GENERAL DYNAMICS CORP — Annual Report 2002

Jun 28, 2002

11-K 1 w61915e11vk.htm FORM 11-K e11vk PAGEBREAK

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Form 11-K

ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-3671

A. Full title of the plan and the address of the plan, if different from the issuer named below:

GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

B. Name of the issuer of the securities held pursuant to the plan and the address of its principal executive office:

GENERAL DYNAMICS CORPORATION 3190 FAIRVIEW PARK DRIVE FALLS CHURCH, VIRGINIA 22042-4253

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN INDEX OF FINANCIAL STATEMENTS AND EXHIBITS

(a)	FINANCIAL STATEMENTS
	Report of Independent Public Accountants	1
	Statements of Net Assets Available for Benefits,
As of December 31, 2001 and 2000	3
	Statement of Changes in Net Assets Available for Benefits,
For the Year Ended December 31, 2001	4
	Notes to Financial Statements	5-12
(b)	SIGNATURE	13
(c)	EXHIBITS
	Exhibit 23.3 Consent of KPMG LLP
	Exhibit 99.7 Limitation of Recovery Against
Arthur Andersen LLP

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Independent Auditors’ Report

The Board of Directors General Dynamics Corporation:

We have audited the accompanying statement of net assets available for benefits of the General Dynamics Corporation Hourly Employee Savings and Stock Investment Plan (the Plan) as of December 31, 2001 and the related statement of changes in net assets available for benefits for the year then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2001 and the changes in net assets available for benefits for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP KPMG LLP

McLean, VA June 26, 2002

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THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP

Report of independent public accountants

To General Dynamics Corporation:

We have audited the accompanying statements of net assets available for benefits of the General Dynamics Corporation Hourly Savings and Stock Investment Plan (the Plan) as of December 31, 2000 and 1999, and the related statement of changes in net assets available for benefits for the year ended December 31, 2000. These financial statements and the schedules referred to below are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 net assets available for benefits of the Plan as of December 31, 2000 and 1999, and the changes in net assets available for benefits for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental statement of investments in master trust funds (Schedule I) and the schedule of reportable transactions (Schedule II) are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labors Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules are the responsibility of the Plan’s management. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP

Vienna, Virginia June 18, 2001

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Statements of Net Assets Available for Benefits

December 31, 2001 and 2000

	2001
Assets:
Investments in Master Trust at fair value (note 4)	$ 392,171,660	418,455,547
Investments in Master Trust at contract value (notes 4 and 8)	230,991,600	212,308,292
Participant Loans	12,050,814	11,977,438
Total assets	635,214,074	642,741,277
Liabilities:
Accrued administrative expenses	70,168	364,457
Net assets available for benefits	$ 635,143,906	642,376,820

See accompanying notes to financial statements.

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Statement of Changes in Net Assets Available for Benefits

Year ended December 31, 2001

Additions to net assets attributable to: — Participation in income of master trust — investment income (note 4)	$ 3,333,086
Contributions:
Participant	21,767,739
Employer	9,133,130
	30,900,869
Total additions	34,233,955
Deductions from net assets attributable to:
Benefits paid to participants	40,520,629
Administrative expenses	946,240
Total deductions	41,466,869
Net decrease	(7,232,914	)
Net assets available for benefits:
Beginning of year	642,376,820
End of year	$ 635,143,906

See accompanying notes to financial statements.

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

| (1) |
| --- |
| The following description of the General Dynamics Corporation Hourly
Employees Savings and Stock Investment Plan provides only general
information. Participants should refer to the Plan document for a more
complete description of the Plan’s provisions. |

(a)	General
	The General Dynamics Corporation Hourly Employees Savings and Stock
Investment Plan (the Plan) is a defined contribution plan covering
eligible hourly employees of General Dynamics Corporation (the Company).
The Plan document was restated effective January 1, 2001 to comply with
recent legislative changes. Substantially all employees of the Company
are eligible to participate except those covered by a collective
bargaining agreement. The Company is the Plan Sponsor and the Plan
Administrator.
(b)	Contributions
	Other than as noted below, participants may contribute from 1 to 10% of
base earnings up to $12.01 per hour and 1 to 6% of base earnings in
excess of $12.01 per hour up to the amount specified in the collective
bargaining agreement. Maximum contributions for represented participants
are determined by the applicable collective bargaining agreements. In
addition, participants at some locations may contribute another 1 to 4%
of base earnings up to the amount specified in the collective bargaining
agreement on an unmatched basis. Participants at Bath Iron Works,
Armament Systems, Defense Systems, Advanced Technology Systems,
Information Systems and UAW employees of General Dynamics Land Systems
(GDLS) may contribute 1 to 15% of their base earnings on a pre-tax
basis. Participants at Government Systems and Gulfstream Aerospace may
contribute 1 to 15% of their base earnings on a pre-tax, after-tax, or
combination basis.
	Most company matching contributions to the Plan are invested in Company
common stock. However, at certain locations, the Company match follows
the Participant’s election. Generally, participants that are eligible
for the Company matching contribution and invest 100% in the General
Dynamics Stock Fund receive a 100% Company matching contribution in the
Company’s common stock. Participants that are eligible for the Company
matching contribution but invest less than 100% in the General Dynamics
Stock Fund receive a 50% Company matching contribution in the Company’s
common stock. The matching contributions vary for participants at Bath
Iron Works, Armament Systems, Defense Systems, Advanced Technology
Systems and Information Systems.
(c)	Participant Accounts
	Each participant shall direct his or her contributions to be invested in
1% increments in various funds. Changes to investment elections can
be made according to rules set by the Plan Administrator. Each
participant’s account is credited with allocations of (a) the Company’s
contributions and (b) Plan earnings. Allocations are based on
participant account balances. The benefit to which a participant is
entitled is the benefit that can be provided from the participant’s
vested account.

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

(d)	Vesting
	Participants are eligible to participate in the Plan upon hire, and
their contributions are always 100% vested. Vesting in the Company’s
contribution portion of their accounts is based on years of credited
service. A participant is 100% vested after five years of credited
service. Generally, for participants from many of the Company’s
subsidiaries, contributions invested in the General Dynamics Stock Fund
must be maintained in that fund for five years before becoming eligible
for transfer to any other fund. Therefore, a portion of the balance in
the General Dynamics Stock Fund represents nonparticipant-directed
investments due to the match. With the exception of the General Dynamics
Stock Fund, all other investment funds are completely
participant-directed.
(e)	Participant Loans
	The Plan permits active participants and employed inactive participants
to borrow up to 50% of the vested amount in their accounts (as limited
by the Plan) and to repay the loan by regular payroll deductions over a
period of up to five years. Loans are issued at the prime rate of
interest.
(f)	Payment of Benefits
	On termination of service due to death, disability, or retirement, a
participant may elect to (a) receive a lump-sum amount equal to the
value of the participant’s vested interest in his or her account (b)
roll over the value of the participant’s vested interest in his or her
account into another qualified plan or (c) receive annual installments
over a specified period. Participants may also receive hardship
withdrawals in a lump-sum payment.
(g)	Forfeited Accounts
	Total forfeited non-vested accounts during 2001 totaled $66,102. These
amounts were used to reduce future employer contributions.

(2) Summary of Accounting Policies

(a)	Basis of Accounting
	The accompanying financial statements are prepared under the accrual
basis of accounting.
(b)	Investment Valuation and Income Recognition
	The Plan’s investments are stated at fair value using the quoted market
price of the underlying assets except for its fully benefit-responsive
investment contracts with insurance companies, which are valued at
contract value (see note 8). Loans are carried at cost, which
approximates fair value. Purchases and sales of securities are recorded
on a trade-date basis. Interest income is recorded on an accrual basis.
Dividends are recorded on the ex-dividend date.

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

(c)	Use of Estimates
	The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and changes therein, and disclosure of
contingent assets and liabilities. Actual results could differ from
those estimates.
(d)	Payment of Benefits
	Benefits are recorded when paid.
(e)	Reclassifications
	Certain prior year amounts have been reclassified to conform to the
current year presentation.

(3)	Tax Status
	The Internal Revenue Service (IRS) issued a favorable determination letter
on March 18, 1999, indicating that the Plan is a qualified profit-sharing
plan under Section 401(a) of the Internal Revenue Code (IRC). The trust
formed thereunder is exempt from Federal income tax under Section 501(a).
Although the Plan has been amended subsequent to the date of the latest
determination from the IRS, the Plan administrator and Plan’s tax counsel
believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the IRC.
(4)	Investments
	The Plan’s investments are held by the General Dynamics Corporation Savings
and Stock Investment Plan Master Trust (the Master Trust), which was
established for the investment of assets of the Plan and the General
Dynamics Corporation Savings and Stock Investment Plan (the Plans). Each
participating plan has an undivided interest in the Master Trust. The
Northern Trust Company, the Trustee, holds the assets of the Master Trust.
The record keepers are Hewitt Associates and Northern Trust Retirement
Consulting, LLC. At December 31, 2001 and 2000, the Plan’s interest in the
net assets of the Master Trust was approximately 16.9% and 17.2%,
respectively. Net assets and net participation in the income of the Master
Trust are allocated to the Plans according to their percentage interest in
the Master Trust.

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

The following table presents the reported value of investments for the Master Trust as of December 31, 2001 and 2000:

Guaranteed investment contracts	2001 — $ 1,372,946,375	1,262,564,006
General Dynamics Corporation common stock	1,217,794,358	1,174,658,230
Investments in registered investment companies	920,881,483	1,074,640,326
Investments in Corporate Bonds	206,661,368	175,350,050
Participant Loans	47,052,396	45,345,045
Cash and cash equivalents	3,158,526	6,382,608
Total	$ 3,768,494,506	3,738,940,265

The interests for each of the Plans participating in the Master Trust net investment assets at December 31, 2001 and 2000 were as follows:

| General Dynamics Corporation Savings and
Stock Investment Plan | 2001 — $ 3,132,935,404 | 3,093,836,134 |
| --- | --- | --- |
| General Dynamics Corporation Hourly Employees
Savings and Stock Investment Plan | 635,143,906 | 642,376,820 |
| Total | $ 3,768,079,310 | 3,736,212,954 |

Investment income (loss) for the Master Trust for the year ended December 31, 2001 is as follows:

Net investment gain in appreciation of General Dynamics Corporation common stock	29,130,403
Net investment gain in appreciation of Guaranteed investment contracts	21,366,464
Net investment gain in appreciation of Investments in Corporate Bonds	13,601,277
Net investment loss in depreciation of Investments in Registered Investment Companies	(115,279,033	)
Interest	66,348,057
Dividends	16,342,963
$	31,510,131

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

The interests of each of the Plans participating in the investment income in the Master Trust for the year ended December 31, 2001 were as follows:

| General Dynamics Corporation Savings and
Stock Investment Plan | $ |
| --- | --- |
| General Dynamics Corporation Hourly Employees
Savings and Stock Investment Plan | 3,333,086 |
| Total | $ 31,510,131 |

The investments of the Master Trust which represent five percent or more of the Plan’s net assets each year, were as follows:

	2001	2000
General Dynamics Corporation common stock	$ 1,217,794,358	$ 1,174,658,230
S&P 500 Stock Index Fund	743,555,410	888,995,598
Fixed Income Fund	1,372,218,765	1,234,294,095

(5)	Plan Termination
	Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contributions at any time and to
terminate the Plan subject to the provisions of ERISA. In the event the
Plan is terminated, each participant will automatically become vested in
the unvested Company contributions. Each participant will receive payments
based on the specific dollar amounts and shares of the Company’s common
stock in his or her account.
(6)	Plan Administration
	The Master Trust primarily pays administrative expenses, although employees
of the Company perform certain administrative functions, which are not
reimbursed by the Master Trust. Although the Company reimbursed no costs in
2001, the Plan document provides that the Company may reimburse these
costs. Total administrative expenses of the Master Trust for the year
ended December 31, 2001 were $5,566,122. Administrative expenses were
allocated to the Plan using the percentage of the Plan’s interest in the
net assets of the Master Trust.

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

| (7) |
| --- |
| The following is a reconciliation of net assets available for benefits as
reported in the financial statements at December 31, 2001 and 2000 to Form
5500: |

| Net assets available for benefits as reported in the
financial statements | 2001 — $ 635,143,906 | | 642,376,820 | |
| --- | --- | --- | --- | --- |
| Amount allocated to withdrawing participants | (504,261 | ) | (926,345 | ) |
| Net assets available for benefits as reported in the Form 5500 | $ 634,639,645 | | 641,450,475 | |

The following is a reconciliation of benefits paid to participants as reported in the financial statements for the year ended December 31, 2001, to Form 5500:

Benefits paid to participants as reported in the financial statements	$
Add: Amounts allocated to withdrawing participants at
December 31, 2001	504,261
Less: Amounts allocated to withdrawing participants at
December 31, 2000	(926,345	)
Benefits paid to participants as reported in the Form 5500	$ 40,098,545

| | Amounts allocated to withdrawing participants are recorded on the Form 5500
for benefit claims that have been processed and approved for payment prior
to December 31, 2001, but not yet paid as of that date. |
| --- | --- |
| (8) | Investment Contracts with Insurance Companies |
| | Most investments held by the Master Trust are recorded at quoted market
value as stated on public exchanges as of December 31, 2001 and 2000. The
Company values the guaranteed investment contracts (GICs) in the Fixed
Income Fund and Long Beach Prudential Fund in accordance with AICPA
Statement of Position No. 94-4, Reporting of Investment Contracts Held by
Health and Welfare Benefit Plans and Defined Contribution Pension Plans. As
of December 31, 2001 and 2000, the GICs included in the Master Trust are
reported at contract value because they have been determined to be fully
benefit responsive. (i.e., participants may direct the withdrawal or
transfer of all or a portion of their investment at contract value). There
are no reserves against contract value for credit risk of the contract
issuers or otherwise. The contract value of the GICs at December 31, 2001,
was $1,372,946,375 as compared to the fair value of $1,468,379,505. The
average yield and crediting interest rates ranged from 6.3% to 9.2% for
2001 and from 6.7% to 12.3% for 2000. |

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

(9)	Derivative Financial Instruments
	To reduce interest rate risk, the Master Trust has entered into U.S.
Treasury and Agency Bond futures contracts. These futures contracts serve
to match the price sensitivity and duration of the Master Trust assets with
the duration of various obligations of the Master Trust. A futures contract
is a contract to purchase U.S. Treasury or Agency Bonds, Notes or Bills at
a fixed price on a set date in the future, generally during the next three
to six months. The Master Trust pays or receives cash daily for changes in
market price of these instruments, with gains or losses reflected in
investment income. The total fair value of derivatives at December 31,
2001 and 2000 was $9,292,812 and $24,815,094, respectively, and is included
in Corporate Bonds.
(10)	Non-participant-directed investments
	Information about the net assets and the significant components of the
changes in net assets relating to the nonparticipant-directed investments
as of December 31, 2001 and 2000 and for the year ended December 31, 2001
is as follows:

General Dynamics Corporation common stock	2001 — $ 174,853,999	166,255,771
Change in net assets:
Participation in income of the Master Trust	$ 5,636,793
Participants’ contributions	11,074,229
Employer’s contributions	6,018,150
Distributions to withdrawn participants	(9,419,497	)
Interfund transfers	(4,711,447	)
Net increase	$ 8,598,228

(Continued)

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GENERAL DYNAMICS CORPORATION HOURLY EMPLOYEES SAVINGS AND STOCK INVESTMENT PLAN

Notes to Financial Statements

December 31, 2001 and 2000

| (11) |
| --- |
| The Plan may, at the discretion of the Plan’s participants or via the
Company match, invest through the Master Trust an unlimited amount of its
assets in common stock of the Company. The Master Trust held 14,996,339
and 14,963,736 shares of common stock of the Company as of December 31,
2001 and 2000, respectively. Dividends in the Master Trust on the
Company’s common stock were $16,342,963 for the year ended December 31,
2001. |

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.

GENERAL DYNAMICS CORPORATION
As Plan Administrator of the General Dynamics Corporation Hourly Employees Savings and Stock Investment Plan
By	/s/ JOHN W. SCHWARTZ John W. Schwartz Vice President and Controller

Dated: June 28, 2002

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