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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 30, 1999
GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 1-3671 13-1673581
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3190 Fairview Park Drive, Falls Church, Virginia 22042-4523
(Address of principal executive offices) (Zip Code)
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(703) 876-3000
Registrant's telephone number, including area code
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Item 2. Acquisition or Disposition of Assets
On July 30, 1999, General Dynamics Corporation acquired Gulfstream
Aerospace Corporation (Gulfstream) through a merger of a subsidiary of the
company into Gulfstream. As a result, the holders of Gulfstream common stock
became entitled to receive one share of the company's common stock in exchange
for each share of Gulfstream common stock. The common stock of Gulfstream was
traded on the New York Stock Exchange through the close of business on July 30,
1999, at which time there were 72,165,645 shares of Gulfstream common stock
outstanding. An additional 4.1 million shares have been reserved for issuance
upon the exercise of stock options which, prior to the acquisition, had been
options to purchase Gulfstream common stock. The transaction was valued at
approximately $4.8 billion, based on the company's stock price of $66.125 per
share.
Gulfstream is a leading designer, developer, manufacturer and marketer
of advanced business jet aircraft. Gulfstream, headquartered in Savannah,
Georgia, has approximately 7,700 employees with operations primarily in six
states. The assets acquired include, among other things, machinery, equipment
and other physical property, the primary use of which relates to the design and
manufacture of advanced business jet aircraft. It is the present intent of
General Dynamics to continue to devote the assets to such purposes.
The acquisition will be accounted for as a pooling of interests, and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of operations
of Gulfstream and have been included in this Current Report on Form 8-K as
Exhibits 99.2 and 99.3. These statements will become the historical consolidated
financial statements of General Dynamics Corporation after post-combination
results are issued.
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired
This document incorporates by reference the documents of Gulfstream
Aerospace Corporation listed below that have previously been filed
with the Securities and Exchange Commission.
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(b) Pro forma financial information
None.
(c) Exhibits
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Exhibit 3.1B - Restated Certificate of Incorporation,
effective August 2, 1999
Exhibit 10.40 - Agreement and Plan of Merger dated May 16,
1999 between General Dynamics Corporation,
Tara Acquisition Corporation and Gulfstream
Aerospace Corporation (1)
Exhibit 10.41 - Voting Agreement dated May 16, 1999 between
General Dynamics Corporation and certain
stockholders of Gulfstream Aerospace
Corporation (1)
Exhibit 10.43 - Registration Agreement dated as of July 30,
1999 between General Dynamics Corporation
and certain stockholders of Gulfstream
Aerospace Corporation
Exhibit 23.1 - Consent of Arthur Andersen LLP
Exhibit 23.2 - Consent of Deloitte & Touche LLP
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Exhibit 99.1 - Management's Discussion and Analysis of the
Results of Operations and Financial
Condition
Exhibit 99.2 - Unaudited Supplemental Consolidated
Financial Statements of General Dynamics
Corporation for the quarterly period ended
April 4, 1999 (as restated to reflect the
acquisition of Gulfstream Aerospace
Corporation on July 30, 1999)
Exhibit 99.3 - Audited Supplemental Consolidated Financial
Statements of General Dynamics Corporation
for the fiscal year ended December 31, 1998
(as restated to reflect the acquisition of
Gulfstream Aerospace Corporation on July 30,
1999)
Exhibit 99.4 - Press Release dated July 30, 1999, "General
Dynamics Completes Acquisition of Gulfstream
Aerospace Corporation on July 30, 1999"
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(1) Filed as an exhibit to the General Dynamics Corporation's quarterly report
on Form 10-Q for the quarterly period ended April 4, 1999, and filed with
the Commission May 18, 1999, and incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL DYNAMICS CORPORATION
by /s/ John W. Schwartz
-----------------------------------
John W. Schwartz
Vice President and Controller
(Authorized Officer and Chief
Accounting Officer)
Dated: August 11, 1999
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EXHIBIT 3.1B
RESTATED
CERTIFICATE OF INCORPORATION
OF
GENERAL DYNAMICS CORPORATION
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FIRST: Name. The name of the corporation (hereinafter called the
"Corporation") is "General Dynamics Corporation." The Corporation was
initially incorporated on February 21, 1952 as "General and Atomic
Manufacturing Company." On March 3, 1952, the name of the Corporation
changed to "General Airmarine Corporation", and on March 11, 1952, the
Corporation's name was changed to its present name, "General Dynamics
Corporation."
SECOND: Delaware Office and Registered Agent. The registered office
or place of business of the Corporation in the State of Delaware is located
at No. 306 South State Street in the City of Dover, County of Kent. The name
and address of the registered agent of the Corporation in the State of
Delaware is United States Corporation Company, No. 306 South State Street,
Dover, Delaware.
THIRD: Nature of the Business or Objects or Purposes. The nature of
the business, or objects or purposes to be transacted, promoted or carried on
are as follows:
(1) To engage in the business of manufacture and operation of
ships and aircraft and to build, manufacture, fabricate, construct,
assemble, design, develop, experiment with, produce, import, export,
purchase, charter, hire or otherwise acquire, own, maintain, sell, lease,
transfer, hold, operate, use, install, equip, replace, service, process,
reprocess, repair, remodel, recondition, assign, mortgage, pledge or
otherwise generally dispose of, trade and deal in boats, ships, vessels,
submarines and other means of navigation of whatsoever kind and
description, and airplanes, airships, helicopters, missiles, dirigibles,
balloons, blimps and other aircraft and space vehicles of whatsoever kind
and description, whether for use upon or under the surface of the sea, in
the air or otherwise, including, without limitation, the acquisition in
any manner whatsoever of all plants, properties, real estate, personalty,
materials, machinery, motive power, supplies and other articles necessary
or convenient for use, directly or indirectly, in connection therewith or
related thereto.
(2) To engage in the business of research and experimentation in
the field of nuclear chain reaction and atomic energy for any and all
civilian, military or other purposes whatsoever to engage in any business
relating, directly or indirectly, to the use of nuclear, fissionable,
fusionable and radioactive material and atomic energy of any description,
and to build, manufacture, fabricate, construct, assemble, design,
develop, experiment with, produce, import, export, purchase, charter,
hire or otherwise acquire, own, maintain, sell, lease, transfer, hold,
operate, use, install, equip, replace, service, process, reprocess,
repair, remodel, recondition, assign, mortgage, pledge or otherwise
generally dispose of, trade and deal in propulsion machinery, reactors,
boilers, pressure vessels, engines, mechanisms, tools, implements,
instruments, appliances and apparatus of whatsoever kind and description,
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making us of, related to or having any purpose in connection with
nuclear, fissionable, fusionable and radioactive materials and atomic
energy, including, without limitation, the acquisition in any manner
whatsoever of all plants, properties, real estate, personalty, materials,
machinery, motive power, supplies and other articles necessary or
convenient for use, directly or indirectly, in connection therewith or
related thereto.
(3) To engage in the business of manufacture and operation of all
types of transportation for use in the air, on and under the sea, and on
and under the land, and to establish and maintain and operate shipping
lines, air lines and vehicular lines of every description for the
transportation of passengers and goods, to build, manufacture, fabricate,
construct, assemble, design, develop, experiment with, produce, import,
export, purchase, charter, hire or otherwise acquire, own, maintain,
sell, lease, transfer, hold, operate, use, install, equip, replace,
service, process, reprocess, repair, remodel, recondition, assign,
mortgage, pledge or otherwise generally dispose of, trade and deal in
ships and aircraft as hereinabove provided for, as well as automobiles,
trucks, trailers, motorcycles, tractors and other vehicles of whatsoever
kind and description, including, without limitation, the acquisition in
any manner whatsoever of all plants, properties, real estate, personalty,
materials, machinery, motive power, supplies and other articles necessary
or convenient for use, directly or indirectly, in connection therewith or
related thereto. Nothing herein shall be deemed to authorize the
Corporation to construct, maintain or operate public utilities within the
State of Delaware.
(4) To engage in the business of manufacture of machinery of every
description, to build, manufacture, fabricate, construct, assemble,
design, develop, experiment with, produce, import, export, purchase,
charter, hire or otherwise acquire, own, maintain, sell, lease, transfer,
hold, operate, use, install, equip, replace, service, process, reprocess,
repair, remodel, recondition, assign, mortgage, pledge or otherwise
generally dispose of, trade and deal in propulsion machinery, motors,
engines, mechanisms, tools, implements, instruments, appliances and
apparatus of whatsoever kind and description, whether operated by
gasoline, kerosene, alcohol, electricity, oil, steam, nuclear fission,
fusion or any other means, whether now known or hereafter discovered,
including without limitation the acquisition in any manner whatsoever of
all plants, properties, real estate, personalty, materials, machinery,
motive power, supplies and other articles necessary or convenient for
use, directly or indirectly, in connection therewith or related thereto.
(5) To engage in the business of manufacture of telephones,
radios, televisions, radar, communication devices of any nature, and
electronic products, to build, manufacture, fabricate, construct,
assemble, design, develop, experiment with, produce, import, export,
purchase, charter, hire or otherwise acquire, own, maintain, sell, lease,
transfer, hold, operate, use, install, equip, replace, service, process,
reprocess, repair, remodel, recondition, assign, mortgage, pledge or
otherwise generally dispose of, trade and deal in telephonic, radio,
broadcasting, receiving, televisual, radar, electric, magnetic,
electro-magnetic, recording, reproducing, transmitting, phonographic,
amplifying, message-receiving and message-sending apparatus, equipment,
materials, articles, accessories, parts, instruments, appliances,
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devices, implements, machine, tools, supplies, preparations, exchanges,
circuits, networks, services, systems and contrivances of all kinds,
electronic devices and products of any nature, now known or hereafter
discovered, including without limitation the acquisition in any manner
whatsoever of all plants, properties, real estate, personalty, materials,
machinery, motive power, supplies and other articles necessary or
convenient for use, directly or indirectly, in connection therewith or
related thereto.
(6) To engage in the business of manufacture of synthetic and
plastic substances and products, to build, manufacture, fabricate,
construct, assemble, design, develop, experiment with, produce, import,
export, purchase, charter, hire or otherwise acquire, own, maintain,
sell, lease, transfer, hold, operate, use, install, equip, replace,
service, process, reprocess, repair, remodel, recondition, assign,
mortgage, pledge or otherwise generally dispose of, trade and deal in
synthetic rubber, plywood, vulcanized fiber, celluloid, natural or
synthetic plastics, plastic substances and materials, and any and all
natural or synthetic organic materials made from cellulose, proteins,
hydrocarbons or resins, including any and all compounds, mixtures and
derivatives of the foregoing or any of them, and any and all articles
consisting or partly consisting of the foregoing, including, without
limitation, the acquisition in any manner whatsoever of all plants,
properties, real estate, personality, materials, machinery, motive power,
supplies and other articles necessary or convenient for use, directly or
indirectly, in connection therewith or related thereto.
(7) To engage in the business of manufacture, production,
purchase, creation or acquisition in any manner of, to use, transport,
sell, market and dispose of, and generally to deal in and with liquid and
compressed gases of all kinds, petrochemicals and other chemicals of the
same or different character, and raw materials therefor and derivatives
thereof, extracts, flavors, foods, syrups, preparations and products, and
to manufacture, fabricate, produce, buy or otherwise create or acquire,
erect, equip and install, use, transport, sell, lease, market and dispose
of, and generally to deal in and with, machinery, appliances and
supplies, including bottling machinery of all kinds and for all purposes,
and all accessories thereto and appliances therefor, and store fixtures
and furniture and furnishings, including soda fountains and all
appurtenances thereto.
(8) To engage in the business of manufacturing, producing,
purchasing, creating or acquiring in any manner and to use, transport,
sell, lease, market and dispose of and generally to deal in and with
brick, stone, lumber, cement, sand, gravel, aluminum, concrete materials,
crushed stone, floor treatments, insulation, limes, masonry materials,
metal products, paints and coatings, paper, pipe, plaster materials,
refractories, roofing materials, and any other materials without limit
used in the building, construction and other industries, and to
manufacture, fabricate, produce, buy, or otherwise create or acquire, and
erect, equip and install, use, transport, sell, lease, market and dispose
of and generally deal in and with the foregoing and any machinery,
appliances and supplies and other articles necessary or convenient for
use, directly or indirectly, in connection therewith or related thereto.
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(9) To engage in the business of mining, milling, concentrating,
converting, smelting, treating, preparing for market, manufacturing,
buying, selling, exchanging and otherwise producing and dealing in coal,
sand, gravel, aluminum, lime, dolomite, and without limitation any and
all minerals whatsoever and the products and by-products thereof of every
kind and description and by whatever process the same can be or may
hereafter be produced and generally and without limit as to amount to
buy, sell, exchange, lease, acquire, and otherwise deal in lands, mines
and mineral rights and claims and to conduct all business appertaining
thereto, to purchase, lease or otherwise acquire mining rights, timber
rights, oil and gas rights, mines, buildings, dwellings, plants,
machinery, tools and other properties whatsoever which may from time to
time be deemed advantageous, to mine and market any mineral or other
product that may be found in or on such lands and to explore, work,
exercise, develop or turn to account the same; to construct, operate,
own, lease or otherwise make use of, railways, tramways, boats, barges,
vessels, automotive vehicles, or any means of transportation whatsoever
in mining and moving and transporting such products, including, without
limitation the acquisition in any manner whatsoever of all plants,
properties, real estate, personalty, material, machinery, motive power,
supplies and other articles necessary or convenient for use, directly or
indirectly, in connection therewith or related thereto.
(10) To engage in the business of manufacturing and merchandising,
generally and without limitation, all types of products and articles, to
build, manufacture, fabricate, construct, assemble, design, develop,
experiment with, produce, import, export, purchase, charter, hire or
otherwise acquire, own, maintain, sell, lease, transfer, hold, operate,
use, install, equip, replace, service, process, reprocess, repair,
remodel, recondition, assign, mortgage, pledge or otherwise generally
dispose of, trade and deal in, all types of manufactured products,
articles, apparatus, machinery, machines, equipment, devices,
accessories, systems, parts, supplies, tools, implements, apparatus, raw
materials, natural products, manufactured products, of whatsoever kind
and description, including, without limitation, the acquisition in any
manner whatsoever of all plants, properties, real estate, personalty,
materials, machinery, motive power, supplies and other articles necessary
or convenient for use, directly or indirectly, in connection therewith or
related thereto.
(11) To build, manufacture, fabricate, construct, assemble,
design, develop, experiment with, produce, import, export, charter, hire
or otherwise acquire, own, maintain, sell, lease, transfer, hold,
operate, use, install, equip, replace, service, process, reprocess,
repair, remodel, recondition, assign, mortgage, pledge, or otherwise
generally dispose of, trade and deal in, goods, chattels, wares,
merchandise and personal property of every class and description.
(12) To purchase or otherwise acquire, and to hold, own, maintain,
work, develop, sell, lease, exchange, hire, convey, mortgage or otherwise
dispose of and deal in, lands and leaseholds, and any interest, estate
and rights in real property, including oil and other mineral rights, and
any personal or mixed property, and any franchises, rights, licenses or
privileges of whatsoever kind and description.
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(13) To engage in engineering, research, experimental, laboratory
and development work in connection with any or all of its purposes, to
act as engineering or research counselors and consultants, and in
connection wherewith to render management, engineering, research,
technical and advisory services to persons, firms, corporations, and
others.
(14) To purchase, lease or otherwise acquire the whole or any part
of the business, goodwill, rights and property of any kind, of any
person, firm, association or corporation, domestic or foreign, and to
undertake the whole or any part of the assets and liabilities of any
person, firm, association or corporation and to pay for the same in cash,
stock, bonds, evidences of indebtedness or property of the Corporation or
otherwise.
(15) To purchase, lease or otherwise acquire and to register,
hold, develop, experiment with, own, maintain, sell, transfer, use,
enjoy, operate, introduce, assign, pledge or otherwise generally dispose
of, trade and deal in, all patent rights and letters patent of the United
States, or of any other country, inventions, designs, formulae,
concessions, trade-marks, trade names, brands, labels, copyrights,
know-how, improvements and processes, whether or not used in connection
with or secured under letter patent of the United States or of any other
country, and to apply for, obtain and register, copyrights, trade-marks
and patents in connection with the same, and to grant or accept licenses
or territorial rights in respect thereof or otherwise turn the same to
account.
(16) To purchase, or otherwise acquire, for investment or
otherwise, to hold, sell, transfer, mortgage, pledge, exchange or
otherwise deal in or dispose of bonds, mortgages, debentures, shares or
obligations of any corporation, foreign or domestic, and to exercise in
respect thereof all the rights, powers and privileges of individual
owners thereof.
(17) To draw, make, accept, discount, endorse, execute and issue
bonds, debentures, promissory notes and all other transferable or
negotiable instruments.
(18) To endorse, guarantee and secure the payment and satisfaction
of bonds, coupons, mortgages, deeds of trust, debentures, securities,
obligations and evidences of indebtedness, and also to guarantee and
secure the payment or satisfaction of interest on obligations and of
dividends on shares of the capital stock of other corporations; also to
assume and guarantee the whole or any part of the liabilities, existing
or prospective, of any person, corporation, firm or association; and to
aid in any manner any other person or corporation with which it has
business dealings, or whose stocks, bonds, or other obligations are held
or are in any manner guaranteed by the Corporation, and to do any other
acts and things for the preservation, protection, improvement or
enhancement of the value of such stocks, bonds, or other obligations.
(19) To purchase, hold, sell and reissue shares of its own stock.
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(20) To issue or exchange stocks, bonds and other obligations in
payment for property purchased or acquired by it, or for any other object
in or about its business, to borrow money without limit, to mortgage or
pledge its franchises, real or personal property, income and profits
accruing to it, any stocks, bonds or other obligations, or any property
which may be acquired by it, and to secure any bonds or other obligations
by it issued or incurred.
(21) To act as selling agents for other manufacturers, and to
manufacture for its own account, and to buy, sell, import, export, and
generally deal in, guns, bombs, munitions, and weapons of every name or
description, and parts, accessories, and equipment used in connection
therewith or thereunto appertaining.
(22) To finance for others the manufacture, purchase, ownership,
sale, maintenance and operation of boats, ships, vessels, submarines,
airplanes, airships, helicopters, guided missiles, dirigibles, balloons,
blimps, automobiles, motor cars, taxicabs, motor trucks, any and all
other vessels, aircraft and vehicles of whatsoever kind and description,
radios, televisions, telephone equipment, or parts and accessories
thereto appertaining, or any other property, real, personal or mixed, of
whatsoever kind and description; to buy, sell and generally deal in
notes, chattel mortgages, mortgages, conditional sales agreements,
accounts and bills receivable and commercial paper and/or liens upon any
property, real, personal or mixed, of whatsoever kind and description,
and to conduct generally the business of an investment broker or finance
corporation, and to buy, sell and generally deal in stocks, bonds, notes
or securities of every name and description, but not to exercise the
functions of bank discount.
(23) To act as agents or subagents, brokers and factors for any
person, firm, association, corporation or government; and to employ any
subagent for any principal whether disclosed or undisclosed, or to act as
principal and to employ any agent or subagent, all for the purpose of
obtaining or acquiring by any means any contract, charter, lease,
agreement or property of any nature or for any other purpose whatsoever;
to act as intermediary, broker or negotiator between principals and/or
agents including, inter alia, lessors, lessees, charterers, buyers,
sellers, mortgagors, mortgagees, pledgors and pledgees; and to make
agreements, contracts or charters in its own name or in the name of any
person, firm, association or corporation which it represents.
(24) To carry on any business whatsoever which the Corporation may
deem proper or convenient in connection with any of the foregoing
purposes or otherwise, or which may be calculated, directly or
indirectly, to promote the interests of the Corporation or to enhance the
value of its property, as contractor, subcontractor, principal, agent,
commission merchant, wholesaler, retailer, attorney in fact, broker,
factor, or in any other capacity or in any combination of capacities; to
conduct its business in the State of Delaware, in other States, in the
District of Columbia, in the Territories, Possessions and Colonies of the
United States of America, and in foreign countries; and to hold,
purchase, lease or otherwise acquire, sell, mortgage and convey or
otherwise dispose of, without limit, real and personal property,
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either in or out of the State of Delaware, and to have and to
exercise all the powers conferred by the laws of the State of Delaware
upon corporations organized under the act pursuant to and under which the
Corporation is organized.
(25) To do all and everything necessary, suitable or proper for
the accomplishment of any of the purposes or the attainment of any of the
objects or the furtherance of any of the powers herein set forth, and to
do every other act or acts, thing or things incidental or appurtenant to
or growing out of or connected with the aforesaid business or powers or
any part of parts thereof, provided the same be not inconsistent with the
laws under which the Corporation is organized.
FOURTH: Capital Stock.
1. Number of Shares Authorized. The total number of shares of all classes
of stock which the Corporation shall have authority to issue is Three Hundred
and Fifty Million (350,000,000), of which Three Hundred Million (300,000,000)
shares of the par value of $1.00 each are to be of a class designated as Common
Stock and Fifty Million (50,000,000) shares of the par value of $1.00 each are
to be of a class designated as Preferred Stock.
2. Consideration for Issuance of Stock May Be Fixed by Directors. Shares
of stock of any class now or hereafter authorized may be issued by the
Corporation from time to time for such consideration not less than the par value
thereof as shall be fixed from time to time by the Board of Directors of the
Corporation. Any and all shares of stock so issued for which the consideration
so fixed has been paid or delivered to the Corporation shall be declared and
taken to be fully paid stock and shall not be liable to any further call or
assessments thereon, and the holders of such shares shall not be liable for any
further payments in respect of such shares. Subscriptions to, or the purchase
price of, shares of stock of the Corporation may be paid for, wholly or partly,
by cash, by labor done, by personal property, or by real property or leases
thereof. In the absence of actual fraud in the transaction, the judgment of the
Directors as to the value of such labor, property, real estate or leases thereof
shall be conclusive.
3. Provisions with Respect to Stock. The voting powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the classes of stock
of the Corporation which are fixed by this Certificate of Incorporation, and the
authority vested in the Board of Directors to fix by resolution or resolutions
providing for the issue of Preferred Stock the voting powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the shares of
Preferred Stock which are not fixed by this Certificate of Incorporation, are as
follows:
(1) The Preferred Stock may be issued from time to time in one or
more series of any number of shares; provided that the aggregate number
of shares issued and not cancelled of any and all such series shall not
exceed the total number of shares of Preferred Stock hereinabove
authorized. Each series of Preferred Stock shall be distinctively
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designated by letter or descriptive words. All series of Preferred Stock
shall rank equally and be identical in all respects except as permitted
by the provisions of Section 3(b) of this Article FOURTH.
(2) Authority is hereby vested in the Board of Directors from time
to time to issue the Preferred Stock as Preferred Stock of any series and
in connection with the creation of each such series to fix by resolution
or resolutions providing for the issue of shares thereof the voting
powers, if any, the designation, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, of such series to the full extent now or hereafter
permitted by this Certificate of Incorporation and the laws of the State
of Delaware, in respect of the matters set forth in the following
paragraphs (1) to (8), inclusive:
(1) The distinctive designation of such series and the
number of shares which shall constitute such series, which number
may be increased or decreased (but not below the number of shares
thereof then outstanding) from time to time by action of the Board
of Directors;
(2) The dividend rate of such series and any limitations,
restrictions or conditions on the payment of dividends, including
whether dividends shall be cumulative and, if so, from which date
or dates, and the relative rights of priority, if any, of payment
of dividends on shares of that series;
(3) The price or prices at which, and the terms and
conditions on which, the shares of such series may be redeemed by
the Corporation;
(4) The amount or amounts payable upon the shares of such
series in the event of any liquidation, dissolution or winding up
of the Corporation and the relative rights of priority, if any, of
payment of shares of such series;
(5) Whether. or not the shares of such series shall be
entitled to the benefit of a sinking fund to be applied to the
purchase or redemption of shares of such series and, if so
entitled, the amount of such fund and the manner of its
application;
(6) Whether or not the shares of such series shall be made
convertible into, or exchangeable for, shares of any other class
or classes of stock of the Corporation or shares of any other
series of Preferred Stock, and, if made so convertible or
exchangeable, the conversion price or prices, or the rate or rates
of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and
conditions of such conversion or exchange;
(7) Whether or not the shares of such series shall have any
voting powers and, if voting powers are so granted, the extent of
such voting powers; and
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(8) Whether or not the issue of any additional shares of
such series or of any future series in addition to such series
shall be subject to restrictions in addition to the restrictions,
if any, on the issue of additional shares imposed in the
resolution or resolutions fixing the terms of any outstanding
series of Preferred Stock theretofore issued pursuant to this
Article FOURTH and, if subject to additional restrictions, the
extent of such additional restrictions.
(3) Before any sum or sums shall be set aside for or applied to
the purchase of Common Stock and before any dividends shall be declared or paid
or any distribution ordered or made upon the Common Stock (other than a dividend
payable in Common Stock), the Corporation shall comply with the dividend and
sinking fund provisions, if any, of any resolution or resolutions providing for
the issue of any series of Preferred Stock any shares of which shall at the time
be outstanding.
(4) Subject to the provisions of Section 3(c) of this Article
FOURTH, the holders of Common Stock shall be entitled, to the exclusion of the
holders of Preferred Stock of any and all series, to receive such dividends as
from time to time may be declared by the Board of Directors.
(5) In the event of any liquidation, dissolution or winding up of
the Corporation, the holders of Preferred Stock of each series then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any payment shall be made to the holders of Common Stock, an amount
determined as provided in Section 3(b) of this Article FOURTH for every share of
their holdings of Preferred Stock of such series. If upon any liquidation,
dissolution or winding up of the Corporation the assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
holders of Preferred Stock of all series the full amounts to which they
respectively shall be entitled, the holders of Preferred Stock of all series
shall share ratably in any distribution of assets according to the respective
amounts which would be payable in respect of the shares of Preferred Stock held
by them upon such distribution if all amounts payable on or with respect to
Preferred Stock of all series were paid in full. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment shall have been made to the holders of Preferred
Stock of the full amount to which they shall be entitled as aforesaid, the
holders of Common Stock shall be entitled, to the exclusion of the holders of
Preferred Stock of any and all series, to share, ratably according to the number
of shares of Common Stock held by them, in all remaining assets of the
Corporation available for distribution to its stockholders. Neither the merger
or consolidation of the Corporation into or with another corporation nor the
merger or consolidation of any other corporation into or with the Corporation,
nor the sale, transfer or lease of all or substantially all the assets of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation.
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(6) Except as otherwise provided by law or by the resolution or
resolutions providing for the issue of any series of Preferred Stock, the
holders of shares of Preferred Stock, as such holders, (i) shall not have any
right to vote, and are hereby specifically excluded from the right to vote, in
the election of directors or for any other purpose and (ii) shall not be
entitled to notice of any meeting of stockholders.
(7) Subject to the provisions of any applicable law, or of the
by-laws of the Corporation as from time to time amended, with respect to the
closing of the transfer books or the fixing of a record date for the
determination of stockholders entitled to vote and except as otherwise provided
by law or by the resolution or resolutions providing for the issue of any series
of Preferred Stock, the holders of outstanding shares of Common Stock shall
exclusively possess voting power for the election of directors and for all other
purposes, each holder of record of shares of Common Stock being entitled to one
vote for each share of Common Stock standing in his name on the books of the
Corporation.
(8) Script Certificates or Cash Equivalents. No fractional shares
of stock of any class of the Corporation now or hereafter authorized shall be
issuable upon or in connection with any conversion, split-up, merger,
consolidation, reclassification, stock dividend or otherwise. In lieu of any
such fractional share, the person entitled to an interest in respect of such a
fractional share shall be entitled, as determined from time to time by the Board
of Directors of the Corporation, to either (i) scrip certificates for fractional
shares with such terms and conditions as the Board of Directors shall prescribe
or (ii) the cash equivalent of any such fractional share based upon the market
value thereof at the date upon which rights in respect of any such fractional
share shall accrue.
(9) Unclaimed Dividends. Anything herein to the contrary
notwithstanding, any and all right, title, interest and claim in or to any
dividends declared, or other distributions made, by the Corporation, whether in
cash, stock or otherwise, which are unclaimed by the stockholder entitled
thereto for a period of six years after the close of business on the payment
date, shall be and be deemed to be extinguished and abandoned; and such
unclaimed dividends or other distributions in the possession of the Corporation,
its transfer agents or other agents or depositories, shall at such time become
the absolute property of the Corporation, free and clear of any and all claims
of any persons whatsoever.
4. Rights or Options. The Corporation shall have the power to create and
issue, whether or not in connection with the issue and sale of any shares of
stock or other securities of the Corporation, rights or options entitling the
holders thereof to purchase from the Corporation any shares of its capital stock
of any class or classes at the time authorized, such rights or options to be
evidenced by or in such instrument or instruments as shall be approved by the
Board of Directors. The terms upon which, the time or times, which may be
limited or unlimited in duration, at or within which, and the price or prices at
which any such rights or options may be issued and any such shares may be
purchased from the Corporation upon the exercise of any such right or option
shall be such as shall be fixed and stated in a resolution or resolutions
adopted by the Board of Directors providing for the creation and issue of such
rights or options, and, in every case, set forth or
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incorporated by reference in the instrument or instruments evidencing such
rights or options. In the absence of actual fraud in the transaction, the
judgment of the Directors as to the consideration for the issuance of such
rights or options and the sufficiency thereof shall be conclusive.
5. Negation of Preemptive Right. No holder of any stock of the
Corporation of any class now or hereafter authorized shall have any right,
preemptive or otherwise, as such holder (other than such right, if any, as the
Board of Directors in its discretion may determine) to purchase, subscribe for
or otherwise acquire any shares of stock of the Corporation of any class now or
hereafter authorized, or any part paid receipts or allotment certificates in
respect of any such shares, or any securities convertible into or exchangeable
for any such shares, or any warrants or other instruments evidencing rights or
options to subscribe for, purchase, or otherwise acquire any such shares,
whether such shares, receipts, certificates, securities, warrants or other
instruments be unissued, or issued and thereafter acquired by the Corporation.
FIFTH: Minimum Capital. The minimum amount of capital of the
Corporation shall be $1,000,000.
SIXTH: Existence. The Corporation shall have perpetual existence.
SEVENTH: Corporate Debts. The private property of the stockholders
shall not be subject to the payment of corporate debts to any extent whatever.
EIGHTH: Meetings. The stockholders and the Board of Directors shall
have power to hold their meetings within or without the State of Delaware at
such place or places as from time to time may be designated by the by-laws,
or in case of the Board of Directors, by resolution of the Board or by
consent of all its members.
NINTH: The Board of Directors and Certain of its Powers. Without
limiting the generality of any other matters herein contained:
(1) The number of directors of the Corporation shall not be less
than three, shall be fixed by, or in the manner provided in, the by-laws
and may be altered from time to time as may be provided therein. In case
of any increase in the number of directors, whether or not by amendment
of the by-laws by the Board of Directors, or in case of any vacancy on
the Board of Directors however caused, the additional directors may be
elected or the vacancy filled by the Board of Directors or by the
stockholders in accordance with the laws of the State of Delaware. The
by-laws shall prescribe the number of directors necessary to constitute a
quorum, which number may be less than a majority of the whole Board of
Directors but not less than one-third of the whole Board of Directors.
The election of directors of the Corporation need not be by ballot unless
the by-laws shall so require.
(2) The Board of Directors shall have the power, without the
assent or vote of the shareholders, except as otherwise expressly
provided by law or by the Certificate of Incorporation or by the by-laws
of the Corporation, to fix the time for the declaration and
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payment of dividends, to fix and vary the amount to be reserved
for any proper purposes, to authorize and to cause to be executed
mortgages and liens upon the real and personal property of the
Corporation, including after-acquired property, to determine the use and
disposition of any surplus or net profits arising from the business of
the Corporation and to use and apply any such surplus or net profits for
the purchase or acquisition of bonds or other obligations or shares of
stock of the Corporation, to such extent and in such manner and upon such
terms as the Board of Directors shall deem expedient, and shares of stock
of the Corporation so purchased or acquired may be resold.
(3) All corporate powers, including, but not limited to, the power
to fix, and from time to time to change, the compensation to be paid to
members of the Board of Directors, and to members of any committee of the
Board of Directors, shall be exercised by the Board of Directors, without
the assent or other action of the stockholders, except as otherwise
expressly provided by law or by the Certificate of Incorporation or by
the by-laws of the Corporation.
(4) Without the assent or other action of the stockholders, unless
otherwise expressly provided by law or by the Certificate of
Incorporation, the Board of Directors may purchase, acquire, hold, lease,
mortgage, pledge, grant options with respect to, sell and convey such
property, real or personal, without as well as within the State of
Delaware, as the Board of Directors may, from time to time, determine;
and, in payment for any property, it may issue or cause to be issued
stock of the Corporation, bonds, debentures, or other obligations
thereof, secured or unsecured.
(5) The Board of Directors may, by resolution or resolutions
passed by a majority of the whole Board, designate one or more
committees, each committee to consist of two or more of the directors of
the Corporation, which, to the extent provided in said resolution or
resolutions or in the by-laws of the Corporation, shall have and may
exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation. Such committee or committees
shall have such name or names as may be stated in the by-laws of the
Corporation or as may be determined from time to time by resolution
adopted by the Board of Directors.
(6) In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon it, the Board of Directors is hereby
empowered to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation, subject, however, to the
provisions of the statutes of the State of Delaware, of the Certificate
of Incorporation, and of the by-laws of the Corporation.
TENTH: By-Laws. Subject to any limitation which may be imposed by the
stockholders or by statute, the Board of Directors may make by-laws and from
time to time may alter, amend or repeal any by-law or by-laws.
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ELEVENTH: Interest of Directors and Officers in Contracts and
Transactions. No contract or other transaction between the Corporation and any
other corporation and no act of the Corporation shall in any way be affected or
invalidated by the fact that any of the directors of the Corporation are
pecuniarily or otherwise interested in, or are directors or officers of, such
other corporation; any director individually, or any firm of which any director
may be a member, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation, provided that the
fact that he or such firm is so interested shall be disclosed or shall have been
known to the Board of Directors or a majority thereof; and any director of the
Corporation who is also a director or officer of such other corporation or who
is so interested may be counted in determining the existence of a quorum at any
meeting of the Board of Directors of the Corporation which shall authorize any
such contract or transaction and may vote thereat to authorize any such contract
or transaction with like force and effect as if he were not such director or
officer of such other corporation or not so interested.
TWELFTH: Indemnification of Directors and Officers.
6. To the extent not inconsistent with Delaware law as in effect from
time to time, every person (and the heirs, executors and administrators of such
person) who is or was a director or officer of the Corporation, or of any other
corporation which he serves or served as such at the written request of the
Corporation and of which the Corporation directly or indirectly is or was a
stockholder or creditor or in which (or in the capital stocks, bonds,
securities, other obligations or assets of which) it is or was or expects to
become in any way interested, shall in accordance with the provisions of this
Article be indemnified by the Corporation against any and all liability and
reasonable expense that may be incurred by him in connection with or resulting
from any claim, action, suit or proceeding; provided that such director or
officer is either wholly successful with respect thereto, or acted in good faith
in what he reasonably believed to be the best interests of the Corporation or
such other corporation and in addition, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
"Claim, action, suit or proceeding" shall include any claim, action, suit or
proceeding (whether brought by or in the right of the Corporation or any other
corporation or otherwise), civil, criminal, administrative or investigative, or
threat thereof, in which a director or officer of the Corporation or such other
corporation (or his heirs, executors or administrators) may become involved, as
a party or otherwise,
(1) by reason of his being or having been a director or officer of
the Corporation or such other corporation or a member of any committee of
the Board of Directors of the Corporation or such other corporation, or
(2) by reason of his acting or having acted in any capacity in a
partnership, association, trust or other organization or entity where he
served as such at the request of the Corporation, or
(3) by reason of any action taken or not taken by him in his
capacity as such director, officer or member of such committee, whether
or not he continues in such capacity at the time such liability or
expense shall have been incurred or asserted.
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The terms "liability" and "expense" shall include, but not be limited to, costs,
counsel fees and disbursements and amounts of judgments, fines or penalties
against, and amounts paid in settlement by or on behalf of, a director or
officer. The term "wholly successful" shall mean termination, withdrawal or
dismissal (with or without prejudice) of any claim, action, suit or proceeding
against the person in question without any express finding of liability or guilt
against him, or the expiration of a reasonable period of time after the making
of any claim or threat of an action, suit or proceeding without the institution
of the same, without any payment or promise made to induce a settlement. The
termination of any claim, action, suit or proceeding, by judgment, order,
settlement (whether with or without court approval) or conviction or upon a plea
of guilty or of nolo contendere, or its equivalent, shall not create a
presumption that a director or officer did not meet the standards of conduct
herein set forth in this Section 1.
7. Every person (and the heirs, executors and administrators of
such person) referred to in Section I of this Article who has been wholly
successful with respect to any claim, action, suit or proceeding shall be
entitled to indemnification. Every other person claiming indemnification under
Section 1 (and the heirs, executors and administrators of such person) shall be
entitled to indemnification if special independent legal counsel, other than
regular counsel of the Corporation, or other disinterested person or persons, in
either case compensated by the Corporation and selected by the Board of
Directors, whether or not a disinterested quorum exists (such counsel or person
or persons being hereinafter called the Referee), shall deliver to the
Corporation their written finding that such director or officer has met the
standards of conduct set forth in Section 1. The person claiming indemnification
shall at the request of the Referee appear before him and answer questions which
the Referee deems relevant and shall be given ample opportunity to present to
the Referee evidence upon which he relies for indemnification.
8. Expenses incurred with respect to any claim, action, suit or
proceeding may be advanced by the Corporation (by action of the Board of
Directors, whether or not a disinterested quorum exists) prior to the final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount unless he is entitled to indemnification under
this Article.
9. The rights of indemnification provided in this Article shall be
in addition to any rights to which any such director or officer may otherwise be
entitled by statute, by-law, agreement, vote of stockholders or otherwise, and
shall apply only to claims made against such director or officer after April 26,
1967 (and any other matters shall continue to be covered by the provisions of
this Article as in effect immediately prior to said date). Persons who are not
directors or officers of the Corporation or of such other corporation but are
employees of the Corporation or any subsidiary may be indemnified to the extent
authorized at any time or from time to time by the Board of Directors.
10. Irrespective of the provisions of this Article, the Board of
Directors may, at any time or from time to time, approve indemnification of
directors and officers or other persons to the full extent permitted by the
provisions of the Delaware General Corporation Law at the time in effect,
whether on account of past or future actions or transactions.
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THIRTEENTH: Limitation on Director Liability. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, or (d) for any transaction
from which the director derived an improper personal benefit. This Article shall
not eliminate or limit the liability of a director for any act or omission
occurring prior to the effective date of this Restated Certificate of
Incorporation. Any repeal or amendment of this Article by the stockholders of
the Corporation shall be prospective only, and shall not adversely affect any
limitations on the personal liability of a director of the Corporation existing
at the time of such repeal or amendment.
FOURTEENTH: Compromise or Arrangement. Whenever a compromise or
arrangement is proposed between this Corporation and its creditors or any class
of them and/or between this Corporation and its stockholders or any class of
them, any court of equitable jurisdiction within the State of Delaware may, on
the application in a summary way of this Corporation or of any creditor or
stockholder thereof, or on the application of any receiver or receivers
appointed for this Corporation under the provisions of section 291 of Title 8 of
the Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all of the creditors or class of creditors, and/or
on all the stockholders or class of stockholders, of this Corporation, as the
case may be, and also on this Corporation.
FIFTEENTH: Amendments. The Corporation reserves the right to amend,
alter, repeal or make additions to any provision contained in this
Certificate of Incorporation in the manner now or hereafter prescribed by the
statutes and laws of the State of Delaware, and all rights conferred on
officers, directors and stockholders herein are granted subject to this
reservation.
SIXTEENTH: Descriptive Headings. The descriptive headings of the
several articles, sections and paragraphs of this Certificate of
Incorporation are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
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CERTIFICATE
The undersigned, David A. Savner, Secretary of GENERAL DYNAMICS
CORPORATION, a Delaware corporation, does hereby certify that the foregoing is a
true copy of the Certificate of Incorporation of the Corporation in effect as of
this date.
WITNESS my hand and the seal of the Corporation this 30th day of July,
1999.
(CORPORATE SEAL)
by /s/ David A. Savner
-------------------------------
David A. Savner
Secretary
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EXHIBIT 10.43
REGISTRATION AGREEMENT
REGISTRATION AGREEMENT dated as of July 30, 1999 between General Dynamics
Corporation, a Delaware corporation (the "Parent Corporation"), and each of the
persons whose names are set forth on the signature page of this Agreement
(referred to in this Agreement individually as a "Stockholder" and collectively
as the "Stockholders").
The Parent Corporation, Tara Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of the Parent Corporation, and
Gulfstream Aerospace Corporation, a Delaware corporation (the "Company"), are
parties to an Agreement and Plan of Merger dated as of May 16, 1999 (as in
effect as of the date hereof, the "Merger Agreement"). Pursuant to the Merger
Agreement, each of the Stockholders will be issued shares of the Common Stock,
par value $1.00 per share (the "Parent Common Stock"), of the Parent
Corporation.
The Parent Corporation and the Stockholders have entered into this
Agreement for the purpose of evidencing certain agreements among the parties
relating to the grant of registration rights by the Parent Corporation to the
Stockholders.
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and for other good and valuable consideration, the value, receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Definitions. For purposes of this Agreement, the following
terms have the meanings set forth below:
"Majority Holders" means the holders of a majority of the Registrable
Securities included in the relevant registration statement at the time the
particular action is taken.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Registrable Securities" means (a) any Parent Common Stock issued to the
Stockholders pursuant to the Merger Agreement and (b) any securities issued or
issuable with respect to the securities referred to in clause (a) by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Registrable Securities, such securities will cease to be Registrable
Securities when they have been distributed to the public pursuant to a offering
registered under the Securities Act or sold to the public in compliance with
Rule 144 under the Securities Act (or any similar rule then in force).
"Registration Expenses" means all expenses incident to the registration and
disposition of the Registrable Securities pursuant to this Agreement, including
all registration, filing and applicable national securities exchange fees, all
fees and expenses of complying with state securities or blue sky laws (including
fees and disbursements of counsel to the underwriters or the Stockholders in
connection with "blue sky" qualification of the Registrable Securities and
determination of their eligibility for investment under the laws of the various
jurisdictions), all word processing, duplicating and printing expenses, all
messenger and delivery expenses, the fees and disbursements of counsel for the
Parent Corporation and of counsel for any other Person reasonably requested by
the Majority Holders, the fees and expenses of the Parent Corporation's
independent public accountants and any other independent public accountants
whose opinions are included in the registration statement, including the
expenses of "cold comfort" letters or any special audits required by, or
incident to, such registration, all fees and disbursements of underwriters
(other than underwriting discounts and
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commissions), all transfer taxes, and the reasonable fees and expenses of
counsel and accountants to the Stockholders; provided that Registration Expenses
will exclude, and the Stockholders will pay, all underwriting discounts and
commissions in respect of the Registrable Securities being registered by such
Stockholders. In connection with any registration pursuant to this Agreement,
the Parent Corporation will not be obligated to pay the fees and expenses for
more than one counsel, other than local and special counsel, or for more than
one firm of accountants representing the Stockholders.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Shelf Registration Statement" means any registration statement that
provides for the offering of Registrable Securities on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act (or any similar or successor
rule then in force).
Except as otherwise provided herein, all capitalized terms used in this
Agreement will have the respective meanings provided in the Merger Agreement.
SECTION 2. Initial Registration.
2.1 Filing of Initial Registration Statement. On June 18, 1999,
the Parent Corporation filed a registration statement on Form S-3 (the
"Initial Registration Statement") with the Securities and Exchange Commission
relating to the proposed underwritten secondary public offering by the
Stockholders of Registrable Securities (the "Initial Offering"). In accordance
with the provisions of Section 6 of this Agreement, the Parent Corporation will
use its best efforts to cause the Initial Registration Statement to become
effective as of the date of the public release of the combined financial
results of the Parent Corporation and the Company contemplated pursuant to
Section 6.20 of the Merger Agreement (the "Earnings Release"). The Parent
Corporation will use its best efforts to maintain the effectiveness of the
Initial Registration Statement for a period of time, not to exceed 120 days
after the date of the Earnings Release or such longer period as the Parent
Corporation and the Majority Holders may agree (the "Initial Registration
Period"), in order to permit the completion of the Initial Offering in the
manner contemplated by the Initial Registration Statement.
2.2 Postponement of Effectiveness. At any time and from time to time prior
to the effectiveness of the Initial Registration Statement, the Majority Holders
may, by delivery of written notice to the Parent Corporation, request that the
Parent Corporation delay the effectiveness of the Initial Registration Statement
or withdraw the Initial Registration Statement. Thereafter, at any time prior to
the expiration of the Initial Registration Period, the Majority Holders may, by
delivery of written notice to the Parent Corporation, request that the Parent
Corporation use its best efforts to cause the Initial Registration Statement to
become effective as soon as practicable after the date of such notice. Any
Registrable Securities not included in the Initial Registration Statement when
filed will be included in the Initial Registration Statement upon the request of
the holder thereof, such request to be made not later than five days prior to
the effective date of the Initial Registration Statement.
2.3 Registration Expenses. The Parent Corporation will pay all
Registration Expenses incurred in connection with the Initial Registration
Statement and the Initial Offering.
2.4 Prohibited Activities. Until the expiration of the Initial
Registration Period, the Parent Corporation will not effect any public sale or
distribution of its equity securities or any securities convertible into or
exchangeable or exercisable for such securities, or make any filing with the
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Securities and Exchange Commission with respect to such sale or distribution
(including on Form S-4 or any similar or successor form), except pursuant to
registrations on Form S-8 or any similar or successor form. The Parent
Corporation has not entered into, and until the end of the Initial Registration
Period will not enter into, any agreement or transaction (a) which would allow
any Person to request registration of its equity securities or any securities
convertible into or exchangeable or exercisable for such securities prior to the
expiration of the Initial Registration Period or (b) the effect of which would
be to adversely affect the ability of the Initial Registration Statement to be
declared effective on the date of the Earnings Release and through the
expiration of the Initial Registration Period.
SECTION 3. Subsequent Demand Registrations.
3.1 Requests for Demand Registrations. At any time after the expiration of
the Initial Registration Period, the holders of at least 40 percent of the
Registrable Securities will have the right to require the Parent Corporation to
effect, and the Parent Corporation will be required to use its best efforts to
effect, two, or if the Initial Registration Statement has not become effective,
three, registrations under the Securities Act (the "Demand Registrations") of
all or part of their Registrable Securities. Each Demand Registration will be on
Form S-2 or S-3 or any similar or successor short-form registration, if
available, or if such forms are not available to effect a Demand Registration,
such other form of the Securities and Exchange Commission as is available. If
requested by the Majority Holders, and the Parent Corporation is then eligible
to use such a registration, the Demand Registration will be made on a Shelf
Registration Statement. Each request for a Demand Registration will specify the
approximate number of Registrable Securities requested to be registered and the
anticipated per share price range for such offering. Within five business days
after receipt of any such request, the Parent Corporation will give written
notice of such requested registration to all other holders of Registrable
Securities and will include in such registration all Registrable Securities with
respect to which the Parent Corporation has received written requests for
inclusion therein no later than five days prior to the effective date of the
registration statement.
3.2 Priority on Demand Registrations; Right to Withdraw. The Parent
Corporation will not include in any Demand Registration any securities which are
not Registrable Securities without the prior written consent of the Majority
Holders. If a Demand Registration is an underwritten offering and the managing
underwriters advise the Parent Corporation that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the Majority Holders, the Parent
Corporation will include in such registration prior to the inclusion of any
securities which are not Registrable Securities the number of Registrable
Securities requested to be included which in the opinion of such underwriters
can be sold in an orderly manner within the acceptable price range of such
offering, pro rata among the respective holders thereof on the basis of the
amount of Registrable Securities owned by each such holder. If, as a result of
the proration provisions set forth in the previous sentence, any holder of
Registrable Securities is not entitled to include all Registrable Securities
previously requested to be included in such registration, such holder may elect
to withdraw such holder's request to include Registrable Securities in such
registration or may reduce the number requested to be included; provided that
such request must be made in writing prior to the execution of the underwriting
agreement.
3.3 Restrictions on Demand Registrations. The Parent Corporation will not
be obligated to effect a Demand Registration within 90 days after the effective
date of the previous Demand Registration. The Parent Corporation may postpone
for up to 90 days the filing or effectiveness of a registration statement for a
Demand Registration, and may terminate the effectiveness of and withdraw for a
period of up to 90 days any Shelf Registration Statement filed pursuant to a
Demand
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Registration, if the Parent Corporation promptly notifies the holders of
Registrable Securities in writing that the Board of Directors of the Parent
Corporation has determined in good faith that effecting such Demand
Registration, or continuing the effectiveness of such registration statement,
would reasonably be expected to have a material adverse effect on any proposal
or plan by the Parent Corporation or any of its Subsidiaries to engage in any
material acquisition of assets, merger, consolidation, tender offer or other
material transaction the public disclosure of which the Board of Directors of
the Parent Corporation has determined in good faith is not in the best interests
of the Parent Corporation and provides an approximation of the anticipated
duration of the postponement. In such event, the requested Demand Registration,
or the Demand Registration pursuant to which the withdrawn registration was
filed, will not count for purposes of the requests for Demand Registrations to
which the Stockholders are entitled under this Agreement. The Parent Corporation
may exercise its rights under this Section 3.3 only one time in any six-month
period and the exercise of one right under this Section 3.3 in any six-month
period will preclude the exercise of any other right under this Section 3.3
during the same six-month period. The Parent Corporation acknowledges that its
rights under this Section 3.3 may not be exercised at any time during the
Initial Registration Period.
3.4 Registration Expenses. All Registration Expenses incurred in
connection with any Demand Registration will be borne by the Parent Corporation.
3.5 Selection of Underwriters. The Majority Holders will have the right to
select the investment bankers and managers to administer each underwritten
Demand Registration. Such investment bankers and managers will be of national
prominence.
3.6 Effective Registration Statement. A registration requested pursuant to
Section 3.1 will not be deemed to have been effected (a) unless a registration
statement with respect thereto has become effective and has been kept
continuously effective for a period of at least 180 days (or such shorter period
terminating when all the Registrable Securities covered by such registration
statement have been sold pursuant thereto), (b) if after it has become
effective, such registration is interfered with by any stop order, injunction or
other order or requirement of the Securities and Exchange Commission or other
governmental agency or court for any reason not attributable to the holders
registering Registrable Securities and has not thereafter become effective or
(c) if the conditions to closing specified in the underwriting agreement, if
any, entered into in connection with such registration are not satisfied or
waived.
3.7 Right to Withdraw. If the managing underwriter of any underwritten
offering advise the holders of Registrable Securities included in such offering
that the Registrable Securities covered by the registration statement cannot be
sold in an orderly manner in such offering within a price range acceptable to
the Majority Holders, then the Majority Holders will have the right to notify
the Parent Corporation in writing that they have determined that the
registration statement be abandoned or withdrawn, in which event the Parent
Corporation will abandon or withdraw such registration statement. In the event
of such abandonment or withdrawal, the Demand Registration pursuant to which the
registration was abandoned or withdrawn will not count for purposes of the
requests for Demand Registrations to which the Stockholders are entitled under
this Agreement.
3.8 Termination of Rights. The right to request Demand Registrations
pursuant to this Section 3 will terminate as of the date the outstanding
Registrable Securities in the aggregate represent less than 0.25 percent of the
issued and outstanding shares of Parent Common Stock.
SECTION 4. Piggyback Registrations.
4.1 Right to Piggyback. Whenever the Parent Corporation proposes to
register any shares of Parent Common Stock under the Securities Act (other than
pursuant to a Demand Registration and other than registrations on Form S-4, Form
S-8 or any similar or successor forms) and the registration form to be used may
be used for the registration of Registrable Securities (a "Piggyback
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Registration"), the Parent Corporation will give prompt written notice to all
holders of Registrable Securities of its intention to effect such a registration
and of such holders' rights under this Section 4 and will include in such
registration all Registrable Securities with respect to which the Parent
Corporation has received written requests for inclusion therein no later than
five days prior to the effective date of the registration statement. Subject to
the provisions of this Section 4, the Parent Corporation will use its best
efforts to effect the registration under the Securities Act of all Registrable
Securities which the Parent Corporation has been so requested to register by the
holders of Registrable Securities. No registration effected under this Section
4.1 will relieve the Parent Corporation of its obligation to effect any
registration upon request under Section 3.1.
4.2 Priority on Primary Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Parent Corporation, and the
managing underwriters advise the Parent Corporation that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in an orderly manner in such offering within a price
range acceptable to the Parent Corporation, the Parent Corporation will include
in such registration (a) first, the securities the Parent Corporation proposes
to sell, (b) second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares owned by each such holder, and (c) third, other
securities requested to be included in such registration.
4.3 Priority on Secondary Registrations. If a Piggyback Registration is an
underwritten secondary registration on behalf of holders of the Parent
Corporation's securities, and the managing underwriters advise the Parent
Corporation that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in an orderly
manner in such offering within a price range acceptable to the holders initially
requesting such registration, the Parent Corporation will include in such
registration (a) first, the securities requested to be included therein by the
holders requesting such registration and the Registrable Securities requested to
be included in such registration, pro rata among the holders of such securities
on the basis of the number of shares owned by each such holder, and (b) second,
other securities requested to be included in such registration.
4.4 Piggyback Expenses. All Registration Expenses incurred in connection
with any Piggyback Registration will be borne by the Parent Corporation.
4.5 Selection of Underwriters. If any Piggyback Registration is an
underwritten offering, the selection of investment bankers and managers for the
offering must be approved by the Majority Holders; provided that Registrable
Securities constitute at least 10 percent of the securities to be sold pursuant
to such Piggyback Registration. Such approval will not be unreasonably withheld.
4.6 Right to Withdraw. Any holder of Registrable Securities will have the
right to withdraw its request for inclusion of its Registrable Securities in any
registration statement pursuant to Section 4.1 at any time prior to the
execution of any underwriting agreement with respect thereto by giving written
notice to the Parent Corporation of its request to withdraw. Any such request
for withdrawal will be irrevocable.
SECTION 5. Holdback Agreement of the Parent Corporation. The Parent
Corporation agrees not to effect any public sale or distribution of its equity
securities, or any securities convertible into or exchangeable or exercisable
for such securities, during the seven days prior to and during the 180-day
period beginning on the effective date of any underwritten Demand Registration
or underwritten Piggyback Registration (except as part of such underwritten
registration or pursuant to registrations on Form S-4, Form S-8 or any similar
or successor forms), unless the underwriters managing the registered public
offering otherwise agree in writing.
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SECTION 6. Registration Procedures. In connection with the Initial
Registration and whenever the holders of Registrable Securities have otherwise
requested that any Registrable Securities be registered pursuant to this
Agreement, the Parent Corporation will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Parent
Corporation, except as otherwise provided in this Agreement, will as
expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use
its best efforts to cause such registration statement to become effective;
provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Parent Corporation will furnish
copies of all such documents proposed to be filed to the counsel selected
by the Majority Holders (the "Holders' Counsel") and, in an underwritten
offering, to counsel for the underwriters;
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and prospectus as
may be necessary to keep such registration statement effective for a period
of not less than 180 days (or, in the case of the Initial Registration
Statement, upon the expiration of the Initial Registration Period) and
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement during
such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish, without charge, to each seller of Registrable Securities
and each underwriter such number of copies of such registration statement,
each amendment and supplement thereto (in each case including all
exhibits), the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as such
seller or underwriter may reasonably request in order to facilitate the
disposition of the Registrable Securities;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests, keep such registration or
qualification in effect for so long as such registration statement remains
in effect, and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller to consummate the disposition
in such jurisdictions of the Registrable Securities owned by such seller;
provided that the Parent Corporation will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise
be required to qualify, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction;
(e) promptly notify each seller of such Registrable Securities (i)
when the registration statement covering such Registrable Securities, any
pre-effective amendment, the prospectus or any prospectus supplement
related thereto or post-effective amendment to such registration statement
has been filed, and, with respect to such registration statement or any
post-effective amendment, when the same has become effective, (ii) of any
request by the Securities and Exchange Commission for amendments or
supplements to such registration statement or the prospectus related
thereto or for additional information, (iii) of the issuance by the
Securities and Exchange Commission of any stop order suspending the
effectiveness of such registration statement or the initiation of any
proceedings for that purpose, (iv) of the receipt by the Parent Corporation
of any notification with respect to the suspension of the qualification of
any of the Registrable Securities for sale under the securities or blue sky
laws of any jurisdiction or the initiation of any proceeding for such
purpose and (v), at any time when a prospectus relating thereto is required
to be delivered under the Securities Act, of the discovery or happening of
any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
required to be stated therein or necessary to
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make the statements therein not misleading, and, at the request of any such
seller, the Parent Corporation will prepare and furnish to each seller of
Registrable Securities a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact required to be stated therein or
necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Parent
Corporation are then listed;
(g) enter into such customary agreements (including underwriting
agreements in customary form) in accordance with the provisions of Sections
6.5 and 8.1;
(h) otherwise comply with all applicable rules and regulations of the
Securities and Exchange Commission;
(i) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the
qualification of any common stock included in such registration statement
for sale in any jurisdiction, the Parent Corporation will use its best
efforts promptly to obtain the withdrawal of such order; and
(j) obtain a cold comfort letter from the Parent Corporation's
independent public accountants, and any other accountants whose opinions
are included in such registration statement, in customary form and covering
such matters of the type customarily covered by cold comfort letters as the
Majority Holders reasonably request.
(k) make available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at least twelve
months beginning with the first full calendar month after the effective
date of such registration statement, which earnings statement will satisfy
the provisions of Section 11(a) of the Securities Act and Rule 158
promulgated thereunder, and promptly furnish to each seller of Registrable
Securities a copy of any amendment or supplement to such registration
statement or prospectus;
(l) obtain an opinion of the Parent Corporation's and any other
counsel reasonably requested by the Majority Holders in customary form and
covering such matters of the type customarily covered by opinions of
counsel as the Majority Holders reasonably request; provided that such
Registrable Securities constitute at least 10 percent of the securities
covered by such registration statement;
(m) use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by such
other federal or state governmental agencies or authorities as may be
necessary in the opinion of counsel to the Parent Corporation and Holders'
Counsel to consummate the disposition of such Registrable Securities;
(n) deliver promptly to Holders' Counsel and each underwriter, if any,
participating in the offering of the Registrable Securities, copies of all
correspondence between the Securities and Exchange Commission and the
Parent Corporation, its counsel or auditors and all memoranda relating to
(and allow the Holders' Counsel and any underwriters counsel to participate
in) discussions with the Securities and Exchange Commission or its staff
with respect to such registration statement; and
(o) make available its employees and personnel and otherwise provide
reasonable assistance to the underwriters (including by participating in
meetings, drafting sessions, due diligence sessions and road shows) in
their marketing of Registrable Securities.
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If any such registration or comparable statement refers to any holder by
name or otherwise as the holder of any securities of the Parent Corporation and
if, in its good faith judgment, such holder is or might be deemed to be a
controlling person of the Parent Corporation, such holder will have the right to
require (i) the insertion therein of language, in form and substance reasonably
satisfactory to such holder and presented to the Parent Corporation in writing,
to the effect that the holding by such holder of such securities is not to be
construed as a recommendation by such holder of the investment quality of the
Parent Corporation's securities covered thereby and that such holding does not
imply that such holder will assist in meeting any future financial requirements
of the Parent Corporation or (ii) in the event that such reference to such
holder by name or otherwise is not required by the Securities Act or any similar
federal statute then in force, the deletion of the reference to such holder;
provided that with respect to this clause (ii) such holder will furnish to the
Parent Corporation an opinion of counsel to such effect, which opinion and
counsel will be reasonably satisfactory to the Parent Corporation.
6.2 Unlegended Certificates. In connection with the offering of any
Registrable Securities registered pursuant to this Agreement, the Parent
Corporation will promptly after the sale of such Registrable Securities (a)
facilitate the timely preparation and delivery to holders and the underwriters,
if any, participating in such offering, of unlegended certificates representing
ownership of such Registrable Securities being sold in such denominations and
registered in such names as requested by such holders or such underwriters and
(b) instruct any transfer agent and registrar of such Registrable Securities to
release any stop transfer orders with respect to any such Registrable
Securities.
6.3 No Required Sale. Nothing in this Agreement will be deemed to create
an independent obligation on the part of any holder of Registrable Securities to
sell any Registrable Securities pursuant to any effective registration
statement.
6.4 Rule 144. The Parent Corporation will take all actions reasonably
necessary to enable holders of Registrable Securities to sell such securities
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 or any similar rule or regulation hereafter
adopted by the Securities and Exchange Commission including, without limiting
the generality of the foregoing, filing on a timely basis all reports required
to be filed by the Securities Exchange Act. Upon the request of any holder of
Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
6.5 Underwriting Agreement. If the Initial Offering or any Demand
Registration is an underwritten offering, the Parent Corporation will enter into
a customary underwriters agreement with a managing underwriter or underwriters
which will be reasonably satisfactory in form and substance to the Majority
Holders and will contain such representations and warranties by, and such other
agreements on the part of, the Parent Corporation and such other terms as are
generally prevailing in agreements of that type, including customary provisions
relating to indemnification and contribution. The holders of Registrable
Securities in such offering may, at their option, be parties to such
underwriting agreement and require that any or all of the representations and
warranties by, and other agreements on behalf of, the Parent Corporation to and
for the benefit of the underwriters also be made to and for the benefit of such
holders and that any and all of the conditions precedent to the obligations of
such underwriters be conditions precedent to the obligations of such holders.
SECTION 7. Indemnification.
7.1 Parent Corporation Indemnification. The Parent Corporation agrees to
indemnify, to the fullest extent permitted by law, each holder of Registrable
Securities, its directors, officers, partners (and the partners thereof,
collectively, "Partners"), agents and affiliates and each Person who controls
such holder (within the meaning of the Securities Act) against all losses,
claims, damages, liabilities
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and expenses, joint or several, caused by (a) any untrue or alleged untrue
statement of material fact contained in any registration statement, prospectus,
summary prospectus or preliminary prospectus or any amendment thereof or
supplement thereto, (b) any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (c) any violation by the Parent Corporation of any federal, state
or common law, rule or regulation applicable to the Parent Corporation or
relating to action required of or inaction by the Parent Corporation in
connection with such registration, except insofar as such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, prospectus, summary prospectus, preliminary prospectus,
amendment or supplement which is contained in written information furnished to
the Parent Corporation through an instrument duly executed by or on behalf of
such holder, specifically stating that it is for use in the preparation thereof,
or by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Parent Corporation
has furnished such holder with a sufficient number of copies of the same. In
connection with an underwritten offering, the Parent Corporation will indemnify
the underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of Registrable
Securities.
7.2 Holder Indemnification. In connection with any registration statement
in which a holder of Registrable Securities is participating, each such holder
will furnish to the Parent Corporation in writing such information and
affidavits as the Parent Corporation reasonably requests for use in connection
with any such registration statement or prospectus and, to the extent permitted
by law, will indemnify the Parent Corporation, its directors and officers and
each Person who controls the Parent Corporation (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact contained
in the registration statement, prospectus, summary prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished by such holder through an instrument duly executed by or on behalf of
such holder, specifically stating that it is for use in the preparation thereof,
or resulting from such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Parent Corporation has furnished such holder with a sufficient number of copies
of the same; provided that the liability of each indemnifying party will be
limited to the amount of proceeds (net of expenses and underwriting discounts
and commissions) received by such indemnifying party in the offering giving rise
to such liability.
7.3 Resolution of Claims. Any Person entitled to indemnification hereunder
will (a) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification (provided that the failure of any
indemnified party to give notice as provided herein will not relieve the
indemnifying party of its obligations under the preceding subsections of this
Section 7, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice, and will not relieve the indemnifying
party from any liability which it may have to the indemnified party otherwise
than under this Section 7) and (b) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party will not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to
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pay the fees and expenses of more than one counsel, other than local and special
counsel, for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim. No indemnifying party will,
without the consent of the indemnified party, consent to entry of any judgment
or enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
7.4 Survival. The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any director, officer, Partner, agent,
affiliate or controlling Person of such indemnified party and will survive the
transfer of securities.
7.5 Contribution. If the indemnification provided for in this Section 7 is
for any reason held by a court to be unavailable to an indemnified party under
Section 7.1 or 7.2 hereof in respect of any loss, claim, damage, liability and
expenses, or any action in respect thereof, then, in lieu of the amount paid or
payable under Section 7.1 or 7.2 hereof, the indemnified party and the
indemnifying party under Section 7.1 or 7.2 hereof will contribute to the
aggregate losses, claims, damages, liabilities and expenses (including legal or
other expenses reasonably incurred in connection with investigating the same),
(a) in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand, and the indemnified party on the other,
which resulted in such loss, claim, damage, liability or expense, or action in
respect thereof, with respect to the statements or omissions which resulted in
such loss, claim, damage, liability or expense, or action in respect thereof, as
well as any other relevant equitable considerations, or (b) if the allocation
provided by clause (a) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative fault but also the
relative benefits received by the indemnifying party and the indemnified party
from the offering of the securities covered by such registration statement as
well as any other relevant equitable considerations. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
Section 7.5 were to be determined by pro rata allocation or by any other method
of allocation which does not take into account the equitable considerations
referred to in the preceding sentence of this Section 7.5. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. In addition, no Person will be
obligated to contribute hereunder any amounts in payment for any settlement of
any action or claim effected without such Person's consent, which consent will
not be unreasonably withheld. Notwithstanding anything in this Section 7.5 to
the contrary, no indemnifying party (other than the Parent Corporation) will be
required to contribute any amount in excess of the proceeds (net of expenses and
underwriting discounts and commissions) received by such party from the sale of
the Registrable Securities in the offering to which the losses, claims, damages,
liabilities or expenses of the indemnified parties relate.
7.6 Other Indemnification. Indemnification and contribution similar to
that specified in the preceding subsections of this Section 7 (with appropriate
modifications) will be given by the Parent Corporation and holders of
Registrable Securities participating in a registered offering with respect to
any required registration or other qualification of securities under any
federal, state or blue sky law or regulation of any governmental authority other
than the Securities Act. The indemnification agreements contained in this
Section 7 will be in addition to any other rights to indemnification or
contribution which any indemnified party may have pursuant to law or contract.
7.7 Indemnification Payments. The indemnification and contribution
required by this Section 7 will be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
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SECTION 8. Participation in Registrations.
8.1 Required Actions. No Person may participate in any registration
hereunder which is underwritten unless such Person (a) agrees to sell such
Person's securities on the basis provided in any underwriting arrangements
approved by the Person or Persons entitled hereunder to approve such
arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents consistent
with the terms of this Agreement; provided that no holder of Registrable
Securities included in any underwritten registration will be required to make
any representations or warranties to the Parent Corporation or the underwriters
other than representations and warranties regarding such holder and such
holder's intended method of distribution and any liability of such holder to any
underwriter or other Person under such underwriting agreement will be limited to
liability arising from breach of its representations and warranties and will be
limited to an amount equal to the proceeds (net of expenses and underwriting
discounts and commissions) that it derives from such registration..
8.2 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Parent Corporation will give each holder
participating in such registration, its underwriters, if any, and its respective
counsel, accountants and other representatives and agents the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Securities and Exchange Commission, and each
amendment thereof or supplement thereto, and give each of them such reasonable
access to its books and records and such reasonable opportunities to discuss the
business of the Parent Corporation with its officers and employees and the
independent public accountants who have certified its financial statements, and
supply all other information reasonably requested by each of them, as is
necessary or appropriate, in the opinion of each such registering holder and
such underwriters' respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
SECTION 9. Miscellaneous.
9.1 No Inconsistent Agreements. The Parent Corporation has not previously
entered into any agreement with respect to its securities granting any
registration rights to any Person. The rights granted to the Stockholders
hereunder do not in any way conflict with and are not inconsistent with any
other agreements to which the Parent Corporation is a party or by which it is
bound. The Parent Corporation is not a party to and will not hereafter enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement. If the Parent Corporation enters into any other registration rights
agreement after the date of this Agreement with respect to any of its securities
containing terms which are more favorable to, or less restrictive on, the other
party thereto than the terms and conditions contained in this Agreement are to
the Stockholders, then the terms and conditions of this Agreement will
immediately be deemed to have been amended without further action by the Parent
Corporation or the Stockholders so that the Stockholders will be entitled to the
benefit of any such more favorable or less restrictive terms or conditions.
9.2 Remedies. The parties agree that irreparable damage would occur in the
event that the provisions of this Agreement were not performed in accordance
with their specific terms. It is accordingly agreed that the parties will be
entitled to specific performance of the terms of this Agreement, without posting
a bond or other security, this being in addition to any other remedy to which
they are entitled at law or in equity.
9.3 Consent to Amendments. Except as otherwise expressly provided herein,
the provisions of this Agreement may be amended and the Parent Corporation may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Parent Corporation has
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obtained the written consent of the holders of a majority of the Registrable
Securities or, if the consent relates to a particular registration statement, by
the Majority Holders. No other course of dealing between the Parent Corporation
and the holder of any Registrable Securities or any delay in exercising any
rights hereunder or under the Certificate of Incorporation will operate as a
waiver of any rights of any such holders. For purposes of this Agreement, shares
of Registrable Securities held by the Parent Corporation or any of its
Subsidiaries will not be deemed to be outstanding.
9.4 Successors and Assigns. Except as otherwise expressly provided herein,
all covenants and agreements contained in this Agreement by or on behalf of any
of the parties hereto will bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not. In
addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for the Stockholders' benefit as holders
of Registrable Securities are also for the benefit of, and enforceable by, any
subsequent holder of such Registrable Securities, each of which will be deemed a
Stockholder for all purposes under this Agreement.
9.5 Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
9.6 Counterparts; Effectiveness. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
will constitute one and the same Agreement. This Agreement will be effective as
to a holder of Registrable Securities when this Agreement has been executed by
the Parent Corporation and such holder.
9.7 Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
9.8 Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally to the
recipient or when sent to the recipient by telecopy (receipt confirmed), one
business day after the date when sent to the recipient by reputable express
courier service (charges prepaid) or three business days after the date when
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
will be sent to the Parent Corporation and the Stockholders at the addresses
indicated below:
If to the Parent Corporation:
General Dynamics Corporation
3190 Fairview Park Drive
Falls Church, Virginia 22041-4523
Attention: David A. Savner, Esq.
Senior Vice President and General Counsel
Facsimile No: (703) 876-3125
With a copy (which will not constitute notice) to:
Jenner & Block
601 13th Street, N.W.
Washington, D.C. 20005
Attention: Craig A. Roeder, Esq.
Facsimile No: (202) 639-6066
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If to a Stockholder:
c/o Forstmann Little & Co.
767 Fifth Avenue
New York, New York 10153
Attention: Sandra J. Horbach
Facsimile No: (212) 759-9059
With a copy (which will not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Stephen Fraidin, P.C.
Aviva Diamant, Esq.
Facsimile No: (212) 859-4000
or to such other address or to the attention of such other party as the
recipient party has specified by prior written notice to the sending party.
9.9 No Third-Party Beneficiaries. This Agreement will not confer any
rights or remedies upon any Person other than the Parent Corporation and the
Stockholders and their respective successors and permitted assigns.
9.10 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, that may have related in any way to the subject matter hereof.
9.11 Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rule of strict construction will be applied against any party. Any reference to
any federal, state, local, or foreign statute or law will be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The use of the word "including" in this Agreement means
"including without limitation" and is intended by the parties to be by way of
example rather than limitation.
8.12 Consent to Jurisdiction. Each of the parties to this Agreement
submits to the jurisdiction of any state or federal court sitting in Wilmington,
Delaware, in any action or proceeding arising out of or relating to this
Agreement, agrees that all claims in respect of the action or proceeding may be
heard and determined in any such court, and agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties to this Agreement waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety
or other security that might be required of any other party with respect
thereto.
8.13 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW, AND
NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE.
* * * * *
13
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the date first written above.
GENERAL DYNAMICS CORPORATION
By
--------------------------------------
Name:
Title:
FORSTMANN LITTLE & CO.
SUBORDINATED DEBT AND EQUITY
MANAGEMENT BUYOUT PARTNERSHIP--IV,
L.P.
By FLC XXIX PARTNERSHIP, L.P.
Its General Partner
By
--------------------------------------
General Partner
GULFSTREAM PARTNERS, L.P.
By FLC XXI PARTNERSHIP
Its General Partner
By
--------------------------------------
General Partner
GULFSTREAM PARTNERS II, L.P.
By FLC XXIV PARTNERSHIP
Its General Partner
By
--------------------------------------
General Partner
--------------------------------------
Name: Lynn Forester, Stockholder
-------------
--------------------------------------
Name: Henry A. Kissinger, Stockholder
------------------
--------------------------------------
Name: Mark H. McCormack, Stockholder
-----------------
--------------------------------------
Name: Michael S. Ovitz, Stockholder
----------------
--------------------------------------
Name: Joseph Kent Walker, Stockholder
------------------
--------------------------------------
Name: Preston A. Henne, Stockholder
-----------------
--------------------------------------
Name: Thomas D. Bell, Jr., Stockholder
-------------------
14
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated August 2, 1999, on the supplemental consolidated financial
statements of General Dynamics Corporation included in this Form 8-K, into
General Dynamics Corporation's previously filed Registration Statements File
Numbers 33-23448, 2-23904, 2-23032, 2-28952, 2-50980, 2-24270, 33-42799,
33-80213 and 33-81051.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
ARTHUR ANDERSEN LLP
Washington, D.C.,
August 10, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-81051 of General Dynamics Corporation on Form S-3 of our reports dated
February 1, 1999 (March 1, 1999 as to Note 16), relating to the financial
statements and financial statement schedules of Gulfstream Aerospace
Corporation, appearing in and incorporated by reference in the Annual Report on
Form 10-K of Gulfstream Aerospace Corporation for the year ended December 31,
1998.
/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 9, 1999
<PAGE> 1
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(Dollars in millions, except per share amounts)
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and
Financial Condition contains forward-looking statements that are based on
management's expectations, estimates, projections and assumptions. Words such as
"expects," "anticipates," "plans," "believes," "estimates," variations of these
words and similar expressions are intended to identify forward-looking
statements which include but are not limited to projections of revenues,
earnings, segment performance, aircraft production and deliveries, cash flows,
contract awards, aircraft backlog stability and the company's expectations
regarding the upcoming year 2000. Forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements are not guarantees of future performance and involve
certain risks and uncertainties, which are difficult to predict. Therefore,
actual future results and trends may differ materially from what is forecast in
forward-looking statements due to a variety of factors, including, without
limitation: the company's successful execution of internal performance plans;
performance issues with key suppliers and subcontractors; the status or outcome
of legal and/or regulatory proceedings; the status or outcome of labor
negotiations; changing priorities or reductions in the U.S. government defense
budget; termination of government contracts due to unilateral government action;
and the timing and occurrence (or non-occurrence) of circumstances beyond the
company's control.
BUSINESS OVERVIEW
The company's primary business is supplying sophisticated defense systems
to the United States and its allies. Over the last decade, due to a decline in
the U.S. defense budgets, participants in the defense industry began a process
of contraction and consolidation. The company participated in this shift by
changing its focus to strengthen certain core businesses through both internal
and external means. Management continues to focus on developing advanced
technological solutions to meet its customers' evolving operational requirements
and improving its cost structure. Management believes these initiatives have
created efficient businesses that are positioned to capture new programs and
contracts. The company's businesses have been awarded new programs with the
potential for significant production, as well as several important contracts on
existing programs, that management believes will carry the programs well into
the next century. The anticipated defense programs and plans of the company and
of the U.S. armed forces are subject to, among other events, changing priorities
or reductions in the U.S. government defense budget. However, the company's
programs continue to receive bipartisan support in the defense budget. The
Department of Defense's fiscal year 2000 budget request submitted to Congress in
February 1999 included substantially all of the company's major programs.
1
<PAGE> 2
Since September 1995, the company has invested approximately $2 billion in
cash for the acquisition of 11 defense industry businesses, which have been
accretive to earnings. Management believes these acquisitions have strengthened
the company's core operations, further improved its capabilities regarding full
systems integration and data management for its defense products, and extended
its reach both geographically and in product mix.
In identifying potential acquisitions, management seeks operations closely
related to its current businesses, which generate attractive financial results
and address all or some of the following criteria:
- focus on defense;
- directly relate to the company's core business;
- provide opportunities within its core competencies.
The company's core competencies include the computerized design and
production of complex products involving advanced electro-mechanical and
electronics systems; the marketing of advanced products and systems to domestic
and foreign government agencies; and the production and assembly of high
precision products involving special materials. In this regard, on July 30,
1999, the company completed the acquisition of Gulfstream Aerospace Corporation
(Gulfstream) in a stock-for-stock exchange. The acquisition of this leading
supplier of commercial advanced long and ultra-long range business aircraft is
expected to be immediately accretive to earnings and cash flow.
In all of its acquisitions, both defense and commercial, the company seeks
to apply its broad expertise in creating efficient manufacturing environments to
further enhance their financial performance and competitive market positions.
Management intends to continue to implement its strategy to strengthen the
company through core business revenue growth by positioning it to capture new
programs and contracts; continued improvement in operations; and disciplined
capital deployment, including internal investment and acquisitions.
With adequate funds on hand and the capacity for additional long-term
borrowing, management believes it has the financial capability to take advantage
of potential opportunities.
BUSINESS SEGMENTS
The company operates in four primary business segments: Marine Systems,
Combat Systems, Information Systems and Technology and Aerospace. Marine Systems
designs, builds and supports nuclear submarines, surface combatants and
auxiliary ships for the U.S. Navy. Marine Systems also provides ship management
services for the U.S. government on prepositioning and ready reserve ships and
builds commercial vessels. Net sales of nuclear submarines were $1,381, $1,321
and $1,443 in 1998, 1997 and 1996, respectively. Net sales of surface combatants
were $936, $839 and $791 in 1998, 1997 and 1996, respectively.
2
<PAGE> 3
Combat Systems develops, produces and supports land and amphibious combat
systems, including the U.S. Army's main battle tank, other armored vehicles,
wheeled reconnaissance vehicles, suspensions, engines, transmissions, guns and
ammunition handling systems, turrets and turret drive systems, and ordnance for
the U.S. armed forces and international customers. Net sales of armored vehicles
were $915, $960 and $889 in 1998, 1997 and 1996, respectively.
Information Systems and Technology provides expertise in signal and
information processing, the use of commercial technologies for military
applications, battlespace information management and intelligence data
acquisition and processing within the defense and intelligence branches of the
U.S. government and its allies. It is also an integrator of marine and ground
combat systems.
Aerospace was formed as a result of the acquisition of Gulfstream
on July 30, 1999. Aerospace designs, develops, manufactures and markets advanced
long and ultra-long range business aircraft and offers aircraft completion and
worldwide aircraft maintenance services and technical support for both
Gulfstream and other business aircraft. For a discussion of the accounting for
this transaction and related information, see Note C to the Supplemental
Consolidated Financial Statements.
The company also owns coal mining and aggregates operations in the Midwest,
and a leasing operation for liquefied natural gas tankers, which are classified
as "Other."
A discussion of each business segment's backlog position (the estimated
remaining sales value of work to be performed under firm contracts), anticipated
programs, operating results and outlook follows. For a summary of business
segment financial information, see Note T to the Supplemental Consolidated
Financial Statements.
MARINE SYSTEMS
In the first quarter of 1999, management realigned the company's
information technology resource businesses, resulting in a different composition
of reportable segments. Data for all prior periods presented has been restated
to give recognition to the 1999 composition of reportable segments.
3
<PAGE> 4
Backlog
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Total Backlog $11,565 $5,864 $7,566
Funded Backlog 5,071 4,172 4,403
</TABLE>
Year-end 1998 backlog includes contracts for the construction of the first
four ships of the Virginia-class submarine, formerly known as the New Attack
Submarine, 13 Arleigh Burke class destroyers (DDG 51), five strategic sealift
ships, and the final Seawolf-class attack submarine. A modification to the final
Seawolf is currently under way. The modification is expected to extend the
company's delivery date of the final Seawolf to 2003.
The company's Marine Systems backlog doubled during 1998 due to several
major awards and the acquisition of NASSCO Holdings Incorporated (NASSCO), whose
wholly owned subsidiaries include National Steel and Shipbuilding Company, in
late 1998.
In September 1998, the Navy awarded a $4.2 billion contract to the company
for the first four ships of the Virginia-class submarine. The Department of
Defense's fiscal year 2000 budget includes funding for a fifth Virginia-class
submarine in fiscal year 2003. The company is scheduled to deliver the lead ship
of the class in 2004. Construction work will be shared equally with the company
as the prime contractor and Newport News Shipbuilding Inc. (Newport News) in the
role of subcontractor, in accordance with the terms of the Team Agreement
entered into in February 1997 between the company and Newport News. Current
Department of Defense plans call for 30 ships in the Virginia-class submarine
program.
In August 1998, the Navy awarded a $68.5 contract to the DD 21
Shipbuilder Alliance, composed of the company and Ingalls Shipbuilding, a
division of Litton Industries, Inc., for the first phase of system concept
design work for the next generation surface combatant ships (DD 21). The company
will serve as the Alliance prime contractor for the first phases of the DD 21
program and leads one of the Alliance's two competing design teams. Each team
will share equally in the funding of the first phase award, and both
shipbuilders are expected to share equally in the production of the DD 21 ships.
Based on the Navy's plans, the development, design, construction and life-cycle
support of the DD 21 ships is estimated at $25 billion and includes the
construction of 32 ships over 25 years, beginning in 2004.
In March 1998, the Navy awarded a multiyear contract to the company for the
construction of six additional DDG 51s for $2.1 billion. This award extends the
company's deliveries to 2006.
With the acquisition of NASSCO, Marine Systems added approximately $1.2
billion to its backlog. Included in this backlog are contracts for the
construction of five strategic sealift ships for the U.S. Navy. An initial
contract for $1.3 billion for the construction of six ships was awarded to
NASSCO in 1993, with a seventh ship added in 1997 for approximately $200. During
1998, the first two of these ships were delivered to
4
<PAGE> 5
the U.S. Navy. Delivery of the seventh ship is scheduled for 2001. Also included
in this backlog is a seven-year contract with the U.S. Navy for the phased
maintenance of six LHA- and LHD-class ships for approximately $500, awarded to
NASSCO during 1997.
The company is a member of a three-contractor team which in December 1996
was awarded a contract to design and build the Navy's new class of amphibious
transport ships (LPD 17). Congressional funding was previously approved for the
design and construction of the first two LPD 17 ships. The Navy anticipates this
to be a 12-ship program. If the Navy receives Congressional funding for the
remaining 10 ships, the company has agreed with its partners that it will
construct four ships. Congressional funding for the next two ships, one to be
constructed by the company, is contained in the Department of Defense fiscal
year 2000 budget request.
Results of Operations and Outlook
<TABLE>
<CAPTION>
Three-Month Period Ended
April 4, March 29,
1999 1998
<S> <C> <C>
Net Sales $ 808 $ 555
Operating Earnings 88 64
Operating Margin 10.9% 11.5%
</TABLE>
Net sales increased $253 during the three-month period due primarily to the
acquisition of NASSCO in late 1998. Operating earnings increased $24 during the
three-month period due primarily to the aforementioned acquisition and to an
earnings rate increase on the DDG 51 program in the fourth quarter of 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Sales $2,529 $2,248 $ 2,332
Operating Earnings 276 227 216
Operating Margin 10.9% 10.1% 9.3%
</TABLE>
Net sales increased $281 in 1998 due primarily to the acquisition of NASSCO
and to earnings rate increases on the DDG 51 program in the fourth quarter and
on the Seawolf program in the first quarter. The operating results of NASSCO
have been included with those of the company from the acquisition closing date,
November 10, 1998. Operating earnings increased $49 in 1998 due to the
aforementioned earnings rate increases, partially offset by a decline in
submarine construction activity due to the delivery of the final Trident during
late 1997. The DDG 51 program continues to realize benefits from cost reduction
efforts and diminishing operating risks as the business base
5
<PAGE> 6
stabilizes from the 1998 six-ship multiyear award. The Seawolf program continues
to benefit from diminishing operating risks due to the maturity of the program
and stabilization of the business base due to the four-ship Virginia-class
award.
Net sales decreased $84 in 1997 due to lower submarine construction
activity as a result of the delivery of the final Trident and the first Seawolf
submarines. This decrease was partially offset by increased engineering and
design work on the Virginia-class submarine. Operating earnings increased $11
due to earnings rate increases on the DDG 51 program in the fourth quarter and
on the Seawolf program in the third quarter.
Looking forward, Marine Systems operating margins in 1999 are expected to
approximate those reported in 1998. With the delivery of the second Seawolf
submarine in late 1998 and the award of the first four ships of the
Virginia-class submarine, operating risks on submarine programs are expected to
continue to diminish. Additionally, the DDG 51 program is expected to continue
to benefit from cost reduction efforts and stabilization of business base.
COMBAT SYSTEMS
In the first quarter of 1999, management realigned the company's
information technology resource businesses, resulting in a different composition
of reportable segments. Data for all prior periods presented has been restated
to give recognition to the 1999 composition of reportable segments.
Backlog
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Total Backlog $1,579 $2,190 $2,057
Funded Backlog 843 1,186 1,031
</TABLE>
The company enters 1999 in its fourth production year of a $1.3 billion
multiyear contract for the upgrade of approximately 600 M1 Abrams tanks to the
M1A2 configuration. Further M1A2 improvements - the System Enhancement Package -
will be incorporated in the last 240 tanks of this multiyear contract, with
deliveries to begin in August 1999. This contract is part of a U.S. Army
procurement program to upgrade approximately 1,150 of the M1 Abrams tanks, with
production anticipated through 2005.
The company is under contract for the development of several other major
systems, including a three-year $300 contract for the design and development of
the Advanced Amphibious Assault Vehicle (AAAV) and construction of at least
three prototypes. Fabrication of the first prototype vehicle began in 1998.
Full-scale production is expected to begin in 2005. The Marine Corps plans to
procure more than 1,000 vehicles in the next decade, a production program worth
as much as $4 billion.
The Crusader Self-Propelled Howitzer program remains the Army's largest
single research and development program; the company's share is approximately 25
percent.
6
<PAGE> 7
The U.S. Army plans to build more than 800 Crusader systems, a production
program that could be worth as much as $13 billion.
Other mature production programs in Combat Systems backlog include several
major components of the Bradley combat vehicle and its derivatives; Hydra 70
Rocket; diesel engines; and a four-year program to upgrade Fox Nuclear,
Biological and Chemical Reconnaissance System vehicles. In May 1998, the company
received a $106 contract from the U.S. Army to begin initial production of the
Wolverine Heavy Assault Bridge, a derivative of the Abrams M1 platform. The
first vehicle is scheduled for delivery in August 1999, with full-rate
production expected to begin in 2000.
In October 1998, the company's Armament Systems operating unit formed a
joint venture with Mason & Hanger Corporation that consolidated two of the U.S.
Army's ammunition production facilities. Previously a consolidated subsidiary,
the company's Milan Army Ammunition Plant is now part of the unconsolidated
joint venture, American Ordnance LLC. This joint venture is expected to lower
costs and improve overall profit margins on the ordnance production programs.
The company's share of American Ordnance's pretax earnings are included with
those of the Combat Systems segment's operating earnings from its date of
formation. Annualized revenues for the company's previous Milan operations were
approximately $75. The joint venture's backlog was approximately $150 at the end
of 1998.
Results of Operations and Outlook
<TABLE>
<CAPTION>
Three-Month Period Ended
April 4, March 29,
1999 1998
<S> <C> <C>
Net Sales $ 290 $ 335
Operating Earnings 35 43
Operating Margin 12.1% 12.8%
</TABLE>
Net sales decreased $45 and operating earnings decreased $8 during the
three-month period due primarily to the completion of production on the Single
Channel Ground and Airborne Radio System (SINCGARS) for the U.S. Army and to the
results of the company's ammunition production facility. Previously a
consolidated subsidiary, the company's Milan Army Ammunition Plant is now part
of an unconsolidated joint venture, American Ordnance LLC.
7
<PAGE> 8
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Sales $1,272 $1,387 $ 1,026
Operating Earnings 166 179 140
Operating Margin 13.1% 12.9% 13.6%
</TABLE>
Net sales decreased $115 in 1998 due primarily to the completion of
production on the SINCGARS program and to the timing of land combat program
deliveries. Operating earnings decreased $13 in 1998 due to the aforementioned
declines in sales, partially offset by higher margins obtained from the SINCGARS
program as production was completed.
Net sales increased $361 and operating earnings increased $39 during 1997
due primarily to the acquisition of Defense Systems and Armament Systems from
Lockheed Martin Corporation on January 1, 1997. For a discussion of the
accounting for this transaction and related information, see Note C to the
Supplemental Consolidated Financial Statements. Excluding the results of the
acquisitions, net sales decreased five percent due primarily to decreased tank
kit production resulting from delivery of the last 48 kits to Egypt as part of
the co-production program in early 1997. This decrease was partially offset by
increased activity on the AAAV program.
Looking forward, the company continues to seek improvements in operating
margins in the Combat Systems segment through efforts to reduce costs and
pursuit of international sales, including foreign military sales of tanks to
Egypt, Greece, Turkey and Saudi Arabia. While operating margins are subject to
quarter-to-quarter variations, the company expects full-year 1999 operating
margins to approximate those reported in 1998.
INFORMATION SYSTEMS AND TECHNOLOGY
In the first quarter of 1999, management realigned the company's
information technology resource businesses, resulting in a different composition
of reportable segments. Data for all prior periods presented has been restated
to give recognition to the 1999 composition of reportable segments.
8
<PAGE> 9
Backlog
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Total Backlog $892 $938 N/A
Funded Backlog 816 831 N/A
</TABLE>
Year-end 1998 backlog for this segment includes contracts at Advanced
Technology Systems for continued sales of commercial undersea fiber optic
products and sales involving light-wave based transmission systems to various
government customers. Contracts at Computing Devices Canada include completion
of the IRIS integrated communications system, sonar integration on the Swedish
Hydra program, upgrading of AWACS display consoles and development of a landmine
detection system. At General Dynamics Information Systems, backlog includes a
contract to improve an advanced radar signal processor used in the Joint STARS
airborne surveillance program. Backlog at Computing Devices Company in the
United Kingdom includes a contract for production work on the Eurofighter
program, a partnership program worth approximately $600 over the 20-year
contract period.
Results of Operations and Outlook
This recently formed segment is the result of a series of acquisitions of
technology businesses that are intended to provide the company with broader and
deeper capabilities in electronics, systems integration and information
management; extend the company's presence geographically; and enable the company
to share technology across business segments.
<TABLE>
<CAPTION>
Three-Month Period Ended
April 4, March 29,
1999 1998
<S> <C> <C>
Net Sales $ 233 $ 218
Operating Earnings 20 14
Operating Margin 8.6% 6.4%
</TABLE>
Net sales increased $15 during the three-month period due primarily to
increased volume for commercial undersea fiber-optic communications equipment.
Operating earnings increased $6 during the three-month period as a result of
higher margins obtained from cost reduction efforts employed during the initial
years of acquisition of the segment's businesses.
9
<PAGE> 10
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Sales $933 $185 N/A
Operating Earnings 69 15 N/A
Operating Margin 7.4% 8.1% N/A
</TABLE>
Net sales increased $748 and operating earnings increased $54 in 1998 due
to the acquisitions of four new businesses in late 1997: General Dynamics
Information Systems, Computing Devices Canada, Ltd., Computing Devices Company
Ltd. in the United Kingdom and Advanced Technology Systems. Defense Systems'
missile guidance and naval fire control systems business became a part of this
segment as a result of management's realignment of technology resources
previously discussed. For a discussion of the accounting for these transactions
and related information, see Note C to the Supplemental Consolidated Financial
Statements.
In 1998, the company completed two additional acquisitions. On August 3,
the company acquired the stock of two related businesses to form Caldwell Cable
Ventures, Inc., a provider of underwater fiberoptic and power cable
installation. Caldwell Cable Ventures operates as a subsidiary of Advanced
Technology Systems. On June 30, the company acquired the assets of Computer
Systems & Communications Corporation, a systems integration and communications
company serving the U.S. Department of Defense and other NATO countries. For a
discussion of the accounting for these transactions and related information, see
Note C to the Supplemental Consolidated Financial Statements.
The operating results of these acquired businesses are included with those
of the company from their respective closing dates.
The company continues to seek improvements in operating margins in
Information Systems and Technology through efforts to reduce costs. During the
second half of 1998, the company initiated internal actions to consolidate the
electronics manufacturing processes of the segment in Advanced Technology
Systems' Greensboro, North Carolina, facility.
AEROSPACE
Backlog
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Total Backlog $3,302 $2,782 $3,104
</TABLE>
Year-end 1998 backlog includes 50 contracts for Gulfstream IV-SPs and 56
contracts for Gulfstream Vs, compared with 43 contracts for Gulfstream IV-SPs
and 45 contracts for Gulfstream Vs at the end of 1997. Excluded from year-end
1998 backlog are 11 undelivered aircraft in the Middle East Shares contract
valued at $300 and 18
10
<PAGE> 11
options valued at $700.
During the third quarter of 1998, Gulfstream GATX Leasing Company executed
agreements to purchase five Gulfstream Vs and one Gulfstream IV-SP, valued at
approximately $210, with deliveries from 1999 through 2001. It also executed
options to purchase three Gulfstream Vs and three Gulfstream IV-SPs, valued at
approximately $200, with deliveries from 2001 through 2004.
During the first quarter of 1998, the company signed a $335 contract for 12
Gulfstream IV-SPs to expand its Gulfstream Shares fractional ownership program
to the Middle East region. The first green aircraft delivery for the Middle East
Shares Program occurred during the third quarter of 1998. As noted above, the
remaining 11 undelivered aircraft are not included in the company's backlog at
year-end.
As of December 31, 1998, the company had contracted to deliver to Executive
Jet 44 Gulfstream IV-SPs and 12 Gulfstream Vs in connection with North American
Gulfstream Shares program plus options for additional 12 Gulfstream Vs. Of
these, 18 Gulfstream IV-SPs were in service, with the remaining 50 Gulfstream
IV-SPs and Gulfstream Vs to be delivered through 2007.
Results of Operations and Outlook
<TABLE>
<CAPTION>
Three-Month Period Ended
April 4, March 29,
1999 1998
<S> <C> <C>
Net Sales $ 625 $ 503
Operating Earnings 99* 66*
Operating Margin 17.3%* 15.1%*
</TABLE>
* Operating earnings and margin exclude pre-owned aircraft transactions, which
generally are sold at or near break-even.
Net sales increased $122 and operating earnings increased $33 during the
three-month period due primarily to the increase in new aircraft and completion
deliveries in 1999. During the three-month period ended in 1999, the company
delivered four more new aircraft and four more completions than delivered in the
three-month period ended in 1998.
11
<PAGE> 12
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Sales $ 2,428 $ 1,904 $ 1,064
Operating Earnings 362* 221* 52*
Operating Margin 16.5%* 13.1%* 5.7%*
</TABLE>
* Operating earnings and margin exclude pre-owned aircraft transactions, which
generally are sold at or near break-even.
Generally, aircraft deliveries remain relatively smooth throughout the
year. However, aircraft deliveries can vary significantly depending upon the
timing of contract execution and final customer acceptance. Accordingly,
Aerospace's revenues can vary significantly from quarter to quarter.
Net sales increased $524 in 1998 due primarily to the increase in new
aircraft deliveries to 61 in 1998 from 51 in 1997. The company's 1998 results of
operations include revenues of K-C Aviation, Inc. from the date of acquisition,
totaling $85, a portion of which resulted from the delivery of eight
non-Gulfstream completions. Cost of sales of the acquired business includes a
non-cash acquisition related charge of $7 for the fair value step-up related to
the sale of inventories.
OTHER
Results of Operations and Outlook
Net sales of $46 for the three-month period ended April 4, 1999 remain
unchanged from the three-month period ended March 29, 1998. Operating earnings
were flat for the three-month period ended April 4, 1999 as compared to $3 for
the three-month period ended March 29, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Sales $236 $242 $223
Operating Earnings 34 26 (2)
</TABLE>
In 1997, Freeman United Coal Mining Company (Freeman) elected to withdraw
from the Bituminous Coal Operators' Association (BCOA) and negotiate future
contracts independently with the United Mine Workers of America union (UMWA).
Freeman's labor contract as part of the BCOA expired on August 1, 1998. On
September 11, 1998, the union workforce, representing approximately seventy
percent of Freeman's total workforce, went on strike. On December 21, 1998, the
strike ended and the company reached a new collective bargaining agreement with
its UMWA represented employees.
12
<PAGE> 13
The company believes the terms of the contract, which extend to February 2003,
will provide it with cost savings.
Despite the impact of the strike at Freeman, operating earnings increased
$8 in 1998 due primarily to improved performance of the aggregates business as a
result of improved shipments due to favorable weather conditions and reduction
in cost, as well as cost reduction efforts at the coal mining operations.
Operating earnings increased $28 in 1997 due primarily to the suspension of
coal mining activity at an unprofitable location in early 1997.
ADDITIONAL FINANCIAL INFORMATION
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased during 1998 due primarily to business acquisitions. As a percentage of
net sales, however, general and administrative expenses have remained consistent
with 1997 and 1996 amounts.
INTEREST (EXPENSE) INCOME, NET. Interest income was $23 in 1998, down from
$51 in 1997 and $73 in 1996 due primarily to a decline in the average cash
balance resulting from the use of $1.75 billion for business acquisitions during
1998 and 1997. Interest expense was $40 in 1998, up from $35 in 1997 and $22 in
1996 as a result of borrowings made in connection with the Computing Devices
International acquisition at the end of 1997, partially offset by a decrease in
average borrowings on Gulfstream's credit facilities.
OTHER INCOME, NET. Other income varies from period to period based on the
timing of transactions such as the sales of investments and miscellaneous
assets.
PROVISION FOR INCOME TAXES. During the first quarter of 1999, the company
and the U.S. Internal Revenue Service settled refund claims for research and
experimentation tax credits for the years 1981 through 1989 for approximately
$334 (including before-tax interest). The company recognized a benefit of $165
(less amounts previously recorded in 1991 and 1992), or $.82 per diluted share,
as a result of this settlement. In April 1999, the company received the $334
cash refund from the IRS related to this settlement. Tax on the interest
totaling approximately $65 will be paid during 1999 with the company's regular
quarterly tax payments. For further discussion of this and other tax matters, as
well as a discussion of the net deferred tax asset, see Notes B and E to the
Supplemental Consolidated Financial Statements.
EARNINGS PER SHARE. On March 4, 1998, the company's board of directors
authorized a two-for-one stock split effected in the form of a 100 percent stock
dividend. Accordingly, earnings per share data has been restated to give
retroactive recognition to the stock split in prior periods.
YEAR 2000. The company has developed an internal Year 2000 compliance
program (Y2K Project), which is focusing on three major areas of assessment,
project planning and remediation with respect to Year 2000 issues (the inability
of date-sensitive software and equipment to properly recognize dates beyond
1999): (1) information technology systems; (2) deliverable software (alone or as
a component of another product); and (3) facilities and embedded processors. The
company is working with its full-time information technology systems partner on
the project. The assessment, project
13
<PAGE> 14
planning and remediation phases of the Y2K Project are substantially complete.
Validation testing occurs as systems are remediated and is expected to be
finished in the latter half of 1999. The company generally develops its
deliverable software to conform with customer specifications. The company has
completed the review of most of its customer contracts and specifications to
determine whether any Year 2000 issues exist. Remediation efforts have been
undertaken where requested, required and/or funded by the customer. Management
believes the company will complete the Y2K Project on schedule and that the
costs to implement will not materially impact results of operations or financial
condition, as most of these costs are expected to be allowable under the
company's U.S. government contracts. The company believes its total Y2K Project
costs will not exceed $44.
The company has made inquiries of substantially all third parties with whom
it has material business relationships to determine if they have Year 2000
issues. To date, the company has not been made aware of any Year 2000 issues
with respect to these third parties that would be expected to materially and
adversely affect the company. There can be no assurance, however, that these
third parties have been or will be successful in identifying or addressing their
Year 2000 issues.
The implementation schedule, projected costs and beliefs regarding the
company's Year 2000 issues detailed above are based on management's best
estimates utilizing assumptions as to future events. There can be no assurance
that these expectations will be realized. Based on the status of the Y2K Project
and third-party surveys, however, the company does not believe there are any
material risks to the company related to Year 2000 issues. The company believes
its worst case Year 2000 scenario, if realized, would involve a brief slowdown
or cessation of production at one or more business units which would not be
expected to have a material adverse effect on financial condition or results of
operations. The company engages in project reviews and internal audit activities
designed to ensure Year 2000 readiness. The company is well into the development
of business continuity plans for Year 2000 and expects to complete them during
the third quarter of 1999.
MARKET RISK. The company's investment securities carry fixed rates of
interest over their respective maturity terms. The company does not use
derivative instruments to alter the interest characteristics of these
instruments. The aggregate fair value of the company's financial instruments
approximates the carrying value at December 31, 1998.
In connection with the long-term financing arrangement completed in
September 1998, the company entered into an agreement to reduce the exposure to
interest rate and foreign currency rate fluctuations. The company does not
expect these transactions to have a material effect on the company's results of
operations or financial condition.
The company's foreign operations attempt to minimize the effects of
currency risk by borrowing externally in the local currency and by hedging their
limited purchases made in foreign currencies when practical. As a matter of
policy, the company does not engage in currency speculation.
With the acquisition of Computing Devices International, the company is
exposed to the effect of foreign currency fluctuations on the U.S. dollar value
of earnings of Computing Devices Canada and Computing Devices Company in the
U.K. The company
14
<PAGE> 15
does not expect the impact of foreign currency fluctuations to be material to
the company's results of operations or financial condition.
NEW ACCOUNTING STANDARDS. Effective January 1, 1999, the company adopted
the provisions of Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance
to aid in the determination of when liabilities should be recognized for
guaranty-fund and other insurance-related assessments, as well as requirements
for the measurement of the liability and related recoverable asset. As these
costs are recoverable under the company's contracts and existing backlog, the
adoption of the SOP did not have a material impact on the company's results of
operations or financial condition.
Effective January 1, 1998, the company adopted the provisions of Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 provides authoritative guidance on
accounting for the costs of computer software developed or obtained for internal
use and provides authoritative guidance for determining whether computer
software is for internal use. The adoption of the SOP did not have a material
impact on the company's results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 137
issued in June 1999 deferred the effective date of SFAS 133 by one year. As
such, the company is now required to adopt the provisions of the standard during
the first quarter of 2001. Because of the company's minimal use of derivatives,
it does not expect that the adoption of the new standard will have a material
impact on the results of operations or financial condition.
FINANCIAL CONDITION
The company's liquidity and financial condition remained strong during
1998, enabling the company to acquire four additional businesses during the year
for approximately $550. The company ended the year with $258 of cash and
equivalents and marketable securities, a strong balance sheet and the capacity
for additional long-term borrowings. A discussion of the company's financial
condition in terms of its operating, investing and financing activities as
defined in the Supplemental Consolidated Statement of Cash Flows follows.
15
<PAGE> 16
OPERATING ACTIVITIES--CONTINUING. The net cash provided by continuing
operations is summarized by type as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Operations $ 622 $ 707 $ 763
Allocated federal income
tax payments (114) (120) (127)
Other 38 62 22
-------- --------- ---------
Operating cash flows 546 649 658
Decrease in marketable
securities, net 30 62 742
------- ------- --------
Net cash provided by
continuing operations $ 576 $ 711 $ 1,400
====== ====== =======
</TABLE>
The four types of cash flows are described as follows:
- Operations represent the pretax cash flows generated by the company's
business segments. Aerospace's principal source of operational cash flow is
provided from customer progress payments and initial deposits on new
aircraft orders. Due to the deliveries of two maturing submarine programs
during 1997, cash flows from operations exceeded operating earnings plus
depreciation and amortization for each of the years ended December 31, 1997
and 1996. This trend is not expected to continue due to the production
growth on several new programs, including the Virginia-class submarine and
light armored vehicles. Even though the company anticipates investing in
working capital during this production growth life cycle, the company still
expects to generate funds from operations in excess of its short- and
long-term liquidity needs.
- For purposes of preparing the Supplemental Consolidated Statement of
Cash Flows, federal income tax payments are allocated between continuing
and discontinued operations based on the portion of taxable income
attributed to each.
- Other cash flows include items that are not directly attributable to a
business segment, such as interest received from investments in excess of
interest paid on debt.
- In accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," the purchases, sales and maturities of
marketable securities classified as trading are reflected as cash flows
from operating activities. The decrease in each of the three years in the
period ended December 31, 1998, was due to the company altering its
investment portfolio to include more available-for-sale securities, which
are included in investing activities.
16
<PAGE> 17
OPERATING ACTIVITIES--DISCONTINUED. Cash flows from discontinued operations
improved during 1998 due primarily to decreased payments for disposition-related
liabilities. For discussion of the A-12 program litigation, see Note Q to the
Supplemental Consolidated Financial Statements.
INVESTING ACTIVITIES. On July 30, 1999, the company acquired Gulfstream
through a merger of a subsidiary of the company into Gulfstream. As a result,
the holders of Gulfstream common stock became entitled to receive one share of
the company's common stock for each Gulfstream share. The common stock of
Gulfstream was traded on the New York Stock Exchange through the close of
business on July 30, 1999, at which time there were 72,165,645 shares of
Gulfstream common stock outstanding. An additional 4.1 million shares have been
reserved for issuance upon the exercise of stock options which, prior to the
merger, had been options to purchase Gulfstream common stock. Gulfstream is a
leading designer, developer, manufacturer and marketer of advanced business jet
aircraft. The acquisition was accounted for as a pooling of interests, and
accordingly, all data for periods prior to the combination have been restated to
include the accounts and results of operations of Gulfstream.
On June 21, 1999, the company entered into a definitive agreement to
acquire GTE Government Systems Corporation, a subsidiary of GTE Corporation, for
$1.05 billion in cash. GTE Government Systems Corporation is a leader in the
advancement of command, control, communications and intelligence systems;
electronic defense systems; communication switching; and information systems for
defense, government and industry in the United States and abroad. GTE Government
Systems Corporation will become part of the Information Systems and Technology
segment. The acquisition will be accounted for under the purchase method of
accounting and is expected to close at the end of August 1999. The company will
finance the purchase consideration through its commercial paper program. On
July 27, 1999, the company began issuing commercial paper in anticipation of
the acquisition. As of August 10, 1999, the company had issued approximately
$250 at an average yield of 5.22% with an average term of 40 days and had
approximately $325 invested in cash equivalents at an average yield of 5.2%.
As previously discussed, General Dynamics acquired three businesses in 1998
and six businesses in 1997. The company liquidated substantially all of its
available-for-sale investment portfolio in order to acquire these businesses. On
May 3, 1999, the company paid from available funds the remaining fixed purchase
consideration of $51 in cash for the acquisition of NASSCO. Gulfstream acquired
one business in 1998 for approximately $250. The purchase was funded primarily
from available funds and a portion from Gulfstream's revolving credit facility.
For further discussion of each acquisition, see Note C to the Supplemental
Consolidated Financial Statements.
The company began construction on a project to modernize facilities and
improve productivity at its Bath Iron Works shipyard in late 1998. The
company anticipates investing a total of approximately $200 through
2000, with approximately $120 expected to be expended during 1999.
Following the sale in 1993 and 1994 of the company's operations located in
southern California, the company retained certain properties. These properties
have been segregated on the Supplemental Consolidated Balance Sheet as real
estate held for development. Development work began in 1994 on certain of these
properties in order to maximize the value the company receives from their sale.
In 1998, the company completed the sale of a 232-acre site in the Kearny Mesa
section of San Diego for
17
<PAGE> 18
approximately $80 in cash, and in 1997 received $23 in cash from the sale of
certain other assets related to these properties.
FINANCING ACTIVITIES. Immediately following consummation of the
acquisition of Gulfstream, the company repaid from its available funds
approximately $270 of Gulfstream's debt instruments. In connection therewith,
the company will record in the third quarter of 1999 a one-time non-cash charge
of approximately $7 for the unamortized debt costs associated with these
instruments. The company will also record in the third quarter a charge to
earnings of approximately $33 for direct acquisition transaction costs,
consisting of investment banking, legal, bank fees, accounting, printing, and
regulatory filing fees.
On June 23, 1999, the company's board of directors formally rescinded
management's authority to repurchase shares of the company's common stock on the
open market. During 1998, 1997 and 1996, the company repurchased approximately
600,000, 1.8 million and 780,000 shares, respectively, of its stock on the open
market for a total of $28, $60 and $23, respectively. As of December 31, 1998,
the company had repurchased approximately 4.3 million shares.
On June 25, 1999, Gulfstream's board of directors formally rescinded
management's authority to repurchase shares of its common stock on the open
market. During the first quarter of 1999, Gulfstream repurchased 960,000 shares
of its stock on the open market for a total of $45. During 1998, Gulfstream
repurchased approximately 5.5 million shares for a total of $199.
In connection with the company's acquisition of Computing Devices
International on December 31, 1997, the company borrowed in Canadian dollars the
U.S. equivalent of $220. The company repaid $70 of this note during 1998 and
refinanced the balance in September 1998 under a 10-year arrangement.
The company exercised its option to call for the early redemption of all of
its outstanding 9.95 percent Debentures on April 1, 1998, for a total of
approximately $40.
On March 3, 1999, the company's board of directors declared an increased
regular quarterly dividend of $.24 per share. The company had previously
increased the quarterly dividend to $.22 per share in March 1998 and to $.205
per share in March 1996.
The company has available a $1 billion committed line of credit expiring in
May 2002 and an available $400 committed line of credit expiring in December
2002. These credit facilities contain minimum net worth requirements.
18
<PAGE> 1
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Supplemental Consolidated Balance Sheet 2
Supplemental Consolidated Statement of Earnings 3
Supplemental Consolidated Statement of Cash Flows 4
Notes to Unaudited Supplemental Consolidated Financial Statements 5
</TABLE>
1
<PAGE> 2
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
April 4 December 31
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 208 $ 165
Marketable securities 52 93
--------------- ---------------
260 258
Accounts receivable 644 580
Contracts in process 1,186 952
Inventory 825 804
Other current assets 726 391
--------------- ---------------
Total Current Assets 3,641 2,985
--------------- ---------------
NONCURRENT ASSETS:
Leases receivable - finance operations 181 181
Real estate held for development 63 65
Property, plant and equipment, net 918 901
Intangible assets 1,784 1,784
Other assets 236 235
--------------- ---------------
Total Noncurrent Assets 3,182 3,166
--------------- ---------------
$ 6,823 $ 6,151
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 76 $ 77
Short-term debt - finance operations 58 58
Accounts payable 425 477
Other current liabilities 2,038 1,760
--------------- ---------------
Total Current Liabilities 2,597 2,372
--------------- ---------------
NONCURRENT LIABILITIES:
Long-term debt 428 453
Long-term debt - finance operations 79 82
Other liabilities 1,015 829
Commitments and contingencies (See Note J)
--------------- ---------------
Total Noncurrent Liabilities 1,522 1,364
--------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus 472 484
Retained earnings 2,932 2,639
Treasury stock (695) (706)
Accumulated other comprehensive loss (5) (2)
---------------- ----------------
Total Shareholders' Equity 2,704 2,415
--------------- ---------------
$ 6,823 $ 6,151
=============== ===============
</TABLE>
The accompanying Notes to Unaudited Supplemental Consolidated Financial
Statements are an integral part of this statement.
2
<PAGE> 3
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
April 4 March 29
1999 1998
--------------- ---------------
<S> <C> <C>
NET SALES $ 2,002 $ 1,657
OPERATING COSTS AND EXPENSES 1,761 1,464
--------------- ---------------
OPERATING EARNINGS 241 193
Interest expense, net (6) (4)
Other income (expense), net 9 (1)
--------------- ----------------
EARNINGS BEFORE INCOME TAXES 244 188
(BENEFIT) / PROVISION FOR INCOME TAXES
R&E Tax Credit (165) -
Provision 86 66
--------------- ---------------
(79) 66
---------------- ---------------
NET EARNINGS $ 323 $ 122
=============== ===============
NET EARNINGS PER SHARE:
Basic $ 1.62 $ 0.61
=============== ===============
Diluted $ 1.60 $ 0.60
=============== ===============
DIVIDENDS PER SHARE $ 0.24 $ 0.22
=============== ===============
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 127 $ 118
=============== ===============
</TABLE>
The accompanying Notes to Unaudited Supplemental Consolidated Financial
Statements are an integral part of this statement.
3
<PAGE> 4
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
April 4 March 29
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 323 $ 122
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 43 39
Postretirement benefit cost 3 1
Decrease (Increase) in -
Marketable securities 41 (6)
Accounts receivable (64) 82
Contracts in process (31) (99)
Inventories (23) (79)
Other current assets (2) 4
Increase (Decrease) in -
Accounts payable and other current liabilities (62) (37)
Customer deposits 71 (77)
Current income taxes (121) 15
Deferred income taxes 12 36
Other, net (21) (10)
-------------------- ----------------
Net cash provided by continuing operations 169 (9)
Net cash used by discontinued operations (2) (3)
-------------------- ----------------
Net Cash Provided by Operating Activities 167 (12)
-------------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (20) 12
Purchases of available-for-sale securities (6) (88)
Sales/maturities of available-for-sale securities 7 41
Capital expenditures (31) (49)
Proceeds from sale of assets 13 -
Other - (1)
---------------- ----------------
Net Cash Used by Investing Activities (37) (85)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (24) (19)
Repayment of debt - finance operations (3) (3)
Dividends paid (28) (26)
Purchase of common stock (46) (74)
Proceeds from option exercises 6 2
Other 8 2
----------------- ---------------
Net Cash Used by Financing Activities (87) (118)
---------------- ----------------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 43 (215)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 165 643
---------------- ---------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 208 $ 428
================ ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Income taxes $ 23 $ 7
Interest (including finance operations) $ 12 $ 8
</TABLE>
The accompanying Notes to Unaudited Supplemental Consolidated Financial
Statements are an integral part of this statement.
4
<PAGE> 5
GENERAL DYNAMICS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Presentation and Preparation
The unaudited supplemental consolidated financial statements include the
accounts of the company and all majority-owned subsidiaries. The unaudited
supplemental consolidated financial statements give retroactive effect to the
acquisition by General Dynamics Corporation (General Dynamics) of Gulfstream
Aerospace Corporation (Gulfstream) through a merger on July 30, 1999, which has
been accounted for as a pooling of interests as described in Note E. These
supplemental financial statements do not extend through the date of
consummation. They will, however, become the historical consolidated financial
statements of General Dynamics and subsidiaries after post-combination results
are issued, as prescribed by generally accepted accounting principles.
The unaudited supplemental consolidated financial statements included
herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Although certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, the company believes that the
disclosures included herein are adequate to make the information presented not
misleading. Operating results for the three-month period ended April 4, 1999,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These unaudited supplemental consolidated financial
statements should be read in conjunction with the supplemental consolidated
financial statements for the year ended December 31, 1998 and the notes thereto
included in this Current Report on Form 8-K.
In the opinion of the company, the unaudited supplemental consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results for the
three-month periods ended April 4, 1999 and March 29, 1998.
(B) Subsequent Events
Stockholder Approvals
On July 30, 1999, the company's stockholders approved (1) an amendment to
its Certificate of Incorporation to increase the number of authorized shares of
common stock from 200 million shares to 300 million shares, and (2) the issuance
by the company of its common stock to stockholders of Gulfstream in connection
with the acquisition discussed in Note E.
Gulfstream Acquisition
On July 30, 1999, the company repaid from its available funds approximately
$270 of Gulfstream's debt instruments. In connection therewith, the company will
record in the third quarter of 1999 a one-time non-cash charge of approximately
$7 for the unamortized debt costs associated with
5
<PAGE> 6
these instruments. The company will also record in the third quarter of 1999 a
charge to earnings of approximately $33 for direct acquisition transaction
costs,consisting of investment banking, legal, bank fees, accounting, printing,
and regulatory filing fees.
In connection with the acquisition of Gulfstream, General Dynamics will
merge the two company's commercial pension plans. As a result of the merger of
these plans, the company expects to recognize previously deferred gains on
General Dynamics commercial pension plan, amounting to approximately $125
(before tax), in income in the third quarter of 1999.
Rescission of Common Stock Repurchase Program
On June 23, 1999, the company's board of directors formally rescinded
management's authority to repurchase shares of the company's common stock on the
open market.
Acquisition of GTE Government Systems Corporation
On June 21, 1999, the company entered into a definitive agreement to
acquire GTE Government Systems Corporation, a subsidiary of GTE Corporation, for
$1.05 billion in cash. GTE Government Systems Corporation is a leader in the
advancement of command, control, communications and intelligence systems;
electronic defense systems; communication switching; and information systems for
defense, government and industry in the United States and abroad. The
acquisition will be accounted for under the purchase method of accounting and is
expected to close at the end of August 1999.
(C) Comprehensive Income
Comprehensive income was $320 and $121 for the three-month periods ended
April 4, 1999 and March 29, 1998, respectively.
(D) Translation of Foreign Currencies
Local currencies have been determined to be functional currencies for the
company's international operations. Foreign currency balance sheets are
translated at the end-of-period exchange rates and earnings statements at the
average exchange rates for each period. The resulting foreign currency
translation adjustments are included in the calculation of other comprehensive
income and included in the equity section on the Supplemental Consolidated
Balance Sheet.
6
<PAGE> 7
(E) Acquisitions
Pooling of Interests Method
On July 30, 1999, the company acquired Gulfstream through a merger of a
subsidiary of the company into Gulfstream. As a result, the holders of
Gulfstream common stock became entitled to receive one share of the company's
common stock for each Gulfstream share. The common stock of Gulfstream was
traded on the New York Stock Exchange through the close of business on July 30,
1999, at which time there were 72,165,645 shares of Gulfstream common stock
outstanding. An additional 4.1 million shares have been reserved for issuance
upon the exercise of stock options which, prior to the acquisition, had been
options to purchase Gulfstream common stock. Gulfstream is a leading designer,
developer, manufacturer and marketer of advanced business jet aircraft. The
acquisition was accounted for as a pooling of interests, and, accordingly, the
consolidated financial statements for periods prior to the combination have been
restated to include the accounts and results of operations of Gulfstream.
The following table reconciles General Dynamics' and Gulfstream's operating
results for the period ending April 4, 1999 to the combined results reported in
these unaudited supplemental consolidated financial statements:
<TABLE>
<CAPTION>
Three months ended April 4, 1999
--------------------------------
General
Dynamics Gulfstream Combined
-------- ---------- --------
<S> <C> <C> <C>
Net Sales $1,377 $625 $2,002
Net earnings 265 58 323
Earnings per share:
Basic 2.09 0.81 1.62
Diluted 2.07 0.79 1.60
Weighted average shares
(in thousands):
Basic 127,008 72,450 199,458
Diluted 128,326 73,914 202,240
</TABLE>
Purchase Method
On November 10, 1998, the company acquired control of NASSCO Holdings
Incorporated (NASSCO) for $369 in cash plus the obligation to discharge $46 in
debt. NASSCO's wholly owned subsidiaries include National Steel and Shipbuilding
Company, which is in the business of ship design, engineering, construction and
repair for the United States military and various commercial customers, and
NASSCO Funding Corporation, a finance subsidiary. The transaction has been
accounted for under the purchase method of accounting. Operating results of
NASSCO are included with those of the company from the closing date. The excess
of the purchase price over the estimated fair value of the net tangible assets
acquired, approximately $250, has been recorded as goodwill. This allocation is
based on preliminary estimates and will be finalized within one year from the
date of acquisition.
7
<PAGE> 8
(F) Earnings Per Share
Basic and diluted weighted average shares outstanding are as follows (in
thousands):
<TABLE>
<CAPTION>
April 4 March 29
1999 1998
---------- ----------
<S> <C> <C>
Basic 199,458 198,466
Diluted 202,240 202,285
</TABLE>
Basic and diluted weighted average shares outstanding were derived in
accordance with SFAS No. 128, which states that when a business combination is
accounted for as a pooling of interests, earnings per share computations shall
be based on the aggregate of the weighted average outstanding shares of the
constituent businesses, adjusted to equivalent shares of the surviving business
for all periods presented.
(G) Intangible Assets
Intangible assets resulting from the company's acquisitions consist of the
following:
<TABLE>
<CAPTION>
April 4 December 31
1999 1998
------------- -----------
<S> <C> <C>
Goodwill $ 1,329 $ 1,323
Contracts and programs acquired 455 461
------------- -----------
$ 1,784 $ 1,784
============= ===========
</TABLE>
Intangible assets are shown net of accumulated amortization of $144 and
$130 at April 4, 1999 and December 31, 1998, respectively. Goodwill is amortized
on a straight-line basis over 40 years. Contracts and programs acquired are
amortized on a straight-line basis over periods ranging from 8 to 30 years.
8
<PAGE> 9
(H) Liabilities
A summary of significant liabilities, by balance sheet caption, follows:
<TABLE>
<CAPTION>
April 4 December 31
1999 1998
--------------- ---------------
<S> <C> <C>
Workers' compensation $ 487 $ 341
Customer deposits 566 488
Retirement benefits 230 196
Salaries and wages 130 115
Advance payments - defense contracts 127 139
Other 498 481
--------------- ---------------
Other Current Liabilities $ 2,038 $ 1,760
=============== ===============
Accrued costs on disposed businesses $ 177 $ 177
Retirement benefits 278 268
Coal mining related liabilities 72 73
Other 488 311
--------------- ---------------
Other Liabilities $ 1,015 $ 829
=============== ===============
</TABLE>
(I) Income Taxes
The company had a net deferred tax asset of $314 and $326 at April 4, 1999
and December 31, 1998, respectively, the current portion of which was $326 and
$328, respectively, and was included in other current assets on the Supplemental
Consolidated Balance Sheet. Based on the level of projected earnings and current
backlog, no material valuation allowance was required for the company's deferred
tax assets at April 4, 1999 and December 31, 1998.
On March 2, 1999, the company and the U.S. Internal Revenue Service
settled refund claims for research and experimentation tax credits for the years
1981 through 1989 for approximately $334 (including before-tax interest). The
company recognized a benefit of $165 (net of amounts previously recorded in 1991
and 1992), or $.82 per diluted share, as a result of this settlement. A
receivable for the $334 refund was included in other current assets on the
Supplemental Consolidated Balance Sheet at April 4, 1999 and was collected early
in the second quarter of 1999.
The IRS has completed its examination of General Dynamics' 1990 through
1993 consolidated federal income tax returns and Gulfstream's 1990 through 1994
consolidated federal income tax returns. Unresolved matters for these years have
been protested to the IRS Appeals Division. A refund claim by General Dynamics
for $78 (plus interest) for research and experimentation tax credits for the
year 1990 will also be considered by the IRS Appeals Division. The IRS is
currently examining General Dynamics' 1994 and 1995 consolidated federal income
tax returns.
The company has recorded liabilities for tax contingencies, therefore,
resolution of open matters for these years is not expected to have a materially
unfavorable impact on the company's results of operations or financial
condition.
9
<PAGE> 10
(J) Commitments and Contingencies
Litigation
Claims made by and against the company regarding the development of the
Navy's A-12 aircraft are discussed in Note K.
On April 19, 1995, 101 then-current and former employees of General
Dynamics' Convair Division in San Diego, California filed a six-count complaint
in the Superior Court of California, County of San Diego, titled Argo, et al. v.
General Dynamics, et al. In addition to General Dynamics, four of Convair's
then-current or former managers were also named as defendants. The plaintiffs
alleged that the company interfered with their right to join an earlier class
action lawsuit by, among other things, concealing its plans to close the Convair
Division. On May 1, 1997, a jury rendered a verdict of $101 against the company
and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the
plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The
company and one of the defendants have appealed the judgment to the Court of
Appeals of the State of California, Fourth Appellate District, Division One. On
appeal, the company is seeking to have the judgment overturned in its entirety
or, alternatively, a substantial reduction in the jury's punitive damage award.
The company believes it has substantial legal defenses, but in any case, it
believes the punitive damage award is excessive as a matter of law. Management
currently believes the ultimate outcome will not have a material impact on the
company's results of operations or financial condition.
On July 13, 1995, General Dynamics Corporation was named as a defendant in
a complaint filed in the Circuit Court of St. Louis County, Missouri, titled
Hunt, et al. v. General Dynamics Corporation, et al. The complaint also names
two insurance brokers, Lloyd Thompson, Ltd. and Willis Corroon Corporation of
Missouri, as defendants. The plaintiffs are members of certain Lloyds' of London
syndicates and British insurance companies who sold the company excess loss
insurance policies covering the company's self-insured workers' compensation
program at Electric Boat for four policy years, from July 1, 1988 to June 30,
1992. The plaintiffs allege that when procuring the policies the company and its
brokers made misrepresentations to the plaintiffs and failed to disclose facts
which were material to the risk. The plaintiffs also allege that the company has
been negligent in its administration of workers' compensation claims. The
plaintiffs seek rescission of the policies, a declaratory judgment that the
policies are void, and compensatory damages in an unspecified amount. General
Dynamics has counterclaimed, alleging that the plaintiffs have breached their
insurance contracts by failing to pay claims. General Dynamics seeks a
declaratory judgment that the policies are valid, actual damages, and payment of
a penalty under a Missouri statute for the plaintiffs' vexatious and
unreasonable failure to pay claims. The company does not expect that this case
will have a material impact on the company's results of operations or financial
condition.
On August 16, 1996, plaintiffs HE Holdings, Inc., and Hughes Missile
Systems Company filed an action against General Dynamics Corporation in the
Superior Court for the State of California for the County of Los Angeles. In
June 1998, plaintiffs filed a sixth amended complaint in which plaintiffs were
redesignated as HE Holdings, Inc., now known as Raytheon Company, and Hughes
Missile Systems Company, now known as Raytheon Missile Systems Company
("plaintiffs"). On September 8, 1998, plaintiffs filed a seventh amended
complaint which is now pending. The seventh amended complaint
10
<PAGE> 11
alleges breach of contract, tortious interference with contract, conversion,
fraud, and breach of the implied covenant of good faith and fair dealing, all
with respect to the Asset Purchase Agreement dated May 8, 1992, for the sale of
the company's missile business, various related leases and other alleged
agreements. The seventh amended complaint seeks approximately $25 in
compensatory damages, as well as punitive damages and declaratory relief. The
company does not expect that the lawsuit will have a material impact on the
company's results of operations or financial condition.
The company is either a named defendant or a third-party defendant in
certain multi-plaintiff tort cases pending in state or federal court in Arizona,
captioned: Cordova, et al. v. Hughes Aircraft Co.; Lanier, et al. v. Hughes
Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et
al. v. Hughes Aircraft Co. In these cases the plaintiffs allege that they
suffered personal injuries and/or property damage from chronic exposure to
drinking water alleged to be contaminated with trace amounts of the industrial
solvent trichloroethylene. The alleged source of the contamination was
industrial facilities in and around the site now occupied by the Tucson
International Airport (TIA) and U.S. Air Force Plant #44. In addition to the
company, defendants are Hughes Aircraft Co. (now Raytheon), the Tucson Airport
authority (TAA), the City of Tucson, (the City) and McDonnell Douglas Corp.
(MDC). In Cordova, the company negotiated a settlement with all but four
defendants, who have appealed the summary judgement entered against them. The
company has reached an agreement to settle all the remaining cases and is
negotiating the final terms of the settlement agreements. Court approval is
required for the settlement of these cases. The company does not believe that
these lawsuits will have a material impact on the company's results of
operations or financial condition.
In other litigation concerning the Tucson site, the company is a defendant
in two cases brought in federal district court in Arizona by TAA and the City
under the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA). Plaintiffs seek reimbursement of CERCLA response costs and a
declaration of the company's alleged liability with respect to soil and
groundwater contamination at portions of the Tucson site. On September 30, 1998,
the U.S. Environmental Protection Agency (U.S. EPA) issued a Special Notice
Letter notifying the company that it was a potentially responsible party (PRP)
with respect to contamination of soil and shallow groundwater on and near
property currently occupied by the TIA. Other PRPs receiving a similar notice
were the U.S. Air Force, TAA, MDC and the City. The company has reached an
agreement to settle the litigation brought by TAA and the City and is awaiting
court approval of a consent decree negotiated with the U.S. EPA in response to
the Special Notice Letter. The company does not believe that these lawsuits or
the pending consent decree will have a material impact on the company's results
of operations or financial condition.
The company is also a defendant in other lawsuits and claims and in other
investigations of varying nature. The company believes its liabilities in these
proceedings, in the aggregate, are not material to the company's results of
operations or financial condition.
Environmental
The company is directly or indirectly involved in certain Superfund sites
in which the company, along with other major U.S. corporations, has been
designated a PRP by the U.S. EPA or a state environmental agency with respect to
past shipments of hazardous waste to sites now requiring environmental cleanup.
Based on a site by site analysis of the estimated quantity of waste contributed
by the company relative to the estimated total quantity of waste, the company
believes its liability at any
11
<PAGE> 12
individual site is not material. The company is also involved in the
investigation, cleanup and remediation of various conditions at sites it
currently or formerly owned or operated.
The company measures its environmental exposure based on enacted laws and
existing regulations and on the technology expected to be approved to complete
the remediation effort. The estimated cost to perform each of the elements of
the remediation effort is based on when those elements are expected to be
performed. Where a reasonable basis for apportionment exists with other PRPs,
the company estimates only its allowable share of the joint and several
remediation liability for a site, taking into consideration the solvency of
other participating PRPs. Based on a site by site analysis, the company believes
it has adequate accruals for any liability it may incur arising from sites
currently or formerly owned or operated at which there is a known environmental
condition, or Superfund sites at which the company is a PRP.
(K) Termination of A-12 Program
The A-12 contract was a fixed-price incentive contract for the full-scale
development and initial production of the Navy's new carrier-based Advanced
Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for
default. Both the company and McDonnell Douglas, now owned by the Boeing
Company, (the contractors) were parties to the contract with the Navy, each had
full responsibility to the Navy for performance under the contract, and both are
jointly and severally liable for potential liabilities arising from the
termination. As a consequence of the termination for default, the Navy demanded
that the contractors repay $1,352 in unliquidated progress payments, but agreed
to defer collection of the amount pending a decision by the U.S. Court of
Federal Claims on the contractors' challenge to the termination for default, or
a negotiated settlement.
The contractors filed a complaint on June 7, 1991, in the U.S. Court of
Federal Claims contesting the default termination. The suit, in effect, seeks to
convert the termination for default to a termination for convenience of the U.S.
government and seeks other legal relief. A trial on Count XVII of the complaint,
which relates to the propriety of the process used in terminating the contract
for default, was concluded in October 1993. In December 1994, the court issued
an order vacating the termination for default. On December 19, 1995, following
further proceedings, the court issued an order converting the termination for
default to a termination for convenience. On March 31, 1998, a final judgment
was entered in favor of the contractors for $1,200 plus interest.
The U.S. government filed an appeal from the trial court's ruling in the
U.S. Court of Appeals for the Federal Circuit. On July 1, 1999, the Court of
Appeals found that the trial court erred in converting the termination for
default to a termination for convenience without first determining whether a
default existed. The Court of Appeals remanded the case for determination of
whether the government's default termination was justified. The Court of Appeals
stated that it was expressing no view on that issue, and it left the parties the
opportunity to fully litigate that issue on remand.
The company continues to believe that the government's default termination
was improper, both as to process (the basis relied upon by the trial court) and
because the contractors were not in default. The company continues to believe
that at a full trial it will be able to demonstrate that the default termination
was not justified and that the termination for default will be converted to a
termination for convenience. If the company is successful in such a new trial,
it could result in the same, a lesser or a greater award to the contractors.
12
<PAGE> 13
The company has fully reserved the contracts in process balance associated
with the A-12 program and has accrued the company's estimated termination
liabilities and the liability associated with pursuing the litigation through
the appeals process and remand proceedings. In the event that the contractors
are ultimately found to have been in default under the A-12 contract and are
required to repay all unliquidated progress payments, additional losses of
approximately $675, plus interest, may be recognized by the company. The company
believes the possibility of this result is remote.
(L) Business Segment Information
Management has chosen to organize its business segments in accordance with
several factors, including a combination of the nature of products and services
offered, the nature of the production processes and the class of customer for
the company's products. Operating segments are aggregated for reporting purposes
consistent with these criteria. Management measures its segments' profit based
primarily on operating earnings. As such, net interest and other income items
have not been allocated to the company's segments. For a further description of
the company's business segments, see Management's Discussion and Analysis of the
Results of Operations and Financial Condition.
Summary financial information for each of the company's segments follows:
<TABLE>
<CAPTION>
Net Sales Operating Earnings
--------- ------------------
April 4 March 29 April 4 March 29
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marine Systems* $ 808 $ 555 $ 88 $ 64
Aerospace 625 503 97 69
Combat Systems* 290 335 35 43
Information Systems
& Technology* 233 218 21 14
Other 46 46 - 3
------ ------ ----- ----
$2,002 $1,657 $ 241 $193
====== ====== ===== ====
</TABLE>
*As of January 1, 1999, management realigned its information technology resource
businesses resulting in a different composition of reportable segments. Segment
data for all years presented has been restated to give recognition to the 1999
composition of reportable segments.
13
<PAGE> 1
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Supplemental Consolidated Statement of Earnings 2
Supplemental Consolidated Balance Sheet 3
Supplemental Consolidated Statement of Cash Flows 4
Supplemental Consolidated Statement of Shareholders' Equity 5
Notes to Supplemental Consolidated Financial Statements 6
</TABLE>
1
<PAGE> 2
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in millions, except per share amounts) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $7,398 $5,966 $4,645
OPERATING COSTS AND EXPENSES 6,480 5,290 4,240
- ---------------------------------------------------------------------------------------------------
OPERATING EARNINGS 918 676 405
Interest (expense) income, net (17) 16 51
Other income (expense), net 3 (3) 1
- ---------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 904 689 457
Provision for income taxes 315 130 140
- ---------------------------------------------------------------------------------------------------
NET EARNINGS $589 $559 $317
- ---------------------------------------------------------------------------------------------------
NET EARNINGS PER SHARE:
Basic $ 2.95 $ 2.80 $ 1.58
Diluted $ 2.91 $ 2.73 $ 1.54
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Supplemental Consolidated Financial Statements are an
integral part of this statement.
2
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31
ASSETS 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 165 $ 643
Marketable securities 93 105
- --------------------------------------------------------------------------------------
258 748
Accounts receivable 580 411
Contracts in process 952 702
Inventories 804 650
Other current assets 391 337
- --------------------------------------------------------------------------------------
Total Current Assets 2,985 2,848
- --------------------------------------------------------------------------------------
NONCURRENT ASSETS:
Leases receivable - finance operations 181 193
Real estate held for development 65 128
Property, plant and equipment, net 901 770
Intangible assets 1,784 1,293
Other assets 235 325
- --------------------------------------------------------------------------------------
Total Noncurrent Assets 3,166 2,709
- --------------------------------------------------------------------------------------
$ 6,151 $ 5,557
- --------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 77 $ 183
Short-term debt - finance operations 58 18
Accounts payable 477 403
Other current liabilities 1,760 1,542
- --------------------------------------------------------------------------------------
Total Current Liabilities 2,372 2,146
- --------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt 453 462
Long-term debt - finance operations 82 100
Other liabilities 829 841
Commitments and contingencies (See Note P)
- --------------------------------------------------------------------------------------
Total Noncurrent Liabilities 1,364 1,403
- --------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus 484 540
Retained earnings 2,639 2,159
Treasury stock (706) (691)
Accumulated other comprehensive loss (2) ---
- --------------------------------------------------------------------------------------
Total Shareholders' Equity 2,415 2,008
- --------------------------------------------------------------------------------------
$ 6,151 $ 5,557
- --------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Supplemental Consolidated Financial Statements are an
integral part of this statement.
3
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $589 $ 559 $ 317
Adjustments to reconcile net earnings to net cash provided by
continuing operations -
Depreciation, depletion and amortization 161 124 94
Decrease (Increase) in assets, net of effects of business acquisitions--
Marketable securities 30 62 742
Accounts receivable (64) (46) (30)
Contracts in process (209) 86 41
Inventory (55) 27 (263)
Other current assets (37) 23 2
Increase (Decrease) in liabilities, net of effects of business acquisitions--
Accounts payable and other current liabilities 52 (34) 105
Customer deposits (73) (109) 432
Current income taxes 151 66 76
Deferred income taxes 61 (53) (61)
Other, net (30) 6 (55)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 576 711 1,400
Net cash used by discontinued operations (12) (33) (121)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 564 678 1,279
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (505) (1,230) (59)
Purchases of available-for-sale securities (443) (440) (986)
Sales/maturities of available-for-sale securities 493 916 484
Capital expenditures (186) (113) (93)
Proceeds from sale of assets 25 11 41
Proceeds from sale of real estate held for development 74 23 --
Other (4) (5) (10)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (546) (838) (623)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 56 220 400
Proceeds from issuance of debt -- finance operations -- -- 150
Repayment of debt (232) (20) (146)
Repayment of debt -- finance operations (38) (17) (158)
Dividends paid (108) (102) (206)
Purchases of common stock (226) (60) (492)
Proceeds from option exercises 54 33 22
Proceeds from issuance of common stock -- -- 100
Other (2) -- (15)
===============================================================================================================================
Net Cash (Used) Provided by Financing Activities (496) 54 (345)
- -------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (478) (106) 311
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 643 749 438
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $165 $ 643 $ 749
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Supplemental Consolidated Financial Statements are an
integral part of this statement.
4
<PAGE> 5
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Treasury Stock Other
------------------------------- Retained ------------------------ Comprehensive
Shares Par Surplus Earnings Shares Amount Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1995, AS
PREVIOUSLY REPORTED 168,774,672 $169 $ 11 $2,005 (42,283,922) ($625) $7
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustment for pooling of
Interests 65,384,077 65 564 (411) (1)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995,
AS RESTATED 234,158,749 234 575 1,594 (42,283,922) (625) 6
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings 317
Unrealized gains on securities,
net of reclassification adjustment (7)
Cash dividends declared, including
preferred (208)
Common stock offering 4,559,100 5 95
Exercise of common stock options 3,968,596 4 10
Shares purchased (469) (783,800) (23)
Amortization of stock plan
Expense 7
Shares issued under Incentive
Compensation Plan 21 (9) 497,408 (2)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,1996 242,686,445 243 232 1,701 (42,570,314) (650) (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings 559
Minimum pension liability
Adjustment 1
Cash dividends declared (102)
Exercise of common stock options 631,877 2
Tax benefit of exercised stock
Options 34
Shares purchased (1,832,500) (60)
Amortization of stock plan expense 1
Shares issued under Incentive
Compensation Plan 29 1,413,696 19
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 243,318,322 243 297 2,159 (42,989,118) (691) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings 589
Unrealized gains on securities 1
Foreign currency translation
Adjustment (1)
Minimum pension liability
Adjustment (2)
Cash dividends declared (110)
Exercise of common stock options 3,572,160 4 27
Tax benefit of exercised stock
Options 40
Shares purchased (5,541,617) (6) (192) (598,000) (28)
Amortization of stock plan expense 1
Modification of common stock
options 6
Shares issued for business
acquisition 4 157,283 3
Shares issued under Incentive
Compensation Plan 61 1,348,705 10
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,1998 241,348,865 $241 $243 $2,639 (42,081,130) ($706) $(2)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Supplemental Consolidated Financial Statements are an
integral part of this statement.
5
<PAGE> 6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION. The Supplemental
Consolidated Financial Statements include the accounts of the company and all
majority-owned subsidiaries. The Supplemental Consolidated Financial Statements
give retroactive effect to the acquisition by General Dynamics Corporation
(General Dynamics) of Gulfstream Aerospace Corporation (Gulfstream) through a
merger on July 30, 1999, which has been accounted for as a pooling of interests
as described in Note C. These supplemental financial statements do not extend
through the date of consummation. They will, however, become the historical
consolidated financial statements of General Dynamics and subsidiaries after
post-combination results are issued, as prescribed by generally accepted
accounting principles.
ACCOUNTING ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION. Sales and earnings under long-term defense contracts
and programs are accounted for using the percentage-of-completion method of
accounting. The combination of estimated profit rates on similar, economically
interdependent contracts is used to develop program earnings rates for contracts
that meet Statement of Position 81-1 criteria. These rates are applied to
contract costs, including general and administrative expenses, for the
determination of sales and operating earnings. Program earnings rates are
reviewed quarterly to assess revisions in contract values and estimated costs at
completion. Based on these assessments, any changes in earnings rates are made
prospectively.
Any anticipated losses on defense contracts and programs are charged to
earnings when identified. Such losses encompass all costs, including general and
administrative expenses, allocable to the contracts. Revenue arising from the
claims process is not recognized either as income or as an offset against a
potential loss until it can be reliably estimated and its realization is
probable.
Commercial contracts for new aircraft are segmented between the manufacture
of the "green" aircraft (i.e., before exterior painting and installation of
customer selected interiors and optional avionics) and its completion. Sales of
new Gulfstream green aircraft are recorded when that aircraft is delivered to
the customer. Revenues from completion services are recorded when the outfitted
aircraft is delivered to the customer. With respect to completed aircraft,
insignificant costs related to parts to be installed and services to be
performed under the contract after delivery of the aircraft are included as cost
of sales at the time of sale of the new aircraft. Sales of all other products
and services, including pre-owned aircraft, are recognized when delivered or the
service is performed.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $509, $432 and $381 in 1998, 1997 and 1996, respectively, and are included
in operating costs and expenses on the Supplemental Consolidated Statement of
Earnings.
INTEREST, NET. Interest income was $23, $51 and $73 in 1998, 1997 and 1996,
respectively. Interest payments, including the company's finance operations,
were $47, $44 and $27 in 1998, 1997 and 1996, respectively. Interest expense
incurred by the company's LNG tanker finance operation is classified as
operating costs and expenses.
6
<PAGE> 7
CASH AND EQUIVALENTS AND MARKETABLE SECURITIES. The company classifies its
securities based on the remaining maturity at the time of purchase. The company
considers securities with a maturity of three months or less to be cash
equivalents. The company adjusts all marketable securities to fair value. In
general, market adjustments to those securities with maturities less than one
year are recognized in earnings and included as a component of accumulated other
comprehensive income for securities with maturities greater than one year. At
December 31, 1998, marketable securities consist primarily of corporate debt and
government backed mortgage securities.
ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS. Accounts receivable represent
only amounts billed and currently due from customers. Recoverable costs and
accrued profit related to long-term defense contracts and programs on which
revenue has been recognized, but billings have not been presented to the
customer (unbilled receivables), are included in contracts in process.
INVENTORIES. Work in process inventories are stated at the lower of cost
(based on estimated average unit costs of the number of units in a production
lot) or market. Raw materials, material components of other work in process and
substantially all purchased parts inventories are stated at the lower of cost
(first-in, first-out method) or market. Pre-owned aircraft acquired in
connection with the sale of new aircraft are recorded at the lower of the
trade-in value or estimated net realizable value.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried at
historical cost net of accumulated depreciation. Most of the company's assets
are depreciated using accelerated methods, with the remainder using the
straight-line method. Depletion of mineral reserves is computed using the
units-of-production method. Depreciation expense was $109, $96 and $76 in 1998,
1997 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, identifiable
intangibles and goodwill are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the company estimates
the future cash flows expected to result from the use of the asset. If the asset
is held for sale, the company reviews its fair value less cost to sell.
ENVIRONMENTAL LIABILITIES. The company accrues environmental costs when it
is probable that a liability has been incurred and the amount can be reasonably
estimated. Cleanup and other environmental exit costs related to sold businesses
were recorded at the time of disposal. Recorded liabilities have not been
discounted. To the extent the U.S. government has specifically agreed to pay the
ongoing maintenance and monitoring costs at sites currently used in the conduct
of the company's government contracting business, these costs are treated as
contract costs and recognized as paid.
STOCK-BASED COMPENSATION. The company measures compensation cost for stock
options as the excess, if any, of the quoted market price of the company's stock
at the measurement date over the exercise price. Stock awards are recorded at
fair value at the date of award.
TRANSLATION OF FOREIGN CURRENCIES. Local currencies have been determined to
be functional currencies for the company's international operations. Foreign
currency balance sheets are translated at the end-of-period exchange rates and
earnings statements at the average exchange rates for each period. The resulting
foreign currency translation adjustments are included in the calculation of
accumulated other comprehensive income and included in the equity section on the
Supplemental Consolidated Balance Sheet.
COMPREHENSIVE INCOME. Effective January 1, 1998, the company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which requires the presentation and disclosure
of comprehensive income. Comprehensive income was $587, $560 and $310 in 1998,
1997 and 1996, respectively.
7
<PAGE> 8
CLASSIFICATION. Consistent with industry practice, assets and liabilities
relating to long-term defense contracts and programs are classified as current
although a portion of these amounts is not expected to be realized within one
year. In addition, certain prior year amounts have been reclassified to conform
to the current year presentation.
B. SUBSEQUENT EVENTS
Stockholder Approvals
On July 30, 1999, the company's stockholders approved (1) an amendment to
its Certificate of Incorporation to increase the number of authorized shares of
common stock from 200 million shares to 300 million shares, and (2) the issuance
by the company of its common stock to stockholders of Gulfstream in connection
with the acquisition discussed in Note C.
Gulfstream Acquisition
On July 30, 1999, the company repaid from its available funds approximately
$270 of Gulfstream's debt instruments (see Note K). In connection therewith, the
company will record in the third quarter of 1999 a one-time non-cash charge of
approximately $7 for the unamortized debt costs associated with these
instruments. The company will also record in the third quarter of 1999 a charge
to earnings of approximately $33 for direct acquisition transaction costs,
consisting of investment banking, legal, bank fees, accounting, printing, and
regulatory filing fees.
In connection with the acquisition of Gulfstream, General Dynamics will
merge the two company's commercial pension plans. As a result of the merger of
these plans, the company expects to recognize previously deferred gains on
General Dynamics commercial pension plan, amounting to approximately $125
(before tax), in income in the third quarter of 1999. See Note S for further
discussion of the commercial pension plans.
Rescission of Common Stock Repurchase Program
On June 23, 1999, the company's board of directors formally rescinded
management's authority to repurchase shares of the company's common stock on the
open market.
8
<PAGE> 9
Acquisition of GTE Government Systems Corporation
On June 21, 1999, the company entered into a definitive agreement to
acquire GTE Government Systems Corporation, a subsidiary of GTE Corporation, for
$1.05 billion in cash. GTE Government Systems Corporation is a leader in the
advancement of command, control, communications and intelligence systems;
electronic defense systems; communication switching; and information systems for
defense, government and industry in the United States and abroad. The
acquisition will be accounted for under the purchase method of accounting and is
expected to close at the end of August 1999.
Settlement of Research and Experimentation Tax Credits
During the first quarter of 1999, the company recognized a benefit of $165
(net of amounts previously recorded in 1991 and 1992), or $.82 per diluted
share, as a result of a settlement with the U.S. Internal Revenue Service for
refund claims for research and experimentation tax credits for the years 1981
through 1989 (see Note E). In April 1999, the company received the cash refund
from the IRS related to this settlement totaling $334 (including before-tax
interest).
C. BUSINESS COMBINATIONS
Pooling of Interests Method
On July 30, 1999, the company acquired Gulfstream through a merger of a
subsidiary of the company into Gulfstream. As a result, the holders of
Gulfstream common stock became entitled to receive one share of the company's
common stock for each Gulfstream share. The common stock of Gulfstream was
traded on the New York Stock Exchange through the close of business on July 30,
1999, at which time there were 72,165,645 shares of Gulfstream common stock
outstanding. An additional 4.1 million shares have been reserved for issuance
upon the exercise of stock options which, prior to the acquisition, had been
options to purchase Gulfstream common stock. Gulfstream is a leading designer,
developer, manufacturer and marketer of advanced business jet aircraft. The
acquisition was accounted for as a pooling of interests, and, accordingly, the
consolidated financial statements for periods prior to the combination have
been restated to include the accounts and results of operations of Gulfstream.
Purchase Method
On November 10, 1998, the company acquired control of NASSCO Holdings
Incorporated (NASSCO) for $369 in cash plus the obligation to discharge $46 in
debt. The company paid $318 of the total consideration and repaid the $46
obligation in cash during November 1998 and paid the remaining fixed purchase
consideration of $51 during May 1999. NASSCO's wholly owned subsidiaries include
National Steel and Shipbuilding Company, which is in the business of ship
design, engineering, construction and repair for the United States military and
various commercial customers, and NASSCO Funding Corporation, a finance
subsidiary (see Note N).
9
<PAGE> 10
Effective August 19, 1998, Gulfstream completed the acquisition of K-C
Aviation, Inc. for approximately $250 in cash. K-C Aviation was a leading
provider of business aviation services and the largest independent completion
center for business aircraft in North America. In addition to custom aircraft
interiors, K-C Aviation was the second largest independent aircraft engine
service center in the United States and offered maintenance services, spare
parts, auxiliary power unit service, avionics retrofit, non-destructive testing
and component overhaul.
The company made two other acquisitions during 1998 for approximately $20
in cash and stock.
Effective December 31, 1997, the company purchased the assets of Computing
Devices International, formerly a division of Ceridian Corporation, for
approximately $500, net of cash acquired of $100. The company borrowed $220 in
connection with the acquisition. See Note K for details on the terms of the
debt. Computing Devices International added three new defense electronics and
system integration units to the company, General Dynamics Information Systems,
Inc., Computing Devices Canada Ltd. and Computing Devices Company Limited in the
United Kingdom.
Effective October 1, 1997, the company purchased the assets of Advanced
Technology Systems, formerly an operating unit of Lucent Technologies, for $267,
net of purchase price adjustment of $17 received in January 1998. Advanced
Technology Systems is a leading supplier of undersea surveillance systems,
signal processing and vibration control systems and related technologies for a
wide range of applications.
Effective January 1, 1997, the company purchased the assets of Defense
Systems and Armament Systems, formerly operating units of Lockheed Martin
Corporation, for $450 in cash. Defense Systems builds missile guidance and naval
fire control systems. Their manufacture of light vehicles and turrets and
transmissions for combat vehicles was transferred to another operating unit of
the company in early 1998. Armament Systems designs, develops and produces
advanced gun, ammunition handling and air defense systems, and is a leader in
the production of ammunition and ordnance products.
The purchase prices have been allocated to the estimated fair values of net
tangible assets acquired, with any excess recorded as intangible assets (see
Note I). Certain of the estimates related to the acquisition of NASSCO are still
preliminary at December 31, 1998, but will be finalized within one year from its
date of acquisition. The operating results of the acquired businesses are
included with those of the company from their respective closing dates.
D. EARNINGS PER SHARE
The company has adopted the provisions of SFAS No. 128, "Earnings Per
Share," which requires the presentation of earnings per share on both a basic
and diluted basis for all periods presented. Basic and diluted weighted average
shares outstanding are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Basic weighted average shares outstanding 199,466 199,769 200,254
Assumed exercise of options 2,758 4,512 5,141
Contingently issuable shares 22 194 60
--------- ------- --------
Diluted weighted average shares outstanding 202,246 204,475 205,455
========= ======= ========
</TABLE>
10
<PAGE> 11
Basic and diluted weighted average shares outstanding were derived in
accordance with SFAS No. 128, which states that when a business combination is
accounted for as a pooling of interests, earnings per share computations shall
be based on the aggregate of the weighted average outstanding shares of the
constituent businesses, adjusted to equivalent shares of the surviving business
for all periods presented.
E. INCOME TAXES
The provision for income taxes included on the Supplemental Consolidated
Statement of Earnings is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Current:
U.S. Federal $269 $182 $200
Foreign 15 - -
State 5 1 1
---- ---- ----
Total current 289 183 201
---- ---- ----
Deferred:
U.S. Federal 27 11 (61)
Foreign (9) - -
State 8 1 -
---- ---- ----
Total deferred 26 12 (61)
---- ---- ----
Decrease in valuation
allowance - (65) -
---- ---- ----
$315 $130 $140
==== ==== ====
</TABLE>
The provision for state and local income taxes which is allocable to U.S.
government contracts is included in operating costs and expenses.
The reconciliation from the statutory federal income tax rate to the
company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
Decrease in valuation
allowance - (9.4) -
Net operating loss
carryforwards - (6.3) (3.6)
Other (0.2) (0.4) (0.8)
----- ----- -----
Effective income tax rate 34.8% 18.9% 30.6%
===== ===== =====
</TABLE>
11
<PAGE> 12
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------
<S> <C> <C>
Long-term contract costing methods $ 90 $ 98
A-12 termination 93 95
Accrued costs on disposed businesses 62 74
Coal mining liabilities 26 27
Postretirement liabilities 90 86
Tax credit/loss carryforwards 49 32
Other 228 146
----- -----
Deferred Assets $ 638 $ 558
----- -----
Lease income $ 66 $ 70
Commercial pension asset 60 54
Intangible assets 48 38
Property basis differences 40 23
Other 98 21
----- -----
Deferred Liabilities $ 312 $ 206
----- -----
Net Deferred Asset $ 326 $ 352
===== =====
</TABLE>
Based on the level of projected earnings and current backlog, no material
valuation allowance was required for the company's deferred tax assets at
December 31, 1998 and 1997. The current portion of the net deferred tax asset is
$328 and $257 at December 31, 1998 and 1997, respectively, and is included in
other current assets on the Supplemental Consolidated Balance Sheet.
The company made income tax payments of $112, $102 and $199 in 1998, 1997
and 1996, respectively.
On March 2, 1999, General Dynamics and the U.S. Internal Revenue Service
settled refund claims for research and experimentation tax credits for the years
1981 through 1989 for approximately $334 (including before-tax interest). See
Note B for further discussion of the settlement's impact on 1999 results of
operations and financial condition.
The IRS has completed its examination of General Dynamics' 1990 through
1993 consolidated federal income tax returns and Gulfstream's 1990 through 1994
consolidated federal income tax returns. Unresolved matters for these years have
been protested to the IRS Appeals Division. A refund claim by General Dynamics
for $78 (plus interest) for research and experimentation tax credits for the
year 1990 will also be considered by the IRS Appeals Division. The IRS is
currently examining General Dynamics' 1994 and 1995 consolidated federal income
tax returns.
The company has recorded liabilities for tax contingencies, therefore,
resolution of open matters for these years is not expected to have a materially
unfavorable impact on the company's results of operations or financial
condition.
12
<PAGE> 13
F. CONTRACTS IN PROCESS
Contracts in process primarily represent costs and accrued profit related
to defense contracts and programs and consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------
<S> <C> <C>
Contract costs and estimated profits $7,866 $6,382
Other contract costs 485 410
------ ------
8,351 6,792
Less advances and progress payments 7,399 6,090
------ ------
$ 952 $ 702
====== ======
</TABLE>
Contract costs include production costs and related overhead, including
general and administrative expenses. Other contract costs primarily represent
amounts required to be recorded under generally accepted accounting principles
that are not currently allocable to contracts, such as a portion of the
company's estimated workers' compensation, postretirement benefits and
environmental expenses. Recovery of these costs under contracts is considered
probable based on existing backlog. If the level of backlog in the future does
not support the continued deferral of these costs, the profitability of the
company's remaining contracts could be affected.
Under the contractual arrangements by which progress payments are received,
the U.S. government asserts that it has a security interest in the contracts in
process identified with the related contracts.
G. INVENTORIES
Inventories consist primarily of commercial aircraft work in process and
raw materials, as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------
<S> <C> <C>
Work in process $ 445 $ 391
Raw materials 191 135
Pre-owned aircraft 150 104
Other 18 20
----- -----
$ 804 $ 650
===== =====
</TABLE>
13
<PAGE> 14
H. PROPERTY, PLANT AND EQUIPMENT, NET
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------
<S> <C> <C>
Land and improvements $ 99 $ 86
Mineral reserves 88 87
Buildings and improvements 450 398
Machinery and equipment 1,322 1,268
Construction in process 108 34
------ ------
2,067 1,873
Less accumulated depreciation,
depletion and amortization 1,166 1,103
------ ------
$ 901 $ 770
====== ======
</TABLE>
Certain of the company's plant facilities are provided by the U.S.
government and therefore, not included above.
I. INTANGIBLE ASSETS
Intangible assets resulting primarily from the company's acquisitions
consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------
<S> <C> <C>
Goodwill $1,323 $ 867
Contracts and programs acquired 461 426
------ ------
$1,784 $1,293
====== ======
</TABLE>
Intangible assets are shown net of accumulated amortization of $130 and $79
at December 31, 1998 and 1997, respectively. Goodwill is amortized on a
straight-line basis over 40 years. Contracts and programs acquired are amortized
on a straight-line basis over periods ranging from 8 to 30 years.
J. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------
<S> <C> <C>
Customer deposits $488 $546
Workers' compensation 341 243
Retirement benefits 196 221
Advance payments - defense contracts 139 114
Salaries and wages 115 117
Other 481 301
------ ------
$1,760 $1,542
====== ======
</TABLE>
14
<PAGE> 15
K. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------
<S> <C> <C>
Term loans $305 $380
Senior notes 142 220
Notes payable 56 -
9.95% Debentures - 38
Industrial development bonds 15 -
Other 12 7
---- ----
530 645
Less current portion 77 183
---- ----
$453 $462
==== ====
</TABLE>
On October 16, 1996, Gulfstream entered into a long-term credit agreement
under which the lenders who are parties to the credit agreement made available
to the company a $400 term loan facility and a $250 revolving credit facility.
Concurrent with entering into the credit agreement, Gulfstream repaid all
amounts outstanding under its pre-existing credit agreements totaling $108, and
terminated such agreements. The effective interest rate on these instruments
was 6.2 percent and 6.9 percent at December 31, 1998 and 1997, respectively. At
December 31, 1998 and 1997, $36 and $46, respectively, was outstanding on the
revolving credit facility. Gulfstream repaid the outstanding obligation on the
revolving credit facility during 1999. On July 30, 1999, the company repaid the
term loan in full from available cash and terminated the credit agreement.
On December 31, 1997, the company borrowed in Canadian dollars the U.S.
equivalent of $220 in connection with its acquisition of Computing Devices
International. In April 1998, the company repaid $70 of this note, and in
September 1998, refinanced the balance with a note maturing in 2008. The debt
carries a 6.32 percent annual interest rate, interest payable semi-annually.
On November 30, 1998, Gulfstream issued notes totaling $56 secured by
three pre-owned aircraft used as core fleet in the Gulfstream Shares Program.
The notes are repayable in consecutive monthly installments of principal
commencing December 31, 1999, with a final maturity on November 30, 2008 of $31.
Interest is payable monthly from November 30, 1998 and is based on LIBOR plus
1.4%.
On April 1, 1998, the company exercised its option to call for the early
redemption of all of its outstanding 9.95 percent Debentures.
On November 10, 1998, the company acquired control of NASSCO, which has
several debt obligations. The industrial development bonds are due December 1,
2002, and bear interest at 6.60 percent per annum with interest payable
semi-annually. Other consists of NASSCO Title XI bonds of $5, which were repaid
during the first quarter of 1999, and several subsidiary mortgage obligations.
The company has available a $1 billion committed line of credit expiring in
May 2002 and an available $400 committed line of credit expiring in December
2002. International credit arrangements include a $30 credit facility expiring
in August 2000, renewable annually thereafter.
15
<PAGE> 16
L. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
--------------------
<S> <C> <C>
Accrued costs on disposed businesses $177 $211
Retirement benefits 268 269
Coal mining related liabilities 73 78
Other 311 283
---- ----
$829 $841
==== ====
</TABLE>
The company has recorded liabilities for contingencies related to disposed
businesses. These liabilities include postretirement benefits, environmental,
legal and other costs.
The company has certain liabilities which are specific to the coal mining
industry, including workers' compensation and reclamation. The company is
subject to the Federal Coal Mine Health & Safety Act of 1969, as amended, and
the related workers' compensation laws in the states in which it has operated.
These laws require the company to pay benefits for occupational disability
resulting from coal workers' pneumoconiosis (black lung). The liability for
known claims and an actuarially determined estimate of future claims that will
be awarded to current and former employees is discounted based on the current
rate. Liabilities to reclaim land disturbed by the mining process and to perform
other closing functions are recorded over the estimated production lives of the
mines.
M. SHAREHOLDERS' EQUITY
STOCK SPLIT. On March 4, 1998, the company's board of directors authorized
a two-for-one stock split effected in the form of a 100 percent stock dividend,
which was distributed on April 2, 1998, to shareholders of record on March 13,
1998. Shareholders' equity has been restated to give retroactive recognition to
the stock split in prior periods by reclassifying from retained earnings and
surplus to common stock the par value of the additional shares arising from the
split. In addition, all references in the financial statements to number of
shares, per share amounts, stock option data, and market prices of the company's
common stock have been restated to give effect to the stock split.
AUTHORIZED STOCK. The authorized capital stock of the company consists of
300 million shares of $1 par value common stock and 50 million shares of $1 par
value preferred stock issuable in series, with the rights, preferences and
limitations of each series to be determined by the board of directors.
SHARES OUTSTANDING. The company had 199,267,735, 200,329,204 and
200,116,131 shares of common stock outstanding as of December 31, 1998, 1997 and
1996, respectively.
N. FINANCE OPERATIONS
The company owns three liquefied natural gas (LNG) tankers which have been
leased to a nonrelated company. The U.S. government-guaranteed Title XI Bonds,
which financed the leases, were retired in 1996. This retirement was financed by
the private placement of new bonds that are secured by the LNG tankers. The new
bonds are callable under certain conditions and are nonrecourse to the company.
16
<PAGE> 17
Accordingly, in the event the lessee defaults on the lease payments, the company
is not obligated to repay the debt. The 1996 refinancing did not have a material
impact on the company's results of operations or financial condition.
The following is a summary of the comparative financial statements for the
LNG tanker finance operations:
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31
1998 1997
--------------------
<S> <C> <C>
ASSETS
Leases receivable $193 $204
Due from parent 40 52
---- ----
$233 $256
==== ====
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt $100 $118
Income taxes 66 70
Shareholder's equity 67 68
---- ----
$233 $256
==== ====
</TABLE>
EARNINGS DATA
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-----------------------
<S> <C> <C> <C>
Interest income $20 $21 $23
Interest expense 7 9 10
Income taxes and other 4 3 7
--- --- ---
Net earnings $ 9 $ 9 $ 6
=== === ===
</TABLE>
On October 1, 1995, the leases were extended from 2004 through 2009. These
leases are classified as direct financing leases. The lease extension increased
aggregate future minimum lease payments and unearned interest income, but did
not alter the company's net investment in leases receivable.
The components of the company's net investment in the leases receivable are
as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------
<S> <C> <C>
Aggregate future minimum
lease payments $287 $318
Unguaranteed residual value 38 38
Less unearned interest income 132 152
---- ----
$193 $204
==== ====
</TABLE>
The company is scheduled to receive minimum lease payments of $31 annually
in each of the next five years.
17
<PAGE> 18
Semiannual scheduled payments, sufficient to retire 100 percent of the
aggregate principal amount of the debt, have commenced and will continue through
maturity in 2004. The weighted average interest rate on the debt is 6.2 percent.
The schedule of principal payments for the next five years is $19 in 1999, $19
in 2000, $21 in 2001, $22 in 2002 and $18 in 2003.
NASSCO Funding Corporation, discussed in Note C, is a special purpose
corporation in the business of issuing commercial paper to assist in providing
funding for the Capital Construction Fund (CCF) (see Note O). The shares
invested in the CCF collateralize these commercial paper obligations. The
maximum maturity period on the commercial paper is 60 days. Certain covenants of
the commercial paper agreement require that 95 percent of the CCF be invested in
high-grade government backed mortgage securities.
The following is a summary of the financial position of NASSCO Funding
Corporation as of December 31, 1998:
<TABLE>
<S> <C>
ASSETS
Marketable securities $48
===
LIABILITIES AND SHAREHOLDER'S EQUITY
Commercial paper $40
Shareholder's equity 8
---
$48
===
</TABLE>
The company repaid the commercial paper obligation and liquidated the
available-for-sale marketable securities during the second quarter of 1999. No
material earnings from NASSCO Funding Corporation are included in the company's
results of operations due to the consummation of the acquisition on November 10,
1998.
O. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the company's financial instruments
approximates carrying value for all financial instruments except as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Short- and long-term debt $530 $530 $645 $648
Short- and long-term debt -
finance operations 140 144 118 120
</TABLE>
Fair value is based on quoted market prices, except for privately placed
debt where fair value is based on risk-adjusted discount rates.
18
<PAGE> 19
Marketable securities classified as available-for-sale were $48 and $30 at
December 31, 1998 and 1997, respectively, and included primarily government
backed mortgage and corporate debt securities, respectively. The 1998 balance
collateralizes the CCF. Qualified assets deposited into the CCF are designated
to provide funds for the acquisition, construction or reconstruction of U.S.
flag and U.S. built marine vessels. Such deposits are not subject to federal
income taxes in the year the associated revenue is earned, but are taxable with
interest payable from the year of the deposit for the most recent qualified
activity, if withdrawn for general corporate purposes or other nonqualified
purposes or upon termination of the agreement. Deposits into the CCF are
preference items for inclusion in federal alternative minimum taxable income.
Deposits into the CCF not committed for qualified vessels within 25 years from
the date of deposit will be treated as nonqualified withdrawals. Any income
relating to a nonqualified withdrawal is likely to be taxable in the year of
withdrawal. At December 31, 1998, the CCF was funded by the marketable
securities discussed above and qualified accounts receivable of an affiliate of
approximately $37. The assets designated for the CCF are restricted.
Other available-for-sale investments at December 31, 1998 and 1997 consist
primarily of $46 of U.S. government debt obligations restricted for payment of
worker's compensation benefits under an agreement with the State of Maine. Also
included at December 31, 1998 are $5, primarily in municipal securities,
restricted for repayment of the industrial development bonds discussed in Note
K, and $4 in equity securities restricted for the payment of supplemental
retirement obligations discussed in Note S. Amortized cost for
available-for-sale marketable securities and other investments approximates fair
value at December 31, 1998 and 1997. For debt and equity securities and
obligations classified as other available-for-sale investments at December 31,
1998, $11 mature within one year, $22 between one and five years, $13 between
five and ten years, and $9 had no fixed maturity date.
The proceeds from the sale of available-for-sale securities were $274, $612
and $228 in 1998, 1997 and 1996, respectively.
The company was contingently liable for debt and lease guarantees and other
arrangements aggregating up to a maximum of approximately $35 at December 31,
1998. The company knows of no event of default which would require it to satisfy
these guarantees and, therefore, the fair value of these contingent liabilities
is considered immaterial.
Approximately 6% and 14% of accounts receivable outstanding at December 31,
1998 and 1997, respectively, are represented by a contract receivable associated
with the sale of multiple aircraft to one customer. Generally, these receivables
are collected prior to delivery of the outfitted aircraft. The company performs
ongoing credit evaluations of its aircraft customers' financial position.
Overall, credit risks with respect to aircraft accounts receivable are limited
due to the large number of customers and their dispersion across many industries
and geographic regions.
P. COMMITMENTS AND CONTINGENCIES
LITIGATION. Claims made by and against the company regarding its
consolidated federal income tax returns are discussed in Notes B and E. Claims
made by and against the company regarding the development of the Navy's A-12
aircraft are discussed in Note Q.
On April 19, 1995, 101 then-current and former employees of General
Dynamics' Convair Division in San Diego, California filed a six-count complaint
in the Superior Court of California, County of San Diego, titled Argo, et al. v.
General Dynamics, et al. In addition to General Dynamics, four of Convair's
then-current or former managers were also named as defendants. The plaintiffs
alleged that the company interfered with their right to join an earlier class
action lawsuit by, among other things, concealing its plans
19
<PAGE> 20
to close the Convair Division. On May 1, 1997, a jury rendered a verdict of $101
against the company and one of the defendants in favor of 97 of the plaintiffs.
The jury awarded the plaintiffs a total of $1.8 in actual damages and $99 in
punitive damages. The company and one of the defendants have appealed the
judgment to the Court of Appeals of the State of California, Fourth Appellate
District, Division One. On appeal, the company is seeking to have the judgment
overturned in its entirety or, alternatively, a substantial reduction in the
jury's punitive damage award. The company believes it has substantial legal
defenses, but in any case, it believes the punitive damage award is excessive as
a matter of law. Management currently believes the ultimate outcome will not
have a material impact on the company's results of operations or financial
condition.
On July 13, 1995, General Dynamics Corporation was named as a defendant in
a complaint filed in the Circuit Court of St. Louis County, Missouri, titled
Hunt, et al. v. General Dynamics Corporation, et al. The complaint also names
two insurance brokers, Lloyd Thompson, Ltd. and Willis Corroon Corporation of
Missouri, as defendants. The plaintiffs are members of certain Lloyds' of London
syndicates and British insurance companies who sold the company excess loss
insurance policies covering the company's self-insured workers' compensation
program at Electric Boat for four policy years, from July 1, 1988 to June 30,
1992. The plaintiffs allege that when procuring the policies the company and its
brokers made misrepresentations to the plaintiffs and failed to disclose facts
which were material to the risk. The plaintiffs also allege that the company has
been negligent in its administration of workers' compensation claims. The
plaintiffs seek rescission of the policies, a declaratory judgment that the
policies are void, and compensatory damages in an unspecified amount. General
Dynamics has counterclaimed, alleging that the plaintiffs have breached their
insurance contracts by failing to pay claims. General Dynamics seeks a
declaratory judgment that the policies are valid, actual damages, and payment of
a penalty under a Missouri statute for the plaintiffs' vexatious and
unreasonable failure to pay claims. The company does not expect that this case
will have a material impact on the company's results of operations or financial
condition.
On August 16, 1996, plaintiffs HE Holdings, Inc., and Hughes Missile
Systems Company filed an action against General Dynamics Corporation in the
Superior Court for the State of California for the County of Los Angeles. In
June 1998, plaintiffs filed a sixth amended complaint in which plaintiffs were
redesignated as HE Holdings, Inc., now known as Raytheon Company, and Hughes
Missile Systems Company, now known as Raytheon Missile Systems Company
("plaintiffs"). On September 8, 1998, plaintiffs filed a seventh amended
complaint which is now pending. The seventh amended complaint alleges breach of
contract, tortious interference with contract, conversion, fraud, and breach of
the implied covenant of good faith and fair dealing, all with respect to the
Asset Purchase Agreement dated May 8, 1992, for the sale of the company's
missile business, various related leases and other alleged agreements. The
seventh amended complaint seeks approximately $25 in compensatory damages, as
well as punitive damages and declaratory relief. The company does not expect
that the lawsuit will have a material impact on the company's results of
operations or financial condition.
The company is either a named defendant or a third-party defendant in
certain multi-plaintiff tort cases pending in state or federal court in Arizona,
captioned: Cordova, et al. v. Hughes Aircraft Co.; Lanier, et al. v. Hughes
Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et
al. v. Hughes Aircraft Co. In these cases the plaintiffs allege that they
suffered personal injuries and/or property damage from chronic exposure to
drinking water alleged to be contaminated with trace amounts of the industrial
solvent trichloroethylene. The alleged source of the contamination was
industrial facilities in and around the site now occupied by the Tucson
International Airport (TIA) and U.S. Air Force Plant #44. In addition to the
company, defendants are Hughes Aircraft Co. (now Raytheon), the Tucson Airport
authority (TAA), the City of Tucson, (the City) and McDonnell Douglas Corp.
(MDC). In Cordova, the
20
<PAGE> 21
company negotiated a settlement with all but four defendants, who have appealed
the summary judgement entered against them. The company has reached an agreement
to settle all the remaining cases and is negotiating the final terms of the
settlement agreements. Court approval is required for the settlement of these
cases. The company does not believe that these lawsuits will have a material
impact on the company's results of operations or financial condition.
In other litigation concerning the Tucson site, the company is a defendant
in two cases brought in federal district court in Arizona by TAA and the City
under the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA). Plaintiffs seek reimbursement of CERCLA response costs and a
declaration of the company's alleged liability with respect to soil and
groundwater contamination at portions of the Tucson site. On September 30, 1998,
the U.S. Environmental Protection Agency (U.S. EPA) issued a Special Notice
Letter notifying the company that it was a potentially responsible party (PRP)
with respect to contamination of soil and shallow groundwater on and near
property currently occupied by the TIA. Other PRPs receiving a similar notice
were the U.S. Air Force, TAA, MDC and the City. The company has reached an
agreement to settle the litigation brought by TAA and the City and is awaiting
court approval of a consent decree negotiated with the U.S. EPA in response to
the Special Notice Letter. The company does not believe that these lawsuits or
the pending consent decree will have a material impact on the company's results
of operations or financial condition.
The company is also a defendant in other lawsuits and claims and in other
investigations of varying nature. The company believes its liabilities in these
proceedings, in the aggregate, are not material to the company's results of
operations or financial condition.
ENVIRONMENTAL. The company is directly or indirectly involved in certain
Superfund sites in which the company, along with other major U.S. corporations,
has been designated a PRP by the U.S. EPA or a state environmental agency with
respect to past shipments of hazardous waste to sites now requiring
environmental cleanup. Based on a site by site analysis of the estimated
quantity of waste contributed by the company relative to the estimated total
quantity of waste, the company believes its liability at any individual site is
not material. The company is also involved in the investigation, cleanup and
remediation of various conditions at sites it currently or formerly owned or
operated.
The company measures its environmental exposure based on enacted laws and
existing regulations and on the technology expected to be approved to complete
the remediation effort. The estimated cost to perform each of the elements of
the remediation effort is based on when those elements are expected to be
performed. Where a reasonable basis for apportionment exists with other PRPs,
the company estimates only its allowable share of the joint and several
remediation liability for a site, taking into consideration the solvency of
other participating PRPs. Based on a site by site analysis, the company believes
it has adequate accruals for any liability it may incur arising from sites
currently or formerly owned or operated at which there is a known environmental
condition, or Superfund sites at which the company is a PRP.
OTHER. In the ordinary course of business, the company has letters of
credit and other similar instruments with financial institutions and insurance
carriers aggregating approximately $480 at December 31, 1998. For discussion of
other financial guarantees, see Note O. The company's rental commitments under
existing operating leases at December 31, 1998, are not significant.
The company has agreements with certain of its suppliers to procure major
aircraft components such as engines, wings, and avionics. The agreements vary in
length from three to five years and generally provide for price and quantity of
components to be supplied. In connection with the Gulfstream V program, the
company has entered into revenue sharing agreements with two suppliers. The
terms of such agreements require the suppliers to design, manufacture and supply
certain aircraft components in exchange for a fixed percentage of the revenues
of each Gulfstream V sold. Progress payments under the revenue sharing
21
<PAGE> 22
agreements are generally required to be made on a pro rata basis concurrent with
the associated deposits received on Gulfstream V contracts.
As of December 31, 1998, in connection with orders for 21 Gulfstream V
aircraft in backlog, the company has offered customers trade-in options (which
may or may not be exercised by the customer) under which the company will
accept trade-in aircraft (primarily Gulfstream IVs and IV-SPs) at a guaranteed
minimum trade-in price. Additionally, in connection with recorded sales of new
aircraft, at December 31, 1998 the company has a commitment to accept pre-owned
aircraft totaling $210. Management believes that the fair market value of all
such aircraft exceeds the specified trade-in value.
Q. TERMINATION OF A-12 PROGRAM
The A-12 contract was a fixed-price incentive contract for the full-scale
development and initial production of the Navy's new carrier-based Advanced
Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for
default. Both the company and McDonnell Douglas, now owned by the Boeing
Company, (the contractors) were parties to the contract with the Navy, each had
full responsibility to the Navy for performance under the contract, and both are
jointly and severally liable for potential liabilities arising from the
termination. As a consequence of the termination for default, the Navy demanded
that the contractors repay $1,352 in unliquidated progress payments, but agreed
to defer collection of the amount pending a decision by the U.S. Court of
Federal Claims on the contractors' challenge to the termination for default, or
a negotiated settlement.
The contractors filed a complaint on June 7, 1991, in the U.S. Court of
Federal Claims contesting the default termination. The suit, in effect, seeks to
convert the termination for default to a termination for convenience of the U.S.
government and seeks other legal relief. A trial on Count XVII of the complaint,
which relates to the propriety of the process used in terminating the contract
for default, was concluded in October 1993. In December 1994, the court issued
an order vacating the termination for default. On December 19, 1995, following
further proceedings, the court issued an order converting the termination for
default to a termination for convenience. On March 31, 1998, a final judgment
was entered in favor of the contractors for $1,200 plus interest.
The U.S. government filed an appeal from the trial court's ruling in the
U.S. Court of Appeals for the Federal Circuit. On July 1, 1999, the Court of
Appeals found that the trial court erred in converting the termination for
default to a termination for convenience without first determining whether a
default existed. The Court of Appeals remanded the case for determination of
whether the government's default termination was justified. The Court of Appeals
stated that it was expressing no view on that issue, and it left the parties the
opportunity to fully litigate that issue on remand.
The company continues to believe that the government's default termination
was improper, both as to process (the basis relied upon by the trial court) and
because the contractors were not in default. The company continues to believe
that at a full trial it will be able to demonstrate that the default termination
was not justified and that the termination for default will be converted to a
termination for convenience. If the company is successful in such a new trial,
it could result in the same, a lesser or a greater award to the contractors.
The company has fully reserved the contracts in process balance associated
with the A-12 program and has accrued the company's estimated termination
liabilities and the liability associated with pursuing the litigation through
the appeals process and remand proceedings. In the event that the contractors
are ultimately found to have been in default under the A-12 contract and are
required to repay all unliquidated
22
<PAGE> 23
progress payments, additional losses of approximately $675, plus interest, may
be recognized by the company. The company believes the possibility of this
result is remote.
R. INCENTIVE COMPENSATION PLAN
Under the 1997 Incentive Compensation Plan, the company may grant awards in
combination of cash, common stock, stock options and restricted stock. The plan
complies with the Securities and Exchange Commission's Rule 16b-3 and with the
Internal Revenue Code Section 162(m).
In October 1993, the company introduced a long-term incentive program which
granted stock options and restricted stock. The stock options are exercisable at
the fair market value of the common stock on the date of grant generally with 50
percent of the stock options vesting on the one-year anniversary of their grant
and the remaining 50 percent vesting on the two-year anniversary of their grant.
The stock options have a maximum term of five years. The restricted stock has a
feature that will increase or decrease the number of shares initially granted
based on movement in the company's stock price from the date of grant to the end
of a specific performance period (generally 18 to 24 months). Once the number
granted has been adjusted, restrictions will continue to be imposed for an
additional two years, at which time all restrictions will lapse. Prior to
October 1993, stock options granted under the company's incentive compensation
plans were awarded for a maximum term of ten years and were exercisable in their
entirety beginning 18 months after the date of award.
Generally, Gulfstream options granted prior to July 1, 1994 vest 25.0% on
date of issuance, 25.0% on the first anniversary of the date of issuance and
25.0% annually thereafter. Generally, Gulfstream options granted on or after
July 1, 1994, vest 33.3% on the first anniversary of the date of issuance, 33.3%
on the second anniversary of the date of issuance and the last 33.3% on the
third anniversary of the date of issuance. Based on the terms of the Gulfstream
options granted, many options experienced accelerated vesting upon the change in
control.
There were 507,340, 345,860 and 91,546 shares of restricted stock awarded
in 1998, 1997 and 1996, respectively. There were 1,219,535 shares of restricted
stock outstanding at December 31, 1998.
23
<PAGE> 24
Information with respect to stock options is as follows:
<TABLE>
<CAPTION>
==============================================================================================
Year Ended December 31
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMBER OF SHARES UNDER STOCK OPTIONS:
Outstanding at beginning of year 10,072,286 9,382,983 13,297,019
Granted 3,770,314 2,910,252 1,157,600
Exercised (4,803,536) (1,904,259) (4,939,356)
Canceled (366,736) (316,690) (132,280)
- ----------------------------------------------------------------------------------------------
Outstanding at end of year 8,672,328 10,072,286 9,382,983
- ----------------------------------------------------------------------------------------------
Exercisable at end of year 4,470,291 5,715,494 6,676,326
==============================================================================================
WEIGHTED AVERAGE EXERCISE PRICE:
Outstanding at beginning of year $ 16.28 $ 12.41 $ 10.45
Granted 45.92 29.70 7.23
Exercised 13.24 17.73 5.63
Canceled 27.93 16.33 22.81
Outstanding at end of year 30.35 16.28 12.41
Exercisable at end of year 19.29 9.66 12.66
==============================================================================================
</TABLE>
24
<PAGE> 25
Information with respect to stock options outstanding and stock options
exercisable at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
====================================================================================================
Options Outstanding
NUMBER WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE REMAINING AVERAGE
EXERCISE PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$3.11-11.37 2,185,718 5.00 years $ 4.09
19.91-29.00 752,344 5.96 25.36
29.06-33.88 2,031,966 2.78 31.93
36.50-50.06 3,702,300 7.65 46.01
- ----------------------------------------------------------------------------------------------------
8,672,328
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=========================================================================
Options Exercisable
WEIGHTED
RANGE OF NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING AT 12/31/98 EXERCISE PRICE
- -------------------------------------------------------------------------
<S> <C> <C>
$3.11-11.37 2,080,380 $ 4.10
19.91-29.00 508,711 24.99
29.06-33.88 1,370,000 31.42
36.50-50.06 511,200 42.98
- -------------------------------------------------------------------------
4,470,291
=========================================================================
</TABLE>
At December 31, 1998, 6,071,881 treasury shares have been reserved for
options that may be granted in the future, in addition to the shares reserved
for issuance on the exercise of options outstanding. In connection with the
acquisition of Gulfstream, an additional 4.1 million shares have been reserved
for issuance upon the exercise of stock options which, prior to the merger, had
been options to purchase Gulfstream common stock.
Had compensation cost for stock options been determined based on the fair
value at the grant dates for awards under the company's incentive compensation
plans, the company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
===============================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Earnings: As Reported $589 $559 $317
Pro Forma $578 $553 $314
Net Earnings Per Share - Basic: As Reported $2.95 $2.80 $1.58
Pro Forma $2.90 $2.77 $1.57
Net Earnings Per Share - Diluted: As Reported $2.91 $2.73 $1.54
Pro Forma $2.86 $2.70 $1.53
Weighted average fair value of $13.48 $6.25 $9.37
options granted
===============================================================================================
</TABLE>
25
<PAGE> 26
The compensation cost calculated under the fair value approach shown above
is recognized over the vesting period of the stock options.
The fair value is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants in all years
presented: (1) expected dividend yields from 1.9% to 2.5%, (2) expected
volatility from 17.6% to 46.1%, (3) risk-free interest rates from 4.8% to 6.4%
and (4) expected lives from 4 months to 3 years.
S. RETIREMENT PLANS
The company provides defined pension and other postretirement benefits to
employees. The following is a reconciliation of the benefit obligations,
plan/trust assets, and funded status of the company's plans:
GENERAL DYNAMICS PLANS
<TABLE>
<CAPTION>
=========================================================================================================================
CHANGE IN BENEFIT OBLIGATION Pension Benefits Other Postretirement Benefits
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ (3,339) $ (2,597) $ (620) $ (628)
Service cost (63) (52) (4) (4)
Interest cost (233) (210) (43) (44)
Amendments (57) (28) 36 66
Actuarial loss (211) (95) (43) (5)
Acquisitions (69) (526) (13) (59)
Benefits paid 203 169 52 54
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ (3,769) $ (3,339) $ (635) $ (620)
=========================================================================================================================
<CAPTION>
CHANGE IN PLAN/TRUST ASSETS Pension Benefits Other Postretirement Benefits
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of assets at beginning of year $ 4,491 $ 3,356 $ 241 $ 203
Actual return on plan/trust assets 873 741 48 43
Acquisitions 29 545 - -
Employer contributions 33 18 17 20
Benefits paid (203) (169) (25) (25)
- -------------------------------------------------------------------------------------------------------------------------
Fair value of assets at end of year $ 5,223 $ 4,491 $ 281 $ 241
=========================================================================================================================
=========================================================================================================================
<CAPTION>
FUNDED STATUS RECONCILIATION Pension Benefits Other Postretirement Benefits
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status $ 1,454 $ 1,152 $ (354) $ (379)
Unrecognized net actuarial gain (1,262) (919) (65) (76)
Unrecognized prior service cost 250 253 2 3
Unrecognized transition (asset)/obligation (24) (35) 71 130
- -------------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 418 $ 451 $ (346) $ (322)
=========================================================================================================================
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
=============================================================================================================================
ASSUMPTIONS AT DECEMBER 31 Pension Benefits Other Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Varying rates of increase in
Compensation levels based on age 4.5-10% 4.5-10% 4.5-10%
Expected long-term rate of return on
Assets 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Assumed health care cost trend rate for next year:
Post-65 claim groups 4.50% 5.00% 6.00%
Pre-65 claim groups 6.50% 7.50% 8.50%
=============================================================================================================================
</TABLE>
Net periodic pension and other postretirement benefits costs included the
following:
<TABLE>
<CAPTION>
============================================================================================================
Pension Benefits Other Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 63 $ 52 $ 50 $ 4 $ 4 $ 7
Interest cost 233 210 182 43 44 46
Expected return on plan assets (309) (272) (247) (16) (14) (13)
Recognized net actuarial (gain) loss (10) (8) 8 (4) (3) (1)
Amortization of unrecognized
transition (asset)/obligation (8) (8) (8) 23 24 29
Amortization of prior service cost 27 25 23 - - 1
- ------------------------------------------------------------------------------------------------------------
$ (4) $ (1) $ 8 $ 50 $ 55 $ 69
============================================================================================================
</TABLE>
PENSION BENEFITS. General Dynamics has 14 trusteed, noncontributory, qualified
defined benefit pension plans covering substantially all employees. Under
certain of the plans, benefits are primarily a function of both the employee's
years of service and level of compensation, while under other plans, benefits
are a function primarily of years of service.
It is the company's policy to fund the plans to the maximum extent
deductible under existing federal income tax regulations. Such contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
Under SFAS No. 87, "Employers' Accounting for Pensions," the company is
required to assume a discount rate at which the obligation could be currently
settled. Reflecting the movement in interest rates, the company decreased its
discount rate assumption from 7.25 percent to 6.75 percent at December 31, 1998,
which increased the projected benefit obligation $210.
Changes in prior service cost resulting from plan amendments are amortized
on a straight-line basis over the average remaining service period of employees
expected to receive benefits under the plan.
Since 1992, the company has deferred certain gains realized by the
commercial plan for the purpose of offsetting any costs associated with its
final disposition, either through reversion or other actions. These deferred
gains have been classified against the prepaid pension cost resulting in a net
asset of $125 and $136 at December 31, 1998 and 1997, respectively, which is
included in other noncurrent assets on the Supplemental Consolidated Balance
Sheet.
The company's contractual arrangements with the U.S. government provide for
the recovery of contributions to the company's government plans. Historically,
the amount contributed to these plans, charged to contracts and included in net
sales has exceeded the net periodic pension cost included in operating costs and
expenses as determined under SFAS 87. Therefore, the company has deferred
recognition of earnings resulting from the difference between contributions and
net periodic pension cost to provide better matching of revenues and expenses.
Similarly, pension settlements and curtailments under the government plans have
also been deferred.
27
<PAGE> 28
As the U.S. government will receive an equitable interest in the excess assets
of a government pension plan in the event of plan termination, the
aforementioned deferrals have been classified against the prepaid pension cost
related to the government plans resulting in the recognition of no net asset on
the Supplemental Consolidated Balance Sheet.
At December 31, 1998, approximately 55 percent of the plans' assets are
invested in securities of the U.S. government or its agencies, 30 percent in
diversified U.S. common stocks, 12 percent in mortgage-backed securities and 3
percent in diversified U.S. corporate debt securities.
In addition to the qualified defined benefit plans, the company provides
eligible employees the opportunity to participate in defined contribution
savings plans that permit contributions on both a pretax and after-tax basis.
Generally, salaried employees and certain hourly employees are eligible to
participate upon commencement of employment with the company. Under most plans,
the employee may contribute to various investment alternatives, including
investment in the company's common stock. In certain of the plans, the company
matches a portion of the employees' contributions with contributions to a fund
which invests in the company's common stock. The company's contributions to the
defined contribution plans amounted to $37, $27 and $22 in 1998, 1997 and 1996,
respectively. The increase in 1998 over 1997 contributions is primarily
attributable to the acquisitions discussed in Note C. Approximately 13 and 12
million shares of the company's common stock were held by the defined
contribution plans at December 31, 1998 and 1997, respectively.
The company also sponsors several unfunded non-qualified supplemental
executive plans that provide participants with additional benefits, including
any excess of such benefits over limits imposed on qualified plans by federal
law. The recorded liability and expense related to these plans are not material
to the company's results of operations and financial condition.
OTHER POSTRETIREMENT BENEFITS. General Dynamics maintains plans providing
postretirement health care coverage for many of its current and former
employees. Postretirement life insurance benefits are also provided to certain
retirees. These benefits vary by employment status, age, service and salary
level at retirement. The coverage provided and the extent to which the retirees
share in the cost of the program vary throughout the company. Both health and
life insurance benefits are provided only to those employees who retire directly
from the service of the company and not to those who terminate service/seniority
prior to eligibility for retirement.
General Dynamics has established several Voluntary Employee's Beneficiary
Association (VEBA) trusts for certain of its plans. Funding of these VEBA trusts
approximates an amount equal to the related annual net periodic postretirement
benefit cost. The remaining plans are primarily funded as claims are received.
As previously stated, the company decreased its discount rate assumption
from 7.25 percent to 6.75 percent at December 31, 1998, which increased the
accumulated postretirement benefit obligation $32.
The health care cost trend rates are assumed to gradually decline to 4.5
percent and 5 percent for post-65 and pre-65 claim groups, respectively, in the
year 2002 and thereafter over the projected payout period of the benefits.
28
<PAGE> 29
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of service
and interest cost components $ 3 $ (3)
Effect on accumulated
postretirement benefit
obligation $ 47 $ (40)
</TABLE>
At December 31, 1998, approximately 57 percent of the trusts' assets were
invested in diversified U.S. common stocks, 5 percent in mortgage-backed
securities, 25 percent in securities of the U.S. government and its agencies and
13 percent in diversified U.S. corporate debt securities.
The company's contractual arrangements with the U.S. government provide for
the recovery of contributions to a VEBA, and for non-funded plans, for costs
based on claims paid. The net periodic postretirement benefit cost exceeds the
company's cost currently allocable to contracts. To the extent the company has
contracts in backlog sufficient to recover the excess cost, the company is
deferring the charge in contracts in process until such time that the cost is
allocable to contracts.
GULFSTREAM PLANS
The following information is based on an actuarial valuation date as of
September 30, and amounts recognized in the supplemental consolidated financial
statements as of December 31.
<TABLE>
<CAPTION>
==========================================================================================================================
CHANGE IN BENEFIT OBLIGATION Pension Benefits Other Benefits
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ (255) $ (213) $ (97) $ (87)
Service cost (18) (13) (6) (4)
Interest cost (19) (17) (7) (7)
Amendments - - 3 -
Actuarial loss (41) (20) - (2)
Benefits paid 8 8 4 3
- --------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ (325) $ (255) $ (103) $ (97)
==========================================================================================================================
<CAPTION>
CHANGE IN PLAN ASSETS Pension Benefits Other Benefits
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of assets at beginning of year $ 239 $ 164 $ - $ -
Actual return on plan assets 9 50 - -
Employer contributions 25 33 4 3
Benefits paid (8) (8) (4) (3)
- --------------------------------------------------------------------------------------------------------------------------
Fair value of assets at end of year $ 265 $ 239 $ - $ -
==========================================================================================================================
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
================================================================================================================================
FUNDED STATUS RECONCILIATION Pension Benefits Other Benefits
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status $ (60) $ (16) $ (103) $ (97)
Unrecognized net actuarial loss/(gain) 49 (4) (15) (16)
Unrecognized prior service cost/(benefit) 6 6 (16) (7)
Contributions paid in fourth quarter 6 6 15 1
- --------------------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 1 $ (8) $ (119) $ (119)
================================================================================================================================
<CAPTION>
================================================================================================================================
ASSUMPTIONS AT DECEMBER 31 Pension Benefits Other Benefits
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.50% 8.00% 6.75% 7.50% 8.00%
Varying rates of increase in
Compensation levels based on age 4.75% 4.75% 4.75%
Expected long-term rate of return on
Assets 9.50% 9.50% 9.50%
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligation in
excess of plan assets were $21, $21 and $20, respectively, as of December 31,
1998, and $17, $17 and $18, respectively, as of December 31, 1997.
Net periodic pension and other benefits costs included the following:
<TABLE>
<CAPTION>
================================================================================================================================
Pension Benefits Other Benefits
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 18 $ 12 $ 12 $ 6 $ 4 $ 4
Interest cost 19 17 15 7 7 7
Expected return on plan assets (20) (16) (13) - - -
Recognized net actuarial gain - - - - (1) -
Amortization of prior service cost - - - (1) - (1)
- --------------------------------------------------------------------------------------------------------------------------------
$17 $13 $14 $ 12 $ 10 $ 10
================================================================================================================================
</TABLE>
PENSION BENEFITS. Gulfstream maintains four defined benefit pension plans
covering substantially all employees. Benefits paid to retirees are based
primarily on age at retirement, years of credited service and compensation
earned during employment. Gulfstream's funding policy complies with the
requirements of federal laws and regulations. Gulfstream's total pension fund
contributions were $25, $25 and $34 in 1998, 1997 and 1996, respectively.
Effective August 19, 1998, and as part of the acquisition described in Note C,
Gulfstream adopted a new pension plan, covering all employees of the acquired
company and all non-vested employees of Gulfstream except for those covered
under a collective bargaining agreement.
OTHER BENEFIT PLANS. In addition to pension benefits, Gulfstream provides
certain health care insurance benefits to retired employees and their
dependents. Gulfstream currently funds these plans on a pay-as-you-go basis.
Substantially all of Gulfstream's salaried employees and certain hourly
employees become eligible for such benefits when they attain certain age and
service requirements while employed by the company. In December 1998, a VEBA was
established and funded with $14 of Gulfstream funds for the
30
<PAGE> 31
purpose of paying retiree claims.
Gulfstream has supplemental benefit plans covering certain key executives.
These plans provide benefits which supplement those provided by the other
retirement plans.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
---------------- ----------------
<S> <C> <C>
Effect on total of service
and interest cost components $ 2 $ (2)
Effect on accumulated
postretirement benefit
obligation $14 $(12)
</TABLE>
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of medicare ineligible employees' covered health care benefits was
assumed for 1998. The rate was assumed to decrease annually by 0.75 percent to
5.0 percent and remain at that level thereafter. For medicare eligible
employees, a 5.25 percent annual rate of increase in the per capita cost of
health care benefits was assumed for 1998. The rate was assumed to decrease
annually by 0.75 percent to 4.5 percent and remain at that level thereafter.
Gulfstream sponsors two voluntary 401(k) investment plans which cover
all eligible employees and are designed to enhance existing retirement plans.
Gulfstream matches either 37.5 percent or 50.0 percent of the employee's
contribution up to a maximum of four percent of the employee's eligible
compensation.
Gulfstream has an Incentive Compensation Plan which provides for payment
of cash awards to officers and key employees based upon achievement of specific
goals by the company and the participating employees. In each of the years
ended 1998, 1997 and 1996, provisions of approximately $6 were charged against
income related to the plan. Payouts are based entirely on the achievement of
financial and business objectives.
31
<PAGE> 32
T. BUSINESS SEGMENT INFORMATION
Management has chosen to organize its business segments in accordance
with several factors, including a combination of the nature of products and
services offered, the nature of the production processes and the class of
customer for the company's products. Operating segments are aggregated for
reporting purposes consistent with these criteria. Management measures its
segments' profit based primarily on operating earnings. As such, net interest
and other income items have not been allocated to the company's segments. For a
further description of the company's business segments, see Management's
Discussion and Analysis of the Results of Operations and Financial Condition.
Summary financial information for each of the company's segments
follows:
<TABLE>
<CAPTION>
NET SALES OPERATING EARNINGS SALES TO U.S. GOVERNMENT
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marine Systems* $2,529 $2,248 $2,332 $276 $227 $216 $2,519 $2,280 $2,316
Aerospace 2,428 1,904 1,064 373 229 51 135 59 29
Combat Systems* 1,272 1,387 1,026 166 179 140 1,165 1,371 996
Information Systems
& Technology* 933 185 - 69 15 - 477 - -
Other 236 242 223 34 26 (2) - - -
------- ------ ------ ---- ---- ---- ------ ------ ------
$ 7,398 $5,966 $4,645 $918 $676 $405 $4,296 $3,710 $3,341
======= ====== ====== ==== ==== ==== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION, DEPLETION
IDENTIFIABLE ASSETS CAPITAL EXPENDITURES AND AMORTIZATION
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marine Systems* $1,266 $ 706 $ 806 $ 78 $ 28 $18 $ 35 $31 $40
Aerospace 1,570 1,399 1,291 28 30 18 35 33 27
Combat Systems* 923 645 336 18 13 14 27 22 12
Information Systems
& Technology* 1,250 1,404 - 16 4 - 45 17 -
Other 406 371 388 16 19 12 15 17 12
Corporate** 736 1,032 1,769 30 19 31 4 4 3
------ ------ ------ ---- ---- ---- ---- ---- ---
$6,151 $5,557 $4,590 $186 $113 $93 $161 $124 $94
====== ====== ====== ==== ==== ==== ==== ==== ===
</TABLE>
* During the first quarter of 1999, management realigned its information
technology resource businesses, resulting in a different composition of
reportable segments. Segment data for all years presented has been restated to
give recognition to the 1999 composition of reportable segments.
** Corporate identifiable assets include cash and equivalents and
marketable securities, deferred taxes, real estate held for development and
net prepaid pension cost related to the company's commercial pension plans.
32
<PAGE> 33
The following table presents revenues by geographic area of the location
of the company's customers:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
North America
United States $ 6,386 $ 5,334 $ 4,322
Canada and Mexico 290 67 5
----- ----- -----
Total North America 6,676 5,401 4,327
Asia/Pacific 280 236 95
Africa/Middle East 173 40 92
Europe 191 201 33
Latin America/Other 78 88 98
------- ------- -------
Total $ 7,398 $ 5,966 $ 4,645
======= ======= =======
</TABLE>
U. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
NET EARNINGS MARKET PRICE
PER SHARE (a) RANGE
NET OPERATING NET -------------- ----------- DIVIDENDS
SALES EARNINGS EARNINGS BASIC DILUTED HIGH LOW DECLARED (b)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
4th Quarter $2,207 $255 $160 $.81 $.79 $62 $49 1/4 $.22
3rd Quarter 1,798 243 159 .79 .78 55 42 7/8 .22
2nd Quarter 1,735 227 148 .74 .73 48 3/8 40 1/4 .22
1st Quarter 1,658 193 122 .62 .61 45 3/4 41 25/32 .22
1997
4th Quarter $1,642 $194 $127 $.64 $.62 $44 7/16 $37 31/32 $.205
3rd Quarter 1,452 174 201 1.01 .99 45 3/4 37 .205
2nd Quarter 1,555 159 120 .60 .58 38 15/16 31 9/16 .205
1st Quarter 1,317 149 111 .55 .54 36 1/8 32 13/16 .205
</TABLE>
Note: Quarterly data is based on a 13 week period.
(a) The sum of the earnings per share for the four quarters in 1998 differs from
the annual earnings per share due to the required method of computing the
weighted average number of shares in interim periods.
(b) Represents dividends declared per share on General Dynamics' common stock.
33
<PAGE> 34
STATEMENT OF FINANCIAL RESPONSIBILITY
To the Shareholders of General Dynamics Corporation:
The management of General Dynamics Corporation is responsible for the
supplemental consolidated financial statements and all related financial
information contained in this report. The supplemental financial statements,
which include amounts based on estimates and judgments, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis.
The company maintains a system of internal accounting controls designed and
intended to provide reasonable assurance that assets are safeguarded, that
transactions are executed and recorded in accordance with management's
authorization and that accountability for assets is maintained. An environment
that establishes an appropriate level of control consciousness is maintained and
monitored by management. An important element of the monitoring process is an
internal audit program that independently assesses the effectiveness of the
control environment.
The Audit and Corporate Responsibility Committee of the board of directors,
which is composed of four outside directors, meets periodically and, when
appropriate, separately with the independent auditors, management and internal
audit to review the activities of each.
The supplemental financial statements have been audited by Arthur Andersen
LLP, independent public accountants, whose report follows.
<TABLE>
<S> <C>
/s/ Michael J. Mancuso /s/ John W. Schwartz
- ------------------------ ----------------------
Michael J. Mancuso John W. Schwartz
Senior Vice President and Chief Financial Officer Vice President and Controller
</TABLE>
34
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To General Dynamics Corporation:
We have audited the accompanying Consolidated Balance Sheet of General
Dynamics Corporation (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997, and the related Consolidated Statements of Earnings,
Shareholders' Equity and Cash Flows for each of the three years in the period
ended December 31, 1998. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of General Dynamics Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
We have also made a similar audit of the accompanying Supplemental
Consolidated Balance Sheet of General Dynamics Corporation and subsidiaries at
December 31, 1998 and 1997, and the related Supplemental Consolidated Statements
of Income, Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1998. The supplemental consolidated
statements give retroactive effect to the merger with Gulfstream Aerospace
Corporation on July 30, 1999, which has been accounted for as a pooling of
interests as described in Note C. These supplemental financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these supplemental financial statements based on our audits.
We did not audit the financial statements of Gulfstream Aerospace
Corporation included in the supplemental consolidated financial statements of
General Dynamics Corporation, which statements reflect total assets and total
revenues constituting 26 percent and 33 percent, respectively in 1998, and 26
percent and 32 percent, respectively, in 1997, of the related supplemental
consolidated totals. These statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to amounts included for Gulfstream Aerospace Corporation,
is based solely upon the report of the other auditors.
35
<PAGE> 36
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, based upon our audit and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Dynamics
Corporation and its subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, after giving retroactive effect to
the merger with Gulfstream Aerospace Corporation as described in Note C, all in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -------------------------
ARTHUR ANDERSEN LLP
Washington, D.C.
August 2, 1999
36
<PAGE> 37
SELECTED FINANCIAL DATA (UNAUDITED)
The following table presents summary selected historical financial data
derived from the audited Supplemental Consolidated Financial Statements and
other information of the company for each of the five years presented. The
following information should be read in conjunction with Management's Discussion
and Analysis of the Results of Operations and Financial Condition and the
audited Supplemental Consolidated Financial Statements and related Notes
thereto.
(Dollars in millions, except per share and employee amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 7,398 $ 5,966 $ 4,645 $ 4,109 $ 3,960
Operating costs and expenses 6,480 5,290 4,240 3,753 3,596
Interest (expense) income, net (17) 16 51 42 2
Provision for income taxes 315 130 140 127 119
Earnings from continuing operations 589 559 317 276 247
Basic earnings per share from
continuing operations 2.95 2.80 1.58 N/A (b) N/A (b)
Diluted earnings per share from
continuing operations 2.91 2.73 1.54 N/A (b) N/A (b)
Cash dividends per common stock
share (a) .88 .82 .82 .75 .70
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION AT DECEMBER 31
Cash and equivalents and
marketable securities $ 258 $ 748 $ 1,127 $ 1,318 $ 1,082
Property, plant and equipment, net 901 770 616 571 402
Total assets 6,151 5,557 4,590 4,103 3,375
Short- and long-term debt 530 645 438 184 218
Short- and long-term debt-
finance operations 140 118 135 146 161
Shareholders' equity 2,415 2,008 1,525 1,784 1,505
Book value per share 12.12 10.02 7.62 9.30 7.83
OTHER INFORMATION
Funded backlog $ 10,594 $ 9,578 $ 9,265 $ 7,165 $ 6,062
Total backlog 17,900 12,381 13,454 9,324 7,506
Shares outstanding at December 31 199.3 200.3 200.1 191.9 192.2
Basic weighted average shares outstanding 199.5 199.8 200.2 N/A (b) N/A (b)
Diluted weighted average shares outstanding 202.2 204.5 205.5 N/A (b) N/A (b)
Active employees at December 31:
Total company 38,440 34,800 28,300 32,000 28,100
Excluding discontinued operations 38,440 34,800 28,300 31,100 25,200
</TABLE>
(a) Represents dividends declared per share on General Dynamics' common stock.
(b) Gulfstream completed its initial public offering during 1996.
37
<PAGE> 1
EXHIBIT 99.4
[GENERAL DYNAMICS LETTERHEAD]
GENERAL DYNAMICS COMPLETES ACQUISITION
OF GULFSTREAM AEROSPACE CORPORATION
SHAREHOLDERS OVERWHELMINGLY APPROVE MERGER
FALLS CHURCH, VA - General Dynamics (NYSE: GD) and Gulfstream Aerospace
Corporation (NYSE: GAC) announced today that they have completed the merger of
their two companies. The transaction creates a company of 38,000 employees and
estimated 1999 sales of $8.2 billion, with leading market positions in business
aviation, land and amphibious combat systems, shipbuilding and marine systems,
and information systems.
Shareholders of both companies voted overwhelmingly in favor of the
transaction at separate meetings held this morning in New York and Falls Church,
Virginia. The two companies had announced on May 17, 1999, their agreement for
General Dynamics to acquire Gulfstream in a one-for-one stock swap. The value of
the transaction is approximately $4.8 billion, based on General Dynamics' July
29, 1999, closing price of $66.125 per share. Gulfstream's final day of trading
is today; it closed yesterday at $66.125 per share. General Dynamics expects to
issue approximately 72.2 million shares of stock to complete the transaction.
Gulfstream, a leading designer, developer, manufacturer and marketer of
large cabin and ultra-long range business aircraft, is now a wholly owned
subsidiary of General Dynamics. It will retain its name and will continue to be
based in Savannah, Georgia. No major changes are planned for existing
management, work force, operations or facilities.
"This is a great deal for the shareholders of both companies, and
we're proud to welcome Gulfstream to General Dynamics," said Nicholas
D. Chabraja, General Dynamics chairman and
(more)
1
<PAGE> 2
GENERAL DYNAMICS
chief executive officer. "The transaction is immediately and strongly accretive
to General Dynamics' earnings and cash flow. Gulfstream is a solid and well-run
business, and an excellent strategic fit. Quite simply, Gulfstream makes the
best business aircraft in the world - and we believe that it will reach its full
potential for significant growth as part of this company. Together, we will
leverage our complementary technical, manufacturing and marketing expertise to
continue to deliver outstanding financial performance in the years to come."
Beginning in the third quarter, Gulfstream will record financial results
as General Dynamics' fourth major business group, to be called Aerospace. The
other three groups are Marine Systems, Combat Systems, and Information Systems
and Technology. Gulfstream had 1998 revenues of $2.4 billion and earnings of
$225.3 million; it ended the second quarter of 1999 with a $3.9 billion backlog
of 122 aircraft. General Dynamics had 1998 sales of $5 billion and earnings of
$542 million; it ended the second quarter of 1999 with a total backlog of $14.1
billion.
(- 30 - )
2
