-----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, M9vC5E2tVCR0Mdz08rbDTj99uxqh9utrKI2nwAQiCwFj/ZMKlatXUvutDIJfA/WN 2u2rNIHAJCEmicQGH4SwVw== 0000950133-99-000806.txt : 19990319 0000950133-99-000806.hdr.sgml : 19990319 ACCESSION NUMBER: 0000950133-99-000806 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 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: SEC FILE NUMBER: 001-03671 FILM NUMBER: 99567983 BUSINESS ADDRESS: STREET 1: 3190 FAIRVIEW PARK DRIVE CITY: FALLS CHURCH STATE: VA ZIP: 22042 BUSINESS PHONE: 7038763000 MAIL ADDRESS: STREET 1: 3190 FAIRVIEW PARK DR CITY: FALLS CHURCH STATE: VA ZIP: 22042 10-K 1 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, 1998 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, Par Value $1 Per Share New York Stock Exchange Chicago Stock Exchange Pacific 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 common equity held by nonaffiliates of the registrant was $6,468,954,567 at March 8, 1999. 127,400,863 shares of the registrant's common stock were outstanding at March 8, 1999. 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, 1998 (the 1998 Annual Report). Part III incorporates information from certain portions of the registrant's definitive Proxy Statement for the 1999 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 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Supplementary Item. Executive Officers of the Registrant 10 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12 Item 8. Financial Statements and Supplementary Data 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 PART III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 13 Item 12. Security Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 SIGNATURES 15
3 Certain sections of this Annual Report on Form 10-K 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 these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows, contract awards and the company's expectations regarding the upcoming year 2000. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; the status or outcome of legal proceedings; the status or outcome of labor negotiations; changing priorities or reductions in the U.S. government defense budget; termination of government contracts due to unilateral government action; and the timing and occurrence (or non-occurrence) of circumstances beyond the company's control. PART I ITEM 1. BUSINESS INTRODUCTION The primary business of General Dynamics Corporation (the company) is supplying sophisticated defense systems to the United States 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 operating units of Lockheed Martin Corporation. On October 1, 1997, the company acquired the assets of Advanced Technology Systems, formerly an operating unit of Lucent Technologies. On December 31, 1997, the company acquired the assets of three operating units which formerly comprised Computing Devices International of Ceridian Corporation: General Dynamics Information Systems, Inc., Computing Devices Canada Ltd., and Computing Devices Company Limited in the United Kingdom. On June 30, 1998, the company acquired the assets of Computer Systems & Communications Corporation. On August 31, 1998, the company acquired the assets of Caldwell Cable Ventures, Inc., which operates as a subsidiary of Advanced Technology Systems. On November 10, 1998, the company acquired control of NASSCO Holdings Incorporated (NASSCO), whose wholly owned subsidiaries include National Steel and Shipbuilding Company. For more information regarding the company's acquisitions during 1998 and 1997, see Note C to the Consolidated Financial Statements on page 31 of the 1998 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. During the period 1992 through 1994, the company divested its tactical military and commercial aircraft, missile systems and space launch systems businesses. The company currently operates in the following business segments: Marine Systems, Combat Systems, Information Systems and Technology and Other. Marine Systems includes Electric Boat Corporation (Electric Boat), Bath Iron Works Corporation (BIW), American Overseas Marine Corporation (AMSEA), General Dynamics Defense Systems, Inc. (Defense Systems) and National Steel and Shipbuilding Company. In the first quarter of 1999, Defense Systems will be moved to the Information Systems and Technology segment. Combat Systems includes General Dynamics Land Systems Inc. (Land Systems) and General Dynamics Armament Systems, Inc. (Armament Systems). Information Systems and Technology includes General Dynamics Advanced Technology Systems, Inc. (ATS), General Dynamics Information Systems, Inc. (GDIS), Computing Devices Canada Ltd., Computing Devices Company Limited in the United Kingdom, and Computer Systems & Communications Corporation (CSCC). The Other business segment includes Freeman Energy Corporation (Freeman Energy), Material Service Corporation (Material Service), and Patriot I, II and IV Shipping Corps. (Patriots). Information on revenues, operating profit or loss and identifiable assets attributable to each of the company's business segments is included in Note S to the Consolidated Financial Statements on page 42 of the 1998 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 1998, and is incorporated herein by reference. A description of the company's products and services, competition, and other related information follows. 1 4 PRODUCTS AND SERVICES MARINE SYSTEMS
Net Sales (in millions) 1998 1997 1996 ------------ ------------ ------------ Nuclear Submarines $ 1,381 $ 1,321 $ 1,443 Surface Combatants 936 839 791 Other 349 151* 98 ------------ ------------ ------------ $ 2,666 $ 2,311 $ 2,332 ============ ============ ============
* Marine Systems net sales for 1997 include the fourth quarter net sales of ATS. In 1998, the net sales of ATS are reported in the Information Systems and Technology segment. Electric Boat designs, builds and supports nuclear submarines for the U.S. Navy, having contracts for the construction of the final Seawolf-class attack submarine and of the first four ships of the Virginia-class submarine, formerly known as the New Attack Submarine. Construction work on the Virginia-class will be shared equally with Electric Boat as the prime contractor and Newport News Shipbuilding Inc. in the role of subcontractor. In addition to nuclear submarine design and construction, 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. To date, BIW has been awarded contracts for the construction of 27 Arleigh Burke class destroyers (DDG 51), 13 of which remain in backlog at December 31, 1998. BIW 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 awarded a contract in 1996 to design and build the Navy's new class of amphibious transport ships (LPD 17). BIW is also a member of a two-contractor Shipbuilder Alliance which was awarded a contract in 1998 for the first phase of system concept design work for the next generation surface combatant ships (DD 21). BIW will serve as the Alliance prime contractor for the first phases of the DD 21 program, will lead one of the Alliance's two competing design teams and is expected to share equally with Ingalls Shipbuilding, a division of Litton Industries, Inc., in the production of the DD 21 ships. 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). 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 currently operating under an extension of their original five-year contract. The MPS vessels operate worldwide; the RRF and AWR vessels are located on the east, gulf and west coasts of the United States. Defense Systems is the lead provider of Trident Fire Control Systems and complete life cycle management of complex electronic systems for the U.S. and U.K. Navies. Defense Systems' TechSight business unit provides automated maintenance and diagnostics systems for the automotive, aircraft and manufacturing industries, and web-based training and certification in the medical, financial, legal and educational fields. National Steel and Shipbuilding Company designs and builds auxiliary ships for the U.S. Navy, having contracts for the design and construction of seven strategic sealift ships, five of which remain in backlog at December 31, 1998. In addition, it is a West Coast ship repair facility for the U.S. Navy and has expertise in commercial shipbuilding. 2 5 COMBAT SYSTEMS
Net Sales (in millions) 1998 1997 1996 ------------- ------------- ------------- Armored Vehicles $ 915 $ 960 $ 889 Ordnance 257 265 - Other 100 284 137 ------------- ------------- ------------- $ 1,272 $ 1,509 $ 1,026 ============= ============= =============
Land Systems designs and manufactures the M1 Series Abrams Main Battle Tank for the U.S. Army and various foreign governments. Land Systems also performs engineering and upgrade work, and provides support for existing armored vehicles. Production of the M1A2, the latest version of the M1, was initiated in 1992. Land Systems is currently in its fourth year of production in a five-year multiyear contract with the U.S. Army to upgrade approximately 600 tanks from the M1 to the M1A2 version. Land Systems is also under contract for the development of several other major armored vehicle programs. The U.S. Marine Corps selected and awarded Land Systems a development contract for the Advanced Amphibious Assault Vehicle (AAAV), including prototype design and construction. Three prototypes are currently under contract. The Army selected Land Systems for the Wolverine Heavy Assault Bridge program which is currently under development and is expected to enter production late in 2000. Land Systems also continues work on the Army's Crusader Self-Propelled Howitzer development program of which the company's share of the program is approximately 25 percent. Certain of Defense Systems' product lines were transferred to Land Systems during 1998, including the manufacture of light armored vehicles, and turrets and transmissions for armored vehicles for the U.S. Army and foreign governments. Armament Systems designs, develops and produces advanced gun and ammunition handling systems for applications on various land, sea and air platforms. Armament Systems is also a leader in the production of ammunition products. Armament Systems is the sole producer of the Hydra 70 2.75" air-to-ground rocket, having produced over 600,000 to date. In October 1998, Armament Systems formed a joint venture with Mason & Hanger Corporation that consolidated two of the U.S. Army's largest ammunition production facilities. Previously a consolidated subsidiary, the company's Milan Army Ammunition Plant is now part of the unconsolidated joint venture, American Ordnance L.L.C. INFORMATION SYSTEMS AND TECHNOLOGY This segment was formed effective January 1, 1998, following the acquisitions of ATS and the three operating units formerly of Computing Devices International. The net sales of ATS for the fourth quarter of 1997 were reported in the Marine Systems segment. Net sales (in millions) for 1998 for this segment were as follows: Communications Systems $ 214 Avionics 204 Commercial 132 Maritime 110 Other 136 ---------- $ 796 ==========
ATS provides undersea surveillance systems as well as special purpose signal and information processors for the U.S. Navy. ATS also provides vibration reduction technologies for the elimination of radiant noise and engine fatigue on various platforms. ATS designs command, communications, control and intelligence systems and network architecture solutions for the DD 21 and the LPD 17 class of ships. ATS also designs and builds power feed and terminal transmission equipment for the commercial undersea fiber-optic communications market. Caldwell Cable Ventures, Inc. provides underwater cable installation services to the commercial telecommunications and utilities markets. 3 6 GDIS provides information processing systems for airborne, land-based, seaborne, and space-based platforms, as well as information management services for the U.S. government. Contract manufacturing services, provided by the company to defense and commercial electronics contractors, was transferred to ATS during 1998. Computing Devices Canada Ltd. is the systems integrator on the IRIS program, whose objective is to modernize and fully digitize the tactical command, control and communications systems of the Canadian land forces. In addition, it provides advanced systems products in the areas of maritime surveillance, land based vetronics and display systems. Computing Devices Company Limited in the United Kingdom provides and supports electronics technology for airborne, ground and naval systems, and has the second largest U.K. share of the European Fighter Aircraft avionics equipment market. CSCC provides systems integration and communication services for the U.S. Department of Defense and other NATO countries. OTHER
Net Sales (in millions) 1998 1997 1996 ------------ ------------ ------------ Aggregates $ 123 $ 110 $ 87 Coal Mining 88 107 111 Other 25 25 25 ------------ ------------ ------------ $ 236 $ 242 $ 223 ============ ============ ============
Material Service is engaged in the mining and sale of aggregates (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. Freeman Energy mines coal, producing approximately 4-5 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. 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 contracts to more than one company in order to ensure competition on subsequent contracts. In recent years, because of reduced defense spending, the industry has consolidated through mergers and acquisitions to maintain critical mass, resulting in fewer and larger competitors. With fewer but more complex programs in competition, companies frequently have formed strategic alliances to pursue these programs. The Department of Defense 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 20 through 25 of the 1998 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K and incorporated herein by reference. 4 7 U.S. GOVERNMENT CONTRACTS The company's primary customer is the U.S. government. Net sales to the U.S. government include Foreign Military Sales (FMS), which 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. Historically, 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 (dollars in millions):
Year Ended December 31 --------------------------------------- 1998 1997 1996 ------ ------ ------ Domestic $3,986 $3,485 $3,051 FMS 175 166 261 ------ ------ ------ Total U.S. government $4,161 $3,651 $3,312 ====== ====== ====== Percent of net sales 84% 90% 92%
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, now owned by the Boeing Company, for the full-scale development of the U.S. Navy's A-12 aircraft. On February 23, 1998, a final judgment was entered in favor of the contractors for $1,200 million plus interest. The U.S. government filed an appeal in the U.S. Court of Appeals for the Federal Circuit. The U.S. government seeks reversal of the judgment and a remand to the trial court for a full trial on the merits. The appeal has been briefed and argued. For further discussion, see Note P to the Consolidated Financial Statements on page 37 of the 1998 Annual 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 had no substantial operations in foreign countries until the acquisition of Computing Devices Canada Ltd. and Computing Devices Company Limited in the United Kingdom at the end of 1997. Direct foreign sales, including international operations, were $413 million, $132 million and $38 million in 1998, 1997 and 1996, respectively. 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. 5 8 RESEARCH AND DEVELOPMENT Research and development activities in Marine Systems, Combat Systems and Information Systems and Technology are conducted principally under U.S. government contracts. These research efforts have been and continue to be concerned with developing products for large systems development programs or performing work under research and development technology contracts. Beginning in 1996, the company experienced a decline in customer sponsored expenditures for research and development due primarily to the Virginia class submarine program at Electric Boat moving to the design phase. Each of the company's defense businesses also engages in independent research and development, of which a significant portion is recovered through overhead charges to U.S. government contracts. The increase in company-sponsored research and development is directly related to the 1998 acquisitions included in the Information Systems and Technology segment. The table below details expenditures for research and development (dollars in millions):
Year Ended December 31 --------------------------------- 1998 1997 1996 ---- ---- ---- Company-sponsored $ 93 $ 55 $ 38 Customer-sponsored 52 58 89 ---- ---- ---- $145 $113 $127 ==== ==== ====
BACKLOG Summary backlog information (in millions) for each business segment follows:
1998 Backlog December 31 Not Expected to ------------------------------------- Be Filled 1998 1997 in 1999 ------------- ------------- --------------- Marine Systems $ 11,728 $ 5,864 $ 9,077 Combat Systems 1,579 2,323 510 Information Systems and Technology 729 805 165 Other 562 607 491 -------------- -------------- -------------- Total Backlog $ 14,598 $ 9,599 $ 10,243 ============== ============== ============== Funded Backlog $ 7,292 $ 6,796 $ 3,510 ============== ============== ==============
Total backlog represents the estimated remaining sales value of work to be performed under firm 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 20 through 25 of the 1998 Annual 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 (the 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 O to the Consolidated Financial Statements on page 37 of the 1998 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K, and is incorporated herein by reference. 6 9 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 owned by other persons. 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, 1998, the company had approximately 31,000 employees (excluding contract labor), of whom 42 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 Marine Draftsmen's Association, the Metal Trades Council (MTC) of New London, Connecticut, the United Auto Workers Union and the United Mine Workers of America. Several agreements are due to expire during 1999, the most significant of which is the Marine Draftsmen's Association. 7 10 ITEM 2. PROPERTIES PRINCIPAL BUSINESS SEGMENTS. A summary of floor space at the main facilities of the Marine Systems, Combat Systems, and Information Systems and Technology segments follows (square feet in millions):
COMPANY GOVERNMENT OWNED LEASED FURNISHED FACILITIES FACILITIES FACILITIES TOTAL --------------- --------------- ---------------- ------------ MARINE SYSTEMS: Electric Boat Groton, Connecticut (Shipyard) 2.8 .1 2.9 Quonset Point, Rhode Island (Plant/Warehouse) 0.4 1.1 1.5 Avenel, New Jersey (Land/Plant) 0.4 0.4 Bath Iron Works Bath, Maine (Shipyard) 1.1 1.1 East Brunswick, Maine (Warehouse) 0.6 0.6 Portland, Maine (Shipyard) 0.1 0.1 National Steel and Shipbuilding Company San Diego, California (Shipyard) 0.2 6.0 6.2 Defense Systems Pittsfield, Massachusetts (Labs) 0.1 0.8 0.9 --------------- --------------- ---------------- ------------ TOTAL MARINE SYSTEMS 5.5 7.4 0.8 13.7 =============== =============== ================ ============ COMBAT SYSTEMS: Land Systems Lima, Ohio (Plant) 1.6 1.6 Muskegon, Michigan (Plant) 1.0 0.1 1.1 Scranton, Pennsylvania (Plant) 0.3 0.3 Woodbridge, Virginia (Office) 0.1 0.1 Tallahassee, Florida (Plant/Office) 0.1 0.1 Sterling Heights, Michigan (Warehouse) 0.6 0.6 Anniston, Alabama (Plant/Warehouse) 0.1 0.1 Imperial, California (Plant/Warehouse) 0.1 0.1 Shelby Township, Michigan (Plant) 0.2 0.2 Armament Systems Burlington, Vermont (Plant/Office) 0.6 0.6 --------------- --------------- ---------------- ------------ TOTAL COMBAT SYSTEMS 2.5 0.6 1.7 4.8 =============== =============== ================ ============ INFORMATION SYSTEMS AND TECHNOLOGY: GDIS Bloomington, Minnesota (Office) 0.5 0.5 Computing Devices Canada Ltd. Ottawa, Ontario (Office/Plant) 0.2 0.1 0.3 Calgary, Alberta (Office) 0.2 0.2 ATS Greensboro, North Carolina (Factory) 0.1 0.3 0.4 Whippany, New Jersey (Office/Labs) 0.2 0.2 --------------- --------------- ---------------- ------------ TOTAL INFORMATION SYSTEMS AND TECHNOLOGY 0.7 0.9 0.0 1.6 =============== =============== ================ ============
8 11 BIW began in 1997 a $200 million project to construct a fifteen acre land level transfer facility and manufacturing support center, and a 750-foot dry-dock in Bath, Maine to improve productivity. OTHER. Freeman Energy operates two underground coal mines and one surface coal mine in Illinois. 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 developed plans and marketing efforts which are intended to maximize the market value of these properties. In 1997, two buildings and 55 acres in Rancho Cucamonga were sold. In 1998, a 232-acre site in the Kearny Mesa section of San Diego was sold. The remaining properties include approximately 2,200 acres in Sycamore Canyon, San Diego, California and 308 acres in Rancho Cucamonga, California. Most of this property is undeveloped. The company owns approximately 20,000 square feet of building space at Rancho Cucamonga and approximately 200,000 square feet of building space at Sycamore Canyon. GENERAL. The company believes that its main facilities are adequate for the present needs of the company and its subsidiaries and, as supplemented by planned improvements and construction, are expected to remain adequate for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The information under the captions "Litigation" and "Environmental" in Note O and the information in Note P to the Consolidated Financial Statements appearing on pages 35 through 37 of the 1998 Annual 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, 1998. 9 12 SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT 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 1998 ------------------------- ----------- David D. Baier -- Vice President Taxes since August 1995; Staff Vice President Taxes 44 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 56 Aerospace Programs and Field Offices July 1991 -- April 1993 Allan C. Cameron -- Vice President of the company and President of Bath Iron Works since 52 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 Gordon R. England -- Executive Vice President since March 1997; President - Lockheed Martin 61 Corporation Fort Worth March 1993 -- March 1995; Executive Vice President of the company and President - Aircraft Systems of the company's Fort Worth Division August 1992 -- March 1993 James I. Finley -- Vice President of the company and President of General Dynamics Information 52 Systems since January 1998; Vice President of Government Information Systems November 1995 -- December 1997; Vice President Programs and Engineering, Westinghouse/United Technologies 1990 -- October 1995 David H. Fogg -- Vice President and Treasurer since March 1998; Staff Vice President and 43 Treasurer November 1994 -- March 1998; Staff Vice President and Assistant Treasurer May 1994 -- November 1994; Corporate Director of Finance and Assistant Treasurer January 1994 -- May 1994 Kenneth A. Hill -- Vice President Information Technology since April 1997; Staff Vice President 49 Personnel Relations November 1994 -- April 1997; Director Salaried Compensation March 1989 -- November 1994 Raymond E. Kozen -- Vice President Planning and Analysis since March 1997; Staff Vice President 57 for Special Projects December 1987 -- March 1997 Kenneth J. Leenstra -- Vice President of the company and President of Armament Systems 61 since February 1997; President of Armament Systems - Lockheed Martin Corporation January 1990 -- January 1997 Michael J. Mancuso -- Senior Vice President and Chief Financial Officer 56 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; Charles E. McQueary -- Vice President of the company and President of Advanced 59 Technology Systems since October 1997; President - Advanced Technology Systems, AT&T/Lucent Technologies January 1994 -- September 1997
10 13
AGE AT DECEMBER 31 NAME, POSITION AND OFFICE 1998 ------------------------- ----------- Kendell M. Pease -- Vice President Communications since May 1998; Admiral and Chief 54 Information Officer, U.S. Navy, August 1992 -- May 1998 David A. Savner -- Senior Vice President - Law and Secretary since April 1998; Senior Partner 54 of Jenner & Block May 1987 -- March 1998 Daniel P. Schmutte -- Vice President of the company and President of Defense Systems 48 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 John W. Schwartz -- Vice President and Controller since March 1998; Staff Vice President 42 and Controller November 1994 -- March 1998; Corporate Director of Accounting July 1992 -- November 1994 David E. Scott -- Vice President of the company and President of Computing Devices 53 Canada since February 1998; President Computing Devices Canada June 1997 -- January 1998; Vice President Communications Division November 1990 -- May 1997 James E. Turner, Jr. -- President and Chief Operating Officer since June 1997; 64 Executive Vice President of the Marine Group October 1995 -- June 1997; Executive Vice President of the company and President of Electric Boat April 1993 --October 1995 Arthur J. Veitch -- Vice President of the company and President of Land Systems since 52 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 company's Convair Division August 1992 -- August 1995 Richard H. Vortmann -- Vice President of the company and President of NASSCO since 54 February 1999; President, Chief Executive Officer and Chairman of the Board of NASSCO April 1989 -- February 1999 John K. Welch -- Vice President of the company and President of Electric Boat since 48 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; 59 Group Vice President - Hughes Missile Systems Company August 1992 -- December 1994 Michael W. Wynne -- Senior Vice President International, Planning and Business Development 54 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
All executive officers of the company are elected annually. No executive officer of the company was selected pursuant to any arrangement or understanding between the officer and any other person. 11 14 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company's common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. On August 31, 1998, the company issued 157,283 shares of common stock to James D. Caldwell in connection with the company's acquisition of Caldwell's Diving Company, Inc. and Cable Ventures Inc. (now known as Caldwell Cable Ventures, Inc.). Up to an additional 15,503 shares of common stock may be issued to Mr. Caldwell upon completion of post-closing financial statements for the acquired businesses. In connection with these share issuances, the company claims exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, based on the fact that the transaction did not involve any public offering of securities. The high and low sales price of the company's common stock and the cash dividends declared with respect to the company's common stock for each quarterly period during the two most recent fiscal years are included in Note T to the Consolidated Financial Statements appearing on page 42 of the 1998 Annual Report, included in this Annual Report on Form 10-K as Exhibit 13, and are incorporated herein by reference. There were 19,904 holders of record of the company's common stock at December 31, 1998. ITEM 6. SELECTED FINANCIAL DATA The "Selected Financial Data" appearing on page 44 of the 1998 Annual 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 "Management's Discussion and Analysis of the Results of Operations and Financial Condition" appearing on pages 20 through 25 of the 1998 Annual Report, included in this Annual Report on Form 10-K as Exhibit 13, is incorporated herein by reference in response to this item. ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK The information appearing under the caption "Market Risk" on page 24 of the 1998 Annual 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 Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Report of Independent Public Accountants appearing on pages 26 through 43 of the 1998 Annual Report, included in this Annual Report on Form 10-K as Exhibit 13, are incorporated herein by reference in response to this item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 15 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 in the sections entitled "Board of Directors of the Company" and "Other Information - Section 16(a) Beneficial Ownership Reporting Compliance" in the company's definitive Proxy Statement, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required to be set forth herein is included in the sections entitled "Board of Directors of the Company" and "Executive Compensation" in the company's definitive Proxy Statement, which sections are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required to be set forth herein is included in the section entitled "Ownership of Common Stock by the Principal Shareholders and Management" in the company's definitive Proxy Statement, which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required to be set forth herein is included in the section entitled "Board of Directors of the Company -Transactions Involving Directors and the Company" in the company's definitive Proxy Statement, which section 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 1998 Annual 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 1998 Annual Report ------- Report of Independent Public Accountants 43 Consolidated Financial Statements: Consolidated Statement of Earnings 26 Consolidated Balance Sheet 27 Consolidated Statement of Cash Flows 28 Consolidated Statement of Shareholders' Equity 29 Notes to Consolidated Financial Statements (A to T) 30-42
13 16 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 Consolidated Financial Statements or the Notes thereto. 3. Exhibits--See Index on pages 16 through 18 of this Annual Report on Form 10-K. (b) Reports on Form 8-K On November 25, 1998, the company reported to the Securities and Exchange Commission under Item 2, Acquisition or Disposition of Assets, that on November 10, 1998, the company had acquired control of NASSCO Holdings Incorporated, whose wholly owned subsidiaries include National Steel and Shipbuilding Company, from NASSCO Holdings Incorporated Employee Stock Ownership Plan and three individual stockholders. Included in the filing was the Stock Purchase Agreement for the acquisition. 14 17 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 Vice President and Controller March 18, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 18, 1999, by the following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors. /s/ Nicholas D. Chabraja Chairman, Chief Executive Officer and Director - ------------------------ (Principal Executive Officer) Nicholas D. Chabraja /s/ James E. Turner, Jr. President and Chief Operating Officer - ------------------------ James E. Turner, Jr. /s/ Michael J. Mancuso Senior Vice President and Chief Financial Officer - ---------------------- (Principal Financial Officer) Michael J. Mancuso /s/ John W. Schwartz Vice President and Controller - -------------------- (Principal Accounting Officer) John W. Schwartz Julius W. Becton, Jr.* Director James S. Crown* Director Lester Crown* Director Charles H. Goodman* Director George A. Joulwan* Director Paul G. Kaminski* Director James R. Mellor* Director Carl E. Mundy, Jr.* Director Carlisle A.H. Trost* Director
*By David A. Savner 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/ David A. Savner ------------------- David A. Savner Secretary 15 18 INDEX TO EXHIBITS
Note Exhibit Number Number Description - ------ ------- ----------- (5) 3-1A --Restated Certificate of Incorporation, effective May 21, 1991 (12) 3-2D --Bylaws as amended effective October 1, 1997 (11) 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 (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 (11) 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 *(11) 10-18B --Amendment to employment agreement between the company and James R. Mellor dated as of November 5, 1996 (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 (10) 10-28 --Asset Purchase and Sale Agreement, dated November 6, 1996, as amended December 20, 1996, between the company and Lockheed Martin Corporation *(11) 10-29 --Employment agreement between the company and Nicholas D. Chabraja dated November 12, 1996 *(11) 10-30 --General Dynamics Corporation Incentive Compensation Plan adopted February 5, 1997, approved by shareholders on May 7, 1997 *(12) 10-31 --Retirement Benefit Agreement between the company and Gordon R. England dated February 14, 1997 (12) 10-32 --Credit Enhancement Agreement between Bath Iron Works Corporation and the City of Bath, Maine dated September 19, 1997, relating to the development program of facilities in Bath, Maine *(12) 10-33 --Retirement Benefit Agreement between the company and Michael J. Mancuso dated March 6, 1998 *(12) 10-34 --Consulting agreement between the company and Paul G. Kaminski dated August 18, 1997 (13) 10-36 --Stock Purchase Agreement dated as of October 8, 1998, between the company and NASSCO Holdings Incorporated and the stockholders of NASSCO Holdings Incorporated * 10-37 --Retirement Benefit Agreement between the company and David A. Savner dated March 4, 1998
16 19 INDEX TO EXHIBITS
Note Exhibit Number Number Description - ------ ------- ----------- 10-38 --Lease Agreement dated January 1, 1991, between National Steel and Shipbuilding Company and the San Diego Unified Port District, relating to facilities in the San Diego, California harbor 10-38A --Amendment of Lease Agreement between National Steel and Shipbuilding Company and the San Diego Unified Port District, dated December 6, 1994 10-39 --Capital Construction Fund Agreement, dated September 13, 1988, between National Steel and Shipbuilding Company and the United States of America, represented by the Maritime Administrator, Department of Transportation 10-39A --Capital Construction Fund Agreement-Addendum No. 1, dated September 13, 1988, between National Steel and Shipbuilding Company and the United States of America, represented by the Maritime Administrator, Department of Transportation 10-39B --Capital Construction Fund Agreement-Addendum No. 2, dated October 29, 1992, between National Steel and Shipbuilding Company and the United States of America, represented by the Maritime Administrator, Department of Transportation 10-39C --Capital Construction Fund Agreement-Addendum No. 3, dated August 27, 1993, between National Steel and Shipbuilding Company and the United States of America, represented by the Maritime Administrator, Department of Transportation 10-39D --Capital Construction Fund Agreement-Addendum No. 4, dated August 28, 1997, between National Steel and Shipbuilding Company and the United States of America, represented by the Maritime Administrator, Department of Transportation 10-39E --Capital Construction Fund Agreement-Addendum No. 5, dated October 29, 1997, between National Steel and Shipbuilding Company and the United States of America, represented by the Maritime Administrator, Department of Transportation 13 --1998 Annual Report (pages 20 through 44) 21 --Subsidiaries 23 --Consent of Independent Public Accountants 24 --Power of Attorney of the Board of Directors 27 --Financial Data Schedule 27-A --Amended Financial Data Schedule for the year ended December 31, 1997 27-B --Amended Financial Data Schedule for the nine months ended September 28, 1997 27-C --Amended Financial Data Schedule for the six months ended June 29, 1997 27-D --Amended Financial Data Schedule for the three months ended March 30, 1997
* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. 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 (Commission File No. 1-3671). (2) Not used. (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 (Commission File No. 1-3671). (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 (Commission File No. 1-3671). (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 (Commission File No. 1-3671). 17 20 NOTES, cont. (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 (Commission File No. 1-3671). (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 (Commission File No. 1-3671). (8) Not used. (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 (Commission File No. 1-3671). (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 (Commission File No. 1-3671). (11) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1996, and filed with the Commission March 21, 1997, and incorporated herein by reference (Commission File No. 1-3671). (12) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1997, and filed with the Commission March 18, 1998, and incorporated herein by reference (Commission File No. 1-3671). (13) Filed as an exhibit to the company's current report on Form 8-K filed with the Commission November 25, 1998, and incorporated herein by reference (Commission File No. 1-3671). 18 EX-10.37 2 RETIREMENT BENEFIT AGREEMENT 1 EXHIBIT 10.37 RETIREMENT BENEFIT AGREEMENT AGREEMENT DATED AS OF 4 March, 1998 between General Dynamics Corporation, a Delaware corporation ("the Corporation"), and David A. Savner ("the Executive"). WHEREAS, the Executive, following his employment by the Corporation, will accrue retirement benefits under 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 provisions), 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 certain additional retirement benefits to be paid following the Executive's termination of employment or retirement. NOW, THEREFORE, in consideration for the Executive's acceptance of employment with the Corporation and the services to be rendered to the Corporation by the Executive, the Corporation and the Executive agree as follows: 1. MEMBERSHIP IN GENERAL DYNAMICS RETIREMENT PLAN. The Executive will become a member of the General Dynamics Retirement Program, a copy of which has been furnished to him. 2. RETIREMENT PROGRAM BENEFIT. Upon the Executive's retirement from the Corporation, the Executive shall be entitled to such annual retirement benefits, if any, as of the date of the Executive'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 Executive elects pursuant to the terms of the Retirement Plan. 3. AMOUNT OF SUPPLEMENTAL RETIREMENT BENEFIT. Upon termination of the Executive's employment with the Corporation under the conditions specified in Section 4, the Supplemental Retirement Benefit shall equal an amount calculated under the Final Average Benefit Formula of the Retirement Plan increased to reflect the addition of five (5) years of Plan Membership (as defined in the Retirement Plan) to the Executive's actual period of Plan Membership while an Executive and then reduced by any payments that may be payable under the Retirement Program. This offset shall be calculated based on the normal lifetime benefits payable under the terms of this Retirement Benefit Agreement and the Retirement Program prior to the election of any optional forms for payment of retirement benefits. Payment of Supplemental Retirement Benefits shall commence to the Executive on the first day of the month following his attainment of age sixty-two (62) or following his date of termination of employment or retirement, if later. Page 1 of 4 2 4. ELIGIBILITY FOR SUPPLEMENTAL RETIREMENT BENEFITS. If the Executive voluntarily terminates employment with the Corporation during his first six (6) years of employment, no Supplemental Retirement Benefit shall be payable under the terms of this Retirement Benefit Agreement. This restriction shall not apply to any retirement benefits that may be payable under the Retirement Program. Subject to the restrictions enumerated in the last paragraph of this Section 4, if the Executive terminates employment following completion of at least six (6) years of employment, the Executive shall be entitled to the Supplemental Retirement Benefit specified in Section 3 above. Alternatively, if the Executive shall terminate his employment with the Corporation at anytime after the execution of this Agreement under either of the conditions specified in paragraphs (a) or (b) below, the Executive shall be entitled to the Supplemental Retirement Benefit specified in Section 3 above. (a) In the event of the Executive's illness or disability such that he is unable, in the sole opinion of the Compensation Committee, to adequately perform the tasks of his position; or (b) If the Corporation shall substantially downgrade the Executive's responsibilities or if the Corporation shall involuntarily terminate his employment other than for cause. Notwithstanding anything in this Agreement to the contrary, no Supplemental Retirement Benefit shall be paid hereunder (and any Supplemental Retirement Benefit currently being paid to the Executive shall cease) if, in the sole opinion of the Compensation Committee, the Executive: (a) is discharged for causing 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, or (iv) individually filing, assisting or participating in a lawsuit against the Corporation, or (b) is subsequently employed either as an employee or an independent contractor (other than as a director on the board of directors for a charitable organization) without prior Compensation Committee approval which approval shall not be unreasonably withheld. 5. ALTERNATE FORM OF BENEFIT. The Executive 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. 6. SURVIVOR BENEFIT IN CASE OF DEATH PRIOR TO COMMENCEMENT OF BENEFITS. If the Executive dies after the date of this Agreement but prior to commencement of benefits, and at the time of his death he would have been entitled to a Supplemental Retirement Benefit under this Agreement in the event of his involuntary termination, then his spouse shall be entitled to receive a "Pre-Retirement Surviving Spouse Annuity" as provided in the Retirement Plan (currently defined as a 50% Contingent Annuity) for her life. The amount of the Pre-Retirement Surviving Spouse Annuity payable under this Agreement shall equal the amount that would have been paid to the Executive under this Page 2 of 4 3 Agreement as a single-life annuity, assuming he was involuntarily terminated immediately prior to his date of death, reduced by the Retirement Plan's actuarial adjustments necessary to express the single-life annuity as a 50% contingent annuity option. Payment of this benefit shall commence on the date the Supplemental Retirement would have commenced to the Executive if he had involuntarily terminated immediately prior to his death. 7. PAYMENT. All annual retirement benefits for the life of the Executive (or alternate form of benefit) or other amounts payable as provided in this Agreement shall be paid as provided in the Executive's benefit election under the Retirement Plan. Any retirement benefits to which the Executive 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 the form of an actuarial equivalent value mutually agreeable to the parties. 8. 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. 9. PAYMENT FROM GENERAL ASSETS. Unless otherwise determined by the Corporation, the Supplemental Retirement Benefit 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 Supplemental Retirement Benefit. Further, the Executive shall have no claim whatsoever to any specific assets or group of assets of the Corporation. The Corporation may, in its discretion, designate that the Supplemental Retirement Benefit 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 Supplemental Retirement Benefit described above, the Corporation shall remain liable for their payment unless otherwise agreed to by the parties of this Agreement. 10. TAXATION. The Executive and the Corporation agree that all payments hereunder shall be treated as "wages" for federal and state income tax and employment tax purposes at such time and in such manner as shall be prescribed by law. Each party to this Agreement shall be responsible for the payment of any such taxes as shall be legally required of such party. 11. This Agreement shall be governed by the laws of the State of Delaware. Page 3 of 4 4 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 Executive has executed this Agreement as of the date first above written. ATTEST: GENERAL DYNAMICS CORPORATION [SIG] By: /s/ W. PETE WYLIE - ---------------------------------- ---------------------------- Secretary W. Pete Wylie Corporate Vice President - Human Resources and Administration [SIG] /s/ DAVID SAVNER - ---------------------------------- ---------------------------- Witness David A. Savner Page 4 of 4 EX-10.38 3 LEASE AGREEMENT DATED JANUARY 1, 1991 1 EXHIBIT 10.38 Document No. 27624 -------------------------- Filed -------------------------------- SD UNIFIED PORT DISTRICT Clerk's Office SAN DIEGO UNIFIED PORT DISTRICT LEASE TO NATIONAL STEEL AND SHIPBUILDING COMPANY OF PROPERTY LOCATED AT HARBOR DRIVE AND 28TH STREET SAN DIEGO, CALIFORNIA FOR FIFTY (50) YEARS COMMENCING JANUARY 1, 1991 AND ENDING DECEMBER 31, 2040 2 TABLE OF CONTENTS
Paragraph/Exhibit Page Number 1. TERM .......................................................... 1 2. RENTAL ........................................................ 1 3. USE ........................................................... 5 4. CONSTRUCTION OF IMPROVEMENTS .................................. 5 5. IMPROVEMENTS .................................................. 6 6. TITLE TO IMPROVEMENTS ......................................... 7 7. LIENS ......................................................... 8 8. LEASE ENCUMBRANCE ............................................. 8 10. DEFAULT ....................................................... 10 11. BANKRUPTCY .................................................... 11 12. EMINENT DOMAIN ................................................ 12 13. SUPERSEDURE ................................................... 12 14. USE OBLIGATION ................................................ 12 15. MAINTENANCE AND REPAIR ........................................ 13 16. PERFORMANCE BOND .............................................. 13 17. TAXES AND UTILITIES ........................................... 13 18. CONFORMANCE WITH RULES AND REGULATIONS ........................ 14 19. NON-DISCRIMINATION ............................................ 14 20. PARTIAL INVALIDITY ............................................ 14 21. HOLD HARMLESS ................................................. 14 22. SUCCESSORS IN INTEREST ........................................ 14 23. EASEMENTS ..................................................... 14 24. TITLE OF LESSOR ............................................... 15 25. INSURANCE ..................................................... 15 26. POLICY OF LESSOR .............................................. 18 27. WARRANTIES-GUARANTEES-COVENANTS ............................... 18
3 28. DAMAGE TO OR DESTRUCTION OF PREMISES .......................... 18 29. QUITCLAIM OF LESSEE'S INTEREST UPON TERMINATION ............... 19 30. PEACEABLE SURRENDER ........................................... 19 31. WAIVER ........................................................ 19 32. HOLD OVER ..................................................... 19 33. SECTION HEADINGS .............................................. 20 34. ENTIRE UNDERSTANDING .......................................... 20 35. TIME IS OF THE ESSENCE ........................................ 20 36. NOTICES ....................................................... 20 37. REMOVAL OF MATERIALS .......................................... 21 38. ACCEPTANCE OF PREMISES ........................................ 21 39. ACCESS ROAD ................................................... 21 40. GENDER/SINGULAR/PLURAL ........................................ 22 41. EQUAL EMPLOYMENT OPPORTUNITY .................................. 22 42. ATTORNEY'S FEES ............................................... 22 43. HAZARDOUS MATERIALS ........................................... 23 44. ABSTRACT OF LEASE ............................................. 25
EXHIBIT "A" EXHIBIT "B" EXHIBIT "C" 4 LEASE THIS LEASE, made and entered into this 22nd day of October, 1991, between the SAN DIEGO UNIFIED PORT DISTRICT, a public corporation, hereinafter called "Lessor," and NATIONAL STEEL AND SHIPBUILDING COMPANY, a Nevada corporation, hereinafter called "Lessee," WITNESSETH: Lessor, for the consideration hereinafter set forth, hereby leases to Lessee for the term and upon the conditions hereinafter set forth, a portion of those lands conveyed to the San Diego Unified Port District by that certain Act of the Legislature of the State of California entitled "San Diego Unified Port District Act," Stats. 1962, 1st Ex. Sess., c. 67, as amended, which lands are more particularly described as follows: Approximately 5,498,071 square feet of tideland area in the City of San Diego, California, more particularly described and delineated on the attached five-page legal description and three-page Drawing No. 2516-B revised June 10, 1983, attached here to as Exhibits "A" and "B" and by this reference made a part hereof. TO HAVE AND TO HOLD said leased premises for the term of the Lease and upon the conditions as follows: 1. TERM: The term of the Lease shall be for a period of fifty (50) years commencing on January 1, 1991, and ending on December 31, 2040, unless sooner terminated as herein provided. 2. RENTAL: Lessee agrees to pay to Lessor rent in accordance with the following schedules and procedures: (a) The term of this Lease shall be divided into a series of rental periods. The first rental period shall commence on the commencement date of this Lease and shall end on March 31, 1991. The second rental period shall commence on April 1, 1991, and end on October 31, 1991. The third rental period shall commence on November 1, 1991, and end on September 30, 1993. Each successive rental period shall consist of sixty (60) months and shall commence at the expiration of the immediately preceding rental period. The last rental period shall be reduced in term in order to coincide with the expiration of this Lease. (b) The rental for the first rental period of this Lease shall be One Hundred Eighty-Two Thousand Seven Hundred Twenty-Four Dollars ($182,724) per month. The rental for the second 1 5 rental period shall be Two Hundred Eight Thousand Four Hundred Eighty-Eight Dollars ($208,488) per month. The rental for Parcel Nos. 1, 2 and 3 for the third rental period shall be One Hundred Ninety-Seven Thousand Eight Hundred Eighty Dollars ($197,880) per month, which is calculated on the basis of sixty-four cents (64 cent(s)) per square foot per year for Parcel No. 1 and nine cents (9 cent(s)) per square foot per year for Parcel Nos. 2 and 3. Said rental sums shall be payable in advance on or before the tenth (10th) day of each month. For the fourth and each successive rental period of this Lease and any extension thereof the rental shall be a sum agreed upon by Lessor and Lessee provided, however, during the fourth and each successive rental period the rents shall be adjusted upward or downward after the expiration of the first thirty (30) months of each rental period (the adjustment date) according to the following computation: "The base figure for computing the adjustment is the arithmetic average of the three monthly index figures for the sixth, fifth, and fourth months immediately preceding the existing rental period as shown in the Consumer Price Index for All Urban Consumers for Los Angeles/Anaheim/Riverside, CA/All Items based on the period 1982-84 = 100 as published by the United States Department of Labor's Bureau of Labor Statistics. The index figure for the adjustment date is the arithmetic average of the three monthly index figures of said Consumer Price Index for All Urban Consumers for the sixth, fifth, and fourth months immediately preceding the adjustment date. "The index for the adjustment date shall be computed as a percentage of the base figure. For example, assuming the base figure is 110 and the index figure for the adjustment date is 121, the percentage to be applied is 121/110 = 1.10 = 110%. "That percentage of the base figure shall be applied to the initial rent in effect at the beginning of the then existing rental period and will continue for the remaining thirty (30) months of the rental period. "In the event the Consumer Price Index for All Urban Consumers for Los Angeles/Anaheim/Riverside, CA/All Items is no longer published, the index for the adjustment date shall be the one reported in the U. S. Department of Labor's comprehensive official index most nearly answering the foregoing description of the index. If an index is calculated from a base different from the base period 1982-84 = 100, the base figure used for calculating the adjustment percentage shall first be converted under a formula supplied by the Bureau. "If the above described Department of Labor indices are no longer published, another index generally recognized as authoritative shall be substituted by agreement of the parties. If they are unable to agree within sixty (60) days 2 6 after demand by either party, a substitute index will be selected by the Chief Officer of the San Francisco Regional Office of the Bureau of Labor Statistics or its successor. "Notwithstanding the publication dates of the index, the effective date of the rent adjustment is at the expiration of the first thirty (30) months of each rental period. Until said rent adjustment can be reasonably determined by index publication, Lessee shall continue to make rental payments pursuant to this Lease at the same rent in effect at the then existing rental period. Because of this provision, overpayment of rents shall be credited to the Lessee's rental account and underpayments of rent shall be immediately paid to the Lessor." (c) In the event the parties cannot agree to the rent for the fourth or any subsequent rental period, the controversy as to rent for said period shall be determined by three arbitrators. After notice by either party to the other requesting arbitration, one arbitrator shall be appointed by each party. Notice of the appointment shall be given by each party to the other when made. The two arbitrators shall immediately choose a third arbitrator to act with them. If they fail to select a third arbitrator, on application by either party, the third arbitrator shall be promptly appointed by the then presiding judge of the. Superior Court of the State of California, County of San Diego, acting in his individual capacity. The party making the application shall give the other party notice of his application. All of the arbitrators shall be qualified real estate appraisers. Each party shall bear the expense of its own appointed arbitrator and shall bear other expenses pursuant to Section 1284.2 of the Code of Civil Procedure of California. Hearings shall be held in the City of San Diego, California. The award shall be the decision of not less than two of the arbitrators. Said award shall be the rent which Lessor would derive from Lessor's property if it was vacant land and water, without any improvements thereon, and made available on the open market for new leasing purposes at the commencement of the rental period under arbitration. For the purpose of this arbitration procedure, the arbitrators shall assume that the Lessor has a fee simple absolute estate. The arbitrators shall take into consideration the size of the premises and any benefits or burdens granted or imposed by the terms of this lease, other than limitations as to Lessee's use as provided in other paragraphs herein, and other than Lessee's obligation to construct improvements as provided in Paragraph 4 herein. In determining what rent Lessor could derive from said property if it were made available on the open market for new leasing purposes, the arbitrators shall consider the property as if it were available to be leased for marine-related industrial uses. Said uses shall not be confined to those permitted Lessee herein nor to Lessee's actual use of the leased premises. In determining the rates, returns, 3 7 rents and/or percentage rentals for said use and/or uses, the arbitrators shall use and analyze only the market data that is found in the open marketplace, such as is demanded and received by other Lessors for the same or similar uses as those referenced above. In all cases, the award shall be based upon recognized real estate appraisal principles and methods. The award determined by the arbitrators shall be effective and retroactive to the first day of the rental period under arbitration. The award shall be in writing in the form of a report that is in accordance with the powers of the arbitrators herein, supported by facts and analysis and in accordance with law. The arbitrators shall make copies of their report available to any ethical practice committee of any recognized professional real estate organization. The arbitration shall be conducted under and subject to Sections 1280 through 1294.2 of the Code of Civil Procedure of California. (d) In addition to the rentals provided in Paragraphs 2(a), (b), and (c), Lessee shall pay the sum of Two Hundred Dollars ($200) per month as rent for the use of the Lessor-owned building as described in Paragraph 6. Said sum shall not be subject to adjustment nor shall it be considered in establishing the rental amounts under this lease. (e) Notwithstanding Paragraph 2 of this Lease, no rent shall be charged to Lessee during the term of this Lease or any extension thereof for Parcel No. 4, shown on attached Exhibits "A" and "B" unless and until such time as Lessor determines rent shall be paid for said Parcel No. 4. Said rent shall be effective thirty (30) days after delivery of a written notice to Lessee from Lessor that Lessor elects to charge rent for said Parcel No. 4. If Lessor makes the election to charge rent, the additional rent for said Parcel No. 4 shall be based upon the square foot water rent for Parcel Nos. 2 and 3 in effect at the time Lessor makes said determination and subsequent adjustments in rent for said Parcel No. 4 shall be made concurrent with and in accordance with the provisions of Paragraphs 2 (a), (b), and (c) of this Lease. (f) In the event Lessee is delinquent in rendering to Lessor an accounting of rent due or in remitting the rent due in accordance with the rental provisions of this Lease, then the rent not paid when due shall bear interest at the rate of ten percent (10%) per annum from the date due until paid; provided, however, that the Port Director of Lessor shall have the right to waive for good cause any interest payment upon written application of Lessee for any such delinquency period. (g) Rentals shall be delivered to the Treasurer of the San Diego Unified Port District at Post Office Box 488, San Diego, California 92112. The designated place of payment may be changed at any time by Lessor upon ten (10) days' written 4 8 notice to Lessee. Lessee assumes all risk of loss if payments are made by mail. 3. USE: Lessee agrees that the leased premises shall be used only and exclusively for the repairing and building of ships and for occasional and incidental uses for steel fabricating, foundry, and general metal manufacturing and for no other purposes whatsoever without the written consent of Lessor, evidenced by resolution, first had and obtained. 4. CONSTRUCTION OF IMPROVEMENTS: (a) On or before December 31, 1993, Lessee shall commence the construction and diligently proceed to completion of real property improvements related to the permitted uses described in Paragraph 3. The improvements shall be of the nature described on the EXAMPLES OF REAL PROPERTY IMPROVEMENTS, which is marked Exhibit "C" and is attached hereto and by this reference made a part hereof. Lessee shall make an investment for the improvements to be constructed as described in this Paragraph in an amount which shall equal or exceed Eighty-Five Million Five Hundred Fifty Thousand Dollars ($85,550,000) hereinafter referred to as "minimum investment". Such minimum investment is consideration for the term of this Lease, and is not a portion of the rental obligations contained in Paragraph 2 of this Lease, and neither such investment or improvements nor any other Lessee investment or improvement shall be considered by the parties or any arbitrator (in the event of arbitration) in determining any rent during the term of this Lease. In the event Lessee fails to invest the entire minimum investment by no later than December 31, 2010, the term of this Lease shall be reduced. The reduction in term shall be one year for every One Million Seven Hundred Eleven Thousand Dollars ($1,711,000), prorated monthly, that Lessee's actual investment in improvements to be constructed as described in this Paragraph is less than the minimum investment. In no event, however, shall the term of the Lease be reduced by operation of the terms of this Paragraph so as to result in termination of this Lease prior to September 30, 2005. The construction of certain improvements contemplated by this Lease may be subject to the California Environmental Quality Act and other laws which may be in effect in the future. If Lessor determines any proposed improvements are within the scope of any then applicable environmental quality act and laws, it may then be necessary for Lessor either to approve or 5 9 disapprove (and thereby prohibit) the construction of such improvements in accordance with any such act or laws and other applicable provisions of this Lease. In the event there is such a disapproval, the cost of such a proposed improvement shall not be credited toward the cost of any improvement nor shall the time for completion of any improvements be extended, waived, or suspended. (b) No construction of any improvement upon the leased premises shall commence without the prior approval of the Port Director of Lessor, as evidenced in writing, and all such construction shall be in accordance with plans and specifications which must be submitted to and approved by the Port Director in writing prior to the commencement of any such construction. (c) When required by Lessor, Lessee shall pave or plant ground cover, at its own cost and expense, over the entire area of the leased premises not covered by buildings. All paving or ground cover shall be in accordance with plans and specifications approved by the Port Director in writing prior to the commencement of any such paving or planting. (d) By no later than March 31 of each year, beginning with March 31, 1992 and ending with March 31, 2011, Lessee shall furnish Lessor an itemized statement of the actual construction cost of any improvements required by the terms of this paragraph, which were completed during the preceding calendar year. The statement of cost shall be sworn to and signed by Lessee or his responsible agent under penalty of perjury. (e) The time during which Lessee is delayed by acts of God, war, invasion, rebellion, revolution, insurrection, riots, labor problems, unavailability of materials, government intervention, or acts or omissions of the Lessor, shall be added to the times for the commencement of construction and completion of construction of improvements as referred to in this Lease and otherwise to perform its obligations referred to in this Lease; provided, that in no event shall the period of excused delay exceed 365 days in the aggregate. 5. IMPROVEMENTS: Lessee may, at its own expense, make any alterations or changes in the leased premises or cause to be built, made or installed thereon any structures, machines, appliances, utilities, signs or other improvements necessary or desirable for the use of said premises and may alter and repair 6 10 any such structures, machines or other improvements; provided, however, that no alterations and changes shall be made and no structures, machines, appliances, utilities, signs or other improvements shall be made, built or installed, and no major repairs thereto shall be made except in accordance with plans and specifications previously submitted to and approved in writing by the Port Director of Lessor. Notwithstanding the foregoing, Lessee shall have the right within the interior of any enclosed building structure to install and/or remove machines, equipment, appliances and trade fixtures to/from the leased premises without the prior consent of the Port Director of Lessor. Lessee further agrees that no banners, pennants, flags, eye-catching spinners or other advertising devices, nor any temporary signs shall be permitted to be flown, installed, placed, or erected on the premises without written consent of the Port Director of Lessor. 6. TITLE TO IMPROVEMENTS: On the commencement date of the term of this Lease, all, existing structures, buildings, installations, and improvements of any kind located on the leased premises are owned by and title thereto is vested in Lessee, except for a building of approximately 2,879 square feet located at the foot of the southerly extension of 28th Street on Parcel No. 1, formerly known as "Lyon's Cafe" and now commonly known as "NASSCO Building 42," which building is owned by Lessor. All said existing structures, buildings, installations and improvements as well as structures, buildings, installations and improvements of any kind placed on the leased premises by Lessee subsequent to the commencement date of the term of this Lease shall at the option of Lessor be removed by Lessee at Lessee's expense. Lessor may exercise said option as to any or all of the structures, buildings, installations and improvements either before or after the expiration or sooner termination of this Lease. If Lessor exercises such option, Lessee shall remove such structures, buildings, installations or improvements within sixty (60) days after the expiration of the term of this Lease or sooner termination thereof. If Lessee fails to remove such structures, buildings, installations or improvements within said sixty (60) days, Lessor shall have the right to have such structures, buildings, installations or improvements removed at the expense of Lessee. As to any or all structures, buildings, installations or improvements owned by Lessee for which Lessor does not exercise said option for removal, title thereto shall vest in the Lessor without cost to Lessor and without any payment to Lessee. Machines, appliances, equipment and trade fixtures of any kind now existing or hereafter placed on the leased premises by Lessee are owned by and title thereto is vested in Lessee and shall be removed by Lessee within sixty (60) days after the expiration of the term of this Lease or sooner termination thereof; provided, however, Lessee agrees to repair any and all damage occasioned by the removal thereof. If any such machines, appliances, equipment and trade fixtures are not removed within sixty (60) days after 7 11 the termination of this Lease, the same may be considered abandoned and shall thereupon become the property of Lessor without cost to the Lessor and without any payment to Lessee; except that Lessor shall have the right to have the same removed at the expense of Lessee. During any period of time employed by Lessee under this Paragraph to remove structures, buildings, installations, improvements, machines, appliances, equipment and trade fixtures, Lessee shall continue to pay the full rental to Lessor in accordance with this Lease which said rental shall be prorated daily. 7. LIENS: Lessee agrees that it will at all times save Lessor free and harmless and indemnify it against all claims for labor or materials in connection with improvements, repairs, or alterations on the leased premises, and the costs of defending against such claims, including reasonable attorney's fees. In the event that any lien or levy of any nature whatsoever is filed against the lease premises or the leasehold interests of the Lessee therein, the Lessee shall, upon written request of Lessor, deposit with Lessor a bond conditioned for the payment in full of all claims upon which said lien or levy has been filed. Such bond shall be acknowledged by Lessee as principal and by a corporation, licensed by the Insurance Commissioner of the State of California to transact the business of a fidelity and surety insurance company, as surety. Lessor shall have the right to declare this Lease in default in the event the bond required by this Paragraph has not been deposited with the Lessor within ten (10) days after written request has been delivered to Lessee. 8. LEASE ENCUMBRANCE: Lessee understands and agrees that it cannot encumber the Lease, leasehold estate and the improvements thereon by a deed of trust, mortgage or other security instrument to assure the payment of the promissory note of Lessee without the prior express written consent by resolution of Lessor in each instance. If any deed of trust, mortgage or other security instrument that encumbers the Lease, leasehold estate and the improvements thereon is entered into by Lessee without Lessor's prior express written consent, Lessor shall have the right to declare this Lease in default. If a deed of trust, mortgage, or other security instrument which Lessor has consented to by resolution, should at any time be in default, before Lessee's interest under said Lease may be sold as part of any foreclosure or trustee's sale or be assigned in lieu of foreclosure, the prior express written consent by resolution of Lessor shall be obtained in each instance. However, the original beneficiary of the deed of trust, the original mortgagee of the mortgage, and the original holder of the security instrument which the Lessor has consented to by resolution may purchase the Lessee's interest at a foreclosure or trustee's sale or accept assignment of the Lease in lieu of foreclosure, without the requirement of any further consent on the part of Lessor provided said party, as an express condition precedent, agrees in 8 12 writing to assume each and every obligation under the Lease. Furthermore, before any said original beneficiary, mortgagee, or holder of a security instrument, or any other consented-to assignee or purchaser may subsequently assign or sublet any of the leasehold or Lessee's interest, it shall obtain the Lessor's prior express written consent by resolution. The decision of the Board of Port Commissioners of Lessor as to such assignee, purchaser, or subtenant shall be final. 9. ASSIGNMENT-SUBLEASE: Lessee agrees not to assign or transfer the whole or any part of this Lease or any interest therein, nor to sublease the whole or any part of the leased premises, nor contract for the management or operation of the whole or any part of the leased premises, nor to permit the occupancy of any part thereof by any other person, nor to permit transfer of the Lease or possession of the leased premises by merger, consolidation, or dissolution, without the consent of Lessor, evidenced by resolution, first had and obtained in each instance. Lessee further agrees that no assignment, voluntary or involuntary, in whole or in part of this Lease, or any interest therein, and no sublease of the whole or any part of the leased premises, and no contract for the management or operation of the whole or any part of the leased premises, and no permission to any person to occupy the whole or any part of the leased premises shall be valid or effective without the consent of Lessor, first had and obtained in each instance; provided, however, that nothing herein contained shall be construed to prevent the occupancy of said premises by any employee, or business invitee of Lessee. In the event any consent of Lessor is given for any Lease assignment or transfer, the following shall apply in each instance: (i) the Lessor shall be paid additional rent, which may be percentage rate or rates, to equal the full fair market rent, commencing on the effective date of such proposed assignment or transfer, unless on that date the rent being paid under this Lease is equal to the full fair market rent; (ii) the Assignee hereby agrees and assumes each and every obligation under the Lease, and (iii) other conditions and qualifications determined by the Board of Port Commissioners of Lessor. Notwithstanding, items (i) and (iii) shall not apply in the event of: (a) a Lease assignment or transfer to a third party from a consented-to lender which acquired title to the Lease by foreclosure or deed in lieu of foreclosure or a new Lease pursuant to the provisions of Paragraph 10 or (b) assignment or transfer of the Lease to a consented-to lender by deed in lieu of foreclosure, or to a consented-to lender or a third party as the successful bidder at a foreclosure sale. The rent under this Lease and any change resulting therein effective upon any Lease assignment or transfer as provided in this Paragraph shall be for the remainder of the rental period during which it occurs, and any said rent shall thereafter be subject to rental review at the commencement of subsequent and succeeding rental periods in accordance with the provisions of Paragraph 2 of this Lease. Notwithstanding the foregoing, if a change in rent is made which becomes effective upon any Lease assignment or transfer, the rent 9 13 shall be subject to any adjustment applicable during the remainder of said rental period during which the Lease assignment or transfer occurred based on the change in the Consumer Price Index if such adjustment is provided for in Paragraph 2 of this Lease; provided, however, the "base figure for computing the adjustment" shall be the arithmetic average of the three monthly index figures for the sixth, fifth and fourth months immediately preceding the effective date of such proposed assignment or transfer for which the Assignee pays additional rent to Lessor to equal the full fair market rent and the "index figure for the adjustment date" shall be the arithmetic average of the three monthly index figures of said Consumer Price Index for the sixth, fifth and fourth months immediately preceding the date such adjustment is effective. In the event any consent of Lessor is given to sublease, the following shall apply in each instance: (i) the Lessor shall be paid additional rent, which may be percentage rate or rates, to equal the full fair market rent for the sublease area, commencing on the effective date of such proposed sublease and continuing for a specified period of time which shall not extend beyond the remainder of the master Lease rental period during which it occurs or until the termination of the sublease, whichever occurs first, unless on that date the rent being paid under this Lease for said area is equal to the full fair market rent, and (ii) other conditions and qualifications determined by the Board of Port Commissioners of Lessor. As long as said sublease is in effect, said rent for the sublease area shall thereafter be subject to rental review at the commencement of subsequent and succeeding master Lease rental periods, in accordance with the provisions of Paragraph 2 of this Lease. In the event the parties cannot agree to an amount that is equal to the full fair market rent described in this paragraph, the full fair market rent shall be determined by the arbitration procedure described in Paragraph 2 of this Lease, except that the arbitration award shall be for a limited period of time commencing and ending as provided in this Paragraph and not for a "rental period" as specified in said Paragraph 2. Until said full fair market rent is determined pursuant to said Paragraph 2, the Lessee shall continue to make rental payments as required by this Lease at the same rate or rates in effect on the effective date of the Lease assignment or sublease. Because of this provision, underpayment of rent, if any, shall be paid to Lessor within ten (10) days of the date that the full fair market rent is determined by said arbitration procedure. 10. DEFAULT: It is mutually understood and agreed that if any default be made in the payment of rental herein provided or in the performance of the covenants, conditions, or agreements herein (any covenant or agreement shall be construed and considered as a condition), or should Lessee fail to fulfill in any manner the uses and purposes for which said premises are leased as above stated, and such default shall not be cured within five (5) days after written notice thereof if default is 10 14 in the submittal of a report of gross income if required in this Lease or ten (10) days after written notice thereof if default is in the performance of the use obligation provisions pursuant to Paragraph 14 of this Lease, or thirty (30) days after written notice thereof if default is in the payment of rent, or sixty (60) days after written notice thereof if default is in the performance of any other covenant, condition and agreements (any covenant or agreement shall be construed and considered as a condition), Lessor shall have the right to immediately terminate this Lease; and that in the event of such termination, Lessee shall have no further rights hereunder and Lessee shall thereupon forthwith remove from said premises and shall have no further right to claim thereto, and Lessor shall immediately thereupon, without recourse to the courts, have the right to reenter and take possession of the leased premises. Lessor shall further have all other rights and remedies as provided by law, including without limitation the right to recover damages from Lessee in the amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which in the ordinary course of things would be likely to result therefrom. In the event Lessor consents to an encumbrance of the Lease for security purposes in accordance with Paragraph 8 of this Lease, it is understood and agreed that Lessor shall furnish copies of all notices of defaults to the beneficiary or mortgagee under said encumbrance by certified mail contemporaneously with the furnishing of such notices to Lessee, and in the event Lessee shall fail to cure such default or defaults within the time allowed above, said beneficiary or mortgagee shall be afforded the right to cure such default at any time within fifteen (15) days following the expiration of the period within which Lessee may cure such default, provided, however, Lessor shall not be required to furnish any further notice of default to said beneficiary or mortgagee. In the event of the termination of this Lease pursuant to the provisions of this Paragraph, Lessor shall have any rights to which it would be entitled in the event of the expiration or sooner termination of this Lease under the provisions of Paragraph 6. 11. BANKRUPTCY: In the event Lessee becomes insolvent, makes an assignment for the benefit of creditors, becomes the subject of a bankruptcy proceeding, reorganization, arrangement, insolvency, receivership, liquidation, or dissolution proceedings, or in the event of any judicial sale of Lessee's interest under this Lease, Lessor shall have the right to declare this Lease in default. The conditions of this Paragraph shall not be applicable or binding on Lessee or the beneficiary in any deed of trust, mortgage, or other security instrument on the demised premises which is of record with Lessor and has been consented to by resolution of Lessor, or to said beneficiary's successors in interest consented to by resolution of Lessor, as long as there 11 15 remains any monies to be paid by Lessee to such beneficiary under the terms of such deed of trust; provided that such beneficiary or its successors in interest, continuously pay to the Lessor all rent due or coming due under the provisions of this Lease and the premises are continuously and actively used in accordance with Paragraph 14 of this Lease. 12. EMINENT DOMAIN: If the whole or a substantial part of the premises hereby leased shall be taken by any public authority under the power of eminent domain, then the term of this Lease shall cease as to the part so taken, from the day the possession of that part shall be taken for any public purpose, and the rent shall be paid up to that day, and from that day Lessee shall have the right either to cancel this Lease and declare the same null and void or to continue in the possession of the remainder of the same under the terms herein provided, except that the minimum rent shall be reduced in proportion to the amount of the promises taken. All damages awarded for such taking shall belong to and be the property of Lessor whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises herein leased; provided, however, that Lessor shall not be entitled to award made for the taking of any installations or improvements on the leased premises belonging to Lessee. 13. SUPERSEDURE: It is mutually agreed that this Lease upon becoming effective shall supersede that certain Lease, as amended, made and entered into the 20th day of December, 1977, with National Steel and Shipbuilding Company, a Nevada corporation, which Lease shall thereafter be void and of no effect except as to any rentals, fees which may have accrued thereunder, or any rights or remedies granted or accruing during or under such agreement. Any such remaining rights, duties, or obligations of the parties pursuant to the terms, covenants, and conditions in or arising during the Lease dated December 20, 1977 shall continue in full force and effect and shall not be affected by this Lease. Nothing herein is intended nor shall be construed as a waiver of any such rights or as a release of any such duties or obligations, whether known or unknown at this time or upon the effective date of this Lease. 14. USE OBLIGATION: Lessee shall actively and continuously use and operate the premises for the limited particular exclusive use as expressly provided for in the Use paragraph of this Lease, except for failure to so use caused by reason of wars, strikes, riots, civil commotion, acts of public enemies, and acts of God. Said active and continuous use and operation enhances the value of the tidelands, provides needed public service, provides additional employment, taxes, and other benefits to the general economy of the area. Lessee, however, shall not and is expressly prohibited from using the premises for any other purpose or use whatsoever, whether it is purported to be in addition to or in 12 16 lieu of the particular exclusive use expressed in said Use paragraph. 15. MAINTENANCE AND REPAIR: As part of the consideration for the leasing thereof, Lessee agrees to assume full responsibility for the operation, maintenance, including painting, and repair of the premises, throughout the term and without expense to the Lessor. Lessee will perform all maintenance, repairs and replacements necessary to maintain and preserve the premises in a good, safe' healthy and sanitary condition satisfactory to Lessor and in compliance with all applicable laws. Lessee further agrees to provide approved containers for trash and garbage and to keep premises free and clear of rubbish and litter, or any other fire hazards. Lessee waives all right to make repairs at the expense of Lessor as provided in Section 1942 of the California Civil Code and all rights provided by Section 1941 of said Code. For the purpose of keeping the premises in a good, safe, healthy and sanitary condition, Lessor shall always have the right but not the duty, to enter, view, inspect, determine the condition of and protect its interests in, the premises. If inspection discloses that the premises are not in the condition described, Lessee must perform the necessary maintenance work within ten (10) days after written notice from Lessor. Further, if at any time Lessor determines that the premises are not in the condition described, Lessor may require Lessee to file and pay for a faithful performance bond, to assure prompt correction without additional notice. The amount of this bond shall be adequate, in Lessor's opinion, to correct the unsatisfactory condition. Notwithstanding, Lessor shall not be required at any time to maintain or to make any improvements or repairs whatsoever on or for the benefit of the leased premises. The rights reserved in this section shall not create any obligations or increase any obligations for Lessor elsewhere in this Lease. 16. PERFORMANCE BOND: No major construction shall be commenced upon the demised premises by Lessee until Lessee has secured and submitted to Lessor performance bonds in the amount of the total estimated construction cost of improvements to be constructed by Lessee. In lieu of said performance bonds, the Port Director of Lessor may at his sole discretion accept the performance and labor and material bonds supplied by Lessee's contractor or subcontractors, or performance guarantees, or other satisfactory evidence that said construction will be timely completed. Said bonds must be issued by a company qualified to do business in the State of California and be in a form acceptable to Lessor. 17. TAXES AND UTILITIES: This Lease may result in a taxable possessory interest and be subject to the payment of property taxes. Lessee agrees to and shall pay before delinquency all taxes and assessments of any kind assessed or levied upon Lessee or the leased premises by reason of this Lease or of any buildings, machines, or other improvements of any nature whatsoever erected, installed or maintained by Lessee or by reason of the business or other activities of Lessee upon or in 13 17 connection with the leased premises. Lessee shall also pay any fees imposed by law for licenses or permits for any business or activities of Lessee upon the leased premises or under this Lease, and shall pay before delinquency any and all charges for utilities at or on the leased premises. 18. CONFORMANCE WITH RULES AND REGULATIONS: Lessee agrees that in all activities on or in connection with the leased premises and in all uses thereof, including the making of any alterations or changes and the installation of any machines or other improvements, it will abide by and conform to all rules and regulations prescribed by the San Diego Unified Port District Act, any ordinances of the City in which the leased land is located, including the Building Code thereof, and any ordinances and general rules of the Lessor, including tariffs, and any applicable laws of the State of California and Federal Government, as any of the same now exist or may hereafter be adopted or amended. 19. NON-DISCRIMINATION: Lessee agrees not to discriminate against any person or class of persons by reason of sex, color, race, religion, or national origin. If the use provided for in this Lease allows the Lessee to offer accommodations or services to the public, such accommodations or services shall be offered by the Lessee to the public on fair and reasonable terms. 20. PARTIAL INVALIDITY: If any term, covenant, condition, or provision of this Lease is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions hereof shall remain in full force and effect and shall in no way be affected, impaired, or invalidated thereby. 21. HOLD HARMLESS: Lessee shall defend, indemnify, and hold harmless Lessor, its officers and employees against causes of action, liability, damage, and expense, including reasonable attorney's fees, for judicial relief of any kind, for damage to property of any kind whatsoever and to whomever belonging, including without limitation Lessee or its employees, or injury or death of any person or persons, including without limitation Lessee or its employees, resulting directly or indirectly from granting and performance of this Lease or arising from the use and operation of the leased premises or any defect in any part thereof. Nothing herein is intended to exculpate Lessor from its own negligence. 22. SUCCESSORS IN INTEREST: Unless otherwise provided in this Lease, the terms, covenants and conditions herein shall apply to and bind the heirs, successors, executors, administrators, and assigns of all the parties hereto, all of whom shall be jointly and severally liable hereunder. 23. EASEMENTS: This Lease and all rights given hereunder are subject to all easements and rights-of-way previously granted or reserved by Lessor in, to, or over the leased premises for any 14 18 purpose whatsoever, and shall be subject to future easements and rights-of-way for access, gas, electricity, water, sewer, drainage, telephone, telegraph, television transmission, and other Lessor or public facilities as may be determined from time to time by Lessor to be in the best interests of the development of the tidelands. Lessor agrees that an effort shall be made so that such future easements and rights-of-way shall be so located and facilities installed as to produce a minimum amount of interference to the business of Lessee. Lessee shall not be entitled to any monetary payment or other remuneration for any such future easements. 24. TITLE OF LESSOR: Lessor's title is derived from the provisions of the San Diego Unified Port District Act, Appendix 1, Harbors & Navigation Code, and is subject to the provisions of said Act. This Lease IS granted subject to the terms and conditions of said Act. 25. INSURANCE: Lessee shall maintain insurance acceptable to Lessor in full force and effect throughout the term of this Lease. The policies for said insurance shall, as a minimum, provide the following: (a) Forms of Coverage (1) "OCCURRENCE" form Commercial General Liability covering premises and operations in the amount of not less than One Million Dollars ($1,000,000) combined single limit per occurrence for bodily injury, personal injury and property damage. Either the general aggregate limit shall apply separately to this location or the general aggregate limit shall be twice the required occurrence limit. If alcoholic beverages are served or sold on the leased premises, Liquor Liability coverage in the amount of not less than One Million Dollars ($1,000,000) shall be obtained. (2) Fire and Extended Coverage, including water damage and debris cleanup provisions in an amount not less than ninety percent (90%) of full replacement value of all improvements located within the leased premises. The fire and extended coverage policies shall be endorsed to state that any insurance proceeds in excess of Twenty-Five Thousand Dollars ($25,000) resulting from a loss under said policies shall be payable jointly to Lessor and Lessee in order that said proceeds will be reinvested in rebuilding and/or repairing the damaged portions of the leased premises; provided, however, that within the period during which there is in existence a mortgage or deed of trust upon the leasehold given by Lessee with the prior consent of Lessor, then and for that period all fire and extended coverage policies shall be made payable jointly to the mortgagee or beneficiary and Lessee, and any proceeds collected therefrom 15 19 shall be held by said mortgagee or beneficiary for the following purposes: (i) As a trust fund to pay for the reconstruction, repair, or replacement of the damaged or destroyed improvements in kind and scope in progress payments as the work is performed with any excess remaining after completion of said work to be retained by said mortgagee or beneficiary and applied to reduction of the debt secured by such mortgage or deed of trust and with any excess remaining after full payment of said debt to be paid over to Lessee; or (ii) In the event that this Lease is terminated with consent of both Lessor and mortgagee or beneficiary and said improvements are not reconstructed, repaired, or replaced, the insurance proceeds shall be retained by said mortgagee or beneficiary to the extent necessary to fully discharge the debt secured by said mortgage or deed of trust and said mortgagee or beneficiary shall hold the balance thereof without liability to restore the premises to a neat and clean condition and then for Lessor and Lessee as their interests may appear. (3) Pollution Liability for Underground Storage Tanks Due to operation of underground storage tanks, Lessee is required to comply with Subpart H of 40 CFR (Code of Federal Regulations) and maintain a Certification of Financial Responsibility detailing financial assurance mechanisms. At the time Lessee is required to comply with Subpart H of 40 CFR, Lessee shall provide Lessor with a certified copy of its Certification of Financial Responsibility. If Lessee's program for financial responsibility includes insurance, then Lessee's policy(ies) shall name Lessor, its officers, officials and employees as additional insureds, and, all other terms of Section (b), below, shall apply. Any time Lessee changes its financial assurance mechanisms, Lessee shall provide Lessor with a certified copy of its revised Certification of Financial Responsibility. (4) Blanket Contractual Coverage (b) General Requirements (1) All required insurance shall be in force the first day of the term of this Lease. The cost of all required insurance shall be borne by Lessee. Certificates in a form acceptable to Lessor evidencing the existence of the necessary insurance policies, and original endorsements effecting coverage required by this clause, shall be kept on file with Lessor during the entire term of this Lease. The certificates and endorsements for each insurance policy are to be signed by a person authorized by that insurer to bind coverage on its behalf. The Lessor reserves the right to 16 20 require complete, certified copies of all required policies at any time. (2) All liability insurance policies will name, or be endorsed to name, Lessor, its officers, officials and employees as additional insureds and protect Lessor, its officers, officials and employees against any legal costs in defending claims. All fire and extended insurance policies will name, or be endorsed to name, Lessor as an additional insured. All insurance policies will be endorsed to state that coverage will not be suspended, voided, cancelled, reduced in coverage or in limits except after thirty (30) days' prior written notice by certified mail, return receipt requested has been given to the Lessor. All insurance policies will be endorsed to state that Lessee's insurance is primary and not excess or contributory to any insurance issued in the name of Lessor. And, all insurance companies must be satisfactory to Lessor. (3) Any deductibles or self-insured retentions must be declared and acceptable to the Lessor. At the option of the Lessor, either: the insurer shall reduce or eliminate such deductibles or self-insured retentions as respects the Lessor, its officers, officials, and employees; or, the Lessee shall procure a bond guaranteeing payment of losses and related investigations, claim administration and defense expenses. (4) Lessor shall retain the right at any time to review the coverage, form, and amount of the insurance required hereby. If, in the opinion of Lessor, the insurance provisions in this Lease do not provide adequate protection for Lessor and/or for members of the public using the leased premises, Lessor may require Lessee to obtain an insurance sufficient in coverage, form and amount to provide adequate protection. Lessor's requirements shall be reasonable but shall be designed to assure protection from and against the kind and extent of risk which exist at the time a change in insurance is required. (5) Lessor shall notify Lessee in writing of changes in the insurance requirements. With respect to changes in insurance requirements that are available from Lessee's then existing insurance carrier, Lessee shall deposit certificates evidencing acceptable insurance policies with Lessor, incorporating such changes within sixty (60) days of receipt of such notice. With respect to changes in insurance requirements that are not available from Lessee's then existing insurance carrier, Lessee shall deposit certificates evidencing acceptable insurance policies with Lessor, incorporating such changes within one hundred twenty (120) days of receipt of such notice. This Lease shall be in default without further notice to Lessee, and Lessor shall be entitled to all legal remedies, if the certificates 17 21 described in this Subparagraph 25(b)(5) are not submitted within the time periods specified. (6) If Lessee fails or refuses to maintain insurance as required in this Lease, or fails to provide proof of insurance, Lessor has the right to declare this Lease in default without further notice to Lessee and Lessor shall be entitled to exercise all legal remedies. (7) The procuring of such required policies of insurance shall not be construed to limit Lessee's liability hereunder, nor to fulfill the indemnification provisions and requirements of this Lease. Notwithstanding said policies of insurance, Lessee shall be obligated for the full and total amount of any damage, injury, or loss caused by negligence or neglect connected with this Lease or with the use or occupancy of the leased premises. (8) Lessee further agrees not to keep on the premises or permit to be kept, used, or sold thereon, anything prohibited by commercially obtainable fire or other insurance policies covering the premises. Lessee shall, at its sole expense, comply with any and all requirements, in regard to premises, of its insurance company necessary for maintaining fire and other insurance coverage at reasonable cost. 26. POLICY OF LESSOR: It is the policy of the Lessor that prevailing wage rates shall be paid all persons who are employed by Lessee on the tidelands of Lessor. 27. WARRANTIES-GUARANTIES-COVENANTS: Lessor makes no warranty, guarantee, covenant, including but not limited to covenants of title and quiet enjoyment, or averment of any nature whatsoever concerning the condition of the leased premises, including the physical condition thereof, or any condition which may affect the leased premises, and it is agreed that Lessor will not be responsible for any loss, damage or costs which may be incurred by Lessee by reason of any such condition or conditions. 28. DAMAGE TO OR DESTRUCTION OF PREMISES: In the event of damage to or destruction by fire, the elements, acts of god, or any other cause, of Lessee-constructed improvements located within the demised premises or in the event Lessee-constructed improvements located within the demised premises are declared unsafe or unfit for use or occupancy by a public entity with the authority to make and enforce such declaration, Lessee shall, within ninety (90) days, commence and diligently pursue to completion the repair, replacement, or reconstruction of improvements necessary to permit full use and occupancy of the demised premises for the purposes required by this Lease. Repair, replacement or reconstruction of improvements within the demised premises shall be accomplished in a manner and according to plans approved by Lessor; provided, however, Lessee shall not be obligated to repair, reconstruct or replace the improvements 18 22 following their destruction in whole or substantial part except to the extent the loss is covered by insurance required to be carried by Lessee pursuant to Paragraph 25 of this Lease (or would be covered whether or not such required insurance is actually in effect). If Lessee elects not to restore, repair or reconstruct as herein provided, then the Lease shall terminate and Lessor shall have any rights to which it would be entitled under the provisions of Paragraph 6. 29. QUITCLAIM OF LESSEE'S INTEREST UPON TERMINATION: Upon termination of this Lease for any reason, including but not limited to termination because of default by Lessee, Lessee shall execute, acknowledge and deliver to Lessor within thirty (30) days after receipt of written demand therefor a good and sufficient deed whereby all right, title and interest of Lessee in the demised premises is quitclaimed to Lessor. Should Lessee fail or refuse to deliver the required deed to Lessor, Lessor may prepare and record a notice reciting the failure of Lessee to execute, acknowledge and deliver such deed and said notice shall be conclusive evidence of the termination of this Lease and of all right of Lessee or those claiming under Lessee in and to the demised premises. 30. PEACEABLE SURRENDER: Upon the expiration of this Lease or the earlier termination or cancellation thereof, as herein provided, Lessee will peaceably surrender said premises to Lessor in as good condition as said premises were at the date of this Lease, ordinary wear and tear excepted. If the Lessee fails to surrender the premises at the expiration of this Lease or the earlier termination or cancellation thereof, Lessee shall defend and indemnify Lessor from all liability and expense resulting from the delay or failure to surrender, including, without limitation, any succeeding Lessee's claims based on Lessee's failure to surrender. 31. WAIVER: Any waiver by Lessor of any breach by Lessee of any one or more of the covenants, conditions, or agreements of this Lease shall not be nor be construed to be a waiver of any subsequent or other breach of the same or any other covenant, condition or agreement of this Lease, nor shall any failure on the part of Lessor to require or exact full and complete compliance by Lessee with any of the covenants, conditions, or agreements of this Lease be construed as in any manner changing the terms hereof or to prevent Lessor from enforcing the full provisions hereof. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 32. HOLD OVER: This Lease shall terminate without further notice at expiration of the term. Any holding over by Lessee after either expiration or termination shall not constitute a renewal or extension or give Lessee any rights in or to the leased 19 23 premises. If Lessee, with Lessor's consent, remains in possession of the leased premises after expiration or termination of the term or after the date in any notice given by Lessor to Lessee terminating this Lease, such possession by Lessee shall be deemed to be a month-to-month tenancy terminable on thirty (30) days' notice given at any time by either party. During any such month-to-month tenancy, Lessee shall pay all rent required by this Lease, and if percentage rent is required by the Lease, it shall be paid monthly on or before the tenth (10th) day of each month. All provisions of this Lease, except those pertaining to term, shall apply to the month-to-month tenancy. 33. SECTION HEADINGS: The Table of Contents and section headings contained herein are for convenience in reference and are not intended to define or limit the scope of any provision thereof. 34. ENTIRE UNDERSTANDING: This Lease contains the entire and only understanding and agreement of the parties, and Lessee, by accepting the same, acknowledges that there is no other written or oral understanding or agreement between the parties with respect to the demised premises and that this Lease supersedes all prior negotiations, discussions, obligations and rights of the parties hereto. No waiver, modification, amendment or alteration of this Lease shall be valid unless it is expressly in writing and signed by authorized persons of the parties hereto. Each of the parties to this Lease acknowledges that no other party, nor any agent or attorney of any other party, has made any promise, representations, waiver or warranty whatsoever, expressed or implied, which is not expressly contained in writing in this Lease, and, each party further acknowledges that it has not executed this Lease in reliance upon any collateral promise, representation, waiver or warranty, or in reliance upon any belief as to any fact not expressly recited in this Lease. 35. TIME IS OF THE ESSENCE: Time is of the essence of each and all of the terms and provisions of this Lease and this Lease shall inure to the benefit of and be binding upon the parties hereto and any successors of Lessee as fully and to the same extent as though specifically mentioned in each instance, and all covenants, stipulations and agreements in this Lease shall extend to and bind any assigns and sublessees of Lessee. 36. NOTICES: Notices given or to be given by Lessor or Lessee to the other may be personally served upon Lessor or Lessee or any person hereafter authorized by either in writing to receive such notice or may be served by certified letter addressed to the appropriate address hereinafter set forth or to such other address as Lessor and Lessee may hereafter designate by written notice. If served by certified mail, forty-eight (48) hours after deposit in the U.S. Mail, service will be considered completed and binding on the party served. 20 24 To Lessor To Lessee Vice President and General Counsel Port Director National Steel and San Diego Unified Port District Shipbuilding Company Post Office Box 488 Post Office Box 85278 San Diego, CA 92112 San Diego, CA 92186-5278 Said notices shall also be served by certified letter to the beneficiary of any deed of trust, mortgage, or other security instrument of record with Lessor and consented to by resolution of Lessor who has notified Lessor in writing of its desire to receive said notice. 37. REMOVAL OF MATERIALS: Lessee hereby agrees that upon the expiration of this Lease or the sooner termination as herein provided, it will remove within sixty (60) days all ships, vessels, barges, hulls, debris, surplus and salvage materials from the land and water area forming a part of or adjacent to the leased premises, so as to leave the same in as good condition as when first occupied by Lessee; provided, however, that if any said ships, vessels, barges, hulls, debris, surplus and salvage materials shall not be so removed within sixty (60) days by the Lessee, Lessor may remove, sell and destroy the same at the expense of Lessee and Lessee hereby agrees to pay to Lessor the reasonable cost of such removal, sale or destruction; or at the option of Lessor, the title to said ships, vessels, barges, hulls, debris, surplus and salvage materials not removed shall become the property of Lessor without cost to Lessor and without any payment to Lessee. During any period of time employed by Lessee under this Paragraph to remove ships, vessels, barges, hulls, debris, surplus and salvage materials, Lessee shall continue to pay the full rental to Lessor in accordance with this Lease which said rental shall be prorated daily. 38. ACCEPTANCE OF PREMISES: By signing this Lease, Lessee represents and warrants that it has independently inspected the premises and made all tests, investigations and observations necessary to satisfy itself of the condition of the premises. Lessee agrees it is relying solely on such independent inspection, tests, investigations and observations in making this Lease. Lessee further acknowledges that the premises are in the condition called for by this Lease, that Lessor has performed all work with respect to premises and that Lessee does not hold Lessor responsible for any defects in the premises. Lessee furthermore accepts and shall be responsible for any risk of harm to any person and property, including without limitation employees of Lessee, from any latent defects in the premises. 39. ACCESS ROAD: Adjoining the westerly side of Parcel No. 1 of the leased premises, is a twenty- (20) foot-wide access road which is shown on attached Exhibit "B". Said road is not part of 21 25 the leased premises. Lessee may use said road for the limited nonexcLusive, nonpreferential purpose of vehicular access to the leased premises and for no other uses or purposes whatsoever. Said road also provides access to the leased premises for emergency vehicles, including ambulances, police vehicles, and fire trucks. In consideration for Lessee not being charged rent for use of said access road, Lessee agrees that Lessor shall not be required at any time to maintain or make any improvements or repairs to said access road. Lessee may, at its own expense, maintain or make improvements or repairs to said access road; provided, however, no maintenance, improvements, or repairs thereto shall be made except in accordance with plans and specifications previously submitted to the Port Director of Lessor and approved in writing by him. 40. GENDER/SINGULAR/PLURAL: The neuter gender includes the feminine and masculine, the masculine includes the feminine and neuter, and the feminine includes the masculine and neuter, and each includes corporation, partnership, or other legal entity when the context so requires. The singular number includes the plural whenever the context so requires. 41. EQUAL EMPLOYMENT OPPORTUNITY: Lessee shall not discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin and shall take affirmative action to assure applicants are employed and that employees are treated during employment without regard to race, color, religion, sex or national origin. Except during the time Lessee is exempt pursuant to written policy of Lessor, Lessee shall submit to Lessor for review and approval a written affirmative action program to attain improved employment for racial and ethnic minorities and women and during the term of this Lease shall further make available employment records to Lessor upon request. Lessee shall certify in writing to Lessor that Lessee is in compliance and throughout the term of this Lease will comply with Title VII of the Civil Rights Act of 1964, as amended, the California Fair Employment Practices Act, and any other applicable Federal, State, and local law, regulation and policy (including without limitation those adopted by Lessor) relating to equal employment opportunity and affirmative action programs, including any such law, regulation, and policy hereinafter enacted. Compliance and performance by Lessee of the equal employment opportunity and affirmative action program provision of this Lease is an express condition hereof and any failure by Lessee to so comply and perform shall be a default as provided in said Lease and Lessor may exercise any right as provided therein and as otherwise provided by law. 42. ATTORNEY'S FEES: In the event any suit is commenced to enforce, protect or establish any right or remedy of any of the terms and conditions hereof, including without limitation a summary action commenced by Lessor under the laws of the State of California relating to the unlawful detention of property, the 22 26 prevailing party shall be entitled to have and recover from the losing party reasonable attorney's fees and costs of suit. 43. HAZARDOUS MATERIALS: Lessee shall comply with all laws regarding hazardous substances, materials or wastes, or petroleum products or fraction thereof (herein collectively referred to as "Contaminants") relative to occupancy and use of the leased premises. Lessee shall be liable and responsible for any Contaminants located on the leased premises and arising out of the occupancy or use of the leased premises by Lessee. Such liability and responsibility shall include, but not be limited to, (i) removal from the leased premises any such Contaminants; (ii) removal from any area outside the premises, including but not limited to surface and ground water, any such Contaminants generated as part of the operations on the leased premises; (iii) damages to persons, property and the leased premises; (iv) all claims resulting from those damages; (v) fines imposed by any governmental agency, and (vi) any other liability as provided by law. Lessee shall defend, indemnify and hold harmless the Lessor, its officials, officers, agents, and employees from any and all such responsibilities, damages, claims, fines, liabilities, including without limitation any costs, expenses and attorney's fees therefor. All storage tanks storing Contaminants, including hydrocarbons, located on the leased premises or hereinafter placed on the leased premises by any party, shall be monitored by Lessee. Lessee shall maintain appropriate records, implement reporting procedures, and properly remove the storage tanks as required under any federal, state, or local laws. If Lessee has in the past or continues to use, dispose, generate, or store Contaminants on the leased premises, Lessor, or its designated representatives, at Lessor's sole discretion, may at any time during the term of this Lease, enter upon the premises and make any inspections, tests or measurements Lessor deems necessary in order to determine if a release of Contaminants has occurred. Lessor shall give Lessee a minimum of 24 hours' notice in writing prior to conducting any inspections or tests, unless, in Lessor' s sole judgment, circumstances require otherwise, and such tests shall be conducted in a manner so as to attempt to minimize any inconvenience and disruption to Lessee's operations. If such tests indicate a release of Contaminants, then Lessor, at Lessor's sole discretion, may require Lessee, at Lessee's sole expense, and at any time during the term of this Lease, to have tests for such Contaminants conducted by a qualified party or parties on the leased premises. If Lessor has reason to believe that any Contaminants that originated from a release on the leased premises have contaminated any area outside the premises, including but not limited to surface and ground water, then Lessor, at Lessor's sole discretion, may require Lessee, at Lessee's sole expense, and at any time during the term of this Lease, to have tests for such Contaminants conducted by a qualified party or parties on said area outside the leased premises. 23 27 The tests conducted by Lessee's qualified party shall include, but not be limited to, applicable comprehensive soil, emission, or ground water sampling test or other procedures to determine any actual or possible contamination. Lessee shall expeditiously, but no longer than 30 days after Lessor's request for such tests, furnish to Lessor the results of said tests, sampling plans, and analysis thereof identifying any Contaminants which exceed then applicable levels permitted by federal, state, or local laws. The Lessee shall report such contamination to the Lessor within 72 hours and shall diligently proceed to identify the extent of contamination, how it will be remediated, when it will be remediated, by whom, and the cost of such remediation. 24 28 44. ABSTRACT OF LEASE: This is the final paragraph and abstract of the Lease dated October 22, 1991, between SAN DIEGO UNIFIED PORT DISTRICT, Lessor, and NATIONAL STEEL & SHIPBUILDING COMPANY, Lessee, concerning the premises described in Exhibits "A" and "B," attached hereto and by this reference made a part hereof. For good and adequate consideration, Lessor leases the premises to Lessee, and Lessee hires them from Lessor, for the term and on the provisions contained in the Lease, including without limitation provisions prohibiting assignment, subleasing, and encumbering said Lease without the express written consent of Lessor in each instance, all as more specifically set forth in said Lease, which said Lease is incorporated in this abstract by this reference. The term is fifty (50) years, beginning January 1, 1991, and ending December 31, 2040. This abstract is not a complete summary of the Lease. Provisions in the abstract shall not be used in interpreting the Lease provisions. In the event of conflict between the abstract and other parts of the Lease, the other parts shall control. Execution hereof constitutes execution of the Lease itself. APPROVED as to form SAN DIEGO UNIFIED PORT DISTRICT and legality October 23, 1991 By [sig] ----------------------------- ASSISTANT Port Director Port Attorney NATIONAL STEEL & SHIPBUILDING COMPANY /s/ JOSEPH D. PATELLO By /s/ R. H. VORTMANN - ---------------------- ---------------------------- JOSEPH D. PATELLO R. H. Vortmann Port Attorney President 25 29 (FOR USE BY SAN DIEGO UNIFIED PORT DISTRICT) STATE OF CALIFORNIA) ss. COUNTY OF SAN DIEGO) On 24 October 1991 before me, Loretta Cory, personally appeared Donald E. Hillman, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/ executed the same in his/ authorized capacity, and that by his/ signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature /s/ LORETTA CORY OFFICIAL SEAL ----------------------- LORETTA CORY [SEAL] Notary Public-California SAN DIEGO COUNTY My Commission Expires August 26, 1994 26 30 PARCEL NO. 1 Commencing at Harbor Line Station No. 472 on the U.S. Bulkhead Line, as said U.S. Bulkhead Line is now established for the Bay of San Diego, and delineated on map entitled "Harbor Lines, San Diego Bay, California, File No. (D.O. Series) 426," approved by the Secretary of the Army, April 29, 1963 and filed in the Office of the District Engineer, Los Angeles, California, said point also being on the westerly boundary of an area commonly known as the United States Naval Station, as said property is described in the grants to the United States of America by the City of San Diego by deeds dated December 1, 1930, recorded March 21, 1932, in Book 100, page 177 of Official Records, and dated July 17, 1940, recorded April 30, 1943, in Book 1499, page 12 O.R., and dated May 18, 1949, recorded October 7, 1949, in Book 3344, page 309 O.R., and filed in the Office of the County Recorder, San Diego County, California; thence along said U.S. Naval Station boundary south 89 degrees 29' 03" east a distance of 87.30 feet; thence north 0 degrees 30' 57" east a distance of 228.56 feet to the TRUE POINT OF BEGINNING of Parcel No. 1; thence leaving said U.S. Naval Station boundary north 89 degrees 29' 03" west a distance of 7.24 feet; thence south 60 degrees 37' 30" west a distance of 23.74 feet; thence north 85 degrees 32' 59" west a distance of 12.80 feet; thence north 56 degrees 35' 56" west a distance of 25.90 feet; thence north 89 degrees 30' 26" west a distance of 300.07 feet; thence south 71 degrees 16' 35" west a distance of 1317.71 feet to a point of intersection with the U.S. Pierhead Line, as said U.S. Pierhead Line is now established and delineated on the above described Harbor Lines Map; thence along said U.S. Pierhead Line north 56 degrees 20' 08" west a distance of 269.75 feet to a point hereinafter known and designated as Point "A"; thence leaving said U.S. Pierhead Line north 71 degrees 15' 38" east a distance of 209.49 feet; thence north 18 degrees 25' 23" west a distance of 29.34 feet; thence north 76 degrees 04' 11" east a distance of 409.07 feet; thence north 14 degrees 04' 19" west a distance of 176.96 feet; thence south 75 degrees 59' 06" west a distance of 50.70 feet; thence north 11 degrees 54' 59" west a distance of 33.16 feet; thence north 66 degrees 39' 00" east a distance of 357.83 feet; thence north 23 degrees 25' 07" west a distance of 114.70 feet; thence south 66 degrees 40' 40" west a distance of 347.70 feet; thence north 21 degrees 32' 06" west a distance of 35.09 feet; thence north 66 degrees 50' 04" east a distance of 39.30 feet; thence north 23 degrees 17' 35" west a distance of 117.05 feet; thence south 66 degrees 35' 50" west a distance of 135.67 feet; thence north 23 degrees 26' 05" west a distance of 34.97 feet; thence north 66 degrees 27' 25" east a distance of 40.85 feet; thence north 23 degrees 18' 37" west a distance of 117.31 feet; thence south 66 degrees 34' 17" west a distance of 38.40 feet; thence north 52 degrees 41' 02" west a distance of 99.58 feet; thence north 36 degrees 38' 30" east a distance of 280.78 feet; thence north 58 degrees 06' 09" west a distance of 235.80 feet; thence north 23 degrees 07' 04" east a distance of 44.65 feet; thence north 65 degrees 55' 29" west a distance of 216.37 feet; thence south 23 degrees 42' 13" west a Sheet 1 of 5 REVISED: - -------------------------------------------------------------------------------------------------------------- DRAWN RWJ:kh SAN DIEGO UNIFIED PORT DISTRICT DATE 10 June 1983 -------------------------- Tideland Lease ------------------------- CHECKED BOURKE Within Corporate Limits of San Diego SCALE ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED [sig] REF. ----------------------- --------------------------- - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
EXHIBIT "A" 31 distance of 44.70 feet; thence south 70 degrees 48' 21" west a distance of 44.40 feet; thence south 20 degrees 32' 27" west a distance of 62.22 feet; thence north 84 degrees 44' 54" west a distance of 122.40 feet; thence south 71 degrees 25' 54" west a distance of 471.27 feet to the beginning of a tangent curve concave to the north having a radius of 100.00 feet; thence westerly along the arc of said curve through a central angle of 52 degrees 13' 58" an arc distance of 91.16 feet to a point which bears south 33 degrees 39' 52" west from the center of said 100.00 foot radius curve; thence north 56 degrees 20' 08" west a distance of 257.01 feet; thence north 33 degrees 39' 52" east a distance of 325.00 feet to the beginning of a tangent curve concave to the west having a radius of 48.00 feet; thence northerly along the arc of said curve through a central angel of 35 degrees 20' 04" an arc distance of 29.60 feet to a point of reverse curve the common radial of which bears north 88 degrees 19' 48" east from the center of said 48.00 foot radius curve; thence northerly along the arc of a 28.00 foot radius curve concave to the east through a central angle of 35 degrees 20' 04" an arc distance of 17.27 feet to a point which bears north 56 degrees 20' 08" west from the center of said 28.00 foot radius curve; thence north 33 degrees 39' 52" east a distance of 116.65 feet to the beginning of a tangent curve concave to the west having a radius of 48.00 feet; thence northerly along the arc of said curve through a central angle of 90 degrees 00' 00" an arc distance of 75.40 feet to a point which bears north 33 degrees 39' 52" east from the center of said 48.00 foot radius curve; thence north 56 degrees 20' 08" west a distance of 111.06 feet to the beginning of a tangent curve concave to the east having a radius of 28.00 feet; thence northerly along the arc of said curve through a central angle of 91 degrees 17' 20" an arc distance of 44.61 feet to a point which bears north 55 degrees 02' 48" west from the center of said 28.00 foot radius curve; thence north 34 degrees 57' 12" east a distance of 173.29 feet to a point of intersection with the southerly right of way line of Belt Street; thence north 49 degrees 42' 27" east a distance of 78.69 feet, said point being on the southerly line of a 100.00 foot wide Atchison, Topeka & Santa Fe Railway Company railroad right of way, said point also being a point on a curve concave to the north having a radius of 1960.08 feet the center of which bears north 22 degrees 00' 00" east; thence easterly along said 1960.08 foot radius curve and southerly railroad right of way line through a central angle of 12 degrees 54' 40" an arc distance of 441.69 feet to a point which bears south 9 degrees 05' 20" west from the center of said 1960.08 foot radius curve; thence south 80 degrees 54' 40" east a distance of 875.13 feet to a point of intersection with the southerly right of way line of Harbor Drive, as said tideland portions of Harbor Drive are now established as and for a public street by the Documents of Conveyance on file in the Office of the District Clerk as Document No. 71; thence leaving said southerly railroad right of way line and along the southerly right of way line of Harbor Drive south 66 degrees 47' 43" east a distance of 63.75 feet; thence south 65 degrees 37' 25" east a distance of 375.85 feet; thence south 80 degrees 56' 13" east a distance of 243.49 feet to the beginning of a tangent Sheet 2 of 5 REVISED: - -------------------------------------------------------------------------------------------------------------- DRAWN RWJ:kh SAN DIEGO UNIFIED PORT DISTRICT DATE 10 June 1983 -------------------------- Tideland Lease ------------------------- CHECKED BOURKE Within Corporate Limits of San Diego SCALE ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED [sig] REF. ----------------------- --------------------------- - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
32 curve concave to the southwest having a radius of 1734.75 feet; thence leaving said southerly right of way line of Harbor Drive southeasterly along the arc of said 1734.75 foot radius curve through a central angle of 15 degrees 10' 19" an arc distance of 459.36 feet to a point of compound curve the common radial of which bears north 24 degrees 14' 06" east; thence southeasterly along the arc of a curve concave to the southwest having a radius of 82.35 feet, through a central angle of 49 degrees 40' 01" an arc distance of 71.39 feet to a point of cusp, said point bears north 73 degrees 54' 07" east from the center of said 82.35 foot radius curve; thence north 0 degrees 02' 10" west a distance of 62.77 feet to a point on a curve concave to the southwest having a radius of 2600.00 feet the center of which bears south 20 degrees 05' 06" west, said point also lying on the said southerly right of way line of Harbor Drive; thence southeasterly along said 2600.00 foot radius curve and along the southerly right of way line of Harbor Drive through a central angle of 17 degrees 57' 44" an arc distance of 815.10 feet; thence south 51 degrees 57' 10" east a distance of 112.54 feet; thence south 51 degrees 23' 57" east a distance of 30.28 feet to a point of intersection with the Ordinary High Water Mark for the Bay of San Diego, as said Ordinary High Water Mark is shown on map entitled "Map of the Lands Transferred to the San Diego Unified Port District Pursuant to Chapter 67, Statutes of 1962, 1st E.S., Vicinity of San Diego Bay, San Diego County, California", filed in the Office of the San Diego County Recorder May 28, 1976, as Miscellaneous Map No. 564, File No. 76-164686; thence leaving said southerly right of way line of Harbor Drive and along said Ordinary High Water Mark south 50 degrees 56' 42" east a distance of 72.56 feet; thence south 52 degrees 36' 48" east a distance of 27.15 feet to a point of intersection with the said southerly right of way line of Harbor Drive; thence leaving said Ordinary High Water Mark and along said southerly right of way line of Harbor Drive south 51 degrees 23' 57" east a distance of 67.18 feet; thence south 50 degrees 11' 52" east a distance of 381.94 feet; thence leaving said southerly right of way line of Harbor Drive south 24 degrees 21' 56" west a distance of 61.53 feet to a point of intersection with a line that is parallel to and distant 8.60 feet northerly from the boundary of the above described U.S. Naval Station; thence along said 8.60 foot parallel line north 89 degrees 29' 03" west a distance of 1103.19 feet to point of intersection with the northerly prolongation of the above described westerly boundary of the U.S. Naval Station; thence leaving said 8.60 foot parallel line and along the said northerly prolongation and the westerly boundary of the U.S. Naval Station south 0 degrees 30' 57" west a distance of 210.54 feet to the TRUE POINT OF BEGINNING of Parcel No. 1, containing 3,446,322 square feet or 79.12 acres of tideland area. Sheet 3 of 5 REVISED: - -------------------------------------------------------------------------------------------------------------- DRAWN RWJ:kh SAN DIEGO UNIFIED PORT DISTRICT DATE 10 June 1983 -------------------------- Tideland Lease ------------------------- CHECKED BOURKE Within Corporate Limits of San Diego SCALE ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED [sig] REF. ----------------------- --------------------------- - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
33 PARCEL NO. 2 Beginning at the above described Point "A", said Point "A" lying on the above described U.S. Pierhead Line north 56 degrees 20' 08" west and distant 1288.48 feet from Harbor Line Station No. 479, said Point "A" also being the TRUE POINT OF BEGINNING of Parcel No. 2; thence north 56 degrees 20' 08" west along said U.S. Pierhead Line a distance of 200.00 feet to a point hereinafter known and designated as Point "B"; thence leaving said U.S. Pierhead Line north 71 degrees 15' 38" east a distance of 441.73 feet; thence north 56 degrees 20' 08" west a distance of 500.00 feet; thence south 71 degrees 15' 38" west a distance of 441.73 feet to a point of intersection with said U.S. Pierhead Line; thence along said U.S. Pierhead Line north 56 degrees 20' 08" west a distance of 756.65 feet to a point of intersection with the easterly property line of an area now under lease to National Pump & Injector Sales & Services, Inc.; thence leaving said U.S. Pierhead Line and along said easterly property line north 33 degrees 39' 52" east a distance of 427.42 feet to a point of intersection with the above described Parcel No. 1; thence leaving said property line of National Pump & Injector leasehold along said Parcel No. 1 south 56 degrees 20' 08" east a distance of 229.51 feet to the beginning of a tangent curve concave to the north having a radius of 100.00 feet; thence easterly along the arc of said curve through a central angle of 52 degrees 13' 58" an arc distance of 91.16 feet; thence north 71 degrees 25' 54" east a distance of 471.27 feet; thence south 84 degrees 44' 54" east a distance of 122.40 feet; thence north 20 degrees 32' 27" east a distance of 62.22 feet; thence north 70 degrees 48' 21" east a distance of 44.40 feet; thence north 23 degrees 42' 13" east a distance of 44.70 feet; thence south 65 degrees 55' 29" east a distance of 216.37 feet; thence south 23 degrees 07' 04" west a distance of 44.65 feet; thence south 58 degrees 06' 09" east a distance of 235.80 feet; thence south 36 degrees 38' 30" west a distance of 280.78 feet; thence south 52 degrees 41' 02" east a distance of 99.58 feet; thence north 66 degrees 34' 17" east a distance of 38.40 feet; thence south 23 degrees 13' 37" east a distance of 117.31 feet; thence south 66 degrees 27' 25" west a distance of 40.85 feet; thence south 23 degrees 26' 05" east a distance of 34.97 feet; thence north 66 degrees 35' 50" east a distance of 135.67 feet; thence south 23 degrees 17' 35" east a distance of 117.05 feet; thence south 66 degrees 50' 04" west a distance of 39.30 feet; thence south 21 degrees 32' 06" east a distance of 35.09 feet; thence north 66 degrees 40' 40" east a distance of 347.70 feet; thence south 23 degrees 25' 07" east a distance of 117.40 feet; thence south 66 degrees 39' 00" west a distance of 357.83 feet; thence south 11 degrees 54' 59" east a distance of 33.16 feet; thence north 75 degrees 59' 06" east a distance of 50.70 feet; thence south 14 degrees 04' 19" east a distance of 176.96 feet; thence south 76 degrees 04' 11" west a distance of 409.07 feet; thence south 18 degrees 25' 23" east a distance of 29.34 feet; thence south 71 degrees 15' 38" west a distance of 209.49 feet to the TRUE POINT OF BEGINNING of Parcel No. 2, containing 1,112,046 square feet or 25.53 acres of water covered area. Sheet 4 of 5 REVISED: - -------------------------------------------------------------------------------------------------------------- DRAWN RWJ:kh SAN DIEGO UNIFIED PORT DISTRICT DATE 10 June 1983 -------------------------- Tideland Lease ------------------------- CHECKED BOURKE Within Corporate Limits of San Diego SCALE ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED [sig] REF. ----------------------- --------------------------- - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
34 PARCEL NO. 3 Beginning at the True Point of Beginning of the above described Parcel No. 1, said point also being the TRUE POINT OF BEGINNING of Parcel No. 3 and lying on the above described westerly boundary of the U.S. Naval Station; thence along said U.S. Naval Station boundary south 0 degrees 30' 57" west a distance of 228.56 feet; thence north 89 degrees 29' 03" west a distance of 87.80 feet to Harbor Line Station No. 472 on the above described U.S. Bulkhead Line; thence continuing along said U.S. Naval Station boundary south 41 degrees 44' 47" west a distance of 1010.16 feet to Harbor Line Station No. 479 on the above described U.S. Pierhead Line; thence leaving said U.S. Naval Station boundary and along said U.S. Pierhead Line north 56 degrees 20' 08" west a distance of 1018.74 feet to a point of intersection with the most southerly line of the above described Parcel No. 1; thence leaving said U.S. Pierhead Line and along said southerly line of said Parcel No. 1 north 71 degrees 16' 35" east a distance of 1317.71 feet; thence south 89 degrees 30' 26" east a distance of 300.07 feet; thence south 56 degrees 35' 56" east a distance of 25.90 feet; thence south 85 degrees 32' 59" east a distance of 12.80 feet; thence north 60 degrees 37' 30" east a distance of 23.74 feet; thence south 89 degrees 29' 03" east a distance of 7.24 feet to the TRUE POINT OF BEGINNING of Parcel No. 3, containing 764,703 square feet or 17.56 acres of water covered area. PARCEL NO. 4 Beginning at Point "B" as described in the above Parcel No. 2, said Point "B" lying on the above described U.S. Pierhead Line north 56 degrees 20' 08" west and distant 1488.48 feet from Harbor Line Station No. 479, said Point "B" also being the TRUE POINT OF BEGINNING of Parcel No. 4; thence along the above described U.S. Pierhead Line north 56 degrees 20' 08" west a distance of 500.00 feet to a point of intersection with said Parcel No. 2; thence leaving said U.S. Pierhead Line and along said Parcel No. 2 north 71 degrees 15' 38" east a distance of 441.73 feet; thence south 56 degrees 20' 08" east a distance of 500.00 feet; thence south 71 degrees 15' 38" west a distance of 441.73 feet to the TRUE POINT OF BEGINNING of Parcel No. 4, containing 175,000 square feet or 4.02 acres of water covered area. The above described areas are those delineated on Drawing No. 2516-B, Sheets 1, 2, and 3, dated 10 June 1983, as revised, and made a part of this agreement. Sheet 5 of 5 REVISED: - -------------------------------------------------------------------------------------------------------------- DRAWN RWJ:kh SAN DIEGO UNIFIED PORT DISTRICT DATE 10 June 1983 -------------------------- Tideland Lease ------------------------- CHECKED BOURKE Within Corporate Limits of San Diego SCALE ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED [sig] REF. ----------------------- --------------------------- - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
35 [CHART] REVISED: FROM 1921-B, 10 JUNE 1983, BY RJ; APPROVED BY CHIEF ENGINEERS' [sig] - -------------------------------------------------------------------------------------------------------------- DRAWN ANDRECHT SAN DIEGO UNIFIED PORT DISTRICT DATE 31 OCT. 1977 -------------------------- Tideland Lease ------------------------- CHECKED P.D.B. & B.B. Within Corporate Limits of San Diego SCALE 1" = 300'+ ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED Stefanson REF. 1165-B; 1592-B; 1600-B; ----------------------- --------------------------- 1506-B; FB184, 305,325; 2E-21.22 - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- SHT. 1 OF 3 SHTS. CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
36 [CHART] REVISED: FROM 1921-B, 10 JUNE 1983, BY RJ; APPROVED BY CHIEF ENGINEERS' [sig] - -------------------------------------------------------------------------------------------------------------- DRAWN ANDRECHT SAN DIEGO UNIFIED PORT DISTRICT DATE 31 OCT. 1977 -------------------------- Tideland Lease ------------------------- CHECKED P.D.B. & B.B. Within Corporate Limits of San Diego SCALE 1" = 300'+ ------------------------ NATIONAL STEEL AND SHIPBUILDING COMPANY -------------------------- REVIEWED Stefanson REF. 1165-B; 1592-B; 1600-B; ----------------------- --------------------------- 1506-B; FB184, 305,325; 2E-21.22 - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- SHT. 2 OF 3 SHTS. CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
37 [CHART] REVISED: - -------------------------------------------------------------------------------------------------------------- DRAWN R. JOHNSON SAN DIEGO UNIFIED PORT DISTRICT DATE 10 JUNE 1983 -------------------------- Tideland Lease ------------------------- CHECKED BOURKE Within Corporate Limits of San Diego SCALE 1" = 100' ------------------------ NATIONAL STEEL AND SHIPBUILDING -------------------------- REVIEWED [sig] COMPANY REF. 1921-B, 2E - 21 ----------------------- --------------------------- - ------------------------------- -------------------------------- APPROVED DRAWING NO. [sig] 2516-B - ------------------------------- SHT. 3 OF 3 SHTS CHIEF ENGINEER - --------------------------------------------------------------------------------------------------------------
38 EXAMPLES OF REAL PROPERTY IMPROVEMENTS 1. New buildings or permanent structures, or alterations or additions to existing buildings or permanent structures. 2. Fill, wharfs, or bridges over existing water area, or dredging of existing land area. 3. Piers, docks, or inclined building ways, or improvements or upgrades of such facilities to facilitate berthing of ships, such as permanent fenders, mooring bitts, dredging (in excess of maintenance dredging), structural upgrades, browing and boarding tower systems, and utility facilities, (such as fresh water and salt water, steam, air, gas, electric power, and sewage connections). 4. New graving dock(s) or improvements to existing graving docks; which would include items similar to those listed in 3, above, plus improvements to pumping system, periodic major overhaul of the caisson and major preservation systems for graving dock walls. 5. Improvements and upgrades of facilities on piers to facilitate connections from and operation of floating dry dock. 6. Improvements and upgrades of permanent utility systems (such as electrical distribution, gas distribution, compressed air systems, water, fire mains, and sewage systems). 7. Platens (a structure which is a special work station built on engineered, level reinforced concrete foundations to facilitate the weld-assembly of major ship structural assemblies) with various special outfitting items such as pin jigging turning jigs, and straight ribs. 8. Roads, paving, curbs, crane rails and foundations, fixed conveyor systems, and other feeder systems for transportation of materials. 9. Ground cover as ordered by Lessor. This list is not exclusive or exhaustive of those improvements which qualify for credit under Paragraph 4(a) of this Lease, but is for example only. Items listed are not approved for construction. Any proposed construction must be submitted as required by lease provisions. EXHIBIT "C" EX-10.38A 4 AMENDMENT OF LEASE AGREEMENT 1 EXHIBIT 10.38A SAN DIEGO UNIFIED PORT DISTRICT ORDINANCE 1707 AN ORDINANCE AMENDING LEASE AGREEMENT BETWEEN THE SAN DIEGO UNIFIED PORT DISTRICT AND NATIONAL STEEL AND SHIPBUILDING COMPANY The Board of Port Commissioners of the San Diego Unified Port District does ordain as follows: Section 1. That lease agreement dated 22 October 1991 between the San Diego Unified Port District and National Steel and Shipbuilding Company, a Nevada corporation, is hereby amended in accordance with Agreement for Amendment of Lease, Amendment No. 1, on file in the office of the District Clerk as Document No. 32187. Section 2. This ordinance shall take effect on the 31st day from its publication. Presented By: DON L. NAY, Port Director By /s/ DON L. NAY --------------------------------- ASSISTANT PORT DIRECTOR Approved: JOSEPH D. PATELLO, Port Attorney /s/ JOSEPH D. PATELLO -------------------------------- sw 12/2/94 2 San Diego Unified Port District Office of the Clerk CERTIFICATION OF VOTE Passed and adopted by the Board of Port Commissioners of the San Diego Unified Port District on December 6, 1994, by the following vote:
Commissioners Yeas Nays Excused Absent Abstained Susan Lew X ---- ---- ---- ---- ---- J. Michael McDade X ---- ---- ---- ---- ---- Patricia McQuater X ---- ---- ---- ---- ---- Robert Penner X ---- ---- ---- ---- ---- Paul H. Speer X ---- ---- ---- ---- ---- Frank J. Urtasun X ---- ---- ---- ---- ---- Jess Van Deventer X ---- ---- ---- ---- ----
AUTHENTICATED BY: [SIG] --------------------------------------------- Chairman of the Board of Port Commissioners CHRISTINE M. STEIN --------------------------------------------- Clerk of the San Diego Unified Port District By: /s/ JOCELYN M. TURNER ------------------------------------------ Deputy Clerk (Seal) Resolution Number:___________ or Ordinance Number: 1707 ----------- Adopted: 12/06/94 --------------------- 3 Document No. 32187 ---------------- Filed -------------------------------- SD UNIFIED PORT DISTRICT Clerk's Office AGREEMENT FOR AMENDMENT OF LEASE AMENDMENT NO. 1 THIS AGREEMENT, made and entered into this 6th day of December, 1994, by and between the SAN DIEGO UNIFIED PORT DISTRICT, a public corporation, hereinafter called "Lessor," and NATIONAL STEEL AND SHIPBUILDING COMPANY, a Nevada corporation, hereinafter called "Lessee," WITNESSETH: WHEREAS, Lessor and Lessee, heretofore on the 22nd day of October, 1991, entered into a Lease of certain tidelands in the city of San Diego, California, which Lease is on file in the Office of the Clerk of Lessor bearing Document No. 27624; and WHEREAS, Lessor and Lessee are mutually desirous of amending said Lease; NOW THEREFORE, for valuable consideration, said Lease is hereby amended in the following respects and no others, and, except as expressly amended, all terms, covenants, and conditions of said Lease shall remain in full force and effect: A. The description of the premises contained in the preamble of said Lease is amended to read as follows: Approximately 5,498,071 square feet of tideland area located on the south side of Harbor Drive at the foot of 28th Street, in the city of San Diego, California, more particularly described and delineated on the attached five-page legal description and three-page Drawing No. 021-022, dated April 21, 1994, attached hereto as Exhibits "A" and "B" and by this reference made a part hereof. B. Said Lease also is hereby amended by deleting therefrom Paragraph 2, Subparagraphs 4(a), 4(b), and 4(d), Paragraphs 5, 9, 11, 15, 19, 25, 31, 37, 41, and 43 in their entirety and substituting in lieu thereof Paragraph 2, Subparagraphs 4(a), 4(b), and 4(d), Paragraphs 5, 9, 11, 15, 19, 25, 31, 37, 41, and 43 as follows: 2. RENTAL: Lessee agrees to pay to Lessor rent in accordance with the following schedules and procedures: (a) The term of this Lease shall be divided into a series of rental periods. The first rental period shall commence on the 1 4 commencement date of this Lease and shall end on March 31, 1991. The second rental period shall commence on April 1, 1991, and end on October 31, 1991. The third rental period shall commence on November 1, 1991, and end on September 30, 1993. Each successive rental period shall consist of one hundred twenty (120) months and shall commence at the expiration of the immediately preceding rental period. The last rental period shall be reduced in term in order to coincide with the expiration of this lease. (b) The rental for the first rental period of this Lease shall be One Hundred Eighty-Two Thousand Seven Hundred Twenty-Four Dollars ($182,724) per month. The rental for the second rental period shall be Two Hundred Eight Thousand Four Hundred Eighty-Eight Dollars ($208,488) per month. The rental for the third rental period shall be One Hundred Ninety-Seven Thousand Eight Hundred Eighty Dollars ($197,880) per month. The rental for Parcel Nos. 1, 2, and 3 for the fourth rental period shall be One Hundred Forty-Six Thousand Four Hundred Forty-One Dollars ($146,441) per month, which is calculated on the basis of forty-five cents (45 cent) per square foot per year for Parcel No. 1 and eleven cents (11 cent) per square foot per year for Parcel Nos. 2 and 3. Said rental sums shall be payable in advance on or before the tenth (10th) day of each month. For the fifth and each successive rental period of this Lease and any extension thereof the rental shall be a sum agreed upon by Lessor and Lessee. During the fourth and each successive rental period, the rents shall be adjusted upward or downward after the expiration of the first sixty (60) months of each rental period (the adjustment date) according to the following computation: "The base figure for computing the adjustment is the arithmetic average of the thirty-six (36) monthly index figures for the fifth (5th) through fortieth (40th) months immediately preceding the existing rental period as shown in the Consumer Price Index for All Urban Consumers for Los Angeles/Anaheim/Riverside, CA/All Items based on the period 1982-84 = 100 as published by the United States Department of Labor's Bureau of Labor Statistics. The index figure for the adjustment date is the arithmetic average of the thirty-six (36) monthly index figures of said Consumer Price Index for All Urban Consumers for the fifth (5th) through fortieth (40th) months immediately preceding the adjustment date. "The index for the adjustment date shall be computed as a percentage of the base figure. For example, assuming the base figure is 110 and the index figure for the adjustment date is 121, the percentage to be applied is 121/110 = 1.10 = 110%. "That percentage of the base figure shall be applied to the initial rent in effect at the beginning of the then existing rental period and will continue for the remaining sixty (60) months of the rental period. 2 5 "In the event the Consumer Price Index for All Urban Consumers for Los Angeles/Anaheim/Riverside, CA/All Items is no longer published, the index for the adjustment date shall be the one reported in the U. S. Department of Labor's comprehensive official index most nearly answering the foregoing description of the index. If an index is calculated from a base different from the base period 1982-84 = 100, the base figure used for calculating the adjustment percentage shall first be converted under a formula supplied by the Bureau. "If the above described Department of Labor indices are no longer published, another index generally recognized as authoritative shall be substituted by agreement of the parties. If they are unable to agree within sixty (60) days after demand by either party, a substitute index will be selected by the Chief Officer of the San Francisco Regional Office of the Bureau of Labor Statistics or its successor. "Notwithstanding the publication dates of the index, the effective date of the rent adjustment is at the expiration of the first sixty (60) months of each rental period. Further, notwithstanding anything to the contrary contained here in this Paragraph 2(b), the rent adjustment shall not exceed seven (7) percent per annum or thirty-five percent (35%) per adjustment, nor shall the rental rate(s) resulting from the rent adjustment exceed the applicable rental rate(s) most recently adopted by the Board of Port Commissioners at the time of such rent adjustment. Until said rent adjustment can be reasonably determined by index publication, Lessee shall continue to make rental payments pursuant to this Lease at the same rent in effect at the then existing rental period. Because of this provision, overpayment of rents shall be credited to the Lessee's rental account and underpayments of rent shall be immediately paid to the Lessor." (c) In the event the parties cannot agree to the rent for a rental period, the controversy as to rent for said period shall be determined by three arbitrators. After notice by either party to the other requesting arbitration, one arbitrator shall be appointed by each party. Notice of the appointment shall be given by each party to the other when made. The two arbitrators shall immediately choose a third arbitrator to act with them. If they fail to select a third arbitrator, on application by either party, the third arbitrator shall be promptly appointed by the then presiding judge of the Superior Court of the state of California, county of San Diego, acting in his individual capacity. The party making the application shall give the other party notice of his application. All of the arbitrators shall be qualified real estate appraisers. Each party shall bear the expense of its own appointed arbitrator and shall bear other expenses pursuant to Section 1284.2 of the Code of Civil Procedure of California. Hearings shall be held in the city of San Diego, California. The award shall be the decision of not less than two of the arbitrators. Said award shall be the rent 3 6 which Lessor would derive from Lessor's property if it was vacant land, without any improvements thereon, and made available on the open market for new leasing purposes at the commencement of the rental period under arbitration. For the purpose of this arbitration procedure, the arbitrators shall assume that the Lessor has a fee simple absolute estate unburdened by any existing Lease. In determining what rent Lessor could derive from said property if it were made available on the open market for new leasing purposes, the arbitrators shall consider the benefits and burdens of all the provisions of this Lease to determine whether or not this Lease is more or less restrictive than private sector or other governmental leases; provided, however, no diminution in value shall be taken as a result of any existing Contaminants or improvements, or lack of improvements, on the subject property, and the property shall be considered as if it were available to be leased for maritime-related industrial uses. Said uses shall not be confined to those permitted Lessee herein nor to Lessee's actual use of the leased premises. In determining the rates, returns, rents and/or percentage rentals for said use and/or uses, the arbitrators shall use and analyze only the market data that is found in the open marketplace, such as is demanded and received by other Lessors for the same or similar uses as those referenced above. In all cases, the award shall be based upon recognized real estate appraisal principles and methods. The award determined by the arbitrators shall be effective and retroactive to the first day of the rental period under arbitration. The award shall be in writing in the form of a report that is in accordance with the powers of the arbitrators herein, supported by facts and analysis and in accordance with law. The arbitrators shall make copies of their report available to any ethical practice committee of any recognized professional real estate organization. The arbitration shall be conducted under and subject to Sections 1280 through 1294.2 of the Code of Civil Procedure of California. (d) In addition to the rentals provided in Paragraphs 2(b) and (c), Lessee shall pay the sum of Two Hundred Dollars ($200) per month as rent for the use of the Lessor-owned building as described in Paragraph 6. Said sum shall not be subject to adjustment nor shall it be considered in establishing the rental amounts under this Lease. (e) Notwithstanding Paragraph 2 of this Lease, no rent shall be charged to Lessee during the term of this Lease or any extension thereof for Parcel No. 4, shown on attached Exhibits "A" and "B" unless and until such time as Lessor determines rent shall be paid for said Parcel No. 4. Said rent shall be effective thirty (30) days after delivery of a written notice to Lessee from Lessor that Lessor elects to charge rent for said Parcel No. 4. If Lessor makes the election to charge rent, the additional rent for said Parcel No. 4 shall be based upon the square foot water rent for Parcel Nos. 2 and 3 in effect at the time Lessor makes said determination and subsequent adjustments in rent for said 4 7 Parcel No. 4 shall be made concurrent with and in accordance with the provisions of Paragraphs 2(a), (b), and (c) of this Lease. (f) In the event Lessee is delinquent in rendering to Lessor an accounting of rent due or in remitting the rent due in accordance with the rental provisions of this Lease, then the rent not paid when due shall bear interest at the rate of ten percent (10%) per annum from the date due until paid; provided, however, that the Port Director of Lessor shall have the right to waive for good cause any interest payment upon written application of Lessee for any such delinquency period. (g) Rentals shall be delivered to the Treasurer of the San Diego Unified Port District at Post Office Box 488, San Diego, California 92112. The designated place of payment may be changed at any time by Lessor upon ten (10) days' written notice to Lessee. Lessee assumes all risk of loss if payments are made by mail. 4. CONSTRUCTION OF IMPROVEMENTS: (a) On or before December 31, 1993, Lessee shall commence the construction and diligently proceed to completion of real property improvements related to the permitted uses described in Paragraph 3. The improvements shall be of the nature described on the EXAMPLES OF REAL PROPERTY IMPROVEMENTS, which is marked Exhibit "C" and is attached hereto and by this reference made a part hereof. Lessee shall make an investment for the improvements to be constructed as described in this Paragraph in an amount which shall equal or exceed Sixty-Seven Million Six Hundred Fifty Thousand Dollars ($67,650,000) hereinafter referred to as "minimum investment." Such minimum investment is consideration for the term of this Lease, and is not a portion of the rental obligations contained in Paragraph 2 of this Lease, and neither such investment or improvements nor any other Lessee investment or improvement shall be considered by the parties or any arbitrator (in the event of arbitration) in determining any rent during the term of this Lease. In the event Lessee fails to invest the entire minimum investment by no later than December 31, 2015, the term of this Lease shall be reduced. The reduction in term shall be one year for every One Million Three Hundred Fifty-Three Thousand Dollars ($1,353,000), prorated monthly, that Lessee's actual investment in improvements to be constructed as described in this Paragraph is less than the minimum investment. The construction of certain improvements contemplated by this Lease may be subject to the California Environmental Quality Act and other laws which may be in effect in the future. If Lessor determines any proposed improvements are within the scope of any then applicable environmental quality act and laws, it may then be necessary for Lessor either to approve or disapprove (and thereby prohibit) the construction of such improvements in 5 8 accordance with any such act or laws and other applicable provisions of this Lease. In the event there is such a disapproval, the cost of such a proposed improvement shall not be credited toward the cost of any improvement nor shall the time for completion of any improvements be extended, waived, or suspended. (b) No construction of any significant improvement upon the leased premises shall commence without the prior approval of the Port Director of Lessor, as evidenced in writing, and all such construction shall be in accordance with all applicable laws, regulations, ordinances and codes and in accordance with plans and specifications which must be submitted to and approved by the Port Director in writing prior to the commencement of any such construction. For purposes of Paragraphs 4 and 5, the term "significant improvements" means improvements that do any of the following: (i) make a change in the silhouette or exterior appearance of the premises visible from any street adjoining the leased premises; (ii) have an estimated cost at least equal to the minimum amount that requires approval by the Board of Port Commissioners under any policies of Lessor then in effect; or (iii) diminish the value of the premises. (d) By no later than March 31 of each year, beginning with March 31, 1992, and ending with March 31, 2016, Lessee shall furnish Lessor an itemized statement of the actual construction cost of any improvements required by the terms of this paragraph, which were completed during the preceding calendar year. The statement of cost shall be sworn to and signed by Lessee or his responsible agent under penalty of perjury. 5. IMPROVEMENTS: (a) Lessee may, at its own expense, make any alterations or changes in the leased premises or cause to be built, made or installed thereon any structures, machines, appliances, utilities, signs or other improvements necessary or desirable for the use of said premises and may alter and repair any such structures, machines or other improvements; provided, however, that no significant improvements, as defined in Paragraph 4(b), or repairs meeting any of the criteria for significant improvements, shall be made, built or installed, and no major repairs thereto shall be made except in accordance with plans and specifications previously submitted to and approved in writing by the Port Director of Lessor. Notwithstanding the foregoing, Lessee shall have the right within the interior of any enclosed building structure to install and/or remove machines, equipment, appliances and trade fixtures to/from the leased premises without the prior consent of the Port Director of Lessor. Lessee further agrees that no banners, pennants, flags, eye-catching spinners or other advertising devices, nor any 6 9 temporary signs shall be permitted to be flown, installed, placed, or erected on the premises without written consent of the Port Director of Lessor. (b) Lessee shall notify Lessor prior to making applications for any development or construction permit or license from any governmental regulatory agency pertaining to the leased premises. Lessee shall provide Lessor with a copy of said application within five (5) days of making said application, along with all plans submitted as part of said application. Lessee shall provide Lessor with a copy of any permit, license or other authorization subsequently issued within ten (10) days of receipt by Lessee. 9. ASSIGNMENT - SUBLEASE: Lessee shall not assign or transfer the whole or any part of this Lease or any interest therein, nor sublease the whole or any part of the leased premises, nor contract for the management or operation of the whole or any part of the leased premises, nor permit the occupancy of any part thereof by any other person, nor permit transfer of the Lease or possession of the leased premises by merger, consolidation or dissolution, nor permit hypothecation, pledge, encumbrance or sale of a controlling interest in the voting stock in said corporation without the consent of Lessor, evidenced by resolution, first had and obtained in each instance. It is mutually agreed that the personal qualifications of the parties controlling the corporation named herein as Lessee are a part of the consideration for the granting of this Lease and said parties do hereby agree to maintain active control and supervision of the operations conducted on the leased premises. No assignment or transfer, hypothecation, pledge, encumbrance or sale, voluntary or involuntary, in whole or in part of said corporation or the Lease or any interest therein, and no sublease of the whole or any part of the leased premises, and no contract for the management or operation of the whole or any part of the leased premises, and no permission to any person to occupy the whole or any part of the leased premises, shall be valid or effective without the consent of Lessor, first had and obtained in each instance; provided, however, that nothing herein contained shall be construed to prevent the occupancy of said premises by any employee or business invitee of Lessee. In the event any consent of Lessor is given for any Lease assignment or transfer, the following shall apply in each instance: (i) the Lessor shall be paid additional rent, which may be percentage rate or rates, to equal the full fair market rent, commencing on the effective date of such proposed assignment or transfer, unless on that date the rent being paid under this Lease is equal to the full fair market rent; (ii) the Assignee hereby agrees and assumes each and every obligation under the Lease, and (iii) other conditions and qualifications determined by the Board of Port Commissioners of Lessor. Notwithstanding, items (i) and (iii) shall not apply in the event of: (a) a Lease assignment or transfer to a third party from a consented-to lender which acquired title to the Lease by foreclosure or deed in lieu of foreclosure or a new Lease pursuant to the provisions of Paragraph 10 or (b) assignment or transfer of the Lease 7 10 to a consented-to lender by deed in lieu of foreclosure, or to a consented-to lender or a third party as the successful bidder at a foreclosure sale. The rent under this Lease and any change resulting therein effective upon any Lease assignment or transfer as provided in this Paragraph shall be for the remainder of the rental period during which it occurs, and any said rent shall thereafter be subject to rental review at the commencement of subsequent and succeeding rental periods in accordance with the provisions of Paragraph 2 of this Lease. Notwithstanding the foregoing, if a change in rent is made which becomes effective upon any Lease assignment or transfer, the rent shall be subject to any adjustment applicable during the remainder of said rental period during which the Lease assignment or transfer occurred based on the change in the Consumer Price Index if such adjustment is provided for in Paragraph 2 of this Lease; provided, however, the "base figure for computing the adjustment" shall be the arithmetic average of the thirty-six (36) monthly index figures for the fifth (5th) and fortieth (40th) months immediately preceding the effective date of such proposed assignment or transfer for which the Assignee pays additional rent to Lessor to equal the full fair market rent and the "index figure for the adjustment date" shall be the arithmetic average of the thirty-six (36) monthly index figures of said Consumer Price Index for the fifth (5th) through fortieth (40th) months immediately preceding the date such adjustment is effective. In the event any consent of Lessor is given to sublease, the following shall apply in each instance: (i) the Lessor shall be paid additional rent, which may be percentage rate or rates, to equal the full fair market rent for the sublease area, commencing on the effective date of such proposed sublease and continuing for a specified period of time which shall not extend beyond the remainder of the master Lease rental period during which it occurs or until the termination of the sublease, whichever occurs first, unless on that date the rent being paid under this Lease for said area is equal to the full fair market rent, and (ii) other conditions and qualifications determined by the Board of Port Commissioners of Lessor. As long as said sublease is in effect, said rent for the sublease area shall thereafter be subject to rental review at the commencement of subsequent and succeeding master Lease rental periods, in accordance with the provisions of Paragraph 2 of this Lease. In the event the parties cannot agree to an amount that is equal to the full fair market rent described in this Paragraph, the full fair market rent shall be determined by the arbitration procedure described in Paragraph 2 of this Lease, except that the arbitration award shall be for a limited period of time commencing and ending as provided in this Paragraph and not for a "rental period" as specified in said Paragraph 2. Until said full fair market rent is determined pursuant to said Paragraph 2, the Lessee shall continue to make rental payments as required by this Lease at the same rate or rates in effect on the effective date of the Lease assignment or sublease. Because of this provision, underpayment of rent, if any, shall be 8 11 paid to Lessor within ten (10) days of the date that the full fair market rent is determined by said arbitration procedure. 11. BANKRUPTCY: In the event Lessee becomes insolvent, makes an assignment for the benefit of creditors, becomes the subject of a bankruptcy proceeding, reorganization, arrangement, insolvency, receivership, liquidation, or dissolution proceedings, or in the event of any judicial sale of Lessee's interest under this Lease, Lessor shall have the right to declare this Lease in default. The conditions of this Paragraph shall not be applicable or binding on Lessee or the beneficiary in any deed of trust, mortgage, or other security instrument on the leased premises which is of record with Lessor and has been consented to by resolution of Lessor, or to said beneficiary's successors in interest consented to by resolution of Lessor, as long as there remains any monies to be paid by Lessee to such beneficiary under the terms of such deed of trust; provided that such beneficiary or its successors in interest, continuously pay to the Lessor all rent due or coming due under the provisions of this Lease and the premises are continuously and actively used in accordance with Paragraph 14 of this Lease. 15. MAINTENANCE AND REPAIR: As part of the consideration for the leasing thereof, Lessee agrees to assume full responsibility for the operation, maintenance, including painting, and repair of the premises, throughout the term and without expense to the Lessor. Lessee will perform all maintenance, repairs and replacements necessary to maintain and preserve the premises in a good, safe, healthy and sanitary condition satisfactory to Lessor and in compliance with all applicable laws. Lessee further agrees to provide approved containers for trash and garbage and to keep premises free and clear of rubbish and litter, or any other fire hazards. Lessee waives all right to make repairs at the expense of Lessor as provided in Section 1942 of the California Civil Code and all rights provided by Section 1941 of said Code. For the purpose of keeping the premises in a good, safe, healthy and sanitary condition, Lessor shall always have the right but not the duty, to enter, view, inspect, determine the condition of and protect its interests in, the premises; provided, however, that such entry is conducted in a manner to cause the least inconvenience and disruption to Lessee's operation as practicable, and provided further that Lessor or its representatives comply with all safety and security requirements of Lessee. It is not intended that Lessee's safety and security requirements be used to bar Lessor's right of inspection, and Lessee shall assure Lessor reasonable access to the leased premises for such purpose. If inspection discloses that the premises are not in the condition described, Lessee must commence the necessary maintenance work within ten (10) days after written notice from Lessor and diligently pursue the same to completion. Further, if at any time Lessor determines that the premises are not in the condition described, Lessor may require Lessee to file and pay for a faithful performance bond, to assure prompt correction without additional notice. The amount of this bond shall be adequate, in 9 12 Lessor's opinion, to correct the unsatisfactory condition. Notwithstanding, Lessor shall not be required at any time to maintain or to make any improvements or repairs whatsoever on or for the benefit of the leased premises. The rights reserved in this section shall not create any obligations or increase any obligations for Lessor elsewhere in this Lease. 19. NONDISCRIMINATION: Lessee agrees at all times to fully comply with all laws prohibiting discrimination against any person or class of persons by reason of sex, color, race, religion, handicap or national origin. If the use provided for in this Lease allows the Lessee to offer accommodations or services to the public, such accommodations or services shall be offered by the Lessee to the public on fair and reasonable terms. In complying with all such laws, including, without limitation, the Americans With Disabilities Act of 1990, Lessee shall be solely responsible for such compliance and required programs and there shall be no allocation of any such responsibility between Lessor and Lessee. 25. INSURANCE: Lessee shall maintain insurance acceptable to Lessor in full force and effect throughout the term of this Lease. The policies for said insurance shall, as a minimum, provide the following: (a) Forms of Coverage (1) "OCCURRENCE" form Commercial General Liability covering premises, operations and contractual liability assumed by Lessee in this Lease in the amount of not less than Two Million Dollars ($2,000,000) combined single limit per occurrence for bodily injury, personal injury and property damage. Either the general aggregate limit shall apply separately to this location or the general aggregate limit shall be twice the required occurrence limit. If alcoholic beverages are served or sold on the leased premises, Liquor Liability coverage in the amount of not less than One Million Dollars ($1,000,000) shall be obtained. (2) Fire and Extended Coverage, including water damage and debris cleanup provisions in an amount not less than ninety percent (90%) of full replacement value of all improvements located within the leased premises. The fire and extended coverage policies shall be endorsed to state that any insurance proceeds in excess of Twenty-Five Thousand Dollars ($25,000) resulting from a loss under said policies shall be payable jointly to Lessor and Lessee in order that said proceeds will be reinvested in rebuilding and/or repairing the damaged portions of the leased premises; provided, however, that within the period during which there is in existence a mortgage or deed of trust upon the leasehold given by Lessee with the prior consent of Lessor, then and for that period all fire and extended coverage policies shall be made payable jointly to the mortgagee or beneficiary and Lessee, and any proceeds collected therefrom 10 13 shall be held by said mortgagee or beneficiary for the following purposes: (i) As a trust fund to pay for the reconstruction, repair, or replacement of the damaged or destroyed improvements in kind and scope in progress payments as the work is performed with any excess remaining after completion of said work to be retained by said mortgagee or beneficiary and applied to reduction of the debt secured by such mortgage or deed of trust and with any excess remaining after full payment of said debt to be paid over to Lessee; or (ii) In the event that this Lease is terminated with consent of both Lessor and mortgagee or beneficiary and said improvements are not reconstructed, repaired, or replaced, the insurance proceeds shall be retained by said mortgagee or beneficiary to the extent necessary to fully discharge the debt secured by said mortgage or deed of trust and said mortgagee or beneficiary shall hold the balance thereof without liability to restore the premises to a neat and clean condition and then for Lessor and Lessee as their interests may appear. (3) Pollution Liability for Underground Storage Tanks Due to operation of underground storage tanks, Lessee is required to comply with Subpart H of 40 CFR (Code of Federal Regulations) or Title 23, Division 3, Chapter 18 of California Code of Regulations (collectively, "applicable UST law"). At the time Lessee is required to comply with any provisions of applicable UST law requiring financial assurance mechanisms, Lessee shall provide Lessor with a certified copy of its Certification of Financial Responsibility. If Lessee's program for financial responsibility includes insurance, then Lessee's policy(ies) shall name Lessor, its officers, officials and employees as additional insureds, and, all other terms of Section (b), below, shall apply. Any time Lessee changes its financial assurance mechanisms, Lessee shall provide Lessor with a certified copy of its revised Certification of Financial Responsibility. (b) General Requirements (1) All required insurance shall be in force the first day of the term of this Lease. The cost of all required insurance shall be borne by Lessee. Certificates in a form acceptable to Lessor evidencing the existence of the necessary insurance policies, and original endorsements effecting coverage required by this clause, shall be kept on file with Lessor during the entire term of this Lease. The certificates and endorsements for each insurance policy are to be signed by a person authorized by that insurer to bind coverage on its behalf. The 11 14 Lessor reserves the right to require complete, certified copies of all required policies at any time. (2) All liability insurance policies will name, or be endorsed to name, Lessor, its officers, officials and employees as additional insureds and protect Lessor, its officers, officials and employees against any legal costs in defending claims. All insurance policies will be endorsed to state that coverage will not be suspended, voided, cancelled, reduced in coverage or in limits except after thirty (30) days' prior written notice by certified mail, return receipt requested has been given to the Lessor. All insurance policies will be endorsed to state that Lessee's insurance is primary and not excess or contributory to any insurance issued in the name of Lessor. And, all insurance companies must be satisfactory to Lessor. (3) Any deductibles or self-insured retentions must be declared and acceptable to the Lessor. If the deductibles or self-insured retentions are unacceptable to the Lessor, the Lessee shall have the option of either: reducing or eliminating such deductibles or self-insured retentions as respects the Lessor, its officers, officials, and employees; or, procuring a bond guaranteeing payment of losses and related investigations, claim administration and defense expenses. (4) Lessor shall retain the right at any time to review the coverage, form, and amount of the insurance required hereby. If, in the opinion of Lessor, the insurance provisions in this Lease do not provide adequate protection for Lessor and/or for members of the public using the leased premises, Lessor may require Lessee to obtain insurance sufficient in coverage, form and amount to provide adequate protection. Lessor's requirements shall be reasonable but shall be designed to assure protection from and against the kind and extent of risk which exist at the time a change in insurance is required. (5) Lessor shall notify Lessee in writing of changes in the insurance requirements. With respect to changes in insurance requirements that are available from Lessee's then existing insurance carrier, Lessee shall deposit certificates evidencing acceptable insurance policies with Lessor incorporating such changes within sixty (60) days of receipt of such notice. With respect to changes in insurance requirements that are not available from Lessee's then existing insurance carrier, Lessee shall deposit certificates evidencing acceptable insurance policies with Lessor, incorporating such changes within one hundred twenty (120) days of receipt of such notice. In the event Lessee fails to deposit insurance certificates as required herein, this Lease shall be in default without further notice to Lessee, and Lessor shall be entitled to all legal remedies. (6) If Lessee fails or refuses to maintain insurance as required in this Lease, or fails to provide proof of insurance, Lessor has the right to declare this Lease in default without 12 15 further notice to Lessee and Lessor shall be entitled to exercise all legal remedies. (7) The procuring of such required policies of insurance shall not be construed to limit Lessee's liability hereunder, nor to fulfill the indemnification provisions and requirements of this Lease. Notwithstanding said policies of insurance, Lessee shall be obligated for the full and total amount of any damage, injury, or loss caused by negligence or neglect connected with this Lease or with the use or occupancy of the leased premises. (8) Lessee agrees not to use the premises in any manner, even if use is for purposes stated herein, that will result in the cancellation of any insurance Lessor may have on the premises or on adjacent premises, or that will cause cancellation of any other insurance coverage for the premises or adjoining premises. Lessee further agrees not to keep on the premises or permit to be kept, used, or sold thereon, anything prohibited by any fire or other insurance policy covering the premises. Lessee shall, at its sole expense, comply with any and all requirements, in regard to premises, of any insurance organization necessary for maintaining fire and other insurance coverage at reasonable cost. 31. WAIVER: Any waiver by either party of any breach by the other party of any one or more of the covenants, conditions, or agreements of this Lease shall not be nor be construed to be a waiver of any subsequent or other breach of the same or any other covenant, condition or agreement of this Lease, nor shall any failure on the part of either party to require or exact full and complete compliance by the other party with any of the covenants, conditions, or agreements of this Lease be construed as in any manner changing the terms hereof or preventing the enforcement in full of the provisions hereof. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 37. REMOVAL OF MATERIALS: Lessee hereby agrees that upon the expiration of this Lease or the sooner termination as herein provided, it will remove within sixty (60) days all ships, vessels, barges, hulls, debris, surplus and salvage materials from the land and water area forming a part of or adjacent to the leased premises, so as to leave the same in as good condition as when first occupied by Lessee, subject to reasonable wear and tear; provided, however, that if any said ships, vessels, barges, hulls, debris, surplus and salvage materials shall not be so removed within sixty (60) days by the Lessee, Lessor may remove, sell and destroy the same at the expense of Lessee and Lessee hereby agrees to pay to Lessor the reasonable cost of such removal, sale or destruction; or at the option of Lessor, the title to said ships, vessels, barges, hulls, 13 16 debris, surplus and salvage materials not removed shall become the property of Lessor without cost to Lessor and without any payment to Lessee. During any period of time employed by Lessee under this Paragraph to remove ships, vessels, barges, hulls, debris, surplus and salvage materials, or to test for and/or remediate Contaminants as required in this Lease, Lessee shall continue to pay the full rental to Lessor in accordance with this Lease which said rental shall be prorated daily. 41. EQUAL EMPLOYMENT OPPORTUNITY: Lessee agrees at all times to fully comply with all applicable laws prohibiting discrimination against any person or class of persons for employment because of race, color, religion, sex, handicap or national origin and, shall take affirmative action to assure applicants are employed and that employees are treated during employment without regard to race, color, religion, sex, handicap or national origin. Except during the time Lessee is exempt pursuant to written policy of Lessor, Lessee shall submit to Lessor for review and approval a written affirmative action program to attain improved employment for racial and ethnic minorities and women and during the term of this Lease shall further make available employment records to Lessor upon request. Lessee shall certify in writing to Lessor that Lessee is in compliance and throughout the term of this Lease will comply with Title VII of the Civil Rights Act of 1964, as amended, the California Fair Housing Act, and any other applicable federal, state, and local law, regulation and policy (including without limitation those adopted by Lessor) relating to equal employment opportunity and affirmative action programs, including any such law, regulation, and policy hereinafter enacted. Compliance and performance by Lessee of the equal employment opportunity and affirmative action program provision of this Lease is an express condition hereof and any failure by Lessee to so comply and perform shall be a default as provided in said Lease and Lessor may exercise any right as provided therein and as otherwise provided by law. 43. HAZARDOUS MATERIALS: Lessee shall comply with all laws regarding hazardous substances, materials or wastes, or petroleum products or fraction thereof (herein collectively referred to as "Contaminants") relative to occupancy and use of the leased premises. Lessee shall be liable and responsible for any Contaminants arising out of the occupancy or use of the leased premises by Lessee. Such liability and responsibility shall include, but not be limited to, (i) removal from the leased premises any such Contaminants; (ii) removal from any area outside the premises, including but not limited to surface and groundwater, any such Contaminants generated as part of the operations on the leased premises; (iii) damages to persons, property and the leased premises; (iv) all claims resulting from those damages; (v) fines imposed by any governmental agency, and (vi) any other liability as provided by law. Lessee shall defend, indemnify and hold harmless the Lessor, its officials, officers, agents, and 14 17 employees from any and all such responsibilities, damages, claims, fines, liabilities, including without limitation any costs, expenses and attorney's fees therefor. Lessor shall have a direct right of action against Lessee even if no third party has asserted a claim. Furthermore, Lessor shall have the right to assign said indemnity. If Lessee has in the past or continues to use, dispose, generate, or store Contaminants on the leased premises, Lessor, or its designated representatives, at Lessor's sole discretion, may at any time during the term of this Lease, enter upon the premises and make any inspections, tests or measurements Lessor deems necessary in order to determine if a release of Contaminants has occurred. Lessor shall give Lessee a minimum of twenty-four (24) hours' notice in writing prior to conducting any inspections or tests, unless, in Lessor's sole judgment, circumstances require otherwise, and such tests shall be conducted in a manner so as to attempt to minimize any inconvenience and disruption to Lessee's operations. If such tests indicate a release of Contaminants, then Lessor, at Lessor's sole discretion, may require Lessee, at Lessee's sole expense, and at any time during the term of this Lease, to have tests for such Contaminants conducted by a qualified party or parties on the leased premises. If Lessor has reason to believe that any Contaminants that originated from a release on the leased premises have contaminated any area outside the premises, including but not limited to surface and groundwater, then Lessor, at Lessor's sole discretion, may require Lessee, at Lessee's sole expense, and at any time during the term of this Lease, to have tests for such Contaminants conducted by a qualified party or parties on said area outside the leased premises. The tests conducted by Lessee's qualified party shall include, but not be limited to, applicable comprehensive soil, emission, or groundwater sampling test or other procedures to determine any actual or possible contamination. Lessee shall expeditiously, but no longer than thirty (30) days after Lessor's request for such tests, furnish to Lessor the results of said tests, sampling plans, and analysis thereof identifying any Contaminants which exceed then applicable levels permitted by federal, state, or local laws. Lessee shall report such contamination to the Lessor within seventy-two (72) hours and shall diligently proceed to identify the extent of contamination, how it will be remediated, when it will be remediated, by whom, and the cost of such remediation. 15 18 ABSTRACT OF LEASE AMENDMENT C. ABSTRACT OF LEASE AMENDMENT NO. 1: This is the final paragraph and abstract of Lease Amendment No. 1, dated DECEMBER 6th, 1994, between SAN DIEGO UNIFIED PORT DISTRICT, Lessor, and NATIONAL STEEL AND SHIPBUILDING COMPANY, Lessee, concerning the premises described in Exhibits "A" and "B", attached hereto and by this reference made a part hereof. For good and adequate consideration, Lessor leases the premises to Lessee, and Lessee hires them from Lessor, for the term and on the provisions contained in Lease dated October 22, 1991, recorded by the San Diego County Recorder's Office as No. 77-538163, and this Lease Amendment No. 1, including, without limitation, provisions prohibiting assignment, subleasing, and encumbering the leasehold without the express written consent of Lessor in each instance, all as more specifically set forth in said Lease and said Amendment, which are incorporated in this abstract by this reference. The term is fifty (50) years beginning January 1, 1991, and ending on December 31, 2040. This Lease Amendment No. 1 shall become effective as of December 1, 1994. This abstract is not a complete summary of the Lease Amendment. Provisions in the abstract shall not be used in interpreting the Lease Amendment provisions. In the event of conflict between the abstract and other parts of the Lease Amendment, the other parts shall control. Execution hereof constitutes execution of the Lease Amendment itself. APPROVED as to form SAN DIEGO UNIFIED PORT DISTRICT and legality DEC 6, 1994 By /s/ DONALD E. HILLMAN, JR - --------------------------- ---------------------------------- ASSISTANT Port Director DONALD E. HILLMAN, JR Port Attorney NATIONAL STEEL AND SHIPBUILDING COMPANY A. W. Lutter, Jr. /s/ JOSEPH C. PATELLO By /s/ A. W. Lutter, Jr. - --------------------------- ---------------------------------- JOSEPH C. PATELLO TITLE: Senior Vice President, Marketing Port Attorney and Business Affairs 16 19 (FOR USE BY SAN DIEGO UNIFIED PORT DISTRICT) STATE OF CALIFORNIA) COUNTY OF SAN DIEGO) On December 13th, 1994 before me, Timothy A. Deuel, Notary Public, personally appeared Donald E. Hillman, Jr., personally known to me to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature /s/ TIMOTHY A. DEUEL ----------------------- [SEAL] TIMOTHY A. DEUEL COMM.# 1038251 NOTARY PUBLIC - CALIFORNIA SAN DIEGO COUNTY MY COMM. EXPIRES SEP 8, 1998 17 20 PARCEL NO. 1 Commencing at Harbor Line Station No. 472 on the U.S. Bulkhead Line, as said U.S. Bulkhead Line is now established for the Bay of San Diego, and delineated on map entitled "Harbor Lines, San Diego Bay, California, File No. (D.O. Series) 426," approved by the Secretary of the Army, april 29, 1963 and filed in the Office of the District Engineer, Los Angeles, California, said point also being on the westerly boundary of an area commonly known as the United States Naval Station, as said property is described in the grants to the United States of America by the City of San Diego by deeds dated December 1 , 1930, recorded March 21, 1932, in Book 100, page 177 of Official Records, and dated July 17, 1940, recorded April 30, 1943, in Book 1499, page 12 O.R., and dated May 18, 1949, recorded October 7, 1949, in Book 3344, page 309 O.R., and filed in the Office of the County Recorder, San Diego County, California; thence along said U.S. Naval Station boundary south 89 degrees 29' 03" east a distance of 87.80 feet; thence north 0 degrees 30' 57" east a distance of 228.56 feet to the TRUE POINT OF BEGINNING of Parcel No. 1; thence leaving said U.S. Naval Station boundary north 89 degrees 29' 03" west a distance of 7.24 feet; thence south 60 degrees 37' 30" west a distance of 23.74 feet; thence north 85 degrees 32' 35" west a distance of 12.80 feet; thence north 56 degrees 35' 56" west a distance of 25.90 feet; thence north 89 degrees 30' 26" west a distance of 300.07 feet; thence south 71 degrees 16' 35" west a distance of 1317.71 feet to a point of intersection with the U.S. Pierhead Line, as said U.S. Pierhead Line is now established and delineated on the above described Harbor Lines Map; thence along said U.S. Pierhead Line north 56 degrees 20' 08" west a distance of 269.75 feet to a point hereinafter known and designated as Point "A"; thence leaving said U.S. Pierhead Line north 71 degrees 15' 38" east a distance of 209.49 feet; thence north 18 degrees 25' 23" west a distance of 29.34 feet; thence north 76 degrees 04' 11" east a distance of 409.07 feet; thence north 14 degrees 04' 19" west a distance of 176.96 feet; thence south 75 degrees 59' 06" west a distance of 50.70 feet; thence north 11 degrees 54' 59" west a distance of 33.16 feet; thence north 66 degrees 39'0 0" east a distance of 357.83 feet; thence north 23 degrees 25' 07" west a distance of 114.70 feet; thence south 66 degrees 40' 40" west a distance of 347.70 feet; thence north 21 degrees 32' 06" west a distance of 35.09 feet; thence north 66 degrees 50' 04" east a distance of 39.30 feet; thence north 23 degrees 17' 35" west a distance of 117.05 feet; thence south 66 degrees 35' 50" west a distance of 135.67 feet; thence north 23 degrees 26' 05" west a distance of 34.97 feet; thence north 66 degrees 27' 25" east a distance of 40.85 feet; thence north 23 degrees 18' 37" west a distance of 117.31 feet; thence south 66 degrees 34' 17" west a distance of 38.40 feet; thence north 52 degrees 41' 02" west a distance of 99.58 feet; thence north 36 degrees 38' 30" east a distance of 280.78 feet; thence north 58 degrees 06' 09" west a distance of 235.80 feet; thence north 23 degrees 07' 04" east a distance of 44.65 feet; thence north 65 degrees 55' 29" west a distance of 216.37 feet; thence south 23 degrees 42' 13" west a PAGE 1 OF 5 REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN BB/mn SAN DIEGO UNIFIED PORT DISTRICT DATE 21 April , 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- Within Corporate Limits of San Diego --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 4590 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- DIRECTOR OF ENGINEERING
EXHIBIT "A" 21 distance of 44.70 feet; thence south 70 degrees 48'21" west a distance of 44.40 feet; thence south 20 degrees 32'27" west a distance of 62.22 feet; thence north 84 degrees 44'54" west a distance of 122.40 feet; thence south 71 degrees 25'54" west a distance of 471.27 feet to the beginning of a tangent curve concave to the north having a radius of 100.00 feet; thence westerly along the arc of said curve through a central angle of 52 degrees 13'58" an arc distance of 91.16 feet to a point which bears south 33 degrees 39'52" west from the center of said 100.00 foot radius curve; thence north 56 degrees 20'08" west a distance of 257.01 feet; thence north 33 degrees 39'52" east a distance of 325.00 feet to the beginning of a tangent curve concave to the west having a radius of 48.00 feet; thence northerly along the arc of said curve through a central angle of 35 degrees 20'04" an arc distance of 29.60 feet to a point of reverse curve the common radial of which bears north 88 degrees 19'48" east from the center of said 48.00 foot radius curve; thence northerly along the arc of a 28.00 foot radius curve concave to the east through a central angle of 35 degrees 20'04" an arc distance of 17.27 feet to a. point which bears north 56 degrees 20'08" west from the center of said 28.00 foot radius curve; thence north 33 degrees 39'52" east a distance of 116.65 feet to the beginning of a tangent curve concave to the west having a radius of 48.00 feet; thence northerly along the arc of said curve through a central angle of 90 degrees 00'00" an arc distance of 75.40 feet to a point which bears north 33 degrees 39'52" east from the center of said 48.00 foot radius curve; thence north 56 degrees 20'08" west a distance of 111.06 feet to the beginning of a tangent curve concave to the east having a radius of 28.00 feet; thence northerly along the arc of said curve through a central angle of 91 degrees 17'20" an arc distance of 44.61 feet to a point which bears north 55 degrees 02'48" west from the center of said 28.00 foot radius curve; thence north 34 degrees 57'12" east a distance of 173.29 feet to a point of intersection with the southerly right of way line of Belt Street; thence north 49 degrees 42'27" east a distance of 78.69 feet to a point on the southerly line of a 100.0 foot wide Atchison, Topeka & Santa Fe Railway Company railroad right of way, said point also being a point on a curve concave to the north having a radius of 1960.08 feet the center of which bears north 22 degrees 00'00" east; thence easterly along said 1960.08 foot radius curve and southerly railroad right of way line through a central angle of 12 degrees 54'40" an arc distance of 441.69 feet to a point which bears south 9 degrees 05'20" west from the center of said 1960.08 foot radius curve; thence south 80 degrees 54'40" east a distance of 875.13 feet to a point of intersection with the southerly right of way line of Harbor Drive, as said tideland portions of Harbor Drive are now established as and for a public street by the Documents of Conveyance on file in the Office of the District Clerk as Document No. 71; thence leaving said southerly railroad right of way line and along the southerly right of way line of Harbor Drive south 66 degrees 47'43" east a distance of 63.75 feet; thence south 65 degrees 37'25" east a distance of 375.85 feet; thence south 80 degrees 56'13" east a distance of 243.49 feet to the PAGE 2 OF 5 REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN BB/mn SAN DIEGO UNIFIED PORT DISTRICT DATE 21 April 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- Within Corporate Limits of San Diego --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- DIRECTOR OF ENGINEERING
EXHIBIT "A" 22 beginning of a tangent curve concave to the southwest having a radius of 1734.75 feet; thence leaving said southerly right of way line of Harbor Drive southeasterly along the arc of said 1734.75 foot radius curve through a central angle of 15 degrees 10'19" an arc distance of 459.36 feet to a point of compound curve the common radial of which bears north 24 degrees 14'06" east; thence southeasterly along the arc of a curve concave to the southwest having a radius of 82.35 feet, through a central angle of 49 degrees 40'01" an arc distance of 71.39 feet to a point of cusp, said point bears north 73 degrees 54'07" east from the center of said 82.35 foot radius curve; thence north 0 degrees 02'10" west a distance of 62.77 feet to a point on a curve concave to the southwest having a radius of 2600.00 feet the center of which bears south 20 degrees 05'06" west, said point also lying on the said southerly right of way line of Harbor Drive; thence southeasterly along said 2600.00 foot radius curve and along the southerly right of way line of Harbor Drive through a central angle of 17 degrees 57'44" an arc distance of 815.10 feet; thence south 51 degrees 57'10" east a distance of 112.54 feet; thence south 51 degrees 23'57" east a distance of 30.28 feet to a point of intersection with the Ordinary High Water Mark for the Bay of San Diego, as said Ordinary High Water Mark is shown on map entitled "Map of the Lands Transferred to the San Diego Unified Port District Pursuant to Chapter 67, Statutes of 1962, 1st E.S., Vicinity of San Diego Bay, San Diego County, California", filed in the Office of the San Diego County Recorder May 28, 1976, as Miscellaneous Map No. 564, File No. 76-164686; thence leaving said southerly right of way line of Harbor Drive and along said Ordinary High Water Mark south 50 degrees 56'42" east a distance of 72.56 feet; thence south 52 degrees 36'48" east a distance of 27.15 feet to a point of intersection with the said southerly right of way line of Harbor Drive; thence leaving said Ordinary High Water Mark and along said southerly right of way line of Harbor Drive south 51 degrees 23'57" east a distance of 67.18 feet; thence south 50 degrees 11'52" east a distance of 381.94 feet; thence leaving said southerly right of way line of Harbor Drive south 24 degrees 21'56" west a distance of 61.53 feet to a point of intersection with a line that is parallel with and distant 8.60 feet northerly from the boundary of the above described U.S. Naval Station; thence along said 8.60 foot parallel line north 89 degrees 29'03" west a distance of 1103.19 feet to point of intersection with the northerly prolongation of the above described westerly boundary of the U.S. Naval Station; thence leaving said 8.60 foot parallel line and along the said northerly prolongation and the westerly boundary of the U.S. Naval Station south degrees 30'57" west a distance of 210.54 feet to the TRUE POINT OF BEGINNING of Parcel No. 1, containing 3,446,322 square feet or 79.12 acres of tideland area. PAGE 3 OF 5 REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN BB/mn SAN DIEGO UNIFIED PORT DISTRICT DATE 21 April 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- Within Corporate Limits of San Diego --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 4590 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- DIRECTOR OF ENGINEERING
EXHIBIT "A" 23 PARCEL NO. 2 Beginning at the above described Point "A", said Point "A" lying on the above described U.S. Pierhead Line north 56 degrees 20'08" west and distant 1288.48 feet from Harbor Line Station No. 479, said Point "A" also being the TRUE POINT OF BEGINNING of Parcel No. 2; thence north 56 degrees 20'08" west along said U.S. Pierhead Line a distance of 200.00 feet to a point hereinafter known and designated as Point "B"; thence leaving said U.S. Pierhead Line north 71 degrees 15'38" east a distance of 441.73 feet; thence north 56 degrees 20'08" west a distance of 500.00 feet; thence south 71 degrees 15'38" west a distance of 441.73 feet to a point of intersection with said U.S. Pierhead Line; thence along said U.S. Pierhead Line north 56 degrees 20'08" west a distance of 756.65 feet to a point of intersection with the easterly property line of an area now under lease to Southwest Marine, Inc.; thence leaving said U.S. Pierhead Line and along said easterly property line north 33 degrees 39'52" east a distance of 427.42 feet to a point of intersection with the above described Parcel No. 1; thence leaving said property line of Southwest Marine, Inc. leasehold along said Parcel No. 1 south 56 degrees 20'08" east a distance of 229.51 feet to the beginning of a tangent curve concave to the north having a radius of 100.00 feet; thence easterly along the arc of said curve through a central angle of 52 degrees 13'58" an arc distance of 91.16 feet; thence north 71 degrees 25'54" east a distance of 471.27 feet; thence south 84 degrees 44'54" east a distance of 122.40 feet; thence north 20 degrees 32'27" east a distance of 62.22 feet; thence north 70 degrees 48'21" east a distance of 44.40 feet; thence north 23 degrees 42'13" east a distance of 44.70 feet; thence south 65 degrees 55'29" east a distance of 216.37 feet; thence south 23 degrees 07'04" west a distance of 44.65 feet; thence south 58 degrees 06'09" east a distance of 235.80 feet; thence south 36 degrees 38'30" west a distance of 280.78 feet; thence south 52 degrees 41'02" east a distance of 99.58 feet; thence north 66 degrees 34'17" east a distance of 38.40 feet; thence south 23 degrees 18'37" east a distance of 117.31 feet; thence south 66 degrees 27'25" west a distance of 40.85 feet; thence south 23 degrees 26'05" east a distance of 34.97 feet; thence north 66 degrees 35'50" east a distance of 135.67 feet; thence south 23 degrees 17'35" east a distance of 117.05 feet; thence south 66 degrees 50'04" west a distance of 39.30 feet; thence south 21 degrees 32'06" east a distance of 35.09 feet; thence north 66 degrees 40'40" east a distance of 347.70 feet; thence south 23 degrees 25'07" east a distance of 114.70 feet; thence south 66 degrees 39'00" west a distance of 357.83 feet; thence south 11 degrees 54'59" east a distance of 33.16 feet; thence north 75 degrees 59'06" east a distance of 50.70 feet; thence south 14 degrees 04'19" east a distance of 176.96 feet; thence south 76 degrees 04'11" west a distance of 409.07 feet; thence south 18 degrees 25'23" east a distance of 29.34 feet; thence south 71 degrees 15'38" west a distance of 209.49 feet to the TRUE POINT OF BEGINNING of Parcel No. 2, containing 1,112,046 square feet or 25.53 acres of water covered area. PAGE 4 OF 5 REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN BB/mn SAN DIEGO UNIFIED PORT DISTRICT DATE 21 April 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- Within Corporate Limits of San Diego --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 4590 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- DIRECTOR OF ENGINEERING
EXHIBIT "A" 24 PARCEL NO. 3 Beginning at the True Point of Beginning of the above described Parcel No. 1, said point also being the TRUE POINT OF BEGINNING of Parcel No. 3, and lying on the above described westerly boundary of the U.S. Naval Station; thence along said U.S. Naval Station boundary south 0 degrees 30'57" west a distance of 228.56 feet; thence north 89 degrees 29'03" west a distance of 87.80 feet to Harbor Line Station No. 472 on the above described U.S. Bulkhead Line; thence continuing along said U.S. Naval Station boundary south 41 degrees 44'47" west a distance of 1010.16 feet to Harbor Line Station No. 479 on the above described U.S. Pierhead Line; thence leaving said U.S. Naval Station boundary and along said U.S. Pierhead Line north 56 degrees 20'08" west a distance of 1018.74 feet to a point of intersection with the most southerly line of the above described Parcel No. 1; thence leaving said U.S. Pierhead Line and along said southerly line of said Parcel No. 1 north 71 degrees 16'35" east a distance of 1317.71 feet; thence south 89 degrees 30'26" east a distance of 300.07 feet; thence south 56 degrees 35'56" east a distance of 25.90 feet; thence south 85 degrees 32'59" east a distance of 12.80 feet; thence north 60 degrees 37'30" east a distance of 23.74 feet; thence south 89 degrees 29'03" east a distance of 7.24 feet to the TRUE POINT OF BEGINNING of Parcel No. 3, containing 764,703 square feet or 17.56 acres of water covered area. PARCEL NO. 4 Beginning at Point "B" as described in the above Parcel No. 2, said Point "B" lying on the above described U.S. Pierhead Line north 56 degrees 20'08" west and distant 1488.48 feet from Harbor Line Station No. 479, said Point "B" also being the TRUE POINT OF BEGINNING of Parcel No. 4; thence along the said U.S. Pierhead Line north 56 degrees 20'08" west a distance of 500.00 feet to a point of intersection with said Parcel No. 2, thence leaving said U.S. Pierhead Line and along said Parcel No. 2 north 71 degrees 15'38" east a distance of 441.73 feet; thence south 56 degrees 20'08" east a distance of 500.00 feet; thence south 71 degrees 15'38" west a distance of 441.73 feet to the TRUE POINT OF BEGINNING of Parcel No. 4, containing 175,000 square feet or 4.02 acres of water covered area. The above described areas are those delineated on Drawing No. 021-022, Sheets 1, 2, and 3, dated 21 April 1994, and made a part of this agreement. PAGE 5 OF 5 REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN BB/mn SAN DIEGO UNIFIED PORT DISTRICT DATE 21 April 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- Within Corporate Limits of San Diego --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 4590 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- DIRECTOR OF ENGINEERING
EXHIBIT "A" 25 [MAP] REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN K.A./B.B. SAN DIEGO UNIFIED PORT DISTRICT DATE 21 APR. 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE AS SHOWN ------------------- WITHIN CORPORATE LIMITS OF SAN DIEGO --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 2516-B,2E-21 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- SHT. 1 OF 3 DIRECTOR OF ENGINEERING
EXHIBIT "B" 26 [MAP] REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN K.A./B.B. SAN DIEGO UNIFIED PORT DISTRICT DATE 21 Apr. 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- WITHIN CORPORATE LIMITS OF SAN DIEGO --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 2516-B, 2E-21 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- SHT. 2 OF 3 DIRECTOR OF ENGINEERING
EXHIBIT "B" 27 [MAP] REVISED: - --------------------------------------------------------------------------------------------------------- DRAWN K.A./B.B. SAN DIEGO UNIFIED PORT DISTRICT DATE 21 Apr. 1994 -------------------- ----------------- CHECKED BOURKE TIDELAND LEASE SCALE ------------------- WITHIN CORPORATE LIMITS OF SAN DIEGO --------------- REVIEWED [SIG] NATIONAL STEEL AND SHIPBUILDING COMPANY REF. 2516-B, 2E-21 ------------------ ----------------- APPROVED DRAWING NO. [SIG] 021-022 - -------------------------- SHT. 3 OF 3 DIRECTOR OF ENGINEERING
EXHIBIT "B" 28 EXAMPLES OF REAL PROPERTY IMPROVEMENTS 1. New buildings, or permanent structures, or alterations, or additions to existing buildings or permanent structures. 2. Fill, wharfs, or bridges over existing water area, or dredging of existing land area. 3. Piers, docks, or inclined building ways, or improvements or upgrades of such facilities to facilitate berthing of ships, such as permanent fenders, mooring bitts, dredging (in excess of maintenance dredging), structural upgrades, browing and boarding tower systems, and utility facilities, (such as fresh water and salt water, steam, air, gas, electric power, and sewage connections). 4. New graving dock(s) or improvements to existing graving docks; which would include items similar to those listed in No. 3 above, plus improvements to pumping system, periodic major overhaul of the caisson, and major preservation systems for graving dock walls. 5. Improvements and upgrades of facilities on piers to facilitate connections from and operation of floating dry dock. 6. Improvements and upgrades of permanent utility systems (such as electrical distribution, gas distribution, compressed air systems, water, fire mains, and sewage systems). 7. Platens (a structure which is a special work station built on engineered, level reinforced concrete foundations to facilitate the weld-assembly of major ship structural assemblies) with various special outfitting items such as pin jigging turning jigs and straight ribs. 8. Roads, paving, curbs, crane rails and foundations, fixed conveyor systems, and other feeder systems for transportation of materials. 9. Ground cover as ordered by Lessor. 10. Other permanent improvements, fixtures, and equipment, which can be fully depreciated within the term of this Lease. This list is not exclusive or exhaustive of those improvements which qualify for credit under Paragraph 4(a) of this Lease, but is for example only. Items listed are not approved for construction. Any proposed construction must be submitted as required by Lease provisions. EXHIBIT "C" EX-10.39 5 CAPITAL CONSTRUCTION FUND AGREEMENT 1 Exhibit 10.39 Contract No. MA/CCF-478 CAPITAL CONSTRUCTION FUND AGREEMENT BETWEEN MARITIME ADMINISTRATION -- UNITED STATES DEPARTMENT OF TRANSPORTATION AND NATIONAL STEEL AND SHIPBUILDING COMPANY This Capital Construction Fund Agreement ("Agreement"), made on September 13, 1988, by and between the United States of America, represented by the Maritime Administrator, Department of Transportation (the "Maritime Administrator"), and National Steel and Shipbuilding Company, a corporation organized and existing under the laws of the State of Nevada (the "Party"), a citizen of the United States of America. WHEREAS: 1. The Party has applied for the establishment of a Capital Construction Fund (the "Fund") under Section 607 of the Merchant Marine Act, 1936, as amended (the "Act"). 2. The Party is or has been the owner of, and has contracted for the construction or reconstruction of, one or more eligible vessels as defined in Section 607(k) of the Act, which vessels are listed in Schedule A hereof; 3. The Party has a program for the construction, reconstruction or acquisition of qualified agreement vessels as defined in Section 607(k) of the Act, which program is described in Schedule B hereof; 4. The Maritime Administrator and the Party desire to enter into an Agreement for the purpose of providing for the construction, or reconstruction of vessels, built in the United States and documented under the laws of the United States for operation in the United States foreign, Great Lakes, or noncontiguous domestic trades; 5. The Maritime Administrator has determined that the Party qualifies for an Agreement under the Act; and 6. The Maritime Administrator has authorized the award of an Agreement upon the terms and conditions set forth herein subject to the Act, as it may be amended from time to time, and such rules and regulations as shall be prescribed by the Secretary of Transportation or his delegate, either alone or jointly with the Secretary of the Treasury, as necessary to carry out the powers, duties, and functions vested in them by the Act (the "rules and regulations"). 2 - 2 - NOW, THEREFORE in consideration of the premises the Maritime Administrator and the Party hereby agree as set forth in the following Articles 1 through 15: 1. ESTABLISHMENT OF A FUND: (A) A Fund is hereby established for the purposes set forth in Article 2 hereof, pursuant to such terms and conditions as shall be prescribed in this Agreement, the Act, and the rules and regulations. (B) The Fund shall be established in the depository or depositories listed in Schedule C hereof. 2. PURPOSES OF THE FUND: The Fund established hereunder shall be utilized to provide for the construction or reconstruction of replacement vessels, additional vessels, or reconstructed vessels, built in the United States and intended for documentation as vessels of the United States for operation by qualified United States citizens in the United States foreign, Great Lakes, or noncontiguous domestic trades, and to provide for qualified withdrawals to achieve the program set forth in Schedule B hereof. 3. TERM OF THE AGREEMENT This Agreement shall be effective on the date of execution by the Maritime Administrator and shall continue until terminated under Article 4. 4. TERMINATION OF AGREEMENT (A) This Agreement may be terminated at any time under any of the following circumstances: (1) Upon written mutual agreement by the Parties. (2) Upon written notice by the Party that a change has been made in federal laws or regulations which would have substantial effect upon the rights or obligations of the Party or the economic benefits derived by Party from the Fund. 3 - 3 - (3) Upon passage of thirty-five (35) months, from the date hereof without contracting for a part or all of the program listed in Schedule B. (B) This Agreement shall terminate upon completion of the program as set forth in Schedule B hereof in its present form or as it may be amended from time to time, or upon written notice by the Party that in its judgement the program listed in Schedule B as in effect at any time, will not be contracted for, or will not be contracted for in a fashion such that the benefits of the Fund will be available to the Party. (C) Upon termination of this Agreement pursuant to paragraphs (A) and/or (B) hereof all amounts remaining in the Fund shall be treated as if withdrawn in a nonqualified withdrawal (as that term is defined in the Act and the rules and regulations) on the date of termination of this Agreement. 5. DEPOSITS TO BE MADE INTO THE FUND (A) Subject to any restrictions contained in the Act, the rules and regulations, or this Agreement, the Party may deposit, for each taxable year to which this Agreement applies, amounts representing some part or all of: (1) The net proceeds from the sale or other disposition of any of the vessels listed in Schedule A or B hereof; and (2) The net proceeds from insurance or indemnity attributable to the vessels listed in Schedule A or B hereof. (B) For each taxable year to which the Agreement applies, the Party shall deposit all receipts from the investment or reinvestment of amounts held in the Fund, except that the Party shall not be permitted to deposit more than is necessary to complete its programs as set out in Schedule B hereof, now or as it may then be amended. (C) Notwithstanding anything in paragraph (A) or (B) hereof to the contrary, the Party shall make the minimum deposits set forth in Schedule D hereof at the time and in such amounts as may be set forth herein, now or as it may then be amended. (D) Deposits may be made in the form of cash or directly in the form of the investments described in Article 7. 4 - 4 - 6. WITHDRAWALS FROM THE FUND: (A) The Party may make such qualified withdrawals (as that term is defined in the Act and the rules and regulations) as shall be necessary to fulfill the obligations set forth in Schedule B hereof. Any such qualified withdrawal may be made without the consent of the Maritime Administrator, except as required by the rules and regulations. (B) Monies may be withdrawn from the Party's capital construction fund for payments made by the Party or an affiliate to pay for the cost of materials, labor, overhead or other components of the cost of a qualified vessel or of the principal portion of indebtedness associated with construction period financing with respect to such a vessel, or to reimburse expenditures of general funds of the Party, or an affiliate, where and to the extent that such general funds were used to pay for the cost of materials, labor, overhead or other components of the cost of a qualified vessel or for the principal portion of indebtedness associated with construction period financing with respect to such a vessel. (C) Any other withdrawal from the capital construction fund shall be made only upon prior written consent of the Maritime Administrator, or as otherwise required herein by the rules and regulations. 7. INVESTMENT OF THE FUND: (A) The Party, at its discretion, may invest fund assets in third party receivables of NASSCO and of Morrison Knudsen Corporation, or of its other affiliates, assigned to the Party for that purpose, from progress payment billings contracts, and under other contracts, with the collection of such receivables to be guaranteed by the Morrison Knudsen Corporation if necessary to cause such receivables to be "qualified investments", and in other investments which are "qualified investments" under Maritime Administration regulations, as they exist at the present time or as they may be amended. Investments in third party receivables of Morrison Knudsen Corporation and its affiliates (excluding the Party) shall be made pursuant to the terms of the form of the Receivables Purchase and Sale Agreement attached hereto as Appendix I. Investments in third party receivables of NASSCO shall be made pursuant to the procedures set forth in Appendix II. 5 -5- (B) The Party agrees that when investing monies held in the Fund it will make such investments as will insure that sufficient cash is available at the time qualified withdrawals are required in accordance with the program described in Schedule B hereof. 8. PLEDGES, ASSIGNMENTS AND TRANSFERS: (A) The Party agrees not to assign, pledge or otherwise encumber, either directly or indirectly or through any reorganization, merger, or consolidation, all or any part of this Agreement, the Fund, or any assets in the Fund without the prior written consent of the Maritime Administrator; provided, however, the Party may transfer the assets of the Fund, in whole or in part, to an investment trustee, as provided in the rules and regulations. (B) The Party shall not obligate any assets in the Fund as a compensating balance. (C) The Secretary hereby grants permission to sell or otherwise dispose of any qualified vessel upon completion of its construction, provided such sale or other disposition is to a United States citizen and meets the requirements as provided in the Agreement and in the Act. (D) If a qualified agreement vessel, in which basis has been reduced through the application of qualified withdrawals, is sold or disposed of by the Party at delivery or within one year of delivery, the disposition will not be contrary to the policies of the Act, the Agreement, and/or the rules and regulations; and no interest on the tax applicable to the amount of gain attributable to the basis reduction will be incurred. (E) If a qualified agreement vessel undergoing construction in which basis has been reduced through the application of qualified withdrawals is destroyed or lost in the course of construction, or prior to delivery and acceptance by the purchaser, as a result of strikes, fires, earthquakes or other events beyond the control of the Party, the destruction or loss will not be treated as a disposition contrary to the policies of the Act, the Agreement, and/or the rules and regulations; and no interest will be incurred on any tax which may be imposed as the result of the receipt of any insurance proceeds or other monies in payment of any insurance proceeds or other monies in payment for the vessel so destroyed or lost. 6 -6- (F) Pursuant to 46 C.F.R. Section 390.6(d), the Secretary will agree to modifications and amendments to Schedules A, B, and D, provided such modifications and amendments are occasioned by changes in financing or construction commitments, and will agree to delete or add a vessel or vessels from Schedule A and B if a transaction is not consummated or a new transaction has been contracted for. 9. RECORDS AND REPORTS: (A) The Party and any affiliate, agreed to by the Party and the Maritime Administrator, shall keep books, records and accounts relating to the construction of the vessels covered by this Agreement in such form as may be prescribed by the Maritime Administrator. (B) The Maritime Administrator agrees not to require the duplication of books, records and accounts required to be kept in some other form by the Secretary of the Treasury, or any other government department, so long as the information required in paragraph (A) hereof is made available to the Maritime Administrator. (C) The Party agrees to file, upon notice from the Maritime Administrator, balance sheets, profit and loss statements, and such other statements of financial operations, and such memoranda of facts and transactions, as in the opinion of the Maritime Administrator may be necessary to evaluate the Party's performance under this Agreement. (D) To the extent required by regulation, the Maritime Administrator shall be entitled to have any statements, reports and memoranda specified in paragraph C above certified by independent public accountants appointed by the Party and reasonably acceptable to the Maritime Administrator. (E) The Party agrees to submit promptly to the Maritime Administrator any contract executed in connection with the program described in Schedule B hereof. (F) The Maritime Administrator is hereby authorized to examine and audit the relevant books, records, and accounts of all persons referred to in this Article whenever he may deem it necessary or desirable. 7 -7- 10. Modification and Amendment: This Agreement may be modified or amended at any time by mutual written consent. 11. Incorporation of Schedules and Appendices: The attached Schedules A, B, C and D and Appendices I and II are incorporated into and made a part of this Agreement. 12. Liquidated Damages Except as stated below in paragraphs (A) through (D), the Party shall have no responsibility for compliance by a purchaser with respect to the operation of any qualified agreement vessel in geographic trades other than those permitted by Section 607 of the Act, but shall remain liable for any such operation during any period where the Party remains the owner of the vessel so operated. (A) In the event that the initial purchaser (the "Purchaser") from the party of a qualified agreement vessel described in Schedule B hereof operates such vessel in geographic trades other than those permitted by Section 607 of the Act, this Agreement, and/or the rules and regulations, the Purchaser shall be obligated to pay to the United States an amount of liquidated damages for each day of such impermissible geographic trading which shall constitute the time value of the deferral of Federal income tax which the Party has received, calculated in accordance with the rules and regulations, such liquidated damages, to be paid to the Maritime Administrator, for deposit in the Treasury of the United States, within the time limits provided for in the rules and regulations. (B) In the event of a failure on the part of the Purchaser to make any such payment, the Party shall be obligated to make such payment within 60 days subsequent to receipt by the Party of notice from the Maritime Administrator. This obligation on the part of the Party under this paragraph shall be limited in accordance with its terms to the operation of a vessel by the Purchaser, as defined, and shall terminate upon any subsequent vessel sale (the "Resale"), it being agreed that in the event of Resale the Party shall no longer bear any liability for the terms of the operation of the vessel subsequent to such Resale. 8 -8- (C) Nothing in this Article shall in any way be construed to diminish or waive any of the Maritime Administrator's other remedies for breach under the Act, the Agreement, or the rules and regulations, or in any way diminish or waive the right of the Party to seek full reimbursement from the Purchaser for any payments which the Party shall be required to make under this Article 12. (D) Notwithstanding the fact that the Agreement may be terminated pursuant to the provisions of Article 4 hereof, or otherwise, the provisions of this Article 12 shall continue in effect as follows: (1) In the case of a vessel constructed or acquired within one year of final delivery from the shipyard after construction and the aid of qualified withdrawals, for a period of twenty (20) years from the date of such vessel's final delivery; (2) In the case of a vessel reconstructed or acquired more than one year after final delivery from the shipyard after construction with the aid of qualified withdrawals, for a period of ten (10) years from the date of such vessel's final delivery from the shipyard after reconstruction or the date of such vessel's acquisition; and (3) In the case of a vessel included in Schedule B hereof as a qualified agreement vessel in regard to which qualified withdrawals from the Fund have been made to pay existing indebtedness, for a period of ten (10) years from the date of the first qualified withdrawal in regard to such vessel, provided, however, that if such vessel was more than fifteen (15) years old on the date of the first qualified withdrawal in regard thereto, such conditions shall continue for a period of five (5) years in regard to such vessel. 13. Warranties and Representations by the Party: The Party hereby warrants and represents that: (A) The Party is a citizen of the United States within the meaning of Section 2 of the Shipping Act, 1916, as amended, and will continue to be so for the term of this Agreement. The Party agrees that, each year, 9 - 9 - within thirty (30) days after the annual meeting of its stockholders, it shall file a supplemental affidavit as evidence of its continuing United States citizenship, provided that any changes in data last furnished with respect to officers, directors and stockholders holding five percent or more of the issued and outstanding stock of each class or series which would result in a loss of the Party's status as a United States citizen shall be promptly reported to the Maritime Administrator. (B) The Party owns or has owned, or has contracted for the construction of one or more eligible vessels (within the meaning of Section 607(k) of the Act) as listed in Schedule A hereof. (C) The qualified vessels described in Schedule B hereof: (1) Were or will be constructed or reconstructed in the United States, except as provided in the Act and the rules and regulations; (2) Are or will be documented under the laws of the United States and are expected to be operated in the foreign, Great Lakes or non- contiguous domestic trades of the United States within the meaning of the Act and the rules and regulations. (D) The Party will meet its deposit obligations as agreed upon in Article 5 of this Agreement. (E) The Party will promptly inform the Maritime Administrator, in writing, of any change in circumstances which would tend to adversely affect the ability of the Party to carry out its obligations under the Agreement. (F) Any Contract for the construction or reconstruction of vessels with respect to which the Party intends to make use of the Fund will contain representations and warranties on the part of the Purchaser to the effect that the Purchaser is a citizen of the United States within the meaning of Section 2 of the Shipping Act, 1916, as amended, and will continue to be so for the term of the construction contract, that the vessel to be purchased is for use in qualified trades within the meaning of Section 607 of the Act, and that upon any subsequent sale of the vessel the provisions concerning operation in qualified trades will be included in the contract of sale. 10 - 10 - (G) The Party will faithfully conform to all rules and regulations governing the Agreement and the Fund. (H) Nothing of monetary value has been improperly given, promised and implied for entering into this Agreement. The Party warrants that no improper personal, political or other activities have been used or attempted in an effort to influence the outcome of the discussion or negotiations leading to the award of this Agreement. Breech of this warranty shall constitute an event of default for which the Maritime Administrator shall have the right, notwithstanding Article 4, to terminate this Agreement without liability to the United States. 14. DEFAULT IN OBLIGATIONS (A) If the Maritime Administrator determines that any substantial obligation under this Agreement is not being fulfilled by the Party, he may, under the rules and regulations and after the Party has been given notice and an opportunity to be heard, declare a breach and treat the entire Fund, or any portion thereof, as an amount withdrawn in a non-qualified withdrawal. (B) The Maritime Administrator shall provide an opportunity for the Party to cure a breach declared pursuant to Paragraph (A) of this Article 14. (C) Events of breach by the Party shall include, but shall not be limited to: (1) Failure in any respect to use due diligence in performing the program as set forth in Schedule B hereof; (2) Obligating the assets in the Fund as a compensating balance; (3) Failure to make deposits required in Schedule D hereof; (4) Failure to secure written permission from the Maritime Administrator when such permission is required by the rules and regulations; (5) Failure to submit reports and/or records on a timely basis as provided in Article 9 hereof; 11 -11- (6) Any material misrepresentation made by the Party or any failure by the Party to disclose material information in connection with this Agreement whether before or after execution hereof and whether made in an application, report, affidavit, or otherwise; or (7) Failure by the Party to comply with any provisions of Section 607 of the Act, the rules and regulations, or this Agreement. 15. EXTENSIONS OF FEDERAL INCOME TAX BENEFITS: The Maritime Administrator agrees that the Federal income tax benefits provided in the Act and the rules and regulations shall be available to the Party if the Party fulfills its obligations under this Agreement. IN WITNESS WHEREOF, The Administrator and the Party have executed this Agreement, in quadruplicate, to be effective as of the date indicated on the first page of this Agreement. UNITED STATES OF AMERICA NATIONAL STEEL AND MARITIME ADMINISTRATOR SHIPBUILDING COMPANY By: /s/ James J. Zok By: /s/ James M. Temenak ------------------------ -------------------- (Contracting Officer) Vice President Attest: Attest: District of Columbia: By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ Sharon G. Maliska ------------------------- --------------------- Secretary Notary Public (Seal) My Commission Expires March 31, 1991 Approved as to form: (Seal) By: /s/ Edmund T. Sommer, Jr. ------------------------- For Assistant Chief Counsel Maritime Administration September 13, 1988 - --------- --- ---- 12 MA/CCF-478 Schedule A ELIGIBLE AGREEMENT VESSELS --------------------------
DATE AND NAME AND SPECIFIC CAPACITY PLACE DATE AREA OF DETAILS OF I.D. NO. TYPE (GROSS TONS) OWNER CONSTRUCTED DOCUMENTED OPERATION SERVICE - -------- -------- ------------ ----- ----------- ---------- --------- ---------- SS ROSE CITY Tarker 89,700 NASSCO 7/23/76(a) To NASSCO U.S. Foreign Crude Oil 575056 San Diego, CA 10/13/85 Trade Transport MR. ED Harbor 25 NASSCO 1976 To NASSCO U.S. Coast- Harbor 575765 Supply Brazoria, TX 6/09/81 wise Trade Service Vessel and Supply Transport THE HAPPY Harbor 17 NASSCO 1929 To NASSCO U.S. Coast- Harbor 228709 Service North Band, 5/30/79 wise Trade Service Vessel OR and Supply Transport
(a) Reconstructed at San Diego. 13 MA/CCF-478 , 1988 SCHEDULE B PROGRAM OBJECTIVES ACQUISITION OR CONSTRUCTION OF VESSELS
Amount Program Vessel to be Approximate Date Objective Name & General Vessel Withdrawn of Anticipated No. Number Characteristics Cost From Fund(a) Contract Delivery Area of Oper - --------- ------ --------------- ------ ------------ -------- -------- ------------ 1 Unknown Alaska Class Tanker $130 million $35 million 6/88 1/90 Alaska to Pan 209,000 DWT, (approx.) As (approx.) identical to EXXON alternative VALDEZ and EXXON to Programs LONG BEACH 2 and 3 2 Unknown Passenger cruise $225 million $35 million 6/88 6/91 Inter-Island ship of about 1,800 (approx.) As (approx.) Cruise ship, passenger capacity alternative Hawaiian for operation to Programs Islands inter-island Hawaii 1 and 3 3 Unknown Two 2,000 TEU $200 million $35 million 1/89 3/91 West Coast Container Ships (approx.) As (approx.) Mainland alternative U.S. to to Programs 6/91 Hawaiian 1 and 2 Islands
- -------------- (a) Represents maximum profit estimated to be received upon sale of vessels listed in Schedule A. Interest earnings on the $35 million may, of course, increase the amount available for program objective. The amounts required to be deposited under Schedule D represent minimums. 14 MA/CCF-478 , 1988 SCHEDULE C DEPOSITORY: MORGAN GUARANTY TRUST COMPANY, 23 WALL STREET, NEW YORK, NY 10015 LIST OF TYPICAL ACCOUNTS RECEIVABLE ESTIMATES AS OF SEPTEMBER 25, 1987 (Thousands of dollars)
Customer Billings Retentions ---------------------- ----------------------------------- Morrison- Morrison- Knudsen Knudsen (except (except NASSCO) NASSCO (NASSCO) NASSCO Total --------- ------- -------- -------- --------- U.S. Government $ 8,405 $4,998 $ 2,306 $28,969 $ 44,678 State and Local Governments $ 21,721 $ 7,422 $ 29,143 Commercial $135,565 $ 100 $38,959 $ 1,321 $175,945 -------- ------- ------- ------- -------- Total $165,691 $5,098 $48,687 $30,290 $249,766 ======== ======= ======= ======= ========
Notes - ------------------------ 1. Allocations among categories (U.S., state and local government, and commercial contracts) are estimates based upon recent historical data. 2. Commercial customers include: Westinghouse Electric, R. J. Reynolds-Nabisco, General Motors Corporation, Union Pacific Railroad, Shell Oil Company, McDonnel Douglas, Anheuser-Busch, Goodyear, Exxon, Eastman-Kodak, General Electric Corporation, Hewlett-Packard, Phillips Petroleum Corporation, Chevron, Atlantic Richfield, and Rockwell International Corporation. 15 MA/CCF-478 , 1998 SCHEDULE D AVAILABLE FUNDS - EXPLANATION
Ordinary Interest Capital Income(a) Income(a) Gain Depreciation Total(a) ----------- --------- -------- ------------- ---------- 1987-89 $1,000,000 -- -- -- $1,000,000 1990-92 -- -- -- -- -- 1993-95 -- -- -- -- --
- --------------------------- (a) NASSCO will make an initial deposit of $50,000 at the signing of the Capital Construction Fund Agreement. NASSCO anticipates a minimum deposit of $1 million, including the $50,000, over the initial three-year period. As indicated on Schedule B, "Program Objectives" NASSCO estimates that approximately $35 million will be received as profit on the sale of the vessel listed on Schedule A. Amounts in excess of $1 million shown in Schedule D will therefore be available for deposit if NASSCO is successful in contract awards for the program objective vessels listed on Schedule B. In addition, of course, interest income will accrue on amounts on deposit. Final determinations with respect to the amount or amounts to be deposited under the Agreement will only be made when and to the extent that NASSCO believes it will be successful in obtaining, or anticipates the award of, one or more of the vessel contracts designated as Schedule B objectives, under a contract or contracts where monies from the NASSCO capital construction fund can be used. EX-10.39.A 6 CAPITAL CONSTRUCTION FUND AGREEMENT-ADDENDUM NO. 1 1 Exhibit 10.39A Addendum No. 1 Contract No. MA/CCF-478 ADDENDUM TO MARITIME ADMINISTRATION CAPITAL CONSTRUCTION FUND AGREEMENT WITH NATIONAL STEEL AND SHIPBUILDING COMPANY THIS AGREEMENT, made by and between the Maritime Administrator, Department of Transportation (the "Maritime Administrator") and National Steel and Shipbuilding Company (the "Party"), a citizen of the United States, as an Addendum to that certain agreement, Contract No. MA/CCF-478. WHEREAS: 1. On September 13, 1988 the parties hereto entered into a Capital Construction Fund Agreement (the "Agreement"), under section 607 of the Merchant Marine Act, 1936, as amended (the "Act"); 2. The parties hereto desire to amend the Agreement in the manner hereinafter set forth; and 3. The parties hereto have agreed to said amendment and desire to incorporate the same into the Agreement. NOW, THEREFORE, in consideration of the premises, the Maritime Administrator and the Party agree as follows: I. Effective , 1988, the Agreement is amended by replacing the existing Schedules A, B, C, and D with the annexed revised Schedules A, B, C and D to (i) add the S. S. WORTH to Schedule A as an eligible vessel; (ii) to modify and increase the deposit ceilings, program objectives and minimum deposits as set out in the annexed revised Schedules B and D; and (iii) designate Idaho First National Bank and Bank of America N.T. & S.A. as depositories, at the same time deleting Morgan Guaranty Trust Company, as set out in Schedule C, and eliminating dated information concerning sources of funds. II. Except as herein otherwise expressly provided, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Maritime Administrator and the party have executed this Addendum No. 1 in quadruplicate, on the dates indicated below, to be effective on the 13th day of September, 1988. 2 - 2 - UNITED STATES OF AMERICA SECRETARY OF TRANSPORTATION NATIONAL STEEL AND MARITIME ADMINISTRATOR SHIPBUILDING COMPANY By: /s/ James J. Zok By: /s/ James M. Temenak -------------------------- --------------------------- (Contracting Officer) Name: James M. Temenak -------------------------- (print or type) Title: Vice President ------------------------- (print or type) ATTEST: ATTEST: DISTRICT OF COLUMBIA: By: [SIGNATURE ILLEGIBLE] By: /s/ Sharon G. Maliska -------------------------- --------------------------- Secretary My Commission Expires March 31, 1991 Maritime Administration Date: Name: Sharon G. Maliska -------------------------- (print or type) Title: Notary Public ------------------------- (print or type) (SEAL) (SEAL) Date: Sept. 13, 1988 -------------------------- APPROVED as to form: By: /s/ Edmund T. Sommer, Jr. -------------------------- For Assistant Chief Counsel Maritime Administration 3 ADDENDUM NO. 1 MA/CCF-478 Schedule A ELIGIBLE AGREEMENT VESSELS
DATE AND NAME AND SPECIFIC CAPACITY PLACE DATE AREA OF DETAILS OF I.D. NO. TYPE [GROSS TONS] OWNER CONSTRUCTED DOCUMENTED OPERATION SERVICE - --------- -------- ------------ ------ ----------- ---------- ------------- ---------- SS WORTH Tanker 89,700 NASSCO 2-19-75 (a) To NASSCO U. S. Foreign Crude Oil 7600548 San Diego, CA 10-03-84 Trade Transport SS ROSE CITY Tanker 89,700 NASSCO 7-23-76 (b) To NASSCO U. S. Foreign Crude Oil 7607891 San Diego, CA 10-13-85 Trade Transport MR. ED Harbor 25 NASSCO 1976 To NASSCO U.S. Coastwise Harbor Service 575765 Supply Vessel Brazoria, TX 6-09-81 Trade and Supply Transport THE HAPPY Harbor 17 NASSCO 1929 To NASSCO U.S. Coastwise Harbor Service 228709 Service Vessel North Bend, OR 5-10-79 Trade and Supply Transport
(a) Reconstructed at San Diego and delivered 12-19-86, accepted 8-19-87. (b) Reconstructed at San Diego. A number of disputes exist between NASSCO and the Navy with respect to workmanship and performance and must be resolved before the Navy will accept the vessel. As of this date, no tentative acceptance date has yet been agreed upon. 4 ADDENDUM NO. 1 MA/CCF-478 SCHEDULE B PROGRAM OBJECTIVES ACQUISITION OR CONSTRUCTION OF VESSELS
Amount Program Vessel to be Approximate Date Objective Name & General Vessel Withdrawn of Anticipated No. Number Characteristics Cost From Fund (a) Contract Delivery Area of Oper - --------- --------- --------------- ------ -------------- -------- ---------- --------------- 1 Unknown Alaska Class Tanker $130 million $70 million 1/89 1/91 Alaska to Pan 209,000 DWT, (approx.) As (approx.) identical to EXXON alternative VALDEZ and EXXON to Programs LONG BEACH 2 and 3 2 Unknown Passenger cruise $225 million $70 million 1/89 6/91 Inter-Island ship of about 1,800 (approx.) As (approx.) Cruise ship, passenger capacity alternative Hawaiian for operation to Programs Islands inter-island Hawaii 1 and 3 3 Unknown Two 2,000 TEU $200 million $70 million 1/89 3/91 West Coast Container Ships (approx.) As (approx.) Mainland alternative U.S. to to Programs 6/91 Hawaiian 1 and 2 Islands
___________________________________ (a) Represents maximum profit estimated to be received upon sale of vessels listed in Schedule A. Interest earnings on the $70 million may, of course, increase the amount available for program objective. The amounts required to be deposited under Schedule D represent minimums. 5 ADDENDUM NO. 1 MA/CCF-478 SCHEDULE C DEPOSITORIES ------------ NAME AND ADDRESS ACCOUNTS ---------------- -------- Idaho First National Bank Savings and Trustee Accounts 101 South Capital Street established pursuant to P.O. Box 7938 46 C.F.R. Section 390.7 Boise, Idaho 83707 Bank of America N.T. & S.A. Savings and Trustee Accounts 450 B Street established pursuant to San Diego, California 92038 46 C.F.R. Section 390.7 6 ADDENDUM NO. 1 MA/CCF-478 September __, 1998 SCHEDULE D MINIMUM DEPOSITS - EXPLANATION
ORDINARY INTEREST CAPITAL INCOME(a) INCOME(a) GAIN DEPRECIATION TOTAL(a) 1987-89 $10,000,000 -- -- -- $10,000,000 1990-92 -- -- -- -- -- 1992-95 -- -- -- -- --
(a) NASSCO will make a minimum deposit of at least $10 million (and may deposit as much as $37 million) upon this Addendum No. 1 becoming effective on September __, 1988. As indicated on Schedule B, "Program Objectives", NASSCO estimates that approximately $70 million will be received as profit on the sale of vessels listed on Schedule A and could be employed in meeting Schedule B objectives. Thus NASSCO anticipates that a substantial additional amount, perhaps in the neighborhood of $30 million to $40 million, may be deposited. In addition, of course, interest income will accrue on amounts on deposit. EX-10.39B 7 CAPITAL CONSTRUCTION FUND AGREEMENT-ADDENDUM NO. 2 1 EXHIBIT 10.39B Addendum No. 2 Contract No. MA/CCF-478 ADDENDUM TO MARITIME ADMINISTRATION CAPITAL CONSTRUCTION FUND AGREEMENT WITH NATIONAL STEEL AND SHIPBUILDING COMPANY This Addendum is made by and between the Maritime Administrator (the "Administrator"), and National Steel and Shipbuilding Company, a citizen of the United States (the "Party"), as an addendum to that certain Capital Construction Fund ("CCF") Agreement Contract No. MA/CCF-478 (the "Agreement"). WHEREAS: 1. The Administrator and the Party entered into the Agreement on September 13, 1988 under Section 607, Merchant Marine Act, 1936, as amended (the "Act"); 2. The Administrator on August 6, 1992, approved the amendment of Schedule A of the Agreement to delete the SS WORTH (Official No. 7600548), the SS ROSE CITY (Official No. 7607891), the MR. ED (Official No. 575765) and the HAPPY (Official No. 228709) from the list of eligible agreement vessels; 3. The Administrator on August 6, 1992, approved an amendment to Schedule B to A. Delete the construction/acquisition of a 209,000 DWT Alaska Class Tanker with an estimated contract price of $130 million to be delivered in January 1991; 2 2 B. Add the construction/acquisition of two 40,000 DWT product tankers with an estimated contract price of $160 million to be delivered in 1993; C. Change the construction/acquisition of a passenger cruise ship of about 1,800 passenger capacity for operation in inter-island Hawaii with an estimated contract price of $225 million to two 500-plus passenger cruise ships to be delivered in 1994 with an estimated contract price of $200 million each; D. Change the construction/acquisition of two 2,000 TEU containerships with an estimated contract price of $200 million to the R.J. PFEIFFER, a 2,000 TEU containership to be delivered on June 15, 1992 with an estimated contract price of $120 million; 4. The Administrator on August 6, 1992 approved the amendment of Schedule C to reflect changes in names from West One Trust to West One Bank, Idaho and from Citicorp Bank to Citicorp Trust of California. The approval also added Sanwa Bank California and The Bank of California as depositories. 5. The Parties desire to amend the agreement as set forth in this Addendum. NOW, THEREFORE, the Administrator and the Party agree as follows: I. Effective August 6, 1992, the agreement is amended by deleting the existing Schedules A, B and C and replacing them with the annexed revised Schedules A, B and C. 3 3 II. Except as herein otherwise expressly provided, the Agreement, as heretofore amended, shall remain in full force and effect. IN WITNESS WHEREOF, the Parties have executed this Addendum No. 2 in four counterparts, effective as of the date specified hereinabove and actually on the 29th day of October, 1992. (SEAL) UNITED STATES OF AMERICA SECRETARY OF TRANSPORTATION ATTEST: MARITIME ADMINISTRATOR By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ James J. Zok ----------------------------- ----------------------------- Secretary Contracting Officer (SEAL) NATIONAL STEEL AND SHIPBUILDING COMPANY ATTEST: By: /s/ Alvin G. Kalmanson By: /s/ S. D. Timmons ----------------------------- ----------------------------- Name: Alvin G. Kalmanson Name: S. D. Timmons ----------------------------- ----------------------------- Vice President, Title: Assistant Secretary Title: Business Affairs ----------------------------- ----------------------------- Approved as to form: By: /s/ [SIGNATURE ILLEGIBLE] ----------------------------- Assistant Chief Counsel Maritime Administration 4 MA/CCF-478 SCHEDULE A ELIGIBLE AGREEMENT VESSELS
Date And Name And Specific Capacity Place Date Area of Details of I.D. No. Type (Gross Tons) Owner Constructed Documented Operation Service - -------- -------- ------------ ----- ----------- ---------- --------- ----------
5 MA/CCF-478 SCHEDULE B PROGRAM OBJECTIVES ACQUISITION OR CONSTRUCTION OF VESSELS
Amount Program Vessel to be Approximate Date Objective Name & General Vessel Withdrawn of Anticipated No. Number Characteristics Cost From Fund Contract Delivery Area of Oper. - --------- --------- ----------------- ------------- ----------- --------- -------- ---------------- 1 R.J. A 2,000 TEU $120 million $75 million 1/90 6/15/92 West Coast Pfeiffer Container Ship for (approx.) (approx.) Mainland U.S. to Matson Navigation Hawaiian Islands Company 2 Unknown Two 40,000 DWT $160 million $80 million unknown 1993 Hawaiian Islands product tankers (approx.) (approx.) Puerto Rico 3 Unknown Two 500 plus $200 million $75 million unknown 1994 Non-Contiguous Passenger each (approx.) each (approx.) Trade v.
6 7/01/92 Revised Schedule C MA/CCF-478 SCHEDULE C DEPOSITORIES NAME AND ADDRESS ACCOUNTS West One Bank, Idaho Investment Account 101 South Capitol Street established pursuant to P.O. Box 7938 46 C.F.R. Section 390.7 Boise, Idaho 83707 Citicorp Trust of California Investment Account 725 S. Figueroa Street established pursuant to Los Angeles, CA 90017 46 C.F.R. Section 390.7 Sanwa Bank California Investment Account 4400 MacArthur Blvd. established pursuant to Newport Beach, CA 92660 46 C.F.R. Section 390.7 The Bank of California Investment Account 475 Sansome Street established pursuant to San Francisco, CA 94111 46 C.F.R. Section 390.7 EX-10.39C 8 CAPITAL CONSTRUCTION FUND AGREEMENT-ADDENDUM NO. 3 1 Exhibit 10.39C Addendum No. 3 Contract No. MA/CCF-478 ADDENDUM TO MARITIME ADMINISTRATION CAPITAL CONSTRUCTION FUND AGREEMENT WITH NATIONAL STEEL AND SHIPBUILDING COMPANY THIS AGREEMENT, made by and between the Maritime Administrator, Department of Transportation (the "Maritime Administrator") and National Steel and Shipbuilding Company ("NASSCO"), a citizen of the United States, as an Addendum to that certain agreement, Contract No. MA/CCF-478. WHEREAS on September 13, 1988, the parties hereto entered into a Capital Construction Fund Agreement as amended by Addendum No. 1 dated September 13, 1988 and Addendum No. 2 dated October 29, 1992 (the "Agreement"), under Section 607 of the Merchant Marine Act, 1936, as amended (the "Act"); WHEREAS, the parties hereto desire to amend the Agreement in the manner hereinafter set forth; and WHEREAS, the parties hereto have agreed to this amendment and desire to incorporate the same into the Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Maritime Administrator and NASSCO agree as follows: I. NASSCO Holdings, Incorporated ("NHI"), the parent of NASSCO, and NASSCO Funding Corporation ("NFC"), a wholly owned subsidiary of NHI, both citizens of the United States, are hereby added as parties to the Agreement effective as of the date hereof. The defined term "Party" shall mean any or all of NHI, NASSCO, or NFC, as the case may be. II. Schedule C to the Agreement is hereby amended by replacing the Schedule C dated 7/01/92 with the Schedule C attached hereto. III. Except as herein otherwise expressly provided herein, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Maritime Administrator, NASSCO, NHI NFC have duly executed this Addendum No. 3 in quadruplicate, on the dates indicated below, to be effective on the 27th day of August, 1993. 2 [Seal] NATIONAL STEEL AND ATTEST: SHIPBUILDING COMPANY By: /s/ S.D. Timmons By: /s/ [SIGNATURE ILLEGIBLE] ------------------------- ---------------------------- Title: Secretary Title: Senior Vice President Date: August 30, 1993 [Seal] NASSCO HOLDINGS, INCORPORATED ATTEST: By: /s/ S.D. Timmons By: /s/ [SIGNATURE ILLEGIBLE] ------------------------- ---------------------------- Title: Secretary Title: President Date: August 30, 1993 [Seal] NASSCO HOLDINGS, INCORPORATED ATTEST: By: /s/ S.D. Timmons By: /s/ F.N. Hallet ------------------------- ---------------------------- Title: Secretary Title: Senior Vice President Date: August 30, 1993 [Seal] UNITED STATES OF AMERICA ATTEST: SECRETARY OF TRANSPORTATION By: Maritime Administrator By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE] ------------------------- ---------------------------- Title: Secretary Title: Contracting Officer Maritime Administration Date: 9/2, 1993 Approved as to form: By: /s/ [SIGNATURE ILLEGIBLE] ------------------------- Assistant Chief Counsel Maritime Administration -2- 3 08/12/93 Revised Schedule C MA/CCF-478 SCHEDULE C DEPOSITORIES NAME AND ADDRESS ACCOUNTS West One Bank Investment Account 101 South Capitol Street established pursuant to P.O. Box 7938 46 C.F.R. Section 390.7 Boise, Idaho 83707 The Bank of California Investment Account 475 Sansome Street established pursuant to San Francisco, CA 94111 46 C.F.R. Section 390.7 BankAmerica National Trust Company Investment Account 2 Rector Street established pursuant to New York, New York 10006 46 C.F.R. Section 390.7 Bank of America National Trust & Investment Account Savings Association established pursuant to 555 California Street 46 C.F.R. Section 390.7 San Francisco, CA 94101 EX-10.39D 9 CAPITAL CONSTRUCTION FUND AGREEMENT-ADDENDUM NO. 4 1 EXHIBIT 10.39D Addendum No. 4 Contract No. MA/CCF-478 ADDENDUM TO MARITIME ADMINISTRATION CAPITAL CONSTRUCTION FUND AGREEMENT WITH NATIONAL STEEL AND SHIPBUILDING COMPANY This Addendum is made by and between the Maritime Administrator (the "Administrator"), and the National Steel and Shipbuilding Company, a citizen of the United States (the "Party"), as an addendum to that certain Capital Construction Fund ("CCF") Agreement Contract No. MA/CCF-478 (the "Agreement"). WHEREAS: 1. The Administrator and the Party entered into the Agreement on September 13, 1988, under Section 607, Merchant Marine Act, 1936, as amended (the "Act"); 2. The Administrator approved the replacement of the existing Schedule B with the revised attached Schedule B which would: a) delete the construction of the R.J. PFEIFFER since the vessel has been delivered; b) add the acquisition/construction of two Roll-on-Roll-off Trailer vessels at an estimated cost of $135 million each, of which approximately $80 million is to be paid by qualified CCF withdrawals; c) increase the acquisition/construction cost of two 500 plus passenger cruise vessels from approximately $200 million each to $400 million each 2 2 and increase the amount to be paid by qualified CCF withdrawals to approximately $80 million; d) delete the acquisition/construction of two 40,000 DWT product tankers at an estimated cost of $160 million to be delivered in 1993; and e) add the acquisition/construction of three 140,000 DWT product tankers at an estimated cost of $200 million each, of which approximately $80 million is to be paid by qualified CCF withdrawals. NOW THEREFORE, the Administrator and the Party agree as follows: I. Effective August 28, 1997, the Agreement is amended by deleting the existing Schedule B and replacing it with the annexed revised Schedule B. II. Except as herein otherwise expressly provided, the Agreement, as heretofore amended, shall remain in full force and effect. IN WITNESS WHEREOF, the Parties have executed this Addendum No. 4 in four counterparts, effective as of the date specified hereinabove and actually on the ________ day of ________, 1997. 3 3 (SEAL) UNITED STATES OF AMERICA SECRETARY OF TRANSPORTATION MARITIME ADMINISTRATOR ATTEST: By: /s/ [ILLEGIBLE SIGNATURE] By: /s/ JAMES J. ZOK --------------------- ----------------------- Secretary Contracting Officer (SEAL) NATIONAL STEEL AND SHIPBUILDING COMPANY ATTEST: By: /s/ S. D. Timmons By: /s/ F. N. Hallett --------------------- ------------------------ Name: S. D. Timmons Name: F. N. Hallett ------------------- ----------------------- Title: Vice President, Title: Senior Vice President, General Counsel & Secretary Finance ---------------------------- ----------------------- Approved as to form: By: /s/ [ILLEGIBLE SIGNATURE] ------------------------ Assistant Chief Counsel Maritime Administrator 4 MA/CCF-478 SCHEDULE B PROGRAM OBJECTIVES ACQUISITION OR CONSTRUCTION OF VESSELS
Amount Program Vessel to be Approximate Date Objective Name & General Vessel Withdrawn of Anticipated No. Number Characteristics Cost From Fund Contract Delivery Area of Operation - --------- --------- --------------- ------ -------------- -------- ---------- ------------------ 1 Unknown Two 500 plus $400 million $80 million 2002 2007 Hawaiian Islands Passenger cruise each (approx) (approx.) vessels 2 Unknown Three 140,000 DWT $200 million $80 million 1998 2003 Non-Contiguous Trade Product Tankers each (approx) (approx.) 3 Unknown Two Roll-on Roll-off $135 million $80 million 2000 2005 Non-Contiguous Trade Trailer Vessels each (approx) (approx.)
EX-10.39E 10 CAPITAL CONSTRUCTION FUND AGREEMENT-ADDENDUM NO. 5 1 Exhibit 10.39E Addendum No. 5 Contract No. MA/CCF-478 ADDENDUM TO MARITIME ADMINISTRATION CAPITAL CONSTRUCTION FUND AGREEMENT WITH NATIONAL STEEL AND SHIPBUILDING COMPANY This Addendum is made by and between the Maritime Administrator (the "Administrator"), and National Steel and Shipbuilding Company, a citizen of the United States (the "Party"), as an addendum to that certain Capital Construction Fund ("CCF") Agreement Contract No. MA/CCF-478 (the "Agreement"). WHEREAS: 1. The Administrator and the Party entered into the Agreement on September 3, 1988, under Section 607, Merchant Marine Act, 1936, as amended (the "Act"); 2. The Administrator approved the extension of the Party's commercial paper program under certain terms; 3. The parties hereto desire to amend the Agreement to reflect the approval; and 4. The parties hereto have agreed to said amendment and desire to incorporate the same into the Agreement. NOW THEREFORE, the Administrator and the Party agree as follows: 2 2 I. Effective July 30, 1997, the Agreement is amended to reflect the following approvals: (1) the extension of the Party's commercial paper program with such approval terminating on a date 25 years from the date of the last deposit into the Party's CCF account of the proceeds from the construction of a qualified vessel; (2) the extension of the underlying Liquidity agreement beyond the current January 9, 1998 expiration date coinciding with the date referred to in (1) above; and (3) the increase in the Party's commercial paper program level to $60 million with an over-collateralization range of 11 to 16 percent, such approvals being subject to the condition that all other provisions relating to the commercial paper program as approved by the Administrator on May 3, 1993, remain in full force and effect (which provisions are principally set forth below, as modified to reflect the modifications in (3) above): a. Consent is granted for NASSCO Funding Corporation (NFC) to pledge assets held in its CCF sub-account as collateral for a commercial paper issue by NFC in connection with constructing CCF qualified vessels, provided the Maritime Administration is supplied with specific details of the program when available and that all such details and related documents are in a form and substance satisfactory to the Administrator. b. It is a requirement that the proceeds of the commercial paper be deposited into the NFC CCF sub-account within the consolidated NASSCO Holdings, Incorporated (NHI) CCF account or be used for a qualified project and that CCF withdrawals will not be reimbursed from the commercial paper proceeds. 3 3 c. The funds derived from the commercial paper program (up to $60 million) or securities acquired with these funds would be deposited in the NFC CCF sub-account within the NHI consolidated CCF account and that additional CCF funding of up to 11 to 16 percent of the commercial paper proceeds would be provided from NFC internal funds to cover shortfalls on the commercial paper resulting from the duration mismatch between the commercial paper notes and the eligible assets. d. At the time of withdrawal from the CCF account for investment in a qualified project, NHI would pay off the commercial paper as it became due with non-CCF funds and that in order to maintain the bankruptcy remote nature of NFC, this would be accomplished as a technical accounting matter within the consolidated fund by using funds from the NFC CCF sub-account to pay off the commercial paper as it becomes due and having NHI or the Party simultaneously fund the identical amount into the NHI/NASSCO CCF sub-account. e. Pursuant to Section 6(C) of the Agreement, consent is granted to make a non-qualified withdrawal in the event that there is a default in the payment of the commercial paper and it becomes necessary to repay the commercial paper from the NFC CCF sub-account without counterbalancing CCF funding. II. The Administrator reserves the right to review his approval of the Party's commercial paper program at any time after the fifth anniversary of the date of the July 30, 1997 approval, provided that the Party has a full opportunity to 4 4 participate in such review and that any decision to terminate the program arising from such a review would not be effective for a period of 12 months from the date that the Party is notified of such decision. III. Except as herein otherwise expressly provided, the Agreement, as heretofore amended, shall remain in full force and effect. IN WITNESS WHEREOF, the Parties have executed this Addendum No. 5 in four counterparts, effective as of the date specified hereinabove and actually on the 20th day of October, 1997. (SEAL) UNITED STATES OF AMERICA SECRETARY OF TRANSPORTATION MARITIME ADMINISTRATION ATTEST: BY: /s/ [SIGNATURE ILLEGIBLE] By: /s/ James J. Zok ----------------------------- --------------------------- Secretary Contracting Officer (SEAL) NATIONAL STEEL AND SHIPBUILDING COMPANY By: /s/ S. D. Timmons By: /s/ F. N. Hallett ----------------------------- --------------------------- Name: S. D. Timmons Name: F. N. Hallett --------------------------- ------------------------ Vice President Senior Vice President, General Counsel & Secretary Finance Title: Title: -------------------------- ------------------------ 5 5 Approved as to form: By:[SIGNATURE ILLEGIBLE] ----------------------- Assistant Chief Counsel Maritime Administrator EX-13 11 1998 ANNUAL REPORT 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 these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows, contract awards and the company's expectations regarding the upcoming year 2000. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; the status or outcome of legal proceedings; the status or outcome of labor negotiations; changing priorities or reductions in the U.S. government defense budget; termination of government contracts due to unilateral government action; and the timing and occurrence (or non-occurrence) of circumstances beyond the company's control. BUSINESS OVERVIEW The company's primary business is supplying sophisticated defense systems to the United States and its allies. Over the last decade, due to a decline in the U.S. defense budgets, participants in the defense industry began a process of contraction and consolidation. The company participated in this shift by changing its focus to strengthen certain core businesses through both internal and external means. Management continues to focus on developing advanced technological solutions to meet its customers' evolving operational requirements and improving its cost structure. Management believes these initiatives have created efficient businesses that are positioned to capture new programs and contracts. The company's businesses have been awarded new programs with the potential for significant production, as well as several important contracts on existing programs, that management believes will carry the programs well into the next century. The anticipated defense programs and plans of the company and of the U.S. armed forces are subject to, among other events, changing priorities or reductions in the U.S. government defense budget. However, the company's programs continue to receive bipartisan support in the defense budget. The Department of Defense's fiscal year 2000 budget request submitted to Congress in February 1999 included substantially all of the company's major programs. Since September 1995, the company has invested approximately $2 billion in the acquisitions of 11 businesses which have been accretive to earnings. Management believes these acquisitions have strengthened the company's core operations, expanded its capabilities to include full systems integration and data management and extended the company's reach both geographically and in product mix. [PHOTO] MICHAEL J. MANCUSO, Senior Vice President and Chief Financial Officer Management intends to continue to implement its strategy to strengthen the company through core business revenue growth by positioning it to capture new programs and contracts; continued improvement in operations; and disciplined capital deployment, including internal investment and acquisitions. For its potential acquisitions, the company looks to those that address all or some of 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 and create synergies among business units; - - provide technology that improves the company's competitive position. With $220 in funds on hand after the most recent acquisition and the capacity for additional long-term borrowing, management believes it has the financial capability to take advantage of potential opportunities. [BAR CHART] NET EARNINGS 1996 $270 1997 $316 1998 $364 OPERATING CASH FLOWS 1996 $415 1997 $528 1998 $352 BUSINESS SEGMENTS The company operates in three primary business segments: Marine Systems, Combat Systems and Information Systems and Technology. Marine Systems designs, builds and supports nuclear submarines and surface combatants for the U.S. Navy and provides ship management services for the U.S. government on prepositioning and ready reserve ships. On November 10, 1998, the company acquired control of NASSCO Holdings 20 GENERAL DYNAMICS 1998 ANNUAL REPORT 2 Incorporated (NASSCO), whose wholly owned subsidiaries include National Steel and Shipbuilding Company, which is in the business of ship design, engineering, construction and repair for the U.S. military and various commercial customers. For a discussion of the accounting for this transaction and related information, see Note C to the Consolidated Financial Statements. Net sales of nuclear submarines were $1,381, $1,321 and $1,443 in 1998, 1997 and 1996, respectively. Net sales of surface combatants were $936, $839 and $791 in 1998, 1997 and 1996, respectively. Combat Systems develops, produces and supports land and amphibious combat systems, including the U.S. Army's main battle tank, other armored vehicles and a broad range of power trains, turrets and gun subsystems for the U.S. armed forces and international customers. It also is a leader in the production of ammunition products. Net sales of armored vehicles were $915, $960 and $889 in 1998, 1997 and 1996, respectively. Information Systems and Technology provides expertise in signal and information processing, the use of commercial technologies for military applications, battlespace information management and intelligence data acquisition and processing within the defense and intelligence branches of the U.S. government and its allies. The company also owns coal mining and aggregates operations in the Midwest, and a leasing operation for liquefied natural gas tankers, which are classified as "Other." A discussion of each business segment's backlog position (the estimated remaining sales value of work to be performed under firm contracts), anticipated programs, operating results and outlook follows. For a summary of business segment financial information, see Note S to the Consolidated Financial Statements which is incorporated herein by reference. MARINE SYSTEMS [BAR CHART] BACKLOG 1996 $7,566 1997 $5,864 1998 $11,728 Year-end backlog includes contracts for the construction of the first four ships of the Virginia-class submarine, formerly known as the New Attack Submarine, 13 Arleigh Burke class destroyers (DDG 51), five strategic sealift ships, and the final Seawolf-class attack submarine. A modification to the final Seawolf is currently under way. The modification is expected to extend the company's delivery date of the final Seawolf to 2003. The company's Marine Systems backlog doubled during 1998 due to several major awards and the acquisition of NASSCO in late 1998. In September, the Navy awarded a $4.2 billion contract to the company for the first four ships of the Virginia-class submarine. The Department of Defense's fiscal year 2000 budget includes funding for a fifth Virginia-class submarine in fiscal year 2003. The company is scheduled to deliver the lead ship of the class in 2004. Construction work will be shared equally with the company as the prime contractor and Newport News Shipbuilding Inc. (Newport News) in the role of subcontractor, in accordance with the terms of the Team Agreement entered into in February 1997 between the company and Newport News. Current Department of Defense plans call for 30 ships in the Virginia-class submarine program. In August, the Navy awarded a $68.5 contract to the newly formed DD 21 Shipbuilder Alliance, composed of the company and Ingalls Shipbuilding, a division of Litton Industries, Inc., for the first phase of system concept design work for the next generation surface combatant ships (DD 21). The company will serve as the Alliance prime contractor for the first phases of the DD 21 program and leads one of the Alliance's two competing design teams. Each team will share equally in the funding of the first phase award, and both shipbuilders are expected to share equally in the production of the DD 21 ships. Based on the Navy's plans, the development, design, construction and life-cycle support of the DD 21 ships is estimated at $25 billion and includes the construction of 32 ships over 25 years, beginning in 2004. In March, the Navy awarded a multiyear contract to the company for the construction of six additional DDG 51s for $2.1 billion. This award extends the company's deliveries to 2006. With the acquisition of NASSCO, Marine Systems added approximately $1.2 billion to its backlog. Included in this backlog are contracts for the construction of five strategic sealift ships for the U.S. Navy. An initial contract for $1.3 billion for the construction of six ships was awarded to NASSCO in 1993, with a seventh ship added in 1997 for approximately $200. During 1998, the first two of these ships were delivered to the U.S. Navy. Delivery of the seventh ship is scheduled for 2001. Also included in this backlog is a seven-year contract with the U.S. Navy for the phased maintenance of six LHA- and LHD-class ships for approximately $500, awarded to NASSCO during 1997. The company is a member of a three-contractor team which in December 1996 was awarded a contract to design and build the Navy's new class of amphibious transport ships (LPD 17). Congressional funding was previously approved for the design and construction of the first two LPD 17 ships. The Navy anticipates this to be a 12-ship program. If the Navy receives Congressional funding for the remaining 10 ships, the company has agreed with its partners that it will construct four ships. Congressional funding for the next two ships, one to be constructed by the company, is contained in the Department of Defense fiscal year 2000 budget request.
RESULTS OF OPERATIONS AND OUTLOOK 1998 1997 1996 ================================================================================ Net Sales $2,666 $2,311 $2,332 Operating Earnings 285 234 216 Operating Margin 10.7% 10.1% 9.3% - --------------------------------------------------------------------------------
GENERAL DYNAMICS 1998 ANNUAL REPORT 21 3 Net sales increased $355 in 1998 due primarily to the acquisition of NASSCO and the transition of the ballistic missile fire control business to the Marine Systems segment from the Combat Systems segment. The operating results of NASSCO have been included with those of the company from the acquisition closing date, November 10, 1998. Operating earnings increased $51 due to earnings rate increases on the DDG 51 program in the fourth quarter and on the Seawolf program in the first quarter. The DDG 51 program continues to realize benefits from cost reduction efforts and diminishing operating risks as the business base stabilizes from the 1998 six-ship multiyear award. The Seawolf program continues to benefit from diminishing operating risks due to the maturity of the program and stabilization of the business base due to the four-ship Virginia-class award. The increase in operating earnings resulting from earnings rate increases was partially offset by a decline in submarine construction activity due to the delivery of the final Trident during late 1997. Net sales decreased $21 in 1997 due to lower submarine construction activity as a result of the delivery of the final Trident and the first Seawolf submarines. This decrease was partially offset by increased engineering and design work on the Virginia-class submarine. Operating earnings increased $18 due to earnings rate increases on the DDG 51 program in the fourth quarter and on the Seawolf program in the third quarter. Looking forward, Marine Systems operating margins in 1999 are expected to approximate those reported in 1998. With the delivery of the second Seawolf submarine in late 1998 and the award of the first four ships of the Virginia-class submarine, operating risks on submarine programs are expected to continue to diminish. Additionally, the DDG 51 program is expected to continue to benefit from cost reduction efforts and stabilization of business base. In the first quarter of 1999, in order to align the company's information technology resources, management moved its Defense Systems operating unit from the Marine Systems segment to the Information Systems and Technology segment. Net sales for this operating unit were approximately $140 in 1998. COMBAT SYSTEMS [BAR CHART] BACKLOG 1996 $2,057 1997 $2,323 1998 $1,579 The company enters 1999 in its fourth production year of a $1.3 billion multiyear contract for the upgrade of approximately 600 M1 Abrams tanks to the M1A2 configuration. Further M1A2 improvements--the System Enhancement Package--will be incorporated in the last 240 tanks of this multiyear contract, with deliveries to begin in August 1999. This contract is part of a U.S. Army procurement program to upgrade approximately 1,150 of the M1 Abrams tanks, with production anticipated through 2005. The company is under contract for the development of several other major systems, including a three-year $300 contract for the design and development of the Advanced Amphibious Assault Vehicle (AAAV) and construction of at least three prototypes. Fabrication of the first prototype vehicle began in 1998. Full-scale production is expected to begin in 2005. The Marine Corps plans to procure more than 1,000 vehicles in the next decade, a production program worth as much as $4 billion. The Crusader Self-Propelled Howitzer program remains the Army's largest single research and development program; the company's share is approximately 25 percent. The U.S. Army plans to build more than 800 Crusader systems, a production program that could be worth as much as $13 billion. Other mature production programs in Combat Systems backlog include several major components of the Bradley combat vehicle and its derivatives; Hydra 70 Rocket; diesel engines; and a four-year program to upgrade Fox Nuclear, Biological and Chemical Reconnaissance System vehicles. In May 1998, the company received a $106 contract from the U.S. Army to begin initial production of the Wolverine Heavy Assault Bridge, a derivative of the Abrams M1 platform. The first vehicle is scheduled for delivery in August 1999, with full-rate production expected to begin in 2000. In October 1998, the company's Armament Systems operating unit formed a joint venture with Mason & Hanger Corporation that consolidated two of the U.S. Army's ammunition production facilities. Previously a consolidated subsidiary, the company's Milan Army Ammunition Plant is now part of the unconsolidated joint venture, American Ordnance LLC. This joint venture is expected to lower costs and improve overall profit margins on the ordnance production programs. The company's share of American Ordnance's pretax earnings are included with those of the Combat Systems segment's operating earnings from its date of formation. Annualized revenues for the company's previous Milan operations were approximately $75. The joint venture's backlog was approximately $150 at the end of 1998.
RESULTS OF OPERATIONS AND OUTLOOK 1998 1997 1996 ================================================================================ Net Sales $1,272 $1,509 $1,026 Operating Earnings 166 187 140 Operating Margin 13.1% 12.4% 13.6% - --------------------------------------------------------------------------------
Net sales decreased $237 in 1998 due primarily to the aforementioned transfer of the ballistic missile fire control business to the Marine Systems segment and completion of production on the Single Channel Ground and Airborne Radio System (SINCGARS). Net sales for the ballistic missile fire control business were approximately $120 in 1997. Operating earnings decreased $21 in 1998 due to the aforementioned declines in sales, including the timing of land combat program 22 GENERAL DYNAMICS 1998 ANNUAL REPORT 4 deliveries, partially offset by higher margins obtained from the SINCGARS program as production was completed. Net sales increased $483 and operating earnings increased $47 during 1997 due primarily to the acquisition of Defense Systems and Armament Systems from Lockheed Martin Corporation on January 1, 1997. For a discussion of the accounting for this transaction and related information, see Note C to the Consolidated Financial Statements. Excluding the results of the acquisitions, net sales decreased five percent due primarily to decreased tank kit production resulting from delivery of the last 48 kits to Egypt as part of the co-production program in early 1997. This decrease was partially offset by increased activity on the AAAV program. Looking forward, the company continues to seek improvements in operating margins in the Combat Systems segment through efforts to reduce costs and pursuit of international sales, including foreign military sales of tanks to Egypt, Greece, Turkey and Saudi Arabia. While operating margins are subject to quarter-to-quarter variations, the company expects full-year 1999 operating margins to approximate those reported in 1998. INFORMATION SYSTEMS AND TECHNOLOGY This recently formed segment is the result of a series of acquisitions of technology companies which are intended to provide the company with broader and deeper capabilities in electronics, systems integration and information management; extend the company's presence geographically; and enable the company to share technology across business segments. In 1998, the company completed two additional acquisitions. On August 3, the company acquired the assets of Caldwell Cable Ventures Inc., a provider of underwater fiberoptic and power cable installation. Caldwell Cable Ventures operates as a subsidiary of Advanced Technology Systems. On June 30, the company acquired the assets of Computer Systems & Communications Corporation, a systems integration and communications company serving the U.S. Department of Defense and other NATO countries. For a discussion of the accounting for these transactions and related information, see Note C to the Consolidated Financial Statements. The operating results of these acquired businesses are included with those of the company from their respective closing dates. The segment's net sales were $796 and operating earnings were $59 for the year ended December 31, 1998. Year-end backlog for this segment totaled approximately $700 and includes contracts at Advanced Technology Systems for continued sales of commercial undersea fiber optic products and sales involving light-wave based transmission systems to various government customers. Contracts at Computing Devices Canada include completion of the IRIS integrated communications system, sonar integration on the Swedish Hydra program, upgrading of AWACS display consoles and development of a landmine detection system. At General Dynamics Information Systems, backlog includes a contract to improve an advanced radar signal processor used in the Joint STARS airborne surveillance program. Backlog at Computing Devices Company in the United Kingdom includes a contract for production work on the Eurofighter program, a partnership program worth approximately $600 over the 20-year contract period. The company continues to seek improvements in operating margins in Information Systems and Technology through efforts to reduce costs. During the second half of this year, the company initiated internal actions to consolidate the electronics manufacturing processes of the segment in Advanced Technology Systems' Greensboro, North Carolina, facility. In the first quarter of 1999, as previously mentioned, management transitioned Defense Systems' business to the Information Systems and Technology segment.
OTHER 1998 1997 1996 ================================================================================ Net Sales $236 $242 $223 Operating Earnings 32 25 (3) - --------------------------------------------------------------------------------
In 1997, Freeman United Coal Mining Company (Freeman) elected to withdraw from the Bituminous Coal Operators' Association (BCOA) and negotiate future contracts independently with the United Mine Workers of America union (UMWA). Freeman's labor contract as part of the BCOA expired on August 1, 1998. On September 11, 1998, the union workforce, representing approximately seventy percent of Freeman's total workforce, went on strike. On December 21, 1998, the strike ended and the company reached a new collective bargaining agreement with its UMWA represented employees. The company believes the terms of the contract, which extend to February 2003, will provide it with cost savings. Despite the impact of the strike at Freeman, operating earnings increased $7 during 1998 due primarily to improved performance of the aggregates business as a result of improved shipments due to favorable weather conditions and reduction in cost, as well as cost reduction efforts at the coal mining operations. Operating earnings increased $28 during 1997 due primarily to the suspension of coal mining activity at an unprofitable location in early 1997. ADDITIONAL FINANCIAL INFORMATION GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased during 1998 due primarily to business acquisitions. As a percentage of net sales, however, general and administrative expenses have remained consistent with 1997 and 1996 amounts. INTEREST INCOME, NET. Interest income was $16 in 1998, down from $40 in 1997 and $59 in 1996 due primarily to a decline in the average cash balance resulting from the use of $1.5 billion for business acquisitions during 1998 and 1997. Interest expense for 1998 increased over 1997 and 1996 as a result of borrowings made in connection with the Computing Devices International acquisition at the end of 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. On March 2, 1999, the company was notified that the Joint Committee on Taxation approved the settlement of the company's tax refund claims GENERAL DYNAMICS 1998 ANNUAL REPORT 23 5 for research and experimentation tax credits for 1987 through 1989. The company expects to net approximately $250 after-tax cash during the second quarter of 1999, including settlement amounts carried forward from tax years 1981 through 1986. The company is presently evaluating the income effect of these settlements, and expects to recognize substantial income from the event in the first quarter of 1999. For further discussion of this and other tax matters, as well as a discussion of the net deferred tax asset, see Notes B and E to the Consolidated Financial Statements. EARNINGS PER SHARE. On March 4, 1998, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend. Accordingly, earnings per share data has been restated to give retroactive recognition to the stock split in prior periods. YEAR 2000. The company has developed an internal Year 2000 compliance program (Y2K Project), which is focusing on three major areas of assessment, project planning and remediation with respect to Year 2000 issues (the inability of date-sensitive software and equipment to properly recognize dates beyond 1999): (1) information technology systems; (2) deliverable software (alone or as a component of another product); and (3) facilities and embedded processors. The company is working with its full-time information technology systems partner on the project. The assessment and project planning phase of the Y2K Project is substantially complete. The company expects the remediation phase to be substantially complete by the end of the first quarter of 1999. Validation testing occurs as systems are remediated and is expected to be finished in the third quarter of 1999. The company generally develops its deliverable software to conform with customer specifications. The company is completing its review of customer contracts and specifications to determine whether any Year 2000 issues exist. Remediation efforts have been undertaken where requested, required and/or funded by the customer. Management believes the company will complete the Y2K Project on schedule and that the costs to implement will not materially impact results of operations or financial condition, as most of these costs are expected to be allowable under the company's U.S. government contracts. The company believes its total Y2K Project costs will not exceed $40. The company has made inquiries of substantially all third parties with whom it has material business relationships to determine if they have Year 2000 issues. To date, the company has not been made aware of any Year 2000 issues with respect to these third parties that would be expected to materially and adversely affect the company. There can be no assurance, however, that these third parties have been or will be successful in identifying or addressing their Year 2000 issues. The implementation schedule, projected costs and beliefs regarding the company's Year 2000 issues detailed above are based on management's best estimates utilizing various assumptions as to future events. There can be no assurances that these expectations will be realized. Based on the status of the Y2K Project and third-party surveys, however, the company does not believe there are any material risks to the company related to Year 2000 issues. The company believes its worst case Year 2000 scenario, if realized, would involve a brief slowdown or cessation of production at one or more business units which would not be expected to have a material adverse effect on financial condition or results of operations. The company engages in continual monitoring, project reviews and internal audit activities designed to ensure Year 2000 readiness. The company has begun, and expects to complete during the second quarter of 1999, contingency planning with respect to Year 2000 issues. MARKET RISK. The company's investment securities carry fixed rates of interest over their respective maturity terms. The company does not use derivative instruments to alter the interest characteristics of these instruments. The aggregate fair value of the company's financial instruments approximates the carrying value at December 31, 1998. In connection with the long-term financing arrangement completed in September 1998, the company entered into an agreement to reduce the exposure to interest rate and foreign currency rate fluctuations. The company does not expect these transactions to have a material effect on the company's results of operations or financial condition. The company's foreign operations attempt to minimize the effects of currency risk by borrowing externally in the local currency and by hedging their limited purchases made in foreign currencies when practical. As a matter of policy, the company does not engage in currency speculation. With the acquisition of Computing Devices International, the company is exposed to the effect of foreign currency fluctuations on the U.S. dollar value of earnings of Computing Devices Canada and Computing Devices Company in the U.K. The company does not expect the impact of foreign currency fluctuations to be material to the company's results of operations or financial condition. NEW ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The company is required to adopt the provisions of the standard during the first quarter of 2000. Because of the company's minimal use of derivatives, the company does not expect that the adoption of the new standard will have a material impact on the results of operations or financial condition. Effective January 1, 1998, the company adopted the provisions of Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides authoritative guidance on accounting for the costs of computer software developed or obtained for internal use and provides authoritative guidance for determining whether computer software is for internal use. The adoption of the SOP did not have a material impact on the company's results of operations or financial condition. The Accounting Standards Executive Committee issued SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," in December 1997. SOP 97-3 provides guidance to aid in the determination of when liabilities should be recognized for guaranty-fund and other insurance-related assessments, as well as requirements for the measurement of the liability and related recoverable asset. The company is required to adopt the provisions of SOP 97-3 in 1999 and expects that it will not have a material impact on the results of operations or financial condition. 24 GENERAL DYNAMICS 1998 ANNUAL REPORT 6 FINANCIAL CONDITION The company's liquidity and financial condition remained strong during 1998, enabling the company to acquire three additional businesses during the year for approximately $300. The company ended the year with $220 of cash and equivalents and marketable securities, a strong balance sheet and the capacity for additional long-term borrowings. A discussion of the company's financial condition in terms of its operating, investing and financing activities as defined in the Consolidated Statement of Cash Flows follows. OPERATING ACTIVITIES--CONTINUING. The net cash provided by continuing operations is summarized by type as follows:
Year Ended December 31 1998 1997 1996 ================================================================================ Operations $424 $ 581 $ 520 Allocated federal income tax payments (110) (115) (127) Other 38 62 22 - -------------------------------------------------------------------------------- Operating cash flows 352 528 415 Decrease in marketable securities, net 30 62 742 - -------------------------------------------------------------------------------- Net cash provided by continuing operations $382 $ 590 $1,157 - --------------------------------------------------------------------------------
The four types of cash flows are described as follows: - - Operations represent the pretax cash flows generated by the company's business segments. Due to the deliveries of two maturing submarine programs during 1997, cash flows from operations exceeded operating earnings plus depreciation and amortization for each of the years ended December 31, 1997 and 1996. This trend is not expected to continue due to the production growth on several new programs, including the Virginia-class submarine and light armored vehicles. Even though the company anticipates investing in working capital during this production growth life cycle, the company still expects to generate funds from operations in excess of its short- and long-term liquidity needs. - - For purposes of preparing the Consolidated Statement of Cash Flows, federal income tax payments are allocated between continuing and discontinued operations based on the portion of taxable income attributed to each. - - Other cash flows include items that are not directly attributable to a business segment, such as interest received from investments in excess of interest paid on debt. - - In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the purchases, sales and maturities of marketable securities classified as trading are reflected as cash flows from operating activities. The decrease in each of the three years in the period ended December 31, 1998, was due to the company altering its investment portfolio to include more available-for-sale securities, which are included in investing activities. OPERATING ACTIVITIES--DISCONTINUED. Cash flows from discontinued operations improved during 1998 due primarily to decreased payments for disposition-related liabilities. For discussion of the A-12 program litigation, see Note P to the Consolidated Financial Statements. INVESTING ACTIVITIES. On February 10, 1999, the company made an offer to the board of directors of Newport News to acquire the outstanding shares of Newport News for $38.50 per share. The proposed transaction is subject to various conditions, including regulatory approvals and acceptance by the board of directors and shareholders of Newport News. If the transaction goes forward, the company would fund the expected acquisition cost of approximately $1.5 billion with existing and new credit facilities. As previously discussed, the company acquired three businesses in 1998 and six businesses in 1997. For further discussion of each acquisition, see Note C to the Consolidated Financial Statements. The company liquidated substantially all of its available-for-sale investment portfolio in order to acquire these businesses. The remaining fixed purchase consideration of $51 in cash for three individual stockholders' share of NASSCO common stock will be paid from available funds on May 5, 1999. The company commenced a project to modernize the facilities and to improve productivity at its Bath Iron Works' shipyard in late 1997. The company anticipates investing approximately $200 over a period of three years. Construction began in November 1998. Following the sale in 1993 and 1994 of the company's operations located in southern California, the company retained certain properties. These properties have been segregated on the Consolidated Balance Sheet as real estate held for development. Development work began in 1994 on certain of the properties in order to maximize the value the company receives from their sale. In 1998, the company completed the sale of a 232-acre site in the Kearny Mesa section of San Diego for approximately $80 in cash, and in 1997, received $23 in cash from the sale of certain other assets related to these properties. FINANCING ACTIVITIES. In connection with the company's acquisition of Computing Devices International on December 31, 1997, the company borrowed in Canadian dollars the U.S. equivalent of $220. The company repaid $70 of this note during 1998 and refinanced the balance in September 1998 under a 10-year arrangement. The company exercised its option to call for the early redemption of all of its outstanding 9.95 percent Debentures on April 1, 1998, for a total of approximately $40. On March 3, 1999, the company's board of directors declared an increased regular quarterly dividend of $.24 per share. The company had previously increased the quarterly dividend to $.22 per share in March 1998 and to $.205 per share in March 1996. In 1994, the board of directors reconfirmed management's authority to repurchase, at its discretion, up to six million shares of the company's common stock. During 1998, 1997 and 1996, the company repurchased approximately 600,000, 1.8 million and 780,000 shares, respectively, of its stock on the open market for a total of $28, $60 and $23, respectively. As of December 31, 1998, the company had repurchased approximately 4.3 million shares. The company has the capacity for long-term borrowings and currently has available a committed, $400 line of credit expiring in December 2002. GENERAL DYNAMICS 1998 ANNUAL REPORT 25 7 CONSOLIDATED STATEMENT OF EARNINGS
Year Ended December 31 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 ================================================================================================================================== NET SALES $4,970 $4,062 $3,581 OPERATING COSTS AND EXPENSES 4,428 3,616 3,228 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING EARNINGS 542 446 353 Interest income, net 4 36 55 Other income (expense), net 3 (3) 1 - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 549 479 409 Provision for income taxes 185 163 139 - ----------------------------------------------------------------------------------------------------------------------------- NET EARNINGS $ 364 $ 316 $ 270 - ----------------------------------------------------------------------------------------------------------------------------- NET EARNINGS PER SHARE: Basic $ 2.88 $ 2.51 $ 2.14 Diluted $ 2.86 $ 2.50 $ 2.13 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 26 GENERAL DYNAMICS 1998 ANNUAL REPORT 8 CONSOLIDATED BALANCE SHEET
December 31 (DOLLARS IN MILLIONS) 1998 1997 ============================================================================================================================ ASSETS - ----------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and equivalents $ 127 $ 336 Marketable securities 93 105 - ----------------------------------------------------------------------------------------------------------------------- 220 441 - ----------------------------------------------------------------------------------------------------------------------- Accounts receivable 316 234 Contracts in process 952 702 Other current assets 385 312 - ----------------------------------------------------------------------------------------------------------------------- Total Current Assets 1,873 1,689 - ----------------------------------------------------------------------------------------------------------------------- NONCURRENT ASSETS: Leases receivable--finance operations 181 193 Real estate held for development 65 128 Property, plant and equipment, net 698 592 Intangible assets 1,525 1,204 Other assets 230 285 - ----------------------------------------------------------------------------------------------------------------------- Total Noncurrent Assets 2,699 2,402 - ----------------------------------------------------------------------------------------------------------------------- $4,572 $4,091 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 2 $ 108 Short-term debt--finance operations 58 18 Accounts payable 295 255 Other current liabilities 1,106 910 - ----------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,461 1,291 - ----------------------------------------------------------------------------------------------------------------------- NONCURRENT LIABILITIES: Long-term debt 167 157 Long-term debt--finance operations 82 100 Other liabilities 643 628 Commitments and contingencies (See Note O) - ----------------------------------------------------------------------------------------------------------------------- Total Noncurrent Liabilities 892 885 - ----------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Common stock, including surplus (shares issued 168,774,672) 285 220 Retained earnings 2,640 2,386 Treasury stock (shares held 1998, 42,081,130 ; 1997, 42,989,118) (706) (691) Accumulated other comprehensive income -- -- - ----------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 2,219 1,915 - ----------------------------------------------------------------------------------------------------------------------- $4,572 $4,091 - -----------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. GENERAL DYNAMICS 1998 ANNUAL REPORT 27 9 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (DOLLARS IN MILLIONS) 1998 1997 1996 ====================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 364 $ 316 $ 270 Adjustments to reconcile net earnings to net cash provided by continuing operations-- Depreciation, depletion and amortization 126 91 67 Decrease (Increase) in assets, net of effects of business acquisitions-- Marketable securities 30 62 742 Accounts receivable (17) (6) 25 Contracts in process (209) 86 41 Leases receivable--finance operations 11 10 8 Other current assets 5 18 -- Increase (Decrease) in liabilities, net of effects of business acquisitions-- Accounts payable and other current liabilities 8 (35) 2 Current income taxes 99 66 76 Deferred income taxes (2) (15) (61) Other, net (33) (3) (13) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 382 590 1,157 Net cash used by discontinued operations (12) (33) (121) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 370 557 1,036 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired (256) (1,230) (59) Purchases of available-for-sale securities (443) (440) (986) Sales/maturities of available-for-sale securities 493 916 484 Capital expenditures (158) (83) (75) Proceeds from sale of assets 24 11 41 Proceeds from sale of real estate held for development 74 23 -- Other (3) (5) (10) - -------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (269) (808) (605) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt -- 220 -- Proceeds from issuance of debt--finance operations -- -- 150 Repayment of debt (157) -- -- Repayment of debt--finance operations (38) (17) (158) Dividends paid (108) (102) (101) Purchase of common stock (28) (60) (23) Proceeds from option exercises 23 30 8 Other (2) -- (6) - -------------------------------------------------------------------------------------------------------------------- Net Cash (Used) Provided by Financing Activities (310) 71 (130) - -------------------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (209) (180) 301 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 336 516 215 - -------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 127 $ 336 $ 516 - --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 28 GENERAL DYNAMICS 1998 ANNUAL REPORT 10 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated Common Stock Treasury Stock Other -------------------------- Retained ----------------- Comprehensive (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Shares Par Surplus Earnings Shares Amount Income =================================================================================================================================== BALANCE, DECEMBER 31, 1995 168,774,672 $169 $11 $2,005 42,283,922 $625 $7 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings 270 Unrealized gains on securities, net of reclassification adjustment (6) Cash dividends declared ($.82 per share) (103) Shares purchased 783,800 23 Shares issued under Incentive Compensation Plan 11 (497,408) 2 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 168,774,672 169 22 2,172 42,570,314 650 1 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings 316 Unrealized gains on securities, net of reclassification adjustment (1) Cash dividends declared ($.82 per share) (102) Shares purchased 1,832,500 60 Shares issued under Incentive Compensation Plan 29 (1,413,696) (19) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 168,774,672 169 51 2,386 42,989,118 691 -- - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings 364 Unrealized gains on securities 1 Foreign currency translation adjustment (1) Cash dividends declared ($.88 per share) (110) Shares purchased 598,000 28 Shares issued for business acquisition 4 (157,283) (3) Shares issued under Incentive Compensation Plan 61 (1,348,705) (10) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 168,774,672 $169 $116 $2,640 42,081,130 $706 $-- - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. GENERAL DYNAMICS 1998 ANNUAL REPORT 29 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. 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 for contracts that meet Statement of Position (SOP) 81-1 criteria. These rates are applied to contract costs, including general and administrative expenses, for the determination of sales and operating earnings. Program earnings rates are reviewed quarterly to assess revisions in contract values and estimated costs at completion. Based on these assessments, any changes in earnings rates are made prospectively. Any anticipated losses on 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 were $384, $334 and $275 in 1998, 1997 and 1996, respectively, and are included in operating costs and expenses on the Consolidated Statement of Earnings. INTEREST, NET. Interest income was $16, $40 and $59 in 1998, 1997 and 1996, respectively. Interest payments, including the company's finance operations, were $18, $12 and $14 in 1998, 1997 and 1996, respectively. Interest expense incurred by the company's finance operations is classified as operating costs and expenses. CASH AND EQUIVALENTS AND MARKETABLE SECURITIES. The company classifies its securities based on the remaining maturity at the time of purchase. The company considers securities with a maturity of three months or less to be cash equivalents. The company adjusts all marketable securities to fair value. In general, market adjustments to those securities with maturities less than one year are recognized in earnings and included as a component of accumulated other comprehensive income for securities with maturities greater than one year. At December 31, 1998, marketable securities consist primarily of corporate debt and government backed mortgage securities. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS. Accounts receivable represent only amounts billed and currently due from customers. Recoverable costs and accrued profit related to long-term contracts and programs on which revenue has been recognized, but billings have not been presented to the customer (unbilled receivables), are included in contracts in process. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried at historical 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. Depreciation expense was $83, $70 and $59 in 1998, 1997 and 1996, respectively. IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, identifiable intangibles and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the company estimates the future cash flows expected to result from the use of the asset. If the asset is held for sale, the company reviews its fair value less cost to sell. ENVIRONMENTAL LIABILITIES. The company accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Cleanup and other environmental exit costs related to sold businesses were recorded at the time of disposal. Recorded liabilities have not been discounted. To the extent the U.S. government has specifically agreed to pay the ongoing maintenance and monitoring costs at sites currently used in the conduct of the company's government contracting business, these costs are treated as contract costs and recognized as paid. STOCK-BASED COMPENSATION. The company measures compensation cost for stock options as the excess, if any, of the quoted market price of the company's stock at the measurement date over the exercise price. Stock awards are recorded at fair value at the date of award. TRANSLATION OF FOREIGN CURRENCIES. Local currencies have been determined to be functional currencies for the company's international operations. Foreign currency balance sheets are translated at the end-of-period exchange rates and earnings statements at the average exchange rates for each period. The resulting foreign currency translation adjustments are included in the calculation of accumulated other comprehensive income and included in the equity section on the Consolidated Balance Sheet. COMPREHENSIVE INCOME. Effective January 1, 1998, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires the presentation and 30 GENERAL DYNAMICS 1998 ANNUAL REPORT 12 disclosure of comprehensive income. Comprehensive income was $364, $315 and $264 in 1998, 1997 and 1996, respectively. 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. SUBSEQUENT EVENTS On March 2, 1999, the company was notified that the Joint Committee on Taxation approved the settlement of the company's tax refund claims for research and experimentation tax credits for 1987 through 1989. The company expects to net approximately $250 after-tax cash during the second quarter of 1999, including settlement amounts carried forward from tax years 1981 through 1986. The company is presently evaluating the income effect of these settlements, and expects to recognize substantial income from the event in the first quarter of 1999. On February 10, 1999, the company made an offer to the board of directors of Newport News Shipbuilding Inc. (Newport News) to acquire the outstanding shares of Newport News for $38.50 per share. The proposed transaction is subject to various conditions, including regulatory approvals and acceptance by the board of directors and shareholders of Newport News. C. ACQUISITIONS On November 10, 1998, the company acquired control of NASSCO Holdings Incorporated (NASSCO). The purchase consideration for 100 percent of NASSCO will be $369 in cash plus the obligation to discharge $46 in debt. The company paid $318 of the total consideration and repaid the $46 obligation in cash during November 1998 for the portion of NASSCO held by the NASSCO Holdings Incorporated Employee Stock Ownership Plan. The remaining fixed purchase consideration of $51 will be paid to three individual stockholders in cash on May 5, 1999, in consideration for their share of NASSCO common stock. NASSCO's wholly owned subsidiaries include National Steel and Shipbuilding Company, which is in the business of ship design, engineering, construction and repair for the United States military and various commercial customers, and NASSCO Funding Corporation, a finance subsidiary. See Note M for further details related to this finance operation. The company made two other acquisitions during 1998 for approximately $20 in cash and stock. Effective December 31, 1997, the company purchased the assets of Computing Devices International, formerly a division of Ceridian Corporation, for approximately $500, net of cash acquired of $100. The company borrowed $220 in connection with the acquisition. See Note J for details on the terms of the debt. Computing Devices International added three new defense electronics and system integration units to the company, General Dynamics Information Systems, Computing Devices Canada Ltd. and Computing Devices Company Limited in the United Kingdom. Effective October 1, 1997, the company purchased the assets of Advanced Technology Systems, formerly an operating unit of Lucent Technologies, for $267, net of purchase price adjustment of $17 received in January 1998. Advanced Technology Systems is a leading supplier of undersea surveillance systems, signal processing and vibration control systems and related technologies for a wide range of applications. Effective January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, formerly operating units of Lockheed Martin Corporation, for $450 in cash. Defense Systems builds missile guidance and naval fire control systems. Their manufacture of light vehicles and turrets and transmissions for combat vehicles was transferred to another operating unit of the company in early 1998. Armament Systems designs, develops and produces advanced gun, ammunition handling and air defense systems, and is a leader in the production of ammunition and ordnance products. Each of these acquisitions has been accounted for under the purchase method of accounting. The purchase prices have been allocated to the estimated fair values of net tangible assets acquired, with any excess recorded as intangible assets (see Note H). Certain of the estimates related to the acquisition of NASSCO are still preliminary at December 31, 1998, but will be finalized within one year from its date of acquisition. The operating results of the acquired businesses are included with those of the company from their respective closing dates. D. EARNINGS PER SHARE The company has adopted the provisions of SFAS No. 128, "Earnings Per Share," which requires the presentation of earnings per share on both a basic and diluted basis for all periods presented. Basic and diluted weighted average shares outstanding are as follows (in thousands):
Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------- Basic weighted average shares outstanding 126,377 125,674 126,343 Assumed exercise of options 811 712 517 Contingently issuable shares 22 194 60 - ------------------------------------------------------------------------- Diluted weighted average shares outstanding 127,210 126,580 126,920 - -------------------------------------------------------------------------
GENERAL DYNAMICS 1998 ANNUAL REPORT 31 13 E. INCOME TAXES The provision for U.S. federal and foreign income taxes included on the Consolidated Statement of Earnings is summarized as follows: Year Ended December 31 1998 1997 1996 ================================================= Current: U.S. Federal $172 $178 $200 Foreign 15 -- -- - ------------------------------------------------- Total current 187 178 200 - ------------------------------------------------- Deferred: U.S. Federal 7 (15) (61) Foreign (9) -- -- - ------------------------------------------------- Total deferred (2) (15) (61) - ------------------------------------------------- $185 $163 $139 ================================================= The provision for state and local income taxes, which is allocable to U.S. government contracts, is included in operating costs and expenses. The reconciliation from the statutory federal income tax rate to the company's effective income tax rate is as follows: Year Ended December 31 1998 1997 1996 ==================================================== Statutory income tax rate 35% 35% 35% Other (1) (1) (1) - ---------------------------------------------------- Effective income tax rate 34% 34% 34% ==================================================== The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consist of the following: December 31 1998 1997 ================================================= Long-term contract costing methods $ 90 $ 98 A-12 termination 93 95 Accrued costs on disposed businesses 62 74 Coal mining liabilities 26 27 Postretirement liabilities 47 43 Tax loss carryforwards 33 -- Other 208 121 - ------------------------------------------------- Deferred Assets $559 $458 - ------------------------------------------------- Lease income $ 66 $ 70 Commercial pension asset 52 48 Intangible assets 46 38 Property basis differences 25 6 Other 83 11 - ------------------------------------------------- Deferred Liabilities $272 $173 - ------------------------------------------------- Net Deferred Asset $287 $285 ================================================= No material valuation allowance was required for the company's deferred tax assets at December 31, 1998 and 1997. The current portion of the net deferred tax asset is $311 and $223 at December 31, 1998 and 1997, respectively, and is included in other current assets on the Consolidated Balance Sheet. The company made U.S. federal and foreign income tax payments of $108, $97 and $199 in 1998, 1997 and 1996, respectively. The company and the U.S. Internal Revenue Service (IRS) settled refund claims for research and experimentation tax credits for the years 1981 through 1989 for approximately $250 (including after-tax interest). See Note B for further discussion. The IRS has completed its examination of the company's 1990 through 1993 consolidated federal income tax returns. Unresolved matters for these years will be protested to the IRS Appeals Division. A refund claim by the company for $78 (plus interest) for research and experimentation tax credits for the year 1990 will also be considered by the IRS Appeals Division. The IRS is currently examining the company's 1994 and 1995 consolidated federal income tax returns. Since the company has recorded liabilities for tax contingencies, resolution of these years is not expected to have a materially unfavorable impact on the company's results of operations or financial condition. F. CONTRACTS IN PROCESS Contracts in process consist of the following: December 31 1998 1997 ================================================ Contract costs and estimated profits $7,989 $6,382 Other costs 485 410 - ------------------------------------------------ 8,474 6,792 Less advances and progress payments 7,522 6,090 - ------------------------------------------------ $ 952 $ 702 ================================================ 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, postretirement benefits and environmental expenses. Recovery of these costs under contracts is considered probable based on existing backlog. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company's remaining contracts could be affected. Under the contractual arrangements by which progress payments are received, the U.S. government asserts that it has a security interest in the contracts in process identified with the related contracts. 32 GENERAL DYNAMICS 1998 ANNUAL REPORT 14 G. PROPERTY, PLANT AND EQUIPMENT, NET The major classes of property, plant and equipment are as follows: December 31 1998 1997 ================================================ Land and improvements $ 95 $ 82 Mineral reserves 88 87 Buildings and improvements 323 296 Machinery and equipment 1,120 1,086 Construction in process 100 25 - ------------------------------------------------ 1,726 1,576 Less accumulated depreciation, depletion and amortization 1,028 984 - ------------------------------------------------ $ 698 $ 592 ================================================ Certain of the company's plant facilities are provided by the U.S. government and therefore not included above. H. INTANGIBLE ASSETS Intangible assets resulting from the company's acquisitions consist of the following: December 31 1998 1997 ==================================================== Contracts and programs acquired $ 416 $ 376 Goodwill 1,109 828 - ---------------------------------------------------- $1,525 $1,204 ==================================================== Intangible assets are shown net of accumulated amortization of $74 and $31 at December 31, 1998 and 1997, respectively. Intangible assets are amortized on a straight-line basis over periods ranging from 8 to 40 years. I. OTHER CURRENT LIABILITIES Other current liabilities consist of the following: December 31 1998 1997 ================================================ Workers' compensation $ 340 $242 Retirement benefits 196 221 Salaries and wages 84 93 Customer deposits 139 114 Other 347 240 - ------------------------------------------------ $1,106 $910 ================================================ J. DEBT Debt consists of the following: December 31 1998 1997 ================================================= Senior notes $142 $220 9.95% Debentures -- 38 Industrial development bonds 15 -- Title XI bonds 5 -- Other 7 7 - ------------------------------------------------- 169 265 Less current portion 2 108 - ------------------------------------------------- $167 $157 ================================================= On December 31, 1997, the company borrowed in Canadian dollars the U.S. equivalent of $220 in connection with its acquisition of Computing Devices International. In April 1998, the company repaid $70 of this note, and in September 1998, refinanced the balance with a note maturing in 2008. The debt carries a 6.32 percent interest rate, interest payable semi-annually. On April 1, 1998, the company exercised its option to call for the early redemption of all of its outstanding 9.95 percent Debentures. On November 10, 1998, the company acquired control of NASSCO, which has several debt obligations. The industrial development bonds are due December 1, 2002, and bear interest at 6.60 percent per annum with interest payable semi-annually. A sinking fund agreement exists for the partial repayment of these bonds and requires the company to make deposits semi-annually until maturity. As the company has prepaid its deposit requirements, the company is not required to make additional deposits until 2000. The Title XI bonds are obligations incurred for capital and technology improvements under a loan guaranteed by the expanded Title XI program of the National Defense Authorization Act for Fiscal Year 1994. Principal and interest are payable quarterly through 2001. The interest rate varies based on the prevailing LIBOR rate. The company has the capacity to borrow up to $450 under its domestic committed lines of credit. Of this amount, $50 is available under a credit facility expiring in June 2000 and $400 is available under a line of credit expiring in December 2002. International credit arrangements include a credit facility of approximately $35 expiring in August 1999. There were no material borrowings under the company's lines of credit during 1998 or 1997. GENERAL DYNAMICS 1998 ANNUAL REPORT 33 15 K. OTHER LIABILITIES Other liabilities consist of the following: December 31 1998 1997 ==================================================== Accrued costs on disposed businesses $177 $211 Retirement benefits 183 154 Coal mining related liabilities 73 78 Other 210 185 - ---------------------------------------------------- $643 $628 ==================================================== The company has recorded liabilities for contingencies related to disposed businesses. These liabilities include postretirement benefits, environmental, legal and other costs. The company has certain liabilities which are specific to the coal mining industry, including workers' compensation and reclamation. The company is subject to the Federal Coal Mine Health & Safety Act of 1969, as amended, and the related workers' compensation laws in the states in which it has operated. These laws require the company to pay benefits for occupational disability resulting from coal workers' pneumoconiosis (black lung). The liability for known claims and an actuarially determined estimate of future claims that will be awarded to current and former employees is discounted based on the current rate. Liabilities to reclaim land disturbed by the mining process and to perform other closing functions are recorded over the estimated production lives of the mines. L. SHAREHOLDERS' EQUITY STOCK SPLIT. On March 4, 1998, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend, which was distributed on April 2, 1998, to shareholders of record on March 13, 1998. Shareholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings and surplus to common stock the par value of the additional shares arising from the split. In addition, all references in the financial statements to number of shares, per share amounts, stock option data and market prices of the company's common stock have been restated to give effect to the stock split. AUTHORIZED STOCK. The authorized capital stock of the company consists of 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. SHARES OUTSTANDING. The company had 126,693,542, 125,785,554 and 126,204,358 shares of common stock outstanding as of December 31, 1998, 1997 and 1996, respectively. M. FINANCE OPERATIONS The company owns three liquefied natural gas (LNG) tankers which have been leased to a nonrelated company. The U.S. government-guaranteed Title XI Bonds, which financed the leases, were retired in 1996. This retirement was financed by the private placement of new bonds that are secured by the LNG tankers. The new bonds are callable under certain conditions and are nonrecourse to the company. Accordingly, in the event the lessee defaults on the lease payments, the company is not obligated to repay the debt. The 1996 refinancing did not have a material impact on the company's results of operations or financial condition. The following is a summary of the comparative financial statements for the LNG tanker finance operations: BALANCE SHEET DATA DECEMBER 31 1998 1997 ====================================================== ASSETS Leases receivable $193 $204 Due from parent 40 52 - ------------------------------------------------------ $233 $256 - ------------------------------------------------------ LIABILITIES AND SHAREHOLDER'S EQUITY Debt $100 $118 Income taxes 66 70 Shareholder's equity 67 68 - ------------------------------------------------------ $233 $256 ====================================================== EARNINGS DATA Year Ended December 31 1998 1997 1996 ================================================= Interest income $20 $21 $23 Interest expense 7 9 10 Income taxes and other 4 3 7 - ------------------------------------------------- Net earnings $ 9 $ 9 $ 6 ================================================= On October 1, 1995, the leases were extended from 2004 through 2009. These leases are classified as direct financing leases. The lease extension increased aggregate future minimum lease payments and unearned interest income, but did not alter the company's net investment in leases receivable. The components of the company's net investment in the leases receivable are as follows: December 31 1998 1997 ================================================ Aggregate future minimum lease payments $287 $318 Unguaranteed residual value 38 38 Less unearned interest income 132 152 - ------------------------------------------------ $193 $204 ================================================ The company is scheduled to receive minimum lease payments of $31 annually in each of the next five years. Semiannual scheduled payments, sufficient to retire 100 percent of the aggregate principal amount of the debt, have commenced and will continue through maturity in 2004. The 34 GENERAL DYNAMICS 1998 ANNUAL REPORT 16 weighted average interest rate on the debt is 6.2 percent. The schedule of principal payments for the next five years is $19 in 1999, $19 in 2000, $21 in 2001, $22 in 2002 and $18 in 2003. NASSCO Funding Corporation, discussed in Note C, is a special purpose corporation in the business of issuing commercial paper to assist in providing funding for the Capital Construction Fund (CCF) (see Note N). The shares invested in the CCF collateralize these commercial paper obligations. The maximum maturity period on the commercial paper is 60 days. Certain covenants of the commercial paper agreement require that 95 percent of the CCF be invested in high-grade government backed mortgage securities. In addition, on December 31, 1998, NASSCO Funding Corporation had a $20 revolving credit agreement (expiring May 1999) with a financial institution which provides liquidity in the event that new commercial paper cannot be reissued to replace maturing commercial paper notes. No balance was outstanding under the agreement at December 31, 1998. The following is a summary of the financial statements for NASSCO Funding Corporation: BALANCE SHEET DATA December 31 1998 ====================================================== ASSETS Marketable securities $48 - ------------------------------------------------------ LIABILITIES AND SHAREHOLDER'S EQUITY Commercial paper $40 Shareholder's equity 8 - ------------------------------------------------------ $48 ====================================================== No material earnings from NASSCO Funding Corporation are included in the company's results of operations due to the consummation of the acquisition on November 10, 1998. N. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the company's financial instruments are as follows: December 31 1998 1997 ================================================================= Carrying Fair Carrying Fair Amount Value Amount Value - ----------------------------------------------------------------- Cash and equivalents and marketable securities $220 $220 $441 $441 Other available-for-sale investments 55 55 46 46 Short- and long-term debt 169 169 265 268 Short- and long-term debt--finance operations 140 144 118 120 - ----------------------------------------------------------------- Fair value is based on quoted market prices, except for privately placed debt where fair value is based on risk-adjusted discount rates. Marketable securities classified as available-for-sale were $48 and $30 at December 31, 1998 and 1997, respectively, and included primarily government backed mortgage and corporate debt securities, respectively. The 1998 balance collateralizes the CCF. Qualified assets deposited into the CCF are designated to provide funds for the acquisition, construction or reconstruction of U.S. flag and U.S. built marine vessels. Such deposits are not subject to federal income taxes in the year the associated revenue is earned, but are taxable with interest payable from the year of the deposit for the most recent qualified activity, if withdrawn for general corporate purposes or other nonqualified purposes or upon termination of the agreement. Deposits into the CCF are preference items for inclusion in federal alternative minimum taxable income. Deposits into the CCF not committed for qualified vessels within 25 years from the date of deposit will be treated as nonqualified withdrawals. Any income relating to a nonqualified withdrawal is likely to be taxable in the year of withdrawal. At December 31, 1998, the CCF was funded by the marketable securities discussed above and qualified accounts receivable of an affiliate of approximately $37. The assets designated for the CCF are restricted. Other available-for-sale investments at December 31, 1998 and 1997 consist primarily of $46 of U.S. government debt obligations restricted for payment of workers' compensation benefits under an agreement with the State of Maine. Also included at December 31, 1998, are $5, primarily in municipal securities, restricted for repayment of the industrial development bonds discussed in Note J, and $4 in equity securities restricted for the payment of supplemental retirement obligations discussed in Note R. Amortized cost for available-for-sale marketable securities and other investments approximated fair value at December 31, 1998 and 1997. For debt and equity securities and obligations classified as other available-for-sale investments at December 31, 1998, $11 mature within one year, $22 between one and five years, $13 between five and ten years and $9 had no fixed maturity date. The proceeds from the sale of available-for-sale securities were $274, $612 and $228 in 1998, 1997 and 1996, respectively. The company was contingently liable for debt and lease guarantees and other arrangements aggregating up to a maximum of approximately $35 at December 31, 1998. The company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. O. COMMITMENTS AND CONTINGENCIES LITIGATION. Claims made by and against the company regarding its consolidated federal income tax returns are discussed in Notes GENERAL DYNAMICS 1998 ANNUAL REPORT 35 17 B and E. Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note P. On April 19, 1995, 101 then-current and former employees of General Dynamics' Convair Division in San Diego, California filed a six-count complaint in the Superior Court of California, County of San Diego, styled Argo, et al. v. General Dynamics, et al. In addition to General Dynamics, four of Convair's then-current or former managers were also named as defendants. The plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit by, among other things, concealing its plans to close the Convair Division. On May 1, 1997, a jury rendered a verdict of $101 against the company and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The company and one of the defendants have appealed the judgment to the Court of Appeals of the State of California, Fourth Appellate District, Division One. On appeal, the company is seeking to have the judgment overturned in its entirety or, alternatively, a substantial reduction in the jury's punitive damage award. The company believes it has substantial legal defenses, but in any case, it believes the punitive damage award is excessive as a matter of law. Management currently believes the ultimate outcome will not have a material impact on the company's results of operations or financial condition. On July 13, 1995, General Dynamics Corporation was named as a defendant in a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics Corporation, et al. The complaint also names two insurance brokers, Lloyd Thompson, Ltd. and Willis Caroon Corporation of Missouri, as defendants. The plaintiffs are members of certain Lloyds' of London syndicates and British insurance companies who sold the company excess loss insurance policies covering the company's self-insured workers' compensation program at Electric Boat for four policy years, from July 1, 1988, to June 30, 1992. The plaintiffs allege that when procuring the policies the company and its brokers made misrepresentations to the plaintiffs and failed to disclose facts which were material to the risk. The plaintiffs also allege that the company has been negligent in its administration of workers' compensation claims. The plaintiffs seek rescission of the policies, a declaratory judgment that the policies are void, and compensatory damages in an unspecified amount. General Dynamics has counterclaimed, alleging that the plaintiffs have breached their insurance contracts by failing to pay claims. General Dynamics seeks a declaratory judgment that the policies are valid, actual damages and payment of a penalty under a Missouri statute for the plaintiffs' vexatious and unreasonable failure to pay claims. The company does not expect that this case will have a material impact on the company's results of operations or financial conditions. On August 16, 1996, plaintiffs HE Holdings, Inc., and Hughes Missile Systems Company filed an action against General Dynamics Corporation in the Superior Court for the State of California for the County of Los Angeles. In June 1998, plaintiffs filed a sixth amended complaint in which plaintiffs were redesignated as HE Holdings, Inc., now known as Raytheon Company and Hughes Missile Systems Company, now known as Raytheon Missile Systems Company ("plaintiffs"). On September 8, 1998, plaintiffs filed a seventh amended complaint which is now pending. The seventh amended complaint alleges breach of contract, tortious interference with contract, conversion, fraud and breach of the implied covenant of good faith and fair dealing, all with respect to the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business, various related leases and other alleged agreements. The seventh amended complaint seeks approximately $25 in compensatory damages, as well as punitive damages and declaratory relief. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. The company is either a named defendant or a third-party defendant in certain multi-plaintiff tort cases pending in Tucson, Arizona, captioned: Cordova, et al. v. Hughes Aircraft Co., et al.; Lanier, et al. v. Hughes Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et al. v. Hughes Aircraft Co. The first case was filed in Superior Court for Pima County, Arizona. The remaining cases are pending in federal district court in Arizona. In all four cases the plaintiffs allege that they suffered personal injuries and/or property damage from chronic exposure to drinking water alleged to be contaminated with trace amounts of the industrial solvent trichloroethylene. The alleged source of the contamination was industrial facilities in and around the site now occupied by the Tucson International Airport (TIA) and U.S. Air Force Plant #44. In addition to the company, defendants are Hughes Aircraft Co. (now Raytheon), the Tucson Airport authority (TAA), the City of Tucson (the City) and McDonnell Douglas Corp. (MDC). The company does not believe that these lawsuits will have a material impact on the company's results of operations or financial condition. In other litigation concerning the Tucson site, the company is a defendant in two cases brought in federal district court in Arizona by TAA and the City under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). Plaintiffs seek reimbursement of CERCLA response costs and a declaration of the company's alleged liability with respect to soil and groundwater contamination at portions of the Tucson site. On September 30, 1998, the U.S. Environmental Protection Agency (U.S. EPA) issued a Special Notice Letter notifying the company that it was a potentially responsible party (PRP) with respect to contamination of soil and shallow groundwater on and near property currently occupied by the TIA. Other PRPs receiving a similar notice were the U.S. Air Force, TAA, MDC and the City. The company has reached an agreement to settle the litigation brought by TAA and the City and is negotiating a potential consent decree with the U.S. EPA in response to the Special Notice Letter. The company does not believe that these lawsuits or the U.S. EPA's 36 GENERAL DYNAMICS 1998 ANNUAL REPORT 18 notice of potential liability will have a material impact on the company's results of operations or financial condition. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its liabilities in these proceedings, in the aggregate, are not material to the company's results of operations or financial condition. ENVIRONMENTAL. The company is directly or indirectly involved in certain Superfund sites in which the company, along with other major U.S. corporations, has been designated a PRP by the U.S. 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 its liability at any individual site is not material. The company is also involved in the investigation, cleanup and remediation of various conditions at sites it currently or formerly owned or operated. The company measures its environmental exposure based on enacted laws and existing regulations and on the technology expected to be approved to complete the remediation effort. The estimated cost to perform each of the elements of the remediation effort is based on when those elements are expected to be performed. Where a reasonable basis for apportionment exists with other PRPs, the company estimates only its allowable share of the joint and several remediation liability for a site, taking into consideration the solvency of other participating PRPs. Based on a site by site analysis, the company believes it has adequate accruals for any liability it may incur arising from sites currently or formerly owned or operated at which there is a known environmental condition, or Superfund site at which the company is a PRP. OTHER. In the ordinary course of business, the company has entered into letter of credit arrangements and other arrangements with financial institutions and insurance carriers aggregating approximately $410 at December 31, 1998. For discussion of other financial guarantees, see Note N. The company's rental commitments under existing operating leases at December 31, 1998, are not significant. P. TERMINATION OF A-12 PROGRAM The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy's new carrier-based Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas, now owned by the Boeing Company, (the contractors) were parties to the contract with the Navy, each had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors' 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 relief. A trial on Count XVII of the complaint, which relates to the propriety of the process used in terminating the contract for default, was concluded in October 1993. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following further proceedings, the court issued an order converting the termination for default to a termination for convenience. On February 23, 1998, a final judgment was entered in favor of the contractors for $1,200 plus interest. The U.S. government filed an appeal in the U.S. Court of Appeals for the Federal Circuit. The U.S. government seeks reversal of the judgment and a remand to the trial court for a full trial on the merits. The appeal has been briefed and argued. Final resolution of the A-12 litigation will depend on the outcome of the appeal and further proceedings in the trial court, if any. The company has not recognized any claim revenue from the 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 the appeals process. 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. The company believes the possibility of this result is remote. Q. INCENTIVE COMPENSATION PLAN Under the 1997 Incentive Compensation Plan, the company may grant awards in combination of cash, common stock, stock options and restricted stock. The plan complies with the Securities and Exchange Commission's Rule 16b-3 and with the Internal Revenue Code Section 162(m). In October 1993, the company introduced a long-term incentive program which granted stock options and restricted stock. The stock options are exercisable at the fair market value of the common stock on the date of grant generally with 50 percent of the stock options vesting on the one-year anniversary of their grant and the remaining 50 percent vesting on the two-year anniversary of their grant. The stock options have a maximum term of five years. The restricted stock has a feature that will increase or decrease the number of shares initially granted based on movement in the company's stock price from the date of grant to the end of a specific performance period (generally 18 to 24 months). Once the number GENERAL DYNAMICS 1998 ANNUAL REPORT 37 19 granted has been adjusted, restrictions will continue to be imposed for an additional two years, at which time all restrictions will lapse. Prior to October 1993, stock options granted under the company's incentive compensation plans were awarded for a maximum term of ten years and were exercisable in their entirety beginning 18 months after the date of award. There were 507,340, 345,860 and 91,546 shares of restricted stock awarded in 1998, 1997 and 1996, respectively. There were 1,219,535 shares of restricted stock outstanding at December 31, 1998. Information with respect to stock options is as follows:
Year Ended December 31 1998 1997 1996 ================================================================================ NUMBER OF SHARES UNDER STOCK OPTIONS: Outstanding at beginning of year 3,577,308 3,653,704 4,605,446 Granted 1,435,640 1,344,252 137,600 Exercised (1,231,376) (1,272,382) (990,010) Canceled (48,541) (148,266) (99,332) - -------------------------------------------------------------------------------- Outstanding at end of year 3,733,031 3,577,308 3,653,704 - -------------------------------------------------------------------------------- EXERCISABLE AT END OF YEAR 1,675,562 1,602,766 2,858,744 - -------------------------------------------------------------------------------- WEIGHTED AVERAGE EXERCISE PRICE: Outstanding at beginning of year $28.76 $25.74 $22.84 Granted 43.30 33.17 30.40 Exercised 25.48 24.55 12.60 Canceled 36.81 30.45 29.02 Outstanding at end of year 35.33 28.76 25.74 Exercisable at end of year 29.41 24.53 24.49 - --------------------------------------------------------------------------------
Information with respect to stock options outstanding and stock options exercisable at December 31, 1998, is as follows:
Options Outstanding ------------------------------------------------- Weighted Average Weighted Number Remaining Average Range of Outstanding Contractual Exercise Exercise Prices at 12/31/98 Life Price ================================================================================ $ 3.79-11.37 56,376 2.9 years $ 8.21 19.91-23.27 245,036 .4 22.89 29.06-33.38 2,004,543 2.7 31.96 36.50-46.84 1,427,076 4.2 43.28 - -------------------------------------------------------------------------------- 3,733,031 - --------------------------------------------------------------------------------
Options Exercisable ------------------------------------------------- Weighted Average Weighted Number Remaining Average Range of Outstanding Contractual Exercise Exercise Prices at 12/31/98 Life Price ================================================================================ $ 3.79-11.37 56,376 2.9 years $ 8.21 19.91-23.27 245,036 .4 22.89 29.06-33.38 1,370,000 2.4 31.42 36.50-46.84 4,150 3.5 39.96 - -------------------------------------------------------------------------------- 1,675,562 - --------------------------------------------------------------------------------
At December 31, 1998, 6,071,881 treasury shares have been reserved for options that may be granted in the future, in addition to the shares reserved for issuance on the exercise of options outstanding. Had compensation cost for stock options been determined based on the fair value at the grant dates for awards under the company's incentive compensation plans, the company's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated as follows:
1998 1997 1996 ================================================================================ Net Earnings: As Reported $364 $316 $270 Pro Forma 359 312 268 Net Earnings Per Share--Basic: As Reported $2.88 $2.51 $2.14 Pro Forma 2.84 2.49 2.12 Net Earnings Per Share--Diluted: As Reported $2.86 $2.50 $2.13 Pro Forma 2.82 2.47 2.11 - -------------------------------------------------------------------------------- Weighted average fair value of options granted $7.63 $5.42 $3.77 - --------------------------------------------------------------------------------
The compensation cost calculated under the fair value approach shown above is recognized over the vesting period of the stock options. The fair value is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
1998 1997 1996 ================================================================================ Dividend yield 1.9% 2.5% 2.3% Expected volatility 17.6% 18.0% 20.0% Risk-free interest rate 5.6% 6.4% 5.7% Expected lives after vesting period 24 18 4 months months months - --------------------------------------------------------------------------------
R. RETIREMENT PLANS PENSION. The company has 14 trusteed, noncontributory, qualified defined benefit pension plans covering substantially all employees. Under certain of the plans, benefits are primarily a function of both the employee's years of service and level of 38 GENERAL DYNAMICS 1998 ANNUAL REPORT 20 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. The change in the company's benefit obligation is as follows:
Year Ended December 31 1998 1997 1996 ================================================================================ Benefit obligation at beginning of year $(3,339) $(2,597) $(2,649) Service cost (63) (52) (50) Interest cost (233) (210) (182) Amendments (57) (28) (12) Actuarial gain (loss) (211) (95) 165 Acquisitions (69) (526) (22) Benefits paid 203 169 153 - -------------------------------------------------------------------------------- Benefit obligation at end of year $(3,769) $(3,339) $(2,597) - --------------------------------------------------------------------------------
The following tables set forth the company's change in plan assets:
Year Ended December 31 1998 1997 1996 ================================================================================ Fair value of plan assets at beginning of year $4,491 $3,356 $3,441 Actual return on plan assets 873 741 12 Acquisitions 29 545 35 Employer contributions 33 18 21 Benefits paid (203) (169) (153) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $5,223 $4,491 $3,356 - --------------------------------------------------------------------------------
December 31 1998 1997 1996 ================================================================================ Funded status $1,454 $1,152 $759 Unrecognized net actuarial gain (1,262) (919) (550) Unrecognized prior service cost 250 253 240 Unrecognized transition asset (24) (35) (39) - -------------------------------------------------------------------------------- Prepaid pension cost $ 418 $ 451 $410 - --------------------------------------------------------------------------------
Assumptions used in accounting for the plans are as follows:
Year Ended December 31 1998 1997 1996 ================================================================================ Discount rate 6.75% 7.25% 7.5% 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 8.0% 8.0% 8.0% - --------------------------------------------------------------------------------
Net periodic pension cost for the total company included the following:
Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Service cost $ 63 $ 52 $ 50 Interest cost 233 210 182 Expected return on plan assets (309) (272) (247) Recognized net actuarial (gain) loss (10) (8) 8 Amortization of unrecognized transition asset (8) (8) (8) Amortization of prior service cost 27 25 23 - -------------------------------------------------------------------------------- $ (4) $ (1) $ 8 - --------------------------------------------------------------------------------
Under SFAS No. 87, "Employers' Accounting for Pensions," the company is required to assume a discount rate at which the obligation could be currently settled. Reflecting the movement in interest rates, the company decreased its discount rate assumption from 7.25 percent to 6.75 percent at December 31, 1998, which increased the projected benefit obligation $210. Changes in prior service cost resulting from plan amendments are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. Included in the company's prepaid pension cost is a net asset of $149 and $136 at December 31, 1998 and 1997, respectively, related to the company's commercial pension plan. The commercial prepaid pension cost 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 GENERAL DYNAMICS 1998 ANNUAL REPORT 39 21 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, 1998, approximately 55 percent of the plans' assets are invested in securities of the U.S. government or its agencies, 30 percent in diversified U.S. common stocks, 12 percent in mortgage-backed securities and 3 percent in diversified U.S. corporate debt securities. In addition to the qualified defined benefit plans, the company provides eligible employees the opportunity to participate in defined contribution savings plans that permit contributions on both a pretax and after-tax basis. Generally, salaried employees and certain hourly employees are eligible to participate upon commencement of employment with the company. Under most plans, the employee may contribute to various investment alternatives, including investment in the company's common stock. In certain of the plans, the company matches a portion of the employees' contributions with contributions to a fund which invests in the company's common stock. The company's contributions to the defined contribution plans amounted to $37, $27 and $22 in 1998, 1997 and 1996, respectively. The increase in 1998 over 1997 contributions is primarily attributable to the acquisitions discussed in Note C. Approximately 13 and 12 million shares of the company's common stock were held by the defined contribution plans at December 31, 1998 and 1997, respectively. The company also sponsors several unfunded non-qualified supplemental executive plans that provide participants with additional benefits, including any excess of such benefits over limits imposed on qualified plans by federal law. The recorded liability and expense related to these plans are not material to the company's results of operations and financial condition. OTHER POSTRETIREMENT BENEFITS. The company maintains plans providing postretirement health care coverage for many of its current and former employees. Postretirement life insurance benefits are also provided to certain retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. Both health and life insurance benefits are provided only to those employees who retire directly from the service of the company and not to those who terminate service/seniority prior to eligibility for retirement. The company established and began funding a Voluntary Employee's Beneficiary Association (VEBA) trust in 1992 for certain plans in an amount approximately equal to their related annual net periodic postretirement benefit cost. The remaining plans are primarily funded as claims are received. The change in the company's benefit obligation is as follows:
Year Ended December 31 1998 1997 1996 ================================================================================ Benefit obligation at beginning of year $(620) $(628) $(688) Service cost (4) (4) (7) Interest cost (43) (44) (46) Amendments 36 66 (1) Actuarial gain (loss) (43) (5) 65 Acquisitions (13) (59) (2) Benefits paid 52 54 51 - -------------------------------------------------------------------------------- Benefit obligation at end of year $(635) $(620) $(628) - --------------------------------------------------------------------------------
The following tables set forth the company's change in trust assets:
Year Ended December 31 1998 1997 1996 ================================================================================ Fair value of trust assets at beginning of year $241 $203 $179 Actual return on trust assets 48 43 17 Employer contributions 17 20 30 Benefits paid (25) (25) (23) - -------------------------------------------------------------------------------- Fair value of trust assets at end of year $281 $241 $203 - --------------------------------------------------------------------------------
December 31 1998 1997 1996 ================================================================================ Funded status $(354) $(379) $(425) Unrecognized net actuarial gain (65) (76) (56) Unrecognized prior service cost 2 3 3 Unrecognized transition obligation 71 130 217 - -------------------------------------------------------------------------------- Accrued postretirement benefit cost $(346) $(322) $(261) - --------------------------------------------------------------------------------
40 GENERAL DYNAMICS 1998 ANNUAL REPORT 22 Assumptions used in accounting for the plans are as follows:
Year Ended December 31 1998 1997 1996 ================================================================================ Discount rate 6.75% 7.25% 7.5% Expected long-term rate of return on assets 8% 8% 8% Assumed health care cost trend rate for next year: Post-65 claim groups 4.5% 5% 6% Pre-65 claim groups 6.5% 7.5% 8.5% - --------------------------------------------------------------------------------
Net periodic postretirement benefit cost for the total company included the following:
Year Ended December 31 1998 1997 1996 ================================================================================ Service cost $ 4 $ 4 $ 7 Interest cost 43 44 46 Expected return on trust assets (16) (14) (13) Recognized net actuarial gain (4) (3) (1) Amortization of unrecognized transition obligation 23 24 29 Amortization of prior service cost -- -- 1 - -------------------------------------------------------------------------------- $ 50 $ 55 $ 69 - --------------------------------------------------------------------------------
As previously stated, the company decreased its discount rate assumption from 7.25 percent to 6.75 percent at December 31, 1998, which increased the accumulated postretirement benefit obligation $32. The health care cost trend rates are assumed to gradually decline to 4.5 percent and 5 percent for post-65 and pre-65 claim groups, respectively, in the year 2002 and thereafter over the projected payout period of the benefits. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease ================================================================================ Effect on total of service and interest cost components $ 3 $ (3) Effect on accumulated postretirement benefit obligation $47 $(40) - --------------------------------------------------------------------------------
At December 31, 1998, approximately 57 percent of the trusts' assets were invested in diversified U.S. common stocks, 5 percent in mortgage-backed securities, 25 percent in securities of the U.S. government and its agencies and 13 percent in diversified U.S. corporate debt securities. The company's contractual arrangements with the U.S. government provide for the recovery of contributions to a VEBA, and for non-funded plans, for costs based on claims paid. The net periodic postretirement benefit cost exceeds the company's cost currently allocable to contracts. To the extent the company has contracts in backlog sufficient to recover the excess cost, the company is deferring the charge in contracts in process until such time that the cost is allocable to contracts. GENERAL DYNAMICS 1998 ANNUAL REPORT 41 23 S. BUSINESS SEGMENT INFORMATION The company's primary business is supplying sophisticated defense systems to the United States and its allies. Management has chosen to organize its business segments in accordance with several factors, including a combination of the nature of products and services offered, the nature of the production processes and the class of customer for the company's products. Operating segments are aggregated for reporting purposes consistent with these criteria. Management measures its segments' profit based primarily on operating earnings. As such, net interest and other income items have not been allocated to the company's segments. For a further description of the company's business segments, see Management's Discussion and Analysis of the Results of Operations and Financial Condition. Summary financial information for each of the company's segments follows:
Net Sales Operating Earnings Sales to U.S. Government 1998 1997 1996 1998 1997 1996 1998 1997 1996 =============================================================================================================================== Marine Systems $2,666 $2,311 $2,332 $285 $234 $216 $2,645 $2,280 $2,316 Combat Systems 1,272 1,509 1,026 166 187 140 1,165 1,371 996 Information Systems & Technology 796 -- -- 59 -- -- 351 -- -- Other 236 242 223 32 25 (3) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- $4,970 $4,062 $3,581 $542 $446 $353 $4,161 $3,651 $3,312 - -------------------------------------------------------------------------------------------------------------------------------
Depreciation, Depletion Identifiable Assets Capital Expenditures and Amortization 1998 1997 1996 1998 1997 1996 1998 1997 1996 =================================================================================================================== Marine Systems $1,421 $ 706 $ 806 $ 79 $28 $18 $ 40 $34 $40 Combat Systems 923 974 336 18 17 14 27 36 12 Information Systems & Technology 1,095 1,075 -- 15 -- -- 40 -- -- Other 406 371 388 16 19 12 15 17 12 Corporate* 727 965 1,769 30 19 31 4 4 3 - ------------------------------------------------------------------------------------------------------------------- $4,572 $4,091 $3,299 $158 $83 $75 $126 $91 $67 - -------------------------------------------------------------------------------------------------------------------
*Corporate identifiable assets include cash and equivalents and marketable securities, deferred taxes, real estate held for development and prepaid pension cost. T. QUARTERLY DATA (UNAUDITED)
Common Stock -------------------------------------------- Net Earnings Market Price Per Share Range Net Operating Net --------------------- ----------------------------- Dividends Sales Earnings Earnings Basic Diluted High Low Declared ======================================================================================================================== 1998 4th Quarter $1,466 $147 $96 $.76 $.75 $62 $49 1/4 $.22 3rd Quarter 1,172 136 94 .74 .74 55 42 7/8 .22 2nd Quarter 1,178 135 92 .73 .72 48 3/8 40 1/4 .22 1st Quarter 1,154 124 82 .65 .65 45 3/4 41 25/32 .22 1997 4th Quarter $1,101 $117 $83 $.66 $.65 $44 7/16 $37 31/32 $.205 3rd Quarter 988 113 82 .65 .65 45 3/4 37 .205 2nd Quarter 1,032 114 80 .64 .64 38 15/16 31 9/16 .205 1st Quarter 941 102 71 .56 .56 36 1/8 32 13/16 .205 - ------------------------------------------------------------------------------------------------------------------------
Note: Quarterly data is based on a 13 week period. 42 GENERAL DYNAMICS 1998 ANNUAL REPORT 24 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 four 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 Chief Financial Officer Vice President and Controller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To General Dynamics Corporation: We have audited the accompanying Consolidated Balance Sheet of General Dynamics Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related Consolidated Statements of Earnings, Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Washington, D.C. March 2, 1999 GENERAL DYNAMICS 1998 ANNUAL REPORT 43 25 SELECTED FINANCIAL DATA (UNAUDITED) The following table presents summary selected historical financial data derived from the audited Consolidated Financial Statements and other information of the company for each of the five years presented. The following information should be read in conjunction with Management's Discussion and Analysis of the Results of Operations and Financial Condition and the audited Consolidated Financial Statements and related Notes thereto.
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PER EMPLOYEE AMOUNTS) 1998 1997 1996 1995 1994 ================================================================================================================================== SUMMARY OF OPERATIONS Net sales $ 4,970 $ 4,062 $ 3,581 $ 3,067 $ 3,058 Operating costs and expenses 4,428 3,616 3,228 2,752 2,737 Interest income, net 4 36 55 55 22 Provision for income taxes 185 163 139 128 120 Earnings from continuing operations 364 316 270 247 223 Earnings per share from continuing operations--basic 2.88 2.51 2.14 1.96 1.77 Earnings per share from continuing operations--diluted 2.86 2.50 2.13 1.95 1.76 Cash dividends on common stock .88 .82 .82 .75 .70 Sales per employee 178,600(d) 160,000(c) 155,500 138,200(b) 143,900(a) - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION AT DECEMBER 31 Cash and equivalents and marketable securities $ 220 $ 441 $ 1,155 $ 1,095 $ 1,059 Property, plant and equipment, net 698 592 441 398 264 Total assets 4,572 4,091 3,299 3,164 2,673 Short- and long-term debt 169 265 38 38 40 Short- and long-term debt--finance operations 140 118 135 146 161 Shareholders' equity 2,219 1,915 1,714 1,567 1,316 Per share 17.51 15.22 13.58 12.39 10.45 - --------------------------------------------------------------------------------------------------------------------------------- OTHER INFORMATION Funded backlog $ 7,292 $ 6,796 $ 6,161 $ 5,227 $ 4,562 Total backlog 14,598 9,599 10,350 7,386 6,006 Shares outstanding at December 31 (in millions) 126.7 125.8 126.2 126.5 126.0 Weighted average shares outstanding basic (in millions) 126.4 125.7 126.3 126.0 126.1 Weighted average shares outstanding diluted (in millions) 127.2 126.6 126.9 126.5 126.9 Common shareholders of record at December 31 19,904 21,046 22,129 22,930 23,935 Active employees at December 31: Total company 30,700 29,000 23,100 27,700 24,200 Excluding discontinued operations 30,700 29,000 23,100 26,800 21,300 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Excludes Bath Iron Works, which was acquired on September 13, 1995. (b) Includes pro forma results of Bath Iron Works as if owned by the company for the entire year. (c) Excludes Advanced Technology Systems, which was acquired on October 1, 1997, and Computing Devices International, which was acquired on December 31, 1997. See Note C. (d) Excludes NASSCO, which was acquired on November 10, 1998. See Note C. 44 GENERAL DYNAMICS 1998 ANNUAL REPORT EX-21 12 SUBSIDIARIES 1 EXHIBIT 21, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 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 Quincy Maritime Corporation III............................................Delaware.....................................100 Water Transportation Alternatives, Inc.....................................Delaware.....................................100 Bath Iron Works Corporation .....................................................Maine........................................100 Computer Systems & Communications Corporation ...................................Delaware.....................................100 Computing Devices International Employment, Inc. ................................Delaware.....................................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 EB Groton Engineering, Inc.................................................Delaware.....................................100 EB Groton Operations, Inc..................................................Delaware.....................................100 EB Newport Engineering, Inc................................................Delaware.....................................100 EB Quonset Point Operations, Inc...........................................Delaware.....................................100 Electro Dynamic Corporation................................................Delaware.....................................100 General Dynamics Power Technology, Inc.....................................Delaware.....................................100 Electrocom, Inc..................................................................Delaware.....................................100 GD Plus S.A.R.L..................................................................France.......................................100 GDIC Corp. ......................................................................Delaware.....................................100 Computing Devices Canada Ltd...............................................Canada.......................................100 Computing Devices Company Limited..........................................United Kingdom...............................100 Computing Devices Hastings Limited...................................United Kingdom...............................100 Computing Devices Eastbourne Limited.................................United Kingdom...............................100 General Dynamics Advanced Technology Systems, Inc................................Delaware.....................................100 Caldwell Cable Ventures, 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 Defense Systems, Inc............................................Delaware.....................................100 General Dynamics Foreign Sales Corporation ......................................Virgin Islands...............................100 General Dynamics Information Systems, Inc........................................Delaware.....................................100 General Dynamics International Corporation ......................................Delaware.....................................100
2 EXHIBIT 21, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 PAGE 2 GENERAL DYNAMICS CORPORATION SUBSIDIARIES
Subsidiaries of General Dynamics Place of Percent of Corporation (Parent and Registrant) Incorporation Voting Power - ----------------------------------- ------------- ------------ General Dynamics Land Systems Inc. ..............................................Delaware.....................................100 AV Technology, LLC.........................................................Maryland.....................................100 General Dynamics Amphibious Systems, Inc...................................Delaware.....................................100 General Dynamics Land Systems Customer Service & Support Company .................................................................Texas........................................100 General Dynamics Support Services Company ...........................Delaware.....................................100 Global Support Services Company......................................Virgin Islands...............................100 General Dynamics Land Systems International, Inc. .........................Delaware.....................................100 G.T. Devices, Inc..........................................................Maryland.....................................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 General Dynamics Shared Resources, Inc...........................................Delaware.....................................100 Material Service Resources Company...............................................Delaware.....................................100 Century Mineral Resources, Inc.............................................Illinois.....................................100 Material Service Corporation...............................................Delaware.....................................100 EPSP, Inc............................................................Texas........................................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 Resources, Inc...............................................Illinois.....................................100 Freeman United Coal Mining Company...................................Delaware.....................................100 Walker Creek Resource Company........................................Delaware.....................................100 NASSCO Holdings Incorporated.....................................................Delaware......................................87 International Manufacturing Technologies, Inc..............................California...................................100 NASSCO Funding Corporation.................................................California...................................100 National Steel and Shipbuilding Company....................................Nevada.......................................100 Patriot I Shipping Corp. ........................................................Delaware.....................................100 Patriot II Shipping Corp. .......................................................Delaware.....................................100 Patriot IV Shipping Corp. .......................................................Delaware.....................................100 S-C 1969 Credit Corporation......................................................New York.....................................100
EX-23 13 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23, ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 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, 1998, 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 18, 1999 EX-24 14 POWER OF ATTORNEY OF THE BOARD OF DIRECTORS 1 GENERAL DYNAMICS CORPORATION EXHIBIT 24 COMMISSION FILE NUMBER 1-3671 POWER OF ATTORNEY ------------ 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, DAVID A. SAVNER, 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 9th day of February 1999. /s/ Julius W. Becton, Jr. /s/ George A. Joulwan - -------------------------- --------------------- Julius W. Becton, Jr. George A. Joulwan /s/ Nicholas D. Chabraja /s/ Paul G. Kaminski - ------------------------- -------------------- Nicholas D. Chabraja Paul G. Kaminski /s/ James S. Crown /s/ James R. Mellor - ------------------- ------------------- James S. Crown James R. Mellor /s/ Lester Crown /s/ Carl E. Mundy, Jr. - ----------------- ----------------------- Lester Crown Carl E. Mundy, Jr. /s/ Charles H. Goodman /s/ Carlisle A.H. Trost - ---------------------- ------------------------ Charles H. Goodman Carlisle A.H. Trost EX-27 15 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of December 31, 1998, and the related Consolidated Statements of Earnings for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1998 DEC-31-1998 127 93 316 0 952 1873 1726 1028 4572 1461 167 0 0 285 1934 4572 4970 4970 4428 4428 0 0 12 549 185 364 0 0 0 364 2.88 2.86
EX-27.A 16 AMENDED FDS FOR YEAR ENDED DECEMBER 31, 1997
5 This schedule contains summary financial information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of December 31, 1997, and the related Consolidated Statement of Earnings for the year ended December 31, 1997 and is qualified in its entirety to such financial statements. 1,000,000 YEAR DEC-31-1997 DEC-31-1997 336 105 234 0 702 1689 1576 984 4091 1291 157 0 0 220 1695 4091 4062 4062 3616 3616 0 0 4 479 163 316 0 0 0 316 2.51 2.50
EX-27.B 17 AMENDED FDS FOR NINE MONTHS ENDED 9/28/1997
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of September 28, 1997, and the related consolidated Statement of Earnings for the nine months ended September 28, 1997 and is qualified in its entirety to such financial statements. 1,000,000 9-MOS DEC-31-1997 SEP-28-1997 202 643 170 0 583 1,888 1,480 972 3,492 887 40 0 0 220 1,636 3,492 2,961 2,961 2,632 2,632 0 0 3 353 120 233 0 0 0 233 1.85 1.84
EX-27.C 18 AMENDED FDS FOR SIX MONTHS ENDED 6/29/1997
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of June 29, 1997, and the related consolidated Statement of Earnings for the six months ended June 29, 1997 and is qualified in its entirety to such financial statements. 1,000,000 6-MOS DEC-31-1997 JUN-29-1997 205 450 172 0 561 1,674 1,483 963 3,391 879 40 0 0 214 1,578 3,391 1,973 1,973 1,757 1,757 0 0 2 230 79 151 0 0 0 151 1.20 1.20
EX-27.D 19 AMENDED FDS FOR THREE MONTHS ENDED 3/30/1997
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of March 30, 1997, and the related consolidated Statement of Earnings for the three months ended March 30, 1997 and is qualified in its entirety to such financial statements. 1,000,000 3-MOS DEC-31-1997 MAR-30-1997 65 304 144 0 726 1,540 1,474 957 3,444 917 40 0 0 200 1,544 3,444 941 941 839 839 0 0 1 108 37 71 0 0 0 71 0.56 0.56
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