-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Th8C/cVoUp1xNiRmZx0l8KNxdU2Lz65Ykwkf3uLAn+ygKerkY1VkU7Ra6tHiDZ/H EYgy/WCmCOQrLPArucT6tQ== 0000950133-97-000914.txt : 19970324 0000950133-97-000914.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950133-97-000914 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL DYNAMICS CORP CENTRAL INDEX KEY: 0000040533 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 131673581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03671 FILM NUMBER: 97560501 BUSINESS ADDRESS: STREET 1: 3190 FAIRVIEW PARK DRIVE CITY: FALLS CHURCH STATE: VA ZIP: 22042 BUSINESS PHONE: 7038763375 MAIL ADDRESS: STREET 1: 3190 FAIRVIEW PARK DR CITY: FALLS CHURCH STATE: VA ZIP: 22042 10-K 1 GENERAL DYNAMICS CORPORATION FORM 10-K. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 I.R.S. Employer Incorporation or Organization Identification No. 3190 Fairview Park Drive, Falls Church, Virginia 22042-4523 - ------------------------------------------------ ---------- Address of principal executive offices Zip Code
Registrant's telephone number, including area code (703) 876-3000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------- ----------------------- Common Stock, $1.00 Par Value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange 9.95% Debentures Due 2018 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. --- The aggregate market value of the voting stock held by nonaffiliates of the registrant was $3,560,534,408 at March 10, 1997, calculated in accordance with the Securities and Exchange Commission rules as to beneficial ownership. 63,267,990 shares of the registrant's common stock were outstanding at March 10, 1997. DOCUMENTS INCORPORATED BY REFERENCE: Parts I and II incorporate information from certain portions of the registrant's Annual Report to security holders for the fiscal year ended December 31, 1996 (1996 Shareholder Report). Part III incorporates information from certain portions of the registrant's definitive Proxy Statement for the 1997 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. ================================================================================ 2 GENERAL DYNAMICS CORPORATION INDEX PART I PAGE ---- Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 Supplementary Item. Executive Officers of the Company 7 PART II Item 5. Market for the Company's Common Equity and Related Shareholder Matters 9 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III Item 10. Directors and Executive Officers of the Registrant 9 Item 11. Executive Compensation 9 Item 12. Security Ownership of Certain Beneficial Owners and Management 9 Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 10 SIGNATURES 11
3 PART I ITEM 1. BUSINESS INTRODUCTION The primary business of General Dynamics (the company) is supplying weapons systems and services to the U.S. government and its allies. The company is a Delaware corporation formed in 1952 as successor to the Electric Boat Company. Two of the company's primary operating units, General Dynamics Land Systems Inc. and Bath Iron Works Corporation, were acquired in 1982 and 1995, respectively. On January 1, 1997, the company acquired the assets of Defense Systems and Armament Systems, formerly business units of Lockheed Martin Corporation. In addition, the company operates other smaller businesses. After divesting its tactical military aircraft, missile systems and space launch systems businesses, the company comprises two major business segments: Marine and Combat Systems Groups, as well as miscellaneous businesses classified as Other. The Marine Group includes Electric Boat Corporation (Electric Boat), Bath Iron Works Corporation (BIW) and American Overseas Marine Corporation (AMSEA). The Combat Systems Group, formerly the Armored Vehicles segment, includes General Dynamics Land Systems Inc. (Land Systems), General Dynamics Defense Systems, Inc. (Defense Systems) and General Dynamics Armament Systems, Inc. (Armament Systems). The Other business segment includes Freeman Energy Corporation (Freeman Energy), Material Service Corporation (Material Service) and Patriot I, II and IV Shipping Corporations (Patriots). Information on revenues, operating profit or loss and identifiable assets attributable to each of the company's three business segments is included in Note Q to the Consolidated Financial Statements on page 36 of the 1996 Shareholder Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 1996, and is incorporated herein by reference. A description of the company's products and services, competition, and other related information follows. PRODUCTS AND SERVICES MARINE GROUP. Electric Boat designs and builds nuclear submarines for the U.S. Navy, having contracts for the design of the New Attack Submarine (NSSN), and for construction of the final Ohio class ballistic missile submarine (Trident) and three Seawolf class attack submarines (Seawolf). In addition, Electric Boat performs a broad range of engineering work including advanced research and technology development, systems and component design evaluation, prototype development and logistics support to the operating fleet. Electric Boat also serves as ship integrator for certain components and subassemblies of the submarines, such as electronic equipment. Net sales were $1,443, $1,567 and $1,678 in 1996, 1995 and 1994, respectively. BIW has contracts for the construction of 11 Arleigh Burke class destroyers (DDG 51) and plays a lead role in providing design, engineering, and ongoing life cycle support services for DDG 51 class ships. BIW is a member of a three-contractor team which was recently selected to design and build the Navy's new class of amphibious transport ships (LPD 17), and is the leader of a team participating in the design of the Navy's arsenal ship. Net sales were $791 in 1996. AMSEA provides ship management services for five of the U.S. Navy's Maritime Prepositioning Ships (MPS), nine of the U.S. Maritime Administration's Ready Reserve Force ships (RRF) and two U.S. Maritime Army War Reserve vessels (AWR-3). The MPS are under five-year contracts of which three were renewed in 1995, and two were renewed in 1996. These contracts are renewable through the year 2011. The RRF ships are in the fourth year of their five-year contracts. The MPS and AWR-3 vessels operate worldwide; the RRF vessels are located on the east, gulf and west coasts of the United States. COMBAT SYSTEMS GROUP. Land Systems designs and manufactures the M1 Series Abrams Main Battle Tank for the U.S. Army, U.S. Marine Corps and various foreign governments. Land Systems also performs engineering and upgrade work, and provides support for existing armored vehicles. Production of the M1A1, a version of the M1 that incorporates increased firepower, additional crew protection features and improved armor, was initiated in 1985. Production of the M1A2, the latest version of the M1 that incorporates battlefield management systems aimed at providing improved fighting ability, as well as improved survivability of the tank's four crew members, was initiated in 1992. Land Systems has a multiyear contract with the U.S. Army to upgrade 120 tanks per year for the next four years from the M1 to the M1A2 version. 1 4 In addition to its tank production, Land Systems participates in four other armored vehicle programs. The first is the Advanced Amphibious Assault Vehicle (AAAV) program for which Land Systems was recently awarded a development contract, including design and construction of at least three prototypes. The second is a four-year program to upgrade 62 Fox Nuclear, Biological and Chemical Reconnaissance System vehicles. The third is the Heavy Assault Bridge program which is currently under development and is expected to enter production late in this decade. The fourth is the Crusader Self-Propelled Howitzer development program of which the company's share is approximately 25 percent. Teamed with Tadiran Ltd. of Israel, Land Systems is also a producer of the Single Channel Ground and Airborne Radio System (SINCGARS). To extend its product lines, Land Systems purchased the assets of Teledyne Vehicle Systems (Muskegon Operations) in March 1996. Muskegon Operations specializes in combat vehicles as well as mobility systems, suspension technology and diesel engines for armored vehicle markets world-wide. The recent acquisition of Defense Systems and Armament Systems expands the company's participation in armored vehicles from heavy tanks to light vehicles, and from full platforms to major subsystems. Defense Systems builds light vehicles, turrets and transmissions for combat vehicles, as well as missile guidance and naval fire control systems. Armament Systems designs, develops and produces advanced gun and ammunition handling systems based on the Gatling principal for application on fixed-wing aircraft, helicopters, surface vehicles and naval ships. General Dynamics Ordnance Systems, Inc., a subsidiary of Armament Systems, is a leader in the production of ammunition and ordnance products and operates the Milan Army Ammunition Plant in Milan, Tennessee, for the U.S. Army. OTHER. Freeman Energy mines coal, producing approximately 5 million tons in each of the last three years. Freeman Energy owns or leases rights to over 600 million tons of coal reserves in Illinois. Material Service is engaged in the mining and sale of aggregates (e.g. stone, sand and gravel) for use in the construction of highways and other infrastructure projects, and for commercial and residential building construction primarily in northern and central Illinois. This business is cyclical and seasonal in nature, and therefore, sales and earnings fluctuate. Patriots are financing subsidiaries that lease liquefied natural gas tankers to a nonaffiliated company. COMPETITION Historically, competition for U.S. government defense contracts was characterized by a number of major companies competing for a variety of weapon system contracts. The customer's procurement policy generally required competitive bids based on strict product specifications. In addition, the customer often awarded more than one company contracts in order to ensure competition on subsequent contracts. In recent years, due to reduced defense spending, the industry has consolidated through mergers and acquisitions to maintain critical mass resulting in fewer and larger competitors. With fewer programs available to win, companies frequently have formed strategic alliances to become more competitive in pursuing these programs. The customer faces challenges due to the reduction in available procurement funds as it must address industrial base issues while assessing competing needs between and among the various branches of the service. Finally, Congress continues to be very influential in its role of selecting which programs to fund and at what level based on limited budget dollars. As a result, the defense procurement policy is evolving and will be affected by these various and sometimes conflicting factors. A discussion of competition on individual programs is included in Management's Discussion and Analysis of the Results of Operations and Financial Condition on pages 18 through 22 of the 1996 Shareholder Report, filed as Exhibit 13 to this Annual Report on Form 10-K and incorporated herein by reference. 2 5 GENERAL INFORMATION U. S. Government Contracts The company's net sales to the U.S. government include Foreign Military Sales (FMS). FMS are sales to foreign governments through the U.S. government, whereby the company contracts with and receives payment from the U.S. government and the U.S. government assumes the risk of collection from the customer. The company's largest FMS sales are M1 tanks and related services, including training in operation and maintenance, and other logistical support. U.S. government sales were as follows (excluding discontinued operations; dollars in millions):
Year Ended December 31 -------------------------------------- 1996 1995 1994 ------ ------ ------ Domestic $3,051 $2,422 $2,190 FMS 261 476 690 ------ ------ ------ Total U.S. government $3,312 $2,898 $2,880 ====== ====== ====== Percent of net sales 92% 94% 94%
All U.S. government contracts are terminable at the convenience of the U.S. government, as well as for default. Under contracts terminable at the convenience of the U.S. government, a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. Contracts which are terminated for default generally provide that the U.S. government only pays for the work it has accepted and may require the contractor to pay for the incremental cost of reprocurement and may hold the contractor liable for damages. In 1991, the U.S. Navy terminated for default a contract with the company and McDonnell Douglas Corporation for the full-scale development of the U.S. Navy's A-12 aircraft. In December 1995 the U.S. Court of Federal Claims issued an order converting the termination for default to a termination for convenience. For further discussion, see Note N to the Consolidated Financial Statements on page 33 of the 1996 Shareholder Report, filed as Exhibit 13 to this Annual Report on Form 10-K and incorporated herein by reference. Companies engaged in supplying goods and services to the U.S. government are dependent on congressional appropriations and administrative allotment of funds, and may be affected by changes in U.S. government policies resulting from various military and political developments. U.S. government defense contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Often the contracts call for successful design and production of very complex and technologically advanced items. Foreign Sales and Operations The major portion of sales and operating earnings of the company for the past three years was derived from operations in the United States. Although the company purchases supplies from and subcontracts with foreign companies, it has no substantial operations in foreign countries. The majority of foreign sales are made as FMS through the U.S. government, but certain direct foreign sales are made of components and support services. Direct foreign sales were $38, $29 and $32 in 1996, 1995 and 1994, respectively. Direct foreign sales are expected to increase in 1997 with the acquisition of Armament Systems and Defense Systems, which generated sales of $53 and $32 respectively in the international market in 1996. Supplies Many items of equipment and components used in the production of the company's products are purchased from other manufacturers. The company is dependent upon suppliers and subcontractors for a large number of components and the ability of its suppliers and subcontractors to meet performance and quality specifications and delivery schedules. In some cases the company is dependent on one or a few sources, either because of the specialized nature of a particular item or because of domestic preference requirements pursuant to which it operates on a given project. All of the company's operations are dependent upon adequate supplies of certain raw materials, such as aluminum and steel, and on adequate supplies of fuel. Fuel or raw material shortages could also have an adverse effect on the company's suppliers, thus impairing their ability to honor their contractual commitments to the company. The company has not experienced serious shortages in any of the raw materials or fuel supplies that are necessary for its production programs. 3 6 Research and Development Research and development activities in the Marine and Combat Systems Groups are conducted principally under U.S. government contracts. These research efforts are concerned with developing products for large systems development programs or performing work under research and development technology contracts. In 1996, the company experienced a decline in customer-sponsored expenditures for research and development due primarily to the NSSN program at Electric Boat moving to the design phase. In addition, the defense businesses engage in independent research and development, of which a significant portion is recovered through overhead charges to U.S. government contracts. The table below details expenditures for research and development (excluding discontinued operations; dollars in millions):
Year Ended December 31 --------------------------------- 1996 1995 1994 ---- ---- ---- Company-sponsored $ 38 $ 25 $ 30 Customer-sponsored 89 178 246 ---- ---- ---- $127 $203 $276 ==== ==== ====
Backlog Summary backlog information for each business segment follows:
December 31 1996 Backlog -------------------------- Not Filled 1996 1995 in 1997 --------- ------- ------- Marine Group $ 7,566 $5,686 $5,123 Combat Systems Group 2,057 1,103 1,255 Other 727 597 666 ------- ------ ------ Total Backlog $10,350 $7,386 $7,044 ======= ====== ====== Funded Backlog $ 6,161 $5,227 $3,308 ======= ====== ======
Total backlog represents the estimated remaining sales value of work primarily performed under authorized U.S. government contracts. Funded backlog 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. For further discussion, see Management's Discussion and Analysis of the Results of Operations and Financial Condition on pages 18 through 22 of the 1996 Shareholder Report, filed as Exhibit 13 to this Annual Report on Form 10-K and incorporated herein by reference. Environmental Controls The 1990 Clean Air Act (Act) had a significant impact on Freeman Energy. The Act requires, among other things, a phased reduction in sulfur dioxide emissions by coal burning facilities. Virtually all of the coal in Freeman Energy's Illinois basin mines has medium or high sulfur content. Freeman Energy's two long-term contract customers have clean coal technologies which allow for utilization of Freeman Energy's coal under the new regulations. Freeman Energy has targeted customers with clean coal technology to mitigate the impact of regulations in the near term. The long-term impact of the Act is not known. Federal, state and local requirements relating to the discharge of materials into the environment and other factors affecting the environment have had and will continue to have an impact on the manufacturing operations of the company. Thus far, compliance with the requirements has been accomplished without material effect on the company's capital expenditures, earnings or competitive position. While it is expected that this will continue to be the case, the company cannot assess the possible effect of compliance with future requirements. Additional information relating to the impact of environmental controls is included under the caption "Environmental" in Note M to the Consolidated Financial Statements on page 32 of the 1996 Shareholder Report, filed as Exhibit 13 to this Annual Report on Form 10-K, and is incorporated herein by reference. 4 7 Patents Numerous patents and patent applications are owned by the company and utilized in its development activities and manufacturing operations. In many cases, however, the U.S. government has an irrevocable, non-exclusive, royalty-free license, pursuant to which the government may use or authorize others to use the inventions covered by the patents. Pursuant to similar arrangements, the government may consent to the company's use of inventions covered by patents. Patents and licenses are important in the operation of the company's business, as one of management's key objectives is developing and providing its customers with advanced technological solutions. Employees At December 31, 1996, the company had approximately 23,100 employees, of whom approximately 60 percent were covered by collective bargaining agreements with various unions, the most significant of which are the International Association of Machinists and Aerospace Workers, the Industrial Union of Marine and Shipbuilding Workers of America, the Metal Trades Council of New London, Connecticut, the United Auto Workers Union, the Office and Professional Employees International Union and the United Mine Workers of America. During 1997, bargaining agreements with the United Auto Workers Union and the Industrial Union of Marine and Shipbuilding Workers of America are scheduled to expire and are subject to negotiations with the respective unions. 5 8 ITEM 2. PROPERTIES A summary of floor space at the main facilities of the Marine and Combat Systems Groups follows (square feet in millions):
COMPANY GOVERNMENT OWNED LEASED FURNISHED FACILITIES FACILITIES FACILITIES TOTAL --------------- ------------- -------------- ------------- MARINE GROUP: Electric Boat Groton, Connecticut 2.6 2.6 Quonset Point, Rhode Island 0.4 1.1 1.5 Avenel, New Jersey 0.4 0.4 Bath Iron Works Bath, Maine 1.1 1.1 East Brunswick, Maine 0.6 0.6 Portland, Maine 0.1 0.1 ------ ------ ------ ------ TOTAL MARINE GROUP 5.1 1.2 0.0 6.3 ====== ====== ====== ====== COMBAT SYSTEMS GROUP: Land Systems Lima, Ohio 1.6 1.6 Muskegon, Michigan 1.0 1.0 Scranton, Pennsylvania 0.3 0.3 Woodbridge, Virginia 0.1 0.1 Tallahassee, Florida 0.1 0.1 ------ ------ ------- ------- TOTAL COMBAT SYSTEMS GROUP 1.1 0.4 1.6 3.1 ====== ====== ======= =======
OTHER. Freeman Energy operates three underground mines and one surface mine in Illinois. The Orient No. 6 underground mine was idled in early 1997. Coal preparation facilities and rail loading facilities are located at each mine sufficient for its output. Material Service operates several stone quarries, as well as sand and gravel pits and yards in the Chicago, Illinois area for its aggregates business. REAL ESTATE HELD FOR DEVELOPMENT. As part of the sale of businesses, certain related properties were retained by the company. These properties have been segregated on the Consolidated Balance Sheet as real estate held for development. The company has retained outside experts to support the development of plans which are intended to maximize the market value of these properties. These properties include 232 acres in Kearny Mesa and 2,420 acres in Sycamore Canyon, both of which are in San Diego, California; and 363 acres in Rancho Cucamonga, California. Most of this property is undeveloped. The company owns 700,000 square feet of building space at Rancho Cucamonga and 200,000 square feet of building space at Sycamore Canyon. The buildings at Kearny Mesa are currently in the process of demolition in preparation for development activity. 6 9 ITEM 3. LEGAL PROCEEDINGS The information under the captions "Litigation" and "Environmental" in Note M and the information in Note N to the Consolidated Financial Statements appearing on pages 31 through 33 of the 1996 Shareholder Report, included in this Annual Report on Form 10-K as Exhibit 13, is incorporated herein by reference in response to this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the company's security holders during the fourth quarter of the year ended December 31, 1996. SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE COMPANY The name, age, offices and positions held for the last five years of the company's executive officers who are not directors are as follows:
AGE AT DECEMBER 31 NAME, POSITION AND OFFICE 1996 ------------------------- --------------- David D. Baier -- Vice President Taxes since August 1995; Staff Vice President Taxes 42 March 1994 -- August 1995; Corporate Tax Counsel and Director of Planning and Litigation September 1991 -- March 1994 G. Kent Bankus -- Vice President Government Relations since April 1993; Staff Vice President 54 Aerospace Programs and Field Offices July 1991 -- April 1993 Edward C. Bruntrager -- Vice President and General Counsel since March 1994; Assistant General 49 Counsel January 1987 -- March 1994 Allan C. Cameron -- Vice President of the company and President of Bath Iron Works since 50 March 1996; Executive Vice President and Chief Operating Officer of Bath Iron Works July 1994 -- March 1996; Facility Manager of Electric Boat May 1993 -- June 1994; Director of Operations of Electric Boat January 1989 -- May 1993 Gordon R. England -- Executive Vice President of the Combat Systems Group since March 1997; 59 President - Lockheed Fort Worth March 1993 -- March 1995; Executive Vice President of the company and President - Aircraft Systems of the Fort Worth Division July 1991 -- March 1993 David H. Fogg -- Staff Vice President and Treasurer since November 1994; Staff Vice President 41 and Assistant Treasurer May 1994 -- November 1994; Corporate Director of Finance and Assistant Treasurer January 1994 -- May 1994; Corporate Director of Risk Management November 1991 -- January 1994 Paul A. Hesse -- Vice President Communications and Secretary since February 1996; Vice President 55 Communications May 1991 -- February 1996 Raymond E. Kozen -- Vice President Planning and Analysis since March 1997; Staff Vice President 55 for Special Projects December 1987 -- March 1997 Kenneth J. Leenstra -- Vice President of the company and President of Armament Systems 59 since February 1997; President of Armament Systems - Lockheed Martin January 1990 -- January 1997
7 10
AGE AT DECEMBER 31 NAME, POSITION AND OFFICE 1996 ------------------------- --------------- Michael J. Mancuso -- Senior Vice President and Chief Financial Officer 54 since March 1997; Vice President and Chief Financial Officer November 1994 -- March 1997; Vice President and Controller May 1994 -- November 1994; Division Vice President and Chief Financial Officer of Land Systems September 1993 -- May 1994; Vice President and Controller - Commercial Engine Business, Pratt & Whitney, United Technologies Corporation (UTC) July 1992 -- September 1993; Vice President - Finance and Administration, Hamilton Standard, UTC August 1989 -- July 1992 Daniel P. Schmutte -- Vice President of the company and President of Defense Systems 46 since February 1997; Vice President Operations August 1995 - February 1997; Staff Vice President and Assistant to the President/Chief Executive Officer June 1993 -- August 1995; Assistant to the President December 1990 -- June 1993 John W. Schwartz -- Staff Vice President and Controller since November 1994; Corporate Director 40 of Accounting July 1992 -- November 1994; Vice President- Corporate Accounting of MNC Financial, Inc. February 1988 -- June 1992 Henry J. Sechler -- Vice President International Business Development since August 1991 64 James E. Turner, Jr. -- Executive Vice President of the Marine Group since October 1995; 62 Executive Vice President of the company and President of Electric Boat April 1993 -- October 1995; Executive Vice President of the Marine, Land Systems and Services Group February 1991 -- April 1993 Arthur J. Veitch -- Vice President of the company and President of Land Systems since 50 February 1997; Vice President of the company and Senior Operating Officer of Land Systems August 1995 -- February 1997; Division Vice President and General Manager of the Convair Division August 1992 -- August 1995; Division Vice President and Program Director - Aircraft Programs of the Convair Division May 1991 -- August 1992 John K. Welch -- Vice President of the company and President of Electric Boat since 46 October 1995; Division Vice President Programs and Planning of Electric Boat April 1994 -- October 1995; Division Vice President Program Management and Development of Electric Boat June 1989 -- April 1994 W. Peter Wylie -- Vice President Human Resources and Administration since August 1995; 57 Group Vice President - Hughes Missile Systems Company August 1992 -- January 1995; Division Vice President Human Resources of the company's Missiles and Electronics Group May 1991 -- August 1992 Michael W. Wynne -- Senior Vice President International, Planning and Business Development 52 since March 1997; Vice President and General Manager of Lockheed Martin, Martin Marietta Astronautics Division May 1994 -- February 1997; Vice President of the company and President of the Space Systems Division August 1992 -- May 1994; Corporate Vice President and General Manager of the Space Systems Division March 1991 -- August 1992
All executive officers of the company are elected annually. There are no family relationships, as defined, among any of the above executive officers. No executive officer of the company was selected pursuant to any arrangement or understanding between the officer and any other person. 8 11 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The company's common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. The high and low market price of the company's common stock and the cash dividends declared for each quarterly period during the two most recent fiscal years are included in Note R to the Consolidated Financial Statements appearing on page 37 of the 1996 Shareholder Report, included in this Annual Report on Form 10-K as Exhibit 13, and are incorporated herein by reference. There were 22,129 common shareholders of record of the company's common stock at December 31, 1996. ITEM 6. SELECTED FINANCIAL DATA The information appearing on page 39 of the 1996 Shareholder Report, included in this Annual Report on Form 10-K as Exhibit 13, is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing on pages 18 through 22 of the 1996 Shareholder Report, included in this Annual Report on Form 10-K as Exhibit 13, is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information appearing on pages 23 through 39 of the 1996 Shareholder Report, included in this Annual Report on Form 10-K as Exhibit 13, is incorporated herein by reference in response to this item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required to be set forth herein, except for a list of the executive officers other than directors that is provided in Part I of this report, is included under the caption "Election of Directors" in the company's definitive Proxy Statement which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required to be set forth herein is included under the captions "Board of Directors and Board Committees" and "Executive Compensation" in the company's definitive Proxy Statement which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required to be set forth herein is included under the captions "Election of Directors" and "Principal Shareholders" in the company's definitive Proxy Statement which is incorporated herein by reference. 9 12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required to be set forth herein is included under the captions "Employment Agreements and Other Arrangements" and "Transactions Involving Directors and Others" in the company's definitive Proxy Statement which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The Report of Independent Public Accountants and Consolidated Financial Statements appearing in the 1996 Shareholder Report on the pages listed in the following index are included in this Annual Report on Form 10-K as Exhibit 13, and are incorporated herein by reference.
Page of 1996 Shareholder Report ------------ Report of Independent Public Accountants 38 Consolidated Financial Statements: Consolidated Statement of Earnings 23 Consolidated Balance Sheet 24 Consolidated Statement of Cash Flows 25 Consolidated Statement of Shareholders' Equity 26 Notes to Consolidated Financial Statements (A to R) 27-37
2. Financial Statement Schedules No schedules are submitted because they are either not applicable or not required, or because the required information is included in the financial statements or the notes thereto. 3. Exhibits--See Index on pages 12 and 13 of this Annual Report on Form 10-K. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1996. 10 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Staff Vice President and Controller March 21, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 21, 1997, by the following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors. /s/James R. Mellor Chairman, Chief Executive Officer and Director - ------------------ (Principal Executive Officer) James R. Mellor /s/ Nicholas D. Chabraja Vice Chairman and Director - ------------------------ Nicholas D. Chabraja /s/ Michael J. Mancuso Senior Vice President and Chief Financial Officer - ---------------------- (Principal Financial Officer) Michael J. Mancuso /s/ John W. Schwartz Staff Vice President and Controller - -------------------- (Principal Accounting Officer) John W. Schwartz * Director - ----------------------- Frank C. Carlucci * Director - ----------------------- James S. Crown * Director - ----------------------- Lester Crown * Director - ----------------------- Charles H. Goodman * Director - ----------------------- Gordon R. Sullivan * Director - ----------------------- Carlisle A. H. Trost
*By Paul A. Hesse pursuant to Power of Attorney executed by the directors listed above, which Power of Attorney has been filed with the Securities and Exchange Commission. /s/ Paul A. Hesse ----------------- Paul A. Hesse Secretary 11 14 INDEX TO EXHIBITS
Note Exhibit Number Number Description ------ ------ ----------- (5) 3-1A --Restated Certificate of Incorporation, effective May 21, 1991 3-2C --Bylaws as amended effective August 7, 1996 4 --Letter re agreement to furnish copy of indenture (1) 10-1A --Amendment of Mining Leases between American National Bank and Trust of Chicago, Trustee, and La Salle National Bank, Trustee, to Freeman Coal Mining Corporation, dated January 1, 1960 (1) 10-1B --Amendatory Agreement between Freeman United Coal Mining Company and American National Bank and Trust Company, as Trustee, and La Salle National Bank, as Trustee, dated January 1, 1975 (3) 10-6A --General Dynamics Corporation Incentive Compensation Plan adopted February 3, 1988, approved by the shareholders on May 4, 1988 (4) 10-6B --General Dynamics Corporation Incentive Compensation Plan (as amended), approved by shareholders on May 1, 1991 (2) 10-7D --Facilities Contract DAAE07-83-E-A007 dated January 29, 1983, between General Dynamics Land Systems, Inc. and the United States relating to government-owned equipment at the Scranton Defense Plant, Eynon, Pennsylvania (4) 10-7E --Facilities Contract DAAE07-90-E-A001 dated June 24, 1990, between General Dynamics Land Systems, Inc. and the United States relating to government-owned facilities and equipment at the Lima Army Tank Plant, Lima, Ohio (7) 10-8B --General Dynamics Corporation Retirement Plan for Directors adopted March 6, 1986, as amended May 5, 1993 10-14A --Lease Agreement dated December 20, 1996, between Electric Boat Corporation and the Rhode Island Economic Development Corporation (6) 10-18 --Employment Agreement between the company and James R. Mellor dated as of March 17, 1993 (9) 10-18A --Amendment to employment agreement between the company and James R. Mellor dated as of October 3, 1995 10-18B --Amendment to employment agreement between the company and James R. Mellor dated as of November 5, 1996 (6) 10-22 --Form of Agreement entered into in 1993 between the company and Corporate Officers who were being retained in employment with the company (8) 10-24 --Asset Purchase Agreement, dated August 17, 1995, between the company and Bath Iron Works Corporation (9) 10-25 --Lease Agreement dated January 14, 1982, between Bath Iron Works Corporation and the City of Portland, Maine, relating to pier facilities in the Portland, Maine harbor (9) 10-26 --Lease Agreement dated January 14, 1982, between Bath Iron Works Corporation and the State of Maine, relating to a dry dock facility in the Portland, Maine harbor (9) 10-27 --Form of Employment Agreement pertaining to change of control entered into between the company and key executives (10) 10-28 --Asset Purchase and Sale Agreement, dated November 6, 1996, as amended December 20, 1996, between the company and Lockheed Martin Corporation 10-29 --Employment agreement between the company and Nicholas D. Chabraja dated November 12, 1996 10-30 --General Dynamics Corporation Incentive Compensation Plan adopted by the board of directors as of February 5, 1997
12 15 INDEX TO EXHIBITS
Note Exhibit Number Number Description - ------ ------ ----------- 11 --Statement re computation of per share earnings 13 --1996 Shareholder Report (pages 18 through 39) 21 --Subsidiaries 23 --Consent of Independent Public Accountants 24 --Power of Attorney of the Board of Directors 27 --Financial Data Schedule
NOTES (1) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1980, and filed with the Commission March 31, 1981, and incorporated herein by reference. (2) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1982, and filed with the Commission March 30, 1983, and incorporated herein by reference. (3) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1987, and filed with the Commission March 17, 1988, and incorporated herein by reference. (4) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1990, and filed with the Commission March 29, 1991, and incorporated herein by reference. (5) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1991, and filed with the Commission March 26, 1992, and incorporated herein by reference. (6) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1992, and filed with the Commission March 30, 1993, and incorporated herein by reference. (7) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1994, and filed with the Commission March 9, 1995, and incorporated herein by reference. (8) Filed as an exhibit to the company's current report on Form 8-K filed with the Commission September 28, 1995, and incorporated herein by reference. (9) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1995, and filed with the Commission March 21, 1996, and incorporated herein by reference. (10) Filed as an exhibit to the company's current report on Form 8-K filed with the Commission January 15, 1997, and incorporated herein by reference. 13 EX-3.2.C 2 BYLAWS. 1 Exhibit 3-2C, Annual Report on Form 10-K for the year ended December 31, 1996 Commission File Number 1-3671 As Amended effective 7 August 1996 By-Laws of GENERAL DYNAMICS CORPORATION ARTICLE I OFFICES SECTION 1. Registered Office. The registered office of General Dynamics Corporation (hereinafter called the Corporation) in the State of Delaware shall be in the City of Dover, County of Kent. The registered agent of the Corporation in said State is United States Corporation Company. SECTION 2. Other Offices. The Corporation may have such other offices in such places, either within or without the State of Delaware, as the Board of Directors of the Corporation (hereinafter called the Board) may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of any other proper business notice of which was given in the notice of such meetings shall be held on such date and at such time as shall be designated by the Board. If any annual meeting shall not be held on the date designated therefor the Board shall cause the meeting to be held as soon thereafter as conveniently may be. SECTION 2. Special Meetings. A special meeting of the stockholders for any purpose or purposes may be called at any time by the Chairman of the Board or by a majority of the directors. SECTION 3. Place of Meeting. All meetings of the stockholders shall be held at such place or places, within or without the State of Delaware, as may from time to time be designated by the Board. SECTION 4. Notice of Meetings. Every stockholder shall furnish the Corporation through its Secretary with an address at which notices of meetings and all other corporate notices may be served on or mailed to him. Except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, notice of each meeting of the stockholders shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting, by delivering a written notice thereof to him personally, or by depositing such notice in the United States mail in a postage prepaid envelope, directed to him at his post-office address furnished by him to the Corporation, or, if he shall not have furnished to the Corporation his address but his address shall otherwise appear on the records of the Corporation, then at his address as it shall so appear on the records of the Corporation, or, if he shall not have furnished to the Corporation his post-office address and his address shall not otherwise appear on the records of the Corporation, then at the registered office of the Corporation in the State of Delaware. Except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, no 2 publication of any notice of a meeting of the stockholders shall be required, nor shall the giving of any notice of any adjourned meeting of stockholders be required if the time and place thereof are announced at the meeting at which the adjournment is taken. Every notice of a meeting of the stockholders shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. SECTION 5. Quorum. At each meeting of the shareholders, except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, the holders of record of a majority of the issued and outstanding shares of stock of the Corporation entitled to be voted at such meeting, present either in person or by proxy, shall constitute a quorum for the transaction of business, provided, however, that in any case where the holders of Preferred Stock or any series thereof are entitled to vote as a class, a quorum of the Common Stock and a quorum of the Preferred Stock or such series thereof shall be separately determined. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in interest of the stockholders of the Corporation present in person or by proxy and entitled to vote, or, in the absence of any stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn the meeting from time to time, provided, however, that at any such meeting where the holders of Preferred Stock or any series thereof are entitled to vote as a class, if one class or series of stock of the Corporation but not the other has a quorum present, the meeting may proceed with the business to be conducted by the class or series having a quorum present, and may be adjourned from time to time in respect of business to be conducted by the class or series not having a quorum present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting in person or by proxy of stockholders holding the number of shares of stock of the Corporation entitled to vote thereat required by statute, the Certificate of Incorporation or these By-Laws for action upon any given matter shall not prevent action at such meeting upon any other matter which may properly come before the meeting, if there shall be present thereat in person or by proxy stockholders holding the number of shares of stock of the Corporation entitled to vote thereat required in respect of such other matter. SECTION 6. Voting. (a) Except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, each stockholder shall at each meeting of the stockholders be entitled to one vote in person or by proxy for each share of stock of the Corporation entitled to be voted thereat held by him and registered in his name on the books of the Corporation on such date as may be fixed pursuant to Article VII of these By-Laws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting. (b) Shares of its own stock belonging to the Corporation, or to another corporation if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall not be entitled to vote. (c) Persons holding stock having voting power in a fiduciary capacity, or their proxies, shall be entitled to vote the shares so held, and persons whose stock having voting power is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. (d) No proxy shall be voted or acted upon after three years from its date, unless said proxy provides for a longer period. (e) If shares shall stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons shall have the same fiduciary relationship respecting the same shares, unless the Secretary shall have been given written notice to the contrary and have been furnished with a copy of the instrument or 3 order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one shall vote, his act shall bind all; (ii) if more than one shall vote, the act of the majority so voting shall bind all; and (iii) if more than one shall vote, but the vote shall be evenly split on any particular matter, then, except as otherwise required by the General Corporation Law of the State of Delaware, each faction may vote the shares in question proportionally. If the instrument so filed shall show that any such tenancy is held in unequal interests, the majority or even-split for the purpose of the next foregoing sentence shall be a majority or even-split in interest. (f) At all meetings of the stockholders all matters, except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, shall be decided by the vote of a majority in interest of the stockholders present in person or by proxy and entitled to vote on such matters, a quorum being present. Except in the case of votes for the election of directors and for other matters where expressly so required, the vote at any meeting of the stockholders on any question need not be by ballot, unless demanded by a stockholder present in person or by proxy and entitled to vote on such matters, or directed by the chairman of the meeting. Upon a demand of any such stockholder, or at the direction of such chairman, that a vote by ballot be taken on any question, such vote shall be taken. On a vote by ballot each ballot shall be signed by the stockholder voting, or on his behalf by his proxy, and it shall show the number of shares voted by him. SECTION 7. Lists of Stockholders. It shall be the duty of the Secretary or other officer who shall have charge of the stock ledger of the Corporation, either directly or through another officer designated by him or through a transfer agent or transfer clerk appointed by the Board, to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders of each class entitled to vote at said meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, at the place where the meeting is to be held for said ten days and shall be produced and kept at the time and place of the meeting, during the whole time thereof, and may be inspected by any stockholder who may be present. Upon the willful neglect or refusal of the directors to produce such list at any meeting for the election of director, they shall be ineligible for election to any office at such meeting. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, such list or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 8. Inspectors of Votes - Judges. Before, or at, each meeting of the stockholders at which a vote by ballot is to be taken, the Board, or the Chairman of such meeting, shall appoint two Inspectors of Votes or Judges to conduct the vote thereat. Each Inspector of Votes or Judge so appointed shall first subscribe an oath or affirmation faithfully to execute the duties of an Inspector of Votes or Judge at such meeting with strict impartiality and according to the best of his ability. Such Inspectors of Votes or Judges shall have the duties prescribed by law and shall decide upon the qualifications of voters and accept their votes and, when the vote is completed, shall count and ascertain the number of shares voted respectively for and against the question or questions on which a vote was taken and shall make and deliver a certificate in writing to the secretary of such meeting of the results thereof. The Inspectors of Votes or Judges need not be stockholders, and any officer or director may be an Inspector of Votes or Judge on any question other than a vote for or against his election to any position with the Corporation or any other question in which he may be directly interested. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting. 4 SECTION 9. Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in the By-Laws shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 9, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 9. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this By-Law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 9, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. SECTION 10. Notice of Business. At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this Section 10, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 10. For business to be properly brought before a stockholder meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at a stockholder meeting except in accordance with the procedures set forth in this Section 10. The Chairman of the meeting 5 shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the By-Laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE III BOARD OF DIRECTORS SECTION 1. General Powers. The property, business and affairs of the Corporation shall be managed by the Board. The Board may adopt such rules and regulations for the conduct of its meetings and the management of the affairs of the Corporation as it may deem proper, not inconsistent with statute, the Certificate of Incorporation and these By-Laws. SECTION 2. Number, Qualifications and Term of Office. The number of directors shall be not less than five nor more than fifteen, as shall be fixed from time to time by resolution of the Board pursuant to a vote of two-thirds of the directors then in office. Individuals over the age of seventy-five years may stand for election as directors only with the approval of the Executive and Nominating Committee and a two-thirds vote of the Directors then in office for a specified reason to be enumerated in the Corporation's proxy statement. In no event shall a Director stand for election beyond the age of eighty. A majority of the Board shall at all times be comprised of Outside Directors. For purposes of this Section, an Outside Director shall mean a person who is not currently employed by the Corporation or any of its Subsidiaries or Affiliates. All directors who are not Outside Directors shall be known as Inside Directors. Collectively, Inside and Outside Directors shall be known as directors. Any Inside Director who served as the Chief Executive Officer of the Corporation after January 1, 1992, and whose employment with the Corporation terminates, may be invited by the Executive and Nominating Committee to continue to serve as a member of the Board for a transitional period of up to one year following the effective date of his/her termination or for an additional period of time thereafter, but then only with a vote of two-thirds of the Directors then in office and for a specified reason to be enumerated in the Corporation's proxy statement. Each director shall hold office until the annual meeting of the stockholders next following his/her election and until his/her successor shall have been elected and shall have qualified, or until his/her death, or until he/she shall earlier resign. This Section shall not be amended except upon a vote of two-thirds of the directors then in office. SECTION 3. Chairman and Vice Chairman. The Board of Directors shall elect a Chairman of the Board and a Vice Chairman of the Board from among the directors. These individuals need not be employees of the Corporation. The Chairman of the Board shall have the overall responsibility for all matters pertaining to the Board, including, without limitation, meetings of the Board. In the absence of the Chairman of the Board, the Vice Chairman of the Board shall perform these duties. SECTION 4. Resignations. Any director may resign at any time by giving notice to the Chairman of the Board or to the Board, in writing or by telegraph, cable or wireless. Any such resignation shall take effect at the time specified therein or, if no time is so specified, upon its receipt by the Chairman of the Board or by the Board; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5. Vacancies. Except as provided in the Certificate of Incorporation, any vacancy in the Board, whether caused by death, resignation, increase in the number of directors (whether by resolution of the Board, amendment of these By-Laws or otherwise) or any other cause, may be filled either by the stockholders of the Corporation entitled to vote for the election of directors, at a meeting of the 6 stockholders called for the purpose, or by vote of two-thirds of the directors then in office though less than a quorum; and each director so chosen shall hold office until the next annual meeting of stockholders and until his successor shall have been elected and shall have qualified, or until his earlier death, or until he shall earlier resign. This Section shall not be amended except upon a vote of two-thirds of the directors then in office. SECTION 6. First Meeting. Promptly after, and on the same day as, each annual election of directors, the Board may, if a quorum be present, meet at the place at which such election was held, for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given. Such meeting may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings of the Board. SECTION 7. Regular Meetings. Regular meetings of the Board shall be held at such times and places as the Board shall determine. Notice of regular meetings shall be mailed to each director addressed to him at his residence or usual place of business, at least five days before the meeting. This Section shall not be amended except upon a vote of two-thirds of the directors then in office. SECTION 8. Special Meetings; Notice. Special meetings of the Board shall be held whenever called by the Chairman of the Board, or by the Secretary on the written request of any three directors. Except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, notices of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least five days before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph, cable or facsimile transmission, or shall be delivered personally or by telephone, not later than two days before the day on which the meeting is to be held. The purposes of any special meeting shall be stated with particularity in the notice thereof. This Section shall not be amended except upon a vote of two-thirds of the directors then in office. SECTION 9. Place of Meetings. The Board may hold its meetings at such place or places within or without the State of Delaware as it may from time to time determine by resolution, or as shall be specified in the respective notices of meetings. SECTION 10. Quorum and Manner of Acting. Except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, five directors shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum the Chairman of the Board or a majority of the directors present may adjourn any meeting from time to time until a quorum shall be present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Prompt notice of any adjourned meetings shall be given. This Section shall not be amended except upon a vote of two-thirds of the directors then in office. SECTION 11. Committees of Board of Directors. Except as otherwise provided in these By-Laws, the Board may, by resolution or resolutions passed by a majority of the Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions, shall have and may exercise the powers of the Board in the management of the property, business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. A majority of all the members of such committee may fix its rules of procedure, determine its manner of acting and fix the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given unless the Board shall otherwise by resolution provide. The Board shall have 7 power to change the members of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time. SECTION 12. Ex Officio Member of Committees. The Chairman of the Board shall be a member "exofficio" of all committees of the Board, except where expressly prohibited by statute, the Certificate of Incorporation or these By-Laws or by the terms of any plan or other document establishing any such committee. SECTION 13. Agenda. An agenda of matters to come before each meeting of the Board shall be sent to each director at least five days before each regular meeting of the Board and at least three days before each special meeting of the Board. This Section shall not be amended except upon a vote of two-thirds of the directors then in office. ARTICLE IV OFFICERS SECTION 1. Number and Qualification of Officers. The principal officers of the Corporation shall be a President, one or more Vice Presidents, a Controller, a Secretary, and a Treasurer. The Board of Directors may choose such other officers as assistants to the above as it may from time to time determine. The President shall be chosen from among the directors. SECTION 2. Election and Term of Office. The officers shall be chosen annually by the Board. Each officer shall hold office until his successor shall have been elected and shall have qualified, or until his earlier death or until his earlier resignation or removal in the manner hereinafter provided. SECTION 3. Powers and Duties of Officers. The powers and duties of the officers shall be as determined from time to time by resolution of the Board, or in such other manner as the Board may authorize, not inconsistent with statute, the Certificate of Incorporation and these By-Laws. SECTION 4. Resignation and Removal. Any officer may resign at any time by giving notice to the Chairman of the Board or to the Board, in writing or by telegraph, cable or wireless. Any such resignation shall take effect at the time specified therein or, if no time is so specified, upon its receipt by the Chairman of the Board or by the Board; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any officer may be removed, either with or without cause, at any time, by the vote of a majority of the Board. SECTION 5. Vacancies. A vacancy in any office because of death, resignation, removal or any other cause shall be filled for the unexpired portion of the term by the Board. ARTICLE V CONTRACTS, CHECKS, DRAFTS AND PROXIES SECTION 1. Contracts. The Board may by resolution authorize any officer or officers, or agent or agents, to enter into any contract or engagement and to execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board or by these By-Laws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or for any amount. 8 SECTION 2. Checks and Drafts. All checks, drafts or other orders for the payment of money, issued in the name of the Corporation, shall be signed in such manner as shall from time to time be determined by resolution of the Board. SECTION 3. Proxies. All proxies or instruments authorizing any person to attend, vote, consent or otherwise act at any and all meetings of stockholders of any corporation in which the Corporation shall own shares or in which it shall otherwise be interested shall be executed by the Chairman of the Board or such other officer as the Chairman of the Board or the Board may from time to time determine. ARTICLE VI CAPITAL STOCK SECTION I. Certificates for Stock. Every holder of shares of stock of the Corporation shall be entitled to have a certificate, in such form as the Board shall prescribe, certifying the number and class of shares of stock of the Corporation owned by him. Each such certificate shall be signed in the name of the Corporation by the Chairman of the Board, the President or a Vice-President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him; provided, however, that if such certificate is countersigned (a) by a transfer agent other than the Corporation or its employee or (b) by a registrar other than the Corporation or its employee, the signatures of any such Chairman of the Board, President, Vice-President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. In case any officer who shall have signed, or whose facsimile signature shall have been placed upon, any such certificate or certificates shall cease to be such officer before such certificate or certificates shall have been issued by the Corporation, such certificate or certificates may be issued by the Corporation with the same effect as though he were such officer at the date of issue. . SECTION 2. Transfer of Stock. Title to a certificate and to the shares of stock of the Corporation represented thereby shall be transferred only (a) by delivery of the certificate endorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby, or (b) by delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby. Such assignment or power of attorney may be either in blank or to a specified person. SECTION 3. Registered Holders. The Corporation shall be entitled to treat the registered holder of any certificate for stock of the Corporation as the absolute and exclusive owner thereof and of the shares represented thereby for all purposes, including without limitation the right to receive dividends and to vote and liability for calls and assessments, and, accordingly, the Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any person, whether or not the Corporation shall have express or other notice thereof, save as expressly provided by statute. SECTION 4. Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with statute, the Certificate of Incorporation or these By-Laws, concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any 9 principal officer or officers to appoint, one or more Transfer Clerks or one or more Transfer Agents and one or more Registrars, and may require all certificates for shares of stock of the Corporation to bear the signature or signatures of any of them. ARTICLE VII RECORD DATE SECTION 1 . Fixing of Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action other than stockholder action by written consent, the Board of Directors may fix a record date, which shall not precede the date such record date is fixed and shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any such other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. ARTICLE VIII WAIVERS OF NOTICE Whenever notice is required to be given by statute, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders shall 10 constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE IX AMENDMENTS Subject to any limitations that may be imposed by the stockholders, and except as specifically provided in Article III of these By-Laws, the Board may make by-laws and from time to time may alter, amend or repeal any by-laws. The stockholders may also adopt, alter, amend or repeal any by-laws at any meeting provided that notice of such proposed adoption, alteration, amendment or repeal is included in the notice of such meeting. CERTIFICATE The undersigned, Secretary of GENERAL DYNAMICS CORPORATION, a Delaware corporation, does hereby certify that the foregoing is a true copy of the By-Laws of the Corporation in effect as of this date. WITNESS my hand and the seal of the Corporation this day of , 19 ---------------------------- Secretary (CORPORATE SEAL) Secretary EX-4 3 AGREEMENT LETTER. 1 EXHIBIT 4, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-3671 GENERAL DYNAMICS CORPORATION LETTER RE AGREEMENT TO FURNISH COPY OF INDENTURE Securities and Exchange Commission 450 Fifth Street, NW Judiciary Plaza Washington, D.C. 20549 To the Commission: Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the company is not filing the indenture with respect to long-term debt because the amount of securities currently authorized under the indenture does not exceed 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. Upon request, the company will furnish copies of the indenture to the Securities and Exchange Commission. Very truly yours, /s/ Paul A. Hesse ----------------- Paul A. Hesse Secretary General Dynamics Corporation EX-10.14.A 4 LEASE AGREEMENT. 1 Exhibit 10-14A, Annual Report on Form 10-K for the year ended December 31, 1996 Commission File Number 1-3671 LEASE AGREEMENT This Lease Agreement (this "Lease") is made and entered into on the date, between or among the parties and upon the terms and conditions hereinafter set forth. SECTION 1. INFORMATION 1.1 Date of Lease: December 20,1996 1.2 "Landlord": Rhode Island Economic Development Corporation, a Rhode Island public corporation formed pursuant to Chapter 64 of Title 42 of the Rhode Island General Laws, 1956 as amended 1.3 "Landlord's Address": 1330 Davisville Road, North Kingstown, Rhode Island 02852 Landlord may change such address at any time by giving notice of such change to Tenant. 1.4 "Tenant": a. Name: Electric Boat Corporation, a Delaware corporation b. 75 Eastern Point Road, Groton, CT 063404989 1.5 The "Premises": That portion of Landlord's land, buildings and site improvements thereon located on the property described in Exhibit A hereto. All Exhibits are attached hereto and made a part hereof. 1.6 Additional Parties: As a portion of the Premises is owned by the State of Rhode Island (the "State") and subject to the terms of that certain Lease and Operating Agreement between the State and the Rhode Island Airport Corporation, a subsidiary corporation of Landlord ("RIAC"), dated June 25,1993 (the "Airport Lease"), the State and RIAC are parties to this Lease for the purposes of confirming their respective consent to the terms hereof pursuant to Section 11.2(a) of the Airport Lease. 1.7 "Term" of Lease: From: January 1, 1997 to and including: December 31,2006 2 1.8 Purpose: Operation of a business for the manufacturing and fabrication of ships, including submarines and other metal fabrication industries with related administrative and support uses as may be required. 1.9 Rental: (a) The following shall be the Base Rentals ("Base Rentals") to be paid on an annual and monthly basis for the periods set forth below:
Date Rental Date Rental Annual Monthly commences terminates Base Rental Base Rental --------- ---------- ----------- ----------- a. January 1,1997 December 31,1998 $1,827,428 $152,285.66 b. January 1,1999 December31, 2004 $1,327,428 $110,619.00 c. January 1, 2005 December31, 2006 $ 827,428 $ 68,952.33
(b) Employment Rent Incentive. (i) Base Rental shall be adjusted based upon employment incentives which are the result of full-time equivalent employees of Tenant working at the Premises or other real property and facilities owned by Tenant and located at the Quonset/Davisville Port and Commerce Park (the Premises and such other facilities of Tenant located at Quonset/Davisville are referred to in this Section 1.9 as the "ERI Site"- from the term Employment Rent Incentive Site) and employed by or on behalf of Tenant. For purposes hereof, full-time equivalent employees ("FTE") shall mean that person or persons who work at the ERI Site a combined equivalent of no less than 35 hours per week. Such rental incentives shall be based upon the following amounts of FTE of Tenant located upon the ERI Site: Below 800 FTE An increase of annual basic rental equal to $500 for each FTE below 800 employed at the Premises by Tenant. 800 to and including 1,000 FTE No change in basic annual rental From 1,001 FTE to and including 1,500 FTE 1% reduction in annual basic rental for each 50 FTE Above 1,500 FTE 2% reduction for each 50 FTE
3 (ii) Upon the commencement date of the term of this Lease, Tenant shall notify Landlord in writing of the number of FTE working for or on behalf of Tenant at the ERI Site. Every six months thereafter during the Term of this Lease, Tenant shall certify to Landlord the daily average number of FTE working for or on behalf of it at the ERI Site for the preceding six-month period, and base annual Rental adjustment calculations shall be made by Landlord and Tenant pursuant to the Terms hereof. Base Rental shall be adjusted, if such adjustment is necessary pursuant to the terms hereof, based upon the FTE calculations set forth in such certification from Tenant to Landlord. (iii) All certifications of FTE from Tenant to Landlord shall be subject to audit by Landlord at reasonable times and no more frequently than four times per year. 1.10 "Additional Rent": Any amounts, payments, or other charges, credits or funds due from Tenant to Landlord or others hereunder in any form whatsoever (other than Base Rental) shall be "Additional Rent" hereunder, shall be in the nature of Rental for purpose of determining Landlord's rights and Tenant's obligations with respect thereto and shall be due and payable without deduction or setoff other than as set forth in this Lease. 1.11 "Additional Premises": That parcel of land and building thereon commonly known as Building 17 and more particularly identified as Parcel 4 on Exhibit A attached hereto. Tenant shall lease the Additional Premises from Landlord pursuant to all terms and conditions set forth herein, except as follows: (a) Tenant shall lease the Additional Premises for a term of two (2) years commencing January 1, 1997 and terminating December 31, 1998 (the "Additional Premises Initial Term"). Tenant shall have the right to lease from Landlord the Additional Premises for two (2) renewal terms of four (4) years each by notifying Landlord ninety days prior to the expiration of the then current term of Tenant's desire to so exercise its option to renew (each such renewal term is hereinafter referred to as the Additional Premises Renewal Term). (b) Tenant shall pay as additional rent for the use of the Additional Premises during the Additional Premises Initial Term an amount equal to One Hundred Thousand ($100,000) Dollars in one lump sum payment on or before April 30, 1997. Tenant, if it exercises its right to extend the term and continues to occupy the Additional Premises, shall pay as additional rent for the Additional Premises Renewal Term an amount equal to Eighty Thousand ($80,000) per year of each year of the Additional Premises Renewal Term, payable in advance in equal monthly installments. 4 1.12 Exhibit Completion Deadline. Landlord and Tenant hereby agree to cooperate and negotiate in good faith the completion, execution and delivery of all Exhibits referred to herein or attached hereto on or before January 31, 1997. If, after such good faith efforts, Landlord and Tenant for any reason fail to so complete, execute and deliver such Exhibits, then in such event either party shall have the right to terminate this Lease upon notice to the other party. In such event, Tenant agrees that it shall be deemed a holdover Tenant pursuant to terms and conditions of existing agreements between Landlord and Tenant prior to this Lease. SECTION 2. -RENTAL. UTILITIES AND OTHER CHARGES 2.1 Rentals: Tenant shall pay the Base Rental amounts set forth in this Lease, during the applicable periods, in monthly installments. Monthly Base Rentals shall be paid in advance on or before the first day of each month; provided, however, Landlord agrees to send to Tenant an invoice for each month's rent no earlier than thirty (30) days prior to such rent being due, and Tenant agrees to pay such rent within 30 days of receiving such invoice. Base Rental for the calendar month during which a term begins or ends, if not a full month, shall be apportioned. If any monthly Base Rental or Additional Rent or other amount or charge due to Landlord is not received by Landlord as provided herein, then the amount due shall bear a late charge at the rate per year equivalent to the prime rate of interest as published in the Wall Street Journal plus two (2%) percent until receipt by Landlord. Notwithstanding anything herein to the contrary, in no event shall the interest charged, reserved and/or taken in this Lease exceed the maximum allowed by and determined in accordance with applicable law. When payments are made by check, they shall be treated as paid to Landlord on the date of receipt of the check, if the check clears; but, if the check is not paid, payment shall be deemed made only when Landlord has received good funds. The foregoing shall not limit Landlord's rights in the event of a default by Tenant. 2.2 Utilities: (a) Landlord shall cause to be provided to Tenant such water and sewerage disposal services as may be reasonably required by Tenant. Except when occasioned by the negligent performance of Landlord's obligations hereinabove set forth, Landlord shall have no responsibility or liability for delays, lapses or cessation of such utility services arising out of labor disputes, strikes, fires, storms, floods, freezing, earthquakes, explosion, civil disorders, acts of public enemy, sabotage, delays in transportation, energy or fuel shortages, unavoidable casualties, mechanical failures, or any other cause beyond its control. In any event, Landlord shall have no liability for consequential damages flowing from any delay, lapse or cessation of utility services. Landlord shall also have the right, in time of energy shortage or rationing, to allocate utility services among the various users thereof in such manner as is necessary and equitable or as may be required by the United States. (b) Landlord shall permit all of its existing facilities to be used to supply public services in common with others to the Premises, including electricity, telephone, telegraph, trucking, railroad and other transportation services. In particular, Landlord shall permit the Narragansett Electric Company to provide service to Tenant over Landlord's existing power 5 distribution facilities and shall cause Landlord to permit Narragansett Electric Company, at its own expense, to install, operate and maintain such secondary power transformation and distribution facilities as may be required to meet the requirements of Tenant. In the event that the existing systems for providing public services to the Premises shall become unavailable for any reason whatsoever, Landlord shall permit access for construction of new systems to the Premises through such portions of the other lands of Landlord as Landlord shall reasonably deem appropriate, the cost of constructing any such distribution system to be borne by the Tenant or the company furnishing such public services. (c) Charges for water and sewer furnished to Tenant under the terms of this lease shall be based on engineering estimates acceptable to Landlord and Tenant. Charges for sewerage disposal services furnished to Tenant shall be based upon the amount of water furnished to Tenant. Charges for utility services shall be established from time to time by Landlord on an equitable, non discriminatory basis. In establishing such charges, account shall be taken of all costs and other charges associated with the provision of utility services including without limitation, the cost of fuels, labor and materials, insurance, repair and maintenance, appropriate charges or reserves established by Landlord for capital improvements and replacements to the facilities rendering utility services, and general administrative overhead. (d) Landlord shall bill Tenant monthly for water and sewer services furnished during the prior month. Tenant shall pay for such utility services within thirty (30) days after the end of each month, or fifteen (15) days after receipt by Tenant of a bill for such services whichever is later. Notwithstanding such payment, Tenant may subsequently contest the reasonableness of any service charges or their compliance with the provisions of this Lease, and if such contest is not resolved by mutual agreement, it shall be resolved consistent with the terms of this Lease. (e) Tenant shall purchase from Landlord, and Landlord shall sell to Tenant, steam heat utilized by Tenant pursuant to terms set forth in the Steam Heat Supply Agreement to be entered into upon the execution of this Lease in substantially the form of Exhibit B attached hereto. 2.3 Payment in Lieu of Taxes: Landlord shall pay from rental received from Tenant, to the Town of North Kingstown, payments in lieu of taxes ("PILOT") pursuant to terms and conditions agreed upon from time to time by Landlord and said Town of North Kingstown. Tenant shall pay directly to the Town of North Kingstown taxes and assessments lawfully imposed by the Town of North Kingstown upon Tenant for its personal property and assessable improvements or fixtures located upon the Premises. 6 SECTION 3. PREMISES Landlord, in consideration of the rents, covenants and agreements to be paid, kept and performed by Tenant as herein provided, hereby demises and leases to Tenant the Premises described above. SECTION 4. PURPOSE The Premises shall be used solely for the purpose set forth above and not for any unlawful purpose. Any use of the Premises in violation of this provision may be enjoined by Landlord without prejudice to any other remedy therefor. SECTION 5. RENTALS Tenant shall pay all Base Rental and Additional Rent and other amounts and charges due to Landlord as set forth above at Landlord's address as hereinabove set forth or at such place as Landlord, from time to time, shall designate in writing. SECTION 6. MAINTENANCE AND USE OF PREMISES 6.1 Tenant shall keep the Premises neat and clean and shall promptly remove its rubbish, waste products, garbage, refuse and trash from the Premises at its own expense. Tenant further agrees that Tenant shall: refrain from placing in the sewerage system any chemical, waste or substance which may require special treatment or may cause damage or injury to the sewerage system and pay the cost of any repair or damage in the sewerage system necessitated by any violation of this undertaking, and not enter into any service, maintenance or other contracts relating to the Premises which shall terminate after or not be terminable by Tenant upon (in which latter event, Tenant shall so terminate same) the expiration of the Term hereof. 6.2 Tenant, at its expense, shall also keep the Premises, including the setting of glass in windows and doors, and all fixtures, piping, roofing, equipment and apparatus of every kind, nature and description, in good order, condition and repair, including the replacement of integral parts thereof, reasonable wear and tear excepted. Such repairs and replacements shall be effected with all due dispatch and shall be of good and workmanlike quality and class equal to the original work or installation. Tenant shall not cause or permit any waste or injury to the Premises and shall keep the Premises free from any and all objectionable noises, odors, rubbish and debris. Tenant shall continuously comply with and observe all statutes, ordinances, rules, codes, requirements, laws, regulations, orders and/or decrees of the federal, state and city governments, or any departments, bureaus or agencies thereof or of any insurance inspection or rating bureau, whether now in force or which may in the future be promulgated. including, but not limited to, those relating to environmental, waste products, garbage, refuse or trash, building, zoning and other matters and the provisions of the Occupational Safety and Health Act of 1970, as amended, and the regulations thereunder, and any expense resulting from such compliance shall be borne by Tenant. Tenant shall, at its expense, make all repairs and improvements to the Premises and parking areas. Tenant shall also, at its own expense, make all repairs necessary to the exterior and 7 structural components of the Premises. On or before January 31, 1997, Landlord and Tenant shall jointly complete a video taped assessment of the condition of the Premises which shall serve as a baseline against which Tenant will maintain the Premises; provided, however, if during the course of completing such video tape Landlord discovers that the Premises or any portion thereof are in need of repair pursuant to agreements between Landlord and Tenant prior to the date of this Lease, then Tenant and Landlord shall agree upon the extent of additional repairs to be performed by Tenant. 6.3 Any substantial or structural alterations, improvements or additions to the Premises shall be at Tenant's expense and made in accordance with all applicable governmental laws and regulations, in a good and workmanlike manner and without any lien or encumbrance therefor. Any alterations shall become part of the realty unless Landlord otherwise agrees in writing; and, at the expiration or termination of this Lease, shall remain on the Premises or shall be removed by Tenant (Tenant restoring any resulting damage to the Premises) at its expense) as Landlord may elect; provided, however, that any structural alterations of Tenant so consented to by Landlord and agreed, in such consent by Landlord, to remain at the Premises at the expiration or termination of this Lease, shall not be required to be removed by Tenant. Also at the expiration or termination of this Lease, Tenant shall remove its goods and effects (including trade fixtures) and, at the request of Landlord (other than as set forth in the preceding sentence), all alterations, additions, improvements and installations, whether made in replacement of, substitution of, or addition to existing facilities, all at Tenants expense; and shall peaceably and quietly surrender to Landlord possession of the Premises and all erections and additions made to the same (as Landlord may have elected), and, in any event, Tenant shall also surrender any piping, electrical installations, switch boxes, transformers, meters, lighting fixtures, all wiring both for light and power up to the point that the same may be attached to any machines; and shall leave the Premises broom clean and in good repair, order and condition in all respects, reasonable wear and tear excepted. Tenant's obligations to observe and perform this covenant shall survive the expiration or termination of this Lease. In the event of Tenant's failure to remove any of Tenant's property from the Premises, Landlord is authorized, without liability to Tenant for loss or damages thereto, and at the sole risk of Tenant, to remove and store any of the property at Tenant's expense, or retain same under Landlord's control or to sell at public or private sale, without notice, any or all of the property not so removed and to apply the net proceeds of such sale to the payment of any sum due hereunder, or to destroy such property. 8 6.4 Any contractors performing work on behalf of Tenant with respect to the structural integrity of the Premises must be approved in writing in advance by Landlord, such approval to not be unreasonably withheld or delayed. Tenant may submit for Landlord's approval a list of contractors Tenant proposes to use during the term of this Lease. 6.5 Tenant shall not erect or maintain upon the Premises any signs, advertisements or notices unless: 1) said signs, advertisements and notices are installed according to all applicable restrictive covenants or rules and regulations or design criteria imposed by Landlord upon the Premises; and 2) Tenant shall have first obtained the written approval of Landlord as to the size, design, color and location of such sign, advertisement and notice, such approval not to be unreasonably withheld. Tenant shall be responsible for all damage to the Premises resulting from the installation, maintenance and removal of such signs, advertisements and notices. 6.6 Tenant shall not permit or commit any waste in or about the Premises. 6.7 Tenant shall not use or occupy or permit the Premises to be used or occupied in any unlawful manner or for any illegal purpose or in such manner as to constitute a nuisance. Tenant and its servants, employees, agents, visitors, invitees or licensees will faithfully observe and comply with such reasonable rules and regulations as Landlord hereafter may, at any time or from time to time, make and communicate in writing to Tenant which, in the reasonable judgment of Landlord, shall be necessary for the reputation, safety, care or appearance of the Premises or the Premises or the preservation of good order therein, or the operation or maintenance of the Premises or the equipment thereof. 6.8 Landlord shall not be responsible for security at the Premises. 6.9 All personal property owned or installed by Tenant in the Premises shall be listed from time to time on the so-called Electric Boat Asset List and on the Government Property Control List, and may be removed by Tenant at any time provided that the Tenant shall, at its expense, repair any damage, holes or openings caused or occasioned by such removal. Any such personal property of the Tenant left upon the Premises after the termination of the Lease may, at the election of Landlord, be removed at Tenant's expense and sold, stored or discarded, or be deemed to have been abandoned and to belong to Landlord. SECTION 7. RIGHTS OF LANDLORD In addition to any other rights of Landlord set forth herein, Landlord shall have the following rights, exercisable without liability to Tenant for damage or injury to property, persons or business, without effecting an eviction, constructive or actual, diminution of services, or disturbance of Tenant's use or possession or giving rise to a claim for setoff or abatement of Base Rental and Additional Rent, or excusing Tenant from the full performance of its obligations under this Lease: a. To enter upon the Premises in accordance with Tenant's security, procedures to inspect the Premises; and, during the last year of the Term, to show them to 9 prospective tenants; or, at any reasonable time, to prospective purchasers or mortgagees of the Premises; b. To take any and all measures, including inspection, making repairs, alterations, additions and improvements to the Premises as may be for the safety, protection, improvement, or preservation of the Premises, it being agreed that any obligation to do so and the payment of the cost thereof shall be in accordance with the other provisions of this Lease; c. To close all or portions of the roads providing access to the Premises parking lot for the purpose of effecting repairs, or alterations, so long as reasonable access is provided to the Premises; and d. Landlord reserves the right to alter, reduce, increase, relocate and change, from time to time, driveways, roads, walkways so long as reasonable access is provided to the Premises. SECTION 8. TENANT'S INDEMNITY AND INSURANCE (a) Tenant shall keep the Premises and its personal property, at its sole cost and expense, insured for the mutual benefit of Landlord and Tenant, as their interests may appear, during the term and any extensions of this Lease, against loss or damage by fire and against loss or damage by other risks now or hereafter embraced by "extended coverage" and "difference in conditions coverage," in an amount equal to the full replacement value of the Premises and its personal property. (b) Tenant shall maintain at its sole cost and expense, but for the mutual benefit of Landlord and Tenant, all as their interests may appear: (i) Liability insurance against claims for property damage, bodily injury, or death, in the amount of Ten Million Dollars ($10,000,000) in respect of any one accident or occurrence; (ii) Workers' compensation insurance covering Tenant except that Tenant may "self-insure" its Workers' Compensation liability to the extent permitted under Rhode Island law. Tenant may effect for its own account any insurance not required under the provisions of this Lease. (c) All insurance provided for in this Section 8 shall be effected under valid, enforceable policies issued by insurers of recognized responsibility which are licensed to do business in the State of Rhode Island. Tenant shall furnish the Landlord copies of each policy and proof of payment of premiums if such policy does not provide for notice to Landlord prior to cancellation and shall provide certificates of insurance to each party insured. 10 (d) All policies of insurance provided for in this Section 8 shall name Landlord, and Tenant, as an insured, all as their respective interests may appear and shall specify that the proceeds shall be paid to Tenant. Each such policy shall contain a provision that no act or omission of any insured shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained, and to the extent obtainable, shall contain an agreement by the insurer that such policy shall not be cancelled without at least thirty (30) days' prior written notice to Landlord; and that the insurer will not be subrogated to any claim any insured might otherwise have against any other insured arising out of such loss. (e) In the event of any damage or loss by fire or other casualty to the Premises or personal property, Tenant shall, only to the extent insurance proceeds are available or adequate for such purpose, with all deliberate speed, at its sole cost and expense, repair, replace and restore the Premises to their prior condition insofar as practicable. (f) Tenant agrees to indemnify landlord against any and all claims for damages, charges or liabilities, including attorneys' fees, arising from Tenant's negligent activities with respect to the Premises. SECTION 9. EMINENT DOMAIN 9.1 In the event that the entire Premises or such portion thereof as would deprive Tenant of all beneficial use of the Premises is taken or condemned by any competent authority for any public or quasi-public use or purpose, or is sold as a result of an impending taking or condemnation (a "taking") this Lease shall terminate as of the date of the taking. If a taking relates only to a portion of the Premises or Tenant is not deprived of all beneficial use of the Premises, Landlord (after such taking or condemnation and the determination of Landlord's award therein) shall expend so much as may be necessary of the net amount of Landlord's award in effecting any restoration necessary to make the Premises tenantable and the Lease shall continue without reduction of the rent. In any event of a taking, Tenant shall be entitled to a pro rata refund of any rental paid in advance and all compensation awarded and" paid for such taking shall belong to and be the property of Landlord irrespective of the basis upon which it is awarded, Tenant hereby specifically assigning to Landlord any award or compensation for the value of Tenant's leasehold estate. Tenant may, however, claim and recover from the condemning authority, but not from Landlord, compensation for damages recoverable only by Tenant, in Tenant's own right, for or on account of any cost or loss to which Tenant might be put in removing Tenant's merchandise, furniture, trade fixtures and equipment and loss of business and improvements paid for by Tenant and expenses compensable to Tenant by statute. SECTION 10. QUIET ENJOYMENT Tenant, subject to the terms and provisions of this Lease, on paying the rent and performing all the covenants, terms and conditions in this Lease contained to be performed on the part of Tenant, may peacefully hold and enjoy the Premises during the Term hereof without any let or hindrance by Landlord or any person claiming by, through or under it. This covenant and all other covenants of the Landlord contained in this Lease shall be binding upon Landlord 11 and Landlord's successors only with respect to breaches occurring during Landlord's and Landlord's successors respective ownership of Landlord's interest hereunder. SECTION 11. SUBORDINATION. ATTORNMENT AND NON-DISTURBANCE This lease is subject and subordinate to all mortgages and bond indentures which may now or hereafter affect the Premises, and to all advances made thereunder, the interest thereon, and all renewals, modifications, consolidations, replacements and extensions thereof if the mortgagee named in said mortgage shall elect by written notice delivered to Tenant to subject and subordinate the rights and interest of Tenant under this Lease to the lien of its mortgage. Alternatively, any mortgagee may elect to give the rights and interests of Tenant under this Lease priority over the lien of its mortgage. In the event of either of such election, and upon notification by such mortgagee to Tenant to that effect, the rights and interests of Tenant under this Lease shall be deemed to be subordinate to or to have priority over, as the case may be, the lien of said mortgage whether this Lease is dated prior to or subsequent to the date of said mortgage. This clause shall be self-operative and no further instrument of subordination shall be required by any mortgagee. In confirmation of such subordination, Tenant shall execute and deliver, within fifteen (15) days of a request therefore, any certificate that Landlord may reasonably request. Tenant hereby constitutes and appoints Landlord Tenant's attorney-in-fact to execute any such certificate or certificates for and on behalf of Tenant. Any subordination of this Lease pursuant to this Section 11 and Tenant's obligation to execute a subordination agreement is dependent upon Tenant's receipt of a non-disturbance agreement with terms customary to those of similar transactions in North Kingstown, Rhode Island at the time of the request therefor from any lender requiring such subordination agreement. In the event Tenant fails to execute such agreement within fifteen (15) business days after demand in writing, Tenant does hereby make, constitute and irrevocably appoint Landlord as its attorney in fact and in its name, place and stead so to do. The execution by Landlord, on behalf of Tenant, of such subordination agreement after said fifteen (15) business days period shall be conclusive evidence that Landlord has obtained for Tenant's behalf a non-disturbance agreement in conformance with the provisions of this Section so long as such agreement contains a provision substantially as follows: "provided, however, anything herein to the contrary notwithstanding, Tenant upon keeping the terms, covenants and conditions to be kept by it pursuant to the Lease and not being in default thereunder, shall have use and possession of the Premises as contemplated by the Lease and any successor in interest to Landlord shall from and after the date it succeeds to Landlord's interest in the Premises, perform Landlord's obligations in accordance with the terms of the Lease." If, in connection with obtaining financing for the Premises, a lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not materially or adversely increase the obligations of Tenant hereunder or materially or adversely affect the leasehold interest hereby created or Tenant's use and enjoyment of the Premises. In the event that a mortgagee or any purchaser at foreclosure sale or judicial proceedings shall succeed to the interest of Landlord, this Lease, nevertheless, shall continue in full force and effect, and Tenant agrees to attorn to such mortgagee or purchaser and to recognize such mortgagee or purchaser as its Landlord. 12 SECTION 12. NO REPRESENTATIONS BY LANDLORD No representations or promises with respect to the Premises, except as are herein expressly set forth, have been made by Landlord or any other party on Landlord's behalf (including any real estate broker), and Tenant agrees that it will have examined the Premises prior to the Commencement Date and will take the same in their condition and state of repair at the Commencement Date. The taking of possession of the Premises by Tenant shall be conclusive evidence as against Tenant that the Premises were in satisfactory condition and in conformity with the provisions of this Lease at the time such possession was so or is taken. SECTION 13. RIGHT TO PAY MONEY TO EFFECT PERFORMANCE If Tenant at any time or from time to time shall fail to perform any of the covenants, terms and conditions in this Lease contained to be performed on the part of Tenant, Landlord may, only in the event of emergency, immediately, or at any time thereafter during such emergency, without notice, perform the same for the account of Tenant, and in any such event, any monies paid by Landlord for such purpose shall be deemed to be Additional Rent due hereunder and shall be payable forthwith to Landlord upon rendition of an invoice therefor. SECTION 14. ASSIGNMENT Tenant shall not assign, mortgage, pledge or otherwise encumber this Lease or its interest herein, or sublet the whole or any part of the Premises without first obtaining on each occasion the consent in writing of Landlord, which consent shall not be unreasonably withheld or delayed. In case of any such approved assignment, the assignee shall assume in writing to Landlord the performance and observance of all the covenants, terms and conditions in this Lease contained, to be kept and performed on the part of Tenant, and such writing of assumption shall be delivered to Landlord simultaneously with such assignment. In the event of any such approved assignment or subletting, notwithstanding any assumption hereof by the assignee or subtenant, Tenant shall remain primarily liable for the performance of all of said covenants, terms and conditions. Notwithstanding the foregoing, if Tenant desires to assign this Lease or sublet all or a part of the Premises, Landlord shall be noticed and may elect to terminate this Lease as to the Premises in the event of a desired assignment or as to such part or all thereof which Tenant desires to sublet, and enter into a new lease with the intended assignee or subtenant, upon such terms as may be agreed between Landlord and such assignee or subtenant, and this Lease shall terminate as to the applicable part or all of the Premises upon the effectiveness of such new lease. Further, in any assignment or subletting consented to by Landlord: any Base Rental and Additional Rent greater than that set forth on this Lease shall inure to the benefit of Landlord. Tenant, by its execution of this Lease, consents to any changes in this Lease to be made by the Landlord and such assignee or subtenant; provided same do not materially or adversely increase the obligations of Tenant hereunder. The foregoing notwithstanding, upon written notice to the Landlord, Tenant may assign this Lease to any entity owned by more than 51% by General Dynamics, and upon such assignment, Tenant shall be relieved from its obligations hereunder; provided that General 13 Dynamics or such new assignee (subject to Landlord's reasonable approval which will not be unreasonably withheld or delayed) assumes such obligations in writing. SECTION 15. LANDLORD'S REMEDIES 15.1 If, at any time subsequent to the date of this Lease, any one or more of the following events (an "Event of Default") shall happen, time being of the essence: a. Tenant shall default in the due and punctual payment of any Base Rental, Additional Rent, amount, charge or other sum due hereunder within five (5) working days after the due date thereof; or b. Tenant shall neglect or fail to perform or observe any of the other covenants or agreements herein contained on the part of Tenant to be performed or observed and Tenant shall fail to remedy the same within ten (10) working days after notice to Tenant specifying such neglect or failure, or if such Event of Default is of such a nature that Tenant cannot reasonable remedy the same within such ten (10) day period, Tenant shall fail to commence promptly to remedy the same and to prosecute such remedy to completion with all due diligence and continuity; or c. Tenant's leasehold interest in the Premises shall be taken on execution, by other process of law or as a result of the exercise of any creditor's rights; or d. Tenant or any guarantor of this Lease shall make an assignment for the benefit of creditors; or e. Tenant shall vacate or abandon the Premises for ten (10) consecutive days, except for reasons of public emergencies or damage to the Premises; or f. Tenant or any guarantor of this Lease shall seek or consent to or acquiesce in the appointment of any receiver or liquidator of Tenant or of all or any substantial part of its property; or g. A petition shall be filed by or against Tenant or any guarantor of this Lease under any law seeking any reorganization, arrangement, readjustment, composition, liquidation, dissolution, stay, injunction or other similar relief under any present or future state or federal statute, law or regulation and shall remain undismissed or unstayed for an aggregate of thirty (30) days, or if any debtor in possession (whether or not Tenant), receiver or liquidator of Tenant or of all or any substantial part of Tenant's properties or of the Premises shall be appointed without the consent or acquiescence of Tenant and such appointment shall remain undismissed or unstayed for an aggregate of thirty (30) days; then in any such case, Landlord may terminate this Lease by notice to Tenant, specifying a date not less than five (5) days after the giving of such notice on which this Lease shall terminate and this Lease shall come to an end on the date specified therein as fully and completely as if such date was the date herein originally fixed for the termination hereof, and Tenant shall then peacefully quit and surrender the Premises 14 to Landlord but Tenant shall remain liable as hereafter provided. All costs and expenses incurred by or on behalf of Landlord occasioned by such Event of Default including, without limiting the foregoing generality, reasonable attorney's fees and other costs of collection, recovery of possession and the exercise of any right or remedy permitted Landlord hereunder shall be paid by Tenant. 15.2 Upon any such expiration or termination of this Lease, Tenant shall quit and peacefully surrender the Premises to Landlord, and Landlord, upon or at any time after any such expiration or termination, may without further notice, enter upon and re-enter the Premises and possess and repossess itself thereof, by "self-help", so-called (if allowed by law), summary proceedings, ejectment or otherwise, and may dispossess Tenant and remove Tenant and all other persons and property from the Premises and may have, hold and enjoy the Premises and the right to receive all rental income of and from the same. 15.3 At any time or from time to time after any such expiration or termination, Landlord may relet the Premises or any part thereof, in the name of Landlord or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term of this Lease) and on such conditions (which may include concessions or free rent) as Landlord, in its reasonable discretion, may determine and may collect and receive the rents therefor. 15.4 No such expiration or termination of this Lease shall relieve Tenant of its liability and obligations under this Lease, and such liability and obligations shall survive any such expiration or termination. In the event of any such expiration or termination, whether or not the Premises or any part thereof shall have been relet, Tenant shall pay to the Landlord the Base Rental, Additional Rent and all other sums, amounts and charges required to be paid by Tenant up to the time of such expiration or termination of this Lease, and thereafter Tenant, until the end of what would have been the Term of this Lease in the absence of such expiration or termination, shall be liable to Landlord for, and shall pay to Landlord, as and for liquidated and agreed current damages for Tenant's default: (a) the equivalent of the amount of the Base Rental, Additional Rent and the other sums, amounts and charges which would be payable under this Lease by Tenant if this Lease were still in effect, less (b) the net proceeds of any reletting effected pursuant to the provisions of paragraph 15.3 hereof, after deducting all Landlord's expenses in connection with such reletting, including, without limitation, removal and warehousing of Tenant's property, removal of Tenant's improvements, additions, alterations and the like, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, alteration costs and expenses of preparation of the Premises for such reletting. Tenant shall pay such damages (herein called "deficiency") to Landlord monthly on the days on which the Rental would have been payable under this Lease if this Lease were still in effect, and Landlord shall be entitled to recover from Tenant each monthly deficiency as the same shall arise; or, at any time after any such expiration or termination, whether or not Landlord shall have collected any monthly deficiencies as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for liquidated and agreed final damages for Tenant's default the entire amount of the deficiency if the Premises have been relet, or, if the Premises have not been relet, the excess of the aggregate of the Base Rental for the balance of the Term, any Additional 15 Rent for the balance of the Term, any sums, amounts and other charges which may reasonably be anticipated hereunder for the balance of the Term and Landlord's expenses as set forth above over the then fair market rental value of the Premises for the same period. If, after Landlord has recovered the foregoing from Tenant, Landlord shall relet the Premises or a part thereof, it shall reimburse Tenant to the extent Tenant has paid amounts to Landlord and in amounts not to exceed the Base Rental, Additional Rent, sums, amounts, charges and expenses actually paid by Tenant to Landlord. 15.5 For purposes of this Section 15, Additional Rent shall include utilities consumed in the Premises to maintain the structural integrity of the same while vacant; provided, however, that this provision shall not apply to facilities to which Tenant does not apply heat in the ordinary course of its operations. 15.6 Tenant hereby expressly waives, so far as permitted by law, the service of any notice of intention to re-enter provided for in any statute, or of the institution of legal proceedings to that end, and Tenant, for and on behalf of Tenant and all persons claiming through or under Tenant also waives any and all right of redemption or re-entry or repossession or to restore the operation of this Lease in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge or in case of re-entry or repossession by Landlord or in case of any expiration or termination of this Lease. Tenant, so far as permitted by law, waives and will waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage. The terms "enter", "re-enter", "entry" or "re-entry", as used in this Lease are not restricted to their technical legal meaning. 15.7 In the event of any breach or anticipatory breach by Tenant of any of the covenants, agreements, terms or conditions contained in this Lease, the Landlord shall be entitled to enjoin such breach or anticipatory breach. Landlord shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings, and other remedies were provided for in this Lease. An anticipatory breach shall, for purposes of this Section 15.7, be deemed to be an event which, with the passage of time or the giving of notice or both, would constitute an Event of Default. 15.8 Each right and remedy of Landlord provided for in this Lease or otherwise existing at law or in equity shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease, or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude or waive the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease, if any, or now or hereafter existing at law or in equity or by statute or otherwise. 15.9 In the event of a default by Tenant hereunder, the Tenant shall be responsible for any reasonable attorney's fees of Landlord incurred in enforcing the provisions of this Lease. 16 SECTION 16. NO WAIVER The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant, term or condition of this Lease or any of the rules established by Landlord under the provisions of this Lease, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Base Rental or Additional Rent, with knowledge of the breach of any such covenant, term, condition or rule shall not be deemed a waiver of such breach and no provision of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by the Landlord. Payment by Tenant, or acceptance by Landlord, of a lesser amount than shall be due from Tenant to Landlord shall not be treated otherwise than as a payment on account. The acceptance by Landlord of a check for a lesser amount with an endorsement or statement thereon, or upon any letter accompanying such check, that such lesser amount is payment in full, shall be given no effect, and Landlord may accept such check without prejudice to any other rights or remedies which Landlord may have against Tenant. No act or thing done by Landlord, its servants and agents, during the term of this Lease, shall constitute an eviction by Landlord, nor shall it be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing, signed by Landlord. SECTION 17. LANDLORD'S LIEN - Omitted Intentionally SECTION 18. HOLDING OVER If Tenant shall hold possession of the Premises beyond the Term without Landlord's written consent Tenant shall pay to Landlord one and one-half (1-1/2) times the latest Base Rental, plus Additional Rent and other sums, amounts and charges for each month during which Tenant shall retain such possession. The provisions of this paragraph shall not operate as a bar or as a waiver by Landlord of any right of re-entry or election provided under Section 15 hereof or available to Landlord under common law. 17 SECTION 19. NO BROKER Tenant represents that the Premises were not presented to it or to any person representing it by any broker or other person, and that no broker or person was involved in the leasing of the Premises, and warrants that no claim for commission for said leasing shall be presented to Landlord and shall indemnify and hold harmless Landlord from any such claims and any legal fees incidental thereto. Landlord represents that no broker or person was involved in the leasing of the Premises to Tenant and warrants that no claim for commission for said leasing shall be presented to Tenant and shall indemnify and hold harmless Tenant from any such claims and any legal fees incidental thereto. SECTION 20. NOTICE All notices and other communications given, authorized or required hereunder shall be in writing and shall be given by personal delivery, mailing the same by certified or registered mail, return receipt requested, postage prepaid, by telecopy, or causing same to be delivered by prepaid overnight carrier with receipt to the parties at their addresses set forth above, or in either case, to such other person or at such other address as either party may hereafter designate by notice to the other party. All such notices and other communications to Landlord shall also be so given to Adler Pollock & Sheehan Incorporated, 2300 Hospital Trust Tower, Providence, Rhode Island 02903, Attention: Robert I. Stolzman, Esq. and all such notices and other communications to Tenant shall also be so given to Vice President and General Counsel, Electric Boat Corporation, 75 Eastern Point Road, Groton, Connecticut, 06340-0989 and Site Manager Electric Boat Corporation, Quonset Point/Davisville Industrial Park, North Kingstown, Rhode Island 02852. Any such notices and other communications given by other means shall not be effective. The date of actual receipt of a notice shall be deemed the date of service of notice; provided, however, that, in the event that an addressee refuses to accept delivery or acknowledge receipt, then notice shall be deemed to have been served on the earlier of the date of hand delivery, the next business day in the case of delivery by overnight carrier, or five days after the date mailed. SECTION 21. CAPTIONS The captions appearing in this Lease are intended only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease or the intent of any provision hereof. 18 SECTION 22. RECORDING OF LEASE The parties agree that this Lease shall not be recorded, but Landlord and Tenant hereby agree, upon request of either party, to enter into a memorandum of lease in recordable form, setting forth the actual time of commencement and time of termination of this Lease and such other provisions, except rental provisions, with respect to this Lease as will put on notice any third party of the existence of this Lease. Such notice shall expressly state that it is executed pursuant to the provisions contained in this Lease and is not intended to vary the terms and conditions of this Lease. Such notice shall be substantially in the form set forth in Exhibit C. Upon the expiration or termination of this Lease, Tenant shall execute and deliver to Landlord, upon the request of Landlord, an instrument in recordable form, reasonably satisfactory to Landlord, certifying that this Lease has expired or terminated. Tenant hereby constitutes and appoints Landlord Tenant's attorney in fact to execute any such instrument for and on behalf of Tenant, if Tenant has not executed and delivered such instrument to Landlord within fifteen (15) days of notice of Landlord requesting same. SECTION 23. PARTIES AND DEFINITIONS The terms "Landlord" and "Tenant" wherever used in this Lease shall include the successors and assigns of said parties (subject to the assignment provisions hereof), and if either of the parties shall not be a corporation, said term shall also include the heirs, executors and administrators of said party, wherever the context requires or permits of such construction, and all of the covenants, terms and conditions herein contained shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and said assigns of the parties in the same manner as if they were expressly mentioned (except as otherwise expressly provided herein). The term "Landlord" as used in this Lease means only the owner for the time being of the Premises so that in the event of any sale of the Premises, Landlord shall be and it hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, it being understood and agreed that the purchaser has assumed and agreed to carry out any and all obligations of Landlord hereunder. Each term and provision of this Lease to be performed by Tenant shall be construed to be joint and several and both a covenant and a condition. The reference contained to successors and assigns of Tenant is not intended to constitute a consent to an assignment by Tenant or to vary the provisions of Section 14 hereof. SECTION 24. PARTIAL INVALIDITY If any term, covenant, condition or provision of this Lease or the application thereof to any person or circumstances shall, at any time or to any extent, be invalid or unenforceable, the remainder of this Lease and the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term, covenant, condition and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 19 SECTION 25. HAZARDOUS WASTE Notwithstanding any terms or conditions set forth in this Section 25 to the contrary, Landlord and Tenant agree that Tenant shall not be liable or responsible to Landlord for any Environmental Condition (as defined below) upon the Premises which was caused by a party other than Tenant (or under Tenant's control or supervision) or which existed prior to Tenant's occupancy of the Premises. 25.1 For the purposes of this paragraph "hazardous waste" and "hazardous substance" shall have the meaning set forth in the Resource, Conservation and Recovery Act of 1980, 42 U.S.C. Sss.6901, et seq. ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Sss.9601, et seq. ("CERCLA"), and any Rhode Island statutes as such statutes may be amended, or as defined in any federal or state regulations adopted pursuant to or in furtherance of such Acts or statutes. "Oil" shall be defined as petroleum or any petroleum products in any form. 25.2 Tenant shall: a. Not manufacture, generate, store, treat or dispose of (except in compliance with all laws, ordinances, and regulations pertaining thereto) any dangerous and/or hazardous waste, material, element or substance or oil or gas or substance detrimental to the environment on the Premises or arrange with another person for the same; b. Upon the request of Landlord, take all such action, including, without limitation, the conducting of engineering tests and sampling by parties reasonably satisfactory to Landlord (all at the sole expense of Tenant) to confirm that no dangerous and/or hazardous waste, material element or substance or oil or gas or substance detrimental to the environment is being manufactured, generated, stored, treated or disposed of by Tenant or General Dynamics Corporation on the Premises; and c. Provide Landlord with written notice: upon Tenant's obtaining knowledge of any potential or known release or threat of release, of any dangerous and/or hazardous waste, material, element or substance or oil or gas or substance determined by the appropriate governmental authority to be detrimental to the environment at or from the Premises and by any person for whose conduct Tenant is responsible or whose liability may result in a lien on property of Tenant; upon Tenant's receipt of any notice to such effect from any federal, state or other governmental authority; and upon Tenant's obtaining knowledge of any incurrence of any reimbursable expense or loss by such governmental authority in connection with the assessment, containment, or removal of any dangerous and/or hazardous waste, material, element or substance or oil or gas or substance determined by the appropriate governmental authority to be detrimental to the environment for which expense or loss Tenant may be liable or for which expense a lien may be imposed upon the property of Tenant. 20 d. With regard to underground storage tanks (if any) used by it or General Dynamics Corporation at the Premises, at its expense, comply with any statute, ordinance or regulation of any governmental authority having jurisdiction over same. 25.3 Tenant will not use the Premises at any time in such a manner as to cause a violation of or to give rise to a removal or restoration obligation under any statute, ordinance, order, decree or other common law of any state, federal, municipal or other governmental body or agency having jurisdiction over the Premises, including, without limitation, RCRA and CERCLA or any similar law, rule, regulation, order, judgment or decree; and Tenant agrees that no such violation or obligation will be created by the removal of any hazardous waste, hazardous substance, oil, gas and/or substance detrimental to the environment from the Premises by Tenant. During or after the Term, in the event Landlord's environmental consultant reasonably determines it necessary, Landlord may, at the expense of Tenant, conduct survey, soil and ground water sampling and such other testing on the Premises as Landlord shall deem appropriate to assess whether Tenant or General Dynamics Corporation is or was in violation of the covenants contained in this Section 25 and Tenant agrees and covenants to undertake and complete, at its sole expense, and as soon as practicable, such removal, restoration, cleanup or other remedial action as Landlord shall, in its reasonable discretion, deem necessary to cure or otherwise adequately respond to any violation of environmental laws which are attributable to Tenant's or General Dynamics Corporation's use of the Premises. 25.4 Tenant further agrees, in addition to the foregoing and not in limitation thereof, to indemnify, defend and hold harmless Landlord from and against any and all claims, demands, liabilities, costs, expense, penalties, damages and losses, including, without limitation, attorney's fees, as incurred, (payable quarterly upon written demand) resulting from or related to any Environmental Condition (as hereinafter defined) caused by it or General Dynamics Corporation or any violation of any Environmental Law (as hereinafter defined) caused by it or General Dynamics Corporation in connection with the Premises including, but not limited to, any claim for personal injury or property damage arising from any such Environmental Condition or violation of any Environmental Law asserted by third parties against Landlord, any liabilities sustained or incurred by Landlord for the containment, removal, remedy, cleanup or abatement of any contamination arising from any Environmental Condition or any violation of any Environmental Law caused by it or General Dynamics Corporation. The term "Environmental Law" shall mean any law, regulation, rule or order of any governmental entity relating to pollution or protection of the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including without limitation CERCLA, as amended, RCRA, as amended, and other laws, regulations, rules and ordinances relating to emissions, discharges or releases of pollutants, contaminants, chemicals, industrial, toxic or hazardous substances or solid or hazardous wastes or oil or gas or any substance detrimental to the environment (collectively "Polluting Substances") or the manufacture, processing, distribution, use, treatment, handling, storage, disposal and transportation of Polluting Substances. The term "Environmental Condition" shall mean the presence, whether discovered or undiscovered, in surface water, ground water, drinking water supply, land surface, subsurface strata, above ground and underground tanks or other containers, or ambient air of any Polluting Substances arising out of 21 or otherwise related to the operations or other activities (including the disposition of such materials or substances) conducted or undertaken at the Premises. 25.5 In the event of any discharge, spillage, contamination, uncontrolled loss, seepage or filtration of a Hazardous Waste, Hazardous Substance and/or Polluting Substance within the Premises as a result of any conduct of or omission by Tenant, or General Dynamics Corporation, or any employee or agent of or independent contractor engaged by Tenant or General Dynamics Corporation. Tenant shall contain, remove or mitigate the same immediately in accordance with all applicable federal, state or local laws, ordinances, rules or regulations. SECTION 26. FORCE MAJEURE. The period of time during which either party is prevented or delayed in their performance or the making of any improvements or repairs or fulfilling any obligation other than the payment of Base Rental, Additional Rent, or any other payments required under this Lease, due to unavoidable delays caused by fire, catastrophe, strikes or labor disputes, civil disorders, Acts of God or the public enemy, governmental prohibitions, notices of violations (whether present or future) or regulations or inability to obtain materials by reason of such regulations, or other causes beyond a party's reasonable control, shall be added to a party's time for performance of the obligation and the party shall not be liable because of such delay of performance. SECTION 27. SUBMISSION OF INSTRUMENT No lease or obligation on the part of Landlord or Tenant to enter into a lease shall arise until this instrument has been executed and delivered by Landlord and Tenant to each other. SECTION 28. ENTIRE AGREEMENT. This Lease contains the entire agreement between the parties, supersedes any other and all previous leases between Tenant and Landlord with respect to the Premises, and may not be changed orally or by any agreement between the parties unless it is in writing, executed by the parties hereto. Notwithstanding any terms herein to the contrary, any covenants or agreements of Tenant with respect to Environmental Conditions shall survive and remain in full force and effect. SECTION 29. RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed or construed by the parties hereto nor by any third party as creating the relationship of principal and agent or of partnership or joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent or any other provision herein contained, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than landlord and tenant. 22 SECTION 30. EXECUTION AND COUNTERPARTS. This Lease may be executed in one or more parts, all of which shall constitute but one agreement. SECTION 31. GOVERNING LAW. This Lease shall be construed in accordance with the laws of the State of Rhode Island. SECTION 32. INABILITY TO PERFORM. This Lease and the obligations of Tenant to pay Base Rental, Additional Rent and any other sums, amount and charges hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease or to supply or is delayed in supplying any service to be supplied pursuant hereto by reason of strike or labor troubles, governmental preemption in connection with a national emergency or by reason of any rule, order, notice of violation (whether present or future) or regulation of any governmental agency or any department or subdivision thereof or by reason of the conditions of supply and demand which have been or are affected by war or natural catastrophe. The terms and provisions of this Section 32 are subject to the terms and provisions of Section 26 of this Lease. SECTION 33. NOTICE TO MORTGAGEE. After receiving written notice from any person, firm or other entity that it holds a mortgage which includes as part of the mortgaged property the Premises, Tenant shall, so long as such mortgage is outstanding, be required to give such holder of the same notices as may be given to Landlord under the terms of this Lease, but such notice may be given by Tenant to Landlord and such holder concurrently. SECTION 34. ESTOPPEL CERTIFICATES. Tenant and Landlord shall, at any time and from time to time upon not less than ten (10) days prior written request by the other or any mortgagee, execute, acknowledge and deliver to the requesting party within said period a statement in writing (and in form reasonably satisfactory to the requesting party) certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications), the dates to which the Base Rental, Additional Rent and other amounts, sums and charges have been paid in advance, if any, stating whether or not, to the best knowledge of the signer of such certificate, Landlord or Tenant is in default in performance of any covenant, agreement, term, provision or condition contained in this Lease and, if so, specifying each such default to which the signer may have knowledge, the existence of any claimed counterclaims or defenses to this Lease, the Commencement Date and the time of termination, and any other 23 matters as may be reasonably requested, it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser of the Premises or of the interest of the Landlord therein, any mortgagee or prospective mortgagee thereof, or any prospective assignee of any mortgage thereof or any such party requesting the same. SECTION 35. ASSIGNMENT OF RENTS. With reference to any assignment by Landlord of Landlord's interest in this Lease, or the rents payable hereunder, conditional in nature or otherwise, Tenant consents thereto and agrees that the execution thereof by Landlord and the acceptance thereof by the holder or the exercise by such holder of its rights under such assignment shall never be deemed an assumption by such holder of any of the obligations of Landlord hereunder, unless such holder shall, by written notice to Tenant, specifically otherwise elect. SECTION 36. MECHANIC'S LIENS. Tenant agrees to promptly discharge (either by payment or by filing of the necessary bond, or otherwise) any mechanic's, materialman's or other lien against the Premises, and/or the Landlord's interest therein, which may arise out of any payment due for or purported to be due for any labor, services, materials, supplies or equipment alleged to have been furnished to or for Tenant in, upon or about the Premises. SECTION 37. ASSIGNMENT BY LANDLORD. Landlord shall have the right to assign this Lease to any other party, in which event Landlord's obligations under this Lease shall terminate as of the date of such assignment for events occurring after such date. SECTION 38. INDEPENDENT COVENANTS. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent. Tenant shall not be entitled to any setoff of the Base Rental, Additional Rent or other sums, charges or amounts owing hereunder against the Landlord if Landlord fails to perform its obligations set forth herein, except as herein specifically set forth. The foregoing shall in no way impair the right of Tenant to commence a separate action against the Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage covering the Premises whose address Tenant has been notified of in writing and an opportunity has been granted to Landlord and such holder to correct such violation as otherwise provided herein. SECTION 39. CONFIDENTIALITY. Each party acknowledges that it will have access to certain financial information of the other party. Such information shall not be released to the public and will be provided, subject to 24 this paragraph, only to those parties who have a legitimate need for such information, including accountants, lawyers, lenders, potential buyers, mortgagees and similar parties. SECTION 40. LANDLORD'S LIABILITY omitted intentionally SECTION 41. MISCELLANEOUS. 41.1 Easements. Landlord shall execute and deliver to Tenant easements for access to the cantilever crane of Tenant and for utility access to the cantilever crane in substantially the form of Exhibits D, E and F attached hereto and made a part hereof. Tenant agrees to release and discharge other easements in favor of Tenant, if any, which are superseded by such cantilever crane easements attached hereto. 41.2 Landlord's Role as Agent. The State and RIAC acknowledge that Landlord is their agent for purposes of administering the terms of this Lease for those portions of the Premises which are comprised of property owned by the State and subject to the Airport Lease. Such agencies hereby convey upon the Landlord the right to perform all acts, give any consents and approvals, and take any and all further action as may be required or permitted by Landlord under the terms of this Lease and without limiting the foregoing generally, to demand and receive rents, insurance proceeds and any other sums due and payable under the terms of this Lease; to provide and fix utility rates as set forth herein; to give and receive notices, including notices of default; to disperse funds; to submit disputes to arbitration; to sue on behalf of the State and the Rhode Island Airport Corporation with respect to the enforcement of the terms of this Lease. Any right of indemnification, immunity or claim which may be protected by insurance and against subrogation of claims provided for in this Lease for the benefit of Landlord is hereby granted by Tenant to the Landlord, and any successor agent or agents named hereafter. 41.3 Restrictive Covenants. Tenant shall not erect on the Premises any building, structure or object which would constitute an obstruction or hazard to airport operations or air navigation pursuant to all federal regulations; Tenant agrees to permit, for the use and benefit of the public, the passage of aircraft in the air space above the Premises, together with such noise and such air space as may be inherent in the operation of aircraft, now known or hereafter used, for navigation or flight in said air space, or for the landing on, taking off from, or operating of Quonset State Airport; this Lease shall be subordinate to such rules and regulations governing the use, maintenance, operation and development of the Quonset State Airport, as may be from time to time promulgated by Landlord, RIAC or the State pursuant to Federal Aviation Administration Regulations; and this Lease shall be subject to deed restrictions appearing of record including: (a) Non-Discrimination Easement for Passage of Aircraft - those covenants not to discriminate and the easement for unobstructed passage of aircraft above the Premises and those other easements and restrictions contained in those deeds of the United States of America to the Landlord (former Rhode Island Port Authority and Economic Development Corporation ) the first such dated November 20, 1978 and recorded in the Town of North Kingstown Land 25 Evidence Records located at Book 317, Page 65, and the second such dated November 11,1980 and recorded in the Town of North Kingstown Land Evidence Records at Book 348, Page 243, and also contained in the Airport Deed, as the same may be appertain to and run with the Premises; and (b) Protective Controls - that Declarations of Restrictions dated November 12, 1982 by the Grantor recorded in the Town of North Kingstown Land Evidence Records at Book 380, Page 211, and, without limiting the foregoing generally, the Quonset Point/Davisville Development Restrictions referred to therein, a copy of which has been granted to Tenant and General Dynamics Corporation. 26 SECTION 42. AMENDMENTS, ADDITIONS AND DELETIONS TO LEASE Any alterations or deletions herein were made in the Lease before execution and any additional provisions to which the parties have agreed and which are added herein or in any Addenda attached hereto shall be considered a part hereof. IN WITNESS WHEREOF, the parties have executed this Lease on the date set forth above. WITNESS: LANDLORD: Rhode Island Economic Development Corporation /s/ ROBERT STOLZMAN /s/ MARCEL A. VALOIS - ----------------------------- ------------------------------- By: Marcel A. Valois ---------------------------- Its: Executive Director ----------------------------- WITNESS: TENANT: Electric Boat Corporation /s/ D.S. HAPKE, JR. /s/ JOHN K. WELCH - ----------------------------- -------------------------------- By: John K. Welch ----------------------------- Its: President ------------------------------ 27 EXHIBIT A (Detailed plan and Description of Premises and Additional Premises) 28 EXHIBIT B STEAM HEAT SUPPLY AGREEMENT (to be negotiated, completed, executed and delivered pursuant to the terms of the Lease) 29 EXHIBIT C MEMORANDUM OF LEASE 1. Lessor: Rhode Island Economic Development Corporation 2. Lessee: Electric Boat Corporation 3. Description of Premises: See Exhibit annexed hereto and made a part hereof. 4. Term of Lease: From January 1, 1997 to and including December 21, 2006. 5. The terms and conditions of the Lease Agreement of which this instrument is a Memorandum are hereby incorporated herein by reference. 6. This Memorandum of Lease is executed pursuant to the provisions contained in Section 22 of that Lease Agreement and is not intended to vary the terms and conditions of that Lease Agreement. IN WITNESS WHEREOF, Lessor and Lessee have executed these presents this _____ day of ____________, 1996. WITNESS: - ------------------------------------ ------------------------------------ - ------------------------------------ ------------------------------------ STATE OF RHODE ISLAND COUNTY OF In said County of and State on the ________ day of December, 1996, before me personally appeared ________, to me known and known by me to be the persons executing the foregoing instrument, and they acknowledged said instrument, by them executed, to be their free act and deed. --------------------------------- Notary Public (In accordance with Section 34-11 of the Rhode Island General Laws, 1956, as amended) 30 EXHIBIT D TEMPORARY CANTILEVER CRANE EASEMENT KNOW ALL MEN BY THESE PRESENTS, that the RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION, a Rhode Island public corporation, for and in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration paid by ELECTRIC BOAT CORPORATION, a Delaware corporation with an address of 75 Eastern Point Road, Groton, CT 06340-0989, the receipt and sufficiency of which is hereby acknowledged, does hereby grant unto said Grantee, its successors and assigns, a non-exclusive easement in, on and over the parcel of real estate set forth and more particularly described on Schedule A attached hereto and made a part hereof, for a term of ten (10) years commencing on January 1, 1997 and terminating December 31, 2006 for the purpose of ingress and egress to and from a cantilever crane providing access to waters of the Narragansett Bay, with all riparian rights attendant thereto. The Grantee, its successors and assigns, shall have the right to enter upon the parcel of real estate described on Schedule A attached hereto with men and equipment for the purpose of ingress and egress by it to said cantilever crane. The Grantee, for itself, its successors and assigns, by accepting and recording this easement, acknowledges and agrees that: It accepts the rights to the parcel of real estate described on Schedule A in its present condition; it shall, thereafter, at its expense, install, repair, maintain and operate said easement area and cantilever crane; upon any occasion of disturbance by any of the Grantee, its successor and assigns, of the land area within the parcel described above, said Grantee, its successors and assigns, shall restore that land area as nearly as possible to its former condition prior to such disturbance (or as mutually agreed upon by said Grantee and Grantor), said restoration to be without delay; and the maintenance of said easement area shall be the responsibility and at the sole risk of said Grantee, its successors and assigns. The Grantor, its successors and assigns, reserves the right to utilize the parcel of real estate described above for any purpose whatsoever; provided, however, that such use does not interfere with the easement herein granted. TO HAVE AND TO HOLD the same with all rights, privileges and appurtenances thereof or "hereunto pertaining and to the use of said Grantee, its successors and assigns, for the term of ten years as set forth herein, for the special purpose of being used and improved as said Cantilever Crane Easement. 31 IN WITNESS WHEREOF, the Rhode Island Economic Development Corporation has executed this Easement as of this day of December, 1996. THE RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION By: -------------------------- Its: -------------------------- STATE OF RHODE ISLAND COUNTY OF PROVIDENCE In said County and State on the _____ day of December, 1996, before me personally appeared , of the Rhode Island Economic Development Corporation, to me known and known by me to be the party executing the foregoing instrument and he/she acknowledged said instrument by him so executed to be his free act and deed and the free act and deed of said corporation. ------------------------------ NOTARY PUBLIC My Commission Expires: ---------- 32 SCHEDULE A (LEGAL DESCRIPTION OF EASEMENT AREA) 33 EXHIBIT E PERMANENT CANTILEVER CRANE EASEMENT KNOW ALL MEN BY THESE PRESENTS, that the RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION, a Rhode Island public corporation, for and in consideration of the sum of $1.00 and other good and valuable consideration paid by ELECTRIC BOAT CORPORATION, a Delaware corporation with an address of 75 Eastern Point Road, Groton, Connecticut 06340-0989, the receipt and sufficiency of which is hereby acknowledged, does hereby grant unto said Grantee, its successors and assigns, a non-exclusive easement in, on and over the parcel of real estate set forth and more particularly described on Exhibit A attached hereto and made a part hereof for the purpose of ingress and egress to and from a cantilever crane providing access to waters of the Narragansett Bay, with all riparian rights attendant thereto, such easement to be perpetual and run with land of said Grantee, subject to the terms and conditions hereof. The Grantor, on behalf of itself, its successors and assigns, shall have the right to relocate said easement area from time to time; provided, however, that (i) such relocated easement area shall be confirmed in writing by said Grantor and delivered to Grantee and recorded with the Land Evidence Records of the Town of North Kingstown; and (ii) such relocated easement area shall be in an area and of a type and nature which will allow Grantee the ability to move to and from said cantilever crane its machinery, equipment, and product made by it; and (iii) such relocated easement area shall have a load bearing capacity to so facilitate such movement by said Grantee. The Grantee, its successors and assigns, shall have the right to enter upon the parcel of real estate described on Schedule A attached hereto, or as relocated from time to time as set forth herein, with men and equipment for the purpose of ingress and egress by it of said cantilever crane. The Grantee, for itself, its successors and assigns, by accepting and recording this Easement, acknowledges and agrees that: It accepts the rights of the parcel of real estate described on Schedule A, or as relocated by Grantor from time to time as set forth herein, in its present condition; it shall, thereafter, at its expense, install, repair, maintain and operate said easement area and cantilever crane; upon any occasion of disturbance by any of the Grantee, its successors and assigns, of the land area within the parcel described above. said Grantee, its successors and assigns, shall restore that land area as nearly as possible to its former condition prior to such disturbance (or as mutually agreed upon by said Grantee and Grantor), said restoration to be without delay; and the maintenance of said easement area shall be the responsibility and at the sole risk of said Grantee, its successors and assigns. The Grantor, its successors and assigns, reserves the right to utilize the parcel of real estate described above for any purpose whatsoever; provided, however, that such use does not interfere with the easement granted herein. 34 TO HAVE AND TO HOLD the same with all rights, privileges and appurtenances thereof or "hereunto pertaining and to the use of said Grantee, its successors and assigns for the perpetual term as set forth herein, for the special purpose of being used and improved as said cantilever crane easement. IN WITNESS WHEREOF, the RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION has executed this easement as of this ___ day of December, 1996. THE RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION By: --------------------------- Its: ---------------------------- STATE OF COUNTY OF In said County and State on the day of December, 1996 before me personally appeared _ , of THE RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION, to me known and known by me to be the party executing the foregoing instrument and helshe acknowledged said instrument by him so executed to be his free act and deed and the free act and deed of the corporation. ------------------------------- NOTARY PUBLIC My Commission Expires: ---------- 35 EXHIBIT F TEMPORARY UTILITY EASEMENTS KNOW ALL MEN BY THESE PRESENTS. that the RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION, a Rhode Island public corporation, for and in consideration of the sum of $1.00 and other good and valuable consideration paid by Electric Boat Corporation, a Delaware corporation with an address of 75 Eastern Point Road, Groton, Connecticut 06340-0989, the receipt and sufficiency of which is hereby acknowledged, does hereby grant unto said Grantee, its successors and assigns, a non-exclusive easement in, on and over the parcel of real estate set forth and more particularly described on Exhibit A attached hereto and made a part hereof, for a term of ten years commencing on January 1, 1997 and terminating December 31, 2006 for the purpose of installation, repair, maintenance and operation of utility and electric lines, conduits and service equipment for facilities of Grantee and leased from Grantee from Grantor. The Grantee, its successors and assigns, shall have the right to enter upon the parcel of real estate described on Exhibit A attached hereto with men and equipment for the purpose of such installation, repair, maintenance and operation by it of said utility and electric lines, conduits and equipment. The Grantee, for itself, its successors and assigns, by accepting and recording this easement, acknowledges and agrees that: It accepts the rights to the parcel of real estate described on Exhibit A in its present conditions; it shall, thereafter, at its expense, install, repair, maintain and operate said easement area and such utility lines, conduit and equipment; upon any occasion of disturbance by any of the Grantee, its successors and assigns, of the land area within the parcel described above, said Grantee, its successors and assigns, shall restore that land area as nearly as possible to its former condition prior to such disturbance (or as mutually agreed upon by said Grantee and Grantor), said restoration to be without delay; and the maintenance of said easement area shall be the responsibility and at the sole risk of said Grantee, its successors and assigns. The Grantor, its successors and assigns, reserves the right to utilize the parcel of real estate described above for any purpose whatsoever; provided, however, that such use does not interfere with the easement herein granted. 36 TO HAVE AND TO HOLD the same with all rights, privileges and appurtenances thereof or "hereunto pertaining and to the use of said Grantee, its successors and assigns, for the term of ten years as set forth herein, for the special purpose of being used and improved as said utility easement. IN WITNESS WHEREOF, the RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION has executed this easement as of this _day of December, 1996. THE RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION By: ---------------------------- Its: ----------------------------- STATE OF COUNTY OF In said County and State on the _____day of December, 1996 before me personally appeared ____________________, _______________________ of THE RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION, to me known and known by me to be the party executing the foregoing instrument and he/she acknowledged said instrument by him so executed to be his free act and deed and the free act and deed of said corporation. ------------------------------- NOTARY PUBLIC My Commission Expires: ----------- EX-10.18.B 5 EMPLOYMENT AGREEMENT AMENDMENT. 1 Exhibit 10-18B, Annual Report on Form 10-K for the year ended December 31, 1996 Commission File Number 1-3671 AMENDMENT TO EMPLOYMENT AGREEMENT FOR JAMES R. MELLOR This Amendment to Employment Agreement dated as of this fifth day of November 1996 by and between General Dynamics Corporation, a Delaware corporation (the "Corporation") and Mr. James R. Mellor. WHEREAS, effective October 3, 1995, the Corporation and Mr. Mellor entered into an Employment Agreement (the "1995 Agreement") amending Mr. Mellor's March 17, 1993, Employment Agreement, pursuant to which Mr. Mellor agreed to extend his services as Chairman and Chief Executive Officer of the Corporation from December 31, 1995, until December 31, 1996; and WHEREAS, the Corporation and Mr. Mellor desire to extend his services as Chairman and Chief Executive Officer of the Corporation until May 31, 1997, and to provide for Mr. Mellor to provide services to the Corporation thereafter to an extent greater than contemplated in the 1995 Employment Agreement, and in connection therewith desire to amend and modify in certain respects the terms of his 1995 Employment Agreement. NOW THEREFORE, the Corporation and Mr. Mellor hereby agree as follows: 1. The Corporation hereby agrees to extend Mr. Mellor's employment as Chairman and Chief Executive Officer of the Corporation until May 31, 1997, and Mr. Mellor hereby agrees to serve in such capacity until such time upon the terms and conditions hereinafter set forth. 2. In consideration of extending his services to the Corporation as Chairman and Chief Executive Officer until May 31, 1997, the Corporation hereby agrees that (i) Mr. Mellor's bonus compensation for the year 1996, which will be paid to him in 1997 when bonuses are paid to other senior executive officers of the Corporation, shall be in the amount of $1,750,000; (ii) that Mr. Mellor's base compensation for the period January 1, 1997, through May 31, 1997, shall be at the same annual rate of base compensation as is currently being paid to Mr. Mellor; (iii) his bonus for the period January 1, 1997, through May 31, 1997, will be the pro rata amount of the bonus payable to him with respect to 1996 or $730,000, payable upon his resignation on May 31, 1997; and (iv) in lieu of Mr. Mellor's participation in the 1997 Long-Term Incentive Program, a cash payment of $840,000 (the equivalent present value of 5/12 of the 1997 Long-Term Award he would otherwise have received), payable upon his resignation on May 31, 1997. 2 3. For the 12-month period following his resignation as Chairman and Chief Executive Officer on May 31, 1997, Mr. Mellor will render services to the Corporation in such manner and upon such terms and conditions as the Corporation and Mr. Mellor shall agree to, provided that, upon the request of the Corporation, Mr. Mellor will devote not less than 5 days during each calendar month during such 12-month period to the rendition of such services. In consideration of the rendition of such services, the Corporation hereby agrees that upon Mr. Mellor's resignation as Chairman and Chief Executive Officer of the Corporation on May 31, 1997, it shall pay to Mr. Mellor the sum of $580,000. 4. Paragraph 1 of Section 1 of the 1995 Employment Agreement is hereby modified, in order to reflect the additional months of service which Mr. Mellor has agreed to render to the Corporation as hereinabove provided, so that the annual supplemental retirement benefit to which he is entitled pursuant to said Paragraph 1 is amended to be "$147,064." Mr. Mellor may receive that amount, upon his request, in a lump-sum payment upon his retirement, said lump-sum payment to represent the normal value accumulated in the General Dynamics Pension Plan for Salaried Employees using the formulas provided for therein. In addition, the amount to be paid to Mr. Mellor pursuant to Paragraph 2 of Section 1 of the 1995 Employment Agreement shall be $100,957 in order to reflect the additional months of service to the Corporation as provided for in this Amendment to the Employment Agreement. 5. The amount to be paid to Mr. Mellor pursuant to Section 2 of the 1995 Employment Agreement shall be deferred until May 31, 1997, with interest thereon computed in accordance with the terms and provisions of Section 2 of said 1995 Employment Agreement. 6. The Addendum to the Retirement Benefit Agreement attached as an Addendum to the 1995 Employment Agreement is hereby amended so that the amount provided for in Section 3(a) therein is changed from "$58,272" to "$147,064." 7. Except as expressly provided herein, the terms and conditions of the 1995 Employment Agreement, including the Addendum thereto, shall remain in full force and effect. 8. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed as of the date first above written on its behalf by the Corporate Vice President, Human Resources and Administration, and its Corporate seal to be 3 hereunto affixed and attested to by its Secretary, each of whom has been "hereunto duly authorized, and Mr. Mellor has signed this Agreement. GENERAL DYNAMICS CORPORATION By: /s/ William P. Wylie -------------------- ATTEST: /s/ Paul A. Hesse - -------------------------- Secretary /s/ James R. Mellor ------------------- James R. Mellor EX-10.29 6 EMPLOYMENT AGREEMENT. 1 Exhibit 10-29, Annual Report on Form 10-K for the year ended December 31, 1996 Commission File Number 1-3671 EMPLOYMENT AGREEMENT FOR NICHOLAS D. CHABRAJA This Employment Agreement dated as of November 12, 1996, by and between General Dynamics Corporation, a Delaware Corporation (the "Corporation") and Mr. Nicholas D. Chabraja; WHEREAS, since January 1, 1993, Mr. Chabraja has served as Senior Vice President and General Counsel of the Corporation, and since March 4, 1994, has served as Executive Vice President and a member of the Board of Directors of the Corporation; WHEREAS, the Corporation desires to employ Mr. Chabraja, effective January 1, 1997, as its Vice Chairman, and effective June 1, 1997, as its Chairman and Chief Executive Officer; and WHEREAS, Mr. Chabraja is willing to serve in such capacity with the Corporation and to devote his full business time and attention to the business and affairs of the Corporation and, in connection therewith, to withdraw as a partner of the law firm of Jenner & Block, Chicago, Illinois, effective January 1, 1997; NOW THEREFORE, it is hereby agreed by and between the Corporation and Mr. Chabraja as follows: 1. Effective January 1, 1997, the Corporation hereby agrees to employ Mr. Chabraja, and Mr. Chabraja hereby agrees to accept such employment, as the Vice Chairman of the Corporation and to discharge such duties and responsibilities as are provided for in the Bylaws of the Corporation and as may from time to time be assigned to him by the Chairman and Chief Executive Officer of the Corporation. Furthermore, the Corporation hereby agrees to employ Mr. Chabraja effective June 1, 1997, and Mr. Chabraja hereby agrees to accept such employment, as the Chairman and Chief Executive Officer of the Corporation with such duties and responsibilities as are provided for in the Bylaws of the Corporation and as may be assigned to him from time to time by the Board of Directors of the Corporation. 2. Effective January 1, 1997, Mr. Chabraja shall be paid base compensation at the rate of $600,000 per year and effective June 1, 1997, Mr. Chabraja shall be paid base compensation at the rate of $700,000 per year. Thereafter, Mr. Chabraja shall receive increases in his base compensation as may from time to time be determined by the Compensation Committee of the Board of Directors of the Corporation provided that in no event during the term of this Employment Agreement shall Mr. Chabraja be paid base compensation at a rate of less than $700,000 per year. 2 In addition to base compensation, Mr. Chabraja shall be granted compensation incentives and annual incentive compensation awards commensurate with the Corporation's performance in comparison to strategic and operational plans and the performance pay levels of other chief executive officers both on a national basis and in the defense industry. In addition, Mr. Chabraja shall be eligible for all other benefits and perquisites offered to other salaried officers of the Corporation who are employed at the Corporate Headquarters, including retirement plan benefits, SSIP benefits, group insurance coverage and other benefits provided to such senior executive officers. In addition, Mr. Chabraja shall be entitled to the use of corporate aircraft, consistent in all cases with Board resolutions and the Corporation's policies regarding the use of such aircraft. 3. Effective January 1, 1997, Mr. Chabraja will withdraw as a partner of the law firm of Jenner & Block, but shall remain "of counsel" to such firm for the period from January 1, 1997, to May 31, 1997, in order to enable him to effectively transition his client practice to other individuals in the firm. On June 1, 1997, Mr. Chabraja shall terminate the "of counsel" relationship to such firm and after said date and during his employment by the Corporation shall have no employment relationship with Jenner & Block. 4. Effective January 1, 1997, Mr. Chabraja will move his residence to the Washington, D. C., metropolitan area. In that regard, the Corporation hereby agrees to pay to Mr. Chabraja a one-time housing allowance of up to $250,000, "grossed-up" for all federal, state and local taxes payable in connection with that payment, in order to defray the cost and expenses of such move, provided Mr. Chabraja shall provide to the Corporation written evidence or other satisfactory substantiation of the expenditure of such amounts. 5. In recognition of Mr. Chabraja's separation from Jenner & Block and employment as Vice Chairman and thereafter Chairman and Chief Executive Officer of the Corporation, the Corporation hereby agrees to provide to Mr. Chabraja with the Supplemental Retirement Benefit Agreement of even date herewith, attached as an Addendum to this Employment Agreement which will provide to him an annual retirement benefit of $280,000, if Mr. Chabraja voluntarily terminates his employment during the first three years of this Agreement, increasing by $6,296 per full month of service with the Corporation that Mr. Chabraja completes during the period from January 1, 2000, to December 31, 2002. In the event Mr. Chabraja's employment with the Corporation is terminated prior to December 31, 2002, by the Corporation other than "for cause," as defined in Paragraph 6 hereto, then for purposes of the Supplemental Retirement Benefit Agreement, Mr. Chabraja will be deemed to have completed his employment on December 31, 2002. Payment of retirement benefits to Mr. Chabraja may not commence prior to January 1, 2003. 6. This Employment Agreement shall be effective on the date hereof and shall terminate on December 31, 2002. In the event this Employment Agreement is terminated by the Corporation prior to December 31, 2002, other than "for cause," the Corporation shall pay to Mr. Chabraja at the time of such termination the amounts Mr. Chabraja would have been entitled to for the full term hereof, based on his base compensation on the date of such termination. If this Employment Agreement is terminated prior to December 31, 2002, by Mr. Chabraja, or is terminated by the Corporation "for cause," the Corporation shall pay Mr. Chabraja, at the time of such termination, all amounts due hereunder through the date of such termination. Termination of this Employment Agreement prior to December 31, 2002, shall in no event affect Mr. Chabraja's rights under Section 5 hereof. For purposes of this Section 6, termination "for cause" shall mean action by Mr. Chabraja: (i) an act or acts of personal dishonesty, (ii) conviction of a felony 3 related to the Corporation, (iii) material violation of General Dynamics' standards of business ethics and conduct, or (iv) individually filing or participating in a lawsuit against the Corporation. Upon any termination of Mr. Chabraja's employment by the Corporation, in addition to any and all other sums Mr. Chabraja may then be entitled, the Corporation hereby agrees that he shall also be entitled to a directed buy-out of the residence being acquired by him contemporaneously with the execution of this Employment Agreement, which is located in McLean, Virginia, in an amount which is equal to the greater of (a) the then appraised value of said residence, (b) the original cost to Mr. Chabraja of such property, plus all improvements made by him thereto, as defined in the Corporation's Relocation Policy. 7. Mr. Chabraja is currently a party to a Severance Protection Agreement with the Corporation dated January 18, 1996, which provides certain benefits to Mr. Chabraja in the event of a termination of Mr. Chabraja's employment with the Corporation. The parties agree that in the event of a termination of Mr. Chabraja's employment with the Corporation, such that he has rights under this Employment Agreement and the Severance Protection Agreement, or any extension or modification thereof, Mr. Chabraja shall be entitled to receive the benefits under the provisions of Sections 2.1(b)(i) and (ii) of the Severance Protection Agreement or the First Paragraph of Section 6 of his Employment Agreement, whichever is greater. In addition, as to those benefits provided for in both the Severance Protection Agreement, or any extension or modification thereof, and this Employment Agreement, Mr. Chabraja will be entitled to those benefits which are the more favorable to him. Except as provided for in this Section 7, the Severance Protection Agreement shall remain in full force and effect. 8. This Employment Agreement shall ensure to the benefit of and be binding upon the Corporation and successors and assigns and upon Mr. Chabraja and his heirs, executors, and assigns and shall be construed and enforced in accordance with the laws of the State of Delaware. 4 IN WITNESS WHEREOF, the Corporation and Mr. Chabraja have executed this Employment Agreement as of the day and year first above written. General Dynamics Corporation By /s/William P. Wylie --------------------- Attest: /s/Paul A. Hesse - -------------------------- Secretary /s/ Nicholas D. Chabraja -------------------------- Nicholas D. Chabraja 5 ADDENDUM RETIREMENT BENEFIT AGREEMENT ADDENDUM TO AGREEMENT dated as of 12 November 1996 between General Dynamics Corporation, a Delaware corporation (the `'Corporation"), and Nicholas D. Chabraja (the "Employee"). WHEREAS, the Employee has accrued retirement benefits which will be payable to him from the General Dynamics Retirement Plan for Salaried Employees (the "Retirement Plan") and to the extent the accrued benefits under the Retirement Plan are limited by Section 415, 401 (a)(4) or 401 (a)(17) of the Internal Revenue Code (or similar provision), any benefit that would have been provided by the benefit formula of the Retirement Plan in excess of those limitations will be provided under a nonqualified plan (Supplemental Retirement Plan). The Retirement Plan and the Supplemental Retirement Plan are hereinafter collectively referred to as the Retirement Program." WHEREAS, this Agreement provides for retirement benefits to be paid on the Employee's retirement. NOW, THEREFORE, in consideration for the Employee's past employment by the Corporation and the Employee's future services, the Corporation and the Employee agree as follows: 1. MEMBERSHIP IN GENERAL DYNAMICS RETIREMENT PLAN. The Employee will continue to be a member of the General Dynamics Retirement Program, a copy of which has been furnished to him. 2. RETIREMENT BENEFIT. Upon the Employee's retirement from the Corporation, the Employee shall be entitled to such annual retirement benefits, if any, as of the date of the Employee's termination of employment with the Corporation, based upon the terms of the Retirement Program. Payment of these benefits shall commence at such time and in the form the Employee elects pursuant to the terms of the Retirement Plan. 3. SUPPLEMENTAL RETIREMENT BENEFIT. (a) Upon the termination of the Employee's employment with the Corporation, but no earlier than 1 January 2003, the Employee shall also be paid by the Corporation each year, as an additional annual retirement benefit for his life, an amount (the "Supplement"), if any, by which the Estimated Retirement Plan Benefit for his life (as described in Paragraph (c)) exceeds the annual retirement benefit for his life that he is entitled to be paid pursuant to the Retirement Program. 6 (b) The benefit provided by Paragraph (a) of this section will not be provided to the Employee if the Employee causes harm to the Corporation (financial, reputation, or product), through: (i) an act or acts of personal dishonesty, (ii) conviction of a felony related to the Corporation, (iii) material violation of General Dynamics' standards of business ethics and conduct, (iv) individually filing or participating in a lawsuit against the Corporation, or (v) subsequent employment with a competitor without Compensation Committee approval. (c) The Estimated Retirement Benefit shall equal an annual retirement benefit of $280,000 for the first three years of the Employment Agreement and shall increase $6,296 per full month of service with the Corporation that Mr. Chabraja completes during the period of 1 January 2000 to 31 December 2002. 4. ALTERNATE FORM OF BENEFIT. The Employee shall have the option, on written notice transmitted to the Corporation at least 30 days prior to the date on which payment of his benefit would otherwise commence hereunder, to elect to receive the retirement benefit described herein payable in an alternate form as provided by the Retirement Plan or, in the Corporation's discretion, in another form of actuarial equivalent value. The applicable single-life annual benefit shall then be converted to the alternate form elected by the application of the actuarial factors used for converting benefits under the Retirement Plan at the time the retirement benefit is to commence. 5. SURVIVOR BENEFIT IN CASE OF DEATH PRIOR TO COMMENCEMENT OF BENEFITS. If the Employee dies prior to commencement of benefits, his spouse shall be entitled to receive payment of the Supplement (as calculated in Paragraph 3(a)) as a pre-retirement surviving spouse annuity as defined in the Retirement Plan (currently defined at a 50% Contingent Annuity) for her life, commencing on the Employee's death. The amount of the benefit shall be calculated by the application of the actuarial factors used by the Retirement Plan for calculating the surviving spouse annuity as of the date of the Employee's death. The Employee's Spouse shall also be entitled to payment of such retirement benefits (as defined in Paragraph 2), if any, as provided under the terms of the Retirement Program. 6. PAYMENT. All annual retirement benefits for the life of the Employee (or alternate form of benefit) or other amounts payable as provided in this Agreement shall be paid as provided in the Employee's benefit election under the Retirement Plan. Any retirement benefits to which the Employee is entitled under this Agreement shall be paid directly by the Corporation to the extent they are not paid under the Retirement Plan. The Corporation may, in its sole discretion, accelerate the payment of benefits under this Agreement in a form of actuarial equivalent value. . 7 7. NO ASSIGNMENT. No benefit under this Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void, and no such benefit shall in any manner be liable for or subject to the debts, liabilities, engagements or torts of the person entitled to such benefit, except as specifically provided in the Retirement Program or pursuant to a Qualified Domestic Relations Order as described in Code Section 414(p). 8. PAYMENT FROM GENERAL ASSETS. (a) Unless otherwise determined by the Corporation, the Supplement will be payable by the Corporation from its general assets. The Corporation shall not be obliged to acquire, designate or set aside any specific assets for payment of the Supplement. Further, the Employee shall have no claim whatsoever to any specific assets or group of assets of the Corporation. (b) The Corporation may, in its discretion, designate that the Supplement shall be satisfied from the assets of a trust, fund, or other segregated group of assets. But, should these assets prove to be insufficient to satisfy payment of the Supplement or postretirement benefits described above, the Corporation shall remain liable for their payment unless otherwise agreed to by the parties of this Agreement. 8 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on behalf of its Chairman and Chief Executive Officer by the Corporate Vice President -Human Resources and Administration and its corporate seal to be hereunto affixed and attested to by the Secretary of the Corporation, and the Employee has executed this Agreement as of the date first above written. ATTEST: GENERAL DYNAMICS CORPORATION /s/ Paul A. Hesse By /s/ William P. Wylie - ------------------ ------------------------------- Secretary William P. Wylie Corporate Vice President - Human Resources and Administration /s/ Margaret N. House /s/ Nicholas D. Chabraja - --------------------------- ---------------------------- Witness Employee EX-10.30 7 COMPENSATION PLAN. 1 Exhibit 10-30, Annual Report on Form 10-K for the year ended December 31, 1996 Commission File Number 1-3671 This plan was approved by the Board of Directors of the Corporation on February 5, 1997. The plan is subject to the approval at the 1997 Annual Meeting of Shareholders. GENERAL DYNAMICS CORPORATION 1997 INCENTIVE COMPENSATION PLAN 1. Purpose. This plan is an amendment and restatement of the 1988 Incentive Compensation Plan; it is renamed the 1997 Incentive Compensation Plan and is referred to hereinafter as the "Plan." The purpose of the Plan is to provide General Dynamics Corporation and its subsidiaries (the "Corporation") with an effective means of attracting, retaining, and motivating officers and other key employees and to provide them with incentives to enhance the growth and profitability of the Corporation. 2. Eligibility. Any officer or key employee of the Corporation in an executive, administrative, professional, scientific, engineering, technical, or advisory capacity is eligible for an award under the Plan. 3. Committee. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Corporation comprised of two or more members of the Board of Directors, all of whom shall be "non-employee directors". Except as otherwise expressly provided in the Plan, the Committee shall have full power and authority to interpret and administer the Plan, to determine the officers and key employees to receive awards and the amounts and types of the awards, to adopt, amend, and rescind rules and regulations, and to establish terms and conditions, not inconsistent with the provisions of the Plan, for the administration and implementation of the Plan, provided, however, that the Committee may not, after the date of any award, make any changes that would adversely affect the rights of a recipient under any award without the consent of the recipient. The determination of the Committee on these matters shall be final and conclusive and binding on the Corporation and all participants. Code Section 162(m) Subcommittee. Notwithstanding the foregoing paragraph, the Plan shall be administered by a subcommittee of the Committee (the "Subcommittee") with respect to persons covered by the deduction limitation of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Subcommittee shall comprise two or more members of the Committee, all of whom shall be "outside directors" as that term is used in Code Section 162(m). With respect to such persons subject to Code Section 162(m), the Subcommittee shall have all of the powers, rights, and duties granted to the Committee under this Plan and each reference to the "Committee" herein shall be deemed to be a reference to the " Subcommittee. " 4. Awards. Awards may be made by the Committee in such amounts as it shall determine in cash, in common stock of the Corporation ("Common Stock"), in options to purchase Common Stock of the Corporation ("Stock Options"), or in shares of Common Stock subject to certain restrictions ("Restricted Stock"), or any combination thereof. Awards of Stock Options shall be limited to awards for such number of shares as shall be allocated for that purpose by the Board of Directors and approved by the shareholders. 5. Code Section 162(m) Awards. Awards to persons covered by the deduction limitation of Code Section 162(m), as described by Code Section 162(m)(3), shall be subject to the following additional limitations: 2 a. Adjustments. The Subcommittee shall have no discretion to increase an award of Stock Options and/or Restricted Stock once granted; except that adjustments are permitted under Sections 11 and 12 of this Plan to the extent permissible under regulations interpreting Code Section 162(m). b. Maximum Awards. Awards of Stock Options and/or Restricted Stock under the Plan shall be limited as follows: (l) Awards of Stock Options shall be limited to 250,000 shares awarded to any one individual in any calendar year and shall be issued at Fair Market Value. (2) Awards of Restricted Stock shall be limited to 50,000 shares awarded to any one individual in any calendar year. Notwithstanding the foregoing, Restricted Stock granted under the Restricted Stock Performance Formula, described below, shall be limited to an initial grant of 50,000 shares, but shall be adjusted upwards or downwards in accordance with that formula. c. Performance Goals. The Subcommittee, in its sole discretion, shall establish performance goals applicable to awards of Restricted Stock in such a manner as shall permit payments with respect thereto to qualify as "performance-based compensation" as described in Code Section 162(m)(4)(C). Such awards shall be based on attainment of, over a specified period of individual performance, specified targets or other parameters relating to one or more of the following business criteria: market price of Common Stock, earnings per share, net profits, total shareholder return, return of shareholders' equity, cash flow, and cumulative return on net assets employed. In addition, awards of Restricted Stock may be based on the Restricted Stock Performance Formula, described below. 6. Restricted Stock Performance Formula. Awards of Restricted Stock may be granted pursuant to the formula described in this section, referred to herein as the "Restricted Stock Performance Formula." The Committee shall make an initial grant of shares of Restricted Stock (the "Initial Grant"). At the end of a specified performance period (determined by the Committee), the number of shares in the Initial Grant shall be increased or decreased based on the increase or decrease in the value of the Common Stock over the performance period. The increase or decrease described in the preceding paragraph shall be determined in the following manner: At the end of each performance period, the Fair Market Value (as defined in Section 7 below) of the Common Stock is compared to the Fair Market Value per share on the grant date. That difference is multiplied by the number of shares of Restricted Stock to be earned at the end of each performance period and the resulting product is divided by the Fair Market Value at the end of the performance period. The number of shares of Common Stock so determined is added to (in the case of a higher Fair Market Value) or subtracted from (in the case of a lower Fair Market Value) the number of shares of Restricted Stock to be earned at that time. Once the number of shares of Restricted Stock has been adjusted, restrictions will continue to be imposed for a period of time. 7. Common Stock. In the case of awards in Common Stock, the number of shares shall be determined by dividing the amount of the award by the average between the highest and lowest quoted selling prices of the Corporation's Common Stock on the New York Stock Exchange on the date of the award. The average is referred to throughout this Plan as the "Fair Market Value." 3 8. Dividend Equivalents and Interest. a. Dividends. If any award in Common Stock or Restricted Stock is to be paid on a deferred basis, the recipient may be entitled, on terms and conditions to be established, to receive a payment of, or credit equivalent to, any dividend payable with respect to the number of shares of Common Stock or Restricted Stock which, as of the record date for the dividend, has been awarded or made payable to the recipient but not delivered. b. Interest. If any award in cash is to be paid on a deferred basis, the recipient may be entitled, on terms and conditions to be established, to be paid interest on the unpaid amount. 9. Restricted Stock Awards. Restricted Stock represents awards made in Common Stock in which the shares granted may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated except upon passage of time, or upon satisfaction of other conditions, or both, in every case as provided by the Committee in its sole discretion. The recipient of an award of Restricted Stock shall be entitled to vote the shares awarded and to the payment of dividend equivalents on the shares from the date the award of shares is made; and, in addition, all Special Distributions (as defined in Section 11 hereof) thereon shall be credited to an account similar to the Account described in Section 11. The recipient of an award of Restricted Stock shall have a nonforfeitable interest in amounts credited to such account in proportion to the lapse of restrictions on the Restricted Stock to which such amounts relate. For example, when restrictions lapse on fifty percent (50%) of the Restricted Stock granted in an award, the holder of such Restricted Stock shall have a nonforfeitable interest in fifty percent (50%) of the amount credited to his account which is attributable to such Restricted Stock. The holder of Restricted Stock shall receive a payment in cash of any amount in his account as soon as practicable after the lapse of restrictions relating thereto. 10. Stock Option Awards a. Available Shares. Shares available for awards of Stock Options under the Plan at the Effective Date of the restatement of the Plan shall be available for awards of Stock Options under the Plan. Shares available for awards of Stock Options may be authorized but unissued shares or may be treasury shares. If any option awarded under the Plan or any predecessor plan shall expire, terminate, or be canceled for any reason without having been exercised in full, the corresponding number of unpurchased shares which were reserved for issuance upon exercise thereof shall again be available for the purposes of the Plan. b. Type of Options. Options shall be in the form of incentive stock options, non-statutory stock options, or both, as the Committee may determine. The term "incentive stock option" means any option, or portion thereof, awarded under the Plan which meets the applicable requirements of Section 422 of the Internal Revenue Code, as it may be amended from time to time. The term "non-statutory stock option" means any option, or portion thereof, awarded under the Plan which does not qualify as an incentive stock option. c. Incentive Stock Option Limitation. For incentive stock options granted under the Plan, the aggregate fair market value (determined as of the date the option is awarded) of the number of whole shares with 4 respect to which incentive stock options are exercisable for the first time by any employee during any calendar year under all plans of the Corporation shall not exceed $100,000. d. Purchase Price. The purchase price of the Common Stock under each option shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of the Common Stock on the date of the award of the option. e. Terms and Conditions. The Committee shall, in its discretion, establish (i) the term of each option, which in the case of incentive stock options shall not be more than ten years, (ii) the terms and conditions upon which and the times when each option shall be exercised, and (iii) the terms and conditions under which options may be exercised after termination of employment for any reason for periods not to exceed three years after termination of employment but not beyond the term established above. f. Purchase by Cash or Stock. The purchase price of shares purchased upon the exercise of any stock option shall be paid (i) in full in cash, or (ii) in whole or in part (in combination with cash) in full shares of Common Stock owned by the optionee and valued at its Fair Market Value on the date of exercise, all pursuant to procedures approved by the Committee. g. Transferability. Options shall not be transferable. During the lifetime of the person to whom an option has been awarded, it may be exercisable only by such person or one acting in his stead or in a representative capacity. Upon or after the death of the person to whom an option is awarded, an option may be exercised by the optionee's legatee or legatees under his last will, or by the option holder's personal representative or distributee's executive, administrator, or personal representative or designee in accordance with the terms of the option. h. Option Exchange. Subject to the restrictions of Section 5, the Committee, in its sole discretion, shall have the authority at any time, and from time to time, to enter into option exchanges with one or more or all holders of options awarded under the Plan, upon such terms and conditions as it deems appropriate and advisable. Such terms and conditions need not be uniform among all holders of outstanding options. 11. Adjustments for Special Distributions. The Committee shall have the authority to change all Stock Options granted under this Plan to adjust equitably the purchase price thereof to reflect a special distribution to shareholders or other extraordinary corporate action involving distributions or payments to shareholders (collectively referred to as "Special Distributions"). In the event of any Special Distribution, the Committee may, to the extent that it determines in its judgment that the adjustment of the purchase price of Stock Options does not fully reflect such Special Distribution, increase the number of shares of Common Stock covered by such Stock Options or cause to be created a Special Distribution account (the "Account") in the name of each individual to whom Stock Options have been granted hereunder (sometimes herein referred to as a "Grantee") to which shall be credited an amount determined by the Committee, or, in the case of noncash Special Distributions, make appropriate comparable adjustments for or payments to or for the benefit of the Grantee. Amounts credited to the Account in accordance with the preceding rules shall be credited with interest, accrued monthly, at an annual rate equal to the higher of Moody's Corporate Bond Yield Average or the 5 prime rate in effect from time to time, and such interest shall be credited in accordance with rules to be established by the Committee. Notwithstanding the foregoing, at no time shall the Committee permit the amount credited to the Grantee's Account to exceed ninety percent (90%) of the purchase price of the Grantee's outstanding Stock Options to which such amount relates. To the extent that any credit would cause the Account to exceed that limitation, such excess shall be distributed to the Grantee in cash. Amounts credited to the Grantee's Account shall be paid to the Grantee or, if the Grantee is deceased, his or her beneficiary at the time that the options to which it relates are exercised or expire, whichever occurs first. The Account shall for all purposes be deemed to be an unfunded promise to pay money in the future in certain specified circumstances. As to amounts credited to the Account, a Grantee shall have no rights greater than the rights of a general unsecured creditor of the Corporation, and amounts credited to the Grantee's Account shall not be assignable or transferrable other than by will or the laws of descent and distribution, and such amounts shall not be subject to the claims of the Grantee's creditors. 12. Adjustments and Reorganizations. The Committee may make such adjustments to awards granted under the Plan (including the terms, exercise price, and otherwise) as it deems appropriate in the event of changes that impact the Corporation, the Corporation's share price, or share status. In the event of any merger, reorganization, consolidation, change of control, recapitalization, separation, liquidation, stock dividend, stock split, extraordinary dividend, spin-off, split-up, rights offering, share combination, or other change in the corporate structure of the Corporation affecting the Common Stock, the number and kind of shares that may be delivered under the Plan shall be subject to such equitable adjustment as the Committee, in its sole discretion, may deem appropriate. The determination of the Committee on these matters shall be final and conclusive and binding on the Corporation and all participants. In the preceding paragraph, "change of control" means any of the following events: a. An acquisition (other than directly from the Corporation) of any voting securities of the Corporation by any person who previously was the beneficial owner of less than 10% of the combined voting power of the Corporation's outstanding voting securities and who immediately after such acquisition is the beneficial owner of 30% or more of the combined voting power of the Corporation's then outstanding voting securities; provided that, in determining whether a change of control has occurred, voting securities which are acquired by (i) an employee benefit plan (or a trust forming a part thereof) maintained by the Corporation or any subsidiary of the Corporation, (ii) the Corporation or any subsidiary of the Corporation, or (iii) any person in connection with a Non-Control Transaction (as hereinafter defined), will not constitute an acquisition which results in a change of control; b. Approval by stockholders of the Corporation of: (1) a merger, consolidation, or reorganization involving the Corporation, unless: (A) the stockholders of the Corporation immediately before such merger, consolidation, or reorganization will own, directly or indirectly, immediately following such merger, consolidation, or reorgaruzation, at least 51% of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, 6 consolidation, or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the voting securities of the Corporation immediately before such merger, consolidation, or reorganization; and (B) the individuals who were members of the Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute a majority of the members of the Board of Directors of the Surviving Corporation; and (C) no person (other than the Corporation, any subsidiary of the Corporation, any employee benefit plan (or any trust forming a part thereof) maintained by the Corporation, the Surviving Corporation, any subsidiary of the Surviving Corporation, or any person who, immediately prior to such merger, consolidation, or reorganization, was the beneficial owner of 20% or more of the then outstanding voting securities of the Corporation) is the beneficial owner of 20% or more of the combined voting power of the Surviving Corporation's then outstanding voting securities; (D) a transaction described in clauses (A) through (C) above is referred to herein as a "Non-Control Transaction;" (2) the complete liquidation or dissolution of the Corporation; or (3) an agreement for sale or other disposition of all or substantially all of the assets of the Corporation to any person (other than a transfer to a subsidiary of the Corporation). c. Notwithstanding the foregoing, a change of control will not be deemed to occur solely because any person (a "Subject Person") acquires beneficial ownership of more than the permitted amount of the outstanding voting securities of the Corporation as a result of the acquisition of voting securities by the Corporation which, by reducing the number of voting securities outstanding, increases the proportional number of shares beneficially owned by the Subject Person, provided that if a change of control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Corporation, and after such share acquisition by the Corporation, the Subject Person becomes the beneficial owner of any additional voting securities which increases the percentage of the then outstanding voting securities beneficially owned by the Subject Person, then a change of control will be deemed to have occurred. 13. Tax Withholding. The Corporation shall have the right to (i) make deductions from any settlement of an award under the Plan, including the delivery or vesting of shares, or require shares or cash or both be withheld from any award, in each case in an amount sufficient to satisfy withholding of any federal, state, or local taxes required by law, or (ii) take such other action as may be necessary or appropriate to satisfy any such withholding obligations. The Committee may determine the manner in which such tax withholding may be satisfied, and may permit shares of Common Stock (rounded up to the next whole number) to be used to satisfy required tax withholding based on the Fair Market Value of any such shares of Common Stock, as of the appropriate time of each award. 14. Expenses. The expenses of administering the Plan shall be borne by the Corporation. 7 15. Amendments. The Board of Directors of the Corporation shall have complete power and authority to amend the Plan, provided that the Board of Directors shall not, without shareholder approval, adopt any amendment which would (a) increase the number of shares for which options may be awarded under the Plan, (b) modify the class of employees eligible to receive awards, (c) extend the period during which incentive stock options may be awarded, or (d) materially increase the benefits of employees receiving awards under the Plan. No amendment to the Plan may, without the consent of the individual to whom the award shall theretofore have been awarded, adversely affect the rights of an individual under the award. 16. Effective Date of the Plan. The Plan shall become effective on its adoption by the Board of Directors of the Corporation on February 5, 1997, subject to approval at the 1997 Annual Meeting of Shareholders. 17. Termination. The Board of Directors of the Corporation may terminate the Plan or any part thereof at any time, provided that no termination may, without the consent of the individual to whom any award shall theretofore have been made, adversely affect the rights of an individual under the award. 18. Other Actions. Nothing contained in the Plan shall be deemed to preclude other compensation plans which may be in effect from time to time or be construed to limit the authority of the Corporation to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Corporation (a) to award options for proper corporate purposes otherwise than under the Plan to an employee or other person, firm, corporation, or association, or (b) to award options to, or assume the option of, any person in connection with the acquisition, by purchase, lease, merger, consolidation, or otherwise, of the business and assets (in whole or in part) of any person, firm, corporation, or association. EX-11 8 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-3671 GENERAL DYNAMICS CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Year Ended December 31 1996 1995 1994 ------------- ------------- ------------- NET EARNINGS: Continuing Operations $ 270 $ 247 $ 223 Discontinued Operations: Earnings from operations - 55 - Gain on disposal - 19 15 ------------- -------------- ------------- $ 270 $ 321 $ 238 ============= ============== ============= Weighted average common shares outstanding 63,171,625 62,992,558 63,068,328 NET EARNINGS PER SHARE - PRIMARY: Continuing Operations $ 4.26 $ 3.91 $ 3.51 Discontinued Operations: Earnings from operations - .87 - Gain on disposal - .30 .24 ------------- -------------- ------------- $ 4.26 $ 5.08 $ 3.75 ============= ============== ============= Common shares from above 63,171,625 62,992,558 63,068,328 Assumed exercise of options (treasury stock method) 258,542 226,734 355,793 ------------- -------------- ------------- 63,430,167 63,219,292 63,424,121 ============= ============== ============= NET EARNINGS PER SHARE - FULLY DILUTED: Continuing Operations $ 4.25 $ 3.90 $ 3.51 Discontinued Operations: Earnings from operations - .87 - Gain on disposal - .30 .24 ------------- -------------- ------------- $ 4.25 $ 5.07 $ 3.75 ============= ============== ============= Common shares from above 63,171,625 62,992,558 63,068,328 Assumed exercise of options (treasury stock method) 363,462 371,590 357,447 ------------- -------------- ------------- 63,535,087 63,364,148 63,425,775 ============= ============== =============
EX-13 9 1996 SHAREHOLDER REPORT (PAGES 18-39) 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in millions, except per share amounts) FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of the Results of Operations and Financial Condition and other sections of this Annual Report contain forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements that include, but are not limited to, projections of revenues, earnings, segment performance, cash flows and contract awards. Such 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 that 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 the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; labor negotiations; changing priorities or reductions in the U.S. government defense budget; and termination of government contracts due to unilateral government action. BUSINESS OVERVIEW The company's primary business is supplying weapons systems and services to the U.S. government and its international allies. Over the last decade, U.S. defense budgets have declined sharply in response to the end of the Cold War. Consequently, there has been a necessary contraction and consolidation by participants in the defense industry. As part of the industry consolidation in the early 1990s, management focused on strengthening certain businesses by both internal and external means, while divesting other businesses. Further, management has been focusing on developing and providing its customers with advanced technological solutions to meet operational requirements, while continually improving cost structure. These efforts have created highly efficient businesses that are positioned to capture new programs and contracts. Through early 1997, the company's businesses have been awarded new programs with the potential for significant production, as well as several important contracts on existing programs. Since September 1995, the company has acquired for approximately $800 the net assets of four businesses that have strengthened the company's franchises. These acquisitions have been and are expected to be immediately accretive to earnings. As a result of these internal and external actions, the company doubled total backlog between September 1995 and January 1997. The company intends to continue to strengthen its current businesses by pursuing acquisitions that bring real value to its shareholders, affordability to its customers and that address the following strategic criteria: - offer the opportunity to achieve savings through consolidation; - leverage on the company's operating strength and core competencies; - broaden product lines; - provide technology that improves the company's competitive position; - result in marketplace leadership. The company may not be able to achieve each of these goals in each acquisition. Management believes there may be additional opportunities to acquire new franchises outside of its current market area on favorable financial terms. With increasing cash flows and earnings, virtually no debt, and approximately $700 in funds on hand after the most recent acquisition, the company has the financial capacity to take advantage of these potential opportunities. EARNINGS FROM CONTINUING OPERATING CASH FLOWS OPERATIONS 1994 $223 1994 $248 1995 $247 1995 $349 1996 $270 1996 $415 BUSINESS SEGMENTS The company comprises two major business segments: Marine and Combat Systems Groups, as well as miscellaneous businesses classified as Other. The Marine Group includes Electric Boat, which designs and builds nuclear submarines for the U.S. Navy; Bath Iron Works (BIW), which designs and builds surface combatants for the U.S. Navy; and American Overseas Marine, which provides ship management services for the U.S. government on prepositioning and ready reserve ships. 2 The Combat Systems Group, formerly the Armored Vehicles segment, includes Land Systems which designs and manufactures the M1 Series Abrams Main Battle Tank for the U.S. Army and international customers, along with other armored vehicle products. On March 29, 1996, Land Systems purchased the assets of Teledyne Vehicle Systems (Muskegon Operations), an operating unit of Teledyne Inc. Muskegon Operations specializes in combat vehicles as well as mobility systems, suspension technology and diesel engines for armored vehicle markets world-wide. On January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, operating units of Lockheed Martin Corporation. Defense Systems builds light vehicles, turrets and transmissions for 18 3 combat vehicles, as well as missile guidance and naval fire control systems. Armament Systems designs, develops and produces advanced gun, ammunition handling and air defense systems, and is a leader in the production of ammunition and ordnance products. The acquisition expands the company's participation in armored vehicles from heavy tanks to light vehicles, and from full platforms to major subsystems. The acquisition also creates a presence in fire control systems and components. A third business segment (Other) includes coal mining and aggregates operations located in Illinois, and leasing operations for liquefied natural gas tankers. A discussion of each business segment's backlog position, anticipated programs, operating results and outlook follows. As noted earlier, the anticipated programs of the Marine and Combat Systems Groups are subject to, among other events, changing priorities or reductions in the U.S. government defense budget. For a summary of business segment information, see Note Q to the Consolidated Financial Statements which is incorporated herein by reference. MARINE GROUP Backlog 1995 $5,686 1996 $7,566 In 1996, Electric Boat obtained a $1.1 billion contract for the construction of the third and final Seawolf class attack submarine. The president's fiscal year 1998 (FY98) budget, as submitted to Congress, includes $150 million to complete the funding of the third Seawolf. Also in 1996, Electric Boat obtained a $1.3 billion contract for the design of the New Attack Submarine (NSSN). Current Department of Defense plans call for 30 ships in the NSSN program. The president's FY98 budget includes approximately $3 billion in funding for the NSSN program, consisting of $400 million for continued design, $2.3 billion for construction of the first ship, and $300 million for long-lead materials for the second and third ships. Congress previously approved approximately $1.3 billion in funding for the continued design and long-lead materials for construction of the first two ships of the NSSN program. The company has entered into a Team Agreement with Newport News Shipbuilding and Drydock Company (Newport News) for the NSSN program. The Team Agreement provides that Electric Boat will be the prime contractor on construction contracts for the NSSNs, though construction and assembly work will be equally shared with Newport News through a subcontracting arrangement. Electric Boat will retain the lead design role. The Team Agreement requires the approval of the U.S. Navy, Department of Defense and a change in existing law which currently requires competition between Electric Boat and Newport News for construction of NSSNs after each has produced two ships. Based on estimates developed by the team, the company believes the Team Agreement will provide significant cost savings to the Navy, therefore enhancing government support for full funding of the first four ships and obtaining the required administrative and legislative approvals. In 1996, BIW obtained $1.1 billion in contracts for the construction of three Arleigh Burke class destroyers (DDG 51). The procurement of these DDG 51s was fully funded by Congress for FY97. BIW now has firm contracts for construction of 11 DDG 51s to be delivered through 2002. Congress has authorized the Secretary of the Navy to initiate multiyear contracts for the procurement of an additional 12 DDG 51s between FY98 and FY01. The president's FY98 budget request provides for approximately $2.8 billion in funding for the first three ships in the multiyear procurement. The Navy currently intends to allocate the 12 destroyers between BIW and its competitor. BIW is also a member of a three-contractor team that was recently selected to design and build the Navy's new class of amphibious transport ships (LPD 17). Congressional funding was previously approved for the design and construction of the lead LPD 17. The Navy anticipates this to be a 12-ship program. If the Navy receives congressional funding for all 12 ships, BIW has agreed with its partners that it will construct four ships. The LPD 17 award is being protested by a competing contractor team led by Litton Industries. The company believes the basis for the Navy's selection will be upheld in the appeal process. BIW was awarded a contract in early 1997 for the Phase II design of the Navy's arsenal ship. BIW is the leader of one of three remaining contractor teams competing for the Phase III design and construction contract which is expected to be awarded in 1998. Congress approved funding this program for FY97, and the president's FY98 budget request includes an additional $150 million in funding. Results of Operations and Outlook
----------------------------------- 1996 1995 1994 ----------------------------------- Net Sales $2,332 $1,884 $1,733 Operating Earnings $ 216 $ 194 $ 196 - --------------------------------------------------------------------------------
Net sales and operating earnings increased $448 and $22, respectively, in 1996 due primarily to the acquisition of BIW. For a discussion of the accounting for this transaction and related information, see Note B to the Consolidated Financial Statements. The operating results of BIW have been included with those of the company from the closing date, September 13, 1995. Excluding the results of BIW, net sales decreased approximately 5 percent during 1996 due to lower construction activity on the Trident and Los Angeles class submarine programs. The impact of lower submarine construction activity on operating earnings was offset by an increase in the earnings rate on the Trident program. As the Trident program nears completion, performance risks have diminished and the benefits of cost reduction efforts are being realized. Accordingly, the 19 4 company assessed the estimated earnings at completion on this program in the third quarter of 1996 and concluded an increase was appropriate. Previously, the earnings rate was increased in the second quarter of 1995. Net sales increased $151 during 1995 due primarily to the acquisition of BIW. Operating earnings were basically unchanged during 1995 as the effect of the acquisition was offset by decreased submarine construction volume. Looking forward, the final Trident is scheduled for delivery in 1997, while the first two Seawolf submarines are scheduled for delivery in 1997 and 1998. Accordingly, submarine construction revenues are expected to decline, but not materially, as these ships are delivered. BIW is realizing the benefits of reengineering efforts that are reducing costs on the DDG 51 program. At Electric Boat, as the Seawolf program matures with construction of the first ship approximately 98 percent complete and as performance improves, operating risks are expected to diminish. In addition, the NSSN program is stabilizing the business base at Electric Boat which in turn is expected to benefit all submarines under construction. As a result, return on sales of the Marine Group is expected to improve in 1997. COMBAT SYSTEMS GROUP Backlog 1995 $1,103 1996 $2,057 In 1996, Land Systems obtained a $1.3 billion multiyear contract for the upgrade of 600 M1 Abrams tanks over five years. This contract is a part of a U.S. Army program to upgrade over 1,000 of its M1 tanks to the M1A2 configuration by the year 2003. The president's FY98 budget request includes $600 million to fund the second year of production and long-lead procurement for the third year of the contract. Congress had previously approved funding for the first year. Based on the stated objectives of the U.S. Army, the company anticipates that this multiyear contract will be followed by an Army requirement for additional upgrades. Also during 1996, Land Systems obtained a contract for the development of the Advanced Amphibious Assault Vehicle (AAAV), including design and construction of at least three prototypes. Additional funds were requested in the president's FY98 budget for the AAAV development program. The Marine Corps plans to build more than 1,000 vehicles in the next decade, a production program worth as much as $4 billion. In addition to domestic sales, Land Systems is under contract to the U.S. Army to manufacture M1A1 kits--including hulls, turrets and other major components--to be shipped to Egypt for final assembly as part of a coproduction program. Through 1996, Land Systems delivered 482 of the 530 M1A1 kits it is under contract to manufacture. Land Systems is pursuing an order for an additional 100 kits which, if obtained, will extend the coproduction program beyond its scheduled December 1997 completion date. Land Systems continues to pursue international sales aggressively. The acquisition of Defense Systems and Armament Systems will enhance the company's international presence. Land Systems is one of two producers of the Single Channel Ground and Airborne Radio System (SINCGARS) for the U.S. Army. The president's FY98 budget requests $290 million in funding for SINCGARS. Land Systems was recently awarded 40 percent of the latest production contract. The Army is soliciting bids from Land Systems and its competitor and will select one contractor for the remaining two years of the production program. Further, the president's FY98 budget requests funding for three additional armored vehicle programs in which Land Systems is participating. The first is a four-year program to upgrade Fox Nuclear, Biological and Chemical Reconnaissance System vehicles. The second is the Heavy Assault Bridge program which is under development and is expected to enter production late this decade. The third is the Crusader Self-Propelled Howitzer development program in which the company's share is approximately 25 percent. The U.S. Army plans to build over 800 Crusader systems, a program that could be worth as much as $13 billion. The president's FY98 budget requests approximately $325 million for the Crusader, which remains the Army's largest single research and development program. Finally, the president's FY98 budget request supports product lines of the new Defense Systems and Armament Systems subsidiaries. This includes funding for several derivatives of the Bradley combat vehicle, Hydra Rocket production, and 60mm and 120mm mortar ordnance. Results of Operations and Outlook
----------------------------------- 1996 1995 1994 ----------------------------------- Net Sales $1,026 $1,050 $1,184 Operating Earnings $ 140 $ 140 $ 140 - --------------------------------------------------------------------------------
Net sales decreased $24 during 1996 due primarily to decreased M1 production resulting from the delivery of the last of 218 M1A2 tanks to Kuwait in the first quarter of 1996. This decrease was partially offset by increased activity on the domestic upgrade program and the impact of the Muskegon Operations acquisition. Operating earnings were unchanged in 1996 due to slightly higher volume on the SINCGARS program and the impact of the Muskegon Operations acquisition, which offset the aforementioned decrease in M1 production. Net sales decreased $134 in 1995 due primarily to decreased M1 production, resulting from the delivery of the last of 315 M1A2 tanks to Saudi Arabia in late 1994. Operating earnings were unchanged in 1995 due to the increase in the earnings rate on the M1 and SINCGARS programs in the third quarter of 1994, which offset the aforementioned volume decrease. 20 5 Looking forward, M1 revenues are expected to remain relatively even in 1997, as the multiyear upgrade contract provides for consistent production of 120 tanks in each of the next four years. Also, the outcome of the SINCGARS sole source award will not affect the company's 1997 results. However, the acquisition of Defense Systems and Armament Systems will increase overall Combat Systems Group sales in 1997. Defense Systems and Armament Systems earn lower margins compared to those historically reported by the company's domestic and foreign tank programs. Accordingly, operating earnings of the Combat Systems Group are expected to increase in 1997, but not proportionately to the increase in sales. The company continues to seek improvements in operating margins in the Combat Systems Group by the consolidation and rationalization of facilities such as the closure of Warren Logistics Center and the consolidation of electronics manufacturing at the Tallahassee facility in 1996. Other
----------------------------- 1996 1995 1994 ----------------------------- Net Sales $ 223 $ 133 $ 141 Operating Losses $ (3) $ (19) $ (15) - --------------------------------------------------------------------------------
Net sales increased $90 and operating losses decreased $16 during 1996 due primarily to the reclassification of the aggregates business to continuing operations in the second quarter of 1996 (for further discussion see Note C to the Consolidated Financial Statements). Operating losses also decreased during 1996 due to the extension of the ship leases. ADDITIONAL FINANCIAL INFORMATION GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased during 1996 due primarily to the acquisition of BIW. However, general and administrative expenses as a percentage of net sales have remained basically even with 1995 and 1994. INTEREST, NET. Interest income was $59 in 1996 and 1995, up from $27 in 1994. Interest remained the same in 1996 as in 1995 due to a similar average cash balance and average interest rate. Interest income increased in 1995 over 1994 due to an increase in the average cash balance resulting from cash from operations and asset sales, as well as higher interest rates. Interest income is expected to decrease significantly in 1997 due to a decline in the average balance resulting from the acquisition of Defense Systems and Armament Systems in early 1997. OTHER INCOME, NET. Other income varies from period to period based on the timing of transactions such as the sales of investments and miscellaneous assets. PROVISION FOR INCOME TAXES. The company is litigating the disallowance of a research and experimentation tax credit claim relating to certain prior years' tax returns. The outcome of this litigation could have a materially favorable impact on the company's results of operations and financial condition. For further discussion of this and other tax litigation, as well as a discussion of the net deferred tax asset, see Note D to the Consolidated Financial Statements. DISCONTINUED OPERATIONS. The company has operated certain businesses that were accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. Earnings from discontinued operations decreased in 1996, as the commercial aircraft subcontracting business ceased operations after the delivery of its final shipset, and the aggregates business was reclassified to continuing operations. Both events occurred in early 1996. For additional discussion, refer to Note C to the Consolidated Financial Statements. Earnings from operations increased in 1995 due primarily to the MD-11 program at the commercial aircraft subcontracting business. Previously, the company had ceased earnings recognition on the MD-11 program due to uncertainties surrounding its completion. As a result of resolving these and other matters related to the shutdown of the operations, the company began recognizing earnings on the program once again in 1995. For a discussion of the financial impact from the disposal of discontinued operations, see Note C to the Consolidated Financial Statements. There are no businesses classified as discontinued operations as of December 31, 1996. ENVIRONMENTAL MATTERS. For a discussion of environmental matters and other contingencies, see Note M to the Consolidated Financial Statements. The company believes that the amount it has recorded with respect to these matters is adequate, and any amount by which the liability exceeds the recorded amount would not be deemed material to the company's financial condition or results of operations. NEW ACCOUNTING STANDARDS. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in March 1995 and No. 123, "Accounting for Stock-Based Compensation," in October 1995. SFAS 121 requires a company to adjust the carrying value of long-lived assets and certain identifiable intangibles if their value is determined to be impaired as defined by the standard. The company adopted the provisions of SFAS 121 as of January 1, 1996, which had no material impact on the company's results of operations or financial condition. SFAS 123 encourages companies to adopt a fair value approach to valuing stock options which would require compensation cost to be recognized based on the fair value of stock options granted. The company has elected, as permitted by the standard, to follow its intrinsic value based method of accounting for stock options consistent with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the measurement date over the exercise price. The Accounting Standards Executive Committee issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," in October 1996. SOP 96-1 provides benchmarks to aid in the determination of when environmental liabilities should be recognized, as well as requirements for what the accrual of environmental liabilities should include. The company is required to adopt the provisions of the statement in 1997 and expects the statement will not have a material impact on the results of operations or financial condition. FINANCIAL CONDITION The company's liquidity and financial condition remained strong during 1996 as the balance of cash and equivalents and marketable securities increased from $1,095 at December 31, 1995, to $1,155 at December 31, 1996. A discussion of the company's financial condition in terms of its operating, investing and financing activities as defined in the Consolidated Statement of Cash Flows follows. 21 6 OPERATING ACTIVITIES--CONTINUING. The net cash provided by continuing operations as reported on the Consolidated Statement of Cash Flows is summarized by type as follows: Year Ended December 31 ------------------------------- 1996 1995 1994 ------------------------------- [S] [C] [C] [C] Operations $ 520 $ 405 $ 343 Allocated federal income tax payments (127) (89) (89) Other 22 33 (6) - -------------------------------------------------------------------------------- Operating cash flows 415 349 248 Decrease (increase) in marketable securities, net 742 (203) (136) - -------------------------------------------------------------------------------- Net cash provided by continuing operations $ 1,157 $ 146 $ 112 - -------------------------------------------------------------------------------- The four types of cash flows are described as follows: - Operations represent the pretax cash flows generated by the three business segments. Cash flows from operations historically approximate operating earnings plus depreciation. In 1996 and 1995, cash flows exceeded this level due to a reduction in operating working capital. The company believes that cash flows will again exceed operating earnings plus depreciation in 1997, due to the expected favorable impact that scheduled product deliveries will have on working capital. - For purposes of preparing the Consolidated Statement of Cash Flows, federal income tax payments are allocated between continuing and discontinued operations based on the portion of taxable income attributed to each. - Other cash flows include items that are not directly attributable to a business segment, such as interest received from investments in excess of interest paid on debt. Other cash flows were negative in 1994 due primarily to the payment of previously deferred compensation. - The company classifies its marketable securities as either trading or available-for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the purchases, sales and maturities of trading securities are reflected as cash flows from operating activities, and the purchases, sales and maturities of available-for-sale securities are reflected as cash flows from investing activities. For additional discussion of the company's marketable securities, see Note L to the Consolidated Financial Statements. In 1996, approximately $500 of the $742 decrease in marketable securities, net, was due to the amount the company invested in available-for-sale securities as opposed to trading securities in order to favorably affect the performance of its investment portfolio. OPERATING ACTIVITIES--DISCONTINUED. Cash flows from discontinued operations decreased during 1996 due primarily to the commercial aircraft subcontracting business ceasing operations and the resulting higher federal income tax payments associated with the delivery of its final shipset. Cash flows from discontinued operations increased during 1995 due to lower allocated federal income tax payments, improved operating cash flows and a decrease in payments for disposition related liabilities. Cash flows from discontinued operations are expected to improve in 1997 due to lower allocated federal income tax payments. For discussion of the A-12 program litigation, see Note N to the Consolidated Financial Statements. [PHOTO] Michael J. Mancuso/Sr. Vice President and Chief Financial Officer INVESTING ACTIVITIES. As previously discussed, the company has purchased available-for-sale securities, which pursuant to SFAS 115, are classified as cash flows from investing activities. Those securities, with maturities longer than one year, are classified as noncurrent assets. Although the maturities extend beyond one year, the securities are still currently available to fund internal and external investment opportunities. The company received proceeds in 1995 and 1994 from the sale of discontinued operations (for a discussion of individual transactions, see Note C to the Consolidated Financial Statements). As part of the sale of discontinued operations, certain properties located in southern California were retained. These properties have been segregated on the Consolidated Balance Sheet as real estate held for development. The company has retained outside experts to support the development of plans that will maximize the value the company receives from these properties. Development work began on certain of these properties during 1994 and is included in capital expenditures. Cash flows from investing activities are expected to be negative in 1997, due to the effect of business acquisitions. FINANCING ACTIVITIES. In the first quarter of 1996, the board of directors increased the regular quarterly dividend to $.41 per share, reflecting the board's confidence in the sustainability of the cash flows generated by the company's operations. The company had previously increased the dividend to $.375 and $.35 per share in March 1995 and March 1994, respectively. In 1994, the board of directors reconfirmed management's authority to repurchase, at its discretion, up to 3 million shares of the company's common stock. During 1996, the company repurchased approximately 390,000 shares of its stock on the open market for a total of $23. During 1994, the company repurchased approximately 530,000 shares of its stock on the open market for a total of $22. The Title XI Bonds issued by the ship financing business were retired in 1996. This retirement was financed by the private placement of new bonds that are callable under certain conditions and that are also nonrecourse to the company. The refinancing had no material impact on the company's results of operations or financial condition. The company expects to generate sufficient funds from operations to meet both its short- and long-term liquidity needs. In addition, the company has the capacity for long-term borrowings and currently has a committed, short-term $600 line of credit. The line of credit expires in May 1997, at which time the company anticipates renewing or replacing it if deemed appropriate. 22 7 CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in millions, except per share amounts)
Year Ended December 31 ------------------------ 1996 1995 1994 ------------------------ NET SALES $3,581 $3,067 $3,058 OPERATING COSTS AND EXPENSES 3,228 2,752 2,737 - ---------------------------------------------------------------------------------- OPERATING EARNINGS 353 315 321 Interest, net 55 55 22 Other income, net 1 5 -- - ---------------------------------------------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 409 375 343 Provision for income taxes 139 128 120 - ---------------------------------------------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS 270 247 223 DISCONTINUED OPERATIONS, NET OF INCOME TAXES: Earnings from operations -- 55 -- Gain on disposal -- 19 15 - ---------------------------------------------------------------------------------- -- 74 15 - ---------------------------------------------------------------------------------- NET EARNINGS $ 270 $ 321 $ 238 - ---------------------------------------------------------------------------------- NET EARNINGS PER SHARE: Continuing operations $ 4.27 $ 3.92 $ 3.53 Discontinued operations: Earnings from operations -- .88 -- Gain on disposal -- .30 .24 - ---------------------------------------------------------------------------------- $ 4.27 $ 5.10 $ 3.77 - ----------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 23 8 CONSOLIDATED BALANCE SHEET
December 31 ------------------------ (Dollars in millions) 1996 1995 ------------------------ ASSETS CURRENT ASSETS: Cash and equivalents $ 516 $ 215 Marketable securities 378 880 - --------------------------------------------------------------------------------------- 894 1,095 Accounts receivable 97 105 Contracts in process 558 567 Other current assets 309 246 - --------------------------------------------------------------------------------------- Total Current Assets 1,858 2,013 - --------------------------------------------------------------------------------------- NONCURRENT ASSETS: Marketable securities 261 -- Leases receivable--finance operations 204 213 Real estate held for development 147 136 Property, plant and equipment, net 441 398 Other assets 388 404 - --------------------------------------------------------------------------------------- Total Noncurrent Assets 1,441 1,151 - --------------------------------------------------------------------------------------- $ 3,299 $ 3,164 - --------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 182 $ 130 Other current liabilities 651 729 - --------------------------------------------------------------------------------------- Total Current Liabilities 833 859 - --------------------------------------------------------------------------------------- NONCURRENT LIABILITIES: Long-term debt 38 38 Long-term debt--finance operations 118 132 Other liabilities 596 568 Commitments and contingencies (See Note M) - --------------------------------------------------------------------------------------- Total Noncurrent Liabilities 752 738 - --------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Common stock, including surplus (shares issued 84,387,336) 109 98 Retained earnings 2,254 2,087 Treasury stock (shares held 1996, 21,285,157; 1995, 21,141,961) (650) (625) Unrealized gain on available-for-sale securities 1 7 - --------------------------------------------------------------------------------------- Total Shareholders' Equity 1,714 1,567 - --------------------------------------------------------------------------------------- $ 3,299 $ 3,164 - ---------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 24 9 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 ------------------------------ (Dollars in millions) 1996 1995 1994 ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 270 $ 321 $ 238 Adjustments to reconcile net earnings to net cash provided by continuing operations - Discontinued operations -- (74) (15) Depreciation, depletion and amortization 67 38 39 Decrease (Increase) in - Marketable securities 742 (203) (136) Accounts receivable 25 21 (42) Contracts in process 41 6 91 Leases receivable--finance operations 8 14 15 Other current assets -- 21 6 Increase (Decrease) in - Accounts payable and other current liabilities 2 (22) (105) Current income taxes 76 3 27 Deferred income taxes (61) 36 4 Other, net (13) (15) (10) - ------------------------------------------------------------------------------------ Net cash provided by continuing operations 1,157 146 112 Net cash provided (used) by discontinued operations (121) 84 31 - ------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 1,036 230 143 - ------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (986) -- -- Sales/maturities of available-for-sale securities 484 7 -- Business acquisitions (59) (292) -- Capital expenditures (75) (32) (23) Proceeds from sale of assets 41 6 17 Proceeds from sale of discontinued operations -- 24 259 Other (10) (5) -- - ------------------------------------------------------------------------------------ Net Cash Provided (Used) by Investing Activities (605) (292) 253 - ------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt--finance operations 150 -- -- Repayment of debt--finance operations (158) (15) (14) Dividends paid (101) (92) (84) Purchase of common stock (23) -- (22) Proceeds from option exercises 8 4 14 Other (6) (2) (2) - ------------------------------------------------------------------------------------ Net Cash Used by Financing Activities (130) (105) (108) - ------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 301 (167) 288 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 215 382 94 - ------------------------------------------------------------------------------------ CASH AND EQUIVALENTS AT END OF YEAR $ 516 $ 215 $ 382 - ------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 25 10 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in millions, except per share amounts)
Common Stock Treasury Stock Unrealized Gain ----------------------------------- Retained ------------------- on Available-for- Shares Par Surplus Earnings Shares Amount Sale Securities - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 84,387,336 $ 84 $ 8 $ 1,709 21,823,824 $ 624 $-- - ---------------------------------------------------------------------------------------------------------------------------- Net earnings 238 Cash dividends declared ($1.40 per share) (87) Shares purchased 529,600 22 Shares issued under Incentive Compensation Plan (5) (961,877) (15) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 84,387,336 84 3 1,860 21,391,547 631 -- - ---------------------------------------------------------------------------------------------------------------------------- Net earnings 321 Cash dividends declared ($1.50 per share) (94) Shares issued under Incentive Compensation Plan 11 (249,586) (6) Unrealized gain on available-for-sale securities 7 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 84,387,336 84 14 2,087 21,141,961 625 7 - ---------------------------------------------------------------------------------------------------------------------------- Net earnings 270 Cash dividends declared ($1.64 per share) (103) Shares purchased 391,900 23 Shares issued under Incentive Compensation Plan 11 (248,704) 2 Change in unrealized gain on available-for-sale securities (6) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 84,387,336 $ 84 $ 25 $ 2,254 21,285,157 $ 650 $ 1 - ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 26 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the accounts of the company and all majority-owned subsidiaries. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. SALES AND EARNINGS UNDER LONG-TERM CONTRACTS AND PROGRAMS. Major defense programs are accounted for using the percentage-of-completion method of accounting. The combination of estimated profit rates on similar, economically interdependent contracts is used to develop program earnings rates. These rates are applied to contract costs, including general and administrative expenses, for the determination of sales and operating earnings. Program earnings rates are reviewed quarterly to assess revisions in contract values and estimated costs at completion. Based on these assessments, any changes in earnings rates are made prospectively. Any anticipated losses on contracts or programs are charged to earnings when identified. Such losses encompass all costs, including general and administrative expenses, allocable to the contracts. Revenue arising from the claims process is not recognized either as income or as an offset against a potential loss until it can be reliably estimated and its realization is probable. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses amounted to $275, $234 and $234 in 1996, 1995 and 1994, respectively, and are included in operating costs and expenses on the Consolidated Statement of Earnings. INTEREST, NET. Interest income was $59, $59 and $27 in 1996, 1995 and 1994, respectively. Interest expense incurred by the company's finance operations totaled $10, $13 and $13 in 1996, 1995 and 1994, respectively, and is classified as operating costs and expenses. Interest payments for the total company were $14, $18 and $16 in 1996, 1995 and 1994, respectively. NET EARNINGS PER SHARE. As there is no material dilution, net earnings per share is based upon the weighted average number of common shares outstanding during each period. The weighted average shares were 63.2, 63.0 and 63.1 million in 1996, 1995 and 1994, respectively. CASH AND EQUIVALENTS AND MARKETABLE SECURITIES. The company considers securities with a remaining maturity of three months or less when purchased to be cash equivalents. Marketable securities consist primarily of corporate and municipal debt securities. Marketable securities with maturities greater than one year from the balance sheet date are classified as noncurrent. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS. Accounts receivable represent only amounts billed and currently due from customers. Recoverable costs and accrued profit related to long-term contracts and programs on which revenue has been recognized, but billings have not been presented to the customer (unbilled receivable), are included in contracts in process. REAL ESTATE HELD FOR DEVELOPMENT. As a result of the sale of businesses, certain properties were retained by the company. These properties are carried at the lower of cost or net realizable value. Assets are depreciated when placed into service. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried at cost net of accumulated depreciation. The company primarily uses accelerated methods of depreciation for depreciable assets. Depletion of mineral reserves is computed using the units-of-production method. IMPAIRMENT OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the company estimates the future cash flows expected to result from the use or sale of the asset. The adoption of the standard did not have a material impact on the company's financial condition or results of operations. INTANGIBLE ASSETS. Intangible assets, net of accumulated amortization, were $149 and $138 at December 31, 1996 and 1995, respectively. These assets are related to contracts and programs acquired, and are amortized over the estimated benefit period of 25 years. Costs in excess of net assets acquired (goodwill) is amortized ratably over appropriate periods, primarily 40 years. Goodwill, net of accumulated amortization, was $16 and $11 at December 31, 1996 and 1995, respectively. The carrying values of intangible assets are reviewed if the facts and circumstances indicate potential impairment. Any impairment would be recorded in the current period. ENVIRONMENTAL LIABILITIES. The company accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Cleanup and other environmental exit costs related to sold businesses were recorded at the time of disposal. Recorded liabilities have not been discounted. To the extent that the U.S. government has specifically agreed to pay the ongoing maintenance and monitoring costs at sites currently used in the conduct of the company's government contracting business, these costs are treated as contract costs and recognized as paid. STOCK-BASED COMPENSATION. The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" in October 1995. SFAS 123 encourages companies to adopt a fair value approach to valuing stock options that would require compensation cost to be recognized based on the fair value of stock options granted. The company has elected, as permitted by the standard, to continue to follow its intrinsic value based method of accounting for stock options consistent with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic method, compensation cost for stock 27 12 options is measured as the excess, if any, of the quoted market price of the company's stock at the measurement date over the exercise price. CLASSIFICATION. Consistent with industry practice, assets and liabilities relating to long-term contracts and programs are classified as current although a portion of these amounts is not expected to be realized within one year. In addition, certain prior year amounts have been reclassified to conform to the current year presentation. B. ACQUISITIONS Effective September 13, 1995, the company purchased the stock of Bath Iron Works Corporation (BIW) for approximately $300 in cash. This transaction has been accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net tangible assets acquired has been primarily recorded as an intangible asset related to the destroyer program. Operating results of BIW have been included with those of the company from the closing date. The following pro forma combined financial information presents the historical results of operations of the company and BIW for the years ended December 31, 1995 and 1994, with pro forma adjustments as if BIW had been acquired as of the beginning of the periods presented. The pro forma information is not necessarily indicative of what the results of operations actually would have been if the transaction had occurred on the date indicated, or of future results of operations.
Year Ended December 31 -------------------- (Unaudited) 1995 1994 -------------------- Net Sales $3,705 $3,951 - -------------------------------------------------------------------------------- Earnings From Continuing Operations $ 260 $ 242 - -------------------------------------------------------------------------------- Per Share $ 4.13 $ 3.84 - --------------------------------------------------------------------------------
Effective March 29, 1996, the company purchased the assets of Teledyne Vehicle Systems (Muskegon Operations), an operating unit of Teledyne Inc., for approximately $55 in cash. Muskegon Operations specializes in combat vehicles as well as mobility systems, suspension technology and diesel engines for armored vehicle markets worldwide. This transaction has been accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net tangible assets acquired has been recorded as intangible assets related to the Muskegon Operations' product lines and goodwill. The results of the Muskegon Operations are included with those of the company from the closing date. Pro forma results are not presented because the effects of the acquisition are not material to the company's results of operations or financial condition. Effective January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, operating units of Lockheed Martin Corporation, for approximately $450 in cash. Defense Systems builds light vehicles, turrets and transmissions for combat vehicles, as well as missile guidance and naval fire control systems. Armament Systems designs, develops and produces advanced gun, ammunition handling and air defense systems, and is a leader in the production of ammunition and ordnance products. The transaction will be accounted for under the purchase method of accounting. The results of Defense Systems and Armament Systems will be included with those of the company in 1997. C. DISCONTINUED OPERATIONS SPACE LAUNCH SYSTEMS. On May 1, 1994, the company closed the sale of its Space Launch Systems business to Martin Marietta Corporation for $209 in cash. The company recognized a gain on disposal of $15, or $.24 per share, net of income taxes of $8. COMMERCIAL AIRCRAFT SUBCONTRACTING. On July 1, 1994, the company and McDonnell Douglas Corporation (McDonnell Douglas) announced an agreement to terminate their contract for the company's production of fuselage sections for the MD-11 jetliner. Under the agreement, the responsibility for production of fuselages was transferred from the company's commercial aircraft subcontracting business to McDonnell Douglas, with the delivery of the 166th shipset in early 1996. The company's commercial aircraft subcontracting business ceased operations after the completion of its obligations under this agreement. OTHER. In early 1996, the aggregates operations of the company's Material Service business were reclassified to continuing operations. During 1995 and 1994 the company sold the lime, brick, concrete pipe and ready-mix operations. As the results of operations and financial condition of Material Service are not material to the company, prior periods have not been restated to reflect this reclassification. In addition, during 1995, the company recognized a portion of its deferred gain from a prior disposal as a result of the favorable resolution of a contingency. There are no businesses classified as discontinued operations as of December 31, 1996. EARNINGS FROM OPERATIONS. The operating results of discontinued operations are:
Year Ended December 31 ------------------------------ 1996 1995 1994 ------------------------------ Net sales $ 28 $ 467 $ 644 - -------------------------------------------------------------------------------- Earnings before income taxes $ -- $ 84 $ -- Provision for income taxes -- 29 -- - -------------------------------------------------------------------------------- Net earnings $ -- $ 55 $ -- - -------------------------------------------------------------------------------- Net earnings per share $ -- $ .88 $ -- - --------------------------------------------------------------------------------
D. INCOME TAXES The provision for federal income taxes for continuing operations is summarized as follows:
Year Ended December 31 -------------------------------- 1996 1995 1994 -------------------------------- Current $ 200 $ 92 $ 116 Deferred (61) 36 4 - -------------------------------------------------------------------------------- $ 139 $ 128 $ 120 - --------------------------------------------------------------------------------
28 13 The reconciliation from the statutory federal income tax rate to the company's effective income tax rate is as follows:
Year Ended December 31 -------------------------------- 1996 1995 1994 -------------------------------- Statutory income tax rate 35.0% 35.0% 35.0% Other (1.0) (.9) -- - -------------------------------------------------------------------------------- Effective income tax rate 34.0% 34.1% 35.0% - --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consist of the following:
December 31 ------------------------ 1996 1995 ------------------------ Long-term contract costing methods $117 $ 63 A-12 termination 91 96 Accrued costs on disposed businesses 90 96 Coal mining liabilities 27 24 Other 125 130 - -------------------------------------------------------------------------------- Deferred Assets $450 $ 409 - -------------------------------------------------------------------------------- Lease income $ 74 $ 77 Commercial pension asset 43 40 Intangible asset 33 23 Other 30 60 - -------------------------------------------------------------------------------- Deferred Liabilities $180 $ 200 - -------------------------------------------------------------------------------- Net Deferred Asset $270 $ 209 - --------------------------------------------------------------------------------
No material valuation allowance was required for the company's deferred tax assets at December 31, 1996 and 1995. The current portion of the net deferred tax asset is $231 and $120 at December 31, 1996 and 1995, respectively, and is included in other current assets on the Consolidated Balance Sheet. The company made federal income tax payments of $199, $83 and $107 in 1996, 1995 and 1994, respectively. The Internal Revenue Service (IRS) has completed its examination of the company's consolidated tax returns through the year 1989. Certain issues related to the years 1977 through 1986 are in litigation (for further discussion see Note M). Other issues related to the years 1987 through 1989 have been protested to the IRS Appeals Division. In addition, the IRS is currently examining the company's consolidated tax returns for the years 1990 through 1993. As the company has recorded liabilities for tax contingencies, resolution of these matters is not expected to have a materially unfavorable impact on the company's financial condition or results of operations. Further, the company has filed refund claims for approximately $275 (plus interest) in additional research and experimentation tax credits for the years 1981 through 1990. A portion of the claims relates to the years 1981 through 1986 and is part of the litigation discussed above, while the remaining claims are being contested at the IRS administrative level. As the ultimate allowance of these claims is expected to be dependent upon the outcome of the litigation, no benefits will be recognized until the completion of the litigation. The provision for state and local income taxes, which is allocable to U.S. government contracts, is included in operating costs and expenses. 14 E. CONTRACTS IN PROCESS Contracts in process consist of the following:
December 31 ----------------------- 1996 1995 ----------------------- Contract costs and estimated profits $ 6,076 $5,916 Other costs 352 398 - -------------------------------------------------------------------------------- 6,428 6,314 Less advances and progress payments 5,870 5,747 - -------------------------------------------------------------------------------- $ 558 $ 567 - --------------------------------------------------------------------------------
Contract costs include production costs and related overhead, including general and administrative expenses. Other costs primarily represent amounts required to be recorded under GAAP that are not currently allocable to contracts, such as a portion of the company's estimated workers' compensation, retiree medical and environmental expenses. These costs have been deferred because their recovery under contracts is considered probable based on existing backlog. If the level of backlog in the future does not support the continued deferral of these costs, their recognition could affect the profitability of the company's remaining contracts. 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. F. PROPERTY, PLANT AND EQUIPMENT, NET The major classes of property, plant and equipment are as follows:
December 31 ---------------------- 1996 1995 ---------------------- Land and improvements $ 78 $ 80 Mineral reserves 93 52 Buildings and improvements 250 212 Machinery and equipment 974 864 - -------------------------------------------------------------------------------- 1,395 1,208 Less accumulated depreciation, depletion and amortization 954 810 - -------------------------------------------------------------------------------- $ 441 $ 398 - --------------------------------------------------------------------------------
Certain of the company's plant facilities are provided by the U.S. government. 29 15 G. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
December 31 ----------------------- 1996 1995 ----------------------- Workers' compensation $ 239 $ 233 Retirement benefits 179 199 Salaries and wages 68 74 A-12 termination liability and legal fees 21 38 Other 144 185 - -------------------------------------------------------------------------------- $ 651 $ 729 - --------------------------------------------------------------------------------
H. LONG-TERM DEBT Long-term debt consists of 9.95 percent Debentures to be retired by annual sinking fund payments between 2011 and 2018. Among the restrictions under the Indenture covering the unsecured Debentures are provisions limiting the company's ability to secure additional debt through mortgages on existing properties and sale and leaseback transactions of principal properties as defined. The company may borrow up to $600 under a committed, short-term line of credit. Under the line of credit, the company pays a fee on the commitment and would pay interest at varying rates based on market conditions. There were no borrowings under the line of credit during 1996 or 1995. I. OTHER LIABILITIES Other liabilities consist of the following:
December 31 ------------------------ 1996 1995 ------------------------ Accrued costs on disposed businesses $ 256 $ 274 Retirement benefits 111 65 Coal mining related liabilities 77 69 Other 152 160 - -------------------------------------------------------------------------------- $ 596 $ 568 - --------------------------------------------------------------------------------
The company has recorded liabilities for contingencies related to disposed businesses. These liabilities include retiree medical, environmental, legal and other costs. The company has certain liabilities that are specific to the coal mining industry, including workers' compensation and reclamation. The company is subject to the Federal Coal Mine Health & Safety Act of 1969, as amended, and the related workers' compensation laws in the states in which it has operated. These laws require the company to pay benefits for occupational disability resulting from coal workers' pneumoconiosis (black lung). The liability for known claims and an actuarially determined estimate of future claims that will be awarded to current and former employees is discounted based on a rate of 7.25 percent at December 31, 1996 and 1995, respectively. Liabilities to reclaim land disturbed by the mining process and to perform other closing functions are recorded over the estimated production lives of the mines. J. SHAREHOLDERS' EQUITY STOCK SPLIT. On March 4, 1994, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend distributed on April 11, 1994, to shareholders of record on March 21, 1994. AUTHORIZED STOCK. The authorized capital stock of the company consists of 200 million shares of $1 par value common stock and 50 million shares of $1 par value preferred stock issuable in series, with the rights, preferences and limitations of each series to be determined by the board of directors. K. FINANCE OPERATIONS The company owns three liquefied natural gas (LNG) tankers that have been leased to a nonrelated company. The U.S. government guaranteed Title XI Bonds, which financed the leases, were retired in 1996. This retirement was financed by the private placement of new bonds that are also secured by the LNG tankers. The new bonds are callable under certain conditions and are also nonrecourse to the company. Accordingly, in the event the lessee defaults on the lease payments, the company is not obligated to repay the debt. The refinancing did not have a material impact on the company's results of operations or financial condition. The following is a summary of the comparative financial statements for the finance operations: BALANCE SHEET DATA
December 31 ------------------------- 1996 1995 ------------------------- ASSETS Leases receivable $ 214 $ 222 Due from parent 64 72 - -------------------------------------------------------------------------------- $ 278 $ 294 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDER'S EQUITY Debt $ 135 $ 146 Income taxes 74 77 Shareholder's equity 69 71 - -------------------------------------------------------------------------------- $ 278 $ 294 - --------------------------------------------------------------------------------
EARNINGS DATA
Year Ended December 31 ---------------------------------- 1996 1995 1994 ---------------------------------- Interest income $ 23 $ 17 $ 16 Interest expense and income taxes 17 14 14 - -------------------------------------------------------------------------------- Net earnings $ 6 $ 3 $ 2 - --------------------------------------------------------------------------------
30 16 On October 1, 1995, the leases were extended from 2004 through the year 2009. These leases are classified as direct financing leases. The lease extension increased aggregate future minimum lease payments and unearned interest income, but did not alter the company's net investment in leases receivable. The components of the company's net investment in the leases receivable are as follows:
December 31 ----------------------- 1996 1995 ----------------------- Aggregate future minimum lease payments $ 349 $ 380 Unguaranteed residual value 38 38 Less unearned interest income 173 196 - -------------------------------------------------------------------------------- $ 214 $ 222 - --------------------------------------------------------------------------------
The company is scheduled to receive minimum lease payments of $31 annually in each of the next five years. Semiannual sinking fund payments, sufficient to retire 100 percent of the aggregate principal amount of the debt, have commenced and will continue through maturity in 2004. The weighted average interest rate on the debt is 6.2 percent. The schedule of principal payments for the next five years is $17 in 1997, $18 in 1998, $19 in 1999, $19 in 2000, and $21 in 2001. L. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the company's financial instruments are as follows:
December 31 -------------------------------------------------- 1996 1995 -------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - -------------------------------------------------------------------------------- Cash and equivalents $516 $516 $215 $215 Current marketable securities: Trading 138 138 880 880 Available-for-sale 240 240 -- -- Noncurrent marketable securities: Available-for-sale 261 261 -- -- Other investments: Available-for-sale 51 51 50 50 Long-term debt 38 41 38 43 Long-term debt--finance operations 135 137 146 168 - --------------------------------------------------------------------------------
Fair value is based on quoted market prices, except for long-term debt--finance operations where fair value is based on a risk-adjusted discount rate. The company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of January 1, 1994. Through December 31, 1995, the company determined that all of its investments classified as cash equivalents and marketable securities were trading securities as defined by SFAS 115. During 1996, the company purchased securities with longer maturities, which pursuant to SFAS 115, are classified as available-for-sale. Trading securities are recorded at fair value with unrealized gains and losses (the adjustments to fair value) recognized in earnings. Available-for-sale securities are recorded at fair value with unrealized gains and losses charged to a separate component of shareholders' equity. As required by SFAS 115, purchases, sales and maturities of available-for-sale securities are classified as cash flows from investing activities. Purchases, sales and maturities of trading securities are classified as cash flows from operating activities. Marketable securities classified as available-for-sale at December 31, 1996, include corporate debt securities of $443 and municipal debt securities of $58. Other investments classified as available-for-sale include U.S. government debt obligations and corporate equity securities. U.S. government debt obligations are $50 and $40 at December 31, 1996 and 1995, respectively, and are restricted for payment of workers' compensation benefits under an agreement with the State of Maine. The amortized cost of U.S. government obligations is $50 and $39 at December 31, 1996 and 1995, respectively. The company's investment in equity securities is $1 and $10 at December 31, 1996 and 1995, respectively. The sale of these equity investments is restricted for a period of less than one year. The unrealized gain net of taxes for these securities was not material at December 31, 1996 and 1995, and is classified as a separate component of shareholders' equity. The proceeds from the sale of available-for-sale securities were $228 and $7 in 1996 and 1995. The realized gain on the sale of available-for-sale securities was not significant in each of the last three years. For debt securities classified as available-for-sale, $250 mature within one year, $283 between one and five years, and $18 between five and ten years. Unrealized gains and losses recognized in earnings each of the last three years on trading securities were not significant. The company was contingently liable for debt and lease guarantees and other arrangements aggregating up to a maximum of approximately $70 at December 31, 1996. The company knows of no event of default that would require it to satisfy these guarantees, and therefore, the fair value of these contingent liabilities is considered immaterial. M. COMMITMENTS AND CONTINGENCIES LITIGATION. On January 7, 1991, the U.S. Navy terminated for default a contract with the company and McDonnell Douglas for the full-scale development of the U.S. Navy's A-12 aircraft. The U.S. Navy has demanded repayment of unliquidated progress payments, plus interest. The company and McDonnell Douglas have a claim pending against the U.S. government in the Court of Federal Claims (see Note N). Certain issues related to the IRS audit of the company's consolidated federal income tax returns for the years 1977 through 1986 were not resolved at the administrative level. Accordingly, in July 1994, the company received a Statutory Notice of Deficiency from the IRS that the company is contesting in the U.S. Tax 31 17 Court. The company has accrued an amount that is expected to be adequate to cover any liability arising from this matter. Also, as part of the Tax Court litigation, the company is contesting the disallowance by the IRS of its refund claim for additional research and experimentation tax credits for the years 1981 through 1986. The company's position is that it is entitled to a tax credit for certain research performed pursuant to fixed-price government contracts. The company believes that its position has been strengthened by the recent decision in Fairchild Industries v. United States, which held for the taxpayer on this issue. The resolution of the Tax Court litigation is expected to take several years. General Dynamics Corporation was served with a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics and Lloyd Thompson, seeking a declaratory judgment and rescission of certain excess loss insurance contracts covering the company's self-insured workers' compensation program at its Electric Boat division for the period July 1, 1988, to June 30, 1992. The insurance contracts cover losses of up to $30 in excess of a $40 attachment point in each of the four policy years. The named plaintiff, Paul Hunt, is an individual suing on behalf of himself and other individuals who are members of the Lloyd's of London syndicates and other British insurers who have underwritten the risk. The company does not expect that the matter will have a material impact on the company's results of operations or financial condition. On July 26, 1996, a jury in Los Angeles County rendered a verdict in favor of the plaintiffs in the trial of Dolores Blanton and William B. Forti v. General Dynamics. The plaintiffs, former employees of the company's E-Metrics subsidiary, claimed they were promised an equity interest in E-Metrics, and were not compensated when the assets and liabilities were transferred to Hughes Aircraft Company as part of the sale of the Missile Systems business in 1992. The company asserted that the decision on equity interests was left to the E-Metrics board of directors, which never considered the issue. The jury found for the plaintiffs in the amount of $7.4 for breach of contract, plus punitive damages of $100. On motion by the company, the trial judge reduced the punitive damage award to $30 for a total judgment of $37.4. The company does not expect that this matter will have a material impact on the company's results of operations or financial condition. Hughes Missile Systems Company (HMSC) has filed an amended complaint against the company alleging breaches of certain representations and warranties contained in the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business. The amended complaint which was filed in the Superior Court of the State of California, seeks $54 in damages. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. In March 1996, the company received a judgment for $26 against the government in General Dynamics v. U.S., a case tried in U.S. District Court for the Central District of California. The company sued the government under the Federal Tort Claims Act, alleging that the Defense Contract Audit Agency negligently audited the Division Air Defense contract, which led to the company's indictment in 1985. The indictment was later dropped. The government has appealed the 1996 judgment. HMSC will receive 30 percent of the net recovery as a result of its purchase of the company's missile business in 1992. The company has not recognized any claim revenue from this matter. The company has been sued as the "alter ego" of Asbestos Corporation Ltd., a Canadian company, in which General Dynamics owned shares between 1969 and 1982. The company, along with more than 50 other defendants, has been sued in several thousand cases filed in Texas by plaintiffs alleging exposure to asbestos. Although the gross claims attributable to the plaintiffs cannot be estimated, including the share of the company or any other defendant, any losses arising from these matters are largely covered by insurance. Therefore, the company does not believe that these matters will have a material impact on the company's results of operations or financial condition. The company is a defendant in tort cases pending in state and federal court in Arizona, as well as a Comprehensive Environmental Response, Compensation and Liability Act case. The litigation arises out of groundwater and soil contamination at the Tucson airport. The company's predecessor in interest, Consolidated Aircraft Company, operated a modification center at the site during World War II. The company has defenses to the claims, as well as a claim against the government for indemnification. The company is unable to estimate its share of any liability arising from these claims. However, the company believes it is entitled to indemnity from the U.S. for any liability. Therefore, the company does not believe the litigation will have a material adverse 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 fourteen Superfund sites in which the company, along with other major U.S. corporations, has been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency 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 it is a small contributor and its liability at any individual site is not material. The company is also involved in the cleanup and remediation of various conditions at sites it currently or formerly owned or operated. The company measures its environmental exposure based on currently available facts, existing technologies, and presently enacted laws and regulations. Where a reasonable basis for apportionment exists with other PRPs, the company has considered only its share of the liability. The company considers the solvency of other PRPs, whether responsibility is being disputed, and its experience in similar matters in determining its share. Based on a site by site analysis, the company has recorded an amount that it believes will be adequate to cover any liability arising from the sites. 32 18 OTHER. In the ordinary course of business, the company has entered into letter of credit agreements and other arrangements with financial institutions aggregating approximately $240 at December 31, 1996. For discussion of other financial guarantees, see Note L. The company's rental commitments under existing leases at December 31, 1996, are not significant. N. TERMINATION OF A-12 PROGRAM As stated in Note M, the U.S. Navy terminated the company's A-12 aircraft contract for default. The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the U.S. Navy's new carrier-based Advanced Tactical Aircraft. Both the company and McDonnell Douglas (the contractors) were parties to the contract with the U.S. Navy, each had full responsibility to the U.S. 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 U.S. 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' appeal of 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 and equitable relief. A trial on Count XVII of the complaint, which relates to the propriety of the termination 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 a trial on the merits, the court issued an order converting the termination for default to a termination of convenience. Based on the court's ruling on quantum issues, the parties have agreed to a stipulation on damages totaling $1,071. The court has also ruled that plaintiffs are entitled to interest on the judgment from June 26, 1991, until paid. Through December 31, 1996, the interest on the stipulated amount was $399. Final resolution of the A-12 litigation will depend on the entry of final judgment, the outcome of expected appeals, and further litigation or negotiation with the government. The company has not recognized any claim revenue from the U.S. Navy. 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 trial. In the unlikely event that the court's decision converting the termination to a termination for convenience is reversed on appeal, and the contractors are ultimately found to be in default of 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. This result is considered remote. O. INCENTIVE COMPENSATION PLAN Under the 1988 Incentive Compensation Plan, as amended, the company may grant awards in combination of cash, common stock, stock options and restricted stock. Prior to October 1993, stock options granted under the plan were awarded for a maximum term of 10 years and were exercisable in their entirety beginning 18 months after the date of award. In October 1993, the company introduced a long-term incentive program that granted stock options and restricted stock. The stock options are generally exercisable at the fair market value of the common stock on the date of grant with 50 percent of the stock options vesting on the one year anniversary of the grant and the remaining 50 percent vesting on the two year anniversary of the grant. The stock options have a maximum term of five years. The restricted stock has a feature that will increase or decrease the number of shares initially granted based on movement in the company's stock price from the date of grant to the end of the two year performance period. Once the number granted has been adjusted, restrictions will continue to be imposed for an additional two years, at which time all restrictions will lapse. There were 45,773, 199,395 and 15,590 shares of restricted stock awarded in 1996, 1995 and 1994, respectively. There are 442,870 shares of restricted stock outstanding at December 31, 1996. Information with respect to stock options is as follows:
Year Ended December 31 --------------------------------------- 1996 1995 1994 --------------------------------------- NUMBER OF SHARES UNDER STOCK OPTIONS: Outstanding at beginning of year 2,302,723 1,820,887 3,610,428 Granted 68,800 719,650 135,810 Exercised (495,005) (171,264) (1,705,172) Canceled (49,666) (66,550) (220,179) - -------------------------------------------------------------------------------- Outstanding at end of year 1,826,852 2,302,723 1,820,887 - -------------------------------------------------------------------------------- EXERCISABLE AT END OF YEAR 1,429,372 979,311 509,866 ================================================================================ WEIGHTED AVERAGE EXERCISE PRICE: Granted $60.80 $60.23 $45.56 Exercised 25.19 22.42 14.44 Canceled 58.03 46.89 46.84 Outstanding at end of year 51.48 45.69 37.80 Exercisable at end of year 48.99 34.32 14.56 ================================================================================
33 19 Information with respect to stock options outstanding and stock options exercisable at December 31, 1996, is as follows:
---------------------------------------------------- Options Outstanding ---------------------------------------------------- Number Weighted Weighted Range of Outstanding Average Remaining Average Exercise Prices at 12/31/96 Contractual Life Exercise Price - -------------------------------------------------------------------------------- $ 7.21-22.75 49,420 3.5 years $ 15.65 39.81-47.00 1,038,370 1.9 46.81 58.13-64.63 739,062 4.0 60.44 - -------------------------------------------------------------------------------- 1,826,852 ================================================================================
---------------------------------------------------- Options Exercisable ---------------------------------------------------- Range of Number Exercisable Weighted Average Exercise Prices at 12/31/96 Exercise Price - -------------------------------------------------------------------------------- $ 7.21-22.75 49,420 $ 15.65 39.81-47.00 1,038,370 46.81 58.13-64.63 341,582 60.44 - -------------------------------------------------------------------------------- 1,429,372 ================================================================================
At December 31, 1996, 1,327,483 treasury shares have been reserved for options that may be granted in the future, in addition to the shares reserved for issuance on the exercise of options outstanding. The company applies APB 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for stock options. The compensation cost for restricted stock has been appropriately recognized at fair market value of the company's stock in 1996 and 1995, respectively. Had compensation costs for stock options been determined based on the fair value at the grant dates for awards under this plan consistent with the method of SFAS 123, the company's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated as follows:
----------------------- 1996 1995 ----------------------- Net Earnings: As Reported $ 270 $ 321 Pro Forma 268 321 Net Earnings Per Share: As Reported $4.27 $5.10 Pro Forma 4.24 5.10 - --------------------------------------------------------------------------------
In accordance with SFAS 123, the fair value approach to valuing stock options used for pro forma presentation has not been applied to stock options granted prior to January 1, 1995. The compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The weighted average fair value of options granted was $7.54 and $7.38 during 1996 and 1995, respectively. The fair value is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 2.3 and 2.5 percent; expected volatility of 20 percent for both years; risk-free interest rates of 5.7 and 5.6 percent; and expected lives of four months after the vesting period. P. RETIREMENT PLANS PENSION. The company has nine trusteed noncontributory defined benefit pension plans covering substantially all employees. Under certain of the plans, benefits are primarily a function of both the employee's years of service and level of compensation, while under other plans, benefits are a function primarily of years of service. It is the company's policy to fund the plans to the maximum extent deductible under existing federal income tax regulations. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Net periodic pension cost for the total company included the following:
Year Ended December 31 ---------------------------------- 1996 1995 1994 ---------------------------------- Service cost-benefits earned during period $ 50 $ 47 $ 65 Interest cost on projected benefit obligation 182 158 146 Actual loss (gain) on plan assets (12) (933) 152 Net amortization and deferral (212) 737 (334) - -------------------------------------------------------------------------------- $ 8 $ 9 $ 29 - --------------------------------------------------------------------------------
The following table sets forth the plans' funded status:
December 31 ----------------------- 1996 1995 ----------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ (2,405) $(2,453) ================================================================================ Accumulated benefit obligation $ (2,450) $(2,487) ================================================================================ Projected benefit obligation $ (2,597) $(2,657) Plans' assets at fair value 3,356 3,441 - -------------------------------------------------------------------------------- Plans' assets in excess of projected benefit obligation 759 784 Unrecognized net gain (550) (607) Unrecognized prior service cost 240 257 Unrecognized net asset at January 1, 1986 (39) (47) - -------------------------------------------------------------------------------- Prepaid pension cost $ 410 $ 387 - --------------------------------------------------------------------------------
Assumptions used in accounting for the plans are as follows:
December 31 ---------------------------------- 1996 1995 1994 ---------------------------------- Discount rate 7.5% 7% 8% Varying rates of increase in compensation levels based on age 4.5-10% 4.5-10% 4.5-10% Expected long-term rate of return on assets 8% 8% 8% ================================================================================
34 20 Under SFAS No. 87, "Employers' Accounting for Pensions," the company is required to assume a discount rate at which the obligation could be currently settled. Reflecting the movement in interest rates, the company increased its discount rate assumption from 7 percent to 7.5 percent at December 31, 1996, which decreased the projected benefit obligation approximately $165. Changes in prior service cost resulting from plan amendments are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. Since 1992, the company has deferred certain gains realized by the commercial plan for the purpose of offsetting any costs associated with its final disposition, either through reversion or other actions. These deferred gains have been classified against the prepaid pension cost resulting in a net asset of $124 and $115 at December 31, 1996 and 1995, respectively, which is included in other noncurrent assets on the Consolidated Balance Sheet. The company's contractual arrangements with the U.S. government provide for the recovery of contributions to the company's government plans. Historically, the amount contributed to these plans, charged to contracts and included in net sales has exceeded the net periodic pension cost included in operating costs and expenses as determined under SFAS 87. Therefore, the company has deferred recognition of earnings resulting from the difference between contributions and net periodic pension cost to provide better matching of revenues and expenses. Similarly, pension settlements and curtailments under the government plans have also been deferred. As the U.S. government will receive an equitable interest in the excess assets of a government pension plan in the event of plan termination, the aforementioned deferrals have been classified against the prepaid pension cost related to the government plans resulting in the recognition of no net asset on the Consolidated Balance Sheet. At December 31, 1996, approximately 53 percent of the plans' assets are invested in securities of the U.S. government or its agencies, 20 percent in diversified U.S. common stocks, 17 percent in mortgage-backed securities and 10 percent in diversified U.S. corporate debt securities. In addition to the defined benefit plans, the company provides eligible employees the opportunity to participate in savings plans that permit contributions on both a pretax and after-tax basis. Generally, salaried employees and certain hourly employees with at least one year of continuous service are eligible to participate. Under most plans, the employee may contribute to various investment alternatives, including investment in the company's common stock. In certain of the plans, the company matches a portion of the employees' contributions with contributions to a fund that invests in the company's common stock. The company's contributions amounted to $22, $25 and $30 in 1996, 1995 and 1994, respectively. Approximately 6 million shares of the company's common stock were held by the plans at both December 31, 1996 and 1995, respectively. The company also sponsors several unfunded non-qualified supplemental executive plans that provide participants with additional benefits, including any excess of such benefits over limits imposed on qualified plans by federal law. The recorded liability and expense related to these plans are not material to the company's results of operations and financial condition. OTHER POSTRETIREMENT BENEFITS. The company maintains plans providing retiree medical coverage for many of its current and former employees. Postretirement life insurance benefits are also provided to certain retirees. These benefits vary by employment status and age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. Both medical and life insurance benefits are provided only to those employees who retire directly from the service of the company and not to those who terminate service/seniority prior to eligibility for retirement. The company established and began funding a Voluntary Employee's Beneficiary Association (VEBA) trust in 1992 for certain plans in the amount of their related annual net periodic postretirement benefit cost under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The remaining plans are primarily funded as claims are received. The net periodic postretirement benefit cost for the total company included the following:
Year Ended December 31 ---------------------------------- 1996 1995 1994 ---------------------------------- Service cost--benefits earned during period $ 7 $ 8 $ 12 Interest cost on projected benefit obligation 46 51 51 Actual loss (gain) on plan assets (17) (32) 1 Amortization of unrecognized transition obligation 29 35 44 Net amortization and deferral 4 20 (7) - -------------------------------------------------------------------------------- $ 69 $ 82 $101 - --------------------------------------------------------------------------------
The following table sets forth the plans' funded status:
December 31 ----------------------- 1996 1995 ----------------------- Accumulated postretirement benefit obligation: Retirees $ 459 $ 483 Other fully eligible participants 32 43 Other active participants 137 162 - -------------------------------------------------------------------------------- 628 688 Less plans' assets at fair value 203 179 - -------------------------------------------------------------------------------- Obligation in excess of plans' assets 425 509 Unrecognized transition obligation (217) (272) Unrecognized net (loss) gain 56 (6) Unrecognized prior service cost (3) (4) - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 261 $ 227
35 21 Assumptions used in accounting for the plans are as follows:
December 31 ---------------------------------- 1996 1995 1994 ---------------------------------- Discount rate 7.5% 7% 8% Expected long-term rate of return on assets 8% 8% 8% Assumed health care cost trend rate for next year: Post-65 claim groups 6% 7% 8% Pre-65 claim groups 8.5% 9.5-13% 10.5-14% - --------------------------------------------------------------------------------
As stated above, the company increased its discount rate assumption from 7 percent to 7.5 percent at December 31, 1996, which decreased the accumulated postretirement benefit obligation approximately $32. In addition, the obligation decreased approximately $30 in 1996 due to a decrease in assumed health care cost trend rates. The health care cost trend rates are assumed to gradually decline to 4.5 percent and 5 percent for post-65 and pre-65 claim groups, respectively, in the year 2004 and thereafter over the projected payout period of the benefits. The effect of a 1 percent increase each year in the health care cost trend rate used would result in an increase of $47 in the accumulated postretirement benefit obligation at December 31, 1996, and an increase of $6 in the aggregate of the service and interest cost components of the 1996 net periodic cost. At December 31, 1996, approximately 51 percent of the trusts' assets were invested in diversified U.S. common stocks, 26 percent in mortgage-backed securities, 19 percent in securities of the U.S. government and its agencies and 4 percent in cash and equivalents. The company's contractual arrangements with the U.S. government provide for the recovery of contributions to a VEBA, and for non-funded plans, for costs based on claims paid. The net periodic postretirement benefit cost calculated pursuant to SFAS 106 exceeds the company's cost currently allocable to contracts. To the extent the company has contracts in backlog sufficient to recover the excess SFAS 106 cost, the company is deferring the charge in contracts in process until such time that the cost is allocable to contracts. The company has certain employees covered by multiemployer plans, including the fund established by the Coal Industry Retiree Health Benefit Act of 1992 (the Act). The company estimates its discounted obligation under the Act to former employees to be $13 at December 31, 1996. The Act also provides for the allocation of beneficiaries who cannot be assigned to an employer. The company's obligation related to such beneficiaries cannot be determined at this time. The company accounts for its contributions related to these plans on the cash basis in accordance with GAAP. Q. BUSINESS SEGMENT INFORMATION The company's primary business is supplying weapons systems and services to the U.S. government and its international allies. For a description of the company's three 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 three segments follows:
Net Sales Operating Earnings Sales to U.S. Government ------------------------------------------------------------------------------------------ 1996 1995 1994 1996 1995 1994 1996 1995 1994 ------------------------------------------------------------------------------------------ Marine Group $ 2,332 $ 1,884 $ 1,733 $ 216 $ 194 $ 196 $ 2,316 $ 1,869 $ 1,721 Combat Systems Group 1,026 1,050 1,184 140 140 140 996 1,029 1,159 Other 223 133 141 (3) (19) (15) -- -- -- - ----------------------------------------------------------------------------------------------------------------- $ 3,581 $ 3,067 $ 3,058 $ 353 $ 315 $ 321 $ 3,312 $ 2,898 $ 2,880 - -----------------------------------------------------------------------------------------------------------------
Depreciation, Depletion Identifiable Assets Capital Expenditures and Amortization ------------------------------------------------------------------------------------------ 1996 1995 1994 1996 1995 1994 1996 1995 1994 ------------------------------------------------------------------------------------------ Marine Group $ 806 $ 935 $ 381 $ 18 $ 8 $ 6 $ 40 $ 23 $ 20 Combat Systems Group 336 237 239 14 8 5 12 9 10 Other 388 317 344 12 3 6 12 5 8 Corporate* 1,769 1,675 1,709 31 13 6 3 1 1 - ----------------------------------------------------------------------------------------------------------------- $3,299 $3,164 $2,673 $ 75 $ 32 $ 23 $ 67 $ 38 $ 39 - -----------------------------------------------------------------------------------------------------------------
* Corporate identifiable assets include cash and equivalents and marketable securities, deferred taxes, real estate held for development, net assets of discontinued operations and prepaid pension cost. 36 22 R. QUARTERLY DATA (UNAUDITED)
Common Stock -------------------------------- Market Price Range Net Operating Net Net Earnings ------------------ Dividends Sales Earnings Earnings Per Share(b) High Low Declared - ------------------------------------------------------------------------------------------------------------ 1996 4th Quarter $ 896 $92 $ 70 $ 1.11 $75 1/2 $66 3/4 $ .41 3rd Quarter 862 89 68 1.08 69 5/8 57 1/2 .41 2nd Quarter 930 89 67 1.06 65 1/4 57 .41 1st Quarter 893 83 65 1.03 62 7/8 57 5/8 .41 - ------------------------------------------------------------------------------------------------------------ 1995 4th Quarter $ 893 $83 $ 88 $ 1.40 $63 $51 3/8 $ .375 3rd Quarter 718 77 91 1.45 56 1/8 44 1/8 .375 2nd Quarter(a) 703 76 82 1.30 48 1/4 42 1/2 .375 1st Quarter(a) 753 79 60 .95 47 1/2 42 3/8 .375 - ------------------------------------------------------------------------------------------------------------
Note: Quarterly data is based on a 13 week period. (a) Does not include results from BIW, which was acquired on September 13, 1995. See Note B. (b) The sum of the earnings per share for the four quarters in 1996 differs from the annual earnings per share due to the required method of computing the weighted average number of shares in interim periods. 37 23 STATEMENT OF FINANCIAL RESPONSIBILITY To the Shareholders of General Dynamics Corporation: The management of General Dynamics Corporation is responsible for the consolidated financial statements and all related financial information contained in this report. The financial statements, which include amounts based on estimates and judgments, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The company maintains a system of internal accounting controls designed and intended to provide reasonable assurance that assets are safeguarded, that transactions are executed and recorded in accordance with management's authorization and that accountability for assets is maintained. An environment that establishes an appropriate level of control consciousness is maintained and monitored by management. An important element of the monitoring process is an internal audit program that independently assesses the effectiveness of the control environment. The Audit and Corporate Responsibility Committee of the board of directors, which is composed of five outside directors, meets periodically and, when appropriate, separately with the independent auditors, management and internal audit to review the activities of each. The financial statements have been audited by Arthur Andersen LLP, independent public accountants, whose report follows. /s/ MICHAEL J. MANCUSO /s/ JOHN W. SCHWARTZ - ------------------------- ----------------------- Michael J. Mancuso John W. Schwartz Senior Vice President and Controller Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To General Dynamics Corporation: We have audited the accompanying Consolidated Balance Sheet of General Dynamics Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related Consolidated Statements of Earnings, Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ------------------------ ARTHUR ANDERSEN LLP Washington, D.C., January 21, 1997 38 24 SELECTED FINANCIAL DATA (UNAUDITED)
---------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------------------------------------------------------- (Dollars in millions, except per share and per employee amounts) SUMMARY OF OPERATIONS Net sales $ 3,581 $ 3,067 $ 3,058 $ 3,187 $ 3,225 Operating costs and expenses 3,228 2,752 2,737 2,878 2,970 Interest, net 55 55 22 36 27 Provision for income taxes 139 128 120 143 5(a) Earnings from continuing operations 270 247 223 270 305(a) Earnings per share from continuing operations (d) 4.27 3.92 3.53 4.34 4.03(a) Cash dividends on common stock 1.64 1.50 1.40 1.00 .80 Sales per employee 155,500 138,200(c) 143,900(b) 138,100(b) 121,500(b) ================================================================================================================= FINANCIAL POSITION AT DECEMBER 31 Cash and equivalents and marketable securities $ 1,155 $ 1,095 $ 1,059 $ 585 $ 943 Property, plant and equipment, net 441 398 264 302 339 Total assets 3,299 3,164 2,673 2,635 3,530 Long-term debt (including current portion) 38 38 40 38 183 Long-term debt--finance operations (including current portion) 135 146 161 175 190 Shareholders' equity 1,714 1,567 1,316 1,177 1,874 Per share 27.16 24.78 20.89 18.81 30.30 ================================================================================================================= OTHER INFORMATION Funded backlog $ 6,161 $ 5,227 $ 4,562 $ 5,487 $ 6,780 Total backlog 10,350 7,386 6,006 7,015 8,488 Shares outstanding at December 31 (in millions) 63.1 63.2 63.0 62.6 61.8 Weighted average shares outstanding (in millions)(d) 63.2 63.0 63.1 62.2 75.6 Common shareholders of record at December 31 22,129 22,930 23,935 24,496 26,158 Active employees at December 31: Total company 23,100 27,700 24,200 30,500 56,800 Excluding discontinued operations 23,100 26,800 21,300 23,100 26,500 =================================================================================================================
(a) Includes a $95 gain ($1.26 per share) from the recognition of research and experimentation and investment tax credits. (b) Excludes BIW, which was acquired on September 13, 1995. See Note B. (c) Includes pro forma results of BIW as if owned by the company for the entire year. (d) Simple earnings per share is presented for 1993-1996, fully diluted earnings per share is presented for 1992. 39 EX-21 10 SUBSIDIARIES. 1 EXHIBIT 21, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-3671 GENERAL DYNAMICS CORPORATION SUBSIDIARIES
Subsidiaries of General Dynamics Place of Percent of Corporation (Parent and Registrant) Incorporation Voting Power - ----------------------------------- ------------- ------------ American Overseas Marine Corporation ..................................Delaware........................100 Quincy Maritime Corporation I.....................................Delaware........................100 Quincy Maritime Corporation II....................................Delaware........................100 Water Transportation Alternatives, Inc............................Delaware........................100 Bath Iron Works Corporation ...........................................Maine...........................100 BIW Acquisition Corporation ...........................................Maine...........................100 Concord I Maritime Corporation ........................................Delaware........................100 Braintree I Maritime Corp. .......................................Delaware........................100 Concord II Maritime Corporation .......................................Delaware........................100 Braintree II Maritime Corp. ......................................Delaware........................100 Concord III Maritime Corporation ......................................Delaware........................100 Braintree III Maritime Corp. .....................................Delaware........................100 Concord IV Maritime Corporation .......................................Delaware........................100 Braintree IV Maritime Corp. ......................................Delaware........................100 Concord V Maritime Corporation ........................................Delaware........................100 Braintree V Maritime Corp. .......................................Delaware........................100 Convair Aircraft Corporation ..........................................Delaware........................100 Convair Corporation ...................................................Delaware........................100 Elco Company, The......................................................New Jersey......................100 Electric Boat Corporation..............................................Delaware........................100 Electric Boat Groton Engineering, Inc.............................Delaware........................100 Electric Boat Groton Operations, Inc..............................Delaware........................100 Electric Boat Newport Engineering, Inc............................Delaware........................100 Electric Boat Quonset Point Operations, Inc.......................Delaware........................100 Electrocom, Inc. ......................................................Delaware........................100 General Dynamics Armament Systems, Inc.................................Delaware........................100 General Dynamics Ordnance Systems, Inc............................Delaware........................100 General Dynamics (C.I.) Limited........................................Cayman Islands..................100 General Dynamics Commercial Launch Services, Inc. .....................Delaware........................100 General Dynamics Defense Systems, Inc..................................Delaware........................100 AV Technology, LLC ...............................................Maryland........................ 80 General Dynamics Foreign Sales Corporation ............................Virgin Islands..................100 General Dynamics International Corporation ............................Delaware........................100 General Dynamics Land Systems Inc. ....................................Delaware........................100 General Dynamics Amphibious Systems, Inc..........................Delaware........................100 General Dynamics Land Systems Tallahassee Operations, Inc. .......Delaware........................100 General Dynamics Land Systems International, Inc. ................Delaware........................100 G.T. Devices, Inc.................................................Maryland........................100 General Dynamics Land Systems Product Support and Services Company.........................................................Texas...........................100 General Dynamics Support Services Company ....................Delaware........................100 Global Support Services Company...............................Virgin Islands..................100 General Dynamics Limited ..............................................United Kingdom..................100 General Dynamics Manufacturing Limited ................................Canada..........................100 General Dynamics Marine Services, Inc..................................Delaware........................100 General Dynamics Properties, Inc.......................................Delaware........................100
2
Subsidiaries of General Dynamics Place of Percent of Corporation (Parent and Registrant) Incorporation Voting Power - ----------------------------------- ------------- ------------ General Dynamics Space Services Company ...............................Delaware........................100 Material Service Resources Company.....................................Delaware........................100 Century Mineral Resources, Inc....................................Illinois........................100 Material Service Corporation......................................Delaware........................100 EPSP, Inc.....................................................Texas...........................100 Hulcher Quarry, Inc...........................................Illinois........................100 Material Service Foundation...................................Illinois........................100 MLRB, Inc.....................................................Illinois........................100 Mineral and Land Resources Corporation........................Delaware........................100 MLRT, Inc................................................Texas...........................100 Thornton Quarries Corporation.................................Illinois........................100 Freeman Energy Corporation........................................Delaware........................100 Freeman Coal Sales, Inc.......................................Illinois........................100 Freeman Resources, Inc........................................Illinois........................100 Freeman United Coal Mining Company............................Delaware........................100 Patriot I Shipping Corporation ........................................Delaware........................100 Patriot II Shipping Corporation .......................................Delaware........................100 Patriot IV Shipping Corporation .......................................Delaware........................100 S-C 1969 Credit Corporation............................................New York........................100
EX-23 11 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-3671 GENERAL DYNAMICS CORPORATION CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference into this Form 10-K for the year ended December 31, 1996, into the company's previously filed registration statements on Form S-8 file numbers 33-23448, 2-23904, 2-23032, 2-28952, 2-50980, 2-24270 and 33-42799. /s/ ARTHUR ANDERSEN LLP ----------------------- ARTHUR ANDERSEN LLP Washington, D.C., March 21, 1997 EX-24 12 POWER OF ATTORNEY OF THE BOARD OF DIRECTORS 1 EXHIBIT 24 GENERAL DYNAMICS CORPORATION POWER OF ATTORNEY COMMISSION FILE NUMBER 1-3671 REPORTS ON FORM IRS NO. 13-1673581 10-K AND 10-Q POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and/or officers of GENERAL DYNAMICS CORPORATION, a Delaware corporation, hereby constitutes and appoints each of NICHOLAS D. CHABRAJA, MICHAEL J. MANCUSO, PAUL A. HESSE, and his true and lawful attorney and agent, in the name and on behalf of the under-signed, to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable to enable General Dynamics Corporation to comply with the Securities Act of 1933, and the Exchange Act of 1934, as amended, and any rules and regulations and requirements of the Securities and Exchange Commission (The Commission) in respect thereof, in connection with annual reports to the commission on form 10-K, quarterly reports on form 10-Q, and other reports as required by General Dynamics Corporation, including specifically, but without limiting the generality of the foregoing, the power and authority to sign the names of the undersigned in his capacity as Director and/or Officer of General Dynamics Corporation to reports filed with the Securities and Exchange Commission with respect thereto, to any and all amendments, including hereby ratifying and confirming all that the attorneys and agents, or any of them, has done, shall do or shall cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 5 day of February, 1997. /s/ Frank C. Carlucci /s/ Charles H. Goodman - ------------------------------- ------------------------------- Frank C. Carlucci Charles H. Goodman /s/ Nicholas D. Chabraja /s/ James R. Mellor - ------------------------------- ------------------------------- Nicholas D. Chabraja James R. Mellor /s/ James S. Crown /s/ Gordon R. Sullivan - ------------------------------- ------------------------------- James S. Crown Gordon R. Sullivan /s/ Lester Crown /s/ Carlisle A. H. Trost - ------------------------------- ------------------------------- Lester Crown Carlisle A. H. Trost EX-27 13 FINANCIAL DATA SCHEDULE.
5 This schedule contains summary financial information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of December 31, 1996, and the related Consolidated Statement of Earnings for the year ended December 31, 1996 and is qualified in its entirety to such financial statements. 1,000,000 YEAR DEC-31-1996 DEC-31-1996 516 378 97 0 558 1858 1395 954 3299 833 38 0 0 109 1605 3299 3581 3581 3228 3228 0 0 4 409 139 270 0 0 0 270 4.26 4.25
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