-----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, AttPYJdNHB9TDPGvXKWJLSs2l8ZcJVq0gHJs/YnhTaicduZgBag779aTo83wnIas VFmLYUgFwpVlSbe963blJQ== 0000012927-96-000003.txt : 19960314 0000012927-96-000003.hdr.sgml : 19960314 ACCESSION NUMBER: 0000012927-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960313 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOEING CO CENTRAL INDEX KEY: 0000012927 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] IRS NUMBER: 910425694 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00442 FILM NUMBER: 96534119 BUSINESS ADDRESS: STREET 1: P O BOX 3707 MS 1F 31 CITY: SEATTLE STATE: WA ZIP: 98124 BUSINESS PHONE: 2066552121 MAIL ADDRESS: STREET 1: 7755 EAST MARGINAL WAY SOUTH CITY: SEATTLE STATE: WA ZIP: 98124-2207 FORMER COMPANY: FORMER CONFORMED NAME: BOEING AIRPLANE CO DATE OF NAME CHANGE: 19730725 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 1 ............................................................................... ............................................................................... UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 1-442 THE BOEING COMPANY 7755 East Marginal Way South Seattle, Washington 98108 Telephone: (206) 655-2121 State of incorporation: Delaware IRS identification number: 91-0425694 Securities registered pursuant to Section 12(b) of the Act: Class of Security: Registered on Common Stock, $5 par value New York Stock Exchange 8 3/8% Notes due March 1, 1996 New York Stock Exchange The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of January 31, 1996, there were 344,460,471 common shares outstanding, and the aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock Exchange) held by nonaffiliates of the registrant was approximately $26.7 billion. Part I and Part II incorporate information by reference to certain portions of the Company's 1995 Annual Report to Shareholders. Part III incorporates information by reference to the registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. ............................................................................... ............................................................................... 1 of 94 Exhibit Index on Page 21 2 PART I Item 1. Business The Boeing Company, together with its subsidiaries (herein referred to as the "Company"), is one of the world's major aerospace firms. The Company operates in two principal industries: commercial aircraft, and defense and space. Commercial aircraft operations - conducted through Boeing Commercial Airplane Group - involve development, production and marketing of commercial jet transports and providing related support services to the commercial airline industry worldwide. Defense and space operations - conducted through Boeing Defense & Space Group - involve research, development, production, modification and support of military aircraft and helicopters and related systems, space systems and missile systems. Defense and space sales are principally through U.S. Government contracts. Revenues, operating profits and other financial data of the Company's industry segments for the three years ended December 31, 1995, are set forth on pages 54 and 55 of the Company's 1995 Annual Report to Shareholders and are incorporated herein by reference. With respect to the commercial aircraft segment, the Company is a leading producer of commercial transport aircraft and offers a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and foreign airlines. This family of jet transport aircraft currently includes the 737 and 757 standard-body models and the 767, 747, and 777 wide-body models. The worldwide market for commercial jet transports is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth in developed and emerging countries and political stability. Demand for the Company's commercial aircraft is further influenced by world trade policies, government-to-government relations, environmental constraints imposed upon airplane operations, airline industry profitability, technological changes, and price and other competitive factors. Commercial jet transports are normally sold on a firm fixed-price basis with an indexed price escalation clause. The Company's ability to deliver jet transports on schedule is dependent upon a variety of factors, including availability of raw materials, performance of suppliers and subcontractors, and certifications by the Federal Aviation Administration. The introduction of new commercial aircraft programs and major derivatives involves increased risks associated with meeting development, production and certification schedules. The Company's commercial aircraft sales are subject to intense competition from aircraft manufacturers, including foreign companies which are nationally owned or subsidized. To meet competition, the Company maintains a program directed toward continually enhancing the performance and capability of its products and has a family of commercial aircraft to meet varied and changing airline requirements. Since the 1970s, the Company has maintained approximately a 60% share of the available commercial jet transport market. The Company continually evaluates opportunities to improve current models, and conducts ongoing marketplace assessments to ensure that its family of jet transports is well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line 2 of 94 3 responsive to changing market conditions by maximizing commonality among the Boeing family of airplanes. Additionally, the Company is committed to continue to lead the industry in customer satisfaction by offering products that exhibit the highest standards of quality, safety, technical excellence and economic performance, and by providing excellent in-service support. The major focus of development activities over the past three years has been the 777 wide-body twinjet which entered service in May 1995. The new 777 model is designed to meet airline requirements for an efficient, comfortable, high- capacity airplane to be used in domestic and regional markets internationally. Deliveries of the extended-range version 777-200 will begin in late 1996, followed in 1998 by the 777-300 version with 20% greater passenger-carrying capability. Development of the 737-600/700/800 next-generation 737 family of short-to- medium-range jetliners began in 1993. These new 737s will provide greater range, increased speed, and reduced noise and emissions while maintaining 737 family commonality. The 737-700, the middle-sized member of the family, will be the first version to be placed into service, with initial deliveries scheduled for late 1997. The 737-800, a larger version, is currently scheduled to be delivered in early 1998. Initial delivery of the smallest version, the 737-600, is currently scheduled for late 1998. The Company continues to assess the market potential for new or derivative aircraft that are larger and have more range than the 747-400. Because of the relatively limited market for this size and range aircraft and the very substantial investment levels that would be required to develop and produce an all-new aircraft, this market segment may best be met with derivatives of the 747 model. The timing of a decision to proceed with a 747 derivative aircraft and the development schedule will be dependent on customer demand and the Company's ability to achieve favorable long-term financial returns on the substantial development costs that would be required. The Company's defense and space segment is highly sensitive to changes in national priorities and U.S. Government defense and space budgets. The principal contributors to defense and space sales in 1995 consisted of the International Space Station program (for which the Company has the prime contractor role), F-22 fighter aircraft engineering and manufacturing development activities, production and remanufacturing of CH-47 helicopters, V-22 Osprey tiltrotor transport development and test activities, E-3 AWACS updates, 767 AWACS development and manufacturing, B-2 bomber subcontractor work, RAH-66 Comanche helicopter development activities, and various facilities management and information services contracts. U.S. Government classified projects also continued to contribute to defense and space segment revenues. The Company's activities on the F-22, RAH-66 and V-22 programs are under joint venture teaming arrangements with other companies. Defense and space developmental programs are normally performed under cost- reimbursement-type contracts, although certain past developmental programs were under fixed-price arrangements. Developmental contracts often contain incentives related to cost performance and/or awards for other contract milestone accomplishments. Production programs are generally performed under firm fixed- price contracts or fixed-price contracts containing incentive provisions related to costs. During 1994 and 1995, an increasing percentage of the Company's 3 of 94 4 defense and space business was contracted under cost-reimbursement-type contracts. The current major developmental programs, principally the International Space Station, F-22 fighter, V-22 Osprey tiltrotor aircraft and RAH-66 Comanche helicopter, primarily involve cost-reimbursement-type contracts. The U.S. Government defense market environment is one in which continued intense competition among defense contractors can be expected, especially in light of U.S. Government budget constraints. The Company's ability to successfully compete for and retain such business is highly dependent on its technical excellence, demonstrated management proficiency, strategic alliances, and cost-effective performance. Company-sponsored research and development not recoverable under contracts and charged directly to earnings as incurred amounted to $1.3 billion, $1.7 billion, and $1.7 billion in 1995, 1994 and 1993, respectively. Research and development expenditures for 1996 are currently projected to be in the $1.2 billion range. The Company's backlog of firm contractual orders (in billions) at December 31 follows: 1995 1994 ----- ----- Commercial aircraft $66.5 $60.6 Defense and space 5.8 5.7 ----- ----- Total $72.3 $66.3 ===== ===== Not included in contractual backlog are purchase options and announced orders for which definitive contracts have not been executed and orders from customers which have filed for bankruptcy protection. Additionally, U.S. Government and foreign military firm backlog is limited to amounts obligated to contracts. Unobligated values not included in backlog at December 31, 1995 and 1994, totaled $7.6 billion and $5.9 billion. In evaluating the Company's contractual backlog for commercial customers, certain risk factors should be considered. Approximately 30% of the commercial aircraft backlog units are scheduled for delivery beyond 1998. Changes in the economic environment and the financial condition of airlines sometimes result in customer requests for rescheduling or cancellation of contractual orders. Contracts with the U.S. Government are subject to termination for default or for convenience by the Government if deemed in its best interests. Contracts which are terminated for convenience generally provide for payments to a contractor for its costs and a proportionate share of profit for work accomplished through the date of termination. Contracts which are terminated for default generally provide that the Government pays only for the work it has accepted, can require the contractor to pay the difference between the original 4 of 94 5 contract price and the cost to reprocure the contract items net of the value of the work accepted from the original contractor, and can hold a contractor liable for damages. (See Item 3, Legal Proceedings, regarding the Government's partial termination of the Peace Shield program for alleged default.) A termination for default, if upheld, also may adversely affect a contractor's ability to compete successfully for other Government contracts. Historically, the Company has not experienced significant shortages of raw materials essential to its business. Although the Company does not anticipate any shortages of critical commodities over the longer term, this is difficult to assess because many factors causing such possible shortages are outside its control. The Company is highly dependent on its suppliers and subcontractors in order to meet commitments to its customers, and many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of domestic and foreign companies. The Company maintains an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties. Although the Company has occasionally experienced problems with supplier and subcontractor performance, none has resulted in material production delays. While the Company owns numerous patents and has licenses under patents owned by others relating to its products and their manufacture, it does not believe that its business would be materially affected by the expiration of any patents or termination of any patent license agreements. The Company has no trademarks, franchises or concessions that are considered to be of material importance to the conduct of its business. The Company is subject to federal, state and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. The Company believes its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and regulations requires continuing management effort and expenditures by the Company. Compliance with environmental laws and regulations has not had in the past, and, the Company believes, will not have in the future, material effects on the capital expenditures, earnings, or competitive position of the Company. (See Item 3, Legal Proceedings, for additional information regarding environmental regulation.) The Company is subject to business and cost classification regulation associated with its U.S. Government defense and space contracts. Violations can result in civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeitures, and suspension or debarment from Government contracts. Sales outside the United States (principally export sales from domestic operations) by geographic area are included on page 54 of the Company's 1995 Annual Report to Shareholders and incorporated herein by reference. Less than 1% of total sales were derived from non-U.S. operations of the Company for each of the three years in the period ended December 31, 1995. Approximately 60% of the Company's contractual backlog value at December 31, 1995, was with non-U.S. customers. Sales outside the United States are influenced by U.S. Government 5 of 94 6 foreign policy, international relationships, and trade policies by governments worldwide. Relative profitability is not significantly different from that experienced in the domestic market. Approximately 14% of accounts receivable and customer financing combined consisted of amounts due from customers outside the United States. These amounts are payable in U.S. dollars, and, in management's opinion, related risks are adequately covered by allowance for losses. The Company has not experienced materially adverse financial consequences as a result of sales and financing activities outside the United States. The Company had approximately 105,000 employees at February 1, 1996, including approximately 1,400 in Canada. 6 of 94 7 Item 2. Properties The locations and floor areas of the Company's principal operating properties at January 1, 1996, are indicated in the following table. Floor area in thousands of square feet Company- owned Leased -------- -------- United States: Seattle, Washington, and surrounding area 45,399 4,440 Wichita, Kansas 12,045 1,093 Philadelphia, Pennsylvania 3,455 382 Portland, Oregon 1,093 Huntsville, Alabama 686 77 Oakridge, Tennessee 492 Sunnyvale, California 461 356 Corinth & Irving, Texas 431 37 Macon, Georgia 399 Spokane, Washington 393 44 Vienna, Virginia 330 167 Chicago, Illinois 301 Glasgow, Montana 179 Canada: Winnipeg, Manitoba 522 40 Arnprior, Ontario 162 53 With the exception of the Glasgow Industrial Airport located in Glasgow, Montana, which is Company-owned, runways and taxiways used by the Company are located on airport properties owned by others and are used by the Company jointly with others. The Company's rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. Government furnishes the Company certain office space, installations and equipment at Government bases for use in connection with various contract activities. Facilities at the major locations support both principal industry segments. Work related to a given program may be assigned to various locations, based upon periodic review of shop loads and production capability. Facilities and equipment expenditures have declined each year since 1992 following record-high levels of expenditures in the 1991-1992 time period, reflecting the substantial completion by 1994 of the facilities and equipment expansion for the new 777 program. No major plant expansions are currently planned. The Company's principal properties are well maintained and in good operating condition. Unused or under-utilized facilities are not considered significant. Existing facilities are sufficient to meet the Company's near-term operating requirements. 7 of 94 8 Item 3. Legal Proceedings Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant proceedings are related to matters covered by insurance. Major contingencies are discussed below. In January 1991, the Company received from the U.S. Government a notice of partial termination for default which terminated most of the work required under contracts to develop and install a new air defense system for Saudi Arabia, known as the Peace Shield program. In June 1991, the Government selected another contractor to perform the work which is the subject of the contracts that have been terminated for default, and the Government may assert claims related to the reprocurement. Management's position, supported by outside legal counsel which specializes in government procurement law, is that the grounds for default asserted by the Government in the Peace Shield termination are not legally supportable. Accordingly, management and counsel are of the opinion that on appeal the termination for default has a substantial probability of being converted to termination for the convenience of the Government, which would eliminate any Government claim for cost of reprocurement or other damages. Additionally, the Company has a legal basis for a claim for equitable adjustment to the prices and schedules of the contracts (the "Contract Claim"). Many of the same facts underlie both the Contract Claim and the Company's appeal of the Government's termination action. The Company filed its complaint in the United States Court of Federal Claims to overturn the default termination in order to obtain payment of the Contract Claim. In conjunction with the notice of partial termination in January 1991, the Government demanded the repayment of unliquidated progress payments in the amount of $605 million plus interest. In April 1995, the parties executed an agreement deferring the Company's potential obligation to repay the $605 million from January 25, 1991, until a decision of the court or earlier settlement. The deferment agreement is subject to annual review by the Government. The parties have been engaged in the discovery phase of the litigation, with the trial scheduled for March 1997, and have concurrently engaged in discussions which could lead to final settlement. On October 20, 1995, the court determined all activities in the lawsuit would be "suspended in light of the prospect of settlement." There can be no assurance that the Government will agree to final settlement on terms acceptable to the Company. If a final settlement is not reached, the Company expects that its position will ultimately be upheld with respect to the termination action and that it will recover on the Contract Claim. The Company's financial statements have been prepared on the basis of a conservative estimate of the Contract Claim and the Company's position that the termination was for the convenience of the Government. If a final settlement is not reached, the Company cannot, at this time, reasonably estimate the length of time that will be required to resolve the termination appeal and the Contract Claim. In the event that final settlement does not occur and the Company's appeal of the termination for default is not 8 of 94 9 successful, the Company could realize a pretax loss on the program approximating the value of the unliquidated progress payments plus related interest and potential damages assessed by the Government. 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 for more than ten years. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings. Such accruals as of December 31, 1995, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends. The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings, if any, 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 such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, 1995. 9 of 94 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information required by this item is included on page 60 and the inside back cover of the Company's 1995 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data Information required by this item is included on pages 56 and 57 of the Company's 1995 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information required by this item is included on pages 26-38 of the Company's 1995 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements and supplementary data, included in the Company's 1995 Annual Report to Shareholders at the pages indicated, are incorporated herein by reference: Consolidated Statements of Net Earnings - years ended December 31, 1995, 1994 and 1993: Page 40. Consolidated Statements of Financial Position - December 31, 1995 and 1994: Page 41. Consolidated Statements of Cash Flows - years ended December 31, 1995, 1994 and 1993: Page 42. Notes to Consolidated Financial Statements: Pages 43-55. Independent Auditors' Report: Page 39. Supplementary data regarding quarterly results of operations: Page 58. Information regarding the commercial program method of accounting is included in Exhibit (99). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 10 of 94 11 PART III Item 10. Directors and Executive Officers of the Registrant Executive Officers No family relationships exist between any of the executive officers, directors or director nominees. The executive officers of the Company as of February 26, 1996, are as follows: Positions and offices held Name Age and business experience ---- --- -------------------------- F. A. Shrontz 64 Chairman of the Board since 1988. Chief Executive Officer since 1986; Director since 1985. President from 1985 until 1988. P. M. Condit 54 President and Director since 1992. Prior thereto Executive Vice President and General Manager - 777 Division, Boeing Commercial Airplane Group since 1989. D. P. Beighle 63 Senior Vice President since 1986. Secretary from 1981 until 1991. L. W. Clarkson 57 Senior Vice President - Planning & International Development since April 1994. Prior thereto Vice President - Planning & International Development since 1992. Prior thereto Senior Vice President - Government & International Affairs, Boeing Commercial Airplane Group since 1988. R. A. Davis 62 Vice President - Engineering and Technology since August 1994. Prior thereto Vice President - Engineering and Product Development, Boeing Commercial Airplane Group since 1993. Prior thereto Vice President - Engineering Division, Boeing Commercial Airplane Group since 1991. B. E. Givan 59 Senior Vice President and Chief Financial Officer since 1990. 11 of 94 12 Positions and offices held Name Age and business experience ---- --- -------------------------- C. G. King 61 Senior Vice President of the Company and President of Boeing Defense & Space Group since May 1993. Prior thereto Executive Vice President, Boeing Defense & Space Group since 1991. L. G. McKean 60 Senior Vice President - Human Resources since April 1994. Prior thereto Vice President - Human Resources since 1990. J. D. Warner 56 President of Boeing Information and Support Services since April 1995. Prior thereto President of Boeing Computer Services since July 1993. Prior thereto Executive Vice President, Boeing Computer Services since March 1993. Prior thereto Vice President - Computing, Boeing Commercial Airplane Group since 1991. R. B. Woodard 52 Senior Vice President of the Company and President of Boeing Commercial Airplane Group since December 1993. Prior thereto Executive Vice President, Boeing Commercial Airplane Group since March 1993. Prior thereto Vice President and General Manager - Renton Division, Boeing Commercial Airplane Group since 1991. Other information required by Item 10 involving the identification and election of directors is incorporated herein by reference to the registrant's definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year. Item 11. Executive Compensation * Item 12. Security Ownership of Certain Beneficial Owners and Management * Item 13. Certain Relationships and Related Transactions * * Information required by Items 11, 12, and 13 is incorporated herein by reference to the registrant's definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year. 12 of 94 13 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed as part of this report: 1. Financial Statements All consolidated financial statements of the Company as set forth under Item 8 of this report on Form l0-K. 2. Financial Statement Schedules Schedule Description Page -------- ----------- ---- II Valuation and Qualifying Accounts 19 The auditors' report with respect to the above-listed financial statement schedule appears on page 18 of this report. All other financial statements and schedules not listed are omitted either because they are not applicable, not required, or the required information is included in the consolidated financial statements. 13 of 94 14 3. Exhibits (3) Articles of Incorporation and By-Laws. (i) Restated Certificate of Incorporation. (Exhibit (3) of the Form 10-K of the Company for the year ended December 31, 1991 (herein referred to as "1991 Form 10-K").) (ii) By-Laws, as amended and restated on October 25, 1993. (Exhibit (3)(ii) of the Form 10-K of the Company for the year ended December 31, 1993 (herein referred to as "1993 Form 10-K").) (4) Instruments Defining the Rights of Security Holders, Including Indentures. (i) Indenture, dated as of March 1, 1986, between the Company and The Chase Manhattan Bank (National Association), Trustee. (Exhibit (4) of the 1991 Form 10-K.) (ii) Indenture, dated as of August 15, 1991, between the Company and The Chase Manhattan Bank (National Association), Trustee. (Exhibit (4) to the Company's Current Report on Form 8-K dated August 27, 1991.) (iii) Rights Agreement, dated as of July 27, 1987, between the Company and The First National Bank of Boston, Rights Agent. Incorporated by reference to the Company's Registration Statement on Form 8-A filed July 20, 1987. (File No. 1-442.) (10) Material Contracts. o The Boeing Company Bank Credit Agreements. (i) Agreement Amended and Restated as of September 30, 1994 (the "Seven-Year Agreement"). (Exhibit (10)(i) of the Form 10-Q of the Company for the quarter ended September 30, 1994.) (a) Amendment No. 1, dated as of September 28, 1995, to the Seven-Year Agreement. (Exhibit (10)(ii) to the Form 10-Q of the Company for the quarter ended September 30, 1995.) (b) Amendment No. 2, dated as of September 29, 1995, to the Seven-Year Agreement. (Exhibit (10)(iv) to the Form 10-Q of the Company for the quarter ended September 30, 1995.) (ii) Agreement Entered Into as of September 30, 1994 (the "364-Day Agreement") (Exhibit (10)(ii) of the Form 10-Q of the Company for the quarter ended September 30, 1994.) (a) Amendment No. 1, dated as of September 28, 1995, to the 364-Day Agreement. (Exhibit (10)(i) to the Form 10-Q of the Company for the quarter ended September 30, 1995.) (b) Amendment No. 2, dated as of September 29, 1995, to the 364-Day Agreement. (Exhibit (10)(iii) to the Form 10-Q of the Company for the quarter ended September 30, 1995.) 14 of 94 15 o Management Contracts and Compensatory Plans. (iii) 1984 Stock Option Plan. (a) Plan, as amended February 23, 1987, and August 28, 1989. Filed herewith. (b) Forms of stock option agreements. (Exhibit (10)(vi)(b) of the Form 10-K of the Company for the year ended December 31, 1992 (herein referred to as "1992 Form 10-K").) (iv) 1988 Stock Option Plan. (a) Plan, as amended on December 14, 1992. (Exhibit (10)(vii)(a) of the 1992 Form 10-K.) (b) Form of Notice of Terms of Stock Option Grant. (Exhibit (10)(vii)(b) of the 1992 Form 10-K.) (v) 1992 Stock Option Plan for Nonemployee Directors. (a) Plan. (Exhibit (19) of the Form 10-Q of the Company for the quarter ended March 31, 1992.) (b) Form of Stock Option Agreement. (Exhibit (10)(viii)(b) of the 1992 Form 10-K.) (vi) Supplemental Benefit Plan for Employees of The Boeing Company. Plan, as amended December 14, 1992. (Exhibit (10)(vi) of the Form 10-K of the Company for the year ended December 31, 1994.) (vii) Supplemental Retirement Plan for Executives of The Boeing Company. Plan, as amended October 25, 1994. (Exhibit (10)(vii) of the Form 10-K of the Company for the year ended December 31, 1994.) (viii) Deferred Compensation Plan for Employees of The Boeing Company. Plan, as amended on October 31, 1994. (Exhibit (10)(iii) of the Form 10-Q of the Company for the quarter ended September 30, 1994.) (ix) Deferred Compensation Plan for Directors of The Boeing Company. Plan, as amended on October 31, 1994. (Exhibit (10)(iv) of the Form 10-Q of the Company for the quarter ended September 30, 1994.) (x) 1993 Incentive Stock Plan for Employees. (a) Plan, as amended on December 13, 1993. (Exhibit (10)(ix)(a) of the 1993 Form 10-K.) (b) Form of Notice of Stock Option Grant. (i) Regular Annual Grant. (Exhibit (10)(ix)(b)(i) of the 1993 Form 10-K.) (ii) Supplemental Grant. (Exhibit (10)(ix)(b)(ii) of the 1993 Form 10-K.) (xi) Incentive Compensation Plan for Officers and Employees of the Company and Subsidiaries. Plan, as amended on October 31, 1994. (Exhibit (10)(v) of the Form l0-Q of the Company for the quarter ended September 30, 1994.) (xii)SAR Deferral Arrangements of the Company. (a) Form of SAR Deferral Agreement. Filed herewith. (b) Plan for Employees, as amended. Filed herewith. (c) Form of SAR deferral election notice. (Exhibit (10)(xiv)(c) of the 1992 Form 10-K.) (12) Computation of Ratio of Earnings to Fixed Charges. Page 20. 15 of 94 16 (13) Portions of the 1995 Annual Report to Shareholders incorporated by reference herein. Filed herewith. (21) List of Company Subsidiaries. Pages 90-91. (24) Independent Auditors' Consent and Report on Financial Statement Schedule for use in connection with filings of Form S-8 under the Securities Act of 1933. Page 18. (99) Additional Exhibits (i) Commercial Program Method of Accounting. Filed herewith. (b) Reports on Form 8-K filed during quarter ended December 31, 1995: None. 16 of 94 17 Signatures Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated. THE BOEING COMPANY (Registrant) By: /s/ Frank Shrontz By: /s/ B. E. Givan ------------------------------ ----------------------------- Frank Shrontz - Chairman of the B. E. Givan - Senior Vice Board, Chief Executive Officer President and Chief Financial and Director Officer By: /s/ Gary W. Beil ------------------------- Gary W. Beil - Vice President and Controller Date: February 26, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Stanley Hiller, Jr. - ------------------------------- --------------------------------- Robert A. Beck - Director Stanley Hiller, Jr. - Director /s/ John E. Bryson /s/ George M. Keller - ------------------------------- --------------------------------- John E. Bryson - Director George M. Keller - Director /s/ Philip M. Condit /s/ Donald E. Petersen - ------------------------------- --------------------------------- Philip M. Condit - Director and Donald E. Petersen - Director President /s/ John B. Fery /s/ Charles M. Pigott - ------------------------------- --------------------------------- John B. Fery - Director Charles M. Pigott - Director /s/ Paul E. Gray /s/ Franklin D. Raines - ------------------------------- --------------------------------- Paul E. Gray - Director Franklin D. Raines - Director /s/ Harold J. Haynes /s/ Rozanne L. Ridgway - ------------------------------- --------------------------------- Harold J. Haynes - Director Rozanne L. Ridgway - Director /s/ George H. Weyerhaeuser --------------------------------- George H. Weyerhaeuser - Director Date: February 26, 1996 17 of 94 18 INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE Board of Directors and Shareholders The Boeing Company: We consent to the incorporation by reference in Registration Statement Nos. 2- 48576, 2-93923, 33-25332, 33-31434, 33-43854, and 33-58798 on Form S-8 of our report dated January 25, 1996, on the consolidated financial statements of The Boeing Company and subsidiaries, in The Boeing Company's 1995 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1995. We also consent to the incorporation of the following report on the Company's financial statement schedule and the reference to us appearing under the heading "Experts" in the Registration Statements. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of The Boeing Company listed in Item 14(a)2 in this Annual Report on Form 10-K for the year ended December 31, 1995. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington March 8, 1996 18 of 94 19 SCHEDULE II - Valuation and Qualifying Accounts The Boeing Company and Subsidiaries Allowance for Doubtful Accounts and Customer Financing (Deducted from assets to which they apply) (Dollars in millions) 1995 1994 1993 - ----------------------------------------------------------------------------- Balance at January 1 $115 $126 $103 Charged to costs and expenses (4) 1 31 Collection of accounts previously charged off 1 Deductions from reserves (accounts charged off) 1 13 8 Balance at December 31 $110 $115 $126 19 of 94 20 EXHIBIT (12) - Computation of Ratio of Earnings to Fixed Charges The Boeing Company and Subsidiaries (Dollars in millions) Year ended December 31, ---------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Earnings before federal taxes on income $360* $1,143 $1,821 $2,256 $2,204 Fixed charges excluding capitalized interest 170 154 75 62 66 Amortization of previously capitalized interest 58 51 31 22 13 Less undistributed earnings of affiliates (5) (3) 1 1 (1) Plus distributed earnings of affiliates - - - - - ------ ------ ------ ------ ------ Earnings available for fixed charges $583 $1,345 $1,928 $2,341 $2,282 ====== ====== ====== ====== ====== Fixed charges: Interest expense $151 $ 130 $ 39 $ 14 $ 13 Interest capitalized during the period 65 87 150 119 44 Rentals deemed representative of an interest factor 19 24 36 48 53 ------ ------ ------ ------ ------ Total fixed charges $235 $ 241 $ 225 $ 181 $ 110 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.5* 5.6 8.6 12.9 20.8 ====== ====== ====== ====== ====== * Includes $600 pretax charge associated with a special retirement program. The ratio of earnings to fixed charges exclusive of the special retirement charge was 5.0. 20 of 94 21 EXHIBITS FILED WITH THIS REPORT ON FORM 10-K Commission File Number 1-442 THE BOEING COMPANY Exhibit Index Annual Report to Share- Form holders 10-K Exhibit Description Page Page - ------------------------------------------------------------------------------- (10)(iii)(a) 1984 Stock Option Plan, as amended February 23, 1987, and August 28, 1989. 67 (10)(xii)(a) SAR Deferral Arrangements of the Company. Form of SAR deferral Agreement. 74 (10)(xii)(b) SAR deferral Arrangement of the Company. Plan for Employees, as amended. 81 (12) Computation of Ratio of Earnings to Fixed Charges 20 (13) Portions of the 1995 Annual Report to Share- holders incorporated by reference in Part I and Part II Market for Registrant's Common Equity and Related Stockholder Matters * 65 Selected Financial Data 56 62 Management's Discussion and Analysis of Financial Position and Results of Operations 26 23 Consolidated Statements of Net Earnings 40 40 Consolidated Statements of Financial Position 41 41 Consolidated Statements of Cash Flows 42 42 Notes to Consolidated Financial Statements 43 43 Independent Auditors' Report 39 39 Supplementary data regarding quarterly results of operations 58 64 (21) List of Company Subsidiaries 90 (24) Independent Auditors' Consent and Report on Financial Statement Schedule for use in connection with filings of Form S-8 under the Securities Act of 1933. 18 (99) Additional exhibits. (i) Commercial Program Method of Accounting. 86 Appendix of graphic and image material pursuant to Rule 304(a) of Regulation S-T 92 * Listed on inside back cover of annual report 21 of 94 22 Exhibit (13) Portions of the 1995 Annual report the Shareholders incorporated by reference in Part I and Part II 22 of 94 23 Management's Discussion and Analysis Results of Operations, Financial Condition and Business Environment Results of Operations REVENUES Operating revenues for 1995 were $19.5 billion compared with $21.9 billion in 1994 and $25.4 billion in 1993. The declines in revenue for the past two years were due to fewer commercial jet transport deliveries as a result of economic conditions and airline industry overcapacity in most major market areas of the world. Additionally, a ten-week strike during the fourth quarter of 1995 by the International Association of Machinists and Aerospace Workers (IAM) resulted in the delay of about 30 jet transport deliveries representing approximately $2 billion in reduced sales in 1995. Adjusting for the impact of the labor strike, the Company's commercial jet transport market share has averaged approximately 60% in terms of sales value of deliveries over the three-year period. Commercial jet transport deliveries by model: 1995 1994 1993 - ----------------------------------------------------- 737 89 121 152 747 25 40 56 757 43 69 71 767 36 40 51 777 13 - - - ----------------------------------------------------- Total 206 270 330 ===================================================== Commercial aircraft products and services accounted for 71%, 77% and 81% of total operating revenues for the years 1995, 1994 and 1993. Total commercial aircraft production declined from a rate of 32 1/2 aircraft per month at the beginning of 1993 to 18 1/2 in the fourth quarter of 1995, prior to the IAM labor strike. Production rates for all models are expected to recover to prestrike levels during the first quarter of 1996. Based on current schedules, total aircraft production will increase to 22 1/2 per month by early 1997. The following production rate increases are planned for the second half of 1996: the 747 from 2 to 3 1/2 per month, the 767 from 3 1/2 to 4 per month, and the 737 from 7 to 8 1/2 per month. The 757 production rate will be decreased from 4 to 3 per month, also in the second half of 1996. The 777 production rate is scheduled to reach 3 1/2 per month by the third quarter of 1996 and 5 per month by early 1997. Total commercial jet transport deliveries for 1996 are currently projected to be approximately 215 aircraft. Commercial transportation sales trends are discussed further in the Commercial Aircraft Business Environment and Trends section on pages 31-34. Sales by industry segment: [Graphic and image material item Number 1 See appendix on page 92 for description.] 23 of 94 24 FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY Certain statements in the financial discussion and analysis by management contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty, including projections for 1996 deliveries and sales and 1996 research and development expenditures, and various business environment and trends projections. Actual future results and trends may differ materially depending on a variety of factors, including the Company's successful execution of internal performance plans; product performance risks associated with regulatory certifications of the Company's commercial aircraft by the U.S. Government and foreign governments; other regulatory uncertainties; collective bargaining labor disputes, performance issues with key suppliers and subcontractors; governmental export and import policies; factors that result in significant and prolonged disruption to air travel worldwide; global trade policies; worldwide political stability and economic growth; changing priorities or reductions in the U.S. Government defense and space budget; termination of government contracts due to unilateral government action or failure to perform; and legal proceedings. Commercial aircraft sales by geographic region: [Graphic and image material item Number 2 See appendix on page 92 for description.] Defense and space segment revenues, including activities previously identified as "Other industries" in prior years, were $5.6 billion for 1995, compared with $5.1 billion and $4.9 billion for 1994 and 1993, respectively. The International Space Station program was the major contributor to the increase in defense and space revenues in 1994 and 1995, following NASA's selection of Boeing Defense & Space Group as the prime contractor for the restructured Space Station program in 1993. The 707 and 767 Airborne Warning and Control System (AWACS) programs and the V-22 program also had increased sales in 1995. Sales associated with B-2 bomber subcontract work declined in both 1994 and 1995. The Company's defense and space business is broadly diversified, and no program accounted for more than 20% of total 1993-1995 defense and space revenues. The International Space Station program represented approximately 25% of total 1995 sales. The principal contributors to defense and space sales in 1995, in addition to the Space Station program, included F-22 fighter aircraft engineering and manufacturing development activities, production and remanufacturing of CH-47 helicopters, V-22 Osprey tiltrotor transport development and test activities, E-3 AWACS updates, 767 AWACS development and manufacturing, B-2 bomber subcontractor work, RAH-66 Comanche helicopter development activities, and various facilities management and information services contracts (previously reported as "Other industries"). U.S. Government classified projects also continued to contribute to defense and space segment revenues. The Company's activities on the F-22, RAH-66 and V-22 programs are under joint venture teaming arrangements with other companies. Defense and space activities are discussed further in the Defense and Space Business Environment and Trends section on pages 34 and 35. Based on current programs and schedules, the Company projects total 1996 revenues to be approximately $22 billion. 24 of 94 25 EARNINGS Net earnings of $393 million for 1995 include the recognition of a $600 million one-time pretax charge, or $390 million after-tax, for the special retirement program offered in the first half of 1995. Excluding the one-time special retirement program charge, net earnings for 1995 were $783 million, $73 million lower than the 1994 net earnings of $856 million. The lower comparable earnings were primarily due to the decline in commercial jet transport sales discussed above. Also contributing to lower earnings was an increase in interest expense of $21 million in 1995 due to less interest being capitalized on plant and equipment investments. These factors were partially offset by lower research and development expense, an increase in other income of $87 million principally attributable to increased interest income on investments, and a negative income tax provision. Research and development expense of $1,267 million for 1995 was down $437 million from 1994, primarily due to reduced 777 developmental expenditures. The negative effective income tax rate for 1995 was due to the recognition of higher tax benefits, together with the lower relative pretax earnings after the second quarter earnings charge for the special retirement program and the effect of the labor strike in the fourth quarter. The tax benefit recognized for 1995 included a research and experimentation tax credit of $90 million, primarily associated with the initial 777 development program that was substantially completed in 1995, and Foreign Sales Corporation tax benefits of $75 million. Without the special retirement program charge, the effective tax rate for 1995 would have been 18.4%, compared with 25.1% in 1994. Research and experimentation tax credit and Foreign Sales Corporation tax benefits were $60 million and $65 million, respectively, for 1994. The special retirement program was offered during the first half of 1995 to achieve desired workforce reductions corresponding with the lower production rates and major process improvement initiatives. Approximately 9,500 employees - - 9% of total employees - accepted the early retirement offer. Funding of the program will occur over a minimum of ten years through the Company's retirement plan and will not have a significant impact on annual cash flow. The overall operating profit margin, exclusive of research and development expense and the special retirement program expense, was 11.1% for 1995 compared with 13.0% for 1994. The lower overall operating profit margin was primarily attributable to defense and space segment sales being a higher percentage of total sales (28% in 1995, 23% in 1994) and the commencement of 777 jet transport deliveries together with fewer deliveries of all other commercial aircraft models. The overall profit margin before research and development expense for the defense and space segment is normally lower than for the commercial aircraft segment. With regard to the 777 program, new jet transport programs normally have lower operating profit margins than established programs due to initial tooling amortization and higher unit production costs in the early years of a program. Significant efficiencies have been gained through process improvements, but the commercial jet transport market remains extremely competitive, resulting in continued price pressure. The Company will continue to pursue major productivity gains to help ensure that its favorable market position is maintained at acceptable profit margins. 25 of 94 26 The diversified programs of the defense and space segment continue to demonstrate solid technical and cost performance. The defense and space segment operating profit margin was 6.6% in 1995 exclusive of the special retirement program expense, compared with 6.0% in 1994. Although the operating profit margin associated with the Company's managing role for the Space Station program is relatively low (due to fee structure for subcontracts), favorable performance was recognized on other programs in 1995. Net earnings: [Graphic and image material item Number 3 See appendix on page 92 for description.] Net earnings of $856 million for 1994 were $388 million lower than in 1993, primarily due to the fewer commercial aircraft deliveries, a higher level of research and development expenditures, increased debt expense, and lower corporate investment income. These factors were partially offset by improved defense and space earnings and a lower effective federal income tax rate. Although commercial aircraft sales levels were down substantially in 1994 relative to 1993, the combined operating profit margin on commercial aircraft programs, before research and development expenditures for new and derivative models, was maintained through efficiencies gained by process improvements throughout the segment's operations. The lower effective federal income tax rate in 1994 was principally due to the recognition of a research and experimentation tax credit of $60 million in 1994, whereas no research and experimentation credit was recognized in 1993. Research and development expensed: [Graphic and image material item Number 4 See appendix on page 93 for description.] Research and development expenditures charged directly to earnings include design, developmental and related test activities for new and derivative commercial jet transports, other company-sponsored product development, and basic defense and space research and development not recoverable under U.S. Government flexibly priced contracts. Research and development associated with new commercial models and derivatives was maintained at relatively high levels over the past three years even though sales were declining during this period. These substantial investment levels are helping to ensure the Company is well positioned to meet future commercial airline market requirements. The principal commercial developmental program during the 1993-1995 time period has been the new 777 wide-body twinjet. During 1993, the 777 development program transitioned from primarily structural and systems design activities to primarily systems integration and test activities. Flight testing of the Pratt & Whitney-powered 777 began in mid-1994, and continued through the first half of 1995. Flight testing of General Electric-powered and Rolls-Royce-powered 777s continued through 1995. Other commercial development programs in 1994 and 1995 included the 777-200ER extended-range version of the 777, the 737-600/700/800 next-generation 737 family, and a freighter version of the 767. Additionally, in 1995 development efforts commenced for the larger capacity 777-300. The defense and space segment plans to selectively pursue commercial-type business opportunities where it can utilize its technical and large-scale integration capabilities. Such business pursuits, which are outside the traditional U.S. Government contracting environment, may require increased levels of research and development expenditures for the defense and space segment over the next few years. 26 of 94 27 Total research and development expenditures for 1996 are currently projected to be in the $1.2 billion range. Research and development activities are discussed further in the Strategic Investments for Long-Term Value section on pages 36-38. Essentially all of the Company's business is performed under contract, and therefore operating results trends are not significantly influenced by the effects of inflation. Additional information relating to sales and earnings contributions by business segment can be found in Note 18 to the Consolidated Financial Statements. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, becomes effective in 1996. The Company does not plan to adopt the expense-recognition alternative for stock options as permitted by the standard. CONTRACTUAL BACKLOG Contractual backlog: [Graphic and image material item Number 5 See appendix on page 93 for description.] Total contractual backlog of unfilled orders at December 31, 1995, was $72.3 billion, compared with $66.3 billion at the end of 1994. Of the total 1995 backlog, $66.5 billion or 92% related to the commercial aircraft segment, compared with $60.6 billion or 91% in 1994. Not included in contractual backlog are purchase options and announced orders for which definitive contracts have not been executed. Commercial backlog includes orders for deliveries that extend several years into the future. Approximately 30% of the commercial aircraft backlog units are scheduled for delivery beyond 1998. U.S. Government and foreign military backlog is limited to amounts obligated to contracts. Unobligated contract values not included in backlog at December 31, 1995 and 1994, totaled $7.6 billion and $5.9 billion. LIQUIDITY AND CAPITAL RESOURCES The primary factors that affect the Company's investment requirements and liquidity position, other than operating results associated with current sales activity, include the timing of new and derivative commercial jet transport programs requiring both high developmental expenditures and initial inventory buildup; cyclical growth and expansion requirements; customer financing assistance; and the timing of federal income tax payments. CASH FLOW SUMMARY Following is a summary of cash flow based on changes in cash and short-term investments. This cash flow summary is not intended to replace the Consolidated Statements of Cash Flows on page 42 that is prepared in accordance with generally accepted accounting principles, but is intended to highlight and facilitate discussion of the principal cash flow elements. 27 of 94 28 (Dollars in billions) 1995 1994 1993 ============================================================================= Net earnings $ 0.4 $ 0.9 $ 1.2 Non-cash charges to earnings (a) 1.8 1.2 1.2 - ----------------------------------------------------------------------------- Net earnings adjusted for non-cash items 2.2 2.1 2.4 Facilities and equipment expenditures (b) (0.6) (0.8) (1.3) Change in gross inventory (c) (2.7) (0.8) 0.6 Change in customer advances (d) 0.8 (0.7) (1.3) - ----------------------------------------------------------------------------- Increase in net inventory (1.9) (1.5) (0.7) Net changes in receivables, liabilities and deferred income taxes (e) 0.4 0.3 (0.4) Pension funding in excess of expense (0.2) (0.1) (0.1) Change in customer financing (f) 1.5 (0.2) (0.9) Cash dividends (0.3) (0.3) (0.3) - ----------------------------------------------------------------------------- Net cash flow before new debt 1.1 (0.5) (1.3) Long-term debt issued 0.8 - ----------------------------------------------------------------------------- Increase (decrease) in cash and short-term investments $ 1.1 $ (0.5) $ (0.5) ============================================================================= Cash and short-term investments at end of year $ 3.7 $ 2.6 $ 3.1 ============================================================================= (a) Non-cash charges to earnings as presented here consisted of depreciation and retiree health care accruals for all years and the special retirement program charge for 1995. The Company has not funded Statement of Financial Accounting Standards No. 106 retiree health care accruals and, at this time, has no plan to fund these accruals in the future. The special retirement program charge will be funded over a minimum of ten years. Retirement plan funding in excess of retirement plan expense is separately indicated. (b) Facilities and equipment expenditures have declined each year since 1992 following record-high levels of expenditures in the 1991-1992 time period, reflecting the substantial completion by 1994 of the facilities and equipment expansion for the 777 program. No major plant expansions are currently planned. 28 of 94 29 (c) Inventory balances on the 737, 747, 757 and 767 commercial jet transport programs declined substantially in 1993 and 1994 due to production rate reductions and improvements in production inventory flow times. These declines were partially offset during 1993 and more than offset in 1994 by substantial production inventory and tooling buildup on the new 777 program. The substantial inventory buildup for the 777 program continued through 1995. Additionally, curtailed deliveries at the end of 1995 due to the ten-week IAM strike resulted in higher inventory levels for all other commercial programs. Defense and space segment inventories declined in 1993, and remained relatively level during the 1994-1995 time period. (d) Commercial customer advances declined during 1993 and 1994 as backlog and deliveries for commercial aircraft programs in total declined. The increase in commercial customer advances during 1995 was principally associated with the 777 program. Approximately 30 777s are scheduled for delivery in 1996, compared with 13 deliveries in 1995. With regard to defense and space contract activity, the ratio of progress billings to gross inventory did not significantly change during this period. (e) Over the three-year period 1993-1995, changes in accounts receivable, accounts payable, other liabilities and deferred taxes resulted in a net increase in cash of $0.3 billion, largely attributable to an increase in accounts payable and other liabilities of $1.0 billion during this time. Offsetting this principal positive cash flow factor were the effects of increases in deferred tax assets of $0.6 billion during this same time period. Federal income tax payments over the past several years have substantially exceeded the tax provisions on book income, due principally to certain tax law changes previously enacted, resulting in the acceleration of the recognition of taxable income related to long-term contracts and inventory costing. The completion in the next two years of contracts executed under prior tax regulations is projected to result in additional tax payments exceeding income tax expense. (f) The changes in customer financing balances have been largely driven both by commercial aircraft market conditions and the ability of the Company to sell customer financing assets. The Company generated $2.6 billion, $0.8 billion and $0.6 billion of cash in 1995, 1994 and 1993 from principal repayments and by selling customer financing receivables. As of December 31, 1995, the Company had outstanding commitments of approximately $3.6 billion to arrange or provide financing related to aircraft on order or under option for deliveries scheduled through 2002. However, not all these commitments are likely to be utilized. The Company will continue to sell customer financing assets from time to time when capital markets are favorable in order to maintain maximum capital resource flexibility. Outstanding loans and commitments are secured by the underlying aircraft. Property, plant and equipment - net additions: [Graphic and image material item Number 6 See appendix on page 93 for description.] Customer financing - net changes: [Graphic and image material item Number 7 See appendix on page 93 for description.] 29 of 94 30 LIQUIDITY AND CAPITAL RESOURCES SUMMARY The $2.3 billion of long-term debt, primarily issued in the 1990-1993 time period, is unsecured, and has an average maturity of approximately 30 years. Total long-term debt as of year-end 1995, excluding $250 million with a March 1996 maturity, amounted to 19% of total book capital (shareholders' equity plus borrowings). The Company believes it has substantial additional long-term borrowing capability, although no additional debt issuances are anticipated at this time. Revolving credit line agreements with a group of major banks, totaling $2.0 billion, remain available but unused. The Company believes its internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise. CONTINGENT ITEMS As discussed in Note 17 to the Consolidated Financial Statements, the U.S. Government terminated for alleged default most of the work required under contracts for a Saudi Arabia air defense system known as the Peace Shield program and selected another contractor to perform the terminated work. In conjunction with the notice of partial termination, the Government demanded that the Company repay $605 million of Peace Shield unliquidated progress payments. In April 1995, an agreement was executed deferring the Company's potential obligation to repay the $605 million from January 25, 1991, until a decision of the court or earlier settlement. The deferment agreement is subject to annual review by the Government. Management believes that the Government's grounds for default are not legally supportable and on appeal the Government's position will be overturned. The Company filed its complaint in the United States Court of Federal Claims to overturn the default termination and submitted a Contract Claim for equitable adjustment to the contract prices and schedules. The Company's financial statements assume that the termination for default will be overturned and that the Contract Claim will be settled in the Company's favor. The parties have been engaged in the discovery phase of the litigation, with the trial scheduled for March 1997, and have concurrently engaged in discussions which could lead to final settlement. On October 20, 1995, the court determined all activities in the lawsuit would be "suspended in light of the prospect of settlement." There can be no assurance that the Government will agree to final settlement on terms acceptable to the Company. If a final settlement is not reached, the Company expects that its position will ultimately be upheld with respect to the termination action and that it will recover on the Contract Claim. If the Company's appeal of the termination for default is not successful, the Company could realize a pretax loss on the program approximating the value of the unliquidated progress payments plus related interest and potential damages. 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. Based on in-depth studies, expert analyses and legal reviews, the Company routinely assesses its contingencies, obligations and commitments to clean up sites, including assessments of the probability of recoveries from other responsible parties who have and have not 30 of 94 31 agreed to a settlement and recoveries from insurance carriers. The Company's policy is to immediately recognize identified exposures related to environmental cleanup sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred in connection with such activities have not had a material impact to the Company's financial position. Based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in a materially adverse impact on the Company's future financial position or operating results and cash flow trends. COMMERCIAL AIRCRAFT BUSINESS ENVIRONMENT AND TRENDS The worldwide market for commercial jet transports is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth in developed and emerging countries and political stability. Demand for the Company's commercial aircraft is further influenced by world trade policies, government-to-government relations, environmental constraints imposed upon airplane operations, airline industry profitability, technological changes, and price and other competitive factors. GLOBAL ECONOMIC AND PASSENGER TRAFFIC TRENDS Since the 1970s, world air travel has grown in parallel with prevailing economic conditions. Major slumps occurred in tandem with the two petroleum price-driven world recessions and the most recent worldwide recession in developed countries, which followed the high economic growth of the late 1980s. The current world economic recovery has been moderate in the United States and slow in Europe. Japan is projected to experience a modest recovery beginning in 1996. Current economic indications suggest that most Asian economies will continue to experience rapid expansion. As the world economy has improved, airline passenger traffic has been increasing. Following the decline in passenger traffic in 1991, the first annual decline since the start of the jet era, worldwide passenger traffic has grown steadily. For the four-year period 1992-1995, the average annual growth rate for worldwide passenger traffic (excluding traffic in the nations of the Commonwealth of Independent States and the three Baltic republics) was approximately 6 1/2%. The Company's forecast of the average long-term growth rate in passenger traffic is approximately 5.6% annually for the balance of the decade and slightly less than 5% for the balance of the 20-year forecast period, based on average worldwide economic real growth of 3.2% over the period. Significant excess capacity in the worldwide aircraft fleet developed during the recent global recession following several years of record-setting delivery levels of new jet transports. At the end of 1993, approximately 1,100 commercial jet transports out of the total world fleet of over 11,000 aircraft were in out- of-service status. By the end of 1995, that number had declined to approximately 730. Due to noise constraints, inferior economics of older aircraft and the market requirement for readily available used aircraft, the Company currently estimates that less than one-fourth of the stored aircraft are potentially practical alternatives to new aircraft for airlines seeking added capacity. 31 of 94 32 Based on global economic growth projections over the long term, and taking into consideration increasing utilization levels of the worldwide aircraft fleet and requirements to replace older aircraft, the Company projects the total commercial jet transport market opportunity over the next 20 years at more than $1,000 billion in 1995 dollars. AIRLINE PROFITABILITY The airline industry's ability to achieve substantial levels of profitability will be an important factor in determining whether the Company's long-term market forecast will be realized. In addition to aggressive cost reduction measures being taken by many airlines, continued growth in passenger traffic, together with stable fare structures, are important conditions if the airline industry is to sustain acceptable earnings levels. Through a combination of passenger traffic growth, improved revenue, lower fuel costs and aggressive cost reduction measures, the airline industry showed significant improvement in operating profitability over the past few years. Airlines' net earnings (after interest costs on debt) also showed a marked improvement in both 1994 and 1995. In the aggregate, the industry achieved approximately a break-even level of net earnings in 1994 and a substantial positive level of earnings in 1995, following four years of net losses. Most airline industry analysts project additional gains in 1996. Worldwide airline industry core operating profits: [Graphic and image material item Number 8 See appendix on page 94 for description.] AIRCRAFT REPLACEMENT DUE TO NOISE REGULATIONS There are approximately 3,600 Stage 2 aircraft worldwide that cannot operate in conformity with legislated noise requirements to be phased in by the year 2002. Approximately 2,100 of these aircraft are in the United States and most of the remainder operate in Europe. Airlines have the option of hushkitting Stage 2 aircraft, replacing them, or selling or removing them from service without replacement. The Company projects that about one-half of the U.S. Stage 2 aircraft will eventually be hushkitted, and the remainder, primarily older aircraft, will be replaced. INDUSTRY COMPETITIVENESS AND WORLD TRADE POLICIES Since the 1970s, the Company has maintained approximately a 60% share of the available commercial jet transport market. This market share has been maintained throughout the economic cycles of the commercial jet transport market, including the difficult market environment in recent years that has resulted in lower production rates and excess production capacity for all jet transport manufacturers. With regard to new orders, this market environment results in intense pressures on pricing and other competitive factors. The Company's focus on improving processes and other cost reduction efforts are intended to enhance the ability to pursue pricing strategies that enable the Company to maintain market share at satisfactory margins. 32 of 94 33 The Company's extensive customer support services network for airlines throughout the world plays a key role in maintaining high customer satisfaction. Online access to engineering drawings and parts lists needed for aircraft maintenance is already available to airline customers, and in 1996, service bulletins and maintenance manuals will also be delivered online. To help airline customers more effectively manage their operating costs, new facilities and systems now provide for next-day shipment for routine spare parts orders, and the highest priority orders are processed and ready for shipment within two hours. A new regional customer service center was opened in Beijing in 1994 to serve growing airline requirements in China and other Asian countries, and the center is currently being expanded to stock 30,000 spare parts. The Company now has 17 field service bases located throughout China. In 1995 the Company opened an avionics center in Singapore that is able to service a significant number of Asian customers. Over the past five years, sales outside the United States have accounted for more than 70% of the Company's total commercial aircraft sales, and approximately 60% of the contractual backlog at year-end 1995 was with customers based outside the United States. Continued access to global markets is extremely important to the Company's future ability to fully realize its sales potential and projected long-term investment returns. In 1992 the U.S. Government and the European Community announced agreement on interpreting the commercial aircraft code of the General Agreement on Tariffs and Trade (GATT). The 1992 agreement bans government production subsidies and limits development in the form of loans to 33% of development costs. The Company would have preferred a ban on all government subsidies for commercial airplane programs, but the controls embodied in the 1992 agreement were considered important in limiting future government subsidies to Airbus Industrie, the Company's European competitor. The World Trade Organization (WTO), based in Geneva, was inaugurated in 1995. Consisting of approximately 110 nations, the WTO was established to promote open and nondiscriminatory trade among its members. The WTO contains an improved subsidies code, applicable to all members, that provides important protections against injurious subsidies by governments, as well as improved dispute settlement procedures to resolve disagreements between nations. Company forecasts indicate that the airlines of China represent a significant potential for commercial jet transport orders over the next 20 years; however, China is not currently a member of the WTO. The Company believes the accession of China to the WTO and the granting of permanent Most-Favored-Nation trading status by the U.S. Government would help ensure an open market and effective trade policies. However, if government and trade relations between the United States and China deteriorate significantly, the Company's ability to sell commercial aircraft to airlines in China could become severely constrained. Airlines of Russia and other States of the former Soviet Union operate a limited number of western-built aircraft, principally under operating leases with leasing firms. Because of high customs taxes and financing constraints, the potential for new aircraft orders has been severely limited. In January 1996, the U.S. Government reached a trade agreement with the Russian Federation that provides for future aircraft tariff reductions. The Company expects that the airlines and aircraft manufacturing industry of this region will eventually be integrated into the international economy. 33 of 94 34 SUMMARY Although market uncertainties remain, particularly with respect to the airline industry's profitability and open market access, the long-term market outlook remains favorable. The Company is well positioned in all segments of the commercial jet transport market, and intends to remain the airline industry's preferred supplier through emphasis on product offerings and customer service that provide the best overall value in the industry. DEFENSE AND SPACE BUSINESS ENVIRONMENT AND TRENDS Procurement budget - Department of Defense and NASA: [Graphic and image material item Number 9 See appendix on page 94 for description.] Uncertain defense priorities and severe U.S. Government budget pressures continue to characterize the business environment for the defense and space segment. Since 1992, total procurement and research funding for U.S. Government defense and space programs has declined nearly 20%. As a consequence, over the last few years, some of the Company's programs have been subject to stretch-out, curtailment or termination. Although a number of programs remain subject to future stretch-out and curtailment, the Company's defense and space business is broadly diversified among priority government programs involving military aircraft, helicopters, information and electronic systems, and space systems. Additionally, the Company's programs are balanced between potential future production programs and ongoing modernization activities for existing defense systems. At this time, total U.S. Government defense and space funding for procurement and research programs is expected to be relatively constant over the next five years. During 1994 and 1995, an increasing percentage of the Company's defense and space business was contracted under cost-reimbursement-type contracts. The current major developmental programs, principally the International Space Station, F-22 fighter, V-22 Osprey tiltrotor aircraft and RAH-66 Comanche helicopter, primarily involve cost-reimbursement-type contracts. In addition to the developmental programs mentioned above, the major revenue-producing programs for 1995 included production and remanufacturing of CH-47 helicopters, updating and modifying various military aircraft and systems, production of 767 Airborne Warning and Control System (AWACS) for the Government of Japan, continuing B-2 bomber subcontract work, other program support and classified project activities. Significant restructuring in the form of mergers, acquisitions and strategic alliances are continuing throughout the industry as a result of the reduced opportunities for new programs. Internal consolidations and restructuring of the Company's defense and space operations have helped position the Defense & Space Group to effectively compete in the current market environment. The Company continues to examine whether its long-term strategy is best pursued through internal means or through acquisitions, dispositions or alliances. Joint venture arrangements with other companies are expected to continue to be common for major developmental programs and follow-on production activities. Currently, the Company's activities in the F-22, V-22 and RAH-66 developmental programs are under joint venture arrangements. 34 of 94 35 Sales to foreign governments represented 19% of total 1995 defense and space sales, compared with an average of 10% for the prior three years, principally due to foreign government sales associated with the 767 AWACS and CH-47 programs in 1995. In 1993 NASA selected Boeing to become the prime contractor for the restructured International Space Station program, which now includes Russian participation. The selection as prime contractor for the International Space Station was an acknowledgment of Boeing Defense & Space Group's ability to effectively manage large, complex integration projects, and represents an assignment of great importance to both the Company and the country's manned space program. Boeing is responsible for the design, development and integration of the Space Station, as well as completion of its original work package to build the habitat and laboratory modules. In early 1995, the International Space Station contract was definitized with NASA at a target price of $5.6 billion. First launch of a Space Station component is currently scheduled for 1997. The F-22 fighter, being developed in partnership with Lockheed Martin, remains a high priority defense program. The Air Force completed its Air Vehicle Critical Design Review in the first quarter of 1995, and first flight is currently scheduled to occur in early 1997. Low-rate initial production is scheduled to begin approximately two years later. The 767 AWACS program is expected to provide important business opportunities over the long term in international markets and ultimately with the U.S. Government. Currently, four 767 AWACS have been ordered by the Government of Japan. The first two 767 airframes have been delivered and are undergoing modification for installation of the AWACS system. Completion of the first 767 AWACS system aircraft is scheduled for 1998. In October 1995, the U.S. Air Force placed into service the first 707 AWACS to incorporate a major block of enhancements, the first significant AWACS enhancements in 10 years. U.S. Government and NATO 707 AWACS upgrades continue to be a significant defense and space activity. Revenues for these upgrades increased in 1995. The V-22 Osprey tiltrotor aircraft, being developed in partnership with Bell Helicopter Textron, has maintained strong congressional support. The V-22 will satisfy U.S. Marine Corps and Special Operations Forces medium-lift requirements with exceptional mobility and rapid deployment. Critical Design Review for the V-22 was successfully completed in late 1994, and the current engineering and manufacturing development contract will provide four production-representative aircraft for operational tests scheduled to begin in late 1996. The RAH-66 Comanche, a reconnaissance light-attack helicopter for the U.S. Army, is being jointly developed with Sikorsky. First flight of the Comanche prototype occurred in January 1996. The CH-47 Chinook helicopter program currently consists of modernizing and remanufacturing earlier model Chinooks and production of new CH-47s. In July 1995, the Company received a contract award from Britain's Ministry of Defence for 14 new Chinook helicopters. These deliveries will begin in 1997. Near-term sales prospects are principally with foreign governments. Other business activities include developing large-scale information systems and providing management services, principally for government agencies. 35 of 94 36 STRATEGIC INVESTMENTS FOR LONG-TERM VALUE Over the past several years, the Company has made significant investments to meet future airline product requirements and to aggressively pursue business and process improvement opportunities. Although constraining earnings and requiring substantial cash resources in the near term, these investments are building long-term value by streamlining operations and positioning the Company to maintain its leadership position. NEW PRODUCT DEVELOPMENT The Company continually evaluates opportunities to improve current models, and conducts ongoing marketplace assessments to ensure that its family of jet transports is well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line responsive to changing market conditions by maximizing commonality among the Boeing family of airplanes. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products that exhibit the highest standards of quality, safety, technical excellence, economic performance, and in-service support. The major focus of development activities over the past three years has been the 777 wide-body twinjet which entered service in May 1995. The new 777 model is designed to meet airline requirements for an efficient, comfortable, high-capacity airplane to be used in domestic and regional markets internationally. Deliveries of the extended-range version 777-200 will begin in late 1996, followed in 1998 by the 777-300 version with 20% greater passenger-carrying capability. As of January 25, 1996, orders for 250 and options for 138 777s have been announced by 20 customers. Development of the 737-600/700/800 next-generation 737 family of short-to- medium-range jetliners began in 1993. These new 737s will provide greater range, increased speed, and reduced noise and emissions while maintaining 737 family commonality. The 737-700, the middle-sized member of the family, will be the first version to be placed into service, with initial deliveries scheduled for late 1997 to Southwest Airlines. The 737-800, a larger version, is currently scheduled to be delivered in early 1998 to Hapag-Lloyd. Initial delivery of the smallest version, the 737-600, is currently scheduled for late 1998 to SAS. As of January 25, 1996, orders for 302 and options for 206 next-generation 737-600/700/800s have been announced by 13 customers. Other derivatives recently developed include freighter versions of the 747-400 and 767. The initial 747-400 freighter was delivered in 1993, and first delivery of the 767 freighter occurred in the fourth quarter of 1995. The Company continues to assess the market potential for new or derivative aircraft that are larger and have more range than the 747-400. Because of the relatively limited market for this size and range aircraft and the very substantial investment levels that would be required to develop and produce an all-new aircraft, this market segment may best be met with derivatives of the 747 model. The timing of a decision to proceed with a 747 derivative aircraft and the development schedule will be dependent on customer demand and the Company's ability to achieve favorable long-term financial returns on the substantial development costs that would be required. 36 of 94 37 While product development activities are principally oriented toward maintaining and enhancing the competitiveness of the Boeing subsonic fleet, the Company is also involved in studying the technological and economic issues associated with development of commercial supersonic aircraft. The major developmental programs in the defense and space segment, funded principally under cost-reimbursement-type contracts, include International Space Station, F-22 fighter aircraft, V-22 Osprey tiltrotor transport and RAH-66 Comanche helicopter. Opportunities for major new U.S. Government defense and space programs in the near term are relatively limited; however, the Company is aggressively seeking ways to capitalize on its existing broad program base and its competitive strength with regard to military and space technology. In recent years, significant resources have been applied in technologies for affordable military aircraft, which has led to award of key conceptual design contracts, including Joint Attack Strike Technology (JAST), a tri-service Defense Department initiative to provide design concepts for an affordable lightweight fighter. During 1995 Boeing completed a series of critical tests with a large-scale JAST model in preparation for the Government's selection of two competing contractors in 1996 for the Concept Demonstration phase of the program. Other new business opportunities being pursued or studied include both military and commercial applications. On the military side, potential applications using the Company's commercial aircraft, particularly the 767, continue to be assessed. In the commercial space arena, Boeing is leading an industrial team to offer highly automated commercial satellite launching from a seagoing launch platform. Team members include Kvaerner a.s. of Norway, RSC-Energia of Russia, and Yuzhnoye of Ukraine. First launch is currently scheduled for 1998. The market requirements and developmental risks associated with a commercial tiltrotor aircraft based on V-22 technology are also being studied. In 1997 the Company will begin producing a phased-array antenna that can provide live television to airline passengers, as well as providing other in-flight communications applications. MAJOR PROCESS IMPROVEMENTS The Company remains strongly committed to continuous quality improvement in all aspects of its business and to maintaining a strong focus on customer needs, including product capabilities, technology, in-service economics and product support. Major long-term productivity gains are being aggressively pursued, with substantial resources committed to investments in training, restructuring of processes, new technology, and organizational realignment. The 777, the 737-700 and other recent developmental programs have included early commitment of resources for integrated product teams, design interface with customer representatives, use of advanced three-dimensional digital product definition and digital pre-assembly computer applications, and increased use of automated manufacturing processes. Although these measures have required significant current investments, substantial long-term benefits are anticipated from reductions in design changes and rework, and improved quality of internally manufactured and supplier parts. 37 of 94 38 A major initiative has been launched to greatly simplify and streamline commercial aircraft configuration control, production management, and related systems. Organizations have been realigned and substantial resources have been dedicated to ensure the new processes and systems are successfully implemented over the next few years. The Defense & Space Group continues to aggressively pursue important process improvements through integrated product teams to provide cost-effective solutions that maintain technological superiority. One example is a rapid prototyping process that facilitates quick and effective cross-disciplinary integration in creating new product prototypes. ------ SHAREHOLDER VALUE AS CORPORATE PERFORMANCE MEASURE The Company's long-range mission is to be the number one aerospace company in the world and among the premier industrial concerns in terms of quality, profitability and growth. The Company has recently revised its fundamental goal with respect to growth and profitability, now defined as increasing shareholder value over the long term. Corporate level and internal operating performance measurements and strategic planning processes are aligned with or directly based on enhancing long-term shareholder value. 38 of 94 39 Independent Auditors' Report Board of Directors and Shareholders, The Boeing Company: We have audited the accompanying consolidated statements of financial position of The Boeing Company and subsidiaries as of December 31, 1995 and 1994, and the related statements of net earnings and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Boeing Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP January 25, 1996 Seattle, Washington 39 of 94 40 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS (Dollars in millions except per share data) Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------ Sales and other operating revenues $19,515 $21,924 $25,438 Costs and expenses 18,613 20,773 23,747 Special retirement program expense 600 - ------------------------------------------------------------------------------ Earnings from operations 302 1,151 1,691 Other income, principally interest 209 122 169 Interest and debt expense (151) (130) (39) - ------------------------------------------------------------------------------ Earnings before federal taxes on income 360 1,143 1,821 Federal taxes on income (33) 287 577 - ------------------------------------------------------------------------------ Net earnings $ 393 $ 856 $ 1,244 ============================================================================== Earnings per share $1.15 $2.51 $ 3.66 ============================================================================== Cash dividends per share $1.00 $1.00 $ 1.00 ============================================================================== See notes to consolidated financial statements. 40 of 94 41 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollars in millions except per share data) December 31, 1995 1994 - ------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 3,730 $ 2,084 Short-term investments 559 Accounts receivable 1,470 1,664 Current portion of customer financing 205 250 Deferred income taxes 840 878 Inventories 14,001 11,269 Less advances and progress billings (7,068) (6,290) - ------------------------------------------------------------------------------ Total current assets 13,178 10,414 Customer financing 1,660 3,071 Property, plant and equipment, at cost 13,744 13,588 Less accumulated depreciation (7,288) (6,786) Deferred income taxes 58 Other assets 746 1,176 - ------------------------------------------------------------------------------ $22,098 $21,463 ============================================================================== Liabilities and Shareholders' Equity Accounts payable and other liabilities $ 6,245 $ 6,267 Advances in excess of related costs 510 273 Income taxes payable 389 281 Current portion of long-term debt 271 6 - ------------------------------------------------------------------------------ Total current liabilities 7,415 6,827 Deferred income taxes 51 Accrued retiree health care 2,441 2,282 Long-term debt 2,344 2,603 Shareholders' equity: Common shares, par value $5.00 - 600,000,000 shares authorized; 349,256,792 shares issued 1,746 1,746 Additional paid-in capital 615 586 Retained earnings 7,746 7,696 Less treasury shares, at cost - 1995 - 5,304,135; 1994 - 8,377,637 (209) (328) - ------------------------------------------------------------------------------ Total shareholders' equity 9,898 9,700 - ------------------------------------------------------------------------------ $22,098 $21,463 ============================================================================== See notes to consolidated financial statements. 41 of 94 42 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------ Cash flows - operating activities: Net earnings $ 393 $ 856 $ 1,244 Adjustments to reconcile net earnings to net cash provided by operating activities: Special retirement program expense 600 Depreciation and amortization - Plant and equipment 976 1,081 953 Leased aircraft, other 57 61 72 Changes in assets and liabilities - Short-term investments 559 207 137 Accounts receivable 194 (49) (187) Inventories, net of advances and progress billings (1,954) (1,545) (733) Accounts payable and other liabilities (24) 413 606 Advances in excess of related costs 237 47 (413) Income taxes payable and deferred 37 (117) (334) Other assets (168) (11) (135) Accrued retiree health care 159 134 144 - ------------------------------------------------------------------------------ Net cash provided by operating activities 1,066 1,077 1,354 - ------------------------------------------------------------------------------ Cash flows - investing activities: Customer financing additions (1,239) (975) (1,560) Customer financing reductions 2,638 770 626 Plant and equipment, net additions (629) (795) (1,317) Other 8 - ------------------------------------------------------------------------------ Net cash provided (used) by investing activities 770 (1,000) (2,243) - ------------------------------------------------------------------------------ Cash flows - financing activities: Debt financing 6 (21) 837 Shareholders' equity - Cash dividends paid (342) (340) (340) Stock options exercised, other 146 26 23 - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities (190) (335) 520 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 1,646 (258) (369) Cash and cash equivalents at beginning of year 2,084 2,342 2,711 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 3,730 $2,084 $2,342 ============================================================================== See notes to consolidated financial statements. 42 of 94 43 THE BOEING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1995, 1994 and 1993 (Dollars in millions except per share data) Note 1 - Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of all subsidiaries. Intercompany profits, transactions and balances have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are addressed in these notes to the consolidated financial statements. Sales and other operating revenues Sales under commercial programs and U.S. Government and foreign military fixed-price contracts are generally recorded as deliveries are made. For certain fixed-price contracts that require substantial performance over an extended period before deliveries begin, sales are recorded based upon attainment of scheduled performance milestones. Sales under cost-reimbursement contracts are recorded as costs are incurred. Certain U.S. Government contracts contain profit incentives based upon performance relative to predetermined targets. Incentives based on cost performance are recorded currently, and other incentives and fee awards are recorded when the amounts can be reasonably estimated or are awarded. Income associated with customer financing activities is included in sales and other operating revenues. Contract and program accounting Defense and space segment operations principally consist of performing work under U.S. Government and foreign military contracts. Cost of sales for such contracts is determined based on the estimated average total contract cost and revenue. To the extent the total of such costs is expected to exceed the total estimated sales price, charges are made to current earnings to reduce inventoried costs to estimated realizable value. 43 of 94 44 Commercial jet transport programs are planned, committed and facilitized based on long-term delivery forecasts, normally for quantities in excess of contractually firm orders. Cost of sales for all commercial jet transport programs is determined based on estimated average total cost and revenue for the current program commitment quantity. For new commercial jet transport programs, the program quantity is initially based on an established number of units representing what is believed to be a conservative market projection. Program commitment quantities generally represent deliveries for the next three to five years, although the initial program quantity for new programs will normally include orders and deliveries over periods up to ten years. The initial program quantity for the new 777 program has been established at 400 units, the same initial program quantity as for the 747 program in 1969 and for the 767 and 757 programs in 1982. The commercial program method of accounting, an industry- developed practice adopted by the Company in the 1960s and applied to all commercial jet transport programs since that time, requires the demonstrated ability to reliably estimate and manage the cost-revenue relationship for the defined program quantity. The program method of accounting effectively amortizes or averages tooling and special equipment costs, as well as unit production costs, over the program quantity. Because of the higher unit production costs experienced at the beginning of a new program and the substantial investment required for initial tooling and special equipment, new commercial jet transport programs normally have lower operating profit margins than established programs. The estimated program average costs and revenues are reviewed and reassessed quarterly, and changes in estimates are recognized over current and future deliveries comprising the program quantity. Inventories Inventoried costs on long-term commercial jet transport programs and U.S. Government and foreign military contracts include direct engineering, production and tooling costs, and applicable overhead. In addition, for U.S. Government fixed-price-incentive contracts, inventoried costs include research and development and general and administrative expenses estimated to be recoverable. Inventoried costs associated with commercial jet transport programs and long- term contracts, less estimated average cost of sales, are not in excess of estimated realizable value. In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year. Commercial spare parts and general stock materials are stated at average cost not in excess of realizable value. Research and development, general and administrative expenses Research and development and general and administrative expenses are charged directly to earnings as incurred except to the extent estimated to be directly recoverable under U.S. Government flexibly priced contracts. Interest expense Interest and debt expense is presented net of amounts capitalized. Interest expense is subject to capitalization as a construction-period cost of property, plant and equipment and of commercial program tooling. 44 of 94 45 Postretirement benefits The Company's funding policy for pension plans is to contribute, at a minimum, the statutorily required amount to an irrevocable trust. Benefits under the plans are generally based on years of credited service, age at retirement and average of last five years' earnings. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method. Cash and cash equivalents Cash and cash equivalents consist of highly liquid instruments, such as certificates of deposit, time deposits, treasury notes and other money market instruments, which generally have maturities of less than three months. Short-term investments Short-term investments principally consist of U.S. Government Treasury obligations, with unrealized gains and losses reflected in other income. Capital assets Property, plant and equipment are recorded at cost, including applicable construction-period interest, and depreciated principally over the following estimated useful lives: new buildings and land improvements, from 20 to 45 years; machinery and equipment, from 3 to 10 years. The principal methods of depreciation are as follows: buildings and land improvements, 150% declining balance; machinery and equipment, sum-of-the-years' digits. Per share data Net earnings per share are computed based on the weighted average number of shares outstanding of 342,159,741; 340,574,779; and 339,736,640 for the years ended December 31, 1995, 1994 and 1993, respectively. There is no material dilutive effect on net earnings per share due to common stock equivalents. Note 2 - Accounts Receivable Accounts receivable at December 31 consisted of the following: 1995 1994 - ------------------------------------------------------------------------------ Accounts receivable under U.S. Government contracts $1,059 $1,200 Accounts receivable from commercial and foreign military customers 411 464 - ------------------------------------------------------------------------------ $1,470 $1,664 ============================================================================== 45 of 94 46 Accounts receivable included the following as of December 31, 1995 and 1994, respectively: amounts not currently billable of $119 and $137 relating primarily to sales values recorded upon attainment of performance milestones that differ from contractual billing milestones and withholds on U.S. Government contracts ($65 and $109 not expected to be collected within one year); $162 and $212 relating to claims and other amounts on U.S. Government contracts subject to future settlement ($19 and $212 not expected to be collected within one year); and $46 and $41 of other receivables not expected to be collected within one year. Note 3 - Inventories Inventories as of December 31, 1995 and 1994, consisted of $13,107 and $10,352 relating to long-term commercial programs and U.S. Government and foreign military contracts, and $894 and $917 relating to commercial spare parts, general stock materials and other inventories. General and administrative and research and development expenses included in inventories represented less than 1% of total inventories. Interest capitalized as construction-period tooling costs amounted to $33, $36 and $50 in 1995, 1994 and 1993, respectively. As of December 31, 1995, there were no significant deferred production costs in excess of estimated average cost of deliveries or unamortized tooling costs not recoverable from existing firm orders for commercial programs other than the 777 and 737-600/700/800 programs. The program quantity for the 777 program for determining deferred production costs in excess of aggregate estimated average cost and over which total tooling costs will be amortized and absorbed in cost of sales has been established at 400 units. Inventory costs relating to the 777 program included unamortized tooling of $3,241 and $3,089 at December 31, 1995 and 1994, and $1,440 at December 31, 1995 of deferred production costs incurred on in-process and delivered units in excess of the estimated average cost of such units determined as described in Note 1. It is estimated that $2,285 of such amounts will be recovered from firm orders received after December 31, 1995. As of December 31, 1995, 183 777s were under firm contract, and 13 777s had been delivered. The program quantity for the 737-600/700/800 program for determining the deferred production costs in excess of aggregate estimated average cost and over which total tooling costs will be amortized will be established when deliveries commence in 1997. Inventory costs relating to the 737-600/700/800 program included tooling of $274 at December 31, 1995. As of December 31, 1995, 212 737-600/700/800s were under firm contract. As of December 31, 1995 and 1994, inventory balances included $324 and $318 subject to claims or other uncertainties related to U.S. Government contracts, principally for the Peace Shield program. (See Note 17.) The estimates underlying the average costs of deliveries reflected in the inventory valuations may differ materially from amounts eventually realized for the reasons outlined in Note 18. 46 of 94 47 Note 4 - Customer Financing Long-term customer financing, less current portion, at December 31 consisted of the following: 1995 1994 - ------------------------------------------------------------------------------ Notes receivable $ 721 $1,189 Investment in sales-type leases 351 1,235 Operating lease aircraft, at cost, less accumulated depreciation of $326 and $269 688 747 - ------------------------------------------------------------------------------ 1,760 3,171 Less valuation allowance (100) (100) - ------------------------------------------------------------------------------ $1,660 $3,071 ============================================================================== Financing for aircraft is collateralized by security in the related asset, and historically, the Company has not experienced a problem in accessing such collateral. The operating lease aircraft category includes new and used jet and commuter aircraft, spare engines and spare parts. Scheduled principal payments from notes receivable and sales-type leases for the next five years are as follows: 1996 1997 1998 1999 2000 ------------------------------------ $205 $63 $49 $36 $38 ==================================== The Company has entered into interest rate swaps with third-party investors whereby the interest rate terms differ from the terms in the original receivable. These interest rate swaps related to $67 of customer financing receivables as of December 31, 1995. Interest rates on fixed-rate notes ranged from 7.87% to 13.215%, and effective interest rates on variable-rate notes ranged from the London Interbank Offered Rate (LIBOR) to 4.05% above LIBOR. Sales and other operating revenues included interest income associated with notes receivable and sales-type leases of $160, $183 and $153 for 1995, 1994 and 1993, respectively. The valuation allowance is subject to change depending on estimates of collectability and realizability of the customer financing balances. 47 of 94 48 Note 5 - Property, Plant and Equipment Property, plant and equipment at December 31 consisted of the following: 1995 1994 - ------------------------------------------------------------------------------ Land $ 404 $ 400 Buildings 5,791 5,662 Machinery and equipment 7,251 7,090 Construction in progress 298 436 - ------------------------------------------------------------------------------ $13,744 $13,588 ============================================================================== Interest capitalized as construction-period property, plant and equipment costs amounted to $32, $51 and $100 in 1995, 1994 and 1993, respectively. Note 6 - Taxes on Income The provision for federal taxes on income consisted of the following: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Taxes paid or currently payable $ 38 $251 $1,113 Change in deferred taxes (71) 36 (536) - ----------------------------------------------------------------------------- $(33) $287 $ 577 ============================================================================= State taxes on income, which are relatively minor in amount, are included in general and administrative expense. The provisions for federal taxes on income were less than those which result from application of the statutory corporate tax rates due to the following: 1995 1994 1993 - ----------------------------------------------------------------------------- Statutory tax rate 35.0 % 35.0 % 35.0 % Foreign Sales Corporation tax benefit (20.8) (5.7) (3.3) Research benefit (25.0) (5.2) Rate change impact on deferred balances (0.5) Other 1.6 1.0 0.5 - ----------------------------------------------------------------------------- Effective tax rate (9.2)% 25.1 % 31.7 % ============================================================================= 48 of 94 49 The deferred tax assets, net of deferred tax liabilities, resulted from an alternative minimum tax credit carryforward and from temporary tax differences associated with the following: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Inventory and long-term contract methods of income recognition $ 191 $ 473 $ 381 Pension benefit accruals (206) (347) (323) Retiree health care accruals 854 799 752 Other employee benefits accruals 291 220 223 Customer financing (362) (318) (158) Alternative minimum tax credit carryforward 130 Domestic International Sales Corporation (12) - ----------------------------------------------------------------------------- Net deferred tax assets $ 898 $ 827 $ 863 ============================================================================= The alternative minimum tax credit carryforward produces a future tax benefit that may be carried forward indefinitely. The temporary tax differences associated with inventory and long-term contract methods of income recognition encompass related costing differences, including timing and depreciation differences. Valuation allowances were not required due to the nature of and circumstances associated with the temporary tax differences. In response to an Internal Revenue Service clarification of a transition rule relating to the repeal of investment tax credit under the Tax Reform Act of 1986, the Company is conducting a comprehensive study regarding prior years' investments that may qualify for additional investment tax credit. The study will likely result in recognition of additional prior years' investment tax credit benefits. Income taxes have been settled with the Internal Revenue Service for all years through 1978, and Internal Revenue Service field examinations have been completed through 1987. The Company believes adequate provision has been made for all open years. Favorable resolution of certain claims by the Company could potentially result in reductions in future tax provisions. Federal income tax payments (refunds) and transfers were $(91), $401 and $908 in 1995, 1994 and 1993, respectively. Note 7 - Other Assets Other assets at December 31 consisted of the following: 1995 1994 - ----------------------------------------------------------------------------- Prepaid pension expense $ 698 $1,115 Investments, other 48 61 - ----------------------------------------------------------------------------- $ 746 $1,176 ============================================================================= 49 of 94 50 Note 8 - Accounts Payable and Other Liabilities Accounts payable and other liabilities at December 31 consisted of the following: 1995 1994 - ----------------------------------------------------------------------------- Accounts payable $3,017 $3,207 Accrued compensation and employee benefit costs 1,374 1,164 Lease and other deposits 508 640 Other 1,346 1,256 - ----------------------------------------------------------------------------- $6,245 $6,267 ============================================================================= Note 9 - Long-Term Debt Long-term debt at December 31 consisted of the following: 1995 1994 - ----------------------------------------------------------------------------- Unsecured debentures and notes: 8 3/8% due Mar. 1, 1996 $ 250 $ 250 6.35% due Jun. 15, 2003 299 299 8 1/10% due Nov. 15, 2006 175 175 8 3/4% due Aug. 15, 2021 398 398 7.95% due Aug. 15, 2024 300 300 7 1/4% due Jun. 15, 2025 247 247 8 3/4% due Sep. 15, 2031 248 248 8 5/8% due Nov. 15, 2031 173 173 7.50% due Aug. 15, 2042 100 100 7 7/8% due Apr. 15, 2043 173 173 6 7/8% due Oct. 15, 2043 125 125 Other notes 127 121 Less current portion (271) (6) - ----------------------------------------------------------------------------- $2,344 $2,603 ============================================================================= The $300 debentures due August 15, 2024, are redeemable at the holder's option on August 15, 2012. All other debentures and notes are not redeemable prior to maturity. The $100 notes due August 15, 2042, with a stated rate of 7.50% were issued to a private investor in connection with an interest rate swap arrangement that resulted in an effective synthetic rate of 7.865%. Maturities of long-term debt for the next five years are as follows: 1996 1997 1998 1999 2000 ------------------------------------ $271 $14 $14 $11 $11 ==================================== Interest payments were $210, $210 and $175 in 1995, 1994 and 1993, respectively. 50 of 94 51 The Company has $2,000 currently available under credit-line agreements with a group of commercial banks. Under these agreements, revised as of September 29, 1995, $1,000 is available until September 27, 1996, and $1,000 is available until September 30, 2002. There are compensating balance arrangements, and retained earnings totaling $1,458 are free from dividend restrictions. The Company has complied with restrictive covenants contained in the various debt agreements. Note 10 - Postretirement Plans Pensions The Company has various noncontributory plans covering substantially all employees. All major plans are funded and have plan assets that exceed accumulated benefit obligations. The following table reconciles the plans' funded status to the prepaid expense balance at December 31. 1995 1994 - ----------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested $(8,816) $(6,826) Nonvested (806) (647) - ----------------------------------------------------------------------------- Accumulated benefit obligation (9,622) (7,473) Effect of projected future salary increases (1,421) (1,517) - ----------------------------------------------------------------------------- Projected benefit obligation (11,043) (8,990) Plan assets at fair value - primarily equities, fixed income obligations and cash equivalents 11,506 9,290 - ----------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 463 300 Unrecognized net actuarial (gain) loss (80) 463 Unrecognized prior service cost 388 439 Unrecognized net asset at January 1, 1987, being recognized over the plans' average remaining service lives (73) (87) - ----------------------------------------------------------------------------- Prepaid pension expense recognized in the Consolidated Statements of Financial Position $ 698 $ 1,115 ============================================================================= The pension provision included the following components: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Service cost (current period attribution) $ 293 $ 352 $ 307 Interest accretion on projected benefit obligation 760 669 632 Actual return on plan assets (2,830) (101) (923) Net deferral and amortization of actuarial gains and losses 2,078 (596) 257 - ----------------------------------------------------------------------------- Net pension provision $ 301 $ 324 $ 273 ============================================================================= 51 of 94 52 The actuarial present value of the projected benefit obligation at December 31, 1995, 1994 and 1993, respectively, was determined using a weighted average discount rate of 7.0%, 8.5% and 7.25%, and a rate of increase in future compensation levels of 5.0%, 5.75% and 5.0%. The expected long-term rate of return on plan assets at December 31, 1995, 1994 and 1993, respectively, was 8.0%, 8.0% and 8.5%. The pension plans provide that, in the event there is a change in control of the Company which is not approved by the Board of Directors and the plans are terminated within five years thereafter, the assets in the plans first will be used to provide the level of retirement benefits required by the Employee Retirement Income Security Act, and then any surplus will be used to fund a trust to continue present and future payments under the postretirement medical and life insurance benefits in the Company's group insurance programs. The Company has an agreement with the Government with respect to certain of the Company pension plans. Under the agreement, should the Company terminate any of the plans (although the Company has no intention of doing so) under conditions in which the plan's assets exceed that plan's obligations, the Government will be entitled to a fair allocation of any of the plan's assets based on plan contributions that were reimbursed under Government contracts. Also, the Revenue Reconciliation Act of 1990 imposes a 20% nondeductible excise tax on the gross assets reverted if the Company establishes a qualified replacement plan or amends the terminating plan to provide for benefit increases; otherwise, a 50% tax is applied. Any net amount retained by the Company is treated as taxable income. A special retirement program was offered during the first half of 1995 to encourage early retirements, resulting in a pretax charge of $600. The special retirement program will be funded over a minimum of ten years through the Company's retirement plan. The projected benefit obligation at June 30, 1995, the date at which the special retirement program expense was recognized, was determined using a weighted average discount rate of 7.75%. The Company has certain unfunded and partially funded plans with a projected benefit obligation of $233 and $132; plan assets of $38 and $5; and unrecognized prior service costs and actuarial losses of $85 and $39 as of December 31, 1995 and 1994, respectively, based on actuarial assumptions consistent with the funded plans. The net provision for the unfunded plans was $27 and $23 for 1995 and 1994. The principal defined contribution plans are the Company-sponsored 401(k) plans and a funded plan for unused sick leave. Under the terms of the Company- sponsored 401(k) plans, eligible employees were allowed to contribute up to 12% of their base pay (15% beginning in 1996). The Company contributes amounts equal to 50% of the employee's contribution to a maximum of 4% of the employee's pay, subject to statutory limitations. The provision for these defined contribution plans in 1995, 1994 and 1993 was $190, $206 and $213, respectively. 52 of 94 53 Other postretirement benefits The Company's postretirement benefits other than pensions consist of health care coverage for eligible retirees and qualifying dependents. Except for employees covered by the United Auto Workers bargaining agreement for whom lifetime benefits are provided, retiree health care is provided principally until age 65. The retiree health care cost provision was $246, $218 and $230 for 1995, 1994 and 1993, respectively. The components of expense were as follows: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Service cost (current period attribution) $ 92 $ 91 $ 92 Interest accretion on accumulated retiree health care obligation 157 136 144 Net deferral and amortization of actuarial gains (3) (9) (6) - ----------------------------------------------------------------------------- Net provision for retiree health care $246 $218 $230 ============================================================================= Benefit costs were calculated based on assumed cost growth for retiree health care costs of an 8.9% annual rate for 1996, decreasing to a 5.0% annual growth rate by the year 2008. A 1% increase or decrease in the assumed annual trend rates would increase or decrease the accumulated retiree health care obligation by $271, $231 and $218 as of December 31, 1995, 1994 and 1993, respectively, with a corresponding effect on the retiree health care expense of $41, $37 and $39. The accumulated retiree health care obligation at December 31, 1995, 1994 and 1993 was determined using a weighted average discount rate of 7.0%, 8.5% and 7.25%, respectively. The accumulated retiree health care obligation at December 31 consisted of the following components: 1995 1994 - ----------------------------------------------------------------------------- Retirees and dependents $ 890 $ 562 Fully eligible active plan participants 201 360 Other active plan participants 1,121 1,039 - ----------------------------------------------------------------------------- Total accumulated retiree health care obligation 2,212 1,961 Unrecognized net actuarial gain 229 321 - ----------------------------------------------------------------------------- Accrued retiree health care $2,441 $2,282 ============================================================================= The special retirement program offered during the first half of 1995 did not result in an additional retiree health care cost due to offsetting unrecognized actuarial gains. 53 of 94 54 Note 11 - Research and Development, General and Administrative Expenses Expenses charged directly to earnings as incurred included the following: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Research and development $1,267 $1,704 $1,661 General and administrative 1,020 1,126 1,102 ============================================================================= Note 12 - Shareholders' Equity Changes in shareholders' equity consisted of the following:
Common Stock ---------------- Additional Treasury Stock Par Paid-In Retained ---------------- Shares in thousands) Shares Value Capital Earnings Shares Amount - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1992 349,257 $1,746 $418 $6,276 9,836 $(384) ============================================================================================================ Net earnings 1,244 Cash dividends declared (340) Treasury shares issued for incentive stock plans, net (11) (717) 28 Tax benefit related to incentive stock plans 3 Stock appreciation rights expired or surrendered 3 - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993 349,257 $1,746 $413 $7,180 9,119 $(356) ============================================================================================================ Net earnings 856 Cash dividends declared (340) Treasury shares issued for incentive stock plans, net (9) (741) 28 Tax benefit related to incentive stock plans 3 Stock appreciation rights expired or surrendered 4 Transfer from contingent stock repurchase provision 175 - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 349,257 $1,746 $586 $7,696 8,378 $(328) ============================================================================================================ Net earnings 393 Cash dividends declared (343) Treasury shares issued for incentive stock plans, net (11) (3,074) 119 Incentive stock plan accrual 11 Tax benefit related to incentive stock plans 20 Stock appreciation rights expired or surrendered 9 - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 349,257 $1,746 $615 $7,746 5,304 $(209) ============================================================================================================
54 of 94 55 In 1992 the Company issued put options on five million shares of its stock, exercisable on specific dates in 1994, giving another party the right to sell shares of Boeing stock to the Company at contractually specified prices. As of December 31, 1993, the temporary equity account "Contingent stock repurchase commitment" of $175 was the amount the Company would have been obligated to pay if all the put options were exercised. All of the put options expired in 1994 and none were exercised. The proceeds from the issuance of the put options were recorded as paid-in capital. In July 1987, the Company adopted a Stockholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of common stock. Under certain conditions, each Right may be exercised to purchase one one- hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $150, subject to adjustment. The Rights will be exercisable only if a person or group has acquired, or obtained the right to acquire, 20% or more of the outstanding shares of common stock; following the commencement of a tender or exchange offer for 30% or more of such outstanding shares of common stock; or after the Board of Directors of the Company declares any person, alone or together with affiliates and associates, to be an Adverse Person. If the Board of Directors declares an Adverse Person, or a person or group acquires more than 30% of the then outstanding shares of common stock (except pursuant to an offer which the independent directors determine to be fair to and otherwise in the best interests of the Company and its shareholders), each Right will entitle its holder to receive, upon exercise, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. The Company will be entitled to redeem the Rights at 5 cents per Right at any time prior to the earlier of the expiration of the Rights in August 1997 or ten days following the time that a person has acquired or obtained the right to acquire a 20% position. The Company may not redeem the Rights if the Board of Directors has previously declared a person to be an Adverse Person. The Rights do not have voting or dividend rights, and until they become exercisable, have no dilutive effect on the earnings of the Company. Information concerning stock options and stock appreciation rights (SARs), issued to officers and other employees at exercise prices equal to market value of the stock at grant date, is presented in the following table. (Shares in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------- Number of shares under option: Outstanding at beginning of year 14,337 13,265 12,001 Granted 2,866 2,225 2,531 Exercised (3,114) (767) (743) Canceled or expired (232) (252) (278) Exercised as SARs (261) (134) (246) - ----------------------------------------------------------------------------- Outstanding at end of year 13,596 14,337 13,265 ============================================================================= Exercisable at end of year 8,058 6,820 5,715 ============================================================================= Exercise prices per share for options outstanding at end of year: High $60.06 $60.06 $60.06 Low $20.69 $19.67 $12.63 ============================================================================= 55 of 94 56 (Shares in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------- Stock appreciation rights: Outstanding at end of year 744 1,258 1,703 Exercisable at end of year 744 1,178 1,480 ============================================================================= Number of shares authorized for future grants under stock option and incentive compensation plans at end of year 14,037 16,813 16,695 ============================================================================= Ten million shares of authorized preferred stock remain unissued. Note 13 - Derivative Financial Instruments The derivative financial instruments held by the Company at December 31, 1995, consisted of simple and specifically tailored interest rate swaps (associated with certain customer financing receivables and long-term debt) to achieve a desired balance of fixed and variable rate positions. The interest rate swaps are accounted for as integral components of the associated receivable and debt, with interest accrued and recognized based upon the effective rates. Due to the component nature of these interest rate swaps, there are no associated gains or losses. (See Note 4, Note 9 and Note 16.) Note 14 - Financial Instruments with Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk include financing commitments, credit guarantees, and participations in customer financing receivables with third-party investors which involve interest rate terms different from the underlying receivables. Irrevocable financing commitments related to aircraft on order, including options, scheduled for delivery through 2002 totaled $3,632 and $3,205 as of December 31, 1995 and 1994. 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. None of these financing commitments have potentially adverse interest rate terms. Participations in customer financing receivables with third-party investors which involve interest rate terms different from the underlying receivables totaled $79 and $109 as of December 31, 1995 and 1994. The Company's maximum exposure to credit-related losses associated with credit guarantees, without regard to collateral, totaled $211 and $114 as of December 31, 1995 and 1994. Because substantially all financial instruments subject to credit risk are adequately collateralized, the probability of significant loss arising from these financial instruments is considered remote. 56 of 94 57 Note 15 - Significant Group Concentrations of Credit Risk Substantially all financial instruments involving potential credit risk are with commercial airline customers and the U.S. Government. As of December 31, 1995, virtually all off-balance-sheet financial instruments described in Note 14 related to commercial aircraft customers. Of the $2,647 in accounts receivable and customer financing receivables included in the Consolidated Statements of Financial Position, $1,394 related to commercial aircraft customers and $1,059 related to the U.S. Government. No single commercial airline customer is associated with more than 25% of all financial instruments relating to customer financing. Financing for aircraft is collateralized by security in the related asset, and historically, the Company has not experienced a problem in accessing such collateral. Note 16 - Disclosures about Fair Value of Financial Instruments As of December 31, 1995 and 1994, the carrying amount of accounts receivable was $1,470 and $1,664 and the fair value of accounts receivable was estimated to be $1,445 and $1,594. The lower fair value reflects a discount due to deferred collection for certain receivables that will be collected over an extended period. The carrying value of accounts payable is estimated to approximate fair value. The carrying amount of notes receivable, net of valuation allowance, is estimated to approximate fair value. Although there are generally no quoted market prices available for customer financing notes receivable, the valuation assessments were based on the respective interest rates, risk-related rate spreads and collateral considerations. As of December 31, 1995 and 1994, the carrying amount of long-term debt was $2,615 and $2,609, and the fair value of long-term debt, based on current market rates for debt of the same risk and maturities, was estimated at $2,996 and $2,486. The Company's long-term debt, however, is generally not callable until maturity. With regard to financial instruments with off-balance-sheet risk, it is not practicable to estimate the fair value of future financing commitments, and all other off-balance-sheet financial instruments are estimated to have only a nominal fair value. The terms and conditions reflected in the outstanding guarantees and commitments for financing assistance are not materially different from those that would have been negotiated as of December 31, 1995. Note 17 - 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. In January 1991, the Company received from the U.S. Government a notice of partial termination for default which terminated most of the work required under contracts to develop and install a new air defense system for Saudi Arabia, known as the Peace Shield program. In June 1991, the Government selected another contractor to perform the work which is the subject of the contracts that have been terminated for default, and the Government may assert claims related to the reprocurement. 57 of 94 58 Management's position, supported by outside legal counsel which specializes in government procurement law, is that the grounds for default asserted by the Government in the Peace Shield termination are not legally supportable. Accordingly, management and counsel are of the opinion that on appeal the termination for default has a substantial probability of being converted to termination for the convenience of the Government, which would eliminate any Government claim for cost of reprocurement or other damages. Additionally, the Company has a legal basis for a claim for equitable adjustment to the prices and schedules of the contracts (the "Contract Claim"). Many of the same facts underlie both the Contract Claim and the Company's appeal of the Government's termination action. The Company filed its complaint in the United States Court of Federal Claims to overturn the default termination in order to obtain payment of the Contract Claim. In conjunction with the notice of partial termination in January 1991, the Government demanded the repayment of unliquidated progress payments in the amount of $605 plus interest. In April 1995, the parties executed an agreement deferring the Company's potential obligation to repay the $605 from January 25, 1991, until a decision of the court or earlier settlement. The deferment agreement is subject to annual review by the Government. The parties have been engaged in the discovery phase of the litigation, with the trial scheduled for March 1997, and have concurrently engaged in discussions which could lead to final settlement. On October 20, 1995, the court determined all activities in the lawsuit would be "suspended in light of the prospect of settlement." There can be no assurance that the Government will agree to final settlement on terms acceptable to the Company. If a final settlement is not reached, the Company expects that its position will ultimately be upheld with respect to the termination action and that it will recover on the Contract Claim. The Company's financial statements have been prepared on the basis of a conservative estimate of the Contract Claim and the Company's position that the termination was for the convenience of the Government. If a final settlement is not reached, the Company cannot, at this time, reasonably estimate the length of time that will be required to resolve the termination appeal and the Contract Claim. In the event that final settlement does not occur and the Company's appeal of the termination for default is not successful, the Company could realize a pretax loss on the program approximating the value of the unliquidated progress payments plus related interest and potential damages assessed by the Government. 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 for more than ten years. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. 58 of 94 59 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 December 31, 1995, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends. The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings, if any, 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 such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. Note 18 - Industry Segment Information The Company operates in two principal industries: commercial aircraft, and defense and space. Commercial aircraft operations principally involve development, production and marketing of commercial jet transports and providing related support services, principally to the commercial airline industry worldwide. Defense and space operations involve research, development, production, modification and support of military aircraft and helicopters and related systems, space systems and missile systems, principally through U.S. Government contracts. No single product line in the defense and space segment represented more than 10% of consolidated revenues, operating profits or identifiable assets. The commercial aircraft segment is subject to both operational and external business-environment risks. Operational risks that can seriously disrupt the Company's ability to make timely delivery of its commercial jet transports and meet its contractual commitments include execution of internal performance plans, and product performance risks associated with regulatory certifications of the Company's commercial aircraft by the U.S. Government and foreign governments, other regulatory uncertainties, collective bargaining labor disputes, and performance issues with key suppliers and subcontractors. While the Company's principal operations are in the United States and Canada, some key suppliers and subcontractors are located in Europe and Japan. External business-environment risks include adverse governmental export and import policies, factors that result in significant and prolonged disruption to air travel worldwide, and other factors that affect the economic viability of the commercial airline industry. Examples of factors relating to external business- environment risks include the volatility of aircraft fuel prices, global trade policies, and worldwide political stability and economic growth. 59 of 94 60 In addition to the foregoing risks associated with the commercial aircraft segment, the defense and space segment is subject to changing priorities or reductions in the U.S. Government defense and space budget, and termination of government contracts due to unilateral government action (termination for convenience) or failure to perform (termination for default). Civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeitures and suspension or debarment from government contracts may result from violations of business and cost classification regulations on U.S. Government contracts. As of January 25, 1996, the principle collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM) representing 33% of employees (current agreement expiring September 1999), Seattle Professional Engineering Employees Association (SPEEA) bargaining units representing 19% of employees (current agreement expiring December 1999) and United Auto Workers (UAW) representing 2% of employees (current agreement expiring September 1999). Foreign sales by geographic area consisted of the following: Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Asia, other than China $4,491 $6,149 $7,689 China 721 1,254 1,181 Europe 1,901 3,277 4,698 Oceania 485 887 635 Africa 127 135 264 Western Hemisphere 474 142 149 - ----------------------------------------------------------------------------- $8,199 $11,844 $14,616 ============================================================================= Defense sales were approximately 27%, 9% and 6% of total sales in Europe for 1995, 1994 and 1993, respectively. Defense sales were approximately 12%, 3% and 2% of total sales in Asia, other than China, for 1995, 1994 and 1993, respectively. Exclusive of these amounts, defense and space sales were principally to the U.S. Government. Financial information by segment for the three years ended December 31, 1995, is summarized on page 61. Corporate income consists principally of interest income from corporate investments. Activities previously identified as "Other industries" have been combined with defense and space because the amounts were not material and such remaining activities were organizationally aligned into the defense and space segment in 1995. Corporate assets consist principally of cash, cash equivalents, short-term investments and deferred income taxes. 60 of 94 61 Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Revenues Commercial aircraft $13,933 $16,851 $20,568 Defense and space 5,582 5,073 4,870 - ----------------------------------------------------------------------------- Operating revenues 19,515 21,924 25,438 Corporate income 209 122 169 - ----------------------------------------------------------------------------- Total revenues $19,724 $22,046 $25,607 ============================================================================= Operating profit Commercial aircraft $ 391 $ 1,022 $ 1,646 Defense and space 124 305 235 - ----------------------------------------------------------------------------- Operating profit 515 1,327 1,881 Corporate income 209 122 169 Debt and other corporate expense (364) (306) (229) - ----------------------------------------------------------------------------- Earnings before taxes $ 360 $ 1,143 $ 1,821 ============================================================================= Identifiable assets at December 31 Commercial aircraft $14,195 $14,440 $12,686 Defense and space 3,220 3,412 3,727 - ----------------------------------------------------------------------------- 17,415 17,852 16,413 Corporate 4,683 3,611 4,037 - ----------------------------------------------------------------------------- Consolidated assets $22,098 $21,463 $20,450 ============================================================================= Depreciation Commercial aircraft $ 837 $ 902 $ 710 Defense and space 196 240 297 - ----------------------------------------------------------------------------- Total depreciation $ 1,033 $ 1,142 $ 1,007 ============================================================================= Capital expenditures, net Commercial aircraft $ 493 $ 619 $ 1,120 Defense and space 136 176 197 - ----------------------------------------------------------------------------- Total capital expenditures, net $ 629 $ 795 $ 1,317 ============================================================================= 61 of 94 62 Ten-Year Summary (page 1 of 2) (Dollars in millions except per share data) (Share data restated for applicable stock splits) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------ Operations Sales and other operating revenues Commercial aircraft $13,933 $16,851 $20,568 $24,133 $22,970 Defense and space 5,582 5,073 4,870 6,051 6,344 - ------------------------------------------------------------------------------ Total $19,515 $21,924 $25,438 $30,184 $29,314 - ------------------------------------------------------------------------------ Net earnings $ 393* $ 856 $ 1,244 $1,554**$ 1,567 Per share 1.15* 2.51 3.66 4.57** 4.56 Percent of sales 2.0% 3.9% 4.9% 5.2% 5.3% - ------------------------------------------------------------------------------ Cash dividends paid $ 342 $ 340 $ 340 $ 340 $ 343 Per share 1.00 1.00 1.00 1.00 1.00 - ------------------------------------------------------------------------------ Other income, principally interest 209 122 169 230 263 - ------------------------------------------------------------------------------ Research and development expensed 1,267 1,704 1,661 1,846 1,417 General and administrative expensed 1,020 1,126 1,102 1,232 1,291 - ------------------------------------------------------------------------------ Additions to plant and equipment 629 795 1,317 2,160 1,850 Depreciation of plant and equipment 976 1,081 953 870 768 - ------------------------------------------------------------------------------ Salaries and wages 5,341 5,799 6,087 6,318 6,502 Average employment 109,400 119,400 134,400 148,600 159,100 ============================================================================== Financial position at December 31 Total assets $22,098 $21,463 $20,450 $18,147 $15,924 Working capital 5,763 3,587 2,601 1,947 2,462 Net plant and equipment 6,456 6,802 7,088 6,724 5,530 - ------------------------------------------------------------------------------ Cash and short-term investments 3,730 2,643 3,108 3,614 3,453 Total debt 2,615 2,609 2,630 1,793 1,317 Customer financing 1,865 3,321 3,177 2,295 1,197 - ------------------------------------------------------------------------------ Shareholders' equity 9,898 9,700 8,983 8,056 8,093 Per share 28.77 28.45 26.41 23.74 23.71 Common shares outstanding (in millions) 344.0 340.9 340.1 339.4 341.3 ============================================================================== Contractual backlog Commercial aircraft $66,540 $60,614 $69,000 $81,991 $92,161 Defense and space 5,805 5,696 4,528 5,939 5,755 - ------------------------------------------------------------------------------ Total $72,345 $66,310 $73,528 $87,930 $97,916 ============================================================================== Cash dividends have been paid on common stock every year since 1942. * Includes $600 pretax charge associated with a special retirement program. Net earnings excluding the effect were $783 or $2.29 per share. ** Exclusive of the cumulative effect of adopting Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Net earnings including the effect were $552 or $1.62 per share. 62 of 94 63 Ten-Year Summary (page 2 of 2) (Dollars in millions except per share data) (Share data restated for applicable stock splits) 1990 1989 1988 1987 1986 - ------------------------------------------------------------------------------ Operations Sales and other operating revenues Commercial aircraft $21,230 $14,268 $11,324 $ 9,873 $ 9,816 Defense and space 6,365 6,008 5,638 5,632 6,628 - ------------------------------------------------------------------------------ Total $27,595 $20,276 $16,962 $15,505 $16,444 - ------------------------------------------------------------------------------ Net earnings $ 1,385 $ 675***$ 614 $ 480 $ 665 Per share 4.01 1.96*** 1.79 1.38 1.90 Percent of sales 5.0% 3.3% 3.6% 3.1% 4.0% - ------------------------------------------------------------------------------ Cash dividends paid $ 328 $ 269 $ 237 $ 217 $ 186 Per share .95 .77 7/9 .68 8/9 .62 2/9 .53 1/3 - ------------------------------------------------------------------------------ Other income, principally interest 448 347 378 308 304 - ------------------------------------------------------------------------------ Research and development expensed 827 754 751 824 757 General and administrative expensed 1,246 1,066 954 891 681 - ------------------------------------------------------------------------------ Additions to plant and equipment 1,586 1,362 690 738 795 Depreciation of plant and equipment 636 584 541 486 433 - ------------------------------------------------------------------------------ Salaries and wages 6,487 6,082 5,404 5,028 4,374 Average employment 161,700 159,200 147,300 136,100 118,500 ============================================================================== Financial position at December 31 Total assets $14,591 $13,278 $12,608 $12,566 $10,910 Working capital 1,396 1,689 1,507 2,246 2,819 Net plant and equipment 4,448 3,481 2,703 2,554 2,281 - ------------------------------------------------------------------------------ Cash and short-term investments 3,326 1,863 3,963 3,435 4,172 Total debt 315 280 258 270 277 Customer financing 1,133 868 1,131 1,215 282 - ------------------------------------------------------------------------------ Shareholders' equity 6,973 6,131 5,404 4,987 4,826 Per share 20.30 17.73 15.67 14.55 13.83 Common shares outstanding (in millions) 343.6 345.8 344.8 342.6 349.0 ============================================================================== Contractual backlog Commercial aircraft $89,997 $71,308 $44,066 $25,611 $18,472 Defense and space 7,197 9,255 9,535 7,593 7,916 - ------------------------------------------------------------------------------ Total $97,194 $80,563 $53,601 $33,204 $26,388 ============================================================================== *** Exclusive of the cumulative effect of adopting Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes. Net earnings including the effect were $973 or $2.82 per share. 63 of 94 64 Quarterly Financial Data (Unaudited) (Dollars in millions except per share data) - ------------------------------------------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------- Quarter 4th 3rd 2nd 1st 4th 3rd 2nd 1st - ------------------------------------------------------------------------------- Sales and other operating revenues $4,539 $4,381 $5,558 $5,037 $5,120 $5,063 $5,396 $6,345 Earnings from operations 140 223 (287)* 226 222 226 270 433 Net earnings 218 225 (231)* 181 157 185 222 292 - ------------------------------------------------------------------------------- Net earnings per share .63 .66 (.68)* .53 .46 .54 .65 .86 Cash dividends per share .25 .25 .25 .25 .25 .25 .25 .25 - ------------------------------------------------------------------------------- Market price: High 80.00 72.38 65.38 54.00 48.38 48.25 50.13 48.75 Low 62.00 60.38 52.63 44.38 42.63 42.50 43.13 42.13 Quarter end 78.38 68.25 62.63 53.75 47.00 43.25 46.25 44.50 =============================================================================== * Includes $600 pretax charge associated with a special early retirement incentive. Excluding the one-time charge, net earnings were $254 and net earnings per share were $.74. The after-tax effect of the one-time special retirement charge for the full year 1995 was $390, or $1.14 per share. 64 of 94 65 Market for Registrant's Common Equity and Related Stockholder Matters The Boeing Company General Offices 7755 East Marginal Way South Seattle, Washington 98018 (206) 655-2121 TRANSFER AGENT AND REGISTRAR The First National Bank of Boston The transfer agent is responsible for shareholder records, issuance of stock certificates, and distribution of dividends and IRS Form 1099. Requests concerning these matters are most efficiently answered by contacting: The First National Bank of Boston c/o Boston EquiServe, L.P. Mail Stop 45-02-64 P.O. Box 644 Boston, Massachusetts 02102-0644 (800) 733-5001 or (617) 575-3400 Boeing shareholders can obtain answers to frequently asked questions, transfer instructions and stock prices through Boston EquiServe's home page on the World Wide Web at . DUPLICATE SHAREHOLDER ACCOUNTS Shareholders with duplicate accounts may call the Bank of Boston for instructions on consolidating those accounts. The company recommends that registered shareholders always use the same form of their names in all stock transactions to be handled in the same account. Shareholders may also request the Bank to eliminate excess mailings of annual and midyear reports going to shareholders in the same household. EQUAL OPPORTUNITY EMPLOYER Boeing is an equal opportunity employer and seeks to attract and retain the best-qualified people regardless of race, sex, age, religion, national origin or veteran status. COMPANY SHAREHOLDER SERVICES Pre-recorded shareholder information and quarterly earnings data are available toll-free from Boeing Shareholder Services at (800) 457-7723. 65 of 94 66 ANNUAL MEETING The annual meeting of Boeing shareholders will be held in the auditorium of the company's 2-22 building, located at 7755 East Marginal South, Seattle, Washington, at 11:00 a.m. on April 29, 1996. Formal notice of the meeting, proxy statement, form of proxy, and annual report were mailed to shareholders beginning March 15, 1996. Written inquiries may be sent to Shareholder Services Mail Stop 10-13 Investor Relations Mail Stop 10-16 The Boeing Company P.O. Box 3707 Seattle, Washington 98124-2207 STOCK EXCHANGES The company's common stock is traded principally on the New York Stock Exchange; the trading symbol is BA. Boeing common stock is also listed on the Amsterdam, Brussels, London, Swiss and Tokyo stock exchanges. Additionally, the stock is traded on the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges. The number of shareholders of record as of January 31, 1996, was 73,060. GENERAL AUDITORS Deloitte & Touche LLP 700 Fifth Avenue, Suite 4500 Seattle, Washington 98104-5044 (206) 292-1800 BOEING ON WORLD WIDE WEB For more information about Boeing, including an electronic copy of the annual report, visit our web site at . 66 of 94 67 Exhibit (10) (iii) (a) 1984 Stock Option Plan, as amended February 23, 1987, and August 28, 1989. 67 of 94 68 THE BOEING COMPANY 1984 STOCK OPTION PLAN As Amended February 23, 1987, and August 28, 1989 1. Purpose. The purpose of this Plan is to promote the interests of the Company and its stockholders by attracting, retaining, and stimulating the performance of selected employees, giving such employees the opportunity to acquire a proprietary interest in the Company's business and an increased personal interest in its continued success and progress. 2. Administration. a. This Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee"). Except for the terms and conditions explicitly set forth in this Plan, the Committee shall have the authority, in its discretion, to determine all matters relating to the options to be granted under this Plan, including selection of the individuals to be granted options, the number of shares to be subject to each option, the date of grant, and all other terms and conditions of the options. Grants under this Plan to employees need not be identical in any respect, even when made simultaneously. The Committee will also determine and approve the granting of Stock Appreciation Rights to selected employees and determine whether the grant of options will consist of an Incentive Stock Option as described in Section 422A of the Internal Revenue Code of 1954, as amended (hereinafter referred to as the "Code"), or a Non- Qualified Stock Option, which shall consist of any option granted under this Plan other than an Incentive Stock Option. b. Options and Stock Appreciation Rights shall be evidenced by written agreements which shall contain such terms and conditions as may be determined by the Committee. Each agreement shall be signed on behalf of the Company by an officer or officers delegated such authority by the Committee using either manual or facsimile signature. c. All decisions made by the Committee pursuant to the provisions of the Plan and all determinations and selections made by the Committee pursuant to such provisions and related orders or resolutions of the Board shall be final and conclusive. No director eligible to receive options or Stock Appreciation Rights shall vote upon the granting of an option or right to himself or vote on the adoption of the Plan or any amendments made to the Plan. 68 of 94 69 3. Eligibility and Participation. The group of employees eligible to receive options and Stock Appreciation Rights shall consist of those employees who are officers or other key employees of the Company or key employees of those subsidiaries designated by the Compensation Committee as eligible to participate in the Plan. 4. Shares Subject to the Plan. a. The stock to be offered under the Plan shall be shares of the Company's authorized common stock and may be unissued shares or shares now held or subsequently acquired by the Company as treasury shares, as the Board of Directors may from time to time determine. Subject to adjustment as provided in Section 14 hereof, the aggregate number of shares to be delivered under the Plan shall not exceed 2 million five hundred thousand (2,500,000) shares; and no more than 5% of such number of shares may be issued to any one individual except as it may be adjusted under Section 14 of this Plan. If an option expires or terminates for any reason during the term of the Plan and prior to the exercise thereof in full, the shares subject to but not delivered under such option shall be available for options thereafter granted. The shares under a related option which are surrendered upon the exercise of a Stock Appreciation Right shall be charged against the aggregate number of shares available which may be delivered under the Plan. b. Any shares of common stock delivered upon exercise of a Stock Appreciation Right may be unissued shares or treasury shares, as the Board of Directors may from time to time determine, and shall be charged against the aggregate number of shares of stock available for purposes of the Plan. 5. Stock Appreciation Rights. The Committee may also grant Stock Appreciation Rights to employees who have been or are granted options under the Plan. In exchange for the surrender in whole or in part of the privilege of exercising the related option to purchase shares of the Company's common stock, the granted Stock Appreciation Right shall entitle an employee to payment of an amount equal to the appreciation in value of the surrendered options (the excess of the fair market value of such options at the time of surrender over their aggregate option price). Such payment may be made in cash, check, or in shares of common stock valued at the fair market value as of the date of the surrender, or partly in cash (or check) and partly in shares of common stock, as determined by the Committee in its sole discretion. The Committee may establish a maximum appreciation value which would be payable under granted rights. For Stock Appreciation Rights exercised during any 10-day window period following 69 of 94 70 the Company's release of quarterly financial information, the Committee may, in its sole discretion, establish a uniform fair market value of the Company's common stock for such period. The uniform fair market value shall not be less than the fair market value otherwise available to an optionee and shall not be greater than the highest daily mean price during such 10-day period of the sales prices of the common stock as reported in The Wall Street Journal; provided, however, that with respect to Stock Appreciation Rights granted in connection with Incentive Stock Options, the fair market value shall not exceed the maximum fair market value that may be used without causing the Incentive Stock Option to lose its qualified status under Section 422A of the Code. 6. Incentive Stock Options. a. An option designated by the Committee as an "Incentive Stock Option" is intended to qualify as an "Incentive Stock Option" within the meaning of Subsection (b) of Section 422A of the Code. b. An Incentive Stock Option shall not be granted to an individual who on the date of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary within the meaning of Section 425(d) of the Code. c. An Incentive Stock Option granted prior to January 1, 1987, shall not be exercisable while there is outstanding (within the meaning of Section 422A(c)(7) of the Code) any other Incentive Stock Option within the meaning of Subsection (b)(7) of Section 422A of the Code, which was granted before the granting of such Incentive Stock Option. d. As to all Incentive Stock Options granted prior to January 1, 1987, under the terms of this Plan, the aggregate fair market value (determined at the time the Incentive Stock Option is granted) of the stock for which any grantee may be granted Incentive Stock Options in any calendar year shall not exceed $100,000 plus any "unused limit carryover" to such year, determined in accordance with Section 422A(c)(4) of the Code. For all Incentive Stock Options granted after December 31, 1986, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the grantee during any calendar year (under this Plan and all other Incentive Stock Option Plans of the Company and any related or predecessor corporation) shall not exceed $100,000. Any option which exceeds these annual limits shall not qualify as an Incentive Stock Option. 70 of 94 71 e. Should Section 422A of the Code be modified during the term of this Plan, the Plan may be amended to conform to such modification, if approved by the Board of Directors, upon recommendation by the Committee. 7. Term of Option Period. The term during which options and Stock Appreciation Rights may be granted under this Plan shall expire on October 31, 1988, and the option period during which each option and Stock Appreciation Right may be exercised shall, subject to the provisions of Section 13 hereof, be such period, expiring not later than the tenth anniversary of the date the option or Stock Appreciation Right is granted, as may be determined by the Committee. 8. Option Price. The price at which shares may be purchased upon exercise of a particular option shall be such price, not less than 100% of the fair market value of such shares at the time such option is granted, as may be fixed by the Committee. 9. Fair Market Value. Except as otherwise provided, for purposes of this Plan fair market value shall be determined under the applicable method provided by Regulations under Section 2031 of the Code. 10. Stock as Form of Exercise Payment. An employee who owns shares of The Boeing Company common stock may use the previously acquired shares, value to be determined as the fair market value, as a form of payment to exercise stock options under the Plan. However, the Committee, in its discretion, may restrict or rescind this right upon notification to the employee-participants in the Plan. An option may be exercised with stock only by delivering whole shares of Company stock having a fair market value equal to or less than the exercise price. If an option is exercised by delivery of stock having a fair market value less than the exercise price, the shortfall must be made up in cash. 11. Exercise of Options and Rights. a. Each option and Stock Appreciation Right granted shall be exercisable in whole or in part at any time or from time to time during the option period as the Committee may determine, provided that the election to exercise an option or Stock Appreciation Right shall be made in accordance with applicable Federal laws and regulations, and further provided that each option shall contain a provision that will prevent exercise of the option unless the optionee remains in the employ of the Company or its subsidiary at least one year after the granting of the option. 71 of 94 72 b. No option may at any time be exercised with respect to a fractional share or exercised in part with respect to fewer than fifty shares unless less than 50 shares remain in the option grant being exercised. In the event that shares are issued pursuant to the exercise of a Stock Appreciation Right, no fractional shares shall be issued; however, a fractional Stock Appreciation Right exercised for cash may be exercised. c. No shares shall be delivered pursuant to the exercise of any option or Stock Appreciation Right, in whole or in part, until qualified for delivery under such securities laws and regulations as may be deemed by the Committee to be applicable thereto and until, in the case of the exercise of an option, payment in full of the option price thereof or stock as a form of payment as provided in Section 10 herein is received by the Company in cash (or check) or stock. No holder of an option or Stock Appreciation Right, or his/her legal representative, legatee, or distributee shall be or be deemed to be a holder of any shares subject to such option or Stock Appreciation Right unless and until he/she has received a certificate or certificates therefor. 12. Transferability of Options and Rights. Options and Stock Appreciation Rights granted under the Plan may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the employee to whom granted, may be exercised only by him/her or by his/her guardian or legal representative. 13. Termination of Employment. The terms and conditions under which an option or Stock Appreciation Right may be exercised after the termination of employment shall be determined by the Committee. 14. Changes in Common Stock. The aggregate number and class of shares on which options may be granted under this Plan, the number and class of shares covered by each outstanding option, and the exercise price per share thereof (but not the total price), and each such option, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of common stock of the Company resulting from a split-up or consolidation of shares or any like capital adjustment or the payment of any such stock dividend, or any other increase or decrease in the number of shares of common stock of the Company without the receipt of consideration by the Company. 72 of 94 73 15. Amendment and Discontinuance. The Board of Directors may amend, suspend, or discontinue the Plan, but may not, without the approval of the holders of the Company's common stock, make any amendment thereof which operates: (a) to increase the total number of shares which may be granted under the Plan, (b) to extend the term of the Plan or the maximum option period provided in Section 7 hereof, (c) to decrease the minimum option price provided in Section 8 hereof, or (d) to materially modify the requirements as to eligibility for participation in the Plan. No amendment to the Plan shall, except with the consent of the optionee, adversely affect rights under an option previously granted. 16. Term of Plan. The Plan shall become effective October 31, 1983, subject to the approval by the holders of the Company's common stock at a meeting to be held within one year of the date of adoption of the Plan. 73 of 94 74 Exhibit (10) (xii) (a) SAR Deferral Arrangement of the Company. Form of SAR Deferral Agreement 74 of 94 75 SAR DEFERRAL AGREEMENT This Agreement is made this _______ day of _______, 1988, between _______ (the "Employee") and The Boeing Company (the "Company"), in consideration for the mutual covenants contained herein. 1. Purpose. The purpose of this Agreement is to enable Employee to defer payment of all or a portion of amounts otherwise receivable by Employee upon the exercise of Stock Appreciation Rights ("SARs") that were granted under the Company's 1979 and 1984 Stock Option Plans (the "1979 and 1984 Plans"), whether such SARs were granted with or without accompanying stock options. This Agreement shall apply only to those SARs (hereafter the "Eligible SARs") granted to Employee under the 1979 and 1984 Plans, evidenced by Letter Agreements between Employee and the Company, which are not vested (i.e., exercisable) as of the above date, and for which Employee makes a SAR deferral election under Section 2. To the extent provided herein, this Agreement shall constitute an amendment of the Letter Agreements which relate to the Eligible SARs. 2. SAR Deferral Election. Employee elects and agrees to defer receipt of the amounts (the "SAR Amounts") which would otherwise be paid to Employee upon the exercise of Eligible SARs as provided below: EXAMPLE: Percentage of Each Vesting Unit's SAR SAR Grant Vesting Units Amount to be Deferred --------- ------------- --------------------- 1985 grant SARs vested in 1986 n/a (SARs already vested) SARs vested in 1987 n/a (SARs already vested) SARs to vest 1988 60% SARs to vest 1989 25% SARs to vest 1990 100% EMPLOYEE ELECTION (to be completed by Employee): Percentage of Each Vesting Unit's SAR SAR Grant Vesting Units Amount to be Deferred --------- ------------- --------------------- 1983 grant SARs vested in 1984 n/a (SARs already vested) SARs vested in 1985 n/a (SARs already vested) SARs vested in 1986 n/a (SARs already vested) SARs vested in 1987 n/a (SARs already vested) SARs to vest 1988 ____ % 75 of 94 76 SAR Deferral Agreement Page 2 Percentage of Each Vesting Unit's SAR SAR Grant Vesting Units Amount to be Deferred --------- ------------- --------------------- 1984 grant SARs vested in 1985 n/a (SARs already vested) SARs vested in 1986 n/a (SARs already vested) SARs vested in 1987 n/a (SARs already vested) SARs to vest 1988 ____ % SARs to vest 1989 ____ % Percentage of Each Vesting Unit's SAR SAR Grant Vesting Units Amount to be Deferred --------- ------------- --------------------- 1985 grant SARs vested in 1986 n/a (SARs already vested) SARs vested in 1987 n/a (SARs already vested) SARs to vest 1988 n/a (SARs already vested) SARs to vest 1989 ____ % SARs to vest 1990 ____ % Percentage of Each Vesting Unit's SAR SAR Grant Vesting Units Amount to be Deferred --------- ------------- --------------------- 1986 grant SARs vested in 1987 n/a (SARs already vested) SARs to vest 1988 ____ % SARs to vest 1989 ____ % SARs to vest 1990 ____ % SARs to vest 1991 ____ % Percentage of Each Vesting Unit's SAR SAR Grant Vesting Units Amount to be Deferred --------- ------------- --------------------- 1987 grant SARs to vest 1988 ____ % SARs to vest 1989 ____ % SARs to vest 1990 ____ % SARs to vest 1991 ____ % SARs to vest 1992 ____ % 76 of 94 77 SAR Deferral Agreement Page 3 Employee agrees that if he exercises any stock options accompanying the Eligible SARs instead of exercising the SARs, then the shares acquired upon exercise of the stock options relating to the SAR Amounts that would otherwise have been deferred pursuant to the above election, shall be restricted in that they may not be sold before the later of January 1 of the calendar year following the date such options were exercised or the day following the 6-month anniversary of the date of exercise. For purposes of this Section 2, the order of priority for any exercise with respect to a vesting unit shall be as follows: (i) For any exercise of SARs, the SAR Amount first shall be deferred up to the number of SARs in the vesting unit multiplied by the deferral percentage, less the number of SARs previously deferred and the number of restricted shares previously acquired in that vesting unit. Any excess SAR Amount not subject to deferral shall be paid to the Employee. (ii) For any exercise of stock options, the restriction shall apply to the shares first acquired in that exercise, up to the number of SARs in the vesting unit multiplied by the deferral percentage, less the number of SARs previously deferred and the number of restricted shares previously acquired in that vesting unit. Any additional shares shall not be restricted. (iii) For any exercise of both SARs and stock options, clause (i) shall first apply. Employee understands and agrees that his election under this Section 2 is irrevocable. Employee further understands and agrees that to the extent that SARs (including SARs which become vested due to retirement) are exercised after termination of employment, amounts otherwise receivable upon such exercise shall remain subject to any deferral elections made under this Section 2. 3. Payment Election. Employee elects and agrees to receive his deferred SAR Amounts with accumulated interest in annual installments to be paid (Employee to complete Option #1 or #2 below): Option #1 _______ On or about each January 15 for ___ years (which may (initial) be one or more years), beginning the year after my employment with the Company terminates. Option #2 _______ On or about each January 15 for ___ years (which may (initial) be one or more years), beginning ___ years (may not exceed 10) after the year in which my employment terminates. Employee understands and agrees that he may request a change in the above payment election, but that such request shall be subject to the approval of the Compensation Committee of the Board of Directors (the "Committee"). 4. Administration of the Plan. Any SAR Amount deferred under the Plan shall be credited to Employee's account under this Agreement at the time (if 77 of 94 78 SAR Deferral Agreement Page 4 any) the deferred SAR is exercised. As of March 31, June 30, September 30 and December 31 of each year, Employee's account will be credited with interest on all amounts in that account during the preceding quarter. Interest will be computed during each calendar year as the mean between the high and the low during the first 11 months of the previous year of yields on Aa Industrial Bonds as reported in the most recent issue of Moody's Industrials as published by Moody's Investors Service, Inc. rounded to the nearest 1/4 of one percent. The Company will notify Employee annually of the established interest rate. 5. Payments. Amounts accumulated under the Plan, together with accumulated interest, shall be paid in annual installments pursuant to the election in Section 3 above. The amount payable to the Employee each year shall be computed by multiplying a fraction, the numerator of which is one and the denominator of which is the number of years remaining in the payment period, by the balance in the account on January 1. The Employee's account shall be debited at the time of payment. The Committee, upon determination of a Former Employee's or surviving Beneficiary's permanent and total disability, other hardship or unanticipated and significant change of circumstances beyond the control of the Former Employee or surviving Beneficiary, at the request of the Former Employee, the surviving Beneficiary, or the legal representative of either, may in its sole discretion (i) shorten or lengthen the time before which deferred SAR Amounts may be paid, or (ii) shorten or lengthen the period over which such payments are to be made. 6. Beneficiaries. Employee elects and agrees that upon his death the Company shall pay his account under this Agreement to: ____________________________________________________________, (state name and relationship) his beneficiary, in annual installments over the number of years, and commencing with the year, selected by Employee under Section 3. This is the "standard" option which will automatically be used unless Employee completes Option #1 or #2 below. Option #1 _______ To pay ___ % of my account in one lump sum (initial) within 15 months of my death, and to pay the balance (if any) of my account in annual installments over the number of years, and commencing with the year, selected by me under Section 3. Option #2 _______ To pay ___ % of my account in ___ equal (initial) installments to be spread out as evenly as practicable over the 15-month period following my death, with the balance (if any) of my Account to be paid in annual installments over the number of years, and commencing with the year, selected by me under Section 3. 78 of 94 79 SAR Deferral Agreement Page 5 Employee understands that he may submit a change to any part of the election under this Section 6 at any time, and that such change shall not be subject to Committee approval. 7. Amendment by the Company. This Agreement may be unilaterally amended from time to time by the Committee, but no amendment shall affect the rights of Employee with respect to an election under Section 2 governing SARs which are vested but unexercised at the time of such amendment, without the approval of Employee. Notwithstanding the foregoing, this Agreement may be terminated at any time by the Board of Directors pursuant to Section 8. Termination and Suspension. This Agreement will continue in effect until terminated by resolution of the Board of Directors. Such resolution may provide (i) that all amounts accumulated prior to such termination will be paid out to Employee on or about the termination date and that any remaining election under Section 2 will be null and void, or (ii) that all amounts accumulated prior to such termination, and all SAR Amounts thereafter deferred pursuant to an election under Section 2 which pertains to SARs which are vested but unexercised as of the termination date, will continue to be subject to the provisions of the Agreement as if the Agreement had not been terminated, and in such case the Agreement will be considered to be "suspended" until all credited amounts are distributed pursuant to the terms herein, at which time the Agreement's termination will be complete. 9. Employee's and Beneficiary's Rights. SAR Amounts deferred and accumulated interest thereon shall remain the property of the Company and neither Employee nor his Beneficiary shall acquire any property interest in the account or any other assets of the Company, the Employee's and his Beneficiary's right being limited to receiving from the Company payments measured as set forth in this Agreement. The deferral arrangement under this Agreement is unfunded, and to the extent that any Employee or his Beneficiary acquires a right to receive benefits, such right shall be no greater than the right of any unsecured general creditor of the Company. The right of Employee, his legal representative, and his Beneficiary, to receive payments under this Agreement shall not be subject to anticipation, sale, assignment, pledge, encumbrance or charge nor shall such right be liable for or subject to the debts, contracts, liabilities or torts of the Employee, his legal representative or Beneficiaries. 10.Powers of the Committee. The Committee shall have full power and authority to construe and interpret this Agreement. Decisions of the Committee shall be final and binding upon all parties, their successors, heirs and assigns. Approval of any changes pursuant to Paragraphs 3 and 5 shall be in the sole discretion of the Committee. 79 of 94 80 SAR Deferral Agreement Page 6 11. Contingencies. Employee understands and agrees that this Agreement and Employee's elections hereunder are conditioned upon (i) the Board of Directors agreeing to the form of this Agreement and (ii) the Company obtaining an SEC no-action letter in a form satisfactory to the Company which applies to this Agreement and the elections hereunder. Unless both these contingencies are satisfied, this Agreement and Employee's elections hereunder shall be null and void. Date: _________________ ______________________________ Employee ______________________________ Social Security Number The Boeing Company By: _______________________ 80 of 94 81 Exhibit (10) (xii) (b) SAR Deferral Arrangement of the Company. Plan for Employees, as amended. 81 of 94 82 SAR DEFERRAL PLAN FOR EMPLOYEES OF THE BOEING COMPANY 1. Purpose. The purpose of the SAR Deferral Plan for Employees of The Boeing Company (the "Plan") is to provide for deferral of payment of all or a portion of amounts otherwise receivable by Employees upon the exercise of Stock Appreciation Rights ("SARs") that are granted under the Company's 1988 and future Stock Option Plans, whether such SARs are granted with or without accompanying stock options. 2. Eligibility. Any Employee granted SARs pursuant to the 1988 and future Stock Option Plans is eligible to elect to participate in the Plan. 3. Election to Participate. a. An eligible Employee may elect to participate in the Plan to defer all or a portion of the amount otherwise receivable upon the exercise of SARs (the "SAR Amount") by executing and delivering to the Company an irrevocable election notice (i) before the date of grant of the SARs, or (ii) subject to approval by the Compensation Committee of the Board of Directors (the "Committee"), before the date the Employee becomes vested in the SARs, provided that an election made by this clause (ii) will apply only with respect to SARs that have not become vested (i.e., exercisable) as of the date the election notice is executed and delivered. A separate election notice must be executed with respect to each SAR grant that is evidenced by a separate letter agreement. To the extent that SARs (including SARs which become vested due to retirement) are exercised after termination of employment, amounts otherwise receivable upon such exercise shall remain subject to any deferral election made under this Section 3. b. On each election notice the Employee shall specify, separately for each vesting unit of SARs, the percentage of the SAR Amounts to be deferred if all or part of such SARs are exercised instead of any accompanying stock options (e.g., 25% of the SARs that first become vested in year one, 75% of the SARs that first become vested in year two, and so on). The Employee shall also acknowledge that if all or part of the stock options accompanying the SARs are exercised instead of the SARs, then the shares acquired upon exercise of the stock options relating to the SAR Amounts that would otherwise have been deferred pursuant to the election shall be restricted in that they may not be sold before the later of January 1 of the calendar year following the date such option was exercised or the day following the 6-month anniversary of the date of exercise. 82 of 94 83 c. For purposes of paragraph b above, the order of priority for any exercise with respect to a vesting unit shall be as follows: (i) For any exercise of SARs, the SAR Amount first shall be deferred up to the number of SARs in the vesting unit multiplied by the deferral percentage, less the number of SARs previously deferred and the number of restricted shares previously acquired in that vesting unit. Any excess SAR Amount not subject to deferral shall be paid to the Employee. (ii) For any exercise of stock options, the restriction shall apply to the shares first acquired in that exercise, up to the number of SARs in the vesting unit multiplied by the deferral percentage, less the number of SARs previously deferred and the number of restricted shares previously acquired in that vesting unit. Any additional shares shall not be restricted. (iii) For any exercise of both SARs and stock options, clause (i) shall first apply. d. On the first election notice executed by an Employee, the Employee shall state the number of years (which may be one or more years) over which the deferred SAR Amounts are to be paid, and shall specify the year in which payments are to commence, which year shall be no earlier than the first calendar year and no later than the tenth calendar year following the calendar year in which an Employee's active employment with the Company terminates. All payments shall be made in annual installments as described in Section 5. The selected number of years for installment payments and the year when such payments are to commence will apply to the SAR Amount being deferred by such election notice and to all future deferrals hereunder; provided, however, that an Employee may subsequently request a change in the number of years selected for installment payments and the year when such payments are to commence. Such request shall be subject to the approval of the Committee, and if approved, shall be applicable to the Employee's total SAR Deferral Account, including past and future SAR Amounts deferred hereunder. 4. Administration of the Plan. Any SAR Amount deferred under the Plan shall be credited to the Employee's SAR Deferral Account at the time (if any) the deferred SAR is exercised. As of March 31, June 30, September 30 and December 31 of each year, a Participant's SAR Deferral Account will be credited with interest on all amounts in that account during the preceding quarter. Interest will be computed during each calendar year as the mean between the high and the low during the first 11 months of the previous year of yields on Aa Industrial Bonds as reported in the most recent issue of Moody's Industrials as published by Moody's Investors Service, Inc. rounded to the nearest 1/4 of one percent. The Company will notify Participants annually of the established interest rate. 83 of 94 84 5. Payments. Amounts accumulated under the Plan, together with accumulated interest, shall be paid in annual installments commencing on or about January 15 of the calendar year following the calendar year in which an Employee's active employment with the Company terminates, unless the Employee elected a later commencement date as provided under Section 3. The amount payable to the Employee each year shall be computed by multiplying a fraction, the numerator of which is one and the denominator of which is the number of years remaining in the payment period, by the balance in the account on January 1. The Employee's account shall be debited at the time of payment. The Committee, upon determination of a Former Employee's or surviving Beneficiary's permanent and total disability, other hardship or unanticipated and significant change of circumstances beyond the control of the Former Employee or surviving Beneficiary, at the request of the Former Employee, the surviving Beneficiary, or the legal representative of either, may in its sole discretion (i) shorten or lengthen the time before which deferred SAR Amounts may be paid, or (ii) shorten or lengthen the period over which such payments are to be made. 6. Beneficiaries. Participants may designate a Beneficiary or Beneficiaries to receive upon the Participant's death, pursuant to the payment provisions of the following paragraph, the amount otherwise due to the Participant. If no Beneficiary has been designated, all such amounts shall be paid to the Participant's personal representative. Participants may change their designated Beneficiary at any time. A Participant may elect in writing to have one or more fixed payments made to any designated Beneficiary. Such payments would be payable within fifteen months of the Participant's death. Any amount remaining in the account will be payable to the Participant's designated Beneficiary in annual installments over the period and commencing with the year selected by the Participant for himself, subject to changes approved by the Committee pursuant to Section 5. 7. Amendment of the Plan. This Plan may be amended from time to time by resolution of the Board of Directors, but no amendment shall affect the rights of Participants hereunder with respect to election notices governing SARs which are vested but unexercised at the time of such amendment. 8. Termination and Suspension of the Plan. This Plan will continue in effect until terminated by resolution of the Board of Directors. Such resolution may provide (i) that all amounts accumulated prior to such termination will be paid out to all Participants on or about the termination date and that any outstanding SAR deferral election notices will be null and void, or (ii) that all amounts accumulated prior to such termination, and all SAR Amounts thereafter deferred pursuant to election notices executed prior to the termination date and which pertain to SARs which are vested but unexercised as of the termination date, will continue to be subject to the provisions of the Plan as if the Plan had not been terminated, and in such case the Plan will be considered to be "suspended" until all credited amounts are distributed pursuant to the terms of the Plan, at which time the Plan's termination will be complete. 84 of 94 85 9. Participant's and Beneficiary's Rights. SAR Amounts deferred and accumulated interest thereon shall remain the property of the Company and no Participant or Beneficiary shall acquire any property interest in the account or any other assets of the Company, the Participant's or Beneficiary's right being limited to receiving from the Company payments measured as set forth in this Plan. The Plan is unfunded, and to the extent that any Participant or Beneficiary acquires a right to receive benefits, such right shall be no greater than the right of any unsecured general creditor of the Company. The right of a Participant, his legal representative, and any Beneficiary or Beneficiaries designated by him, to receive payments under this Plan shall not be subject to anticipation, sale, assignment, pledge, encumbrance or charge nor shall such right be liable for or subject to the debts, contracts, liabilities or torts of the Participant, his legal representative or Beneficiaries. 10.Powers of the Committee. The Committee shall have full power and authority to construe and interpret this Plan. Decisions of the Committee shall be final and binding upon all parties, their successors, heirs and assigns. Approval of any changes pursuant to Paragraphs 3 and 5 shall be in the sole discretion of the Committee. 85 of 94 86 Exhibit (99) Additional Exhibits (i) Commercial Program Method of Accounting 86 of 94 87 EXHIBIT (99) Commercial Program Method of Accounting The Company's accounting practice relative to its major commercial aircraft programs is a method of accounting developed through industry practice beginning in the 1960s, but is not specifically addressed in formal accounting standards such as statements of financial accounting standards by the Financial Accounting Standards Board. Although this specialized accounting method is not specifically addressed in existing standards, in 1974 the Securities and Exchange Commission (SEC) codified, through Accounting Series Release No. 164, specifically delineated disclosure requirements for the program method of accounting, following the SEC's formal due process procedures. The Company's commercial aircraft program method of accounting is described in Note 1, "Summary of Significant Accounting Policies - Contract and Program Accounting," to the Consolidated Financial Statements filed under the Form 10-K for the fiscal year ended December 31, 1995. The relevant disclosure in Note 1 is as follows: Commercial jet transport programs are planned, committed and facilitized based on long-term delivery forecasts, normally for quantities in excess of contractually firm orders. Cost of sales for all commercial jet transport programs is determined based on estimated average total cost and revenue for the current program commitment quantity. For new commercial jet transport programs, the program quantity is initially based on an established number of units representing what is believed to be a conservative market projection. Program commitment quantities generally represent deliveries for the next three to five years, although the initial program quantity for new programs will normally include orders and deliveries over periods up to ten years. The initial program quantity for the new 777 program has been established at 400 units, the same initial program quantity as for the 747 program in 1969 and for the 767 and 757 programs in 1982. The commercial program method of accounting, an industry-developed practice adopted by the Company in the 1960s and applied to all commercial jet transport programs since that time, requires the demonstrated ability to reliably estimate and manage the cost-revenue relationship for the defined program quantity. The program method of accounting effectively amortizes or averages tooling and special equipment costs, as well as unit production costs, over the program quantity. Because of the higher unit production costs experienced at the beginning of a new program and the substantial investment required for initial tooling and special equipment, new commercial jet transport programs normally have lower operating profit margins than established programs. The estimated program average costs and revenues are reviewed and reassessed quarterly, and changes in estimates are recognized over current and future deliveries comprising the program quantity. Related disclosures are included in Note 3, "Inventories," to the Consolidated Financial Statements filed under the Form 10-K for the fiscal year ended December 31, 1995. Specific disclosures are limited to those programs for which deferred production costs in excess of estimated average cost of deliveries or unamortized tooling costs not recoverable from existing firm orders are material in amount. 87 of 94 88 The accounting theory underlying the program method of accounting is essentially the same as "contract accounting," which is addressed in the AICPA Statement of Position 81-1. The important difference in methodology is the definitional size of the "accounting contract" over which costs are averaged. The program "accounting contract" is not limited to production units under contract (as is normally the case with contract accounting), but rather is often based on a quantity in excess of the units covered by firm backlog. The Company began using the program method of accounting over 30 years ago, and has applied the accounting method to all its major commercial programs (707, 727, 737, 747, 757, 767 and 777), and only its major commercial programs. The program method of accounting was originally applied by the Company in connection with the 707 program to provide an appropriate matching of sales and cost of sales. The Company believes the application of the program method of accounting is appropriate only under certain circumstances, typically for production programs having the following characteristics: (a) The production program represents a major commitment of the Company based on an evaluation of the estimated overall rate of return or profitability of the program as a whole. (Initial contractual orders are normally not adequate to allow for recovery of the related production costs.) (b) Initial and early production stages require investment of substantial resources relative to the Company's financial position. Due to the nature of the production item (generally involving high technology, labor intensive processes), earlier production units require substantially more effort (labor and non-labor resources) than subsequent units such that an improvement curve benefit will be realized with significant cost implications over a period of several years. Design and fabrication of special tools and equipment are commonly necessary, for which virtually no economic benefits can be realized other than in connection with the particular production program. (c) Because of market constraints or competitive factors, the substantial investment of resources can only be recovered over a several-year market quantity. Sales prices are principally market determined, and are relatively constant in real terms over the program life. (d) Because of the substantial and long-term investment of resources necessary for such production programs, which normally includes significant pre-production design and developmental costs, the market will have no more than a few producers for that basic product. Proposed criteria for use of the program method of accounting were documented in a 1980 AICPA Task Force draft of a proposed Statement of Position on "Program Accounting." The Company believes that the proposed criteria for use, as outlined below, provide appropriate guidance: 88 of 94 89 Criteria for Use of Program Accounting 1) The program method of accounting may be used in circumstances in which a contractor has invested substantial resources to design and produce multiple units of a product that o requires substantial research and development as well as initial production tooling and facility costs unique to its production, o is based on anticipation of decreasing unit costs arising from the effects of a learning curve, o requires a substantial period to produce the number of units in the program, and o is intended to be sold on the basis of level pricing, which requires that the pricing of the product, except for the effects of changes in the general price level, will be level over all units or will correlate closely with changes in the specific prices of direct costs of production. 2) At the beginning of a program the Company will have identified a number of anticipated customers, but will have obtained firm contracts for the production and delivery of a number of units of the product that will not, by themselves, permit recovery of the initial and early investment in the production effort. The program accounting method may be used only if a contractor o can demonstrate a demand for the product expressed in a number of units, or a range of the number of units, over the program's estimated sales life that will permit recovery of costs incurred under the program, o has previously financed and produced similar products, o has documented its ability to finance and produce the program product, and o is able to make reasonably dependable estimates of (a) the number of units to be produced and sold, (b) the length of time to produce and sell them, and (c) their associated production costs, revenues and gross margin. The Company believes that the above stringent criteria are necessary for the appropriate application of program accounting, and the Company's use of program accounting is consistent with these criteria. 89 of 94 90 EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries (All Wholly-Owned) Place of Date Name Incorporation Incorporated - ------------------------------------------------------------------------------- Aileron Inc. Delaware 1989 Aldford Limited* Bermuda 1993 Aldford-1 Corporation Delaware 1993 Amwell Limited* Bermuda 1993 Amwell-1 Corporation Delaware 1993 Andsell Limited* Bermuda 1993 Andsell-1 Corporation Delaware 1993 ARGOSystems, Inc. California 1969 Arneway Limited* Bermuda 1993 Arneway-1 Corporation Delaware 1993 Astro Limited Bermuda 1975 Astro-II, Inc. Vermont 1984 Beaufoy Limited* Bermuda 1993 Beaufoy-1 Corporation Delaware 1993 BCS Richland, Inc. Washington 1975 BE&C Engineers, Inc. Delaware 1978 Boeing Aerospace Operations, Inc. Washington 1972 Boeing Agri-Industrial Company Oregon 1973 Boeing Canada Technology Ltd.* Ontario 1929 Boeing China, Inc. Delaware 1986 Boeing Commercial Space Company Delaware 1987 BOEING DEFENSE & SPACE-CORINTH CO. Delaware 1987 BOEING DEFENSE & SPACE-IRVING CO. Delaware 1979 Boeing Defense & Space - Oak Ridge, Inc. Delaware 1980 Boeing Domestic Sales Corporation Washington 1974 Boeing Equipment Holding Company Washington 1968 Boeing Financial Corporation Washington 1965 Boeing Georgia, Inc. Delaware 1980 Boeing Information Services, Inc. Delaware 1981 Boeing International Corporation Delaware 1953 Boeing International Sales Corporation Washington 1971 Boeing Investment Company, Inc. Delaware 1985 Boeing Leasing Company Delaware 1988 Boeing Louisiana, Inc. Delaware 1986 Boeing Middle East Limited Delaware 1982 Boeing Nevada, Inc. Delaware 1989 Boeing of Canada Ltd. Delaware 1986 Boeing Offset Company, Inc. Delaware 1985 * Second-tier subsidiaries ** Third-tier subsidiaries 90 of 94 91 EXHIBIT (21) - List of Company Subsidiaries (Continued) The Boeing Company and Subsidiaries (All Wholly-Owned) Place of Date Name Incorporation Incorporated - ------------------------------------------------------------------------------- Boeing Operations International, Incorporated Delaware 1981 Boeing Petroleum Services, Inc. Delaware 1984 Boeing Precision Gear, Inc. Delaware 1994 Boeing Sales Corporation Guam 1984 Boeing Sales Corporation, Limited Bermuda 1993 Boeing Technology International, Inc. Washington 1973 Braham Limited* Bermuda 1993 Braham-1 Corporation Delaware 1993 Energy Enterprises, Inc. Delaware 1991 Gainford Limited* Bermuda 1993 Gainford-1 Corporation Delaware 1993 Gaucho-1 Inc. Delaware 1994 GAUCHO-2 Inc. Delaware 1994 Grape Limited* Bermuda 1993 Grape Corporation Delaware 1993 Hanway Corporation Delaware 1993 Longacres Park, Inc. Washington 1948 Mandarin-1 Corporation Delaware 1993 Mandarin-2 Corporation Delaware 1993 Mandarin-3 Corporation Delaware 1993 Mandarin-4 Corporation Delaware 1993 Mandarin-5 Corporation Delaware 1993 Mandarin-6 Corporation Delaware 1993 Montana Aviation Research Company Delaware 1991 RGL-1 Corporation Delaware 1993 RGL-2 Corporation Delaware 1993 RGL-3 Corporation Delaware 1993 RGL-4 Corporation Delaware 1993 RGL-5 Corporation Delaware 1993 RGL-6 Corporation Delaware 1993 Rainier Aircraft Leasing, Inc. Delaware 1992 UTL Canada, Inc.* (in process of dissolution) Canada 1987 Wingspan, Inc.* Delaware 1994 2433265 Manitoba Ltd.** Manitoba 1989 692567 Ontario Limited* Ontario 1986 757UA, Inc.* Delaware 1989 767ER, Inc. Delaware 1987 * Second-tier subsidiaries ** Third-tier subsidiaries 91 of 94 92 Appendix of graphic and image material pursuant to Rule 304(a) of Regulation S-T Graphic and image material item Number 1 Sales by industry segment: A bar chart for the five years 1991-1995 indicating sales by industry segment (Dollars in billions): 1991 1992 1993 1994 1995 Commercial Aircraft 22.970 24.133 20.568 16.851 13.933 Defense and Space 6.344 6.051 4.870 5.073 5.582 Total 29.314 30.184 25.438 21.924 19.515 Graphic and image material item Number 2 Commercial aircraft sales by geographic region: A bar chart for the five years 1991-1995 indicating sales by type of customer (Dollars in billions): 1991 1992 1993 1994 1995 United States 5.851 7.205 6.371 5.490 6.813 Asia 5.179 6.772 8.741 7.215 4.658 Europe 8.300 6.953 4.416 2.994 1.381 Oceania 1.654 1.908 0.631 0.884 0.482 Other 1.986 1.295 0.409 0.268 0.599 Total 22.970 24.133 20.568 16.851 13.933 Graphic and image material item Number 3 Net earnings: A bar chart of net earnings for the five years 1991-1995 (Dollars in billions): 1991 - 1.567; 1992 - 1.554(*); 1993 - 1.244; 1994 - 0.856; 1995 - 0.393 (1) (*) Exclusive of the cumulative effect of the accounting change for retiree health care. (1) Excluding special retirement program charge, 1995 - .783 92 of 94 93 Graphic and image material item Number 4 Research and development expensed: A bar chart of research and development expensed for the five years 1991-1995 (Dollars in billions): 1991 - 1.417; 1992 - 1.846; 1993 - 1.661; 1994 - 1.704; 1995 - 1.267 Graphic and image material item Number 5 Contractual backlog: A bar chart for the five years 1991-1995 indicating contractual backlog (Dollars in billions): 1991 1992 1993 1994 1995 Commercial Aircraft 92.161 81.991 69.000 60.614 66.540 Defense and Space 5.755 5.939 4.528 5.696 5.805 Total 97.916 87.930 73.528 66.310 72.345 Graphic and image material item Number 6 Property, plant and equipment -- net additions: A bar chart for the five years 1991-1995 indicating property, plant and equipment -- net additions and depreciation (Dollars in billions): 1991 1992 1993 1994 1995 Net additions 1.850 2.160 1.317 0.795 0.629 Depreciation 0.768 0.870 0.953 1.081 0.976 Graphic and image material item Number 7 Customer financing -- net changes: A bar chart for the five years 1991-1995 indicating customer financing - net additions (Dollars in billions): 1991 1992 1993 1994 1995 Net additions 0.100 1.140 0.934 0.205 (1.399) 93 of 94 94 Graphic and image material item Number 8 Worldwide airline industry core operating profits: A bar chart for the 20 years 1975 - 1995 indicating worldwide airline industry core operating profits (Dollars in billions): 1975 1976 1977 1978 1979 1980 1981 1982 1983 0.730 2.156 2.629 3.070 0.736 (0.634) (0.692) (0.160) 2.000 1984 1985 1986 1987 1988 1989 1990 1991 1992 5.100 4.100 4.600 7.200 10.200 7.600 (1.500) (0.500) (1.500) 1993 1994 1995* 2.500 8.000 11.700 * Estimate Graphic and image material item Number 9 Procurement budget - Department of Defense and NASA: A bar chart for the six years 1990 - 1995 indicating Procurement budgets - Department of Defense and NASA (Dollars in billions): 1990 - 135.0; 1991 - 126.0; 1992 - 117.0; 1993 - 107.0; 1994 - 94.0;1995 - 94.0 94 of 94 EX-27 2 ART. 5 FDS FOR 1995 FORM 10-K
5 1,000,000 12-MOS DEC-31-1995 DEC-31-1995 3,730 0 2,311 110 6,933 13,178 13,744 7,288 22,098 7,415 2,615 1,746 0 0 8,152 22,098 19,515 19,515 0 19,213 0 0 151 360 (33) 393 0 0 0 393 1.15 1.15
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