Notes to Consolidated Financial Statements

Financial Report 1995

Notes to Consolidated Financial Statements (part II)

Note 12
Shareholders’ Equity

Changes in shareholders’ equity consisted of the following:

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.

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 creditrelated 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.

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.

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.

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 ofDecember 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, 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.

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 principal 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:

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 below. 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.

Ten-Year Summary

Quarterly Financial Data (Unaudited)