-----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, Nz3QtiLKAOYjRwt06Mj6Y3FEqqKbazPB4cuPEfPOObTSD2NB5Tl942kV17XwgLoZ yO0g3Rp7aSC51Ztc8iWshA== 0000950133-99-002674.txt : 19990812 0000950133-99-002674.hdr.sgml : 19990812 ACCESSION NUMBER: 0000950133-99-002674 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990730 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990811 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: 8-K SEC ACT: SEC FILE NUMBER: 001-03671 FILM NUMBER: 99684541 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 8-K 1 GENERAL DYNAMICS CORPORATION FORM 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 30, 1999 GENERAL DYNAMICS CORPORATION (Exact name of registrant as specified in its charter)
Delaware 1-3671 13-1673581 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 3190 Fairview Park Drive, Falls Church, Virginia 22042-4523 (Address of principal executive offices) (Zip Code)
(703) 876-3000 Registrant's telephone number, including area code 2 Item 2. Acquisition or Disposition of Assets On July 30, 1999, General Dynamics Corporation acquired Gulfstream Aerospace Corporation (Gulfstream) through a merger of a subsidiary of the company into Gulfstream. As a result, the holders of Gulfstream common stock became entitled to receive one share of the company's common stock in exchange for each share of Gulfstream common stock. The common stock of Gulfstream was traded on the New York Stock Exchange through the close of business on July 30, 1999, at which time there were 72,165,645 shares of Gulfstream common stock outstanding. An additional 4.1 million shares have been reserved for issuance upon the exercise of stock options which, prior to the acquisition, had been options to purchase Gulfstream common stock. The transaction was valued at approximately $4.8 billion, based on the company's stock price of $66.125 per share. Gulfstream is a leading designer, developer, manufacturer and marketer of advanced business jet aircraft. Gulfstream, headquartered in Savannah, Georgia, has approximately 7,700 employees with operations primarily in six states. The assets acquired include, among other things, machinery, equipment and other physical property, the primary use of which relates to the design and manufacture of advanced business jet aircraft. It is the present intent of General Dynamics to continue to devote the assets to such purposes. The acquisition will be accounted for as a pooling of interests, and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of Gulfstream and have been included in this Current Report on Form 8-K as Exhibits 99.2 and 99.3. These statements will become the historical consolidated financial statements of General Dynamics Corporation after post-combination results are issued. Item 7. Financial Statements and Exhibits (a) Financial statements of business acquired This document incorporates by reference the documents of Gulfstream Aerospace Corporation listed below that have previously been filed with the Securities and Exchange Commission. Annual Report on Form 10-K for the fiscal year ended December 31, 1998 Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (b) Pro forma financial information None. (c) Exhibits
Exhibit 3.1B - Restated Certificate of Incorporation, effective August 2, 1999 Exhibit 10.40 - Agreement and Plan of Merger dated May 16, 1999 between General Dynamics Corporation, Tara Acquisition Corporation and Gulfstream Aerospace Corporation (1) Exhibit 10.41 - Voting Agreement dated May 16, 1999 between General Dynamics Corporation and certain stockholders of Gulfstream Aerospace Corporation (1) Exhibit 10.43 - Registration Agreement dated as of July 30, 1999 between General Dynamics Corporation and certain stockholders of Gulfstream Aerospace Corporation Exhibit 23.1 - Consent of Arthur Andersen LLP Exhibit 23.2 - Consent of Deloitte & Touche LLP
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Exhibit 99.1 - Management's Discussion and Analysis of the Results of Operations and Financial Condition Exhibit 99.2 - Unaudited Supplemental Consolidated Financial Statements of General Dynamics Corporation for the quarterly period ended April 4, 1999 (as restated to reflect the acquisition of Gulfstream Aerospace Corporation on July 30, 1999) Exhibit 99.3 - Audited Supplemental Consolidated Financial Statements of General Dynamics Corporation for the fiscal year ended December 31, 1998 (as restated to reflect the acquisition of Gulfstream Aerospace Corporation on July 30, 1999) Exhibit 99.4 - Press Release dated July 30, 1999, "General Dynamics Completes Acquisition of Gulfstream Aerospace Corporation on July 30, 1999"
(1) Filed as an exhibit to the General Dynamics Corporation's quarterly report on Form 10-Q for the quarterly period ended April 4, 1999, and filed with the Commission May 18, 1999, and incorporated herein by reference. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENERAL DYNAMICS CORPORATION by /s/ John W. Schwartz ----------------------------------- John W. Schwartz Vice President and Controller (Authorized Officer and Chief Accounting Officer) Dated: August 11, 1999 -3- EX-3.1B 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1B RESTATED CERTIFICATE OF INCORPORATION OF GENERAL DYNAMICS CORPORATION --------------------- FIRST: Name. The name of the corporation (hereinafter called the "Corporation") is "General Dynamics Corporation." The Corporation was initially incorporated on February 21, 1952 as "General and Atomic Manufacturing Company." On March 3, 1952, the name of the Corporation changed to "General Airmarine Corporation", and on March 11, 1952, the Corporation's name was changed to its present name, "General Dynamics Corporation." SECOND: Delaware Office and Registered Agent. The registered office or place of business of the Corporation in the State of Delaware is located at No. 306 South State Street in the City of Dover, County of Kent. The name and address of the registered agent of the Corporation in the State of Delaware is United States Corporation Company, No. 306 South State Street, Dover, Delaware. THIRD: Nature of the Business or Objects or Purposes. The nature of the business, or objects or purposes to be transacted, promoted or carried on are as follows: (1) To engage in the business of manufacture and operation of ships and aircraft and to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in boats, ships, vessels, submarines and other means of navigation of whatsoever kind and description, and airplanes, airships, helicopters, missiles, dirigibles, balloons, blimps and other aircraft and space vehicles of whatsoever kind and description, whether for use upon or under the surface of the sea, in the air or otherwise, including, without limitation, the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (2) To engage in the business of research and experimentation in the field of nuclear chain reaction and atomic energy for any and all civilian, military or other purposes whatsoever to engage in any business relating, directly or indirectly, to the use of nuclear, fissionable, fusionable and radioactive material and atomic energy of any description, and to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in propulsion machinery, reactors, boilers, pressure vessels, engines, mechanisms, tools, implements, instruments, appliances and apparatus of whatsoever kind and description, 2 making us of, related to or having any purpose in connection with nuclear, fissionable, fusionable and radioactive materials and atomic energy, including, without limitation, the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (3) To engage in the business of manufacture and operation of all types of transportation for use in the air, on and under the sea, and on and under the land, and to establish and maintain and operate shipping lines, air lines and vehicular lines of every description for the transportation of passengers and goods, to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in ships and aircraft as hereinabove provided for, as well as automobiles, trucks, trailers, motorcycles, tractors and other vehicles of whatsoever kind and description, including, without limitation, the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. Nothing herein shall be deemed to authorize the Corporation to construct, maintain or operate public utilities within the State of Delaware. (4) To engage in the business of manufacture of machinery of every description, to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in propulsion machinery, motors, engines, mechanisms, tools, implements, instruments, appliances and apparatus of whatsoever kind and description, whether operated by gasoline, kerosene, alcohol, electricity, oil, steam, nuclear fission, fusion or any other means, whether now known or hereafter discovered, including without limitation the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (5) To engage in the business of manufacture of telephones, radios, televisions, radar, communication devices of any nature, and electronic products, to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in telephonic, radio, broadcasting, receiving, televisual, radar, electric, magnetic, electro-magnetic, recording, reproducing, transmitting, phonographic, amplifying, message-receiving and message-sending apparatus, equipment, materials, articles, accessories, parts, instruments, appliances, 3 devices, implements, machine, tools, supplies, preparations, exchanges, circuits, networks, services, systems and contrivances of all kinds, electronic devices and products of any nature, now known or hereafter discovered, including without limitation the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (6) To engage in the business of manufacture of synthetic and plastic substances and products, to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in synthetic rubber, plywood, vulcanized fiber, celluloid, natural or synthetic plastics, plastic substances and materials, and any and all natural or synthetic organic materials made from cellulose, proteins, hydrocarbons or resins, including any and all compounds, mixtures and derivatives of the foregoing or any of them, and any and all articles consisting or partly consisting of the foregoing, including, without limitation, the acquisition in any manner whatsoever of all plants, properties, real estate, personality, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (7) To engage in the business of manufacture, production, purchase, creation or acquisition in any manner of, to use, transport, sell, market and dispose of, and generally to deal in and with liquid and compressed gases of all kinds, petrochemicals and other chemicals of the same or different character, and raw materials therefor and derivatives thereof, extracts, flavors, foods, syrups, preparations and products, and to manufacture, fabricate, produce, buy or otherwise create or acquire, erect, equip and install, use, transport, sell, lease, market and dispose of, and generally to deal in and with, machinery, appliances and supplies, including bottling machinery of all kinds and for all purposes, and all accessories thereto and appliances therefor, and store fixtures and furniture and furnishings, including soda fountains and all appurtenances thereto. (8) To engage in the business of manufacturing, producing, purchasing, creating or acquiring in any manner and to use, transport, sell, lease, market and dispose of and generally to deal in and with brick, stone, lumber, cement, sand, gravel, aluminum, concrete materials, crushed stone, floor treatments, insulation, limes, masonry materials, metal products, paints and coatings, paper, pipe, plaster materials, refractories, roofing materials, and any other materials without limit used in the building, construction and other industries, and to manufacture, fabricate, produce, buy, or otherwise create or acquire, and erect, equip and install, use, transport, sell, lease, market and dispose of and generally deal in and with the foregoing and any machinery, appliances and supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. -3- 4 (9) To engage in the business of mining, milling, concentrating, converting, smelting, treating, preparing for market, manufacturing, buying, selling, exchanging and otherwise producing and dealing in coal, sand, gravel, aluminum, lime, dolomite, and without limitation any and all minerals whatsoever and the products and by-products thereof of every kind and description and by whatever process the same can be or may hereafter be produced and generally and without limit as to amount to buy, sell, exchange, lease, acquire, and otherwise deal in lands, mines and mineral rights and claims and to conduct all business appertaining thereto, to purchase, lease or otherwise acquire mining rights, timber rights, oil and gas rights, mines, buildings, dwellings, plants, machinery, tools and other properties whatsoever which may from time to time be deemed advantageous, to mine and market any mineral or other product that may be found in or on such lands and to explore, work, exercise, develop or turn to account the same; to construct, operate, own, lease or otherwise make use of, railways, tramways, boats, barges, vessels, automotive vehicles, or any means of transportation whatsoever in mining and moving and transporting such products, including, without limitation the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, material, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (10) To engage in the business of manufacturing and merchandising, generally and without limitation, all types of products and articles, to build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, purchase, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge or otherwise generally dispose of, trade and deal in, all types of manufactured products, articles, apparatus, machinery, machines, equipment, devices, accessories, systems, parts, supplies, tools, implements, apparatus, raw materials, natural products, manufactured products, of whatsoever kind and description, including, without limitation, the acquisition in any manner whatsoever of all plants, properties, real estate, personalty, materials, machinery, motive power, supplies and other articles necessary or convenient for use, directly or indirectly, in connection therewith or related thereto. (11) To build, manufacture, fabricate, construct, assemble, design, develop, experiment with, produce, import, export, charter, hire or otherwise acquire, own, maintain, sell, lease, transfer, hold, operate, use, install, equip, replace, service, process, reprocess, repair, remodel, recondition, assign, mortgage, pledge, or otherwise generally dispose of, trade and deal in, goods, chattels, wares, merchandise and personal property of every class and description. (12) To purchase or otherwise acquire, and to hold, own, maintain, work, develop, sell, lease, exchange, hire, convey, mortgage or otherwise dispose of and deal in, lands and leaseholds, and any interest, estate and rights in real property, including oil and other mineral rights, and any personal or mixed property, and any franchises, rights, licenses or privileges of whatsoever kind and description. -4- 5 (13) To engage in engineering, research, experimental, laboratory and development work in connection with any or all of its purposes, to act as engineering or research counselors and consultants, and in connection wherewith to render management, engineering, research, technical and advisory services to persons, firms, corporations, and others. (14) To purchase, lease or otherwise acquire the whole or any part of the business, goodwill, rights and property of any kind, of any person, firm, association or corporation, domestic or foreign, and to undertake the whole or any part of the assets and liabilities of any person, firm, association or corporation and to pay for the same in cash, stock, bonds, evidences of indebtedness or property of the Corporation or otherwise. (15) To purchase, lease or otherwise acquire and to register, hold, develop, experiment with, own, maintain, sell, transfer, use, enjoy, operate, introduce, assign, pledge or otherwise generally dispose of, trade and deal in, all patent rights and letters patent of the United States, or of any other country, inventions, designs, formulae, concessions, trade-marks, trade names, brands, labels, copyrights, know-how, improvements and processes, whether or not used in connection with or secured under letter patent of the United States or of any other country, and to apply for, obtain and register, copyrights, trade-marks and patents in connection with the same, and to grant or accept licenses or territorial rights in respect thereof or otherwise turn the same to account. (16) To purchase, or otherwise acquire, for investment or otherwise, to hold, sell, transfer, mortgage, pledge, exchange or otherwise deal in or dispose of bonds, mortgages, debentures, shares or obligations of any corporation, foreign or domestic, and to exercise in respect thereof all the rights, powers and privileges of individual owners thereof. (17) To draw, make, accept, discount, endorse, execute and issue bonds, debentures, promissory notes and all other transferable or negotiable instruments. (18) To endorse, guarantee and secure the payment and satisfaction of bonds, coupons, mortgages, deeds of trust, debentures, securities, obligations and evidences of indebtedness, and also to guarantee and secure the payment or satisfaction of interest on obligations and of dividends on shares of the capital stock of other corporations; also to assume and guarantee the whole or any part of the liabilities, existing or prospective, of any person, corporation, firm or association; and to aid in any manner any other person or corporation with which it has business dealings, or whose stocks, bonds, or other obligations are held or are in any manner guaranteed by the Corporation, and to do any other acts and things for the preservation, protection, improvement or enhancement of the value of such stocks, bonds, or other obligations. (19) To purchase, hold, sell and reissue shares of its own stock. -5- 6 (20) To issue or exchange stocks, bonds and other obligations in payment for property purchased or acquired by it, or for any other object in or about its business, to borrow money without limit, to mortgage or pledge its franchises, real or personal property, income and profits accruing to it, any stocks, bonds or other obligations, or any property which may be acquired by it, and to secure any bonds or other obligations by it issued or incurred. (21) To act as selling agents for other manufacturers, and to manufacture for its own account, and to buy, sell, import, export, and generally deal in, guns, bombs, munitions, and weapons of every name or description, and parts, accessories, and equipment used in connection therewith or thereunto appertaining. (22) To finance for others the manufacture, purchase, ownership, sale, maintenance and operation of boats, ships, vessels, submarines, airplanes, airships, helicopters, guided missiles, dirigibles, balloons, blimps, automobiles, motor cars, taxicabs, motor trucks, any and all other vessels, aircraft and vehicles of whatsoever kind and description, radios, televisions, telephone equipment, or parts and accessories thereto appertaining, or any other property, real, personal or mixed, of whatsoever kind and description; to buy, sell and generally deal in notes, chattel mortgages, mortgages, conditional sales agreements, accounts and bills receivable and commercial paper and/or liens upon any property, real, personal or mixed, of whatsoever kind and description, and to conduct generally the business of an investment broker or finance corporation, and to buy, sell and generally deal in stocks, bonds, notes or securities of every name and description, but not to exercise the functions of bank discount. (23) To act as agents or subagents, brokers and factors for any person, firm, association, corporation or government; and to employ any subagent for any principal whether disclosed or undisclosed, or to act as principal and to employ any agent or subagent, all for the purpose of obtaining or acquiring by any means any contract, charter, lease, agreement or property of any nature or for any other purpose whatsoever; to act as intermediary, broker or negotiator between principals and/or agents including, inter alia, lessors, lessees, charterers, buyers, sellers, mortgagors, mortgagees, pledgors and pledgees; and to make agreements, contracts or charters in its own name or in the name of any person, firm, association or corporation which it represents. (24) To carry on any business whatsoever which the Corporation may deem proper or convenient in connection with any of the foregoing purposes or otherwise, or which may be calculated, directly or indirectly, to promote the interests of the Corporation or to enhance the value of its property, as contractor, subcontractor, principal, agent, commission merchant, wholesaler, retailer, attorney in fact, broker, factor, or in any other capacity or in any combination of capacities; to conduct its business in the State of Delaware, in other States, in the District of Columbia, in the Territories, Possessions and Colonies of the United States of America, and in foreign countries; and to hold, purchase, lease or otherwise acquire, sell, mortgage and convey or otherwise dispose of, without limit, real and personal property, -6- 7 either in or out of the State of Delaware, and to have and to exercise all the powers conferred by the laws of the State of Delaware upon corporations organized under the act pursuant to and under which the Corporation is organized. (25) To do all and everything necessary, suitable or proper for the accomplishment of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers herein set forth, and to do every other act or acts, thing or things incidental or appurtenant to or growing out of or connected with the aforesaid business or powers or any part of parts thereof, provided the same be not inconsistent with the laws under which the Corporation is organized. FOURTH: Capital Stock. 1. Number of Shares Authorized. The total number of shares of all classes of stock which the Corporation shall have authority to issue is Three Hundred and Fifty Million (350,000,000), of which Three Hundred Million (300,000,000) shares of the par value of $1.00 each are to be of a class designated as Common Stock and Fifty Million (50,000,000) shares of the par value of $1.00 each are to be of a class designated as Preferred Stock. 2. Consideration for Issuance of Stock May Be Fixed by Directors. Shares of stock of any class now or hereafter authorized may be issued by the Corporation from time to time for such consideration not less than the par value thereof as shall be fixed from time to time by the Board of Directors of the Corporation. Any and all shares of stock so issued for which the consideration so fixed has been paid or delivered to the Corporation shall be declared and taken to be fully paid stock and shall not be liable to any further call or assessments thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. Subscriptions to, or the purchase price of, shares of stock of the Corporation may be paid for, wholly or partly, by cash, by labor done, by personal property, or by real property or leases thereof. In the absence of actual fraud in the transaction, the judgment of the Directors as to the value of such labor, property, real estate or leases thereof shall be conclusive. 3. Provisions with Respect to Stock. The voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the classes of stock of the Corporation which are fixed by this Certificate of Incorporation, and the authority vested in the Board of Directors to fix by resolution or resolutions providing for the issue of Preferred Stock the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of Preferred Stock which are not fixed by this Certificate of Incorporation, are as follows: (1) The Preferred Stock may be issued from time to time in one or more series of any number of shares; provided that the aggregate number of shares issued and not cancelled of any and all such series shall not exceed the total number of shares of Preferred Stock hereinabove authorized. Each series of Preferred Stock shall be distinctively -7- 8 designated by letter or descriptive words. All series of Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of Section 3(b) of this Article FOURTH. (2) Authority is hereby vested in the Board of Directors from time to time to issue the Preferred Stock as Preferred Stock of any series and in connection with the creation of each such series to fix by resolution or resolutions providing for the issue of shares thereof the voting powers, if any, the designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of such series to the full extent now or hereafter permitted by this Certificate of Incorporation and the laws of the State of Delaware, in respect of the matters set forth in the following paragraphs (1) to (8), inclusive: (1) The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (2) The dividend rate of such series and any limitations, restrictions or conditions on the payment of dividends, including whether dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (3) The price or prices at which, and the terms and conditions on which, the shares of such series may be redeemed by the Corporation; (4) The amount or amounts payable upon the shares of such series in the event of any liquidation, dissolution or winding up of the Corporation and the relative rights of priority, if any, of payment of shares of such series; (5) Whether. or not the shares of such series shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of shares of such series and, if so entitled, the amount of such fund and the manner of its application; (6) Whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes of stock of the Corporation or shares of any other series of Preferred Stock, and, if made so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (7) Whether or not the shares of such series shall have any voting powers and, if voting powers are so granted, the extent of such voting powers; and -8- 9 (8) Whether or not the issue of any additional shares of such series or of any future series in addition to such series shall be subject to restrictions in addition to the restrictions, if any, on the issue of additional shares imposed in the resolution or resolutions fixing the terms of any outstanding series of Preferred Stock theretofore issued pursuant to this Article FOURTH and, if subject to additional restrictions, the extent of such additional restrictions. (3) Before any sum or sums shall be set aside for or applied to the purchase of Common Stock and before any dividends shall be declared or paid or any distribution ordered or made upon the Common Stock (other than a dividend payable in Common Stock), the Corporation shall comply with the dividend and sinking fund provisions, if any, of any resolution or resolutions providing for the issue of any series of Preferred Stock any shares of which shall at the time be outstanding. (4) Subject to the provisions of Section 3(c) of this Article FOURTH, the holders of Common Stock shall be entitled, to the exclusion of the holders of Preferred Stock of any and all series, to receive such dividends as from time to time may be declared by the Board of Directors. (5) In the event of any liquidation, dissolution or winding up of the Corporation, the holders of Preferred Stock of each series then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made to the holders of Common Stock, an amount determined as provided in Section 3(b) of this Article FOURTH for every share of their holdings of Preferred Stock of such series. If upon any liquidation, dissolution or winding up of the Corporation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of Preferred Stock of all series the full amounts to which they respectively shall be entitled, the holders of Preferred Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares of Preferred Stock held by them upon such distribution if all amounts payable on or with respect to Preferred Stock of all series were paid in full. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of Preferred Stock of the full amount to which they shall be entitled as aforesaid, the holders of Common Stock shall be entitled, to the exclusion of the holders of Preferred Stock of any and all series, to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the Corporation available for distribution to its stockholders. Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation, nor the sale, transfer or lease of all or substantially all the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation. -9- 10 (6) Except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of shares of Preferred Stock, as such holders, (i) shall not have any right to vote, and are hereby specifically excluded from the right to vote, in the election of directors or for any other purpose and (ii) shall not be entitled to notice of any meeting of stockholders. (7) Subject to the provisions of any applicable law, or of the by-laws of the Corporation as from time to time amended, with respect to the closing of the transfer books or the fixing of a record date for the determination of stockholders entitled to vote and except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of outstanding shares of Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in his name on the books of the Corporation. (8) Script Certificates or Cash Equivalents. No fractional shares of stock of any class of the Corporation now or hereafter authorized shall be issuable upon or in connection with any conversion, split-up, merger, consolidation, reclassification, stock dividend or otherwise. In lieu of any such fractional share, the person entitled to an interest in respect of such a fractional share shall be entitled, as determined from time to time by the Board of Directors of the Corporation, to either (i) scrip certificates for fractional shares with such terms and conditions as the Board of Directors shall prescribe or (ii) the cash equivalent of any such fractional share based upon the market value thereof at the date upon which rights in respect of any such fractional share shall accrue. (9) Unclaimed Dividends. Anything herein to the contrary notwithstanding, any and all right, title, interest and claim in or to any dividends declared, or other distributions made, by the Corporation, whether in cash, stock or otherwise, which are unclaimed by the stockholder entitled thereto for a period of six years after the close of business on the payment date, shall be and be deemed to be extinguished and abandoned; and such unclaimed dividends or other distributions in the possession of the Corporation, its transfer agents or other agents or depositories, shall at such time become the absolute property of the Corporation, free and clear of any and all claims of any persons whatsoever. 4. Rights or Options. The Corporation shall have the power to create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the Corporation, rights or options entitling the holders thereof to purchase from the Corporation any shares of its capital stock of any class or classes at the time authorized, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the Board of Directors. The terms upon which, the time or times, which may be limited or unlimited in duration, at or within which, and the price or prices at which any such rights or options may be issued and any such shares may be purchased from the Corporation upon the exercise of any such right or option shall be such as shall be fixed and stated in a resolution or resolutions adopted by the Board of Directors providing for the creation and issue of such rights or options, and, in every case, set forth or -10- 11 incorporated by reference in the instrument or instruments evidencing such rights or options. In the absence of actual fraud in the transaction, the judgment of the Directors as to the consideration for the issuance of such rights or options and the sufficiency thereof shall be conclusive. 5. Negation of Preemptive Right. No holder of any stock of the Corporation of any class now or hereafter authorized shall have any right, preemptive or otherwise, as such holder (other than such right, if any, as the Board of Directors in its discretion may determine) to purchase, subscribe for or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any part paid receipts or allotment certificates in respect of any such shares, or any securities convertible into or exchangeable for any such shares, or any warrants or other instruments evidencing rights or options to subscribe for, purchase, or otherwise acquire any such shares, whether such shares, receipts, certificates, securities, warrants or other instruments be unissued, or issued and thereafter acquired by the Corporation. FIFTH: Minimum Capital. The minimum amount of capital of the Corporation shall be $1,000,000. SIXTH: Existence. The Corporation shall have perpetual existence. SEVENTH: Corporate Debts. The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. EIGHTH: Meetings. The stockholders and the Board of Directors shall have power to hold their meetings within or without the State of Delaware at such place or places as from time to time may be designated by the by-laws, or in case of the Board of Directors, by resolution of the Board or by consent of all its members. NINTH: The Board of Directors and Certain of its Powers. Without limiting the generality of any other matters herein contained: (1) The number of directors of the Corporation shall not be less than three, shall be fixed by, or in the manner provided in, the by-laws and may be altered from time to time as may be provided therein. In case of any increase in the number of directors, whether or not by amendment of the by-laws by the Board of Directors, or in case of any vacancy on the Board of Directors however caused, the additional directors may be elected or the vacancy filled by the Board of Directors or by the stockholders in accordance with the laws of the State of Delaware. The by-laws shall prescribe the number of directors necessary to constitute a quorum, which number may be less than a majority of the whole Board of Directors but not less than one-third of the whole Board of Directors. The election of directors of the Corporation need not be by ballot unless the by-laws shall so require. (2) The Board of Directors shall have the power, without the assent or vote of the shareholders, except as otherwise expressly provided by law or by the Certificate of Incorporation or by the by-laws of the Corporation, to fix the time for the declaration and -11- 12 payment of dividends, to fix and vary the amount to be reserved for any proper purposes, to authorize and to cause to be executed mortgages and liens upon the real and personal property of the Corporation, including after-acquired property, to determine the use and disposition of any surplus or net profits arising from the business of the Corporation and to use and apply any such surplus or net profits for the purchase or acquisition of bonds or other obligations or shares of stock of the Corporation, to such extent and in such manner and upon such terms as the Board of Directors shall deem expedient, and shares of stock of the Corporation so purchased or acquired may be resold. (3) All corporate powers, including, but not limited to, the power to fix, and from time to time to change, the compensation to be paid to members of the Board of Directors, and to members of any committee of the Board of Directors, shall be exercised by the Board of Directors, without the assent or other action of the stockholders, except as otherwise expressly provided by law or by the Certificate of Incorporation or by the by-laws of the Corporation. (4) Without the assent or other action of the stockholders, unless otherwise expressly provided by law or by the Certificate of Incorporation, the Board of Directors may purchase, acquire, hold, lease, mortgage, pledge, grant options with respect to, sell and convey such property, real or personal, without as well as within the State of Delaware, as the Board of Directors may, from time to time, determine; and, in payment for any property, it may issue or cause to be issued stock of the Corporation, bonds, debentures, or other obligations thereof, secured or unsecured. (5) The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions or in the by-laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be stated in the by-laws of the Corporation or as may be determined from time to time by resolution adopted by the Board of Directors. (6) In addition to the powers and authorities hereinbefore or by statute expressly conferred upon it, the Board of Directors is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, however, to the provisions of the statutes of the State of Delaware, of the Certificate of Incorporation, and of the by-laws of the Corporation. TENTH: By-Laws. Subject to any limitation which may be imposed by the stockholders or by statute, the Board of Directors may make by-laws and from time to time may alter, amend or repeal any by-law or by-laws. -12- 13 ELEVENTH: Interest of Directors and Officers in Contracts and Transactions. No contract or other transaction between the Corporation and any other corporation and no act of the Corporation shall in any way be affected or invalidated by the fact that any of the directors of the Corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation; any director individually, or any firm of which any director may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof; and any director of the Corporation who is also a director or officer of such other corporation or who is so interested may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize any such contract or transaction and may vote thereat to authorize any such contract or transaction with like force and effect as if he were not such director or officer of such other corporation or not so interested. TWELFTH: Indemnification of Directors and Officers. 6. To the extent not inconsistent with Delaware law as in effect from time to time, every person (and the heirs, executors and administrators of such person) who is or was a director or officer of the Corporation, or of any other corporation which he serves or served as such at the written request of the Corporation and of which the Corporation directly or indirectly is or was a stockholder or creditor or in which (or in the capital stocks, bonds, securities, other obligations or assets of which) it is or was or expects to become in any way interested, shall in accordance with the provisions of this Article be indemnified by the Corporation against any and all liability and reasonable expense that may be incurred by him in connection with or resulting from any claim, action, suit or proceeding; provided that such director or officer is either wholly successful with respect thereto, or acted in good faith in what he reasonably believed to be the best interests of the Corporation or such other corporation and in addition, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. "Claim, action, suit or proceeding" shall include any claim, action, suit or proceeding (whether brought by or in the right of the Corporation or any other corporation or otherwise), civil, criminal, administrative or investigative, or threat thereof, in which a director or officer of the Corporation or such other corporation (or his heirs, executors or administrators) may become involved, as a party or otherwise, (1) by reason of his being or having been a director or officer of the Corporation or such other corporation or a member of any committee of the Board of Directors of the Corporation or such other corporation, or (2) by reason of his acting or having acted in any capacity in a partnership, association, trust or other organization or entity where he served as such at the request of the Corporation, or (3) by reason of any action taken or not taken by him in his capacity as such director, officer or member of such committee, whether or not he continues in such capacity at the time such liability or expense shall have been incurred or asserted. -13- 14 The terms "liability" and "expense" shall include, but not be limited to, costs, counsel fees and disbursements and amounts of judgments, fines or penalties against, and amounts paid in settlement by or on behalf of, a director or officer. The term "wholly successful" shall mean termination, withdrawal or dismissal (with or without prejudice) of any claim, action, suit or proceeding against the person in question without any express finding of liability or guilt against him, or the expiration of a reasonable period of time after the making of any claim or threat of an action, suit or proceeding without the institution of the same, without any payment or promise made to induce a settlement. The termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction or upon a plea of guilty or of nolo contendere, or its equivalent, shall not create a presumption that a director or officer did not meet the standards of conduct herein set forth in this Section 1. 7. Every person (and the heirs, executors and administrators of such person) referred to in Section I of this Article who has been wholly successful with respect to any claim, action, suit or proceeding shall be entitled to indemnification. Every other person claiming indemnification under Section 1 (and the heirs, executors and administrators of such person) shall be entitled to indemnification if special independent legal counsel, other than regular counsel of the Corporation, or other disinterested person or persons, in either case compensated by the Corporation and selected by the Board of Directors, whether or not a disinterested quorum exists (such counsel or person or persons being hereinafter called the Referee), shall deliver to the Corporation their written finding that such director or officer has met the standards of conduct set forth in Section 1. The person claiming indemnification shall at the request of the Referee appear before him and answer questions which the Referee deems relevant and shall be given ample opportunity to present to the Referee evidence upon which he relies for indemnification. 8. Expenses incurred with respect to any claim, action, suit or proceeding may be advanced by the Corporation (by action of the Board of Directors, whether or not a disinterested quorum exists) prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount unless he is entitled to indemnification under this Article. 9. The rights of indemnification provided in this Article shall be in addition to any rights to which any such director or officer may otherwise be entitled by statute, by-law, agreement, vote of stockholders or otherwise, and shall apply only to claims made against such director or officer after April 26, 1967 (and any other matters shall continue to be covered by the provisions of this Article as in effect immediately prior to said date). Persons who are not directors or officers of the Corporation or of such other corporation but are employees of the Corporation or any subsidiary may be indemnified to the extent authorized at any time or from time to time by the Board of Directors. 10. Irrespective of the provisions of this Article, the Board of Directors may, at any time or from time to time, approve indemnification of directors and officers or other persons to the full extent permitted by the provisions of the Delaware General Corporation Law at the time in effect, whether on account of past or future actions or transactions. -14- 15 THIRTEENTH: Limitation on Director Liability. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the Delaware General Corporation Law, or (d) for any transaction from which the director derived an improper personal benefit. This Article shall not eliminate or limit the liability of a director for any act or omission occurring prior to the effective date of this Restated Certificate of Incorporation. Any repeal or amendment of this Article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitations on the personal liability of a director of the Corporation existing at the time of such repeal or amendment. FOURTEENTH: Compromise or Arrangement. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all of the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. FIFTEENTH: Amendments. The Corporation reserves the right to amend, alter, repeal or make additions to any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by the statutes and laws of the State of Delaware, and all rights conferred on officers, directors and stockholders herein are granted subject to this reservation. SIXTEENTH: Descriptive Headings. The descriptive headings of the several articles, sections and paragraphs of this Certificate of Incorporation are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. -15- 16 CERTIFICATE The undersigned, David A. Savner, Secretary of GENERAL DYNAMICS CORPORATION, a Delaware corporation, does hereby certify that the foregoing is a true copy of the Certificate of Incorporation of the Corporation in effect as of this date. WITNESS my hand and the seal of the Corporation this 30th day of July, 1999. (CORPORATE SEAL) by /s/ David A. Savner ------------------------------- David A. Savner Secretary -16- EX-10.43 3 REGISTRATION AGREEMENT 1 EXHIBIT 10.43 REGISTRATION AGREEMENT REGISTRATION AGREEMENT dated as of July 30, 1999 between General Dynamics Corporation, a Delaware corporation (the "Parent Corporation"), and each of the persons whose names are set forth on the signature page of this Agreement (referred to in this Agreement individually as a "Stockholder" and collectively as the "Stockholders"). The Parent Corporation, Tara Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of the Parent Corporation, and Gulfstream Aerospace Corporation, a Delaware corporation (the "Company"), are parties to an Agreement and Plan of Merger dated as of May 16, 1999 (as in effect as of the date hereof, the "Merger Agreement"). Pursuant to the Merger Agreement, each of the Stockholders will be issued shares of the Common Stock, par value $1.00 per share (the "Parent Common Stock"), of the Parent Corporation. The Parent Corporation and the Stockholders have entered into this Agreement for the purpose of evidencing certain agreements among the parties relating to the grant of registration rights by the Parent Corporation to the Stockholders. NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the value, receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. For purposes of this Agreement, the following terms have the meanings set forth below: "Majority Holders" means the holders of a majority of the Registrable Securities included in the relevant registration statement at the time the particular action is taken. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Registrable Securities" means (a) any Parent Common Stock issued to the Stockholders pursuant to the Merger Agreement and (b) any securities issued or issuable with respect to the securities referred to in clause (a) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act or sold to the public in compliance with Rule 144 under the Securities Act (or any similar rule then in force). "Registration Expenses" means all expenses incident to the registration and disposition of the Registrable Securities pursuant to this Agreement, including all registration, filing and applicable national securities exchange fees, all fees and expenses of complying with state securities or blue sky laws (including fees and disbursements of counsel to the underwriters or the Stockholders in connection with "blue sky" qualification of the Registrable Securities and determination of their eligibility for investment under the laws of the various jurisdictions), all word processing, duplicating and printing expenses, all messenger and delivery expenses, the fees and disbursements of counsel for the Parent Corporation and of counsel for any other Person reasonably requested by the Majority Holders, the fees and expenses of the Parent Corporation's independent public accountants and any other independent public accountants whose opinions are included in the registration statement, including the expenses of "cold comfort" letters or any special audits required by, or incident to, such registration, all fees and disbursements of underwriters (other than underwriting discounts and 1 2 commissions), all transfer taxes, and the reasonable fees and expenses of counsel and accountants to the Stockholders; provided that Registration Expenses will exclude, and the Stockholders will pay, all underwriting discounts and commissions in respect of the Registrable Securities being registered by such Stockholders. In connection with any registration pursuant to this Agreement, the Parent Corporation will not be obligated to pay the fees and expenses for more than one counsel, other than local and special counsel, or for more than one firm of accountants representing the Stockholders. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Shelf Registration Statement" means any registration statement that provides for the offering of Registrable Securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (or any similar or successor rule then in force). Except as otherwise provided herein, all capitalized terms used in this Agreement will have the respective meanings provided in the Merger Agreement. SECTION 2. Initial Registration. 2.1 Filing of Initial Registration Statement. On June 18, 1999, the Parent Corporation filed a registration statement on Form S-3 (the "Initial Registration Statement") with the Securities and Exchange Commission relating to the proposed underwritten secondary public offering by the Stockholders of Registrable Securities (the "Initial Offering"). In accordance with the provisions of Section 6 of this Agreement, the Parent Corporation will use its best efforts to cause the Initial Registration Statement to become effective as of the date of the public release of the combined financial results of the Parent Corporation and the Company contemplated pursuant to Section 6.20 of the Merger Agreement (the "Earnings Release"). The Parent Corporation will use its best efforts to maintain the effectiveness of the Initial Registration Statement for a period of time, not to exceed 120 days after the date of the Earnings Release or such longer period as the Parent Corporation and the Majority Holders may agree (the "Initial Registration Period"), in order to permit the completion of the Initial Offering in the manner contemplated by the Initial Registration Statement. 2.2 Postponement of Effectiveness. At any time and from time to time prior to the effectiveness of the Initial Registration Statement, the Majority Holders may, by delivery of written notice to the Parent Corporation, request that the Parent Corporation delay the effectiveness of the Initial Registration Statement or withdraw the Initial Registration Statement. Thereafter, at any time prior to the expiration of the Initial Registration Period, the Majority Holders may, by delivery of written notice to the Parent Corporation, request that the Parent Corporation use its best efforts to cause the Initial Registration Statement to become effective as soon as practicable after the date of such notice. Any Registrable Securities not included in the Initial Registration Statement when filed will be included in the Initial Registration Statement upon the request of the holder thereof, such request to be made not later than five days prior to the effective date of the Initial Registration Statement. 2.3 Registration Expenses. The Parent Corporation will pay all Registration Expenses incurred in connection with the Initial Registration Statement and the Initial Offering. 2.4 Prohibited Activities. Until the expiration of the Initial Registration Period, the Parent Corporation will not effect any public sale or distribution of its equity securities or any securities convertible into or exchangeable or exercisable for such securities, or make any filing with the - --------------- 2 3 Securities and Exchange Commission with respect to such sale or distribution (including on Form S-4 or any similar or successor form), except pursuant to registrations on Form S-8 or any similar or successor form. The Parent Corporation has not entered into, and until the end of the Initial Registration Period will not enter into, any agreement or transaction (a) which would allow any Person to request registration of its equity securities or any securities convertible into or exchangeable or exercisable for such securities prior to the expiration of the Initial Registration Period or (b) the effect of which would be to adversely affect the ability of the Initial Registration Statement to be declared effective on the date of the Earnings Release and through the expiration of the Initial Registration Period. SECTION 3. Subsequent Demand Registrations. 3.1 Requests for Demand Registrations. At any time after the expiration of the Initial Registration Period, the holders of at least 40 percent of the Registrable Securities will have the right to require the Parent Corporation to effect, and the Parent Corporation will be required to use its best efforts to effect, two, or if the Initial Registration Statement has not become effective, three, registrations under the Securities Act (the "Demand Registrations") of all or part of their Registrable Securities. Each Demand Registration will be on Form S-2 or S-3 or any similar or successor short-form registration, if available, or if such forms are not available to effect a Demand Registration, such other form of the Securities and Exchange Commission as is available. If requested by the Majority Holders, and the Parent Corporation is then eligible to use such a registration, the Demand Registration will be made on a Shelf Registration Statement. Each request for a Demand Registration will specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Within five business days after receipt of any such request, the Parent Corporation will give written notice of such requested registration to all other holders of Registrable Securities and will include in such registration all Registrable Securities with respect to which the Parent Corporation has received written requests for inclusion therein no later than five days prior to the effective date of the registration statement. 3.2 Priority on Demand Registrations; Right to Withdraw. The Parent Corporation will not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the Majority Holders. If a Demand Registration is an underwritten offering and the managing underwriters advise the Parent Corporation that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering within a price range acceptable to the Majority Holders, the Parent Corporation will include in such registration prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold in an orderly manner within the acceptable price range of such offering, pro rata among the respective holders thereof on the basis of the amount of Registrable Securities owned by each such holder. If, as a result of the proration provisions set forth in the previous sentence, any holder of Registrable Securities is not entitled to include all Registrable Securities previously requested to be included in such registration, such holder may elect to withdraw such holder's request to include Registrable Securities in such registration or may reduce the number requested to be included; provided that such request must be made in writing prior to the execution of the underwriting agreement. 3.3 Restrictions on Demand Registrations. The Parent Corporation will not be obligated to effect a Demand Registration within 90 days after the effective date of the previous Demand Registration. The Parent Corporation may postpone for up to 90 days the filing or effectiveness of a registration statement for a Demand Registration, and may terminate the effectiveness of and withdraw for a period of up to 90 days any Shelf Registration Statement filed pursuant to a Demand 3 4 Registration, if the Parent Corporation promptly notifies the holders of Registrable Securities in writing that the Board of Directors of the Parent Corporation has determined in good faith that effecting such Demand Registration, or continuing the effectiveness of such registration statement, would reasonably be expected to have a material adverse effect on any proposal or plan by the Parent Corporation or any of its Subsidiaries to engage in any material acquisition of assets, merger, consolidation, tender offer or other material transaction the public disclosure of which the Board of Directors of the Parent Corporation has determined in good faith is not in the best interests of the Parent Corporation and provides an approximation of the anticipated duration of the postponement. In such event, the requested Demand Registration, or the Demand Registration pursuant to which the withdrawn registration was filed, will not count for purposes of the requests for Demand Registrations to which the Stockholders are entitled under this Agreement. The Parent Corporation may exercise its rights under this Section 3.3 only one time in any six-month period and the exercise of one right under this Section 3.3 in any six-month period will preclude the exercise of any other right under this Section 3.3 during the same six-month period. The Parent Corporation acknowledges that its rights under this Section 3.3 may not be exercised at any time during the Initial Registration Period. 3.4 Registration Expenses. All Registration Expenses incurred in connection with any Demand Registration will be borne by the Parent Corporation. 3.5 Selection of Underwriters. The Majority Holders will have the right to select the investment bankers and managers to administer each underwritten Demand Registration. Such investment bankers and managers will be of national prominence. 3.6 Effective Registration Statement. A registration requested pursuant to Section 3.1 will not be deemed to have been effected (a) unless a registration statement with respect thereto has become effective and has been kept continuously effective for a period of at least 180 days (or such shorter period terminating when all the Registrable Securities covered by such registration statement have been sold pursuant thereto), (b) if after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Securities and Exchange Commission or other governmental agency or court for any reason not attributable to the holders registering Registrable Securities and has not thereafter become effective or (c) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived. 3.7 Right to Withdraw. If the managing underwriter of any underwritten offering advise the holders of Registrable Securities included in such offering that the Registrable Securities covered by the registration statement cannot be sold in an orderly manner in such offering within a price range acceptable to the Majority Holders, then the Majority Holders will have the right to notify the Parent Corporation in writing that they have determined that the registration statement be abandoned or withdrawn, in which event the Parent Corporation will abandon or withdraw such registration statement. In the event of such abandonment or withdrawal, the Demand Registration pursuant to which the registration was abandoned or withdrawn will not count for purposes of the requests for Demand Registrations to which the Stockholders are entitled under this Agreement. 3.8 Termination of Rights. The right to request Demand Registrations pursuant to this Section 3 will terminate as of the date the outstanding Registrable Securities in the aggregate represent less than 0.25 percent of the issued and outstanding shares of Parent Common Stock. SECTION 4. Piggyback Registrations. 4.1 Right to Piggyback. Whenever the Parent Corporation proposes to register any shares of Parent Common Stock under the Securities Act (other than pursuant to a Demand Registration and other than registrations on Form S-4, Form S-8 or any similar or successor forms) and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback 4 5 Registration"), the Parent Corporation will give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and of such holders' rights under this Section 4 and will include in such registration all Registrable Securities with respect to which the Parent Corporation has received written requests for inclusion therein no later than five days prior to the effective date of the registration statement. Subject to the provisions of this Section 4, the Parent Corporation will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Parent Corporation has been so requested to register by the holders of Registrable Securities. No registration effected under this Section 4.1 will relieve the Parent Corporation of its obligation to effect any registration upon request under Section 3.1. 4.2 Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Parent Corporation, and the managing underwriters advise the Parent Corporation that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Parent Corporation, the Parent Corporation will include in such registration (a) first, the securities the Parent Corporation proposes to sell, (b) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of shares owned by each such holder, and (c) third, other securities requested to be included in such registration. 4.3 Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Parent Corporation's securities, and the managing underwriters advise the Parent Corporation that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Parent Corporation will include in such registration (a) first, the securities requested to be included therein by the holders requesting such registration and the Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such holder, and (b) second, other securities requested to be included in such registration. 4.4 Piggyback Expenses. All Registration Expenses incurred in connection with any Piggyback Registration will be borne by the Parent Corporation. 4.5 Selection of Underwriters. If any Piggyback Registration is an underwritten offering, the selection of investment bankers and managers for the offering must be approved by the Majority Holders; provided that Registrable Securities constitute at least 10 percent of the securities to be sold pursuant to such Piggyback Registration. Such approval will not be unreasonably withheld. 4.6 Right to Withdraw. Any holder of Registrable Securities will have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement pursuant to Section 4.1 at any time prior to the execution of any underwriting agreement with respect thereto by giving written notice to the Parent Corporation of its request to withdraw. Any such request for withdrawal will be irrevocable. SECTION 5. Holdback Agreement of the Parent Corporation. The Parent Corporation agrees not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the 180-day period beginning on the effective date of any underwritten Demand Registration or underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-4, Form S-8 or any similar or successor forms), unless the underwriters managing the registered public offering otherwise agree in writing. 5 6 SECTION 6. Registration Procedures. In connection with the Initial Registration and whenever the holders of Registrable Securities have otherwise requested that any Registrable Securities be registered pursuant to this Agreement, the Parent Corporation will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Parent Corporation, except as otherwise provided in this Agreement, will as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective; provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Parent Corporation will furnish copies of all such documents proposed to be filed to the counsel selected by the Majority Holders (the "Holders' Counsel") and, in an underwritten offering, to counsel for the underwriters; (b) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and prospectus as may be necessary to keep such registration statement effective for a period of not less than 180 days (or, in the case of the Initial Registration Statement, upon the expiration of the Initial Registration Period) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish, without charge, to each seller of Registrable Securities and each underwriter such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests, keep such registration or qualification in effect for so long as such registration statement remains in effect, and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller; provided that the Parent Corporation will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; (e) promptly notify each seller of such Registrable Securities (i) when the registration statement covering such Registrable Securities, any pre-effective amendment, the prospectus or any prospectus supplement related thereto or post-effective amendment to such registration statement has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Securities and Exchange Commission for amendments or supplements to such registration statement or the prospectus related thereto or for additional information, (iii) of the issuance by the Securities and Exchange Commission of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose, (iv) of the receipt by the Parent Corporation of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose and (v), at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the discovery or happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact required to be stated therein or necessary to 6 7 make the statements therein not misleading, and, at the request of any such seller, the Parent Corporation will prepare and furnish to each seller of Registrable Securities a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact required to be stated therein or necessary to make the statements therein not misleading; (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Parent Corporation are then listed; (g) enter into such customary agreements (including underwriting agreements in customary form) in accordance with the provisions of Sections 6.5 and 8.1; (h) otherwise comply with all applicable rules and regulations of the Securities and Exchange Commission; (i) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Parent Corporation will use its best efforts promptly to obtain the withdrawal of such order; and (j) obtain a cold comfort letter from the Parent Corporation's independent public accountants, and any other accountants whose opinions are included in such registration statement, in customary form and covering such matters of the type customarily covered by cold comfort letters as the Majority Holders reasonably request. (k) make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first full calendar month after the effective date of such registration statement, which earnings statement will satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each seller of Registrable Securities a copy of any amendment or supplement to such registration statement or prospectus; (l) obtain an opinion of the Parent Corporation's and any other counsel reasonably requested by the Majority Holders in customary form and covering such matters of the type customarily covered by opinions of counsel as the Majority Holders reasonably request; provided that such Registrable Securities constitute at least 10 percent of the securities covered by such registration statement; (m) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Parent Corporation and Holders' Counsel to consummate the disposition of such Registrable Securities; (n) deliver promptly to Holders' Counsel and each underwriter, if any, participating in the offering of the Registrable Securities, copies of all correspondence between the Securities and Exchange Commission and the Parent Corporation, its counsel or auditors and all memoranda relating to (and allow the Holders' Counsel and any underwriters counsel to participate in) discussions with the Securities and Exchange Commission or its staff with respect to such registration statement; and (o) make available its employees and personnel and otherwise provide reasonable assistance to the underwriters (including by participating in meetings, drafting sessions, due diligence sessions and road shows) in their marketing of Registrable Securities. 7 8 If any such registration or comparable statement refers to any holder by name or otherwise as the holder of any securities of the Parent Corporation and if, in its good faith judgment, such holder is or might be deemed to be a controlling person of the Parent Corporation, such holder will have the right to require (i) the insertion therein of language, in form and substance reasonably satisfactory to such holder and presented to the Parent Corporation in writing, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of the Parent Corporation's securities covered thereby and that such holding does not imply that such holder will assist in meeting any future financial requirements of the Parent Corporation or (ii) in the event that such reference to such holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such holder; provided that with respect to this clause (ii) such holder will furnish to the Parent Corporation an opinion of counsel to such effect, which opinion and counsel will be reasonably satisfactory to the Parent Corporation. 6.2 Unlegended Certificates. In connection with the offering of any Registrable Securities registered pursuant to this Agreement, the Parent Corporation will promptly after the sale of such Registrable Securities (a) facilitate the timely preparation and delivery to holders and the underwriters, if any, participating in such offering, of unlegended certificates representing ownership of such Registrable Securities being sold in such denominations and registered in such names as requested by such holders or such underwriters and (b) instruct any transfer agent and registrar of such Registrable Securities to release any stop transfer orders with respect to any such Registrable Securities. 6.3 No Required Sale. Nothing in this Agreement will be deemed to create an independent obligation on the part of any holder of Registrable Securities to sell any Registrable Securities pursuant to any effective registration statement. 6.4 Rule 144. The Parent Corporation will take all actions reasonably necessary to enable holders of Registrable Securities to sell such securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission including, without limiting the generality of the foregoing, filing on a timely basis all reports required to be filed by the Securities Exchange Act. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 6.5 Underwriting Agreement. If the Initial Offering or any Demand Registration is an underwritten offering, the Parent Corporation will enter into a customary underwriters agreement with a managing underwriter or underwriters which will be reasonably satisfactory in form and substance to the Majority Holders and will contain such representations and warranties by, and such other agreements on the part of, the Parent Corporation and such other terms as are generally prevailing in agreements of that type, including customary provisions relating to indemnification and contribution. The holders of Registrable Securities in such offering may, at their option, be parties to such underwriting agreement and require that any or all of the representations and warranties by, and other agreements on behalf of, the Parent Corporation to and for the benefit of the underwriters also be made to and for the benefit of such holders and that any and all of the conditions precedent to the obligations of such underwriters be conditions precedent to the obligations of such holders. SECTION 7. Indemnification. 7.1 Parent Corporation Indemnification. The Parent Corporation agrees to indemnify, to the fullest extent permitted by law, each holder of Registrable Securities, its directors, officers, partners (and the partners thereof, collectively, "Partners"), agents and affiliates and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities 8 9 and expenses, joint or several, caused by (a) any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus, summary prospectus or preliminary prospectus or any amendment thereof or supplement thereto, (b) any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading or (c) any violation by the Parent Corporation of any federal, state or common law, rule or regulation applicable to the Parent Corporation or relating to action required of or inaction by the Parent Corporation in connection with such registration, except insofar as such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, prospectus, summary prospectus, preliminary prospectus, amendment or supplement which is contained in written information furnished to the Parent Corporation through an instrument duly executed by or on behalf of such holder, specifically stating that it is for use in the preparation thereof, or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Parent Corporation has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Parent Corporation will indemnify the underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. 7.2 Holder Indemnification. In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder will furnish to the Parent Corporation in writing such information and affidavits as the Parent Corporation reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Parent Corporation, its directors and officers and each Person who controls the Parent Corporation (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus, summary prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished by such holder through an instrument duly executed by or on behalf of such holder, specifically stating that it is for use in the preparation thereof, or resulting from such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Parent Corporation has furnished such holder with a sufficient number of copies of the same; provided that the liability of each indemnifying party will be limited to the amount of proceeds (net of expenses and underwriting discounts and commissions) received by such indemnifying party in the offering giving rise to such liability. 7.3 Resolution of Claims. Any Person entitled to indemnification hereunder will (a) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure of any indemnified party to give notice as provided herein will not relieve the indemnifying party of its obligations under the preceding subsections of this Section 7, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice, and will not relieve the indemnifying party from any liability which it may have to the indemnified party otherwise than under this Section 7) and (b) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to 9 10 pay the fees and expenses of more than one counsel, other than local and special counsel, for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. No indemnifying party will, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 7.4 Survival. The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any director, officer, Partner, agent, affiliate or controlling Person of such indemnified party and will survive the transfer of securities. 7.5 Contribution. If the indemnification provided for in this Section 7 is for any reason held by a court to be unavailable to an indemnified party under Section 7.1 or 7.2 hereof in respect of any loss, claim, damage, liability and expenses, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 7.1 or 7.2 hereof, the indemnified party and the indemnifying party under Section 7.1 or 7.2 hereof will contribute to the aggregate losses, claims, damages, liabilities and expenses (including legal or other expenses reasonably incurred in connection with investigating the same), (a) in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand, and the indemnified party on the other, which resulted in such loss, claim, damage, liability or expense, or action in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage, liability or expense, or action in respect thereof, as well as any other relevant equitable considerations, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative fault but also the relative benefits received by the indemnifying party and the indemnified party from the offering of the securities covered by such registration statement as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 7.5 were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the preceding sentence of this Section 7.5. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. In addition, no Person will be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent will not be unreasonably withheld. Notwithstanding anything in this Section 7.5 to the contrary, no indemnifying party (other than the Parent Corporation) will be required to contribute any amount in excess of the proceeds (net of expenses and underwriting discounts and commissions) received by such party from the sale of the Registrable Securities in the offering to which the losses, claims, damages, liabilities or expenses of the indemnified parties relate. 7.6 Other Indemnification. Indemnification and contribution similar to that specified in the preceding subsections of this Section 7 (with appropriate modifications) will be given by the Parent Corporation and holders of Registrable Securities participating in a registered offering with respect to any required registration or other qualification of securities under any federal, state or blue sky law or regulation of any governmental authority other than the Securities Act. The indemnification agreements contained in this Section 7 will be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract. 7.7 Indemnification Payments. The indemnification and contribution required by this Section 7 will be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 10 11 SECTION 8. Participation in Registrations. 8.1 Required Actions. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents consistent with the terms of this Agreement; provided that no holder of Registrable Securities included in any underwritten registration will be required to make any representations or warranties to the Parent Corporation or the underwriters other than representations and warranties regarding such holder and such holder's intended method of distribution and any liability of such holder to any underwriter or other Person under such underwriting agreement will be limited to liability arising from breach of its representations and warranties and will be limited to an amount equal to the proceeds (net of expenses and underwriting discounts and commissions) that it derives from such registration.. 8.2 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Parent Corporation will give each holder participating in such registration, its underwriters, if any, and its respective counsel, accountants and other representatives and agents the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Securities and Exchange Commission, and each amendment thereof or supplement thereto, and give each of them such reasonable access to its books and records and such reasonable opportunities to discuss the business of the Parent Corporation with its officers and employees and the independent public accountants who have certified its financial statements, and supply all other information reasonably requested by each of them, as is necessary or appropriate, in the opinion of each such registering holder and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. SECTION 9. Miscellaneous. 9.1 No Inconsistent Agreements. The Parent Corporation has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the Stockholders hereunder do not in any way conflict with and are not inconsistent with any other agreements to which the Parent Corporation is a party or by which it is bound. The Parent Corporation is not a party to and will not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. If the Parent Corporation enters into any other registration rights agreement after the date of this Agreement with respect to any of its securities containing terms which are more favorable to, or less restrictive on, the other party thereto than the terms and conditions contained in this Agreement are to the Stockholders, then the terms and conditions of this Agreement will immediately be deemed to have been amended without further action by the Parent Corporation or the Stockholders so that the Stockholders will be entitled to the benefit of any such more favorable or less restrictive terms or conditions. 9.2 Remedies. The parties agree that irreparable damage would occur in the event that the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties will be entitled to specific performance of the terms of this Agreement, without posting a bond or other security, this being in addition to any other remedy to which they are entitled at law or in equity. 9.3 Consent to Amendments. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended and the Parent Corporation may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Parent Corporation has 11 12 obtained the written consent of the holders of a majority of the Registrable Securities or, if the consent relates to a particular registration statement, by the Majority Holders. No other course of dealing between the Parent Corporation and the holder of any Registrable Securities or any delay in exercising any rights hereunder or under the Certificate of Incorporation will operate as a waiver of any rights of any such holders. For purposes of this Agreement, shares of Registrable Securities held by the Parent Corporation or any of its Subsidiaries will not be deemed to be outstanding. 9.4 Successors and Assigns. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for the Stockholders' benefit as holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of such Registrable Securities, each of which will be deemed a Stockholder for all purposes under this Agreement. 9.5 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 9.6 Counterparts; Effectiveness. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. This Agreement will be effective as to a holder of Registrable Securities when this Agreement has been executed by the Parent Corporation and such holder. 9.7 Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 9.8 Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered personally to the recipient or when sent to the recipient by telecopy (receipt confirmed), one business day after the date when sent to the recipient by reputable express courier service (charges prepaid) or three business days after the date when mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications will be sent to the Parent Corporation and the Stockholders at the addresses indicated below: If to the Parent Corporation: General Dynamics Corporation 3190 Fairview Park Drive Falls Church, Virginia 22041-4523 Attention: David A. Savner, Esq. Senior Vice President and General Counsel Facsimile No: (703) 876-3125 With a copy (which will not constitute notice) to: Jenner & Block 601 13th Street, N.W. Washington, D.C. 20005 Attention: Craig A. Roeder, Esq. Facsimile No: (202) 639-6066 12 13 If to a Stockholder: c/o Forstmann Little & Co. 767 Fifth Avenue New York, New York 10153 Attention: Sandra J. Horbach Facsimile No: (212) 759-9059 With a copy (which will not constitute notice) to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Stephen Fraidin, P.C. Aviva Diamant, Esq. Facsimile No: (212) 859-4000 or to such other address or to the attention of such other party as the recipient party has specified by prior written notice to the sending party. 9.9 No Third-Party Beneficiaries. This Agreement will not confer any rights or remedies upon any Person other than the Parent Corporation and the Stockholders and their respective successors and permitted assigns. 9.10 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements, or representations by or among the parties, written or oral, that may have related in any way to the subject matter hereof. 9.11 Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. Any reference to any federal, state, local, or foreign statute or law will be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The use of the word "including" in this Agreement means "including without limitation" and is intended by the parties to be by way of example rather than limitation. 8.12 Consent to Jurisdiction. Each of the parties to this Agreement submits to the jurisdiction of any state or federal court sitting in Wilmington, Delaware, in any action or proceeding arising out of or relating to this Agreement, agrees that all claims in respect of the action or proceeding may be heard and determined in any such court, and agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the parties to this Agreement waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto. 8.13 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. * * * * * 13 14 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date first written above. GENERAL DYNAMICS CORPORATION By -------------------------------------- Name: Title: FORSTMANN LITTLE & CO. SUBORDINATED DEBT AND EQUITY MANAGEMENT BUYOUT PARTNERSHIP--IV, L.P. By FLC XXIX PARTNERSHIP, L.P. Its General Partner By -------------------------------------- General Partner GULFSTREAM PARTNERS, L.P. By FLC XXI PARTNERSHIP Its General Partner By -------------------------------------- General Partner GULFSTREAM PARTNERS II, L.P. By FLC XXIV PARTNERSHIP Its General Partner By -------------------------------------- General Partner -------------------------------------- Name: Lynn Forester, Stockholder ------------- -------------------------------------- Name: Henry A. Kissinger, Stockholder ------------------ -------------------------------------- Name: Mark H. McCormack, Stockholder ----------------- -------------------------------------- Name: Michael S. Ovitz, Stockholder ---------------- -------------------------------------- Name: Joseph Kent Walker, Stockholder ------------------ -------------------------------------- Name: Preston A. Henne, Stockholder ----------------- -------------------------------------- Name: Thomas D. Bell, Jr., Stockholder ------------------- 14 EX-23.1 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated August 2, 1999, on the supplemental consolidated financial statements of General Dynamics Corporation included in this Form 8-K, into General Dynamics Corporation's previously filed Registration Statements File Numbers 33-23448, 2-23904, 2-23032, 2-28952, 2-50980, 2-24270, 33-42799, 33-80213 and 33-81051. /s/ ARTHUR ANDERSEN LLP ----------------------------- ARTHUR ANDERSEN LLP Washington, D.C., August 10, 1999 EX-23.2 5 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-81051 of General Dynamics Corporation on Form S-3 of our reports dated February 1, 1999 (March 1, 1999 as to Note 16), relating to the financial statements and financial statement schedules of Gulfstream Aerospace Corporation, appearing in and incorporated by reference in the Annual Report on Form 10-K of Gulfstream Aerospace Corporation for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP ------------------------- DELOITTE & TOUCHE LLP Atlanta, Georgia August 9, 1999 EX-99.1 6 MANAGEMENT'S DISCUSSION AND ANAYLSIS 1 EXHIBIT 99.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in millions, except per share amounts) FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of the Results of Operations and Financial Condition contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, aircraft production and deliveries, cash flows, contract awards, aircraft backlog stability and the company's expectations regarding the upcoming year 2000. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; the status or outcome of legal and/or regulatory proceedings; the status or outcome of labor negotiations; changing priorities or reductions in the U.S. government defense budget; termination of government contracts due to unilateral government action; and the timing and occurrence (or non-occurrence) of circumstances beyond the company's control. BUSINESS OVERVIEW The company's primary business is supplying sophisticated defense systems to the United States and its allies. Over the last decade, due to a decline in the U.S. defense budgets, participants in the defense industry began a process of contraction and consolidation. The company participated in this shift by changing its focus to strengthen certain core businesses through both internal and external means. Management continues to focus on developing advanced technological solutions to meet its customers' evolving operational requirements and improving its cost structure. Management believes these initiatives have created efficient businesses that are positioned to capture new programs and contracts. The company's businesses have been awarded new programs with the potential for significant production, as well as several important contracts on existing programs, that management believes will carry the programs well into the next century. The anticipated defense programs and plans of the company and of the U.S. armed forces are subject to, among other events, changing priorities or reductions in the U.S. government defense budget. However, the company's programs continue to receive bipartisan support in the defense budget. The Department of Defense's fiscal year 2000 budget request submitted to Congress in February 1999 included substantially all of the company's major programs. 1 2 Since September 1995, the company has invested approximately $2 billion in cash for the acquisition of 11 defense industry businesses, which have been accretive to earnings. Management believes these acquisitions have strengthened the company's core operations, further improved its capabilities regarding full systems integration and data management for its defense products, and extended its reach both geographically and in product mix. In identifying potential acquisitions, management seeks operations closely related to its current businesses, which generate attractive financial results and address all or some of the following criteria: - focus on defense; - directly relate to the company's core business; - provide opportunities within its core competencies. The company's core competencies include the computerized design and production of complex products involving advanced electro-mechanical and electronics systems; the marketing of advanced products and systems to domestic and foreign government agencies; and the production and assembly of high precision products involving special materials. In this regard, on July 30, 1999, the company completed the acquisition of Gulfstream Aerospace Corporation (Gulfstream) in a stock-for-stock exchange. The acquisition of this leading supplier of commercial advanced long and ultra-long range business aircraft is expected to be immediately accretive to earnings and cash flow. In all of its acquisitions, both defense and commercial, the company seeks to apply its broad expertise in creating efficient manufacturing environments to further enhance their financial performance and competitive market positions. Management intends to continue to implement its strategy to strengthen the company through core business revenue growth by positioning it to capture new programs and contracts; continued improvement in operations; and disciplined capital deployment, including internal investment and acquisitions. With adequate funds on hand and the capacity for additional long-term borrowing, management believes it has the financial capability to take advantage of potential opportunities. BUSINESS SEGMENTS The company operates in four primary business segments: Marine Systems, Combat Systems, Information Systems and Technology and Aerospace. Marine Systems designs, builds and supports nuclear submarines, surface combatants and auxiliary ships for the U.S. Navy. Marine Systems also provides ship management services for the U.S. government on prepositioning and ready reserve ships and builds commercial vessels. Net sales of nuclear submarines were $1,381, $1,321 and $1,443 in 1998, 1997 and 1996, respectively. Net sales of surface combatants were $936, $839 and $791 in 1998, 1997 and 1996, respectively. 2 3 Combat Systems develops, produces and supports land and amphibious combat systems, including the U.S. Army's main battle tank, other armored vehicles, wheeled reconnaissance vehicles, suspensions, engines, transmissions, guns and ammunition handling systems, turrets and turret drive systems, and ordnance for the U.S. armed forces and international customers. Net sales of armored vehicles were $915, $960 and $889 in 1998, 1997 and 1996, respectively. Information Systems and Technology provides expertise in signal and information processing, the use of commercial technologies for military applications, battlespace information management and intelligence data acquisition and processing within the defense and intelligence branches of the U.S. government and its allies. It is also an integrator of marine and ground combat systems. Aerospace was formed as a result of the acquisition of Gulfstream on July 30, 1999. Aerospace designs, develops, manufactures and markets advanced long and ultra-long range business aircraft and offers aircraft completion and worldwide aircraft maintenance services and technical support for both Gulfstream and other business aircraft. For a discussion of the accounting for this transaction and related information, see Note C to the Supplemental Consolidated Financial Statements. The company also owns coal mining and aggregates operations in the Midwest, and a leasing operation for liquefied natural gas tankers, which are classified as "Other." A discussion of each business segment's backlog position (the estimated remaining sales value of work to be performed under firm contracts), anticipated programs, operating results and outlook follows. For a summary of business segment financial information, see Note T to the Supplemental Consolidated Financial Statements. MARINE SYSTEMS In the first quarter of 1999, management realigned the company's information technology resource businesses, resulting in a different composition of reportable segments. Data for all prior periods presented has been restated to give recognition to the 1999 composition of reportable segments. 3 4 Backlog
Year Ended December 31, 1998 1997 1996 Total Backlog $11,565 $5,864 $7,566 Funded Backlog 5,071 4,172 4,403
Year-end 1998 backlog includes contracts for the construction of the first four ships of the Virginia-class submarine, formerly known as the New Attack Submarine, 13 Arleigh Burke class destroyers (DDG 51), five strategic sealift ships, and the final Seawolf-class attack submarine. A modification to the final Seawolf is currently under way. The modification is expected to extend the company's delivery date of the final Seawolf to 2003. The company's Marine Systems backlog doubled during 1998 due to several major awards and the acquisition of NASSCO Holdings Incorporated (NASSCO), whose wholly owned subsidiaries include National Steel and Shipbuilding Company, in late 1998. In September 1998, the Navy awarded a $4.2 billion contract to the company for the first four ships of the Virginia-class submarine. The Department of Defense's fiscal year 2000 budget includes funding for a fifth Virginia-class submarine in fiscal year 2003. The company is scheduled to deliver the lead ship of the class in 2004. Construction work will be shared equally with the company as the prime contractor and Newport News Shipbuilding Inc. (Newport News) in the role of subcontractor, in accordance with the terms of the Team Agreement entered into in February 1997 between the company and Newport News. Current Department of Defense plans call for 30 ships in the Virginia-class submarine program. In August 1998, the Navy awarded a $68.5 contract to the DD 21 Shipbuilder Alliance, composed of the company and Ingalls Shipbuilding, a division of Litton Industries, Inc., for the first phase of system concept design work for the next generation surface combatant ships (DD 21). The company will serve as the Alliance prime contractor for the first phases of the DD 21 program and leads one of the Alliance's two competing design teams. Each team will share equally in the funding of the first phase award, and both shipbuilders are expected to share equally in the production of the DD 21 ships. Based on the Navy's plans, the development, design, construction and life-cycle support of the DD 21 ships is estimated at $25 billion and includes the construction of 32 ships over 25 years, beginning in 2004. In March 1998, the Navy awarded a multiyear contract to the company for the construction of six additional DDG 51s for $2.1 billion. This award extends the company's deliveries to 2006. With the acquisition of NASSCO, Marine Systems added approximately $1.2 billion to its backlog. Included in this backlog are contracts for the construction of five strategic sealift ships for the U.S. Navy. An initial contract for $1.3 billion for the construction of six ships was awarded to NASSCO in 1993, with a seventh ship added in 1997 for approximately $200. During 1998, the first two of these ships were delivered to 4 5 the U.S. Navy. Delivery of the seventh ship is scheduled for 2001. Also included in this backlog is a seven-year contract with the U.S. Navy for the phased maintenance of six LHA- and LHD-class ships for approximately $500, awarded to NASSCO during 1997. The company is a member of a three-contractor team which in December 1996 was awarded a contract to design and build the Navy's new class of amphibious transport ships (LPD 17). Congressional funding was previously approved for the design and construction of the first two LPD 17 ships. The Navy anticipates this to be a 12-ship program. If the Navy receives Congressional funding for the remaining 10 ships, the company has agreed with its partners that it will construct four ships. Congressional funding for the next two ships, one to be constructed by the company, is contained in the Department of Defense fiscal year 2000 budget request. Results of Operations and Outlook
Three-Month Period Ended April 4, March 29, 1999 1998 Net Sales $ 808 $ 555 Operating Earnings 88 64 Operating Margin 10.9% 11.5%
Net sales increased $253 during the three-month period due primarily to the acquisition of NASSCO in late 1998. Operating earnings increased $24 during the three-month period due primarily to the aforementioned acquisition and to an earnings rate increase on the DDG 51 program in the fourth quarter of 1998.
Year Ended December 31, 1998 1997 1996 Net Sales $2,529 $2,248 $ 2,332 Operating Earnings 276 227 216 Operating Margin 10.9% 10.1% 9.3%
Net sales increased $281 in 1998 due primarily to the acquisition of NASSCO and to earnings rate increases on the DDG 51 program in the fourth quarter and on the Seawolf program in the first quarter. The operating results of NASSCO have been included with those of the company from the acquisition closing date, November 10, 1998. Operating earnings increased $49 in 1998 due to the aforementioned earnings rate increases, partially offset by a decline in submarine construction activity due to the delivery of the final Trident during late 1997. The DDG 51 program continues to realize benefits from cost reduction efforts and diminishing operating risks as the business base 5 6 stabilizes from the 1998 six-ship multiyear award. The Seawolf program continues to benefit from diminishing operating risks due to the maturity of the program and stabilization of the business base due to the four-ship Virginia-class award. Net sales decreased $84 in 1997 due to lower submarine construction activity as a result of the delivery of the final Trident and the first Seawolf submarines. This decrease was partially offset by increased engineering and design work on the Virginia-class submarine. Operating earnings increased $11 due to earnings rate increases on the DDG 51 program in the fourth quarter and on the Seawolf program in the third quarter. Looking forward, Marine Systems operating margins in 1999 are expected to approximate those reported in 1998. With the delivery of the second Seawolf submarine in late 1998 and the award of the first four ships of the Virginia-class submarine, operating risks on submarine programs are expected to continue to diminish. Additionally, the DDG 51 program is expected to continue to benefit from cost reduction efforts and stabilization of business base. COMBAT SYSTEMS In the first quarter of 1999, management realigned the company's information technology resource businesses, resulting in a different composition of reportable segments. Data for all prior periods presented has been restated to give recognition to the 1999 composition of reportable segments. Backlog
Year Ended December 31, 1998 1997 1996 Total Backlog $1,579 $2,190 $2,057 Funded Backlog 843 1,186 1,031
The company enters 1999 in its fourth production year of a $1.3 billion multiyear contract for the upgrade of approximately 600 M1 Abrams tanks to the M1A2 configuration. Further M1A2 improvements - the System Enhancement Package - will be incorporated in the last 240 tanks of this multiyear contract, with deliveries to begin in August 1999. This contract is part of a U.S. Army procurement program to upgrade approximately 1,150 of the M1 Abrams tanks, with production anticipated through 2005. The company is under contract for the development of several other major systems, including a three-year $300 contract for the design and development of the Advanced Amphibious Assault Vehicle (AAAV) and construction of at least three prototypes. Fabrication of the first prototype vehicle began in 1998. Full-scale production is expected to begin in 2005. The Marine Corps plans to procure more than 1,000 vehicles in the next decade, a production program worth as much as $4 billion. The Crusader Self-Propelled Howitzer program remains the Army's largest single research and development program; the company's share is approximately 25 percent. 6 7 The U.S. Army plans to build more than 800 Crusader systems, a production program that could be worth as much as $13 billion. Other mature production programs in Combat Systems backlog include several major components of the Bradley combat vehicle and its derivatives; Hydra 70 Rocket; diesel engines; and a four-year program to upgrade Fox Nuclear, Biological and Chemical Reconnaissance System vehicles. In May 1998, the company received a $106 contract from the U.S. Army to begin initial production of the Wolverine Heavy Assault Bridge, a derivative of the Abrams M1 platform. The first vehicle is scheduled for delivery in August 1999, with full-rate production expected to begin in 2000. In October 1998, the company's Armament Systems operating unit formed a joint venture with Mason & Hanger Corporation that consolidated two of the U.S. Army's ammunition production facilities. Previously a consolidated subsidiary, the company's Milan Army Ammunition Plant is now part of the unconsolidated joint venture, American Ordnance LLC. This joint venture is expected to lower costs and improve overall profit margins on the ordnance production programs. The company's share of American Ordnance's pretax earnings are included with those of the Combat Systems segment's operating earnings from its date of formation. Annualized revenues for the company's previous Milan operations were approximately $75. The joint venture's backlog was approximately $150 at the end of 1998. Results of Operations and Outlook
Three-Month Period Ended April 4, March 29, 1999 1998 Net Sales $ 290 $ 335 Operating Earnings 35 43 Operating Margin 12.1% 12.8%
Net sales decreased $45 and operating earnings decreased $8 during the three-month period due primarily to the completion of production on the Single Channel Ground and Airborne Radio System (SINCGARS) for the U.S. Army and to the results of the company's ammunition production facility. Previously a consolidated subsidiary, the company's Milan Army Ammunition Plant is now part of an unconsolidated joint venture, American Ordnance LLC. 7 8
Year Ended December 31, 1998 1997 1996 Net Sales $1,272 $1,387 $ 1,026 Operating Earnings 166 179 140 Operating Margin 13.1% 12.9% 13.6%
Net sales decreased $115 in 1998 due primarily to the completion of production on the SINCGARS program and to the timing of land combat program deliveries. Operating earnings decreased $13 in 1998 due to the aforementioned declines in sales, partially offset by higher margins obtained from the SINCGARS program as production was completed. Net sales increased $361 and operating earnings increased $39 during 1997 due primarily to the acquisition of Defense Systems and Armament Systems from Lockheed Martin Corporation on January 1, 1997. For a discussion of the accounting for this transaction and related information, see Note C to the Supplemental Consolidated Financial Statements. Excluding the results of the acquisitions, net sales decreased five percent due primarily to decreased tank kit production resulting from delivery of the last 48 kits to Egypt as part of the co-production program in early 1997. This decrease was partially offset by increased activity on the AAAV program. Looking forward, the company continues to seek improvements in operating margins in the Combat Systems segment through efforts to reduce costs and pursuit of international sales, including foreign military sales of tanks to Egypt, Greece, Turkey and Saudi Arabia. While operating margins are subject to quarter-to-quarter variations, the company expects full-year 1999 operating margins to approximate those reported in 1998. INFORMATION SYSTEMS AND TECHNOLOGY In the first quarter of 1999, management realigned the company's information technology resource businesses, resulting in a different composition of reportable segments. Data for all prior periods presented has been restated to give recognition to the 1999 composition of reportable segments. 8 9 Backlog
Year Ended December 31, 1998 1997 1996 Total Backlog $892 $938 N/A Funded Backlog 816 831 N/A
Year-end 1998 backlog for this segment includes contracts at Advanced Technology Systems for continued sales of commercial undersea fiber optic products and sales involving light-wave based transmission systems to various government customers. Contracts at Computing Devices Canada include completion of the IRIS integrated communications system, sonar integration on the Swedish Hydra program, upgrading of AWACS display consoles and development of a landmine detection system. At General Dynamics Information Systems, backlog includes a contract to improve an advanced radar signal processor used in the Joint STARS airborne surveillance program. Backlog at Computing Devices Company in the United Kingdom includes a contract for production work on the Eurofighter program, a partnership program worth approximately $600 over the 20-year contract period. Results of Operations and Outlook This recently formed segment is the result of a series of acquisitions of technology businesses that are intended to provide the company with broader and deeper capabilities in electronics, systems integration and information management; extend the company's presence geographically; and enable the company to share technology across business segments.
Three-Month Period Ended April 4, March 29, 1999 1998 Net Sales $ 233 $ 218 Operating Earnings 20 14 Operating Margin 8.6% 6.4%
Net sales increased $15 during the three-month period due primarily to increased volume for commercial undersea fiber-optic communications equipment. Operating earnings increased $6 during the three-month period as a result of higher margins obtained from cost reduction efforts employed during the initial years of acquisition of the segment's businesses. 9 10
Year Ended December 31, 1998 1997 1996 Net Sales $933 $185 N/A Operating Earnings 69 15 N/A Operating Margin 7.4% 8.1% N/A
Net sales increased $748 and operating earnings increased $54 in 1998 due to the acquisitions of four new businesses in late 1997: General Dynamics Information Systems, Computing Devices Canada, Ltd., Computing Devices Company Ltd. in the United Kingdom and Advanced Technology Systems. Defense Systems' missile guidance and naval fire control systems business became a part of this segment as a result of management's realignment of technology resources previously discussed. For a discussion of the accounting for these transactions and related information, see Note C to the Supplemental Consolidated Financial Statements. In 1998, the company completed two additional acquisitions. On August 3, the company acquired the stock of two related businesses to form Caldwell Cable Ventures, Inc., a provider of underwater fiberoptic and power cable installation. Caldwell Cable Ventures operates as a subsidiary of Advanced Technology Systems. On June 30, the company acquired the assets of Computer Systems & Communications Corporation, a systems integration and communications company serving the U.S. Department of Defense and other NATO countries. For a discussion of the accounting for these transactions and related information, see Note C to the Supplemental Consolidated Financial Statements. The operating results of these acquired businesses are included with those of the company from their respective closing dates. The company continues to seek improvements in operating margins in Information Systems and Technology through efforts to reduce costs. During the second half of 1998, the company initiated internal actions to consolidate the electronics manufacturing processes of the segment in Advanced Technology Systems' Greensboro, North Carolina, facility. AEROSPACE Backlog
Year Ended December 31, 1998 1997 1996 Total Backlog $3,302 $2,782 $3,104
Year-end 1998 backlog includes 50 contracts for Gulfstream IV-SPs and 56 contracts for Gulfstream Vs, compared with 43 contracts for Gulfstream IV-SPs and 45 contracts for Gulfstream Vs at the end of 1997. Excluded from year-end 1998 backlog are 11 undelivered aircraft in the Middle East Shares contract valued at $300 and 18 10 11 options valued at $700. During the third quarter of 1998, Gulfstream GATX Leasing Company executed agreements to purchase five Gulfstream Vs and one Gulfstream IV-SP, valued at approximately $210, with deliveries from 1999 through 2001. It also executed options to purchase three Gulfstream Vs and three Gulfstream IV-SPs, valued at approximately $200, with deliveries from 2001 through 2004. During the first quarter of 1998, the company signed a $335 contract for 12 Gulfstream IV-SPs to expand its Gulfstream Shares fractional ownership program to the Middle East region. The first green aircraft delivery for the Middle East Shares Program occurred during the third quarter of 1998. As noted above, the remaining 11 undelivered aircraft are not included in the company's backlog at year-end. As of December 31, 1998, the company had contracted to deliver to Executive Jet 44 Gulfstream IV-SPs and 12 Gulfstream Vs in connection with North American Gulfstream Shares program plus options for additional 12 Gulfstream Vs. Of these, 18 Gulfstream IV-SPs were in service, with the remaining 50 Gulfstream IV-SPs and Gulfstream Vs to be delivered through 2007. Results of Operations and Outlook
Three-Month Period Ended April 4, March 29, 1999 1998 Net Sales $ 625 $ 503 Operating Earnings 99* 66* Operating Margin 17.3%* 15.1%*
* Operating earnings and margin exclude pre-owned aircraft transactions, which generally are sold at or near break-even. Net sales increased $122 and operating earnings increased $33 during the three-month period due primarily to the increase in new aircraft and completion deliveries in 1999. During the three-month period ended in 1999, the company delivered four more new aircraft and four more completions than delivered in the three-month period ended in 1998. 11 12
Year Ended December 31, 1998 1997 1996 Net Sales $ 2,428 $ 1,904 $ 1,064 Operating Earnings 362* 221* 52* Operating Margin 16.5%* 13.1%* 5.7%*
* Operating earnings and margin exclude pre-owned aircraft transactions, which generally are sold at or near break-even. Generally, aircraft deliveries remain relatively smooth throughout the year. However, aircraft deliveries can vary significantly depending upon the timing of contract execution and final customer acceptance. Accordingly, Aerospace's revenues can vary significantly from quarter to quarter. Net sales increased $524 in 1998 due primarily to the increase in new aircraft deliveries to 61 in 1998 from 51 in 1997. The company's 1998 results of operations include revenues of K-C Aviation, Inc. from the date of acquisition, totaling $85, a portion of which resulted from the delivery of eight non-Gulfstream completions. Cost of sales of the acquired business includes a non-cash acquisition related charge of $7 for the fair value step-up related to the sale of inventories. OTHER Results of Operations and Outlook Net sales of $46 for the three-month period ended April 4, 1999 remain unchanged from the three-month period ended March 29, 1998. Operating earnings were flat for the three-month period ended April 4, 1999 as compared to $3 for the three-month period ended March 29, 1998.
Year Ended December 31, 1998 1997 1996 Net Sales $236 $242 $223 Operating Earnings 34 26 (2)
In 1997, Freeman United Coal Mining Company (Freeman) elected to withdraw from the Bituminous Coal Operators' Association (BCOA) and negotiate future contracts independently with the United Mine Workers of America union (UMWA). Freeman's labor contract as part of the BCOA expired on August 1, 1998. On September 11, 1998, the union workforce, representing approximately seventy percent of Freeman's total workforce, went on strike. On December 21, 1998, the strike ended and the company reached a new collective bargaining agreement with its UMWA represented employees. 12 13 The company believes the terms of the contract, which extend to February 2003, will provide it with cost savings. Despite the impact of the strike at Freeman, operating earnings increased $8 in 1998 due primarily to improved performance of the aggregates business as a result of improved shipments due to favorable weather conditions and reduction in cost, as well as cost reduction efforts at the coal mining operations. Operating earnings increased $28 in 1997 due primarily to the suspension of coal mining activity at an unprofitable location in early 1997. ADDITIONAL FINANCIAL INFORMATION GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased during 1998 due primarily to business acquisitions. As a percentage of net sales, however, general and administrative expenses have remained consistent with 1997 and 1996 amounts. INTEREST (EXPENSE) INCOME, NET. Interest income was $23 in 1998, down from $51 in 1997 and $73 in 1996 due primarily to a decline in the average cash balance resulting from the use of $1.75 billion for business acquisitions during 1998 and 1997. Interest expense was $40 in 1998, up from $35 in 1997 and $22 in 1996 as a result of borrowings made in connection with the Computing Devices International acquisition at the end of 1997, partially offset by a decrease in average borrowings on Gulfstream's credit facilities. OTHER INCOME, NET. Other income varies from period to period based on the timing of transactions such as the sales of investments and miscellaneous assets. PROVISION FOR INCOME TAXES. During the first quarter of 1999, the company and the U.S. Internal Revenue Service settled refund claims for research and experimentation tax credits for the years 1981 through 1989 for approximately $334 (including before-tax interest). The company recognized a benefit of $165 (less amounts previously recorded in 1991 and 1992), or $.82 per diluted share, as a result of this settlement. In April 1999, the company received the $334 cash refund from the IRS related to this settlement. Tax on the interest totaling approximately $65 will be paid during 1999 with the company's regular quarterly tax payments. For further discussion of this and other tax matters, as well as a discussion of the net deferred tax asset, see Notes B and E to the Supplemental Consolidated Financial Statements. EARNINGS PER SHARE. On March 4, 1998, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend. Accordingly, earnings per share data has been restated to give retroactive recognition to the stock split in prior periods. YEAR 2000. The company has developed an internal Year 2000 compliance program (Y2K Project), which is focusing on three major areas of assessment, project planning and remediation with respect to Year 2000 issues (the inability of date-sensitive software and equipment to properly recognize dates beyond 1999): (1) information technology systems; (2) deliverable software (alone or as a component of another product); and (3) facilities and embedded processors. The company is working with its full-time information technology systems partner on the project. The assessment, project 13 14 planning and remediation phases of the Y2K Project are substantially complete. Validation testing occurs as systems are remediated and is expected to be finished in the latter half of 1999. The company generally develops its deliverable software to conform with customer specifications. The company has completed the review of most of its customer contracts and specifications to determine whether any Year 2000 issues exist. Remediation efforts have been undertaken where requested, required and/or funded by the customer. Management believes the company will complete the Y2K Project on schedule and that the costs to implement will not materially impact results of operations or financial condition, as most of these costs are expected to be allowable under the company's U.S. government contracts. The company believes its total Y2K Project costs will not exceed $44. The company has made inquiries of substantially all third parties with whom it has material business relationships to determine if they have Year 2000 issues. To date, the company has not been made aware of any Year 2000 issues with respect to these third parties that would be expected to materially and adversely affect the company. There can be no assurance, however, that these third parties have been or will be successful in identifying or addressing their Year 2000 issues. The implementation schedule, projected costs and beliefs regarding the company's Year 2000 issues detailed above are based on management's best estimates utilizing assumptions as to future events. There can be no assurance that these expectations will be realized. Based on the status of the Y2K Project and third-party surveys, however, the company does not believe there are any material risks to the company related to Year 2000 issues. The company believes its worst case Year 2000 scenario, if realized, would involve a brief slowdown or cessation of production at one or more business units which would not be expected to have a material adverse effect on financial condition or results of operations. The company engages in project reviews and internal audit activities designed to ensure Year 2000 readiness. The company is well into the development of business continuity plans for Year 2000 and expects to complete them during the third quarter of 1999. MARKET RISK. The company's investment securities carry fixed rates of interest over their respective maturity terms. The company does not use derivative instruments to alter the interest characteristics of these instruments. The aggregate fair value of the company's financial instruments approximates the carrying value at December 31, 1998. In connection with the long-term financing arrangement completed in September 1998, the company entered into an agreement to reduce the exposure to interest rate and foreign currency rate fluctuations. The company does not expect these transactions to have a material effect on the company's results of operations or financial condition. The company's foreign operations attempt to minimize the effects of currency risk by borrowing externally in the local currency and by hedging their limited purchases made in foreign currencies when practical. As a matter of policy, the company does not engage in currency speculation. With the acquisition of Computing Devices International, the company is exposed to the effect of foreign currency fluctuations on the U.S. dollar value of earnings of Computing Devices Canada and Computing Devices Company in the U.K. The company 14 15 does not expect the impact of foreign currency fluctuations to be material to the company's results of operations or financial condition. NEW ACCOUNTING STANDARDS. Effective January 1, 1999, the company adopted the provisions of Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance to aid in the determination of when liabilities should be recognized for guaranty-fund and other insurance-related assessments, as well as requirements for the measurement of the liability and related recoverable asset. As these costs are recoverable under the company's contracts and existing backlog, the adoption of the SOP did not have a material impact on the company's results of operations or financial condition. Effective January 1, 1998, the company adopted the provisions of Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides authoritative guidance on accounting for the costs of computer software developed or obtained for internal use and provides authoritative guidance for determining whether computer software is for internal use. The adoption of the SOP did not have a material impact on the company's results of operations or financial condition. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 137 issued in June 1999 deferred the effective date of SFAS 133 by one year. As such, the company is now required to adopt the provisions of the standard during the first quarter of 2001. Because of the company's minimal use of derivatives, it does not expect that the adoption of the new standard will have a material impact on the results of operations or financial condition. FINANCIAL CONDITION The company's liquidity and financial condition remained strong during 1998, enabling the company to acquire four additional businesses during the year for approximately $550. The company ended the year with $258 of cash and equivalents and marketable securities, a strong balance sheet and the capacity for additional long-term borrowings. A discussion of the company's financial condition in terms of its operating, investing and financing activities as defined in the Supplemental Consolidated Statement of Cash Flows follows. 15 16 OPERATING ACTIVITIES--CONTINUING. The net cash provided by continuing operations is summarized by type as follows:
Year Ended December 31 1998 1997 1996 ------------------------------------- Operations $ 622 $ 707 $ 763 Allocated federal income tax payments (114) (120) (127) Other 38 62 22 -------- --------- --------- Operating cash flows 546 649 658 Decrease in marketable securities, net 30 62 742 ------- ------- -------- Net cash provided by continuing operations $ 576 $ 711 $ 1,400 ====== ====== =======
The four types of cash flows are described as follows: - Operations represent the pretax cash flows generated by the company's business segments. Aerospace's principal source of operational cash flow is provided from customer progress payments and initial deposits on new aircraft orders. Due to the deliveries of two maturing submarine programs during 1997, cash flows from operations exceeded operating earnings plus depreciation and amortization for each of the years ended December 31, 1997 and 1996. This trend is not expected to continue due to the production growth on several new programs, including the Virginia-class submarine and light armored vehicles. Even though the company anticipates investing in working capital during this production growth life cycle, the company still expects to generate funds from operations in excess of its short- and long-term liquidity needs. - For purposes of preparing the Supplemental Consolidated Statement of Cash Flows, federal income tax payments are allocated between continuing and discontinued operations based on the portion of taxable income attributed to each. - Other cash flows include items that are not directly attributable to a business segment, such as interest received from investments in excess of interest paid on debt. - In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the purchases, sales and maturities of marketable securities classified as trading are reflected as cash flows from operating activities. The decrease in each of the three years in the period ended December 31, 1998, was due to the company altering its investment portfolio to include more available-for-sale securities, which are included in investing activities. 16 17 OPERATING ACTIVITIES--DISCONTINUED. Cash flows from discontinued operations improved during 1998 due primarily to decreased payments for disposition-related liabilities. For discussion of the A-12 program litigation, see Note Q to the Supplemental Consolidated Financial Statements. INVESTING ACTIVITIES. On July 30, 1999, the company acquired Gulfstream through a merger of a subsidiary of the company into Gulfstream. As a result, the holders of Gulfstream common stock became entitled to receive one share of the company's common stock for each Gulfstream share. The common stock of Gulfstream was traded on the New York Stock Exchange through the close of business on July 30, 1999, at which time there were 72,165,645 shares of Gulfstream common stock outstanding. An additional 4.1 million shares have been reserved for issuance upon the exercise of stock options which, prior to the merger, had been options to purchase Gulfstream common stock. Gulfstream is a leading designer, developer, manufacturer and marketer of advanced business jet aircraft. The acquisition was accounted for as a pooling of interests, and accordingly, all data for periods prior to the combination have been restated to include the accounts and results of operations of Gulfstream. On June 21, 1999, the company entered into a definitive agreement to acquire GTE Government Systems Corporation, a subsidiary of GTE Corporation, for $1.05 billion in cash. GTE Government Systems Corporation is a leader in the advancement of command, control, communications and intelligence systems; electronic defense systems; communication switching; and information systems for defense, government and industry in the United States and abroad. GTE Government Systems Corporation will become part of the Information Systems and Technology segment. The acquisition will be accounted for under the purchase method of accounting and is expected to close at the end of August 1999. The company will finance the purchase consideration through its commercial paper program. On July 27, 1999, the company began issuing commercial paper in anticipation of the acquisition. As of August 10, 1999, the company had issued approximately $250 at an average yield of 5.22% with an average term of 40 days and had approximately $325 invested in cash equivalents at an average yield of 5.2%. As previously discussed, General Dynamics acquired three businesses in 1998 and six businesses in 1997. The company liquidated substantially all of its available-for-sale investment portfolio in order to acquire these businesses. On May 3, 1999, the company paid from available funds the remaining fixed purchase consideration of $51 in cash for the acquisition of NASSCO. Gulfstream acquired one business in 1998 for approximately $250. The purchase was funded primarily from available funds and a portion from Gulfstream's revolving credit facility. For further discussion of each acquisition, see Note C to the Supplemental Consolidated Financial Statements. The company began construction on a project to modernize facilities and improve productivity at its Bath Iron Works shipyard in late 1998. The company anticipates investing a total of approximately $200 through 2000, with approximately $120 expected to be expended during 1999. Following the sale in 1993 and 1994 of the company's operations located in southern California, the company retained certain properties. These properties have been segregated on the Supplemental Consolidated Balance Sheet as real estate held for development. Development work began in 1994 on certain of these properties in order to maximize the value the company receives from their sale. In 1998, the company completed the sale of a 232-acre site in the Kearny Mesa section of San Diego for 17 18 approximately $80 in cash, and in 1997 received $23 in cash from the sale of certain other assets related to these properties. FINANCING ACTIVITIES. Immediately following consummation of the acquisition of Gulfstream, the company repaid from its available funds approximately $270 of Gulfstream's debt instruments. In connection therewith, the company will record in the third quarter of 1999 a one-time non-cash charge of approximately $7 for the unamortized debt costs associated with these instruments. The company will also record in the third quarter a charge to earnings of approximately $33 for direct acquisition transaction costs, consisting of investment banking, legal, bank fees, accounting, printing, and regulatory filing fees. On June 23, 1999, the company's board of directors formally rescinded management's authority to repurchase shares of the company's common stock on the open market. During 1998, 1997 and 1996, the company repurchased approximately 600,000, 1.8 million and 780,000 shares, respectively, of its stock on the open market for a total of $28, $60 and $23, respectively. As of December 31, 1998, the company had repurchased approximately 4.3 million shares. On June 25, 1999, Gulfstream's board of directors formally rescinded management's authority to repurchase shares of its common stock on the open market. During the first quarter of 1999, Gulfstream repurchased 960,000 shares of its stock on the open market for a total of $45. During 1998, Gulfstream repurchased approximately 5.5 million shares for a total of $199. In connection with the company's acquisition of Computing Devices International on December 31, 1997, the company borrowed in Canadian dollars the U.S. equivalent of $220. The company repaid $70 of this note during 1998 and refinanced the balance in September 1998 under a 10-year arrangement. The company exercised its option to call for the early redemption of all of its outstanding 9.95 percent Debentures on April 1, 1998, for a total of approximately $40. On March 3, 1999, the company's board of directors declared an increased regular quarterly dividend of $.24 per share. The company had previously increased the quarterly dividend to $.22 per share in March 1998 and to $.205 per share in March 1996. The company has available a $1 billion committed line of credit expiring in May 2002 and an available $400 committed line of credit expiring in December 2002. These credit facilities contain minimum net worth requirements. 18 EX-99.2 7 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS 1 GENERAL DYNAMICS CORPORATION SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999 INDEX
PAGE ---- Supplemental Consolidated Balance Sheet 2 Supplemental Consolidated Statement of Earnings 3 Supplemental Consolidated Statement of Cash Flows 4 Notes to Unaudited Supplemental Consolidated Financial Statements 5
1 2 GENERAL DYNAMICS CORPORATION SUPPLEMENTAL CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in millions)
April 4 December 31 1999 1998 --------------- --------------- ASSETS - ------ CURRENT ASSETS: Cash and equivalents $ 208 $ 165 Marketable securities 52 93 --------------- --------------- 260 258 Accounts receivable 644 580 Contracts in process 1,186 952 Inventory 825 804 Other current assets 726 391 --------------- --------------- Total Current Assets 3,641 2,985 --------------- --------------- NONCURRENT ASSETS: Leases receivable - finance operations 181 181 Real estate held for development 63 65 Property, plant and equipment, net 918 901 Intangible assets 1,784 1,784 Other assets 236 235 --------------- --------------- Total Noncurrent Assets 3,182 3,166 --------------- --------------- $ 6,823 $ 6,151 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 76 $ 77 Short-term debt - finance operations 58 58 Accounts payable 425 477 Other current liabilities 2,038 1,760 --------------- --------------- Total Current Liabilities 2,597 2,372 --------------- --------------- NONCURRENT LIABILITIES: Long-term debt 428 453 Long-term debt - finance operations 79 82 Other liabilities 1,015 829 Commitments and contingencies (See Note J) --------------- --------------- Total Noncurrent Liabilities 1,522 1,364 --------------- --------------- SHAREHOLDERS' EQUITY: Common stock, including surplus 472 484 Retained earnings 2,932 2,639 Treasury stock (695) (706) Accumulated other comprehensive loss (5) (2) ---------------- ---------------- Total Shareholders' Equity 2,704 2,415 --------------- --------------- $ 6,823 $ 6,151 =============== ===============
The accompanying Notes to Unaudited Supplemental Consolidated Financial Statements are an integral part of this statement. 2 3 GENERAL DYNAMICS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts)
Three Months Ended -------------------------------------------------------- April 4 March 29 1999 1998 --------------- --------------- NET SALES $ 2,002 $ 1,657 OPERATING COSTS AND EXPENSES 1,761 1,464 --------------- --------------- OPERATING EARNINGS 241 193 Interest expense, net (6) (4) Other income (expense), net 9 (1) --------------- ---------------- EARNINGS BEFORE INCOME TAXES 244 188 (BENEFIT) / PROVISION FOR INCOME TAXES R&E Tax Credit (165) - Provision 86 66 --------------- --------------- (79) 66 ---------------- --------------- NET EARNINGS $ 323 $ 122 =============== =============== NET EARNINGS PER SHARE: Basic $ 1.62 $ 0.61 =============== =============== Diluted $ 1.60 $ 0.60 =============== =============== DIVIDENDS PER SHARE $ 0.24 $ 0.22 =============== =============== SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 127 $ 118 =============== ===============
The accompanying Notes to Unaudited Supplemental Consolidated Financial Statements are an integral part of this statement. 3 4 GENERAL DYNAMICS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in millions)
Three Months Ended -------------------------------------------------------- April 4 March 29 1999 1998 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 323 $ 122 Adjustments to reconcile net earnings to net cash provided by continuing operations - Depreciation, depletion and amortization 43 39 Postretirement benefit cost 3 1 Decrease (Increase) in - Marketable securities 41 (6) Accounts receivable (64) 82 Contracts in process (31) (99) Inventories (23) (79) Other current assets (2) 4 Increase (Decrease) in - Accounts payable and other current liabilities (62) (37) Customer deposits 71 (77) Current income taxes (121) 15 Deferred income taxes 12 36 Other, net (21) (10) -------------------- ---------------- Net cash provided by continuing operations 169 (9) Net cash used by discontinued operations (2) (3) -------------------- ---------------- Net Cash Provided by Operating Activities 167 (12) -------------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (20) 12 Purchases of available-for-sale securities (6) (88) Sales/maturities of available-for-sale securities 7 41 Capital expenditures (31) (49) Proceeds from sale of assets 13 - Other - (1) ---------------- ---------------- Net Cash Used by Investing Activities (37) (85) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (24) (19) Repayment of debt - finance operations (3) (3) Dividends paid (28) (26) Purchase of common stock (46) (74) Proceeds from option exercises 6 2 Other 8 2 ----------------- --------------- Net Cash Used by Financing Activities (87) (118) ---------------- ---------------- NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 43 (215) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 165 643 ---------------- --------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 208 $ 428 ================ =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Income taxes $ 23 $ 7 Interest (including finance operations) $ 12 $ 8
The accompanying Notes to Unaudited Supplemental Consolidated Financial Statements are an integral part of this statement. 4 5 GENERAL DYNAMICS CORPORATION NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in millions, except per share amounts) (A) Basis of Presentation and Preparation The unaudited supplemental consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. The unaudited supplemental consolidated financial statements give retroactive effect to the acquisition by General Dynamics Corporation (General Dynamics) of Gulfstream Aerospace Corporation (Gulfstream) through a merger on July 30, 1999, which has been accounted for as a pooling of interests as described in Note E. These supplemental financial statements do not extend through the date of consummation. They will, however, become the historical consolidated financial statements of General Dynamics and subsidiaries after post-combination results are issued, as prescribed by generally accepted accounting principles. The unaudited supplemental consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, the company believes that the disclosures included herein are adequate to make the information presented not misleading. Operating results for the three-month period ended April 4, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These unaudited supplemental consolidated financial statements should be read in conjunction with the supplemental consolidated financial statements for the year ended December 31, 1998 and the notes thereto included in this Current Report on Form 8-K. In the opinion of the company, the unaudited supplemental consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the three-month periods ended April 4, 1999 and March 29, 1998. (B) Subsequent Events Stockholder Approvals On July 30, 1999, the company's stockholders approved (1) an amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock from 200 million shares to 300 million shares, and (2) the issuance by the company of its common stock to stockholders of Gulfstream in connection with the acquisition discussed in Note E. Gulfstream Acquisition On July 30, 1999, the company repaid from its available funds approximately $270 of Gulfstream's debt instruments. In connection therewith, the company will record in the third quarter of 1999 a one-time non-cash charge of approximately $7 for the unamortized debt costs associated with 5 6 these instruments. The company will also record in the third quarter of 1999 a charge to earnings of approximately $33 for direct acquisition transaction costs,consisting of investment banking, legal, bank fees, accounting, printing, and regulatory filing fees. In connection with the acquisition of Gulfstream, General Dynamics will merge the two company's commercial pension plans. As a result of the merger of these plans, the company expects to recognize previously deferred gains on General Dynamics commercial pension plan, amounting to approximately $125 (before tax), in income in the third quarter of 1999. Rescission of Common Stock Repurchase Program On June 23, 1999, the company's board of directors formally rescinded management's authority to repurchase shares of the company's common stock on the open market. Acquisition of GTE Government Systems Corporation On June 21, 1999, the company entered into a definitive agreement to acquire GTE Government Systems Corporation, a subsidiary of GTE Corporation, for $1.05 billion in cash. GTE Government Systems Corporation is a leader in the advancement of command, control, communications and intelligence systems; electronic defense systems; communication switching; and information systems for defense, government and industry in the United States and abroad. The acquisition will be accounted for under the purchase method of accounting and is expected to close at the end of August 1999. (C) Comprehensive Income Comprehensive income was $320 and $121 for the three-month periods ended April 4, 1999 and March 29, 1998, respectively. (D) Translation of Foreign Currencies Local currencies have been determined to be functional currencies for the company's international operations. Foreign currency balance sheets are translated at the end-of-period exchange rates and earnings statements at the average exchange rates for each period. The resulting foreign currency translation adjustments are included in the calculation of other comprehensive income and included in the equity section on the Supplemental Consolidated Balance Sheet. 6 7 (E) Acquisitions Pooling of Interests Method On July 30, 1999, the company acquired Gulfstream through a merger of a subsidiary of the company into Gulfstream. As a result, the holders of Gulfstream common stock became entitled to receive one share of the company's common stock for each Gulfstream share. The common stock of Gulfstream was traded on the New York Stock Exchange through the close of business on July 30, 1999, at which time there were 72,165,645 shares of Gulfstream common stock outstanding. An additional 4.1 million shares have been reserved for issuance upon the exercise of stock options which, prior to the acquisition, had been options to purchase Gulfstream common stock. Gulfstream is a leading designer, developer, manufacturer and marketer of advanced business jet aircraft. The acquisition was accounted for as a pooling of interests, and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of Gulfstream. The following table reconciles General Dynamics' and Gulfstream's operating results for the period ending April 4, 1999 to the combined results reported in these unaudited supplemental consolidated financial statements:
Three months ended April 4, 1999 -------------------------------- General Dynamics Gulfstream Combined -------- ---------- -------- Net Sales $1,377 $625 $2,002 Net earnings 265 58 323 Earnings per share: Basic 2.09 0.81 1.62 Diluted 2.07 0.79 1.60 Weighted average shares (in thousands): Basic 127,008 72,450 199,458 Diluted 128,326 73,914 202,240
Purchase Method On November 10, 1998, the company acquired control of NASSCO Holdings Incorporated (NASSCO) for $369 in cash plus the obligation to discharge $46 in debt. NASSCO's wholly owned subsidiaries include National Steel and Shipbuilding Company, which is in the business of ship design, engineering, construction and repair for the United States military and various commercial customers, and NASSCO Funding Corporation, a finance subsidiary. The transaction has been accounted for under the purchase method of accounting. Operating results of NASSCO are included with those of the company from the closing date. The excess of the purchase price over the estimated fair value of the net tangible assets acquired, approximately $250, has been recorded as goodwill. This allocation is based on preliminary estimates and will be finalized within one year from the date of acquisition. 7 8 (F) Earnings Per Share Basic and diluted weighted average shares outstanding are as follows (in thousands):
April 4 March 29 1999 1998 ---------- ---------- Basic 199,458 198,466 Diluted 202,240 202,285
Basic and diluted weighted average shares outstanding were derived in accordance with SFAS No. 128, which states that when a business combination is accounted for as a pooling of interests, earnings per share computations shall be based on the aggregate of the weighted average outstanding shares of the constituent businesses, adjusted to equivalent shares of the surviving business for all periods presented. (G) Intangible Assets Intangible assets resulting from the company's acquisitions consist of the following:
April 4 December 31 1999 1998 ------------- ----------- Goodwill $ 1,329 $ 1,323 Contracts and programs acquired 455 461 ------------- ----------- $ 1,784 $ 1,784 ============= ===========
Intangible assets are shown net of accumulated amortization of $144 and $130 at April 4, 1999 and December 31, 1998, respectively. Goodwill is amortized on a straight-line basis over 40 years. Contracts and programs acquired are amortized on a straight-line basis over periods ranging from 8 to 30 years. 8 9 (H) Liabilities A summary of significant liabilities, by balance sheet caption, follows:
April 4 December 31 1999 1998 --------------- --------------- Workers' compensation $ 487 $ 341 Customer deposits 566 488 Retirement benefits 230 196 Salaries and wages 130 115 Advance payments - defense contracts 127 139 Other 498 481 --------------- --------------- Other Current Liabilities $ 2,038 $ 1,760 =============== =============== Accrued costs on disposed businesses $ 177 $ 177 Retirement benefits 278 268 Coal mining related liabilities 72 73 Other 488 311 --------------- --------------- Other Liabilities $ 1,015 $ 829 =============== ===============
(I) Income Taxes The company had a net deferred tax asset of $314 and $326 at April 4, 1999 and December 31, 1998, respectively, the current portion of which was $326 and $328, respectively, and was included in other current assets on the Supplemental Consolidated Balance Sheet. Based on the level of projected earnings and current backlog, no material valuation allowance was required for the company's deferred tax assets at April 4, 1999 and December 31, 1998. On March 2, 1999, the company and the U.S. Internal Revenue Service settled refund claims for research and experimentation tax credits for the years 1981 through 1989 for approximately $334 (including before-tax interest). The company recognized a benefit of $165 (net of amounts previously recorded in 1991 and 1992), or $.82 per diluted share, as a result of this settlement. A receivable for the $334 refund was included in other current assets on the Supplemental Consolidated Balance Sheet at April 4, 1999 and was collected early in the second quarter of 1999. The IRS has completed its examination of General Dynamics' 1990 through 1993 consolidated federal income tax returns and Gulfstream's 1990 through 1994 consolidated federal income tax returns. Unresolved matters for these years have been protested to the IRS Appeals Division. A refund claim by General Dynamics for $78 (plus interest) for research and experimentation tax credits for the year 1990 will also be considered by the IRS Appeals Division. The IRS is currently examining General Dynamics' 1994 and 1995 consolidated federal income tax returns. The company has recorded liabilities for tax contingencies, therefore, resolution of open matters for these years is not expected to have a materially unfavorable impact on the company's results of operations or financial condition. 9 10 (J) Commitments and Contingencies Litigation Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note K. On April 19, 1995, 101 then-current and former employees of General Dynamics' Convair Division in San Diego, California filed a six-count complaint in the Superior Court of California, County of San Diego, titled Argo, et al. v. General Dynamics, et al. In addition to General Dynamics, four of Convair's then-current or former managers were also named as defendants. The plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit by, among other things, concealing its plans to close the Convair Division. On May 1, 1997, a jury rendered a verdict of $101 against the company and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The company and one of the defendants have appealed the judgment to the Court of Appeals of the State of California, Fourth Appellate District, Division One. On appeal, the company is seeking to have the judgment overturned in its entirety or, alternatively, a substantial reduction in the jury's punitive damage award. The company believes it has substantial legal defenses, but in any case, it believes the punitive damage award is excessive as a matter of law. Management currently believes the ultimate outcome will not have a material impact on the company's results of operations or financial condition. On July 13, 1995, General Dynamics Corporation was named as a defendant in a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics Corporation, et al. The complaint also names two insurance brokers, Lloyd Thompson, Ltd. and Willis Corroon Corporation of Missouri, as defendants. The plaintiffs are members of certain Lloyds' of London syndicates and British insurance companies who sold the company excess loss insurance policies covering the company's self-insured workers' compensation program at Electric Boat for four policy years, from July 1, 1988 to June 30, 1992. The plaintiffs allege that when procuring the policies the company and its brokers made misrepresentations to the plaintiffs and failed to disclose facts which were material to the risk. The plaintiffs also allege that the company has been negligent in its administration of workers' compensation claims. The plaintiffs seek rescission of the policies, a declaratory judgment that the policies are void, and compensatory damages in an unspecified amount. General Dynamics has counterclaimed, alleging that the plaintiffs have breached their insurance contracts by failing to pay claims. General Dynamics seeks a declaratory judgment that the policies are valid, actual damages, and payment of a penalty under a Missouri statute for the plaintiffs' vexatious and unreasonable failure to pay claims. The company does not expect that this case will have a material impact on the company's results of operations or financial condition. On August 16, 1996, plaintiffs HE Holdings, Inc., and Hughes Missile Systems Company filed an action against General Dynamics Corporation in the Superior Court for the State of California for the County of Los Angeles. In June 1998, plaintiffs filed a sixth amended complaint in which plaintiffs were redesignated as HE Holdings, Inc., now known as Raytheon Company, and Hughes Missile Systems Company, now known as Raytheon Missile Systems Company ("plaintiffs"). On September 8, 1998, plaintiffs filed a seventh amended complaint which is now pending. The seventh amended complaint 10 11 alleges breach of contract, tortious interference with contract, conversion, fraud, and breach of the implied covenant of good faith and fair dealing, all with respect to the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business, various related leases and other alleged agreements. The seventh amended complaint seeks approximately $25 in compensatory damages, as well as punitive damages and declaratory relief. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. The company is either a named defendant or a third-party defendant in certain multi-plaintiff tort cases pending in state or federal court in Arizona, captioned: Cordova, et al. v. Hughes Aircraft Co.; Lanier, et al. v. Hughes Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et al. v. Hughes Aircraft Co. In these cases the plaintiffs allege that they suffered personal injuries and/or property damage from chronic exposure to drinking water alleged to be contaminated with trace amounts of the industrial solvent trichloroethylene. The alleged source of the contamination was industrial facilities in and around the site now occupied by the Tucson International Airport (TIA) and U.S. Air Force Plant #44. In addition to the company, defendants are Hughes Aircraft Co. (now Raytheon), the Tucson Airport authority (TAA), the City of Tucson, (the City) and McDonnell Douglas Corp. (MDC). In Cordova, the company negotiated a settlement with all but four defendants, who have appealed the summary judgement entered against them. The company has reached an agreement to settle all the remaining cases and is negotiating the final terms of the settlement agreements. Court approval is required for the settlement of these cases. The company does not believe that these lawsuits will have a material impact on the company's results of operations or financial condition. In other litigation concerning the Tucson site, the company is a defendant in two cases brought in federal district court in Arizona by TAA and the City under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). Plaintiffs seek reimbursement of CERCLA response costs and a declaration of the company's alleged liability with respect to soil and groundwater contamination at portions of the Tucson site. On September 30, 1998, the U.S. Environmental Protection Agency (U.S. EPA) issued a Special Notice Letter notifying the company that it was a potentially responsible party (PRP) with respect to contamination of soil and shallow groundwater on and near property currently occupied by the TIA. Other PRPs receiving a similar notice were the U.S. Air Force, TAA, MDC and the City. The company has reached an agreement to settle the litigation brought by TAA and the City and is awaiting court approval of a consent decree negotiated with the U.S. EPA in response to the Special Notice Letter. The company does not believe that these lawsuits or the pending consent decree will have a material impact on the company's results of operations or financial condition. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its liabilities in these proceedings, in the aggregate, are not material to the company's results of operations or financial condition. Environmental The company is directly or indirectly involved in certain Superfund sites in which the company, along with other major U.S. corporations, has been designated a PRP by the U.S. EPA or a state environmental agency with respect to past shipments of hazardous waste to sites now requiring environmental cleanup. Based on a site by site analysis of the estimated quantity of waste contributed by the company relative to the estimated total quantity of waste, the company believes its liability at any 11 12 individual site is not material. The company is also involved in the investigation, cleanup and remediation of various conditions at sites it currently or formerly owned or operated. The company measures its environmental exposure based on enacted laws and existing regulations and on the technology expected to be approved to complete the remediation effort. The estimated cost to perform each of the elements of the remediation effort is based on when those elements are expected to be performed. Where a reasonable basis for apportionment exists with other PRPs, the company estimates only its allowable share of the joint and several remediation liability for a site, taking into consideration the solvency of other participating PRPs. Based on a site by site analysis, the company believes it has adequate accruals for any liability it may incur arising from sites currently or formerly owned or operated at which there is a known environmental condition, or Superfund sites at which the company is a PRP. (K) Termination of A-12 Program The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy's new carrier-based Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas, now owned by the Boeing Company, (the contractors) were parties to the contract with the Navy, each had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors' challenge to the termination for default, or a negotiated settlement. The contractors filed a complaint on June 7, 1991, in the U.S. Court of Federal Claims contesting the default termination. The suit, in effect, seeks to convert the termination for default to a termination for convenience of the U.S. government and seeks other legal relief. A trial on Count XVII of the complaint, which relates to the propriety of the process used in terminating the contract for default, was concluded in October 1993. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following further proceedings, the court issued an order converting the termination for default to a termination for convenience. On March 31, 1998, a final judgment was entered in favor of the contractors for $1,200 plus interest. The U.S. government filed an appeal from the trial court's ruling in the U.S. Court of Appeals for the Federal Circuit. On July 1, 1999, the Court of Appeals found that the trial court erred in converting the termination for default to a termination for convenience without first determining whether a default existed. The Court of Appeals remanded the case for determination of whether the government's default termination was justified. The Court of Appeals stated that it was expressing no view on that issue, and it left the parties the opportunity to fully litigate that issue on remand. The company continues to believe that the government's default termination was improper, both as to process (the basis relied upon by the trial court) and because the contractors were not in default. The company continues to believe that at a full trial it will be able to demonstrate that the default termination was not justified and that the termination for default will be converted to a termination for convenience. If the company is successful in such a new trial, it could result in the same, a lesser or a greater award to the contractors. 12 13 The company has fully reserved the contracts in process balance associated with the A-12 program and has accrued the company's estimated termination liabilities and the liability associated with pursuing the litigation through the appeals process and remand proceedings. In the event that the contractors are ultimately found to have been in default under the A-12 contract and are required to repay all unliquidated progress payments, additional losses of approximately $675, plus interest, may be recognized by the company. The company believes the possibility of this result is remote. (L) Business Segment Information Management has chosen to organize its business segments in accordance with several factors, including a combination of the nature of products and services offered, the nature of the production processes and the class of customer for the company's products. Operating segments are aggregated for reporting purposes consistent with these criteria. Management measures its segments' profit based primarily on operating earnings. As such, net interest and other income items have not been allocated to the company's segments. For a further description of the company's business segments, see Management's Discussion and Analysis of the Results of Operations and Financial Condition. Summary financial information for each of the company's segments follows:
Net Sales Operating Earnings --------- ------------------ April 4 March 29 April 4 March 29 1999 1998 1999 1998 ---- ---- ---- ---- Marine Systems* $ 808 $ 555 $ 88 $ 64 Aerospace 625 503 97 69 Combat Systems* 290 335 35 43 Information Systems & Technology* 233 218 21 14 Other 46 46 - 3 ------ ------ ----- ---- $2,002 $1,657 $ 241 $193 ====== ====== ===== ====
*As of January 1, 1999, management realigned its information technology resource businesses resulting in a different composition of reportable segments. Segment data for all years presented has been restated to give recognition to the 1999 composition of reportable segments. 13 EX-99.3 8 AUDITED SUPPLEMENTAL FINANCIAL STATEMENTS 1 GENERAL DYNAMICS CORPORATION SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 INDEX
PAGE ---- Supplemental Consolidated Statement of Earnings 2 Supplemental Consolidated Balance Sheet 3 Supplemental Consolidated Statement of Cash Flows 4 Supplemental Consolidated Statement of Shareholders' Equity 5 Notes to Supplemental Consolidated Financial Statements 6
1 2 SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS
Year Ended December 31 (Dollars in millions, except per share amounts) 1998 1997 1996 - --------------------------------------------------------------------------------------------------- NET SALES $7,398 $5,966 $4,645 OPERATING COSTS AND EXPENSES 6,480 5,290 4,240 - --------------------------------------------------------------------------------------------------- OPERATING EARNINGS 918 676 405 Interest (expense) income, net (17) 16 51 Other income (expense), net 3 (3) 1 - --------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 904 689 457 Provision for income taxes 315 130 140 - --------------------------------------------------------------------------------------------------- NET EARNINGS $589 $559 $317 - --------------------------------------------------------------------------------------------------- NET EARNINGS PER SHARE: Basic $ 2.95 $ 2.80 $ 1.58 Diluted $ 2.91 $ 2.73 $ 1.54 - ---------------------------------------------------------------------------------------------------
The accompanying Notes to Supplemental Consolidated Financial Statements are an integral part of this statement. 2 3 SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(Dollars in millions) December 31 ASSETS 1998 1997 - -------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and equivalents $ 165 $ 643 Marketable securities 93 105 - -------------------------------------------------------------------------------------- 258 748 Accounts receivable 580 411 Contracts in process 952 702 Inventories 804 650 Other current assets 391 337 - -------------------------------------------------------------------------------------- Total Current Assets 2,985 2,848 - -------------------------------------------------------------------------------------- NONCURRENT ASSETS: Leases receivable - finance operations 181 193 Real estate held for development 65 128 Property, plant and equipment, net 901 770 Intangible assets 1,784 1,293 Other assets 235 325 - -------------------------------------------------------------------------------------- Total Noncurrent Assets 3,166 2,709 - -------------------------------------------------------------------------------------- $ 6,151 $ 5,557 - -------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 77 $ 183 Short-term debt - finance operations 58 18 Accounts payable 477 403 Other current liabilities 1,760 1,542 - -------------------------------------------------------------------------------------- Total Current Liabilities 2,372 2,146 - -------------------------------------------------------------------------------------- NONCURRENT LIABILITIES: Long-term debt 453 462 Long-term debt - finance operations 82 100 Other liabilities 829 841 Commitments and contingencies (See Note P) - -------------------------------------------------------------------------------------- Total Noncurrent Liabilities 1,364 1,403 - -------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Common stock, including surplus 484 540 Retained earnings 2,639 2,159 Treasury stock (706) (691) Accumulated other comprehensive loss (2) --- - -------------------------------------------------------------------------------------- Total Shareholders' Equity 2,415 2,008 - -------------------------------------------------------------------------------------- $ 6,151 $ 5,557 - --------------------------------------------------------------------------------------
The accompanying Notes to Supplemental Consolidated Financial Statements are an integral part of this statement. 3 4 SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (Dollars in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $589 $ 559 $ 317 Adjustments to reconcile net earnings to net cash provided by continuing operations - Depreciation, depletion and amortization 161 124 94 Decrease (Increase) in assets, net of effects of business acquisitions-- Marketable securities 30 62 742 Accounts receivable (64) (46) (30) Contracts in process (209) 86 41 Inventory (55) 27 (263) Other current assets (37) 23 2 Increase (Decrease) in liabilities, net of effects of business acquisitions-- Accounts payable and other current liabilities 52 (34) 105 Customer deposits (73) (109) 432 Current income taxes 151 66 76 Deferred income taxes 61 (53) (61) Other, net (30) 6 (55) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 576 711 1,400 Net cash used by discontinued operations (12) (33) (121) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 564 678 1,279 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired (505) (1,230) (59) Purchases of available-for-sale securities (443) (440) (986) Sales/maturities of available-for-sale securities 493 916 484 Capital expenditures (186) (113) (93) Proceeds from sale of assets 25 11 41 Proceeds from sale of real estate held for development 74 23 -- Other (4) (5) (10) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (546) (838) (623) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 56 220 400 Proceeds from issuance of debt -- finance operations -- -- 150 Repayment of debt (232) (20) (146) Repayment of debt -- finance operations (38) (17) (158) Dividends paid (108) (102) (206) Purchases of common stock (226) (60) (492) Proceeds from option exercises 54 33 22 Proceeds from issuance of common stock -- -- 100 Other (2) -- (15) =============================================================================================================================== Net Cash (Used) Provided by Financing Activities (496) 54 (345) - ------------------------------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (478) (106) 311 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 643 749 438 - ------------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $165 $ 643 $ 749 - -------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Supplemental Consolidated Financial Statements are an integral part of this statement. 4 5 SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in millions, except share amounts)
Accumulated Common Stock Treasury Stock Other ------------------------------- Retained ------------------------ Comprehensive Shares Par Surplus Earnings Shares Amount Income - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31,1995, AS PREVIOUSLY REPORTED 168,774,672 $169 $ 11 $2,005 (42,283,922) ($625) $7 - ---------------------------------------------------------------------------------------------------------------------------------- Adjustment for pooling of Interests 65,384,077 65 564 (411) (1) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995, AS RESTATED 234,158,749 234 575 1,594 (42,283,922) (625) 6 - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings 317 Unrealized gains on securities, net of reclassification adjustment (7) Cash dividends declared, including preferred (208) Common stock offering 4,559,100 5 95 Exercise of common stock options 3,968,596 4 10 Shares purchased (469) (783,800) (23) Amortization of stock plan Expense 7 Shares issued under Incentive Compensation Plan 21 (9) 497,408 (2) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31,1996 242,686,445 243 232 1,701 (42,570,314) (650) (1) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings 559 Minimum pension liability Adjustment 1 Cash dividends declared (102) Exercise of common stock options 631,877 2 Tax benefit of exercised stock Options 34 Shares purchased (1,832,500) (60) Amortization of stock plan expense 1 Shares issued under Incentive Compensation Plan 29 1,413,696 19 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 243,318,322 243 297 2,159 (42,989,118) (691) - - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings 589 Unrealized gains on securities 1 Foreign currency translation Adjustment (1) Minimum pension liability Adjustment (2) Cash dividends declared (110) Exercise of common stock options 3,572,160 4 27 Tax benefit of exercised stock Options 40 Shares purchased (5,541,617) (6) (192) (598,000) (28) Amortization of stock plan expense 1 Modification of common stock options 6 Shares issued for business acquisition 4 157,283 3 Shares issued under Incentive Compensation Plan 61 1,348,705 10 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31,1998 241,348,865 $241 $243 $2,639 (42,081,130) ($706) $(2) - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Supplemental Consolidated Financial Statements are an integral part of this statement. 5 6 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION. The Supplemental Consolidated Financial Statements include the accounts of the company and all majority-owned subsidiaries. The Supplemental Consolidated Financial Statements give retroactive effect to the acquisition by General Dynamics Corporation (General Dynamics) of Gulfstream Aerospace Corporation (Gulfstream) through a merger on July 30, 1999, which has been accounted for as a pooling of interests as described in Note C. These supplemental financial statements do not extend through the date of consummation. They will, however, become the historical consolidated financial statements of General Dynamics and subsidiaries after post-combination results are issued, as prescribed by generally accepted accounting principles. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REVENUE RECOGNITION. Sales and earnings under long-term defense contracts and programs are accounted for using the percentage-of-completion method of accounting. The combination of estimated profit rates on similar, economically interdependent contracts is used to develop program earnings rates for contracts that meet Statement of Position 81-1 criteria. These rates are applied to contract costs, including general and administrative expenses, for the determination of sales and operating earnings. Program earnings rates are reviewed quarterly to assess revisions in contract values and estimated costs at completion. Based on these assessments, any changes in earnings rates are made prospectively. Any anticipated losses on defense contracts and programs are charged to earnings when identified. Such losses encompass all costs, including general and administrative expenses, allocable to the contracts. Revenue arising from the claims process is not recognized either as income or as an offset against a potential loss until it can be reliably estimated and its realization is probable. Commercial contracts for new aircraft are segmented between the manufacture of the "green" aircraft (i.e., before exterior painting and installation of customer selected interiors and optional avionics) and its completion. Sales of new Gulfstream green aircraft are recorded when that aircraft is delivered to the customer. Revenues from completion services are recorded when the outfitted aircraft is delivered to the customer. With respect to completed aircraft, insignificant costs related to parts to be installed and services to be performed under the contract after delivery of the aircraft are included as cost of sales at the time of sale of the new aircraft. Sales of all other products and services, including pre-owned aircraft, are recognized when delivered or the service is performed. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $509, $432 and $381 in 1998, 1997 and 1996, respectively, and are included in operating costs and expenses on the Supplemental Consolidated Statement of Earnings. INTEREST, NET. Interest income was $23, $51 and $73 in 1998, 1997 and 1996, respectively. Interest payments, including the company's finance operations, were $47, $44 and $27 in 1998, 1997 and 1996, respectively. Interest expense incurred by the company's LNG tanker finance operation is classified as operating costs and expenses. 6 7 CASH AND EQUIVALENTS AND MARKETABLE SECURITIES. The company classifies its securities based on the remaining maturity at the time of purchase. The company considers securities with a maturity of three months or less to be cash equivalents. The company adjusts all marketable securities to fair value. In general, market adjustments to those securities with maturities less than one year are recognized in earnings and included as a component of accumulated other comprehensive income for securities with maturities greater than one year. At December 31, 1998, marketable securities consist primarily of corporate debt and government backed mortgage securities. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS. Accounts receivable represent only amounts billed and currently due from customers. Recoverable costs and accrued profit related to long-term defense contracts and programs on which revenue has been recognized, but billings have not been presented to the customer (unbilled receivables), are included in contracts in process. INVENTORIES. Work in process inventories are stated at the lower of cost (based on estimated average unit costs of the number of units in a production lot) or market. Raw materials, material components of other work in process and substantially all purchased parts inventories are stated at the lower of cost (first-in, first-out method) or market. Pre-owned aircraft acquired in connection with the sale of new aircraft are recorded at the lower of the trade-in value or estimated net realizable value. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried at historical cost net of accumulated depreciation. Most of the company's assets are depreciated using accelerated methods, with the remainder using the straight-line method. Depletion of mineral reserves is computed using the units-of-production method. Depreciation expense was $109, $96 and $76 in 1998, 1997 and 1996, respectively. IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, identifiable intangibles and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the company estimates the future cash flows expected to result from the use of the asset. If the asset is held for sale, the company reviews its fair value less cost to sell. ENVIRONMENTAL LIABILITIES. The company accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Cleanup and other environmental exit costs related to sold businesses were recorded at the time of disposal. Recorded liabilities have not been discounted. To the extent the U.S. government has specifically agreed to pay the ongoing maintenance and monitoring costs at sites currently used in the conduct of the company's government contracting business, these costs are treated as contract costs and recognized as paid. STOCK-BASED COMPENSATION. The company measures compensation cost for stock options as the excess, if any, of the quoted market price of the company's stock at the measurement date over the exercise price. Stock awards are recorded at fair value at the date of award. TRANSLATION OF FOREIGN CURRENCIES. Local currencies have been determined to be functional currencies for the company's international operations. Foreign currency balance sheets are translated at the end-of-period exchange rates and earnings statements at the average exchange rates for each period. The resulting foreign currency translation adjustments are included in the calculation of accumulated other comprehensive income and included in the equity section on the Supplemental Consolidated Balance Sheet. COMPREHENSIVE INCOME. Effective January 1, 1998, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires the presentation and disclosure of comprehensive income. Comprehensive income was $587, $560 and $310 in 1998, 1997 and 1996, respectively. 7 8 CLASSIFICATION. Consistent with industry practice, assets and liabilities relating to long-term defense contracts and programs are classified as current although a portion of these amounts is not expected to be realized within one year. In addition, certain prior year amounts have been reclassified to conform to the current year presentation. B. SUBSEQUENT EVENTS Stockholder Approvals On July 30, 1999, the company's stockholders approved (1) an amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock from 200 million shares to 300 million shares, and (2) the issuance by the company of its common stock to stockholders of Gulfstream in connection with the acquisition discussed in Note C. Gulfstream Acquisition On July 30, 1999, the company repaid from its available funds approximately $270 of Gulfstream's debt instruments (see Note K). In connection therewith, the company will record in the third quarter of 1999 a one-time non-cash charge of approximately $7 for the unamortized debt costs associated with these instruments. The company will also record in the third quarter of 1999 a charge to earnings of approximately $33 for direct acquisition transaction costs, consisting of investment banking, legal, bank fees, accounting, printing, and regulatory filing fees. In connection with the acquisition of Gulfstream, General Dynamics will merge the two company's commercial pension plans. As a result of the merger of these plans, the company expects to recognize previously deferred gains on General Dynamics commercial pension plan, amounting to approximately $125 (before tax), in income in the third quarter of 1999. See Note S for further discussion of the commercial pension plans. Rescission of Common Stock Repurchase Program On June 23, 1999, the company's board of directors formally rescinded management's authority to repurchase shares of the company's common stock on the open market. 8 9 Acquisition of GTE Government Systems Corporation On June 21, 1999, the company entered into a definitive agreement to acquire GTE Government Systems Corporation, a subsidiary of GTE Corporation, for $1.05 billion in cash. GTE Government Systems Corporation is a leader in the advancement of command, control, communications and intelligence systems; electronic defense systems; communication switching; and information systems for defense, government and industry in the United States and abroad. The acquisition will be accounted for under the purchase method of accounting and is expected to close at the end of August 1999. Settlement of Research and Experimentation Tax Credits During the first quarter of 1999, the company recognized a benefit of $165 (net of amounts previously recorded in 1991 and 1992), or $.82 per diluted share, as a result of a settlement with the U.S. Internal Revenue Service for refund claims for research and experimentation tax credits for the years 1981 through 1989 (see Note E). In April 1999, the company received the cash refund from the IRS related to this settlement totaling $334 (including before-tax interest). C. BUSINESS COMBINATIONS Pooling of Interests Method On July 30, 1999, the company acquired Gulfstream through a merger of a subsidiary of the company into Gulfstream. As a result, the holders of Gulfstream common stock became entitled to receive one share of the company's common stock for each Gulfstream share. The common stock of Gulfstream was traded on the New York Stock Exchange through the close of business on July 30, 1999, at which time there were 72,165,645 shares of Gulfstream common stock outstanding. An additional 4.1 million shares have been reserved for issuance upon the exercise of stock options which, prior to the acquisition, had been options to purchase Gulfstream common stock. Gulfstream is a leading designer, developer, manufacturer and marketer of advanced business jet aircraft. The acquisition was accounted for as a pooling of interests, and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of Gulfstream. Purchase Method On November 10, 1998, the company acquired control of NASSCO Holdings Incorporated (NASSCO) for $369 in cash plus the obligation to discharge $46 in debt. The company paid $318 of the total consideration and repaid the $46 obligation in cash during November 1998 and paid the remaining fixed purchase consideration of $51 during May 1999. NASSCO's wholly owned subsidiaries include National Steel and Shipbuilding Company, which is in the business of ship design, engineering, construction and repair for the United States military and various commercial customers, and NASSCO Funding Corporation, a finance subsidiary (see Note N). 9 10 Effective August 19, 1998, Gulfstream completed the acquisition of K-C Aviation, Inc. for approximately $250 in cash. K-C Aviation was a leading provider of business aviation services and the largest independent completion center for business aircraft in North America. In addition to custom aircraft interiors, K-C Aviation was the second largest independent aircraft engine service center in the United States and offered maintenance services, spare parts, auxiliary power unit service, avionics retrofit, non-destructive testing and component overhaul. The company made two other acquisitions during 1998 for approximately $20 in cash and stock. Effective December 31, 1997, the company purchased the assets of Computing Devices International, formerly a division of Ceridian Corporation, for approximately $500, net of cash acquired of $100. The company borrowed $220 in connection with the acquisition. See Note K for details on the terms of the debt. Computing Devices International added three new defense electronics and system integration units to the company, General Dynamics Information Systems, Inc., Computing Devices Canada Ltd. and Computing Devices Company Limited in the United Kingdom. Effective October 1, 1997, the company purchased the assets of Advanced Technology Systems, formerly an operating unit of Lucent Technologies, for $267, net of purchase price adjustment of $17 received in January 1998. Advanced Technology Systems is a leading supplier of undersea surveillance systems, signal processing and vibration control systems and related technologies for a wide range of applications. Effective January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, formerly operating units of Lockheed Martin Corporation, for $450 in cash. Defense Systems builds missile guidance and naval fire control systems. Their manufacture of light vehicles and turrets and transmissions for combat vehicles was transferred to another operating unit of the company in early 1998. Armament Systems designs, develops and produces advanced gun, ammunition handling and air defense systems, and is a leader in the production of ammunition and ordnance products. The purchase prices have been allocated to the estimated fair values of net tangible assets acquired, with any excess recorded as intangible assets (see Note I). Certain of the estimates related to the acquisition of NASSCO are still preliminary at December 31, 1998, but will be finalized within one year from its date of acquisition. The operating results of the acquired businesses are included with those of the company from their respective closing dates. D. EARNINGS PER SHARE The company has adopted the provisions of SFAS No. 128, "Earnings Per Share," which requires the presentation of earnings per share on both a basic and diluted basis for all periods presented. Basic and diluted weighted average shares outstanding are as follows (in thousands):
Year Ended December 31 1998 1997 1996 ----------------------------- Basic weighted average shares outstanding 199,466 199,769 200,254 Assumed exercise of options 2,758 4,512 5,141 Contingently issuable shares 22 194 60 --------- ------- -------- Diluted weighted average shares outstanding 202,246 204,475 205,455 ========= ======= ========
10 11 Basic and diluted weighted average shares outstanding were derived in accordance with SFAS No. 128, which states that when a business combination is accounted for as a pooling of interests, earnings per share computations shall be based on the aggregate of the weighted average outstanding shares of the constituent businesses, adjusted to equivalent shares of the surviving business for all periods presented. E. INCOME TAXES The provision for income taxes included on the Supplemental Consolidated Statement of Earnings is summarized as follows:
Year Ended December 31 1998 1997 1996 ---------------------------------------- Current: U.S. Federal $269 $182 $200 Foreign 15 - - State 5 1 1 ---- ---- ---- Total current 289 183 201 ---- ---- ---- Deferred: U.S. Federal 27 11 (61) Foreign (9) - - State 8 1 - ---- ---- ---- Total deferred 26 12 (61) ---- ---- ---- Decrease in valuation allowance - (65) - ---- ---- ---- $315 $130 $140 ==== ==== ====
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 federal income tax rate 35.0% 35.0% 35.0% Decrease in valuation allowance - (9.4) - Net operating loss carryforwards - (6.3) (3.6) Other (0.2) (0.4) (0.8) ----- ----- ----- Effective income tax rate 34.8% 18.9% 30.6% ===== ===== =====
11 12 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 90 86 Tax credit/loss carryforwards 49 32 Other 228 146 ----- ----- Deferred Assets $ 638 $ 558 ----- ----- Lease income $ 66 $ 70 Commercial pension asset 60 54 Intangible assets 48 38 Property basis differences 40 23 Other 98 21 ----- ----- Deferred Liabilities $ 312 $ 206 ----- ----- Net Deferred Asset $ 326 $ 352 ===== =====
Based on the level of projected earnings and current backlog, no material valuation allowance was required for the company's deferred tax assets at December 31, 1998 and 1997. The current portion of the net deferred tax asset is $328 and $257 at December 31, 1998 and 1997, respectively, and is included in other current assets on the Supplemental Consolidated Balance Sheet. The company made income tax payments of $112, $102 and $199 in 1998, 1997 and 1996, respectively. On March 2, 1999, General Dynamics and the U.S. Internal Revenue Service settled refund claims for research and experimentation tax credits for the years 1981 through 1989 for approximately $334 (including before-tax interest). See Note B for further discussion of the settlement's impact on 1999 results of operations and financial condition. The IRS has completed its examination of General Dynamics' 1990 through 1993 consolidated federal income tax returns and Gulfstream's 1990 through 1994 consolidated federal income tax returns. Unresolved matters for these years have been protested to the IRS Appeals Division. A refund claim by General Dynamics for $78 (plus interest) for research and experimentation tax credits for the year 1990 will also be considered by the IRS Appeals Division. The IRS is currently examining General Dynamics' 1994 and 1995 consolidated federal income tax returns. The company has recorded liabilities for tax contingencies, therefore, resolution of open matters for these years is not expected to have a materially unfavorable impact on the company's results of operations or financial condition. 12 13 F. CONTRACTS IN PROCESS Contracts in process primarily represent costs and accrued profit related to defense contracts and programs and consist of the following:
December 31 1998 1997 ----------------------- Contract costs and estimated profits $7,866 $6,382 Other contract costs 485 410 ------ ------ 8,351 6,792 Less advances and progress payments 7,399 6,090 ------ ------ $ 952 $ 702 ====== ======
Contract costs include production costs and related overhead, including general and administrative expenses. Other contract costs primarily represent amounts required to be recorded under generally accepted accounting principles that are not currently allocable to contracts, such as a portion of the company's estimated workers' compensation, postretirement benefits and environmental expenses. Recovery of these costs under contracts is considered probable based on existing backlog. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company's remaining contracts could be affected. Under the contractual arrangements by which progress payments are received, the U.S. government asserts that it has a security interest in the contracts in process identified with the related contracts. G. INVENTORIES Inventories consist primarily of commercial aircraft work in process and raw materials, as follows:
December 31 1998 1997 ---------------------- Work in process $ 445 $ 391 Raw materials 191 135 Pre-owned aircraft 150 104 Other 18 20 ----- ----- $ 804 $ 650 ===== =====
13 14 H. PROPERTY, PLANT AND EQUIPMENT, NET The major classes of property, plant and equipment are as follows:
December 31 1998 1997 ------------------------ Land and improvements $ 99 $ 86 Mineral reserves 88 87 Buildings and improvements 450 398 Machinery and equipment 1,322 1,268 Construction in process 108 34 ------ ------ 2,067 1,873 Less accumulated depreciation, depletion and amortization 1,166 1,103 ------ ------ $ 901 $ 770 ====== ======
Certain of the company's plant facilities are provided by the U.S. government and therefore, not included above. I. INTANGIBLE ASSETS Intangible assets resulting primarily from the company's acquisitions consist of the following:
December 31 1998 1997 ------------------------- Goodwill $1,323 $ 867 Contracts and programs acquired 461 426 ------ ------ $1,784 $1,293 ====== ======
Intangible assets are shown net of accumulated amortization of $130 and $79 at December 31, 1998 and 1997, respectively. Goodwill is amortized on a straight-line basis over 40 years. Contracts and programs acquired are amortized on a straight-line basis over periods ranging from 8 to 30 years. J. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
December 31 1998 1997 ----------------------- Customer deposits $488 $546 Workers' compensation 341 243 Retirement benefits 196 221 Advance payments - defense contracts 139 114 Salaries and wages 115 117 Other 481 301 ------ ------ $1,760 $1,542 ====== ======
14 15 K. DEBT Debt consists of the following:
December 31 1998 1997 ------------------- Term loans $305 $380 Senior notes 142 220 Notes payable 56 - 9.95% Debentures - 38 Industrial development bonds 15 - Other 12 7 ---- ---- 530 645 Less current portion 77 183 ---- ---- $453 $462 ==== ====
On October 16, 1996, Gulfstream entered into a long-term credit agreement under which the lenders who are parties to the credit agreement made available to the company a $400 term loan facility and a $250 revolving credit facility. Concurrent with entering into the credit agreement, Gulfstream repaid all amounts outstanding under its pre-existing credit agreements totaling $108, and terminated such agreements. The effective interest rate on these instruments was 6.2 percent and 6.9 percent at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, $36 and $46, respectively, was outstanding on the revolving credit facility. Gulfstream repaid the outstanding obligation on the revolving credit facility during 1999. On July 30, 1999, the company repaid the term loan in full from available cash and terminated the credit agreement. On December 31, 1997, the company borrowed in Canadian dollars the U.S. equivalent of $220 in connection with its acquisition of Computing Devices International. In April 1998, the company repaid $70 of this note, and in September 1998, refinanced the balance with a note maturing in 2008. The debt carries a 6.32 percent annual interest rate, interest payable semi-annually. On November 30, 1998, Gulfstream issued notes totaling $56 secured by three pre-owned aircraft used as core fleet in the Gulfstream Shares Program. The notes are repayable in consecutive monthly installments of principal commencing December 31, 1999, with a final maturity on November 30, 2008 of $31. Interest is payable monthly from November 30, 1998 and is based on LIBOR plus 1.4%. On April 1, 1998, the company exercised its option to call for the early redemption of all of its outstanding 9.95 percent Debentures. On November 10, 1998, the company acquired control of NASSCO, which has several debt obligations. The industrial development bonds are due December 1, 2002, and bear interest at 6.60 percent per annum with interest payable semi-annually. Other consists of NASSCO Title XI bonds of $5, which were repaid during the first quarter of 1999, and several subsidiary mortgage obligations. The company has available a $1 billion committed line of credit expiring in May 2002 and an available $400 committed line of credit expiring in December 2002. International credit arrangements include a $30 credit facility expiring in August 2000, renewable annually thereafter. 15 16 L. OTHER LIABILITIES Other liabilities consist of the following:
December 31 1998 1997 -------------------- Accrued costs on disposed businesses $177 $211 Retirement benefits 268 269 Coal mining related liabilities 73 78 Other 311 283 ---- ---- $829 $841 ==== ====
The company has recorded liabilities for contingencies related to disposed businesses. These liabilities include postretirement benefits, environmental, legal and other costs. The company has certain liabilities which are specific to the coal mining industry, including workers' compensation and reclamation. The company is subject to the Federal Coal Mine Health & Safety Act of 1969, as amended, and the related workers' compensation laws in the states in which it has operated. These laws require the company to pay benefits for occupational disability resulting from coal workers' pneumoconiosis (black lung). The liability for known claims and an actuarially determined estimate of future claims that will be awarded to current and former employees is discounted based on the current rate. Liabilities to reclaim land disturbed by the mining process and to perform other closing functions are recorded over the estimated production lives of the mines. M. SHAREHOLDERS' EQUITY STOCK SPLIT. On March 4, 1998, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend, which was distributed on April 2, 1998, to shareholders of record on March 13, 1998. Shareholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings and surplus to common stock the par value of the additional shares arising from the split. In addition, all references in the financial statements to number of shares, per share amounts, stock option data, and market prices of the company's common stock have been restated to give effect to the stock split. AUTHORIZED STOCK. The authorized capital stock of the company consists of 300 million shares of $1 par value common stock and 50 million shares of $1 par value preferred stock issuable in series, with the rights, preferences and limitations of each series to be determined by the board of directors. SHARES OUTSTANDING. The company had 199,267,735, 200,329,204 and 200,116,131 shares of common stock outstanding as of December 31, 1998, 1997 and 1996, respectively. N. FINANCE OPERATIONS The company owns three liquefied natural gas (LNG) tankers which have been leased to a nonrelated company. The U.S. government-guaranteed Title XI Bonds, which financed the leases, were retired in 1996. This retirement was financed by the private placement of new bonds that are secured by the LNG tankers. The new bonds are callable under certain conditions and are nonrecourse to the company. 16 17 Accordingly, in the event the lessee defaults on the lease payments, the company is not obligated to repay the debt. The 1996 refinancing did not have a material impact on the company's results of operations or financial condition. The following is a summary of the comparative financial statements for the LNG tanker finance operations: BALANCE SHEET DATA
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. 17 18 Semiannual scheduled payments, sufficient to retire 100 percent of the aggregate principal amount of the debt, have commenced and will continue through maturity in 2004. The weighted average interest rate on the debt is 6.2 percent. The schedule of principal payments for the next five years is $19 in 1999, $19 in 2000, $21 in 2001, $22 in 2002 and $18 in 2003. NASSCO Funding Corporation, discussed in Note C, is a special purpose corporation in the business of issuing commercial paper to assist in providing funding for the Capital Construction Fund (CCF) (see Note O). The shares invested in the CCF collateralize these commercial paper obligations. The maximum maturity period on the commercial paper is 60 days. Certain covenants of the commercial paper agreement require that 95 percent of the CCF be invested in high-grade government backed mortgage securities. The following is a summary of the financial position of NASSCO Funding Corporation as of December 31, 1998: ASSETS Marketable securities $48 === LIABILITIES AND SHAREHOLDER'S EQUITY Commercial paper $40 Shareholder's equity 8 --- $48 ===
The company repaid the commercial paper obligation and liquidated the available-for-sale marketable securities during the second quarter of 1999. No material earnings from NASSCO Funding Corporation are included in the company's results of operations due to the consummation of the acquisition on November 10, 1998. O. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the company's financial instruments approximates carrying value for all financial instruments except as follows:
December 31 1998 1997 ----------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Short- and long-term debt $530 $530 $645 $648 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. 18 19 Marketable securities classified as available-for-sale were $48 and $30 at December 31, 1998 and 1997, respectively, and included primarily government backed mortgage and corporate debt securities, respectively. The 1998 balance collateralizes the CCF. Qualified assets deposited into the CCF are designated to provide funds for the acquisition, construction or reconstruction of U.S. flag and U.S. built marine vessels. Such deposits are not subject to federal income taxes in the year the associated revenue is earned, but are taxable with interest payable from the year of the deposit for the most recent qualified activity, if withdrawn for general corporate purposes or other nonqualified purposes or upon termination of the agreement. Deposits into the CCF are preference items for inclusion in federal alternative minimum taxable income. Deposits into the CCF not committed for qualified vessels within 25 years from the date of deposit will be treated as nonqualified withdrawals. Any income relating to a nonqualified withdrawal is likely to be taxable in the year of withdrawal. At December 31, 1998, the CCF was funded by the marketable securities discussed above and qualified accounts receivable of an affiliate of approximately $37. The assets designated for the CCF are restricted. Other available-for-sale investments at December 31, 1998 and 1997 consist primarily of $46 of U.S. government debt obligations restricted for payment of worker's compensation benefits under an agreement with the State of Maine. Also included at December 31, 1998 are $5, primarily in municipal securities, restricted for repayment of the industrial development bonds discussed in Note K, and $4 in equity securities restricted for the payment of supplemental retirement obligations discussed in Note S. Amortized cost for available-for-sale marketable securities and other investments approximates fair value at December 31, 1998 and 1997. For debt and equity securities and obligations classified as other available-for-sale investments at December 31, 1998, $11 mature within one year, $22 between one and five years, $13 between five and ten years, and $9 had no fixed maturity date. The proceeds from the sale of available-for-sale securities were $274, $612 and $228 in 1998, 1997 and 1996, respectively. The company was contingently liable for debt and lease guarantees and other arrangements aggregating up to a maximum of approximately $35 at December 31, 1998. The company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. Approximately 6% and 14% of accounts receivable outstanding at December 31, 1998 and 1997, respectively, are represented by a contract receivable associated with the sale of multiple aircraft to one customer. Generally, these receivables are collected prior to delivery of the outfitted aircraft. The company performs ongoing credit evaluations of its aircraft customers' financial position. Overall, credit risks with respect to aircraft accounts receivable are limited due to the large number of customers and their dispersion across many industries and geographic regions. P. COMMITMENTS AND CONTINGENCIES LITIGATION. Claims made by and against the company regarding its consolidated federal income tax returns are discussed in Notes B and E. Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note Q. On April 19, 1995, 101 then-current and former employees of General Dynamics' Convair Division in San Diego, California filed a six-count complaint in the Superior Court of California, County of San Diego, titled Argo, et al. v. General Dynamics, et al. In addition to General Dynamics, four of Convair's then-current or former managers were also named as defendants. The plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit by, among other things, concealing its plans 19 20 to close the Convair Division. On May 1, 1997, a jury rendered a verdict of $101 against the company and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The company and one of the defendants have appealed the judgment to the Court of Appeals of the State of California, Fourth Appellate District, Division One. On appeal, the company is seeking to have the judgment overturned in its entirety or, alternatively, a substantial reduction in the jury's punitive damage award. The company believes it has substantial legal defenses, but in any case, it believes the punitive damage award is excessive as a matter of law. Management currently believes the ultimate outcome will not have a material impact on the company's results of operations or financial condition. On July 13, 1995, General Dynamics Corporation was named as a defendant in a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics Corporation, et al. The complaint also names two insurance brokers, Lloyd Thompson, Ltd. and Willis Corroon Corporation of Missouri, as defendants. The plaintiffs are members of certain Lloyds' of London syndicates and British insurance companies who sold the company excess loss insurance policies covering the company's self-insured workers' compensation program at Electric Boat for four policy years, from July 1, 1988 to June 30, 1992. The plaintiffs allege that when procuring the policies the company and its brokers made misrepresentations to the plaintiffs and failed to disclose facts which were material to the risk. The plaintiffs also allege that the company has been negligent in its administration of workers' compensation claims. The plaintiffs seek rescission of the policies, a declaratory judgment that the policies are void, and compensatory damages in an unspecified amount. General Dynamics has counterclaimed, alleging that the plaintiffs have breached their insurance contracts by failing to pay claims. General Dynamics seeks a declaratory judgment that the policies are valid, actual damages, and payment of a penalty under a Missouri statute for the plaintiffs' vexatious and unreasonable failure to pay claims. The company does not expect that this case will have a material impact on the company's results of operations or financial condition. On August 16, 1996, plaintiffs HE Holdings, Inc., and Hughes Missile Systems Company filed an action against General Dynamics Corporation in the Superior Court for the State of California for the County of Los Angeles. In June 1998, plaintiffs filed a sixth amended complaint in which plaintiffs were redesignated as HE Holdings, Inc., now known as Raytheon Company, and Hughes Missile Systems Company, now known as Raytheon Missile Systems Company ("plaintiffs"). On September 8, 1998, plaintiffs filed a seventh amended complaint which is now pending. The seventh amended complaint alleges breach of contract, tortious interference with contract, conversion, fraud, and breach of the implied covenant of good faith and fair dealing, all with respect to the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business, various related leases and other alleged agreements. The seventh amended complaint seeks approximately $25 in compensatory damages, as well as punitive damages and declaratory relief. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. The company is either a named defendant or a third-party defendant in certain multi-plaintiff tort cases pending in state or federal court in Arizona, captioned: Cordova, et al. v. Hughes Aircraft Co.; Lanier, et al. v. Hughes Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et al. v. Hughes Aircraft Co. In these cases the plaintiffs allege that they suffered personal injuries and/or property damage from chronic exposure to drinking water alleged to be contaminated with trace amounts of the industrial solvent trichloroethylene. The alleged source of the contamination was industrial facilities in and around the site now occupied by the Tucson International Airport (TIA) and U.S. Air Force Plant #44. In addition to the company, defendants are Hughes Aircraft Co. (now Raytheon), the Tucson Airport authority (TAA), the City of Tucson, (the City) and McDonnell Douglas Corp. (MDC). In Cordova, the 20 21 company negotiated a settlement with all but four defendants, who have appealed the summary judgement entered against them. The company has reached an agreement to settle all the remaining cases and is negotiating the final terms of the settlement agreements. Court approval is required for the settlement of these cases. The company does not believe that these lawsuits will have a material impact on the company's results of operations or financial condition. In other litigation concerning the Tucson site, the company is a defendant in two cases brought in federal district court in Arizona by TAA and the City under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). Plaintiffs seek reimbursement of CERCLA response costs and a declaration of the company's alleged liability with respect to soil and groundwater contamination at portions of the Tucson site. On September 30, 1998, the U.S. Environmental Protection Agency (U.S. EPA) issued a Special Notice Letter notifying the company that it was a potentially responsible party (PRP) with respect to contamination of soil and shallow groundwater on and near property currently occupied by the TIA. Other PRPs receiving a similar notice were the U.S. Air Force, TAA, MDC and the City. The company has reached an agreement to settle the litigation brought by TAA and the City and is awaiting court approval of a consent decree negotiated with the U.S. EPA in response to the Special Notice Letter. The company does not believe that these lawsuits or the pending consent decree will have a material impact on the company's results of operations or financial condition. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its liabilities in these proceedings, in the aggregate, are not material to the company's results of operations or financial condition. ENVIRONMENTAL. The company is directly or indirectly involved in certain Superfund sites in which the company, along with other major U.S. corporations, has been designated a PRP by the U.S. EPA or a state environmental agency with respect to past shipments of hazardous waste to sites now requiring environmental cleanup. Based on a site by site analysis of the estimated quantity of waste contributed by the company relative to the estimated total quantity of waste, the company believes its liability at any individual site is not material. The company is also involved in the investigation, cleanup and remediation of various conditions at sites it currently or formerly owned or operated. The company measures its environmental exposure based on enacted laws and existing regulations and on the technology expected to be approved to complete the remediation effort. The estimated cost to perform each of the elements of the remediation effort is based on when those elements are expected to be performed. Where a reasonable basis for apportionment exists with other PRPs, the company estimates only its allowable share of the joint and several remediation liability for a site, taking into consideration the solvency of other participating PRPs. Based on a site by site analysis, the company believes it has adequate accruals for any liability it may incur arising from sites currently or formerly owned or operated at which there is a known environmental condition, or Superfund sites at which the company is a PRP. OTHER. In the ordinary course of business, the company has letters of credit and other similar instruments with financial institutions and insurance carriers aggregating approximately $480 at December 31, 1998. For discussion of other financial guarantees, see Note O. The company's rental commitments under existing operating leases at December 31, 1998, are not significant. The company has agreements with certain of its suppliers to procure major aircraft components such as engines, wings, and avionics. The agreements vary in length from three to five years and generally provide for price and quantity of components to be supplied. In connection with the Gulfstream V program, the company has entered into revenue sharing agreements with two suppliers. The terms of such agreements require the suppliers to design, manufacture and supply certain aircraft components in exchange for a fixed percentage of the revenues of each Gulfstream V sold. Progress payments under the revenue sharing 21 22 agreements are generally required to be made on a pro rata basis concurrent with the associated deposits received on Gulfstream V contracts. As of December 31, 1998, in connection with orders for 21 Gulfstream V aircraft in backlog, the company has offered customers trade-in options (which may or may not be exercised by the customer) under which the company will accept trade-in aircraft (primarily Gulfstream IVs and IV-SPs) at a guaranteed minimum trade-in price. Additionally, in connection with recorded sales of new aircraft, at December 31, 1998 the company has a commitment to accept pre-owned aircraft totaling $210. Management believes that the fair market value of all such aircraft exceeds the specified trade-in value. Q. TERMINATION OF A-12 PROGRAM The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy's new carrier-based Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas, now owned by the Boeing Company, (the contractors) were parties to the contract with the Navy, each had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors' challenge to the termination for default, or a negotiated settlement. The contractors filed a complaint on June 7, 1991, in the U.S. Court of Federal Claims contesting the default termination. The suit, in effect, seeks to convert the termination for default to a termination for convenience of the U.S. government and seeks other legal relief. A trial on Count XVII of the complaint, which relates to the propriety of the process used in terminating the contract for default, was concluded in October 1993. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following further proceedings, the court issued an order converting the termination for default to a termination for convenience. On March 31, 1998, a final judgment was entered in favor of the contractors for $1,200 plus interest. The U.S. government filed an appeal from the trial court's ruling in the U.S. Court of Appeals for the Federal Circuit. On July 1, 1999, the Court of Appeals found that the trial court erred in converting the termination for default to a termination for convenience without first determining whether a default existed. The Court of Appeals remanded the case for determination of whether the government's default termination was justified. The Court of Appeals stated that it was expressing no view on that issue, and it left the parties the opportunity to fully litigate that issue on remand. The company continues to believe that the government's default termination was improper, both as to process (the basis relied upon by the trial court) and because the contractors were not in default. The company continues to believe that at a full trial it will be able to demonstrate that the default termination was not justified and that the termination for default will be converted to a termination for convenience. If the company is successful in such a new trial, it could result in the same, a lesser or a greater award to the contractors. The company has fully reserved the contracts in process balance associated with the A-12 program and has accrued the company's estimated termination liabilities and the liability associated with pursuing the litigation through the appeals process and remand proceedings. In the event that the contractors are ultimately found to have been in default under the A-12 contract and are required to repay all unliquidated 22 23 progress payments, additional losses of approximately $675, plus interest, may be recognized by the company. The company believes the possibility of this result is remote. R. INCENTIVE COMPENSATION PLAN Under the 1997 Incentive Compensation Plan, the company may grant awards in combination of cash, common stock, stock options and restricted stock. The plan complies with the Securities and Exchange Commission's Rule 16b-3 and with the Internal Revenue Code Section 162(m). In October 1993, the company introduced a long-term incentive program which granted stock options and restricted stock. The stock options are exercisable at the fair market value of the common stock on the date of grant generally with 50 percent of the stock options vesting on the one-year anniversary of their grant and the remaining 50 percent vesting on the two-year anniversary of their grant. The stock options have a maximum term of five years. The restricted stock has a feature that will increase or decrease the number of shares initially granted based on movement in the company's stock price from the date of grant to the end of a specific performance period (generally 18 to 24 months). Once the number granted has been adjusted, restrictions will continue to be imposed for an additional two years, at which time all restrictions will lapse. Prior to October 1993, stock options granted under the company's incentive compensation plans were awarded for a maximum term of ten years and were exercisable in their entirety beginning 18 months after the date of award. Generally, Gulfstream options granted prior to July 1, 1994 vest 25.0% on date of issuance, 25.0% on the first anniversary of the date of issuance and 25.0% annually thereafter. Generally, Gulfstream options granted on or after July 1, 1994, vest 33.3% on the first anniversary of the date of issuance, 33.3% on the second anniversary of the date of issuance and the last 33.3% on the third anniversary of the date of issuance. Based on the terms of the Gulfstream options granted, many options experienced accelerated vesting upon the change in control. There were 507,340, 345,860 and 91,546 shares of restricted stock awarded in 1998, 1997 and 1996, respectively. There were 1,219,535 shares of restricted stock outstanding at December 31, 1998. 23 24 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 10,072,286 9,382,983 13,297,019 Granted 3,770,314 2,910,252 1,157,600 Exercised (4,803,536) (1,904,259) (4,939,356) Canceled (366,736) (316,690) (132,280) - ---------------------------------------------------------------------------------------------- Outstanding at end of year 8,672,328 10,072,286 9,382,983 - ---------------------------------------------------------------------------------------------- Exercisable at end of year 4,470,291 5,715,494 6,676,326 ============================================================================================== WEIGHTED AVERAGE EXERCISE PRICE: Outstanding at beginning of year $ 16.28 $ 12.41 $ 10.45 Granted 45.92 29.70 7.23 Exercised 13.24 17.73 5.63 Canceled 27.93 16.33 22.81 Outstanding at end of year 30.35 16.28 12.41 Exercisable at end of year 19.29 9.66 12.66 ==============================================================================================
24 25 Information with respect to stock options outstanding and stock options exercisable at December 31, 1998, is as follows:
==================================================================================================== Options Outstanding NUMBER WEIGHTED WEIGHTED RANGE OF OUTSTANDING AT AVERAGE REMAINING AVERAGE EXERCISE PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE - ---------------------------------------------------------------------------------------------------- $3.11-11.37 2,185,718 5.00 years $ 4.09 19.91-29.00 752,344 5.96 25.36 29.06-33.88 2,031,966 2.78 31.93 36.50-50.06 3,702,300 7.65 46.01 - ---------------------------------------------------------------------------------------------------- 8,672,328 ====================================================================================================
========================================================================= Options Exercisable WEIGHTED RANGE OF NUMBER AVERAGE EXERCISE PRICES OUTSTANDING AT 12/31/98 EXERCISE PRICE - ------------------------------------------------------------------------- $3.11-11.37 2,080,380 $ 4.10 19.91-29.00 508,711 24.99 29.06-33.88 1,370,000 31.42 36.50-50.06 511,200 42.98 - ------------------------------------------------------------------------- 4,470,291 =========================================================================
At December 31, 1998, 6,071,881 treasury shares have been reserved for options that may be granted in the future, in addition to the shares reserved for issuance on the exercise of options outstanding. In connection with the acquisition of Gulfstream, an additional 4.1 million shares have been reserved for issuance upon the exercise of stock options which, prior to the merger, had been options to purchase Gulfstream common stock. Had compensation cost for stock options been determined based on the fair value at the grant dates for awards under the company's incentive compensation plans, the company's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated as follows:
=============================================================================================== 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Net Earnings: As Reported $589 $559 $317 Pro Forma $578 $553 $314 Net Earnings Per Share - Basic: As Reported $2.95 $2.80 $1.58 Pro Forma $2.90 $2.77 $1.57 Net Earnings Per Share - Diluted: As Reported $2.91 $2.73 $1.54 Pro Forma $2.86 $2.70 $1.53 Weighted average fair value of $13.48 $6.25 $9.37 options granted ===============================================================================================
25 26 The compensation cost calculated under the fair value approach shown above is recognized over the vesting period of the stock options. The fair value is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in all years presented: (1) expected dividend yields from 1.9% to 2.5%, (2) expected volatility from 17.6% to 46.1%, (3) risk-free interest rates from 4.8% to 6.4% and (4) expected lives from 4 months to 3 years. S. RETIREMENT PLANS The company provides defined pension and other postretirement benefits to employees. The following is a reconciliation of the benefit obligations, plan/trust assets, and funded status of the company's plans: GENERAL DYNAMICS PLANS
========================================================================================================================= CHANGE IN BENEFIT OBLIGATION Pension Benefits Other Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Benefit obligation at beginning of year $ (3,339) $ (2,597) $ (620) $ (628) Service cost (63) (52) (4) (4) Interest cost (233) (210) (43) (44) Amendments (57) (28) 36 66 Actuarial loss (211) (95) (43) (5) Acquisitions (69) (526) (13) (59) Benefits paid 203 169 52 54 - ------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ (3,769) $ (3,339) $ (635) $ (620) ========================================================================================================================= CHANGE IN PLAN/TRUST ASSETS Pension Benefits Other Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Fair value of assets at beginning of year $ 4,491 $ 3,356 $ 241 $ 203 Actual return on plan/trust assets 873 741 48 43 Acquisitions 29 545 - - Employer contributions 33 18 17 20 Benefits paid (203) (169) (25) (25) - ------------------------------------------------------------------------------------------------------------------------- Fair value of assets at end of year $ 5,223 $ 4,491 $ 281 $ 241 ========================================================================================================================= ========================================================================================================================= FUNDED STATUS RECONCILIATION Pension Benefits Other Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Funded status $ 1,454 $ 1,152 $ (354) $ (379) Unrecognized net actuarial gain (1,262) (919) (65) (76) Unrecognized prior service cost 250 253 2 3 Unrecognized transition (asset)/obligation (24) (35) 71 130 - ------------------------------------------------------------------------------------------------------------------------- Prepaid/(accrued) benefit cost $ 418 $ 451 $ (346) $ (322) =========================================================================================================================
26 27
============================================================================================================================= ASSUMPTIONS AT DECEMBER 31 Pension Benefits Other Postretirement Benefits - ----------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Varying rates of increase in Compensation levels based on age 4.5-10% 4.5-10% 4.5-10% Expected long-term rate of return on Assets 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% Assumed health care cost trend rate for next year: Post-65 claim groups 4.50% 5.00% 6.00% Pre-65 claim groups 6.50% 7.50% 8.50% =============================================================================================================================
Net periodic pension and other postretirement benefits costs included the following:
============================================================================================================ Pension Benefits Other Postretirement Benefits - ------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Service cost $ 63 $ 52 $ 50 $ 4 $ 4 $ 7 Interest cost 233 210 182 43 44 46 Expected return on plan assets (309) (272) (247) (16) (14) (13) Recognized net actuarial (gain) loss (10) (8) 8 (4) (3) (1) Amortization of unrecognized transition (asset)/obligation (8) (8) (8) 23 24 29 Amortization of prior service cost 27 25 23 - - 1 - ------------------------------------------------------------------------------------------------------------ $ (4) $ (1) $ 8 $ 50 $ 55 $ 69 ============================================================================================================
PENSION BENEFITS. General Dynamics has 14 trusteed, noncontributory, qualified defined benefit pension plans covering substantially all employees. Under certain of the plans, benefits are primarily a function of both the employee's years of service and level of compensation, while under other plans, benefits are a function primarily of years of service. It is the company's policy to fund the plans to the maximum extent deductible under existing federal income tax regulations. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Under SFAS No. 87, "Employers' Accounting for Pensions," the company is required to assume a discount rate at which the obligation could be currently settled. Reflecting the movement in interest rates, the company decreased its discount rate assumption from 7.25 percent to 6.75 percent at December 31, 1998, which increased the projected benefit obligation $210. Changes in prior service cost resulting from plan amendments are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. Since 1992, the company has deferred certain gains realized by the commercial plan for the purpose of offsetting any costs associated with its final disposition, either through reversion or other actions. These deferred gains have been classified against the prepaid pension cost resulting in a net asset of $125 and $136 at December 31, 1998 and 1997, respectively, which is included in other noncurrent assets on the Supplemental Consolidated Balance Sheet. The company's contractual arrangements with the U.S. government provide for the recovery of contributions to the company's government plans. Historically, the amount contributed to these plans, charged to contracts and included in net sales has exceeded the net periodic pension cost included in operating costs and expenses as determined under SFAS 87. Therefore, the company has deferred recognition of earnings resulting from the difference between contributions and net periodic pension cost to provide better matching of revenues and expenses. Similarly, pension settlements and curtailments under the government plans have also been deferred. 27 28 As the U.S. government will receive an equitable interest in the excess assets of a government pension plan in the event of plan termination, the aforementioned deferrals have been classified against the prepaid pension cost related to the government plans resulting in the recognition of no net asset on the Supplemental Consolidated Balance Sheet. At December 31, 1998, approximately 55 percent of the plans' assets are invested in securities of the U.S. government or its agencies, 30 percent in diversified U.S. common stocks, 12 percent in mortgage-backed securities and 3 percent in diversified U.S. corporate debt securities. In addition to the qualified defined benefit plans, the company provides eligible employees the opportunity to participate in defined contribution savings plans that permit contributions on both a pretax and after-tax basis. Generally, salaried employees and certain hourly employees are eligible to participate upon commencement of employment with the company. Under most plans, the employee may contribute to various investment alternatives, including investment in the company's common stock. In certain of the plans, the company matches a portion of the employees' contributions with contributions to a fund which invests in the company's common stock. The company's contributions to the defined contribution plans amounted to $37, $27 and $22 in 1998, 1997 and 1996, respectively. The increase in 1998 over 1997 contributions is primarily attributable to the acquisitions discussed in Note C. Approximately 13 and 12 million shares of the company's common stock were held by the defined contribution plans at December 31, 1998 and 1997, respectively. The company also sponsors several unfunded non-qualified supplemental executive plans that provide participants with additional benefits, including any excess of such benefits over limits imposed on qualified plans by federal law. The recorded liability and expense related to these plans are not material to the company's results of operations and financial condition. OTHER POSTRETIREMENT BENEFITS. General Dynamics maintains plans providing postretirement health care coverage for many of its current and former employees. Postretirement life insurance benefits are also provided to certain retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. Both health and life insurance benefits are provided only to those employees who retire directly from the service of the company and not to those who terminate service/seniority prior to eligibility for retirement. General Dynamics has established several Voluntary Employee's Beneficiary Association (VEBA) trusts for certain of its plans. Funding of these VEBA trusts approximates an amount equal to the related annual net periodic postretirement benefit cost. The remaining plans are primarily funded as claims are received. As previously stated, the company decreased its discount rate assumption from 7.25 percent to 6.75 percent at December 31, 1998, which increased the accumulated postretirement benefit obligation $32. The health care cost trend rates are assumed to gradually decline to 4.5 percent and 5 percent for post-65 and pre-65 claim groups, respectively, in the year 2002 and thereafter over the projected payout period of the benefits. 28 29 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
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. GULFSTREAM PLANS The following information is based on an actuarial valuation date as of September 30, and amounts recognized in the supplemental consolidated financial statements as of December 31.
========================================================================================================================== CHANGE IN BENEFIT OBLIGATION Pension Benefits Other Benefits - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Benefit obligation at beginning of year $ (255) $ (213) $ (97) $ (87) Service cost (18) (13) (6) (4) Interest cost (19) (17) (7) (7) Amendments - - 3 - Actuarial loss (41) (20) - (2) Benefits paid 8 8 4 3 - -------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ (325) $ (255) $ (103) $ (97) ========================================================================================================================== CHANGE IN PLAN ASSETS Pension Benefits Other Benefits - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Fair value of assets at beginning of year $ 239 $ 164 $ - $ - Actual return on plan assets 9 50 - - Employer contributions 25 33 4 3 Benefits paid (8) (8) (4) (3) - -------------------------------------------------------------------------------------------------------------------------- Fair value of assets at end of year $ 265 $ 239 $ - $ - ==========================================================================================================================
29 30
================================================================================================================================ FUNDED STATUS RECONCILIATION Pension Benefits Other Benefits - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Funded status $ (60) $ (16) $ (103) $ (97) Unrecognized net actuarial loss/(gain) 49 (4) (15) (16) Unrecognized prior service cost/(benefit) 6 6 (16) (7) Contributions paid in fourth quarter 6 6 15 1 - -------------------------------------------------------------------------------------------------------------------------------- Prepaid/(accrued) benefit cost $ 1 $ (8) $ (119) $ (119) ================================================================================================================================ ================================================================================================================================ ASSUMPTIONS AT DECEMBER 31 Pension Benefits Other Benefits - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Discount rate 6.75% 7.50% 8.00% 6.75% 7.50% 8.00% Varying rates of increase in Compensation levels based on age 4.75% 4.75% 4.75% Expected long-term rate of return on Assets 9.50% 9.50% 9.50%
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefit obligation in excess of plan assets were $21, $21 and $20, respectively, as of December 31, 1998, and $17, $17 and $18, respectively, as of December 31, 1997. Net periodic pension and other benefits costs included the following:
================================================================================================================================ Pension Benefits Other Benefits - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Service cost $ 18 $ 12 $ 12 $ 6 $ 4 $ 4 Interest cost 19 17 15 7 7 7 Expected return on plan assets (20) (16) (13) - - - Recognized net actuarial gain - - - - (1) - Amortization of prior service cost - - - (1) - (1) - -------------------------------------------------------------------------------------------------------------------------------- $17 $13 $14 $ 12 $ 10 $ 10 ================================================================================================================================
PENSION BENEFITS. Gulfstream maintains four defined benefit pension plans covering substantially all employees. Benefits paid to retirees are based primarily on age at retirement, years of credited service and compensation earned during employment. Gulfstream's funding policy complies with the requirements of federal laws and regulations. Gulfstream's total pension fund contributions were $25, $25 and $34 in 1998, 1997 and 1996, respectively. Effective August 19, 1998, and as part of the acquisition described in Note C, Gulfstream adopted a new pension plan, covering all employees of the acquired company and all non-vested employees of Gulfstream except for those covered under a collective bargaining agreement. OTHER BENEFIT PLANS. In addition to pension benefits, Gulfstream provides certain health care insurance benefits to retired employees and their dependents. Gulfstream currently funds these plans on a pay-as-you-go basis. Substantially all of Gulfstream's salaried employees and certain hourly employees become eligible for such benefits when they attain certain age and service requirements while employed by the company. In December 1998, a VEBA was established and funded with $14 of Gulfstream funds for the 30 31 purpose of paying retiree claims. Gulfstream has supplemental benefit plans covering certain key executives. These plans provide benefits which supplement those provided by the other retirement plans. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease ---------------- ---------------- Effect on total of service and interest cost components $ 2 $ (2) Effect on accumulated postretirement benefit obligation $14 $(12)
For measurement purposes, a 7.5 percent annual rate of increase in the per capita cost of medicare ineligible employees' covered health care benefits was assumed for 1998. The rate was assumed to decrease annually by 0.75 percent to 5.0 percent and remain at that level thereafter. For medicare eligible employees, a 5.25 percent annual rate of increase in the per capita cost of health care benefits was assumed for 1998. The rate was assumed to decrease annually by 0.75 percent to 4.5 percent and remain at that level thereafter. Gulfstream sponsors two voluntary 401(k) investment plans which cover all eligible employees and are designed to enhance existing retirement plans. Gulfstream matches either 37.5 percent or 50.0 percent of the employee's contribution up to a maximum of four percent of the employee's eligible compensation. Gulfstream has an Incentive Compensation Plan which provides for payment of cash awards to officers and key employees based upon achievement of specific goals by the company and the participating employees. In each of the years ended 1998, 1997 and 1996, provisions of approximately $6 were charged against income related to the plan. Payouts are based entirely on the achievement of financial and business objectives. 31 32 T. BUSINESS SEGMENT INFORMATION Management has chosen to organize its business segments in accordance with several factors, including a combination of the nature of products and services offered, the nature of the production processes and the class of customer for the company's products. Operating segments are aggregated for reporting purposes consistent with these criteria. Management measures its segments' profit based primarily on operating earnings. As such, net interest and other income items have not been allocated to the company's segments. For a further description of the company's business segments, see Management's Discussion and Analysis of the Results of Operations and Financial Condition. Summary financial information for each of the company's segments follows:
NET SALES OPERATING EARNINGS SALES TO U.S. GOVERNMENT 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- Marine Systems* $2,529 $2,248 $2,332 $276 $227 $216 $2,519 $2,280 $2,316 Aerospace 2,428 1,904 1,064 373 229 51 135 59 29 Combat Systems* 1,272 1,387 1,026 166 179 140 1,165 1,371 996 Information Systems & Technology* 933 185 - 69 15 - 477 - - Other 236 242 223 34 26 (2) - - - ------- ------ ------ ---- ---- ---- ------ ------ ------ $ 7,398 $5,966 $4,645 $918 $676 $405 $4,296 $3,710 $3,341 ======= ====== ====== ==== ==== ==== ====== ====== ======
DEPRECIATION, DEPLETION IDENTIFIABLE ASSETS CAPITAL EXPENDITURES AND AMORTIZATION 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- Marine Systems* $1,266 $ 706 $ 806 $ 78 $ 28 $18 $ 35 $31 $40 Aerospace 1,570 1,399 1,291 28 30 18 35 33 27 Combat Systems* 923 645 336 18 13 14 27 22 12 Information Systems & Technology* 1,250 1,404 - 16 4 - 45 17 - Other 406 371 388 16 19 12 15 17 12 Corporate** 736 1,032 1,769 30 19 31 4 4 3 ------ ------ ------ ---- ---- ---- ---- ---- --- $6,151 $5,557 $4,590 $186 $113 $93 $161 $124 $94 ====== ====== ====== ==== ==== ==== ==== ==== ===
* During the first quarter of 1999, management realigned its information technology resource businesses, resulting in a different composition of reportable segments. Segment data for all years presented has been restated to give recognition to the 1999 composition of reportable segments. ** Corporate identifiable assets include cash and equivalents and marketable securities, deferred taxes, real estate held for development and net prepaid pension cost related to the company's commercial pension plans. 32 33 The following table presents revenues by geographic area of the location of the company's customers:
Year ended December 31 1998 1997 1996 ---- ---- ---- North America United States $ 6,386 $ 5,334 $ 4,322 Canada and Mexico 290 67 5 ----- ----- ----- Total North America 6,676 5,401 4,327 Asia/Pacific 280 236 95 Africa/Middle East 173 40 92 Europe 191 201 33 Latin America/Other 78 88 98 ------- ------- ------- Total $ 7,398 $ 5,966 $ 4,645 ======= ======= =======
U. QUARTERLY DATA (UNAUDITED)
COMMON STOCK -------------------------------- NET EARNINGS MARKET PRICE PER SHARE (a) RANGE NET OPERATING NET -------------- ----------- DIVIDENDS SALES EARNINGS EARNINGS BASIC DILUTED HIGH LOW DECLARED (b) ----------------------------------------------------------------------------------------------- 1998 4th Quarter $2,207 $255 $160 $.81 $.79 $62 $49 1/4 $.22 3rd Quarter 1,798 243 159 .79 .78 55 42 7/8 .22 2nd Quarter 1,735 227 148 .74 .73 48 3/8 40 1/4 .22 1st Quarter 1,658 193 122 .62 .61 45 3/4 41 25/32 .22 1997 4th Quarter $1,642 $194 $127 $.64 $.62 $44 7/16 $37 31/32 $.205 3rd Quarter 1,452 174 201 1.01 .99 45 3/4 37 .205 2nd Quarter 1,555 159 120 .60 .58 38 15/16 31 9/16 .205 1st Quarter 1,317 149 111 .55 .54 36 1/8 32 13/16 .205
Note: Quarterly data is based on a 13 week period. (a) The sum of the earnings per share for the four quarters in 1998 differs from the annual earnings per share due to the required method of computing the weighted average number of shares in interim periods. (b) Represents dividends declared per share on General Dynamics' common stock. 33 34 STATEMENT OF FINANCIAL RESPONSIBILITY To the Shareholders of General Dynamics Corporation: The management of General Dynamics Corporation is responsible for the supplemental consolidated financial statements and all related financial information contained in this report. The supplemental financial statements, which include amounts based on estimates and judgments, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The company maintains a system of internal accounting controls designed and intended to provide reasonable assurance that assets are safeguarded, that transactions are executed and recorded in accordance with management's authorization and that accountability for assets is maintained. An environment that establishes an appropriate level of control consciousness is maintained and monitored by management. An important element of the monitoring process is an internal audit program that independently assesses the effectiveness of the control environment. The Audit and Corporate Responsibility Committee of the board of directors, which is composed of four outside directors, meets periodically and, when appropriate, separately with the independent auditors, management and internal audit to review the activities of each. The supplemental financial statements have been audited by Arthur Andersen LLP, independent public accountants, whose report follows. /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
34 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To General Dynamics Corporation: We have audited the accompanying Consolidated Balance Sheet of General Dynamics Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related Consolidated Statements of Earnings, Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. We have also made a similar audit of the accompanying Supplemental Consolidated Balance Sheet of General Dynamics Corporation and subsidiaries at December 31, 1998 and 1997, and the related Supplemental Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1998. The supplemental consolidated statements give retroactive effect to the merger with Gulfstream Aerospace Corporation on July 30, 1999, which has been accounted for as a pooling of interests as described in Note C. These supplemental financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. We did not audit the financial statements of Gulfstream Aerospace Corporation included in the supplemental consolidated financial statements of General Dynamics Corporation, which statements reflect total assets and total revenues constituting 26 percent and 33 percent, respectively in 1998, and 26 percent and 32 percent, respectively, in 1997, of the related supplemental consolidated totals. These statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to amounts included for Gulfstream Aerospace Corporation, is based solely upon the report of the other auditors. 35 36 We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based upon our audit and the report of the other auditors, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and its subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, after giving retroactive effect to the merger with Gulfstream Aerospace Corporation as described in Note C, all in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - ------------------------- ARTHUR ANDERSEN LLP Washington, D.C. August 2, 1999 36 37 SELECTED FINANCIAL DATA (UNAUDITED) The following table presents summary selected historical financial data derived from the audited Supplemental Consolidated Financial Statements and other information of the company for each of the five years presented. The following information should be read in conjunction with Management's Discussion and Analysis of the Results of Operations and Financial Condition and the audited Supplemental Consolidated Financial Statements and related Notes thereto. (Dollars in millions, except per share and employee amounts)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SUMMARY OF OPERATIONS Net sales $ 7,398 $ 5,966 $ 4,645 $ 4,109 $ 3,960 Operating costs and expenses 6,480 5,290 4,240 3,753 3,596 Interest (expense) income, net (17) 16 51 42 2 Provision for income taxes 315 130 140 127 119 Earnings from continuing operations 589 559 317 276 247 Basic earnings per share from continuing operations 2.95 2.80 1.58 N/A (b) N/A (b) Diluted earnings per share from continuing operations 2.91 2.73 1.54 N/A (b) N/A (b) Cash dividends per common stock share (a) .88 .82 .82 .75 .70 FINANCIAL POSITION AT DECEMBER 31 Cash and equivalents and marketable securities $ 258 $ 748 $ 1,127 $ 1,318 $ 1,082 Property, plant and equipment, net 901 770 616 571 402 Total assets 6,151 5,557 4,590 4,103 3,375 Short- and long-term debt 530 645 438 184 218 Short- and long-term debt- finance operations 140 118 135 146 161 Shareholders' equity 2,415 2,008 1,525 1,784 1,505 Book value per share 12.12 10.02 7.62 9.30 7.83 OTHER INFORMATION Funded backlog $ 10,594 $ 9,578 $ 9,265 $ 7,165 $ 6,062 Total backlog 17,900 12,381 13,454 9,324 7,506 Shares outstanding at December 31 199.3 200.3 200.1 191.9 192.2 Basic weighted average shares outstanding 199.5 199.8 200.2 N/A (b) N/A (b) Diluted weighted average shares outstanding 202.2 204.5 205.5 N/A (b) N/A (b) Active employees at December 31: Total company 38,440 34,800 28,300 32,000 28,100 Excluding discontinued operations 38,440 34,800 28,300 31,100 25,200
(a) Represents dividends declared per share on General Dynamics' common stock. (b) Gulfstream completed its initial public offering during 1996. 37 EX-99.4 9 PRESS RELEASE 1 EXHIBIT 99.4 [GENERAL DYNAMICS LETTERHEAD] GENERAL DYNAMICS COMPLETES ACQUISITION OF GULFSTREAM AEROSPACE CORPORATION SHAREHOLDERS OVERWHELMINGLY APPROVE MERGER FALLS CHURCH, VA - General Dynamics (NYSE: GD) and Gulfstream Aerospace Corporation (NYSE: GAC) announced today that they have completed the merger of their two companies. The transaction creates a company of 38,000 employees and estimated 1999 sales of $8.2 billion, with leading market positions in business aviation, land and amphibious combat systems, shipbuilding and marine systems, and information systems. Shareholders of both companies voted overwhelmingly in favor of the transaction at separate meetings held this morning in New York and Falls Church, Virginia. The two companies had announced on May 17, 1999, their agreement for General Dynamics to acquire Gulfstream in a one-for-one stock swap. The value of the transaction is approximately $4.8 billion, based on General Dynamics' July 29, 1999, closing price of $66.125 per share. Gulfstream's final day of trading is today; it closed yesterday at $66.125 per share. General Dynamics expects to issue approximately 72.2 million shares of stock to complete the transaction. Gulfstream, a leading designer, developer, manufacturer and marketer of large cabin and ultra-long range business aircraft, is now a wholly owned subsidiary of General Dynamics. It will retain its name and will continue to be based in Savannah, Georgia. No major changes are planned for existing management, work force, operations or facilities. "This is a great deal for the shareholders of both companies, and we're proud to welcome Gulfstream to General Dynamics," said Nicholas D. Chabraja, General Dynamics chairman and (more) 1 2 GENERAL DYNAMICS chief executive officer. "The transaction is immediately and strongly accretive to General Dynamics' earnings and cash flow. Gulfstream is a solid and well-run business, and an excellent strategic fit. Quite simply, Gulfstream makes the best business aircraft in the world - and we believe that it will reach its full potential for significant growth as part of this company. Together, we will leverage our complementary technical, manufacturing and marketing expertise to continue to deliver outstanding financial performance in the years to come." Beginning in the third quarter, Gulfstream will record financial results as General Dynamics' fourth major business group, to be called Aerospace. The other three groups are Marine Systems, Combat Systems, and Information Systems and Technology. Gulfstream had 1998 revenues of $2.4 billion and earnings of $225.3 million; it ended the second quarter of 1999 with a $3.9 billion backlog of 122 aircraft. General Dynamics had 1998 sales of $5 billion and earnings of $542 million; it ended the second quarter of 1999 with a total backlog of $14.1 billion. (- 30 - ) 2 -----END PRIVACY-ENHANCED MESSAGE-----