues consist principally of interest from financing receivables and lease income from operating lease equipment. Additionally, segment earnings reflect depreciation on leased equipment and expenses recorded against the valuation allowance presented in Note 10. No interest expense on debt is included in BCC segment earnings. The Company has extended certain intercompany guarantees to BCC, including guarantees on lease income from operating lease equipment. For the three months ended March 31, 2002, BCC's segment earnings included $23 of income under guarantees, $10 of which related to impairment loss abatements at a consolidated level. There was no significant earnings impact related to guarantees for the three months ended March 31, 2001. For internal reporting purposes, the Company records Commercial Airplanes segment revenues and operating profits for airplanes transferred to other segments, and such transfers may include airplanes accounted for as operating leases that are considered transferred to Boeing Capital Corporation. The revenues for these transfers are eliminated in the 'Accounting differences/eliminations' caption. In the event an airplane accounted for as an operating lease is subsequently sold, the 'Accounting differences/eliminations' caption would reflect the recognition of revenue and operating profit for the consolidated financial statements. The Company records cost of sales for 7-series commercial airplane programs under the program method of accounting described in Note 1 of the Company's 2001 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 and certain commercial modification programs, 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 $(335) and $(111) for the three months ended March 2002 and 2001. 27 28 Note 20 - Business Segment Data (continued) The Other segment loss includes expenses resulting from certain intercompany guarantees extended to BCC discussed in the paragraph above. During the first quarter of 2002, the Other segment loss included $23 of expense, $10 of which related to impairment losses. There was no significant earnings impact related to guarantees for the three months ended March 31, 2001. 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. The costs attributable to share-based plans are not allocated. Other unallocated costs include corporate costs not allocated to the operating segments, including, for the period ended March 31, 2001, goodwill amortization resulting from acquisitions prior to 1998. For the period ended March 31, 2002, unallocated costs do not include goodwill amortization as a result of the Company adopting SFAS No. 142, "Goodwill and Other Intangible Assets," as described in Note 3. Note 21 - Standard Issued and Not Yet Implemented In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," effective to the Company on January 1, 2003. The Company does not believe that the implementation of this standard will have a significant impact on the financial statements. 28 29 - ------------------------------------------------------------------------------- | Forward-Looking Information is Subject to Risk and Uncertainty | | | | Certain statements in this report contain "forward-looking" information | | that involves risk and uncertainty, including projections for new products, | | deliveries, realization of technical and market benefits from acquisitions, | | revenues, operating margins, free cash flow, taxes, research and | | development expenses, prospects for delivery stream recovery in commercial | | aircraft, and other trend projections. This forward-looking information | | is based upon a number of assumptions including assumptions regarding | | global economic, passenger and freight growth; current and future markets | | for the Company's products and services; demand for the Company's products | | and services; performance of internal plans, including, without limitation, | | plans for productivity gains, reductions in cycle time and improvements | | in design processes, production processes, program performance, | | benefits from reorganizations, and asset utilization; product performance | | customer financing; customer, supplier and subcontractor performance; | | customer model selections; favorable outcomes of certain pending sales | | campaigns and U.S. and foreign government procurement actions; including | | the timing of procurement of tankers, 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; and the | | assessment of the impact of the attacks of September 11, 2001. Actual | | results and future 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 | | rate increases and decreases (particularly with respect to wide body | | production), production system initiatives, timing of product deliveries | | and launches, supplier contract negotiations, asset management plans, | | acquisition and divestiture plans, procurement plans, credit rating agency | | assessments, and other cost-reduction efforts; the actual outcomes of | | certain pending sales campaigns and U.S. and foreign government procurement | | activities; including the timing of procurement of tankers, 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; 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; any | | additional impacts from the attacks of September 11, 2001; global trade | | policies; worldwide political stability; domestic and international | | economic conditions; 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 2001 and the 10Q's for the | | quarters ended 31 March 2001, 30 June 2001 and 30 September 2001. | - ------------------------------------------------------------------------------- 29 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Consolidated Results of Operations - ---------------------------------- Sales of $13.8 billion for the first three months of 2002 were 4% higher than sales for the comparable period of 2001. For the first three months of 2002, a total of 110 commercial aircraft were delivered, compared with 122 for the same period in 2001. Approximately 380 commercial aircraft deliveries are currently projected for the full year of 2002, compared with 527 in 2001. Net loss for the first quarter of 2002 was $1,249 million, compared with net earnings of $1,237 million for the same period in 2001. The first quarter of 2002 net loss included a $(1,827) million cumulative effect of accounting change as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." The first quarter of 2002 also included a net non-recurring after tax charge of $24 million. This charge included a $15 million benefit related to continuing F-15 program supplier termination negotiations; a $24 million charge related to decreased valuations of commercial aircraft and adverse exposure under certain guarantees and commitments related to the events of September 11; and a $15 million loss recognized on a long-held equity investment. A non-recurring after tax benefit of $475 million was recorded during the comparable period of 2001 related to a research and development tax settlement. Research and development expense totaled $459 million for the first three months of 2002, compared with $422 million for the same period of 2001. Commercial Airplanes segment research and development expense of $223 million for the first quarter of 2002 reflected an increase over the $195 million expense for the first quarter of 2001. Space and Communications segment research and development expense of $128 million for the first quarter of 2002 is in line with the spending levels for the same period in 2001. Military Aircraft and Missile Systems segment research and development expense of $82 million for the first quarter of 2002 was higher than the $53 million expense for the first quarter of 2001. Research and development in the Other segment relates principally to Connexion by BoeingSM and Air Traffic Management. Income tax expense for the first three months of 2002 was $254 million, or 30.5% of pretax earnings, compared with $69 million, or 5.3% of pretax earnings in 2001. These rates differ from the federal statutory rate of 35% due primarily to Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion tax benefits, tax credits, and state income taxes, and for 2001 due to a one-time audit settlement benefit for research credits at McDonnell Douglas Corporation. 30 31 In December 1996, The Boeing Company filed suit in the U.S. District Court for the Western District of Washington for the refund of over $400 in federal income taxes and related interest. The suit challenged the Internal Revenue Service (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 for the years 1979 through 1987. In September 1998, the District Court granted the Company's motion for summary judgment. The U.S. Department of Justice appealed this decision. On August 2, 2001, the United States Court of Appeals for the Ninth Circuit reversed the District Court's summary judgment. The Company filed a petition for rehearing with the Ninth Circuit Court of Appeals and was denied such rehearing. The Company filed a petition for writ of certiorari with the United States Supreme Court and is awaiting the Court's decision on whether to grant hearing of this case before the Court. The Company has fully provided for any potential earnings impact that may result from this decision. If the Company were to prevail, the refund would include interest computed to the payment date. In February 2000, the World Trade Organization (WTO) Appellate Body upheld a panel decision that U.S. FSC tax provisions constituted a prohibited export subsidy. In response, in November 2000, the United States enacted legislation to repeal the FSC tax provisions, subject to transition rules, and enacted replacement legislation (the Extraterritorial Income Exclusion Act of 2000). The European Union objected to this ETI exclusion, and in November 2001 asked the WTO to authorize trade sanctions on a list of goods, including aircraft, produced in the United States. At this point the WTO has not yet ruled on the request for sanctions and it is not known if, and to what extent, any sanctions will be authorized. In January 2002, the Appellate Body of the WTO upheld a ruling that the United States had failed to withdraw the prohibited FSC export subsidy. The U.S. Government is currently reviewing its options in response to this decision. It is not possible to predict what impact, if any, this issue will have on future earnings pending final resolution of the challenge. Segment Results of Operations - ----------------------------- The Company operates in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications, and Boeing Capital Corporation. All other activities fall within the Other segment, principally made up of Boeing Technology, Connexion by BoeingSM and Air Traffic Management. Commercial Airplanes First quarter 2002 commercial jet aircraft deliveries totaled 110 compared with 122 during the same period in 2001. Commercial Airplanes segment revenues were $8.3 billion in the first quarter 2002 compared with $8.4 billion for the same period in 2001. The decline in revenue was due primarily to the decline in the spare parts market resulting from the events of September 11, 2001. The decline in jet aircraft deliveries did not have a significant impact on total revenue due to favorable mix of aircraft sold. 31 32 Commercial jet aircraft deliveries were as follows: Three months ended March 31 ------------------------------------------------- Model 2002 2001 ------------------------------------------------- 717 3 7 (1) 737 Next Generation 59*(1) 72* 747 8 7 757 12 8 767 12 10 777 16 16 MD-11 - 2 ------------------------------------------------- Total 110 122 ================================================= *Included one intercompany C-40 737 aircraft 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. Commercial Airplanes segment first quarter 2002 operating earnings, based on the unit cost of airplanes delivered, were $973 million, compared with $860 million for the same period in 2001. The overall Commercial Airplanes segment operating profit margin was 11.7% for the first quarter of 2002, compared with 10.2% for the same period in 2001. The first quarter 2002 margin increase over the same period in 2001 primarily reflects favorable cost performance on the 737NG program, offset by the decline in spare parts sales and increased research and development expense. Commercial Airplanes segment earnings, as determined under generally accepted accounting principles (GAAP) and including intercompany transactions, reflect the program method of accounting and incorporate a portion of the 'Accounting differences/eliminations' caption as discussed in Note 20. Commercial Airplanes segment earnings under GAAP were $639 million and $749 million for the first quarter of 2002 and 2001. The GAAP determined segment margin of 7.7% in 2002 compares with 8.9% for the same three month period in 2001. In addition to the impacts to the segment margins caused by the decline in spare parts sales and increased research and development expense identified above, the GAAP segment margins have been adversely impacted due to the near-term aircraft market decline resulting from the events of September 11. The favorable cost performance on the 737NG program reflected in the current period earnings and margin based on unit cost of sales is recognized over current and future deliveries under the program method of accounting. For segment reporting purposes, the favorable cost performance is a cumulative adjustment over current and prior deliveries. Program quantities for the 737NG and 777 are 1,800 and 600 units, unchanged from March 31, 2001. 32 33 As of March 31, 2002, the Company had cumulatively delivered 96 717 program aircraft. The 717 program is accounted for under the program method of accounting. 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. The Company has potentially material exposures related to the 717 program, principally attributable to vendor termination costs that could result from a lack of longer-term market acceptance. Additionally, the Company has potential exposure relating to the valuation of 717 customer financing assets. Military Aircraft and Missile Systems Military Aircraft and Missile Systems segment revenues for the first quarter of 2002 increased 22% to $3.0 billion compared to $2.4 billion for the same period in 2001. Aircraft, rotorcraft, and tactical weapons program deliveries were all higher, as were revenues from military aerospace support. Military Aircraft and Missile Systems segment deliveries included the following: Three months ended March 31 ------------------------------------------------ Model 2002 2001 ------------------------------------------------ C-17 3 2 F/A-18E/F 10 7 T-45TS 2 4 CH-47 2 2 AH-64 Apache (New Builds) 5 2 First quarter 2002 segment earnings and operating margins totaled $363 million and 12.2%. This compares to segment earnings and operating margins of $246 million and 10.1% during the first quarter of 2001. The increase in earnings from 2001 is primarily due to the additional delivery volume and program performance improvements. Research and development expense in the first quarter of 2002 was $82 million compared to $53 million during the first quarter of 2001. Additional spending on the 767 Tanker program primarily drove the increase in research and development expense from a year ago. Military Aircraft and Missile Systems took steps towards securing significant growth opportunities during the quarter. On March 13, 2002, Military Aircraft and Missile Systems received additional Joint Direct Attack Munitions (JDAM) orders increasing production rates and accelerating deliveries in support of increasing national security needs. In April 2002, the Korean Ministry of National Defense announced that Boeing's F-15K was selected for its F-X fighter program, with expected contract finalization in the second quarter of 2002. On March 29, 2002, the U.S. Air Force selected Boeing to proceed in negotiations on a tanker program. Tanker negotiations, including lease arrangements, are currently expected to be complete this summer. On March 18, 2002, the Company signed an agreement to sell its ordnance business located in Mesa, AZ to Alliant Techsystems (ATK) pending regulatory approvals. The transaction is expected to be completed in the second quarter of 2002. 33 34 Space and Communications Space and Communications segment revenues were $2.3 billion in the first quarter of 2002 compared with $2.2 billion for the same period in 2001. Space and Communications segment deliveries included the following: Three months ended March 31 ------------------------------------------------ Model 2002 2001 ------------------------------------------------ Delta II 1 - Satellites 3 1 The greatest segment revenue growth was in the Missile Defense sector, with the Company being named the missile defense architecture System Integration Lead for the newly established National Team. Growth will also continue in the Integrated Battlespace market. Space and Communications segment operating earnings for the first quarter of 2002 were $42 million compared with $84 million in the first quarter of 2001. Operating margins were 1.8% for the first quarter of 2002 compared to 3.7% for the first quarter of 2001. The lower earnings and margins were a result of issues in the commercial satellite market and with technical issue resolution and its impact on satellite production. In February 2002, Space and Communications undertook a reorganization of their commercial satellite manufacturing activities in response to unfavorable market conditions. This action will enhance factory efficiencies and competitiveness via the infusion of proven Boeing lean manufacturing processes. The restructuring includes facilities consolidation, workforce rightsizing, and design and production streamlining with an enhanced focus on quality. These actions are expected to improve the profitability of satellite manufacturing for the remainder of the year despite the current downturn in the commercial satellite market. Major events during the first quarter of 2002 included another successful Ground-based Midcourse Defense program integrated flight test. As previously mentioned, Space and Communications also assumed the Systems Integration Lead for the new national industry team established by the Missile Defense Agency. In addition, Space and Communications achieved a significant milestone in their Integrated Battlespace growth strategy by being selected as the prime contractor to develop the Army's future combat system. Significant risk remains related to work in process inventory and supplier commitments for the Delta III program. Space and Communications is actively working to mitigate much of this risk, primarily through the conversion of Delta IIIs to Delta IIs. This risk assessment remains closely monitored, and additional opportunities for conversions are under review. 34 35 The Sea Launch program in which Boeing is a 40% partner with RSC Energia (25%) of Russia, Kvaerner Maritime (20%) of Norway, and KB Yuzhnoye/PO Yuzhmach (15%) of Ukraine had no launches in the first quarter of 2002, however, several launches are planned for the year. Boeing's investment in this venture as of March 31, 2002 is reported at zero, which reflects the prior recognition of losses reported by Sea Launch. Boeing has financial exposure with respect to the venture, which relates to guarantees by the Company provided to certain Sea Launch creditors, performance guarantees provided by the Company to a Sea Launch customer and financial exposure related to accounts receivable/inventory. Net of liabilities established, the Company's maximum exposure to credit-related losses associated with credit guarantees is $351 million as of March 31, 2002. Financial exposure related to performance guarantees and accounts receivable/inventory amounted to $162 million at March 31, 2002. The Company and Lockheed Martin are 50-50 partners in United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the U.S. Air Force. United Space Alliance also performs modifications, testing and checkout operations that are required to ready the Space Shuttle for launch. The joint venture operations are not included in the Company's consolidated statements; however, the Company's proportionate share of joint venture earnings is recognized as income. Included in Space and Communications operating earnings for the first quarter of 2002 were $15 million compared to $18 million in the first quarter of 2001 related to United Space Alliance operations. The lower income was primarily due to one less shuttle flight in the current quarter versus the first quarter of 2001. Space and Communications continues to invest in its key development programs - Delta IV and 737 Airborne Early Warning & Control. First quarter 2002 company- sponsored research and development spending was $47 million, which was slightly lower than first quarter 2001 spending of $53 million. This was primarily due to the transition of the Delta IV launch vehicle into production later this year. Additionally, overall research and development investment was comparable year over year with first quarter 2002 spending of $128 million compared to first quarter 2001 spending of $123 million. Boeing Capital Corporation Revenues for Boeing Capital Corporation (BCC) consisted principally of income earned on funds employed in financing activities (direct finance leases, operating leases, notes receivable, and investments). Earnings are net of depreciation on leased equipment and operating expenses. No interest expense on debt is included in BCC's earnings reflected in Note 20; however, interest expense of $90 million and $73 million was associated with debt relating to financing activities as of March 31, 2002 and 2001. Operating earnings for BCC were $156 million for the first quarter of 2002, compared with $113 million for the first quarter of 2001, exclusive of interest expense. The increase was due principally to an increase in financing assets. 35 36 Since the terrorist attacks of September 11, 2001, BCC has continued to closely monitor the value and utility of equipment securing its financing assets. The effects of the terrorist attacks have not had, and BCC believes they are not likely to have, a material adverse impact on BCC's earnings, cash flows or financial position. However, no assurance can be given that such impact will not become material if the economy and the airline industry do not recover as currently expected. In the first quarter of 2002, $242 million of financing assets secured by aircraft operated by United Airlines were transferred from the Company to BCC. Other Other segment earnings were a loss of $52 million in the first quarter of 2002 and a loss of $22 million for the same period in 2001. The increase in losses between periods was primarily due to research and development activity related to Connexion by BoeingSM and, to a lesser extent, Air Traffic Management and Boeing Technology. Research and development expense attributable to the Other segment was $26 million in the first quarter of 2002 and $51 million for the same period in 2001. Also included in the Other segment for first quarter of 2002 were losses relating to intercompany guarantees made to BCC amounting to $23 million, $10 million of which related to impairment losses, at a consolidated level, and operating earnings of $11 million attributable to financing assets not intended to be transferred to BCC. As of March 31, 2002, these financing assets consisted of four C-17 transport aircraft leased to the United Kingdom Royal Air Force. Events of September 11, 2001 On September 11, 2001, the United States was the target of severe terrorist attacks that involved the use of U.S. commercial aircraft manufactured by the Company. These attacks resulted in a significant loss of life and property and caused major disruptions in business activities and in the U.S. economy overall. To address the widespread financial impact of the attacks, the Emerging Issues Task Force (EITF) released Issue No. 01-10, "Accounting for the Impact of Terrorist Attacks of September 11, 2001." This issue specifically prohibits treating costs and losses resulting from the events of September 11, 2001, as extraordinary items; however, it observes that any portion of these costs and losses deemed to be unusual or infrequently occurring should be presented as a separate line item in income from continuing operations. As of December 31, 2001, the Company completed an assessment of the impact due to events of September 11, 2001 and recorded liabilities totaling $542 million. Of this amount, $402 million related to liabilities to be primarily settled in cash and the remaining $140 million was recorded as asset impairments on used aircraft purchase contracts. 36 37 During the first quarter of 2002, the Company identified and recorded a further charge of $34 million attributable to the events of September 11, 2001. Of this charge, $12 million was associated with guarantee commitments and $22 million related to a further decrease in used airplane values. Three used airplanes on purchase contracts were returned from customers during the quarter resulting in an inventory write-down and a reduction to the liability of $19 million. See Note 2 for a reconciliation of the liabilities recorded as of March 31, 2002 and December 31, 2001. The Company will continue to assess other potential losses and costs it might incur in relation to the attacks. These future costs are not yet accruable; however, the Company expects that such costs may be incurred throughout 2002. Any costs or adjustments in estimates will continue to be recognized as a separate component of earnings from operations entitled 'Special charges due to events of September 11, 2001.' Liquidity and Capital Resources - ------------------------------- As of March 31, 2002, the Company's cash position totaled $643 million. Excluding non-recourse debt and Boeing Capital Corporation (BCC), a financing subsidiary wholly owned by the Company, total debt represents 35% of total shareholders' equity plus debt. The consolidated debt, including BCC and non- recourse, represents 57% of total shareholders' equity plus debt. Revolving credit line agreements with a group of major banks, totaling $4.5 billion, remain available but unused. The Company also has available $4.0 billion under commercial paper programs, of which $2.0 billion is attributable to BCC, and are backed by the $4.5 billion revolving credit line agreements. As of the end of the first quarter of 2002, the Company had an outstanding commercial paper balance of $360 million, which is related to BCC. On April 15, 2002, Boeing contributed $325 million to three of the Company's defined benefit plans. These three plans, like all of Boeing's major domestic plans, remain fully funded under the Internal Revenue Code. The Company elected to contribute enough funds to ensure that each of Boeing's plans would have assets that were at least approximately equal to (and in most cases greater than) the liability for vested benefits as measured by the Pension Benefit Guaranty Corporation. The Company has the following Standard & Poor's credit ratings: short-term, A- 1; senior debt, A+. BCC has the following Standard & Poor's credit ratings: short-term, A-1; senior debt, A+. The Company has the following Moody's credit ratings: short-term, P-1; senior debt, A2. BCC has the following Moody's credit ratings: short-term, P-2; senior debt, A3. 37 38 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): March 31 December 31 2002 2001 ------------------------------------------------------------ Commercial Airplanes $ 71.6 $ 75.9 Military Aircraft and Missile Systems 22.5 17.6 Space and Communications 16.1 13.1 ------------------------------------------------------------ Total contractual backlog $110.2 $106.6 ============================================================ Unobligated U.S. Government contract funding not included in backlog totaled $20.9 billion at March 31, 2002, compared with $27.5 billion at December 31, 2001. Standard Issued and Not Yet Implemented - --------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," effective to the Company on January 1, 2003. The Company does not believe that the implementation of this standard will have a significant impact on the financial statements. 38 39 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. 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. The Company is subject to commodity price risk relating principally to energy used in production. The Company uses commodity derivatives, such as fixed- price purchase commitments, to hedge against potentially unfavorable price changes of commodities. Commodity price exposure related to these contracts is not material. 39 40 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 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 McDonnell Douglas (now a subsidiary of 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 March 31, 2002, inventories included approximately $583 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 McDonnell Douglas's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, and that the upper range of possible loss on termination for convenience was $350 million. On August 31, 2001, the U.S. Court of Federal Claims issued a decision after trial upholding the Government's default termination of the A-12 contract on the ground that the Team could not meet the revised contract schedule unilaterally imposed by the Government after the Government had waived the original schedule. The court did not, however, enter a judgment for the Government on its claim that the Team be required, as a consequence of the alleged default, to repay progress payments that had not been formally liquidated by deliveries at the time of termination. These unliquidated progress payments total $1,350 million. On October 4, 2001, the court confirmed that it would not be entering judgment in favor of the Government in the amount of these unliquidated progress payments. This is the latest decision relating to long-running litigation resulting from the A-12 contract termination in 1991, and follows an earlier trial court decision in favor of the contractors and reversal of that initial decision on appeal. The Company believes, supported by an opinion of outside counsel, that the trial court's rulings with respect to the enforceability of the unilateral schedule and the termination for default are contrary to law and fact. The Company believes the decision raises valid issues for appeal and is pursuing its appeal. 40 41 If, contrary to the Company's belief, the decision of the trial court on termination were sustained on appeal, the Company would incur an additional loss of approximately $275 million, consisting principally of remaining inventory costs and adjustments. And if, contrary to the Company's belief, the appeals court further held that a money judgment should be entered against the Team in the amount of the unliquidated progress payments, the Team would be required to pay the Government $1,350 million plus statutory interest from February 1991 (currently totaling approximately $970 million). Under this outcome, the Company would be obligated to pay one half of these amounts. The additional loss to the Company would total approximately $1,430 million in pretax charges, consisting principally of the repayment obligations and the remaining inventory costs and adjustments. The Company believes that the loss provision established by McDonnell Douglas in 1990 continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process as of March 31, 2002. Final resolution of the A-12 litigation will depend upon the outcome of further proceedings or possible negotiations with the Government. 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 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 sought compensatory damages and treble damages. On September 17, 2001, the Company reached agreement with class counsel to settle the lawsuit for $92.5 million. The settlement will have no effect on the Company's earnings, cash flow or financial position, as it is within insurance limits. The settlement is conditioned on notice to the class members and Court approval, which is expected to occur in 2002. 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, 2000, 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. 41 42 The Company has denied the allegation that it has engaged in any unlawful "pattern and practice." Plaintiffs' motion for class certification was filed in May 2001. The class they sought included salaried employees in Puget Sound, Wichita, St. Louis, and Long Beach, and hourly employees in Puget Sound, Wichita, and St. Louis. On October 19, 2001, the court granted class certification to a segment of the population sought by the plaintiffs. The court ruled that the action could proceed on the basis of two limited subclasses: a. all non-executive salaried women (including engineers) in the Puget Sound area, and b. all hourly women covered by the Machinists' Bargaining Agreement in the Puget Sound area. The claims to be litigated are alleged gender discrimination in compensation and promotion. The court also held that the plaintiffs could not seek back pay. Rather, should liability be found, the potential remedies include some form of injunctive relief as well as punitive damages. The U.S. Ninth Circuit Court of Appeals has accepted the Company's interlocutory appeal of the class certification decision, particularly the ruling that leaves open the possibility of punitive damages. In January 2002 and March 2002, four other gender discrimination class actions were filed in locations that were originally part of the Beck case but subsequently excluded from the class certified by the district court. The four new cases cover females employed in California, Missouri, Kansas, and Oklahoma. Many of the named plaintiffs in these new cases were also named plaintiffs in Beck. Like Beck, these new cases focus on compensation and promotion decisions. The Company intends to continue its aggressive defense of these cases. It is not possible to predict what impact, if any, these cases could have on the financial statements. 42 43 Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on April 29, 2002. (b) At the Annual Meeting, in an uncontested election, four nominees of the Board of Directors were elected directors for three-year terms expiring on the date of the annual meeting in 2005. The votes were as follows: For Withheld ----------- ---------- Philip M. Condit 661,819,185 36,181,148 Kenneth M. Duberstein 676,077,380 21,922,952 W. James McNerney, Jr. 676,597,445 21,402,887 Lewis E. Platt 671,873,413 26,126,919 The terms of the following directors continued after the annual meeting: John H. Biggs John F. McDonnell Harry C. Stonecipher John E. Bryson Rozanne L. Ridgway Paul E. Gray John M. Shalikashvili (c) The results of voting on Proposals 2 through 13 were as follows: 2. A Company proposal to ratify the appointment of Deloitte & Touche as independent auditors for the fiscal year ending December 31, 2002. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 663,867,890 83.17% 95.11% 95.62% Against 30,380,272 3.81% 4.35% 4.38% Abstain 3,752,170 0.47% 0.54% 3. A shareholder proposal requesting the Company to provide a comprehensive report describing the Company's involvement in space-based weaponization. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 34,766,117 4.36% 6.31% 6.58% Against 493,652,543 61.85% 89.55% 93.42% Abstain 22,844,187 2.86% 4.14% Broker non-votes 146,737,484 18.38% 43 44 4. A shareholder proposal requesting the Board to institute a special Executive Compensation Review to find ways to link compensation of its key executives with corporate social performance. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 46,820,143 5.87% 8.49% 8.85% Against 482,294,666 60.42% 87.49% 91.15% Abstain 22,147,034 2.77% 4.02% Broker non-votes 146,738,488 18.38% 5. A shareholder proposal requesting the Compensation Committee of the Board to incorporate measures of human capital in establishing and administering standards for calculating performance-based executive compensation. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 46,332,964 5.80% 8.40% 8.71% Against 485,379,663 60.81% 88.05% 91.29% Abstain 19,550,214 2.45% 3.55% Broker non-votes 146,737,490 18.38% 6. A shareholder proposal requesting the Board to amend its written diversity and equal employment opportunity policies to exclude any reference to sexual orientation. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 45,447,870 5.69% 8.24% 8.53% Against 487,169,818 61.03% 88.37% 91.47% Abstain 18,645,165 2.34% 3.38% Broker non-votes 146,737,478 18.38% 7. A shareholder proposal requesting the Board to adopt annual election of all directors. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 272,775,797 34.17% 49.48% 50.49% Against 267,526,989 33.52% 48.53% 49.51% Abstain 10,960,065 1.37% 2.01% Broker non-votes 146,737,480 18.38% 44 45 8. A shareholder proposal recommending that the Company not adopt or maintain a shareholder rights plan, unless such plan has been previously approved by a shareholder vote. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 272,641,696 34.16% 49.46% 50.66% Against 265,554,557 33.27% 48.17% 49.34% Abstain 13,066,587 1.64% 2.37% Broker non-votes 146,737,491 18.38% 9. A shareholder proposal recommending the adoption of a bylaw provision to nominate independent directors to key board committees. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 121,312,431 15.20% 22.01% 22.80% Against 410,866,547 51.47% 74.53% 77.20% Abstain 19,083,867 2.39% 3.46% Broker non-votes 146,737,486 18.38% 10. A shareholder proposal recommending that the Board obtain prior shareholder approval for all future severance agreements for senior executives if there is a change in control of the Company. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 150,399,024 18.84% 27.28% 28.16% Against 383,647,304 48.06% 69.59% 71.84% Abstain 17,216,511 2.16% 3.12% Broker non-votes 146,737,492 18.38% 11. A shareholder proposal requesting the Board to adopt simple majority vote on all issues submitted for shareholder vote. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 271,438,087 34.01% 49.54% 50.69% Against 264,023,853 33.08% 48.18% 49.31% Abstain 12,501,402 1.57% 2.28% Broker non-votes 150,036,990 18.80% 45 46 12. A shareholder proposal requesting that the Company adopt a Directors' compensation bylaw requiring that the Company's Directors be paid with Boeing common stock as the major or full amount of their retainer. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 47,374,443 5.94% 8.65% 8.95% Against 481,689,866 60.35% 87.91% 91.05% Abstain 18,899,036 2.37% 3.45% Broker non-votes 150,036,987 18.80% 13. A shareholder proposal requesting the Board of Directors to give all non-represented employees a choice of pension plans at the time of termination or retirement. Number of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 63,931,783 8.01% 11.67% 11.98% Against 469,673,734 58.84% 85.71% 88.02% Abstain 14,357,814 1.80% 2.62% Broker non-votes 150,037,000 18.80% 46 47 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 February 25, 2002. Filed herewith. (15) Letter from independent accountants regarding unaudited interim financial information. Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter covered by this report. 47 48 REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS The condensed consolidated statement of financial position as of March 31, 2002, the condensed consolidated statements of operations for the three-month periods ended March 31, 2002 and 2001, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2002 and 2001, have been reviewed by the registrant's independent accountants, Deloitte & Touche LLP, whose report covering their review of the financial statements follows. 48 49 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders The Boeing Company Chicago, Illinois We have reviewed the accompanying condensed consolidated statement of financial position of The Boeing Company and subsidiaries (the "Company") as of March 31, 2002, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2002 and 2001. 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, 2001, 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, 2002, 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, 2001 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived. As discussed in Note 3 to the condensed consolidated financial statements, on January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois April 23, 2002 49 50 - - - - - - - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BOEING COMPANY ------------------------------ (Registrant) May 7, 2002 /s/ James A. Bell ---------------- ------------------------------ (Date) James A. Bell Vice President of Finance & Corporate Controller 50 EX-3 4 c-ex3bylaws.txt ARTICLES OF INCORPORATION AND BY-LAWS 1 BY-LAWS OF THE BOEING COMPANY (As amended February 25, 2002) 1 2 THE BOEING COMPANY BY-LAWS TABLE OF CONTENTS ARTICLE I Stockholders' Meetings Page Section 1. Annual Meetings 5 Section 2. Special Meetings 5 Section 3. Place of Meeting 5 Section 4. Notice of Meetings 5 Section 5. Waivers of Notice 6 Section 6. Quorum 6 Section 7. Proxies 6 7.1 Appointment 6 7.2 Delivery to Corporation; Duration 7 Section 8. Inspectors of Election 7 8.1 Appointment 7 8.2 Duties 7 8.3 Determination of Proxy Validity 7 Section 9. Fixing the Record Date 8 9.1 Meetings 8 9.2 Consent to Corporate Action Without a Meeting 8 9.3 Dividends, Distributions, and Other Rights 9 9.4 Voting List 9 Section 10. Action By Stockholders Without a Meeting 9 Section 11. Business and Nominations at Stockholders' Meetings 10 11.1 Business and Nominations at Annual Meetings 10 11.2 Stockholder Notice 10 11.3 Business and Nominations at Special Meetings 11 11.4 Stockholder Meeting Procedures 11 11.5 Public Announcement of Stockholders' Meetings 11 Section 12. Notice to Corporation 12 2 4 ARTICLE VI Stock and Transfers of Stock Section 1. Stock Certificates 18 Section 2. Transfer Agents and Registrars 19 Section 3. Transfers of Stock 19 Section 4. Lost Certificates 19 ARTICLE VII Miscellaneous Section 1. Fiscal Year 19 Section 2. (Repealed) Section 3. Signing of Negotiable Instruments 19 Section 4. Indemnification of Directors and Officers 20 4.1 Right to Indemnification 20 4.2 Right of Indemnitee to Bring Suit 21 4.3 Nonexclusivity of Rights 21 4.4 Insurance, Contracts, and Funding 21 4.5 Persons Serving Other Entities 22 4.6 Indemnification of Employees and Agents 22 of the Corporation 4.7 Procedures for the Submission of Claims 22 ARTICLE VIII Amendments Section 1. Amendment of the By-Laws: General 22 Section 2. Amendments as to Compensation and Removal of Officers 23 Section 3. Amendments as to Shareholder Meetings, Directors 23 Section 4. Amendment of this Article VIII 23 4 5 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 such time as designated by the Board 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. 5 6 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. 6 7 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. 7 8 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 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. 8 9 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 resolution 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. 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. 9 10 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. 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. 10 11 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. 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. 11 12 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 eleven, 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. 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. 12 13 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. 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. 13 14 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. 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. 14 15 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. 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) and, at the discretion of the Board, 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. 15 16 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. 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. 16 17 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. 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. 17 18 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. 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. 18 19 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. 19 20 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. 20 21 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. 21 22 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. 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 advance- ment 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 alteration 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. 22 23 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. 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. 23 EX-15 5 d-ex15dt.txt DELOITTE & TOUCHE LETTER EXHIBIT (15) Letter from Independent Accountants Regarding Unaudited Interim Financial Information To the Board of Directors and Shareholders of The Boeing Company Chicago, Illinois We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of The Boeing Company and subsidiaries (the "Company") for the three-month periods ended March 31, 2002 and 2001, as indicated in our report dated April 23, 2002; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, is incorporated by reference in Registration Statement Nos. 2-48576, 33-25332, 33-31434, 33-43854, 33-58798, 33-52773, 333-03191, 333-16363, 333-26867, 333-32461, 333-32491, 333-32499, 333-32567, 333-35324, 333-41920, 333-47450, 333-54234 and 333-73252 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 the 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 Chicago, Illinois May 6, 2002 -----END PRIVACY-ENHANCED MESSAGE-----