<PAGE> 1
================================================================================
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)
<TABLE>
<S> <C> <C>
Delaware 1-3671 13-1673581
-------- ------ ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
3190 Fairview Park Drive, Falls Church, Virginia 22042-4523
------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(703) 876-3000
--------------
Registrant's telephone number, including area code
================================================================================
<PAGE> 2
Item 5. Other Events
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.
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
Exhibit 99.1. 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
None.
(b) Pro forma financial information
None.
(c) Exhibits
Exhibit 99.1 - Unaudited Supplemental Consolidated Financial
Statements and Management's Discussion and Analysis of
General Dynamics Corporation for the quarterly period
ended July 4, 1999 (as restated to reflect the
acquisition of Gulfstream Aerospace Corporation on July
30, 1999)
-2-
<PAGE> 3
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 17, 1999
-3-
<PAGE> 1
Exhibit 99.1
GENERAL DYNAMICS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1- Supplemental Consolidated Financial Statements
Supplemental Consolidated Balance Sheet 2
Supplemental Consolidated Statement of Earnings (Three Months) 3
Supplemental Consolidated Statement of Earnings (Six Months) 4
Supplemental Consolidated Statement of Cash Flows 5
Notes to Unaudited Supplemental Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis 15
</TABLE>
1
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
July 4 December 31
1999 1998
------------------ ------------------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 379 $ 165
Marketable securities 133 93
------------------ ------------------
512 258
Accounts receivable 678 580
Contracts in process 1,168 952
Inventories 871 804
Other current assets 382 391
------------------ ------------------
Total Current Assets 3,611 2,985
------------------ ------------------
NONCURRENT ASSETS:
Leases receivable - finance operations 175 181
Real estate held for development 63 65
Property, plant and equipment, net 929 901
Intangible assets 1,780 1,784
Other assets 265 235
------------------ ------------------
Total Noncurrent Assets 3,212 3,166
------------------ ------------------
$ 6,823 $ 6,151
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 77 $ 77
Short-term debt - finance operations 18 58
Accounts payable 399 477
Other current liabilities 2,006 1,760
------------------ ------------------
Total Current Liabilities 2,500 2,372
------------------ ------------------
NONCURRENT LIABILITIES:
Long-term debt 416 453
Long-term debt - finance operations 73 82
Other liabilities 979 829
Commitments and contingencies (See Note J)
------------------ ------------------
Total Noncurrent Liabilities 1,468 1,364
------------------ ------------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus 477 484
Retained earnings 3,077 2,639
Treasury stock (694) (706)
Accumulated other comprehensive income (5) (2)
------------------- -------------------
Total Shareholders' Equity 2,855 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
-------------------------------------------
July 4 June 28
1999 1998
------------------ ------------------
<S> <C> <C>
NET SALES $ 2,087 $ 1,735
OPERATING COSTS AND EXPENSES 1,808 1,508
------------------ ------------------
OPERATING EARNINGS 279 227
Interest expense, net (5) (4)
Other (expense) income, net (4) 4
------------------- -------------------
EARNINGS BEFORE INCOME TAXES 270 227
Provision for income taxes 95 79
------------------ ------------------
NET EARNINGS $ 175 $ 148
================== ==================
NET EARNINGS PER SHARE:
Basic $ .88 $ .74
================== ==================
Diluted $ .86 $ .73
================== ==================
DIVIDENDS PER SHARE $ .24 $ .22
================== ==================
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 136 $ 120
================== ==================
</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 EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
July 4 June 28
1999 1998
------------------ ------------------
<S> <C> <C>
NET SALES $ 4,089 $ 3,392
OPERATING COSTS AND EXPENSES 3,569 2,972
------------------ ------------------
OPERATING EARNINGS 520 420
Interest expense, net (11) (8)
Other income, net 5 3
------------------ -------------------
EARNINGS BEFORE INCOME TAXES 514 415
(BENEFIT) / PROVISION FOR INCOME TAXES
R&E Tax Credit (165) -
Provision 181 145
------------------ ------------------
16 145
------------------ ------------------
NET EARNINGS $ 498 $ 270
================== ==================
NET EARNINGS PER SHARE:
Basic $ 2.50 $ 1.35
================== ==================
Diluted $ 2.46 $ 1.33
================== ==================
DIVIDENDS PER SHARE $ .48 $ .44
================== ==================
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 263 $ 238
================== ==================
</TABLE>
The accompanying Notes to Unaudited Supplemental Consolidated Financial
Statements are an integral part of this statement.
4
<PAGE> 5
GENERAL DYNAMICS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------------
July 4 June 28
1999 1998
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 498 $ 270
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 92 77
Decrease (Increase) in -
Marketable securities (88) (31)
Accounts receivable (98) 15
Contracts in process (16) (115)
Inventories (122) (118)
Other current assets 37 6
Increase (Decrease) in -
Accounts payable and other current liabilities (143) 22
Customer deposits 143 (1)
Current income taxes 183 (3)
Deferred income taxes 40 60
Other, net (39) (9)
------------------- -------------------
Net cash provided by continuing operations 487 173
Net cash used by discontinued operations (3) (4)
------------------- -------------------
Net Cash Provided by Operating Activities 484 169
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (71) 12
Purchases of available-for-sale securities (24) (132)
Sales/maturities of available-for-sale securities 73 85
Capital expenditures (77) (76)
Proceeds from sale of assets 13 16
Other - (3)
------------------- -------------------
Net Cash Used by Investing Activities (86) (98)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt, net (45) (146)
Repayments of debt - finance operations (49) (9)
Dividends paid (58) (53)
Purchase of common stock (59) -
Proceeds from option exercises 14 (149)
Other 13 37
------------------- -------------------
Net Cash Used by Financing Activities (184) (320)
------------------- -------------------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 214 (249)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 165 643
------------------- -------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 379 $ 394
=================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Income taxes $ 95 $ 99
Interest (including finance operations) $ 21 $ 25
</TABLE>
The accompanying Notes to Unaudited Supplemental Consolidated Financial
Statements are an integral part of this statement.
5
<PAGE> 6
GENERAL DYNAMICS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of 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- and six-month periods ended July 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 the company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 11, 1999, and incorporated
herein by reference.
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-
and six-month periods ended July 4, 1999 and June 28, 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.
6
<PAGE> 7
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 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.
(C) Comprehensive Income
Comprehensive income was $172 and $148 for the three-month period and
$495 and $269 for the six-month period ended July 4, 1999 and June 28, 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.
(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.
7
<PAGE> 8
The following table reconciles General Dynamics' and Gulfstream's
operating results for the three- and six-month periods ended July 4, 1999 to the
combined results reported in these unaudited supplemental consolidated financial
statements:
<TABLE>
<CAPTION>
Three months ended July 4, 1999 Six months ended July 4, 1999
------------------------------- -----------------------------
General General
Dynamics Gulfstream Combined Dynamics Gulfstream Combined
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,379 $708 $2,087 $2,756 $1,333 $4,089
Net earnings 105 70 175 370 128 498
Earnings per share:
Basic 0.82 0.97 0.88 2.91* 1.78 2.50
Diluted 0.81 0.95 0.86 2.87* 1.74 2.46
Weighted average shares
(in thousands):
Basic 127,554 71,645 199,199 127,281 72,048 199,329
Diluted 129,159 73,157 202,316 128,738 73,536 202,274
</TABLE>
*Includes impact of R&E tax credit discussed in Note I.
Purchase Method
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.
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 $270, has been allocated to goodwill and contracts and
programs acquired. This allocation is based on preliminary estimates and will be
finalized within one year from the date of acquisition.
8
<PAGE> 9
(F) Earnings Per Share
Basic and diluted weighted average shares outstanding are as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
July 4 June 28 July 4 June 28
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 199,199 200,227 199,329 199,346
Diluted 202,316 203,458 202,274 202,914
</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>
July 4 December 31
1999 1998
----------------- ------------------
<S> <C> <C>
Goodwill $ 1,268 $ 1,323
Contracts and programs acquired 512 461
----------------- ------------------
$ 1,780 $ 1,784
================= ==================
</TABLE>
Intangible assets are shown net of accumulated amortization of $160 and
$130 at July 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.
(H) Liabilities
A summary of significant liabilities, by balance sheet caption, follows:
<TABLE>
<CAPTION>
July 4 December 31
1999 1998
------------------ ------------------
<S> <C> <C>
Workers' compensation $ 481 $ 341
Customer deposits 666 488
Retirement benefits 214 196
Salaries and wages 113 115
Advance payments - defense contracts 116 139
Other 416 481
------------------ ------------------
Other Current Liabilities $ 2,006 $ 1,760
================== ==================
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
July 4 December 31
1999 1998
------------------ ------------------
<S> <C> <C>
Accrued costs on disposed businesses $ 171 $ 177
Retirement benefits 281 268
Coal mining related liabilities 68 73
Other 459 311
------------------ ------------------
Other Liabilities $ 979 $ 829
================== ==================
</TABLE>
(I) Income Taxes
The company had a net deferred tax asset of $304 and $326 at July 4, 1999
and December 31, 1998, respectively, the current portion of which was $319 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 net
deferred tax assets at July 4, 1999 and December 31, 1998.
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 during the first quarter
of $165 (net of 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.
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.
(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
10
<PAGE> 11
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 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
11
<PAGE> 12
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 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.
12
<PAGE> 13
(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.
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.
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<PAGE> 14
(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>
Three Months Ended
------------------
Net Sales Operating Earnings
--------- ------------------
July 4 June 28 July 4 June 28
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marine Systems* $764 $586 $ 88 $ 68
Aerospace 708 557 116 92
Combat Systems 306 298 34 38
Information Systems
& Technology* 243 228 24 16
Other 66 66 17 13
-- -- ------ ------
$2,087 $1,735 $279 $227
====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------
Net Sales Operating Earnings
--------- ------------------
July 4 June 28 July 4 June 28
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marine Systems* $1,572 $1,141 $ 176 $ 132
Aerospace 1,333 1,060 213 161
Combat Systems 596 633 69 81
Information Systems
& Technology* 476 446 45 30
Other 112 112 17 16
--- --- ------ ------
$4,089 $3,392 $520 $420
====== ====== ==== ====
</TABLE>
*As of January 1, 1999, management moved its Defense Systems operating unit from
the Marine Systems segment to the Information Systems and Technology segment.
Data for prior periods has been restated to give recognition to the current
composition of reportable segments.
14
<PAGE> 15
GENERAL DYNAMICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
July 4, 1999
(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 Segments
The company operates in four primary business segments: Marine Systems,
Combat Systems, Information Systems and Technology and Aerospace. 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. The
following table sets forth the net sales and operating earnings by business
segment for the three- and six-month periods ended July 4, 1999, and June 28,
1998:
15
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Six-Month Period Ended
- -----------------------------------------------------------------------------------------------------------------
July 4 June 28 Increase/ July 4 June 28 Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
- -----------------------------------------------------------------------------------------------------------------
NET SALES:
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marine Systems $ 764 $ 586 $ 178 $1,572 $1,141 $ 431
Aerospace 708 557 151 1,333 1,060 273
Combat Systems 306 298 8 596 633 (37)
Information Systems and
Technology 243 228 15 476 446 30
Other 66 66 - 112 112 -
- -----------------------------------------------------------------------------------------------------------------
$2,087 $ 1,735 $ 352 $ 4,089 $3,392 $ 697
- -----------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS:
- -----------------------------------------------------------------------------------------------------------------
Marine Systems $ 88 $ 68 $ 20 $ 176 $ 132 $ 44
Aerospace* 117 87 30 215 153 62
Combat Systems 34 38 (4) 69 81 (12)
Information Systems and
Technology 24 16 8 45 30 15
Other 17 13 4 17 16 1
- -----------------------------------------------------------------------------------------------------------------
$ 280 $ 222 $ 58 $ 522 $ 412 $ 110
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Operating earnings exclude pre-owned aircraft transactions, which generally
are sold at or near break-even.
Marine Systems
Results of Operations
Net sales increased during the three- and six-month periods due primarily
to the acquisition of NASSCO Holdings Incorporated (NASSCO), whose wholly owned
subsidiaries include National Steel and Shipbuilding Company, on November 10,
1998, as well as increased activity on the Virginia-class submarine and DD 21
program. Operating earnings increased during the three- and six-month periods
due primarily to the aforementioned acquisition and to an earnings rate increase
on the Arleigh Burke class destroyer (DDG 51) program in the fourth quarter of
1998.
As of January 1, 1999, in order to align the company's information
technology resources, management moved its Defense Systems operating unit from
the Marine Systems segment to the Information Systems and Technology segment.
Data for the three- and six-month periods ended June 28, 1998, has been restated
to give recognition to the current composition of reportable segments.
16
<PAGE> 17
Aerospace
Results of Operations
Net sales and operating earnings increased during the three- and six-
month periods due primarily to the increase in new aircraft and completion
deliveries in 1999. During the three- and six- month periods, aircraft
deliveries increased by two and six, respectively, and completions increased by
ten and fourteen, respectively, over the same periods in 1998.
Combat Systems
Results of Operations
Net sales increased and operating earnings decreased slightly during the
three-month period due to the contrast in maturity of programs year over year.
Net sales and operating earnings decreased during the six-month period due
primarily to the completion of production on the Single Channel Ground and
Airborne Radio System for the U.S. Army and to the treatment of 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.
Information Systems and Technology
Results of Operations
Net sales increased during the three- and six-month periods due primarily
to increased volume for commercial undersea fiber-optic communications
equipment. Operating earnings increased during the three- and six-month periods
due primarily to the aforementioned increase in volume, as well as a result of
higher margins obtained from cost reduction efforts employed during the first
year of acquisition of the segment's businesses.
In the first quarter of 1999, as previously mentioned, management
transitioned the Defense Systems' business to the Information Systems and
Technology segment from the Marine Systems segment. Data for the three- and
six-month periods ended June 28, 1998, has been restated to give recognition to
the current composition of reportable segments.
17
<PAGE> 18
Backlog
The following table details the backlog of each business segment as
calculated at July 4, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
July 4 December 31
1999 1998
------------- -------------
<S> <C> <C>
Marine Systems $ 11,190 $ 11,565
Aerospace 2,985 3,302
Combat Systems 1,465 1,579
Information Systems and Technology 915 892
Other 528 562
------------- -------------
============= =============
Total Backlog $ 17,083 $ 17,900
============= =============
Funded Backlog $ 10,544 $ 10,594
============= =============
</TABLE>
Total backlog represents the estimated remaining sales value of work to
be performed under firm contracts. Funded backlog for government programs
represents the portion of total backlog that has been appropriated by Congress
and funded by the procuring agency. To the extent backlog has not been funded,
there is no assurance that congressional appropriations or agency allotments
will be forthcoming. Total backlog also includes amounts for long-term coal
contracts. As previously mentioned, data at December 31, 1998, has been restated
to give recognition to the current composition of reportable segments.
Additional Financial Information
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 (net of 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 Note I to the Supplemental Consolidated
Financial Statements.
Environmental Matters and Other Contingencies
For a discussion of environmental matters and other contingencies, see
Notes J and K to the Supplemental Consolidated Financial Statements. The
company's liability, in the aggregate, with respect to these matters, is not
expected to be material to the company's results of operations or financial
condition.
18
<PAGE> 19
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 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.
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.
19
<PAGE> 20
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
Operating Activities
Cash flows from continuing operations increased this year over last year
due to increased levels of initial deposits and progress payments received for
new aircraft and the cash refund the company received from the IRS related to
the settlement discussed above in "Provision for Income Taxes". Excluding the
cash refund and taxes paid on the interest component of the refund, cash flows
from continuing operations decreased this year over last year due primarily to
the timing of payments for working capital investments.
The company expects to continue to generate funds from operations in
excess of its short- and long-term liquidity needs.
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 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, 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
20
<PAGE> 21
average term of 40 days and had approximately $325 invested in cash equivalents
at an average yield of 5.2%.
On May 3, 1999, the company paid from available funds the remaining fixed
purchase consideration of $51 in cash for three individual stockholders' share
of NASSCO common stock.
The company began construction on its facility modernization project 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.
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. In the third quarter,
the company will also record 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. 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.
On March 3, 1999, the company's board of directors declared an increased
regular quarterly dividend of $.24 per share.
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.
21
