Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
INTRODUCTION
General Dynamics Corporation (the company) is a Delaware corporation formed in 1952 as successor to the Electric Boat Company, now the company's Nuclear Submarines business. Consolidated Vultee Aircraft Corporation was merged into the company in 1954 and from it emerged the company's former Tactical Military Aircraft, Missile Systems and Space Launch Systems businesses. The Material Service Resources Company is the successor to the Material Service Corporation which was merged into the company in 1959. Chrysler Defense, Inc., now the company's Armored Vehicles business, was acquired in 1982. The Cessna Aircraft Company, formerly the company's General Aviation business, was acquired in 1985. In addition, the company operates other smaller businesses.
Prior to 1992, the businesses of the company included the following: Tactical Military Aircraft, Nuclear Submarines, Armored Vehicles, Space Launch Systems, Missile Systems and General Aviation. Over the past three years, the company has sold its Tactical Military Aircraft, Missile Systems, General Aviation and Space Launch Systems businesses, as well as certain other smaller businesses. The company's remaining continuing business segments are Nuclear Submarines, Armored Vehicles and Other. The Other business segment is composed of Freeman Energy Corporation (Freeman Energy), American Overseas Marine Corporation (AMSEA) and Patriot I, II and IV Shipping Corporations (Patriots). A general description of these businesses including products, properties and other related information follows. For further discussion of the business segments including financial information and backlog, as well as an overall discussion of the company's business environment, reference is made to Management's Discussion and Analysis of the Results of Operations and Financial Condition, appearing on pages 14 through 18 in the company's 1994 Shareholder Report, included in this Form 10-K - Annual Report as Exhibit 13, and incorporated herein by reference.
NUCLEAR SUBMARINES
The company's Electric Boat Division (Electric Boat) designs and builds nuclear submarines for the U.S. Navy. Electric Boat also performs overhaul and repair work on submarines as well as a broad range of engineering work including advanced research and technology development, systems and component design evaluation, prototype development and logistics support to the operating fleet. Certain components and subassemblies of the submarines, such as electronic equipment, are produced by other firms.
Electric Boat has contracts for construction of Los Angeles class attack submarines (688), Ohio class ballistic missile submarines (Trident) and Seawolf class attack submarines (Seawolf), all of which are currently under construction at its 96 acre shipyard on the Thames River at Groton, Connecticut. The shipyard, which contains a covered area in excess of 2.6 million square feet, is owned by the company. Electric Boat also produces modular submarine hull sections, components and subassemblies in leased facilities at Quonset Point, Rhode Island, and in company-owned facilities at Avenel, New Jersey. Approximately 45% of Electric Boat's property, plant and equipment was fully depreciated at December 31, 1994.
Electric Boat competed with Newport News Shipbuilding and Drydock Company (Newport News) for construction of the 688 and Seawolf submarines. Electric Boat is currently the sole-source producer of Trident and Seawolf submarines and the designer of the New Attack Submarine. For most engineering work, Electric Boat competes in a highly competitive environment with several smaller specialized firms in addition to Newport News.
ARMORED VEHICLES
The company's Land Systems Division (Land Systems) is the sole-source producer of main battle tanks for the U.S. government. Land Systems designs and manufactures the M1 Series Abrams Main Battle Tank for the U.S. Army and the U.S. Marine Corps. Land Systems also performs engineering and upgrade work as well as provides support for existing armored vehicles. Production of the M1A1, a version of the M1 that incorporates increased firepower, additional crew protection features, and improved armor, was initiated in 1985. Production of the M1A2, the latest version of the M1 which incorporates battlefield management systems aimed at providing improved fightability, as well as improved survivability of the tank's four crew members, was initiated in 1992. In addition to domestic sales, M1 tanks are being sold through the U.S. government to various foreign governments. Land Systems provides training in operation and maintenance and other logistic support on international sales.
Certain components of the M1 series tank, such as the engine and the transmission and final drive, are produced by other firms. Land Systems has bid and is currently bidding on other armored vehicle and related programs for the U.S.
government in competition primarily with the United Defense Limited Partnership, a partnership between FMC Corporation and Harsco Corporation. The current international market is characterized by intense competition for a limited number of business opportunities. The company, in cooperation with the U.S. government, has been successful in competitive bids for production contracts and related logistic support with Egypt, Saudi Arabia and Kuwait, but was unsuccessful on similar bids with the United Arab Emirates and Sweden.
Tank production is performed at a 1.6 million square foot plant on 369 acres in Lima, Ohio, and machining operations are performed at a 1.1 million square foot plant on 145 acres in Warren (Detroit), Michigan. Each is owned by the U.S. government and operated by Land Systems under a facilities contract. In support of these plants, Land Systems leases property in Scranton, Pennsylvania, and owns or leases property in a few locations in the Detroit area.
The company, teamed with Tadiran Ltd. of Israel, was selected during 1988 as the second-source producer of the Single Channel Ground and Airborne Radio System (SINCGARS). The company won 40% and 45% shares of the first two competitive bids under the SINCGARS program with ITT Corporation in 1994 and 1995, respectively. The company leases space in Tallahassee, Florida, to support SINCGARS production.
OTHER
Freeman Energy mines coal, the majority of which is sold in the spot market or under short-term contracts to a variety of customers. Freeman Energy's remaining coal production (approximately 45%) is sold under long-term contracts to utilities and industrial users located principally in the Midwest. Several of these long-term contracts have price adjustment clauses to reflect changes in certain costs of production. Freeman Energy operates three underground mines and one surface mine in Illinois, along with one surface mine in Kentucky. Coal preparation facilities and rail loading facilities are located at each mine sufficient for its output. Total production from Freeman Energy's mines was approximately 5 million tons in 1994 and 1993, and 4.5 million tons in 1992. In addition, Freeman Energy owns or leases rights to over 600 million tons of coal reserves in Illinois and Kentucky. Due to the commodity nature of the company's coal operations, the primary factors affecting competition are price and geographic service area. Freeman Energy's operations are not significantly affected by seasonal variations.
The 1990 Clean Air Act requires, among other things, a phased reduction in sulfur dioxide emissions by coal burning facilities over the next few years. Virtually all of the coal in Freeman Energy's Illinois basin mines has medium or high sulfur content. The impact of compliance with the Clean Air Act will be mitigated in the near-term by Freeman Energy's long-term contracts and through installation of pollution control devices by certain of Freeman Energy's major customers. The long-term impact of the Clean Air Act is not known.
AMSEA provides ship management services for five of the U.S. Navy's Maritime Prepositioning Ships (MPS) and ten of the U.S. Maritime Administration's Ready Reserve Force (RRF) ships. The MPS are under five-year contracts which expire in 1995 and 1996 but are renewable through the year 2011. The RRF ships are in the second year of five-year contracts for which the company competed with various other ship management providers. The MPS vessels operate worldwide and the RRF vessels are located on the east, gulf and west coasts of the United States. AMSEA's home office is in Quincy, Massachusetts.
Patriots are financing subsidiaries which lease liquefied natural gas tankers constructed by the company to unrelated third parties.
DISCONTINUED OPERATIONS
The company has sold or intends to sell certain businesses that are reported as discontinued operations in the company's financial statements. The remaining businesses are as follows:
The company's Convair Division is the sole-source producer of fuselages for the McDonnell Douglas Corporation (McDonnell Douglas) MD-11 wide body tri-jet aircraft. During 1994, the company signed an agreement to terminate its contract with McDonnell Douglas after delivery of the 166th shipset in early 1996. The Convair Division will seek no new business and will cease operations after completion of its obligations under the contract. Production work is performed in San Diego, California, in facilities owned by the company which are on land leased from the San Diego Port Authority.
Material Service Corporation (Material Service) is engaged in the quarrying and direct sale of aggregates (e.g. stone, sand and gravel), and the production and direct sale of ready mix concrete and other concrete products. Material Service's aggregate and concrete facilities and operations are located primarily in Illinois.
REAL ESTATE HELD FOR DEVELOPMENT
As part of the sale of businesses, certain related properties were retained by the company. These properties have been segregated on the Consolidated Balance Sheet as real estate held for development. The company has retained outside experts to support the development of plans which are intended to maximize the market value of these properties. These properties include 232 acres in Kearny Mesa and 2,420 acres in Sycamore Canyon, both of which are in the city of San Diego, California; 370 acres in Rancho Cucamonga, California; and 53 acres in Camden, Arkansas. Most of this property is undeveloped. The company owns 3.4 million square feet of building space on the aforementioned properties, as well as .6 million square feet of building space on land leased from the San Diego Port Authority. Certain of these facilities are currently being leased by the purchasers of the related sold businesses for what is expected to be a short transition period.
GENERAL INFORMATION
U. S. Government Contracts
The company's net sales to the U.S. government include Foreign Military Sales (FMS). FMS are sales to foreign governments through the U.S. government, whereby the company contracts with and receives payment from the U.S. government and the U.S. government assumes the risk of collection from the customer. U.S. government sales were as follows (excluding discontinued operations; dollars in millions):
All U.S. government contracts are terminable at the convenience of the U.S. government, as well as for default. Under contracts terminable at the convenience of the U.S. government, a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. Contracts which are terminated for default generally provide that the U.S. government only pays for the work it has accepted and may require the contractor to pay for the incremental cost of reprocurement and may hold the contractor liable for damages. In 1991, the U.S. Navy terminated the company's A-12 aircraft contract for default; the company is actively pursuing litigation against the U.S. government in the U.S. Court of Federal Claims in connection with the termination. For further discussion, see Note P to the Consolidated Financial Statements on page 29 of the 1994 Shareholder Report, included in this Form 10-K - Annual Report as Exhibit 13.
Companies engaged in supplying goods and services to the U.S. government are dependent on congressional appropriations and administrative allotment of funds, and may be affected by changes in U.S. government policies resulting from various military and political developments. U.S. government contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Often the contracts call for successful design and production of very complex and technologically advanced items.
Foreign Sales and Operations
The major portion of sales and operating earnings of the company for the past three years was derived from operations in the United States. Although the company purchases supplies from and subcontracts with foreign companies, it has no substantial operations in foreign countries. The majority of foreign sales are made as FMS through the U.S. government, but certain direct foreign sales are made of components and support services. Direct foreign sales were $32 million, $35 million and $42 million in 1994, 1993 and 1992, respectively.
Research and Development
Research and development activities in the Nuclear Submarines and Armored Vehicles segments are conducted principally under U.S. government contracts. These research efforts are generally either concerned with developing products for large systems development programs or performing work under research and development technology contracts. In addition, the defense businesses engage in independent research and development, of which a significant portion is recovered through overhead charges to U.S. government contracts.
The table below details expenditures for research and development (excluding discontinued operations; dollars in millions):
Supplies
Many items of equipment and components used in the production of the company's products are purchased from other manufacturers. The company is dependent upon suppliers and subcontractors for a large number of components and the ability of its suppliers and subcontractors to meet performance and quality specifications and delivery schedules. In some cases it is dependent on one or a few sources, either because of the specialized nature of a particular item or because of domestic preference requirements pursuant to which it operates on a given project.
All of the company's operations are dependent upon adequate supplies of certain raw materials, such as aluminum and steel, and on adequate supplies of fuel. Fuel or raw material shortages could also have an adverse effect on the company's suppliers, thus impairing their ability to honor their contractual commitments to the company. The company has not experienced serious shortages in any of the raw materials or fuel supplies that are necessary for its production programs.
Environmental Controls
Federal, state and local requirements relating to the discharge of materials into the environment and other factors affecting the environment have had and will continue to have an impact on the manufacturing operations of the company. Thus far, compliance with the requirements has been accomplished without material effect on the company's capital expenditures, earnings or competitive position. While it is expected that this will continue to be the case, the company cannot assess the possible effect of compliance with future requirements.
Patents
Numerous patents and patent applications are owned by the company and utilized in its development activities and manufacturing operations. In many cases, however, the U.S. government has an irrevocable, non-exclusive, royalty-free license, pursuant to which the government may use or authorize others to use the inventions covered by the patents. Pursuant to similar arrangements, the goverment may consent to the company's use of inventions covered by patents. While in the aggregate its patents and licenses are considered important in the operation of the company's business, engineering, production skills and experience are more important to the company than its patents or licenses.
Employees
At the end of 1994, the company had approximately 24,200 employees, of whom approximately 50% were covered by collective bargaining agreements with various unions, the most significant of which are the International Association of Machinists and Aerospace Workers, the Metal Trades Council of New London, Connecticut, the United Auto Workers Union, the Office and Professional Employees International Union and the United Mine Workers of America. During 1995, several collective bargaining agreements, which cover approximately one-half of the union represented work force, are scheduled to expire and are subject to negotiations with the respective unions, the most significant of which is the Metal Trades Council at Electric Boat.
ITEM 2.



ITEM 2. PROPERTIES
The information required for this item is included in Item 1 of this report.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The information in Note O to the Consolidated Financial Statements appearing on pages 28 and 29 of the 1994 Shareholder Report, included in this Form 10-K - Annual Report as Exhibit 13, is incorporated herein by reference in response to this item.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the company's Security Holders during the fourth quarter of the year ended December 31, 1994.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE COMPANY
The name, age, offices and positions held for the last five years of the company's executive officers who are not directors are as follows:
All executive officers of the company are elected annually. There are no family relationships, as defined, among any of the above executive officers. No executive officer of the company was selected pursuant to any arrangement or understanding between the officer and any other person.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
General Dynamics Corporation common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange.
The high and low market price of General Dynamics Corporation common stock and the cash dividends declared for each quarterly period within the two most recent fiscal years are included in Note T to the Consolidated Financial Statements appearing on page 32 of the company's 1994 Shareholder Report, included in this Form 10-K -- Annual Report as Exhibit 13, and incorporated herein by reference.
There were 23,935 common shareholders of record of General Dynamics Corporation common stock at December 31, 1994.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information appearing on pages 14 through 18 and 34 of the 1994 Shareholder Report, included in this Form 10-K -- Annual Report as Exhibit 13, is incorporated herein by reference in response to this item.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information appearing on pages 14 through 18 of the 1994 Shareholder Report, included in this Form 10-K -- Annual Report as Exhibit 13, is incorporated herein by reference in response to this item.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages 19 through 34 of the 1994 Shareholder Report, included in this Form 10-K -- Annual Report as Exhibit 13, is incorporated herein by reference in response to this item.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required to be set forth herein, Item 10, "Directors and Executive Officers of the Registrant," Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions," except for a list of the Executive Officers which is provided in Part I of this report, is included in the company's definitive Proxy Statement pursuant to Regulation 14A, which is incorporated herein by reference, to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 1994.
PART IV
ITEM 14.







ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Report of Independent Public Accountants and Consolidated Financial Statements appearing in the 1994 Shareholder report on the pages listed in the following index are included in this Form 10-K -- Annual Report as Exhibit 13 and are incorporated herein by reference.
2. Financial Statement Schedules
No schedules are submitted because they are either not applicable or not required, or because the required information is included in the financial statements or the notes thereto.
3. Exhibits--See Index on pages 9 and 10.
(b) Reports on Form 8-K
On December 12, 1994, the company reported to the Securities and Exchange Commission that on December 9, 1994, the United States Court of Federal Claims filed an order in the matter of McDonnell Douglas Corporation and General Dynamics Corporation vs. United States of America which vacated the U.S. Navy's termination of the company's A-12 contract for default, finding that the A-12 contract was not terminated for contractor default, but because the Office of the Secretary of Defense withdrew support and funding from the A-12.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GENERAL DYNAMICS CORPORATION
By: /s/ John W. Schwartz -------------------- John W. Schwartz Staff Vice President and Controller March 9, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 9, 1995, BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED, INCLUDING A MAJORITY OF THE DIRECTORS.
Nicholas D. Chabraja Director
James S. Crown Director
Lester Crown Director
Charles H. Goodman Director
Michael J. Mancuso Vice President and Chief Financial Officer (Principal Financial Officer)
James R. Mellor Chief Executive Officer and Director (Principal Executive Officer)
Allen E. Puckett Director
Bernard W. Rogers Director
John W. Schwartz Staff Vice President and Controller (Principal Accounting Officer)
Carlisle A. H. Trost Director
By: /s/ E. Alan Klobasa ------------------- E. Alan Klobasa Attorney-in-Fact
INDEX TO EXHIBITS
NOTES
(1) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1980, and filed with the Commission March 31, 1981, and incorporated herein by reference.
(2) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1982, and filed with the Commission March 30, 1983, and incorporated herein by reference.
(3) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1984, and filed with the Commission April 1, 1985, and incorporated herein by reference.
(4) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1986, and filed with the Commission March 31, 1987, and incorporated herein by reference.
(5) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1987, and filed with the Commission March 17, 1988, and incorporated herein by reference.
(6) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1988, and filed with the Commission March 23, 1989, and incorporated herein by reference.
(7) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1989, and filed with the Commission March 30, 1990, and incorporated herein by reference.
(8) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1990, and filed with the Commission March 29, 1991, and incorporated herein by reference.
(9) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1991, and filed with the Commission March 26, 1992, and incorporated herein by reference.
(10) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1992, and filed with the Commission March 30, 1993, and incorporated herein by reference.
(11) Filed as an exhibit to the company's annual report on Form 10-K for the year ending December 31, 1993, and filed with the Commission March 29, 1994, and incorporated herein by reference.