<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3671
GENERAL DYNAMICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-1673581
- --------------------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
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
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $1 PAR VALUE - OCTOBER 29, 1999 200,973,331
================================================================================
<PAGE> 2
GENERAL DYNAMICS CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Earnings (Three Months) 3
Consolidated Statement of Earnings (Nine Months) 4
Consolidated Statement of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings 25
Item 4 - Submission of Matters to a Vote of Security Holders 25
Item 6 - Exhibits and Reports on Form 8-K 26
SIGNATURE 26
- ---------
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 69 $ 165
Marketable securities - 93
------------- -------------
69 258
Accounts receivable 841 580
Contracts in process 1,410 952
Inventories 1,032 804
Other current assets 392 391
------------- -------------
Total Current Assets 3,744 2,985
------------- -------------
NONCURRENT ASSETS:
Leases receivable - finance operations 174 181
Real estate held for development 63 65
Property, plant and equipment, net 1,040 901
Intangible assets 2,623 1,784
Other assets 387 235
------------- -------------
Total Noncurrent Assets 4,287 3,166
------------- -------------
$ 8,031 $ 6,151
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term debt, including current portion of long-term debt $ 1,153 $ 77
Short-term debt - finance operations 19 58
Accounts payable 474 477
Other current liabilities 1,992 1,760
------------- -------------
Total Current Liabilities 3,638 2,372
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt 164 453
Long-term debt - finance operations 69 82
Other liabilities 1,133 829
Commitments and contingencies (See Note M)
------------- -------------
Total Noncurrent Liabilities 1,366 1,364
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus 495 484
Retained earnings 3,214 2,639
Treasury stock (675) (706)
Accumulated other comprehensive loss (7) (2)
------------- -------------
Total Shareholders' Equity 3,027 2,415
------------- -------------
$ 8,031 $ 6,151
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
2
<PAGE> 4
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
October 3 September 27
1999 1998
------------- -------------
<S> <C> <C>
NET SALES $ 2,215 $ 1,798
OPERATING COSTS AND EXPENSES 1,860 1,555
------------- -------------
OPERATING EARNINGS 355 243
Interest expense, net (6) (3)
Other (expense) income, net (44) 3
------------- -------------
EARNINGS BEFORE INCOME TAXES 305 243
Provision for income taxes 121 84
------------- -------------
NET EARNINGS $ 184 $ 159
============= =============
NET EARNINGS PER SHARE:
Basic $ .92 $ .79
============= =============
Diluted $ .91 $ .78
============= =============
DIVIDENDS PER SHARE $ .24 $ .22
============= =============
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 139 $ 117
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
3
<PAGE> 5
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------
October 3 September 27
1999 1998
------------- -------------
<S> <C> <C>
NET SALES $ 6,304 $ 5,190
OPERATING COSTS AND EXPENSES 5,429 4,527
------------- -------------
OPERATING EARNINGS 875 663
Interest expense, net (17) (11)
Other (expense) income, net (39) 6
------------- -------------
EARNINGS BEFORE INCOME TAXES 819 658
PROVISION FOR INCOME TAXES
R&E Tax Credit (165) -
Provision 302 229
------------- -------------
137 229
------------- -------------
NET EARNINGS $ 682 $ 429
============= =============
NET EARNINGS PER SHARE:
Basic $ 3.42 $ 2.15
============= =============
Diluted $ 3.38 $ 2.12
============= =============
DIVIDENDS PER SHARE $ .72 $ .66
============= =============
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 401 $ 354
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
4
<PAGE> 6
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------
October 3 September 27
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 682 $ 429
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 140 116
Recognition of pension gains previously deferred (126) -
Revaluation of undeveloped coal reserves and equipment 61 -
Amortization of debt issuance costs on debt repaid 7 -
Decrease (Increase) in assets, net of effects of business acquisitions-
Marketable securities 45 (39)
Accounts receivable (63) 28
Contracts in process (98) (198)
Inventories (317) (94)
Other current assets 23 4
Increase (Decrease) in liabilities, net of effects of business acquisitions-
Accounts payable and other current liabilities (105) 59
Customer deposits 27 (78)
Current income taxes 171 (9)
Deferred income taxes 48 94
Other, net (20) (9)
------------- -------------
Net cash provided by continuing operations 475 303
Net cash used by discontinued operations (5) (11)
------------- -------------
Net Cash Provided by Operating Activities 470 292
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (1,130) (256)
Purchases of available-for-sale securities (26) (439)
Sales/maturities of available-for-sale securities 75 293
Capital expenditures (117) (105)
Proceeds from sale of assets 13 16
Proceeds from sale of real estate held for development - 74
Other (1) (4)
------------- -------------
Net Cash Used by Investing Activities (1,186) (421)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial paper issuances 1,141 -
Repayments of other debt, net (370) (117)
Repayments of debt - finance operations (53) (12)
Dividends paid (88) (81)
Purchases of common stock (59) (223)
Proceeds from option exercises 49 43
Other - (2)
------------- -------------
Net Cash Provided (Used) by Financing Activities 620 (392)
------------- -------------
NET DECREASE IN CASH AND EQUIVALENTS (96) (521)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 165 643
------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 69 $ 122
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Federal income taxes $ 246 $ 82
Interest (including finance operations) $ 36 $ 35
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
5
<PAGE> 7
GENERAL DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The unaudited consolidated financial statements include the accounts of the
company and all majority-owned subsidiaries. The unaudited consolidated
financial statements give retroactive effect to the acquisition by General
Dynamics Corporation (General Dynamics) of Gulfstream Aerospace Corporation
(Gulfstream) on July 30, 1999, which has been accounted for as a pooling of
interests as described in Note D. The consolidated financial statements for
periods prior to the combination have been restated to include the accounts and
results of operations of Gulfstream. In addition, certain prior year amounts
have been reclassified to conform to the current year presentation.
The unaudited 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 nine-month periods ended October 3, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. These unaudited 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 consolidated financial
statements contain all adjustments necessary for a fair statement of the results
for the three- and nine-month periods ended October 3, 1999, and September 27,
1998.
(B) 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 are included in the equity section on the Consolidated Balance Sheet.
(C) Comprehensive Income
Comprehensive income was $182 and $157 for the three-month period and $677
and $426 for the nine-month period ended October 3, 1999, and September 27,
1998, respectively.
6
<PAGE> 8
(D) 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.
In connection with the acquisition, the company recorded a charge to
earnings of $36 (before-tax) for related costs, consisting of investment
banking, legal, bank fees, accounting, printing and regulatory filing fees.
Also in connection with the acquisition, General Dynamics merged the
two companies' commercial pension plans. As a result of the merger of these
plans, the company recognized previously deferred gains on General Dynamics
commercial pension plan, totaling $126 (before-tax).
The pre-acquisition results of operations for the separate companies
and the combined amounts presented in the consolidated financial statements are
as follows:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
July 4, 1999 September 27, 1998 September 27, 1998
------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales:
General Dynamics $ 2,756 $ 1,172 $ 3,504
Gulfstream 1,333 626 1,686
----- --- -----
Combined $ 4,089 $ 1,798 $ 5,190
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
July 4, 1999 September 27, 1998 September 27, 1998
------------ ------------------ ------------------
<S> <C> <C> <C>
Net earnings:
General Dynamics $ 370 $ 94 $ 268
Gulfstream 128 65 161
--- -- ---
Combined $ 498 $ 159 $ 429
=== ==== ====
</TABLE>
7
<PAGE> 9
In connection with the acquisition of Gulfstream, General Dynamics entered
into a registration agreement with three investment partnerships affiliated with
Forstmann Little & Co. and the directors and executive officers of Gulfstream
who owned shares of Gulfstream stock. The registration agreement provides, among
other things, that General Dynamics will, upon request and with certain
limitations, register for resale the shares of General Dynamics common stock
which the partnerships and the directors and executive officers received in the
acquisition transaction. For further information, refer to the Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on June
24, 1999.
Also 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
order to facilitate the acquisition.
Purchase Method
On September 1, 1999, the company completed the acquisition of three
business units comprising GTE Government Systems Corporation, a subsidiary of
GTE Corporation, for $1.03 billion in cash. The company financed the purchase
consideration through its commercial paper program. 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 transaction has been accounted for under the purchase
method of accounting. Operating results of the three business units 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 $840, has been recorded as goodwill. This allocation is based on
preliminary estimates and will be finalized within one year from the date of
acquisition.
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 during the fourth quarter of 1999.
On 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. The transaction has been accounted for under
the purchase method of accounting. Operating results of K-C Aviation are
included with those of the company from the closing date. The excess of the
purchase price over the fair value of the net tangible assets acquired,
approximately $175, has been allocated to goodwill.
8
<PAGE> 10
(E) Earnings Per Share
Basic and diluted weighted average shares outstanding are as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
October 3 September 27 October 3 September 27
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 200,293 199,943 199,660 199,545
Diluted 202,612 202,515 201,963 202,715
</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.
The sum of the earnings per share for the first three quarters of 1999
differs from the earnings per share for the nine months ended October 3, 1999,
due to the required method of computing the weighted average number of shares
independently for the three- and nine-month periods.
(F) Contracts in Process
Contracts in process primarily represent costs and accrued profit related
to government contracts and programs and consist of the following:
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
------------- -------------
<S> <C> <C>
Net contract costs and estimated profits $ 552 $ 467
Other contract costs 858 485
------------- -------------
$ 1,410 $ 952
============= =============
</TABLE>
Contract costs are net of advances and progress payments and include
production costs and related overhead, such as 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, other insurance-related assessments, postretirement benefits and
environmental expenses. 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.
9
<PAGE> 11
(G) Inventories
Inventories consist primarily of commercial aircraft components, as
follows:
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
------------- -------------
<S> <C> <C>
Work in process $ 458 $ 445
Raw materials 248 191
Pre-owned aircraft 306 150
Other 20 18
------------- -------------
$ 1,032 $ 804
============= =============
</TABLE>
(H) Property, Plant and Equipment, Net
Management has concluded not to make additional investments in its
undeveloped high sulfur coal reserves given the current coal industry
environment. As such, the company revalued these coal reserves and related
equipment, resulting in a non-cash charge to earnings of approximately $60
(before-tax).
(I) Intangible Assets
Intangible assets resulting primarily from the company's acquisitions
consist of the following:
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
---------- -------------
<S> <C> <C>
Goodwill $ 2,119 $ 1,323
Contracts and programs acquired 504 461
---------- -------------
$ 2,623 $ 1,784
========== =============
</TABLE>
Intangible assets are shown net of accumulated amortization of $179 and
$130 at October 3, 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
40 years.
10
<PAGE> 12
(J) Debt
Debt (excluding finance operations) consists of the following:
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
------------- -------------
<S> <C> <C>
Commercial paper $ 1,149 $ -
Term loans - 305
Senior notes 144 142
Notes payable - 56
Industrial development bonds 15 15
Other 9 12
------------- -------------
1,317 530
Less current portion 1,153 77
------------- -------------
$ 164 $ 453
============= =============
</TABLE>
On July 27, 1999, the company began issuing commercial paper in
anticipation of the acquisition of GTE Government Systems Corporation. As of
October 3, 1999, the company had $1,156 par value discounted commercial paper
outstanding at an average yield of approximately 5.46% with an average term of
approximately 65 days. 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, both of which back this commercial paper program.
During 1999, the company repaid from available funds the term loans
and notes payable. In connection therewith, the company recorded in the third
quarter a one-time non-cash charge of $7 (before-tax) for the unamortized debt
costs associated with these instruments.
(K) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
------------- --------------
<S> <C> <C>
Customer deposits $ 550 $ 488
Workers' compensation 487 341
Retirement benefits 225 196
Salaries and wages 137 115
Advance payments - government contracts 100 139
Other 493 481
------------- -------------
Other Current Liabilities $ 1,992 $ 1,760
============= =============
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
------------- -------------
<S> <C> <C>
Retirement benefits $ 462 $ 268
Accrued costs on disposed businesses 147 177
Coal mining related liabilities 67 73
Other 457 311
------------- -------------
Other Liabilities $ 1,133 $ 829
============= =============
</TABLE>
(L) Income Taxes
The company had a net deferred tax asset of $284 and $332 at October 3,
1999, and December 31, 1998, respectively, the current portion of which was $314
and $328, respectively, and was included in other current assets on the
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 October 3, 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 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.
(M) 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 N.
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
12
<PAGE> 14
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 Lloyd's 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
13
<PAGE> 15
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 judgment
entered against them. The company has reached an agreement to settle all the
remaining cases and final settlement documents are being processed, including
appropriate court orders. 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.
14
<PAGE> 16
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 $660 at October 3, 1999. The company was also
contingently liable for debt and lease guarantees and other arrangements
aggregating up to a maximum of approximately $70 at October 3, 1999.
(N) 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.
15
<PAGE> 17
Nonetheless, the parties have agreed to explore the possibility of an
out-of-court settlement of the litigation. Warren Christopher, former U.S.
Secretary of State, has agreed to serve as a neutral mediator. It is expected
that the mediation process will be completed by the end of 1999. The parties
have agreed that they will not comment on negotiations during the mediation
process.
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.
(O) Business Segment Information
Management has chosen to organize and measure 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,
other income items and income taxes 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
--------- ------------------
October 3 September 27 October 3 September 27
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Marine Systems* $ 788 $ 594 $ 80 $ 66
Combat Systems 296 284 37 39
Information Systems
& Technology* 354 226 30 18
Aerospace 704 626 128 104
Other 73 68 80 16
-- -- -- --
$2,215 $1,798 $ 355 $ 243
====== ====== ====== ======
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Net Sales Operating Earnings
--------- ------------------
October 3 September 27 October 3 September 27
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Marine Systems* $2,360 $1,735 $ 256 $ 198
Combat Systems 892 917 106 120
Information Systems
& Technology* 830 672 75 48
Aerospace 2,037 1,686 341 265
Other 185 180 97 32
------ ------ ------ ------
$6,304 $5,190 $ 875 $ 663
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets
-------------------
October 3 December 31
1999 1998
------ ------
<S> <C> <C>
Marine Systems* $1,478 $1,250
Combat Systems 926 922
Information Systems
& Technology* 2,553 1,250
Aerospace 1,924 1,537
Other** 390 406
Corporate*** 760 786
------ ------
$8,031 $6,151
====== ======
</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 periods presented has been restated to give
recognition to the 1999 composition of reportable segments.
** Other includes assets of both of the company's finance operations.
*** 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 plan.
17
<PAGE> 19
GENERAL DYNAMICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
October 3, 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 nine-month periods ended October 3, 1999, and
September 27, 1998:
18
<PAGE> 20
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
- ----------------------------------------------------------------------------------------------------------------------------------
October 3 September 27 Increase/ October 3 September 27 Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marine Systems $ 788 $ 594 $ 194 $ 2,360 $ 1,735 $ 625
Combat Systems 296 284 12 892 917 (25)
Information Systems
& Technology 354 226 128 830 672 158
Aerospace 704 626 78 2,037 1,686 351
Other 73 68 5 185 180 5
- ----------------------------------------------------------------------------------------------------------------------------------
$ 2,215 $ 1,798 $ 417 $ 6,304 $ 5,190 $ 1,114
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPERATING
EARNINGS:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marine Systems $ 80 $ 66 $ 14 $ 256 $ 198 $ 58
Combat Systems 37 39 (2) 106 120 (14)
Information Systems
& Technology 30 18 12 75 48 27
Aerospace 128 104 24 341 265 76
Other 80 16 64 97 32 65
- ----------------------------------------------------------------------------------------------------------------------------------
$ 355 $ 243 $ 112 $ 875 $ 663 $ 212
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Marine Systems
Results of Operations
Net sales increased during the three- and nine-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 nine-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 nine-month periods ended September 27, 1998, has been
restated to give recognition to the current composition of reportable segments.
19
<PAGE> 21
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 nine-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 nine-month periods due primarily
to the acquisition of three business units of GTE's Government Systems
Corporation on September 1, 1999. Operating earnings increased during the three-
and nine-month periods due primarily to increased volume for commercial undersea
fiber-optic communications equipment.
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
nine-month periods ended September 27, 1998, has been restated to give
recognition to the current composition of reportable segments.
Aerospace
Results of Operations
Net sales and operating earnings increased during the three- and nine-
month periods due primarily to the increase in new aircraft and completion
deliveries in 1999. During the three- and nine-month periods, aircraft
deliveries increased by two and eight, respectively, and completions increased
by two and sixteen, respectively, over the same periods in 1998.
Other
Results of Operations
Operating earnings increased during the three- and nine-month periods due
to several non-recurring events during the quarter. In connection with the
acquisition of Gulfstream, General Dynamics merged the two companies' commercial
pension plans. As a result of the merger of these plans, the company recognized
previously deferred gains on General Dynamics commercial pension plan, totaling
$126 (before-tax). Additionally, management has concluded not to make additional
investments in its undeveloped high sulfur coal reserves given the current coal
industry environment. As such, the company revalued these coal reserves and
related equipment, resulting in a non-cash charge to earnings of approximately
$60 (before-tax).
20
<PAGE> 22
Backlog
The following table details the backlog of each business segment as
calculated at October 3, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
October 3 December 31
1999 1998
--------- -----------
<S> <C> <C>
Marine Systems $10,799 $11,565
Combat Systems 1,266 1,579
Information Systems and Technology 1,804 892
Aerospace 3,548 4,302
Other 512 562
------- -----------
Total Backlog $17,929 $18,900
======= ===========
Funded Backlog $10,499 $10,565
======= ===========
</TABLE>
Total backlog represents the estimated remaining sales value of work to be
performed under firm contracts or aircraft to be delivered, options for
additional Gulfstream aircraft and amounts for long-term coal 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. As previously
mentioned, data at December 31, 1998, has been restated to give recognition to
the current composition of reportable segments.
Additional Financial Information
Other, Net
In the third quarter of 1999 in connection with the acquisition of
Gulfstream, the company recorded a charge to earnings of $36 (before-tax) for
related costs, consisting of investment banking, legal, bank fees, accounting,
printing, and regulatory filing fees. Additionally, in connection with the
repayment of certain of Gulfstream's debt instruments, the company recorded in
the third quarter of 1999 a one-time non-cash charge of $7 (before-tax) for the
unamortized debt costs associated with these instruments.
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 L to the Consolidated Financial Statements.
21
<PAGE> 23
Environmental Matters and Other Contingencies
For a discussion of environmental matters and other contingencies, see
Notes M and N to the 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.
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 essentially complete. Validation testing occurs as systems are
remediated and is substantially complete. 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
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 has developed business continuity plans
for Year 2000 and expects to test these plans during November 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
22
<PAGE> 24
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.
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 primarily to 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 related tax effect, cash flows from continuing operations
decreased this year over last year due primarily to a working capital buildup to
support growth in the company's sales of commercial undersea communications
equipment, as well as to the timing of pre-owned aircraft taken as trade-ins on
new aircraft sales, but which have not yet been resold.
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 September 1, 1999, the company completed the acquisition of three
business units comprising GTE Government Systems Corporation, a subsidiary of
GTE Corporation, for $1.03 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 company financed the
23
<PAGE> 25
purchase consideration through the issuance of commercial paper. As of October
3, 1999, the company had approximately $1,100 commercial paper outstanding at an
average yield of approximately 5.46% with an average term of approximately 65
days. The company expects to reissue commercial paper as it matures, and has the
option to extend the term up to 270 days.
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 $70 expected to be
expended during 1999.
Financing Activities
During the third quarter of 1999, the company repaid from its available
funds approximately $325 of Gulfstream's debt instruments.
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, both of which back the company's commercial paper program. These credit
facilities contain minimum net worth requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes with respect to this item from the
disclosure included in Management's Discussion and Analysis filed as Exhibit
99.1 to 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.
24
<PAGE> 26
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
October 3, 1999
Item 1. Legal Proceedings
Reference is made to Note M, Commitments and Contingencies, to the
Consolidated Financial Statements in Part I, for statements relevant to
activities in the quarter covering certain litigation to which the company is a
party.
Item 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Shareholders of the company, for which proxies were
solicited pursuant to Regulation 14A under the Securities Exchange Act
of 1934, was held on July 30,1999.
(b) A brief discussion of each matter voted upon at the Special Meeting and
the number of votes cast is as follows:
<TABLE>
<CAPTION>
Matter Votes Cast
---------------------------------------------------------------------------------
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Amendment to Charter
Increasing No. of
Authorized Shares of
Common Stock to
300,000,000 107,896,147 1,053,497 333,287
Issuance of Shares
Pursuant to Agreement
and Plan of Merger 107,623,501 1,195,525 463,905
</TABLE>
25
<PAGE> 27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On August 17, 1999, the company reported to the Securities and Exchange
Commission under Item 5, Other Events, that on July 30, 1999, the
company acquired Gulfstream Aerospace Corporation (Gulfstream) through
a merger of a subsidiary of the company into Gulfstream. Included in
the filing under Item 7, Financial Statements and Exhibits, were the
following: (a) Unaudited Supplemental Consolidated Financial Statements
of General Dynamics Corporation for the quarterly period ended July 4,
1999 (as restated to reflect the acquisition of Gulfstream on July 30,
1999) and (b) 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 on July 30, 1999).
On September 13, 1999, the company reported to the Securities and
Exchange Commission under Item 5, Other Events, combined net sales, net
earnings and per share data of the company and Gulfstream for the month
ended August 29, 1999. The company also reported the completion of the
acquisition of GTE Government Systems Corporation on September 1, 1999
and management's reevaluation of future investment in its coal
operations.
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: November 12, 1999
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GENERAL
DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET AS OF OCTOBER 3, 1999, AND THE
RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED OCTOBER 3,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> OCT-03-1999<F1>
<CASH> 69
<SECURITIES> 0
<RECEIVABLES> 841
<ALLOWANCES> 0
<INVENTORY> 2,442
<CURRENT-ASSETS> 3,744
<PP&E> 2,268
<DEPRECIATION> (1,228)
<TOTAL-ASSETS> 8,031
<CURRENT-LIABILITIES> 3,557
<BONDS> 164
0
0
<COMMON> 495
<OTHER-SE> 2,532
<TOTAL-LIABILITY-AND-EQUITY> 8,031
<SALES> 6,304
<TOTAL-REVENUES> 6,304
<CGS> 5,429
<TOTAL-COSTS> 5,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 819
<INCOME-TAX> (137)
<INCOME-CONTINUING> 682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682
<EPS-BASIC> 3.42
<EPS-DILUTED> 3.38
<FN>
<F1>ON JULY 30, 1999 GENERAL DYNAMICS ACQUIRED GULFSTREAM IN A POOLING OF INTERESTS
TRANSACTION. AS SUCH, THE RESULTS OF OPERATIONS, AS SUBMITTED ON THIS SCHEDULE,
INCLUDE THE RESULTS OF GULFSTREAM FOR THE FULL NINE-MONTH PERIOD.
</FN>
</TABLE>
