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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Schedule 14D-9
(Rule 14d-101)
SOLICITATION/RECOMMENDATION STATEMENT UNDER SECTION 14(d)(4) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Litton Industries, Inc.
(Name of Subject Company)
Litton Industries, Inc.
(Name of Person Filing Statement)
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Common Stock, $1.00 Par Value Per Share
(Including the Associated Preferred Stock Purchase Rights)
Series B $2 Cumulative Preferred Stock, $5.00 Par Value Per Share
(Title of Class of Securities)
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538021 10 6 (Common Stock)
538021 40 3 (Preferred Stock)
(CUSIP Number of Class of Securities)
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John E. Preston, Esq.
Senior Vice President and General Counsel
Litton Industries, Inc.
21240 Burbank Boulevard
Woodland Hills, California 91367-6675
(818) 598-5000
(Name, Address and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of the Person Filing Statement)
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Copy to:
Daniel A. Neff, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
(212) 403-1000
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[_]Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
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Item 1. Subject Company Information.
The name of the subject company is Litton Industries, Inc., a Delaware
corporation (the "Company"). The address of the Company's principal executive
offices is 21240 Burbank Boulevard, Woodland Hills, California 91367-6675. The
Company's telephone number at its principal executive offices is (818) 598-
5000.
The titles of the classes of equity securities to which this
Solicitation/Recommendation Statement on Schedule 14D-9 (together with any
Exhibits or Annexes hereto, this "Statement") relates are (i) the Common
Stock, par value $1.00 per share, of the Company (the "Common Stock"),
including the associated preferred stock purchase rights (the "Rights" and,
together with the Common Stock, the "Common Shares") issued pursuant to the
Rights Agreement, dated as of August 17, 1994, between the Company and The
Bank of New York, as Rights Agent, and (ii) the Series B $2 Cumulative
Preferred Stock, par value $5.00 per share, of the Company (the "Preferred
Shares").
As of December 31, 2000, there were 45,577,834 Common Shares outstanding
and 410,643 Preferred Shares outstanding.
Item 2. Identity and Background of Filing Person.
The filing person is the subject company. The Company's name, business
address and business telephone number are set forth in Item 1 above.
This Statement relates to the tender offer by LII Acquisition Corp.
("Purchaser"), a Delaware corporation and a wholly owned subsidiary of
Northrop Grumman Corporation ("Northrop Grumman"), a Delaware corporation, to
purchase all of the outstanding Common Shares at a purchase price of $80.00
per Common Share, net to the seller in cash and all of the outstanding
Preferred Shares at a purchase price of $35.00 per Preferred Share, net to the
seller in cash, upon the terms and subject to the conditions set forth in
Purchaser's Offer to Purchase, dated January 5, 2001, and in the related
Letters of Transmittal (which, together with any amendments or supplements
thereto, collectively constitute the "Offer"). The Offer is described in a
Tender Offer Statement on Schedule TO (as amended or supplemented from time to
time, the "Schedule TO"), filed by Purchaser with the Securities and Exchange
Commission on January 5, 2001.
The Offer is being made in accordance with the Agreement and Plan of
Merger, dated as of December 21, 2000, among Northrop Grumman, Purchaser and
the Company (the "Merger Agreement"). The Merger Agreement provides that,
subject to the satisfaction or waiver of certain conditions, following
completion of the Offer, and in accordance with the Delaware General
Corporation Law (the "DGCL"), Purchaser will be merged with and into the
Company (the "Merger"). On consummation of the Merger, the Company will
continue as the surviving corporation and will become a subsidiary of Northrop
Grumman. At the effective time of the Merger (the "Effective Time"), each
issued and outstanding Common Share (other than Common Shares owned by
Northrop Grumman, Purchaser, the Company or any of their respective
subsidiaries, and Common Shares held by stockholders who have perfected their
dissenters' rights of appraisal under Section 262 of the DGCL) will be
converted into the right to receive the same amount in cash per Common Share
that is paid pursuant to the Offer (the "Merger Consideration"). At the
Effective Time, each issued and outstanding Preferred Share will remain
outstanding, without change, as a share of the Series B $2 Cumulative
Preferred Stock, par value $5.00 per share, of the surviving corporation. As a
result, after the Merger, holders of Preferred Shares who do not tender their
Preferred Shares in the Offer will hold preferred stock in the surviving
subsidiary of Northrop Grumman.
The Schedule TO states that the principal offices of Northrop Grumman and
Purchaser are located at 1840 Century Park East, Los Angeles, California
90067.
Item 3. Past Contacts, Transactions, Negotiations and Agreements.
Certain contracts, agreements, arrangements or understandings between the
Company or its affiliates and certain of its directors and executive officers
are described in the Information Statement pursuant to Rule 14f-1
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under the Securities Exchange Act of 1934 (the "Information Statement") that
is attached as Annex B to this Statement and is incorporated herein by
reference. Except as set out in this Statement (including in the Exhibits
hereto and in Annex B hereto) or incorporated herein by reference, to the
knowledge of the Company, as of the date of this Statement there exists no
material agreement, arrangement or understanding or any actual or potential
conflict of interest between the Company or its affiliates and (1) the
Company's executive officers, directors or affiliates or (2) Purchaser or
Purchaser's executive officers, directors or affiliates.
The Confidentiality Agreement.
On June 23, 2000, the Company and Northrop Grumman entered into a
confidentiality agreement, in connection with their mutual interest in
exploring a transaction involving a potential form of teaming arrangement,
joint endeavor or other combination. The summary of that agreement, contained
in Section 12 of the Offer to Purchase, dated January 5, 2001, which is filed
as Exhibit (a)(1)(i) to the Schedule TO and which is being mailed to
stockholders together with this Statement, is incorporated herein by
reference.
The Merger Agreement.
The summary of the Merger Agreement and the statement of the conditions of
the Offer contained in Sections 12 and 16, respectively, of the Offer to
Purchase, dated January 5, 2001, are incorporated herein by reference. The
summary and description of the Merger Agreement is qualified in its entirety
by reference to the Merger Agreement, which has been filed as Exhibit (e)(1)
hereto and is incorporated herein by reference.
Effects of the Offer and the Merger Under Company Stock Plans and Agreements
Between the Company and its Executive Officers.
Certain members of the Company's management, including the Company's Chief
Executive Officer and the Company's President, who are also members of the
Board of Directors of the Company (the "Board"), have interests in the
transactions contemplated by the Merger Agreement that are in addition to
their interests as Company stockholders generally. As described below,
consummation of the Offer will constitute a change in control of the Company
for purposes of determining the entitlement of the executive officers of the
Company to certain severance and other benefits. Furthermore, Dr. Sugar,
currently the Company's President and Chief Operating Officer, will become a
Northrop Grumman Corporate Vice President, and President and Chief Executive
Officer of the new Litton subsidiary of Northrop Grumman. Dr. Sugar will also
be nominated to Northrop Grumman's Board of Directors effective as of the
closing of the Merger.
The Board was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated
thereby.
Stock-based Rights. All unvested options to purchase Common Shares then
held by executive officers will vest upon consummation of the Offer. Upon
consummation of the proposed Merger, each outstanding option which is then
vested, including all options held by the Company's executive officers, will
be converted into the right to receive a cash payment equal to the product of
(i) the excess of the Merger Consideration over the per share exercise price
of the option times (ii) the number of shares subject to the option, unless
the holder has previously elected to have the option converted into an option
to acquire shares of Northrop Grumman. Each outstanding option which is
unvested at the effective time of the Merger will be converted into an option
to purchase shares of Northrop Grumman common stock.
Upon consummation of the Offer, all restrictions will lapse with respect to
previously granted restricted Common Shares, including those held by the
Company's executive officers, and all deferred stock units will become
immediately due and payable.
As a result of the consummation of the Offer and the Merger, in respect of
their options, deferred stock units and restricted stock, for which vesting
will be accelerated by consummation of the Offer, the directors and executive
officers will receive the following cash payments, unless they elect to have
some or all of their options converted into Northrop Grumman options: Mr.
Brown, $7,770,959, Dr. Sugar, $17,627,758, Mr. Steuert,
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$3,914,423, Mr. St. Pe, $2,305,887, Mr. Halamandaris, $2,691,020, and all
remaining executive officers and directors, as a group, $11,850,821.
Change of Control Agreements. The Company is party to Change of Control
Employment Agreements with 53 of its executives, including all its executive
officers. The parties to the Merger Agreement acknowledged and agreed that the
consummation of the Offer will constitute a "change of control" under these
agreements. Accordingly, upon termination of employment by the executive
officer for "good reason" or "without cause" by the Company within three years
following the change of control, or, if the executive officer terminates
employment for any reason during the 30-day period following the first
anniversary of the change of control, the executive officer will be entitled
to three times the executive officer's base salary and highest bonus award of
any type, including, without limitation, any annual or signing bonus paid
during the last three full fiscal years, continuation of welfare benefits for
three years, three years of service credit under the Company's pension plan
and, if applicable, the Supplemental Executive Retirement Plan, and provision
of certain other benefits in accordance with the Company's plans and
practices. On December 21, 2000, the Compensation and Selection Committee of
the Board (the "Committee") specified that the following comprise these other
benefits:
. Incentive Loan Program;
. Use of a company automobile by the executive officer without cost, with
a tax gross-up, for three years following termination;
. Executive Financial Planning for an additional year following
termination;
. Directors' and Officers' Liability Insurance for six years following
termination;
. Continued participation in the Hyatt Legal Plan for three years
following termination; and
. Educational assistance programs for three years following termination.
In addition, the Compensation and Selection Committee of the Board
specified that the welfare plan benefits that continue under the agreements
during the three-year period following termination include:
. Supplemental Medical Insurance Plan for Key Executive Employees;
. Executive Survivor Benefit Plan; and
. Executive Physical Plan.
Under the terms of the Change of Control Employment Agreements, the Company
will also pay any legal fees and expenses incurred by the executive officer in
connection with a dispute arising out of the subject matter of the agreement.
If any payment received under an executive officer's Change of Control
Employment Agreement or otherwise is subjected to the excise tax imposed under
Section 4999 of the Internal Revenue Code (the "Code"), the executive officer
is entitled to an additional payment to restore the executive officer to the
same after-tax position that the executive officer would have been in if the
excise tax had not been imposed.
On December 21, 2000, Dr. Sugar's Change of Control Employment Agreement,
dated June 21, 2000, was modified to clarify the intent of both parties that
Dr. Sugar's letter agreement, dated June 21, 2000, was not to be superseded by
his Change of Control Employment Agreement.
It is estimated that the total maximum amount of cash severance payable to
each executive officer under these agreements, not including any excise tax
gross-up, would be: $6,188,052 for Mr. Brown, $5,000,000 for Dr. Sugar,
$3,084,869 for Mr. Steuert, $2,997,540 for Mr. St. Pe, $3,366,800 for Mr.
Halamandaris, and $16,128,160 for all remaining executive officers as a group.
Employment Agreement between Northrop Grumman and Dr. Sugar. On December
21, 2000, Northrop Grumman entered into a letter agreement with Dr. Sugar
pursuant to which Dr. Sugar will serve as Corporate Vice President of Northrop
Grumman, President and Chief Executive Officer of the Litton subsidiary of
Northrop Grumman, and a member of the Northrop Grumman Board of Directors
effective upon the closing date of the
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Merger, provided that the Merger closes on or before December 31, 2001. In
general, under the terms of this letter agreement, Northrop Grumman assumes
the obligations of the Company under Dr. Sugar's Change of Control Employment
Agreement and his letter agreement dated June 21, 2000. However, Dr. Sugar's
rights under those agreements are modified in two respects. First, Dr. Sugar
will not be entitled to severance benefits under those agreements if he
terminates his employment during the employment period commencing on the
closing date of the Merger and ending on the later of (i) the date six months
following the closing date or (ii) December 31, 2001, although he will will
retain the right to receive severence benefits if he terminates his employment
after that employment period on the basis of an event that occurs during that
employment period that constitutes "good reason" under his Change of Control
Employment Agreement or a "constructive termination without cause" prior to
December 31, 2001 under the letter agreement dated June 21, 2000. Second,
during the 30-day period following such employment period, Dr. Sugar will have
the right to voluntarily terminate his employment for any reason and such
termination will be considered a termination for "good reason" under his
Change of Control Employment Agreement and a "constructive termination without
cause" prior to December 31, 2001 under the letter agreement dated June 21,
2000. The letter agreement affirms that in the event of any such termination,
Dr. Sugar will be entitled to a total severance benefit under those agreements
equal to the greater of (i) $5,000,000 or (ii) three times the sum of his
annual base salary and highest bonus award during the last three full fiscal
years. In addition, the letter agreement will not affect Dr. Sugar's right to
accelerated vesting of stock options or restricted stock upon the consummation
of the Offer.
Restoration Plan and Trust. The Company's Restoration Plan, an unfunded,
nonqualified retirement plan, restores Company-provided retirement benefits
and Financial Security and Savings Program ("FSSP") matching
contributions, which an FSSP participant could have received if it were not
for the limitations prescribed by the Code. Upon consummation of the Offer,
benefits under this plan will vest in full, all participants will become
immediately eligible for the commencement of payment of benefits, a grantor
trust will be established by January 31, 2001, and the Committee will be given
the authority to decide whether benefits payable under the plan should be paid
in a present value lump sum.
Non-Employee Director Deferred Compensation Plan. Under the Company's Non-
Employee Director Deferred Compensation Plan, non-employee directors may defer
annual retainers and meeting fees in the form of units of Common Shares or
stock options. Non-employee directors may also elect to defer compensation in
the form of cash in an interest bearing account. Upon the consummation of the
Offer, each director's account will be immediately due and payable in a lump
sum.
Additional Participants in the Executive Medical Plan. On December 21,
2000, the Committee approved the addition of two executive officers as
participants in the Executive Medical Plan. The approximate cost of these
additional executive officers will be $105,840.
Amended and Restated Supplemental Executive Retirement Plan. The Company's
Supplemental Executive Retirement Plan (or "SERP") is an unfunded,
nonqualified defined benefit retirement plan that provides certain key
employees of the Company with supplemental retirement benefits. Upon
consummation of the Offer, the following features of the plan will be
triggered:
. No additional participants may be designated under the plan;
. Each active participant will be vested regardless of years of service or
age and there will be a waiver of all conditions concerning eligibility
for payment of a retirement benefit that requires (i) filing of
elections, (ii) compliance with non-competition agreements, (iii)
satisfaction of any other terms or conditions or the application of any
benefit reductions, and (iv) termination of employment with the Company
in order to begin receiving retirement benefits;
. Within ten days after the consummation of the Offer, the Company will be
required to fund a grantor trust for benefits under the plan;
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. So long as a claim is not frivolous, the Company will be responsible for
all legal fees incurred in connection with a claim for benefits under
the plan; and
. Any amendment, termination or suspension of the plan will require
consent of 85% of participants.
On December 21, 2000, the Committee amended the definition of "average
compensation" used to calculate SERP benefits to provide that, in the event of
a change of control, "average compensation" will be the greater of (i) the
participant's highest annual compensation during the past ten years (or, if a
participant has not been employed by the Company for an entire year, the
annualized amount of base pay plus incentive compensation), or (ii) the
participant's annualized base pay plus maximum targeted incentive compensation
for the calendar year in which a change of control occurs.
On December 21, 2000, the Committee approved the addition of three
executive officers as participants in the SERP, effective immediately prior to
the signing of the Merger Agreement.
As a result of the foregoing, the Company's executive officers will become
entitled to an immediate lump-sum payment of their retirement benefits under
this plan, upon consummation of the Offer. The total benefits, and the
portions representing the enhanced value resulting from consummation of the
Offer, are as follows: $11,663,095 and $7,977,381 for Mr. Brown, $3,051,881
and $3,051,881 for Dr. Sugar, $6,050,411 and $6,050,411 for Mr. Steuert,
$3,878,564 and $2,003,859 for Mr. St. Pe, $4,223,506 and $2,572,463 for
Mr. Halamandaris and $15,177,982 and $12,556,312 for all other executive
officers.
Approval of Certain Threshold, Commitment and Maximum Awards under the 2001
Annual Incentive Plan and 2001 Special Cash Incentive Plan for Ronald D.
Sugar. The 2001 Annual Incentive Plan provides annual awards to designated
participants, including executive officers, upon achievement of certain
financial performance objectives of the Company, and individual performance
objectives, in certain instances. Absent a change of control, individual
awards will equal a specified percentage of base pay as of July 31, 2001,
depending upon whether the performance reaches threshold, commitment or
maximum levels; except that no individual may receive an award in excess of $2
million. Under the plan, upon a change of control of the Company, including
consummation of the Offer, awards will be paid to participants immediately. On
December 21, 2000, the Committee determined that upon consummation of the
Offer, corporate performance for fiscal year 2001 will be deemed to be
achieved at the maximum level. Therefore, if the Offer is consummated before
the end of fiscal year 2001, awards under this plan will be payable to the
plan's Corporate participants, including executive officers, at the maximum
percentages of base salary, without pro-ration, upon consummation of the
Offer. If the Offer has not been consummated before the end of fiscal year
2001, awards will be payable at the end of the fiscal year at the maximum
level. In addition, the Committee determined that awards for Group and
Division participants (except for participants from the Advanced Electronics
Group) will be increased to 125% of the level earned, provided performance
achieves the commitment level, and will remain payable without pro-ration at
the end of the fiscal year, except that no award may exceed the maximum level.
On December 8, in connection with the proposed sale of the Advanced
Electronics Group, the Committee determined that awards for participants from
the Advanced Electronics Group will be increased to 150% of the level earned,
provided performance reaches the threshold level, and will be payable, on a
pro rata basis, at the end of the fiscal year. The maximum annual bonuses
payable to the executive officers pursuant to this plan are as follows:
$1,237,610 for Mr. Brown, $775,008 for Dr. Sugar, $571,272 for Mr. Steuert,
$555,100 for Mr. St. Pe, $731,913 for Mr. Halamandaris and $2,863,989 for all
other executive officers.
The 2001 Special Cash Incentive Plan for Ronald D. Sugar was established in
accordance with his letter agreement dated June 21, 2000 and was approved at
the September 20, 2000 meeting of the Committee. On December 21, 2000, the
Committee determined that Dr. Sugar has achieved maximum performance as
described in the plan. As a result, he will be entitled to a bonus of $857,963
upon the earlier of the consummation of the Offer or July 31, 2001.
Retirement Arrangements for Certain Executive Officers. On December 21,
2000, the Committee approved retirement benefit enhancements for Mr. Brown and
one other executive officer. These enhancements provide
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each executive officer retirement benefits that equal those that he would have
enjoyed had he continued to work for the Company until the attainment of age
65. For this benefit, the Committee assumed that the salaries of Mr. Brown and
the other executive officer would increase 7% per year. The Committee also
assumed that Mr. Brown and the other executive officer would receive a maximum
bonus award for compensation purposes. The cost of these increased benefits
will be approximately $6,114,859. The Committee also resolved that Mr. Brown
and the other executive officer will participate in the Executive Medical
Program for life. Finally, the Committee resolved that Mr. Brown and the other
executive officer will participate as active employees in the Executive Life
Insurance Program until each attains age 65. The current benefit payable to
Mr. Brown and the other executive under the Executive Life Insurance Program
is four times salary until they attain age 65 and one times salary for five
years thereafter. When Mr. Brown and the other executive officer attain age
70, the benefit payable will decrease to $100,000.
Employee Benefits. The Merger Agreement provides that Northrop Grumman will
not demand repayment of loans currently outstanding under the Company's
Incentive Loan Program before December 31, 2001. As of October 27, 2000, Mr.
Brown, Dr. Sugar, Mr. Halamandaris, and Mr. Steuert, together with four other
executive officers, had loan balances outstanding under this program.
The Merger Agreement also provides that Northrop Grumman will assume and
honor the Company's commitments to provide lifetime medical benefits under the
Company's Executive Medical Plan to Mr. Brown, another executive officer and
two directors and their respective spouses.
The Merger Agreement further provides that Northrop Grumman will continue
the executive life insurance policies as in effect on December 21, 2000 for
the remaining lifetime of certain retired Company executives, including two
who currently serve as directors.
Director and Officer Indemnification; Insurance.
The Merger Agreement provides that Northrop Grumman and the surviving
corporation will jointly and severally indemnify to the fullest extent of the
law all current and former officers and directors of the Company and its
subsidiaries against (i) all losses, claims, damages, costs, expenses
(including counsel fees and expenses), settlement payments or liabilities
arising out of any claim or proceeding based on the fact that any such person
was a director or officer of the Company or its subsidiaries and (ii) all
liabilities arising out of the Merger Agreement and the transactions
contemplated by it. The Merger Agreement further provides that the provisions
of the certificate of incorporation and bylaws of the surviving corporation
shall be at least as favorable to indemnified officers and directors as the
Company's current certificate and bylaws. The Merger Agreement also provides
that, for six years after the Effective Time, Northrop Grumman will maintain
directors' and officers' liability insurance on coverage terms at least as
favorable as the insurance provided by the Company to its officers and
directors, provided that the premiums for such insurance do not exceed 300% of
the insurance premiums currently paid by the Company.
Item 4. The Solicitation or Recommendation.
(a) Recommendation of the Board.
At a meeting held on December 21, 2000, the Board determined that the terms
of the Offer and the Merger are advisable, fair to, and in the best interests
of, the common stockholders of the Company. At this meeting, the Board
unanimously approved the Merger Agreement, the Offer, the Merger and the other
transactions contemplated by the Merger Agreement, and unanimously approved
the Merger Agreement for purposes of Section 203 of the DGCL.
Your Board unanimously recommends that common stockholders accept the Offer
and tender their Common Shares in the Offer.
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Neither the Company nor the Board makes any recommendation to any
stockholder as to whether to tender or to refrain from tendering Preferred
Shares. Each stockholder must make his or her own decision whether to tender
Preferred Shares. The Offer gives stockholders who are considering a sale of
all or part of their Preferred Shares the opportunity to sell such Preferred
Shares for a higher price than that available in the open market immediately
prior to the announcement of the Offer and without the usual transaction costs
associated with market sales. Holders of Preferred Shares should also consider
the possible effects of the Offer on the market for Preferred Shares, as
described in Section 14 of the Offer to Purchase. No director or officer owns
any Preferred Shares.
A letter to the Company's stockholders communicating the Board's
recommendation and a press release announcing the execution of the Merger
Agreement are filed herewith as Exhibits (a)(2)(i) and (a)(2)(iii),
respectively, and are incorporated herein by reference.
(b) (i) Background of the Offer; Contacts with Northrop Grumman.
On March 16, 2000, the Company's management presented its annual review of
strategic alternatives to the Board at a regularly scheduled meeting. The
review included an overview of the Company's strategic plan and several
alternative strategies, including potential acquisitions, divestitures and
mergers. The Board requested that management continue its analyses of
strategic alternatives for further discussion at the May Board meeting.
On May 18, the Board held a regular meeting at which the Company's
management presented additional analyses of strategic alternatives. The
presentation included a review of the potential divestiture of the Company's
Advanced Electronics Group, as well as other alternatives, including a
potential merger with Northrop Grumman, which was identified in light of
discussions and conversations in which representatives from the two companies
had engaged at times during the prior several years. Northrop Grumman was also
identified as one of the likely buyers of the Advanced Electronics Group.
Following the May Board meeting, the Company's management, as part of its
exploration of strategic alternatives to the potential sale of the Advanced
Electronics Group, initiated contacts with Northrop Grumman regarding
potential areas of mutual strategic interest.
On June 23, the Company and Northrop Grumman entered into a confidentiality
agreement in connection with their mutual interest in exploring a transaction
involving a potential form of teaming arrangement, joint endeavor or other
combination.
On July 19, the Company's management and Northrop Grumman's management met
to provide each other with an overview of their respective companies and to
discuss potential forms of combination.
On September 14, Mr. Brown and Mr. Kresa discussed a potential combination
of Northrop Grumman and the Company. Mr. Kresa proposed a potential
combination in which the Company's stockholders would receive a value equal to
0.70 shares of Northrop Grumman common stock for each Common Share, consisting
of 80% Northrop Grumman common stock and 20% cash, and indicated that there
could be flexibility regarding the cash and stock percentages.
On September 21, the Board held a regularly scheduled meeting. At that
meeting, Mr. Brown briefly informed the Board of his discussion with Mr.
Kresa. The Board supported management's position that the Company should not
pursue Mr. Kresa's proposal.
On October 19, the Board held a regular meeting at which the Company's
management reviewed strategic alternatives, including the potential sale of
the Advanced Electronics Group. The Board directed the Company's management to
proceed with actions to explore the sale of the Advanced Electronics Group.
On October 20, the Company announced that the Board had authorized the
management to explore the sale of the Advanced Electronics Group.
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On October 20, Mr. Kresa sent a letter to Mr. Brown stating that, subject
to confirmatory due diligence, Northrop Grumman was prepared to acquire the
Company for a value equal to 0.70 shares of Northrop Grumman common stock for
each Common Share, with 80% of the consideration to be paid in Northrop
Grumman common stock and 20% to be paid in cash. This offer represented a
price of $60.725 per Common Share, based on Northrop Grumman's closing share
price that day of $86.75. Mr. Kresa's letter stated that such a transaction
would represent a 24% premium over the Company's closing price on October 20,
and a 46% premium over Company's closing price on September 13 (the day before
discussions between Mr. Kresa and Mr. Brown took place). Mr. Kresa's letter
also stated that the strategic sale by the Company of the Advanced Electronics
Group would be in conflict with Northrop Grumman's plans for the combined
company.
On October 25, Mr. Brown informed Mr. Kresa that he would discuss Mr.
Kresa's October 20 proposal with the Board, but that it was Mr. Brown's view
that the proposal was essentially the same as the proposal Mr. Kresa
communicated in September, which had already been rejected.
On October 31, during a telephone call, Mr. Kresa and Mr. Brown again
discussed the possibility of a business combination between the Company and
Northrop Grumman. Mr. Brown made three principal points. First, he highlighted
the "hidden value" of certain aspects of the Company's business that the Board
did not feel were properly reflected in the Company's share price, including
the potential recovery in its litigation against Honeywell and the
extraordinary growth potential of the Electronic Components and Materials
business. Second, Mr. Brown explained the strategic reasoning behind the
Company's contemplated divestiture of the Advanced Electronics Group. Third,
Mr. Brown emphasized that the Board believed that Northrop Grumman's proposal,
as set out in Mr. Kresa's letter of October 20 was inadequate in terms of the
value it placed on the Company.
On November 2, in response to this discussion, Mr. Kresa sent another
letter to Mr. Brown stating that Northrop Grumman was willing to entertain
transaction structures whereby the Company's stockholders would remain the
primary beneficiaries of the Honeywell litigation and the growing Commercial
Electronics business. Mr. Kresa also reiterated that the sale of the Advanced
Electronics Group was in conflict with Northrop Grumman's plans for the
combined company and urged the Company to suspend the sale process until the
Company and Northrop Grumman had the opportunity to complete their mutual
consideration of a transaction. Mr. Kresa further stated that Northrop Grumman
had reexamined its October 19 proposal and had decided to alter its proposal,
subject to confirmatory due diligence, to reflect a value for the Company
equal to 0.75 shares of Northrop common stock for each Common Share, with 50%
of the consideration to be paid in Northrop Grumman common stock and 50% to be
paid in cash. The revised proposal also contemplated providing to the
Company's common stockholders additional value to be derived from the
Honeywell litigation and the Commercial Electronics business. This proposal
represented a price of $61.6875 per Common Share, based on Northrop Grumman's
closing share price that day of $82.25, plus the value of any interest, which
had not been defined, to be retained in the Honeywell litigation and the
Commercial Electronics business.
On November 3, the Board held a special meeting to review the Company's
strategic plan, and its related assumptions and risks, as well as alternatives
to the strategic plan including the potential sale of the Advanced Electronics
Group, the sale of other parts of the Company and the sale of the entire
Company. At the meeting the Board approved proceeding with the sale of the
Advanced Electronics Group. The consensus of the Board was that management
continue discussions with Northrop Grumman concerning Northrop Grumman's
interest in a business combination with the Company. In this regard the Board
noted that Northrop Grumman had exhibited a high degree of interest in a
business combination with the Company and had demonstrated flexibility in
terms of potential transaction structures and pricing, but had not proposed a
transaction which the Board considered attractive. The Board did not want to
preclude the possibility that Northrop Grumman might ultimately propose a
transaction offering compelling value for the Company's stockholders.
On November 6, the Company formally announced its decision to sell its
Advanced Electronics Group.
On November 8, the Company signed an engagement letter with Merrill Lynch &
Co. ("Merrill Lynch") whereby Merrill Lynch agreed to advise the Company in
the event a business combination with Northrop
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Grumman were to be negotiated. For the terms of that engagement letter, see
Item 5--Persons/Assets Retained, Employed, Compensated or Used.
On November 9 and 10, the Company's management met with Northrop Grumman's
management and informed it that, in order for any business combination
proposal to cause the Company to forego its planned sale of the Advanced
Electronics Group and its intention to continue its operations in accordance
with the Company's strategic plan, the proposed transaction would have to
offer values consistent with stockholder interest and would have to properly
value each of the business segments and assets of the Company. The Company's
management again advised that the proposal set forth in the November 2 letter
did not meet these requirements.
On November 29, Mr. Kresa sent another letter to Mr. Brown outlining a
revised proposal to acquire the Company. Mr. Kresa stated that Northrop
Grumman was prepared to acquire 100% of the Common Shares in one of two
potential transactions, and included a draft merger agreement for each
transaction. The first transaction contemplated exchanging each Common Share
for a value equal to 0.75 of a share of Northrop Grumman common stock with 50%
to be paid in Northrop Grumman common stock and 50% to be paid in cash, and a
contingent value instrument structured to provide the Company's common
stockholders with 75% of the net after-tax recovery in the pending Honeywell
and fiber-optic litigation and between 40% and 60% of the net after-tax value
of the Electronic Components and Materials business achieved within the five-
year period following the closing of the transaction, depending on the values
achieved on a pre-tax basis. Not including the value of the contingent value
instrument, this first transaction represented a price of $63.1875 per Common
Share, based on Northrop Grumman's closing price of $84.25. The second
transaction consisted of $72.00 in cash for each Common Share and did not
include a contingent value instrument. The financing for the alternative
transactions would be provided from Northrop Grumman internally available
funds as well as existing lending sources.
On December 1, the Board held a special telephonic meeting to discuss the
terms proposed by Northrop Grumman on November 29. Based on the presentations
and discussions, the Board concluded that only an all cash offer would be
acceptable, and that the $72.00 price contained in the November 29 proposal
for an all cash transaction was inadequate. Also at the meeting, the Company's
outside legal advisors advised the Board with respect to its fiduciary duties.
The Board authorized the Company's management and representatives from Merrill
Lynch to continue discussions with Northrop Grumman.
On December 4, 5 and 11, representatives from Merrill Lynch delivered
summary, publicly available offering memoranda data relating to the Advanced
Electronics Group to selected potential acquirers of the Advanced Electronics
Group.
On December 8, the Board held a regular meeting at which the Company's
management and representatives from Merrill Lynch updated the Board with
respect to discussions with Northrop Grumman and other strategic alternatives.
Representatives from Merrill Lynch reviewed their report dated December 8
which set forth the historical stock price trading ranges and volume for the
Company, comparable valuations for publicly traded aerospace and defense
companies and comparable valuations for recent aerospace and defense
transactions. The report also included several valuation ranges for the
Company based on various valuation methodologies. These included a range of
values based on comparable trading and transaction valuations, present values
of strategic plan cash flows and projected stock prices, and pre-tax and
after-tax sum-of-the-parts valuations. The Board authorized the Company's
management and representatives from Merrill Lynch to continue discussions with
Northrop Grumman.
On December 12 and 14, Mr. Steuert met with Albert F. Meyers, Corporate
Vice President and Treasurer of Northrop Grumman, during which they discussed
potential synergies which could be achieved in a business combination.
On December 14, Mr. Brown had conversations with Mr. Kresa. Mr. Brown
indicated that, if Northrop Grumman was prepared to offer $80.00 per Common
Share in cash for the Company, he would recommend to
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the Board that it accept the offer. Later that day, Mr. Kresa informed
Mr. Brown that the Northrop Grumman Board of Directors was prepared to raise
its all-cash proposal to $80.00 per Common Share.
Between December 15 and December 21, the legal advisors and management of
the Company and Northrop Grumman negotiated the terms of a definitive merger
agreement and the Company's management and financial advisors provided
Northrop Grumman's management and financial advisors with financial and legal
due diligence, as had been provided at various times during November and
December. By the morning of December 20, the Company's management and legal
advisors and Northrop Grumman's management and legal advisors had reached
agreement on all major substantive issues.
On December 21, the Board met to consider the terms of the merger agreement
and to vote on the proposed transaction. Representatives from Merrill Lynch
presented the financial and valuation analyses they had performed and then
delivered Merrill Lynch's oral opinion, confirmed later that day in writing,
that as of the date of that opinion, and based upon and subject to certain
considerations and assumptions, the $80.00 in cash per Common Share to be
received by the Company's common stockholders was fair from a financial point
of view to such holders other than Northrop Grumman and its affiliates. At the
same meeting, the Company's outside legal counsel described the terms and
effects of the merger agreement. Following further discussion and
consideration, the Board, by unanimous vote, approved and authorized the
execution of the merger agreement on the terms discussed at the meeting.
On Thursday afternoon, December 21, representatives of the Company's and
Northrop Grumman's respective management and legal advisors completed the
definitive Merger Agreement. Thereafter, the Company and Northrop Grumman
entered into the Merger Agreement and issued a joint press release announcing
the transaction.
(ii) Reasons for the Recommendation of the Board.
In reaching its recommendations described above in paragraph (a) of this
Item 4, the Board considered a number of factors, including the following:
1. Company Operating and Financial Condition. The Board considered the
current and historical financial condition and results of operations of the
Company, as well as the prospects and strategic objectives of the Company,
including the risks involved in achieving those prospects and objectives, and
the current and expected conditions in the industries in which the Company's
businesses operate. In particular, the Board was concerned that the trend
toward consolidation among defense contractors negatively affected the
Company's ability to bid successfully as prime contractor on major development
and procurement contracts against its largest competitors. A combination with
Northrop Grumman would, in the Board's view, expand the Company's
opportunities in its major markets.
2. Transaction Financial Terms/Premium to Market Price. The $80.00 Offer
represents a premium of over 29% over the $61.6875 closing price of the Common
Shares on the New York Stock Exchange on December 20, 2000 (the last trading
day prior to the Board meeting at which the Board approved the Merger
Agreement), a premium of approximately 34% over the average closing price for
the 30-day trading period ending on December 20, 2000, a premium of over 40%
over the average closing price for the 60-day trading period ending on
December 20, 2000, and a premium of approximately 26% over the closing price
of $63.4375 on December 18, 2000, which was the highest closing price attained
during the 52-week period ending December 20, 2000. The Board concluded that
the $80.00 price fairly reflects the Company's prospects for growth and
improved performance. The Board also considered and viewed as desirable that
the form of consideration to be paid to holders of Common Shares in the Offer
and the Merger and to holders of Preferred Shares in the Offer would be cash
and thus that stockholders would not be subject to the market risk that they
would otherwise face as a result
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of continued investment in the Company's capital stock. The Board was aware
that the consideration received by holders of Common Shares in the Offer and
Merger, and the consideration received by holders of Preferred Shares in the
Offer, would be taxable to such holders for federal income tax purposes.
3. Strategic Alternatives. The Board considered the strategic alternatives
available to the Company, including the possibility of growing its business
through significant acquisitions while remaining an independent public
company. In this respect, the Board noted the limitations on the ability of
the Company to acquire other businesses in the shipbuilding sector due to
antitrust concerns. The Board also considered the alternative of disposing of
certain business units, including the Advanced Electronics Group, in order to
focus its corporate resources on the remaining core business units. In
considering the Company's strategic alternatives, the Board noted that the
strategic fit between the Company and Northrop Grumman made Northrop Grumman,
in the Board's view, the most logical acquirer for the Company. On the one
hand, Northrop Grumman's existing portfolio of businesses--particularly its
focus on systems integration for military customers, its advanced electronics
business and its information technology business--complements the Company's
businesses. On the other hand, a combination with Northrop Grumman does not
appear to raise significant antitrust impediments.
4. Merrill Lynch's Valuation Analysis. The Board considered presentations
from Merrill Lynch at a series of meetings. Merrill Lynch's presentations
included detailed analyses, including the historical stock price trading
ranges and volume for the Company, comparable valuations for publicly traded
aerospace and defense companies and comparable valuations for recent aerospace
and defense transactions. The presentations also included valuations for the
Company based on various methodologies, including comparable trading and
transaction valuations, present values of strategic plan cash flows and
projected stock prices, and pre-tax and after-tax sum-of-the-parts valuations.
5. Merrill Lynch's Fairness Opinion. The Board considered the opinion of
Merrill Lynch delivered to the Board dated December 21, 2000, that as of that
date, based upon and subject to certain considerations and assumptions, the
consideration to be received by holders of Common Shares pursuant to the
Merger Agreement was fair from a financial point of view to such holders,
other than Northrop Grumman and its affiliates. A copy of the written opinion
rendered by Merrill Lynch to the Board, setting forth the procedures followed,
the matters considered, the assumptions made and limitations on the review
undertaken by Merrill Lynch in arriving at its opinion, is attached hereto as
Annex A and incorporated herein by reference. Stockholders are urged to read
this opinion in its entirety. The opinion of Merrill Lynch was presented for
the benefit of the Board in connection with its consideration of the Merger
Agreement and is directed only to the fairness of the consideration to be
received by the holders of Common Shares pursuant to the Offer and the Merger.
The opinion does not constitute a recommendation to any stockholder as to
whether such stockholder should tender any Common Shares pursuant to the Offer
and how such stockholder should vote on the proposed Merger or any matter
related thereto. The Board was aware that Merrill Lynch became entitled to
certain fees upon the signing of the definitive Merger Agreement and certain
fees contingent upon consummation of the Offer. See Item 5--Persons/Assets
Retained, Employed, Compensated or Used.
6. Timing of Completion. The Board considered the anticipated timing for
the completion of the transactions contemplated by the Merger Agreement,
including the structure of the transactions as a tender offer for all of the
Common Shares and Preferred Shares followed by the Merger. The Board
considered that the tender offer could allow stockholders to receive the
transaction consideration earlier than in an alternative form of transaction.
The terms of the subsequent Merger provide that common stockholders will
receive the same consideration for their Common Shares as received by common
stockholders who tender their Common Shares in the Offer.
7. Limited Conditions to Consummation. The Board considered that Northrop
Grumman's obligation to consummate the Offer and the Merger is subject to a
limited number of conditions (as set forth in Section 12 of the Offer to
Purchase), with no financing condition. The Board also considered the relative
likelihood of obtaining required regulatory approvals for this transaction,
and the terms of the Merger Agreement regarding
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the obligations of both companies to pursue such approvals. The Board is of
the view that the proposed transaction is very likely to be consummated.
8. Alternative Transactions. The Board considered that under the terms of
the Merger Agreement, while the Company is prohibited from soliciting
acquisition proposals from third parties, the Company may engage in
discussions or negotiations with, and may furnish non-public information to, a
third party that makes an unsolicited written acquisition proposal if, among
other things, the Board by a majority vote determines in its good faith
judgment, after receiving advice from a financial advisor of national
reputation, that such acquisition proposal is reasonably likely to provide
greater value to the Company's stockholders from a financial point of view
than the Offer and the Merger. In addition, the Company may make inquiries and
engage in discussions with a third party that makes an unsolicited written
proposal if the Board by a majority vote determines in its good faith
judgment, based upon the advice of legal counsel, that it is required to deal
further with the third party in order to comply with its fiduciary duties. The
Board considered that the terms of the Merger Agreement permit the Company to
terminate the Merger Agreement to enter into such a superior transaction
involving the Company if the Company pays Northrop Grumman a $110 million
termination fee. Although the Board considered that these provisions of the
Merger Agreement could have the effect of deterring third parties who might be
interested in exploring an acquisition of the Company, the Board concluded
that the effect of these provisions would not preclude a superior proposal to
acquire the Company. In this regard, the Board recognized that the provisions
of the Merger Agreement relating to termination fees and non-solicitation of
acquisition proposals were insisted upon by Northrop Grumman as a condition to
entering into the Merger Agreement.
9. Lack of Solicitation of Other Potential Acquirers. The Board did not
solicit other potential acquirers to determine their interest in a business
combination with the Company. In evaluating the possibility that another
acquirer for the Company might be willing to pay a higher price than Northrop
Grumman, the Board considered the fact that no other potential acquirer
appeared as well positioned as Northrop Grumman to realize strategic benefits,
including cost savings, from a combination with the Company. The Board also
considered that, although there were other industry participants with the
financial ability to acquire the Company, over the past several years Northrop
Grumman was the industry participant that had demonstrated the greatest
interest in acquiring the Company. Further, for the reasons set forth in
paragraph 3 above, the Board believed Northrop Grumman was the most logical
strategic acquirer. The Board also considered that under the terms of the
Merger Agreement the Company would not be precluded from accepting an
unsolicited superior offer if one were to be presented. Finally, the Board
concluded that the advantages to the Company's stockholders of entering into
the Merger Agreement outweighed the possibility that another company might be
willing to pay a higher price for the Company but would be unwilling to
present an unsolicited proposal after the Merger Agreement was announced.
10. Potential Conflicts of Interest. The Board considered the interests of
certain Company executives in the Offer and the Merger (see Item 3--Effects of
the Offer and the Merger Under Company Stock Plans and Agreements Between the
Company and its Executive Officers).
The foregoing includes the material factors considered by the Board. In
view of its many considerations, the Board did not find it practical to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered. In addition, individual members of the Board may have given
different weights to the various factors considered. After weighing all of
these considerations, the Board was unanimous in determining to approve the
Merger Agreement and to recommend that holders of Common Shares tender their
Common Shares in the Offer.
(c) Intent to Tender.
After reasonable inquiry and to the best of the Company's knowledge, each
executive officer and director of the Company currently intends to tender all
Common Shares held of record or beneficially owned by such person to Purchaser
in the Offer, except for persons who would by tendering incur liability under
Section 16(b) of the Exchange Act.
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Item 5. Persons/Assets Retained, Employed, Compensated or Used.
Pursuant to a letter agreement dated November 8, 2000, the Company retained
Merrill Lynch to act as its financial advisor in connection with a possible
business combination with Northrop Grumman. Merrill Lynch is an
internationally recognized investment banking and advisory firm. As part of
its investment banking and financial advisory business, Merrill Lynch is
continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. In addition, Merrill Lynch is a full-service securities firm engaged
in securities trading, brokerage and financing activities. In the ordinary
course of its trading and brokerage activities, Merrill Lynch or its
affiliates may at any time hold long or short positions, and may trade or
otherwise effect transactions, for its own account or the accounts of
customers, in debt or equity securities or senior loans of the Company or
Northrop Grumman. In the past, Merrill Lynch and its affiliates have provided
financial advisory and financing services for the Company, including pursuant
to an engagement letter dated June 15, 2000 in connection with the Company's
determination to sell the Advanced Electronics Group.
Pursuant to the November 8 engagement letter, the Company agreed to pay
Merrill Lynch a fee, in cash, for its financial advisory services in an amount
equal to 0.45% of the Consideration paid in connection with any business
combination with Northrop Grumman. The engagement letter defined Consideration
to include, among other things, the sum of the cash paid to the Company's
security holders and the amount of all indebtedness of the Company or any of
its subsidiaries assumed in connection with the transaction. Pursuant to the
engagement letter, the Company was to pay Merrill Lynch 10% of this advisory
fee on execution of the definitive Merger Agreement, with the balance to be
paid at the date on which the conditions of the tender offer have been fully
satisfied or fully waived by the Company. Based on the Consideration to be
paid under the terms of the Merger Agreement, Merrill Lynch's fee for
financial advisory services in connection with the Offer and the Merger will
be approximately $23 million. The Company has also agreed to reimburse Merrill
Lynch for reasonable expenses as incurred. In addition, the Company has agreed
to indemnify Merrill Lynch and its affiliates and their respective directors,
officers, employees, agents and controlling persons against any and all
liabilities related to or arising out of any business combination contemplated
by the engagement letter, including the Offer and the Merger, except to the
extent that such liabilities are found in a final court judgment to have
resulted from Merrill Lynch's willful misconduct, bad faith or gross
negligence. The Company has also agreed to indemnify Merrill Lynch against the
reasonable expenses, including fees of legal counsel, that are incurred in
defending against any pending or threatened claim arising out of the
transactions contemplated by the Merger Agreement.
Except as described above, neither the Company nor any person acting on its
behalf has or currently intends to employ, retain or compensate any person to
make solicitations or recommendations in connection with the Offer or the
Merger.
Item 6. Interest in Securities of the Subject Company.
On December 11, 2000, the Company granted each non-employee director an
option to purchase 2,000 Common Shares pursuant to the Company's Non-Employee
Director Stock Plan. Pursuant to the plan, the options were immediately
exercisable at an exercise price of $61.0625, the closing price of the Common
Shares on the day of the grant.
On December 1, 2000, Alton J. Brann, Joseph T. Casey, Carol B. Hallett and
C. B. Thornton, Jr. were each granted options to purchase 101 Common Shares at
an exercise price of $59.6875, as a result of their election, under the terms
of the Company's Non-Employee Directors Deferred Compensation Plan, to convert
their director's fees into stock options, subject to the Company's Non-
Employee Directors Stock Plan. See Annex B to this Statement--Deferred
Compensation for Non-Employee Directors. The options were immediately vested
and exercisable.
On December 5, 2000, Joseph T. Casey and Carol B. Hallett were each granted
options to purchase 100 Common Shares and C. B. Thornton, Jr. was granted
options to purchase 167 Common Shares, as a result of
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their election to convert their director's fees into stock options. The
options had an exercise price of $59.7188 and were immediately vested and
exercisable.
On December 8, 2000, Alton J. Brann and C. B. Thornton, Jr. were each
granted options to purchase 295 Common Shares and Joseph T. Casey and Carol B.
Hallett were granted options to purchase 197 Common Shares and 459 Common
Shares, respectively, as a result of their election to convert director's fees
into stock options. The options had an exercise price of $60.9375 and were
immediately vested and exercisable.
On December 1, 2000, David E. Jeremiah and James R. Wilson each received
27.6440 deferred stock units as a result of their election, under the terms of
the Company's Non-Employee Directors Deferred Compensation Plan, to defer and
convert their director's fees into deferred stock units. Such stock units are
payable in Common Shares upon termination of a director's service on the
Board. See Annex B to this Statement--Deferred Compensation for Non-Employee
Directors.
On December 8, 2000, David E. Jeremiah received 126.3590 deferred stock
units and James R. Wilson received 54.1538 deferred stock units as a result of
their election to defer and convert their director's fees.
Except as described in the preceding paragraphs, no transactions in Common
Shares or Preferred Shares have been effected during the past 60 days by the
Company or, to the knowledge of the Company, by any executive officer,
director, affiliate or subsidiary of the Company.
Item 7. Purposes of the Transaction and Plans or Proposals.
Except as set forth in this Statement, the Company is not currently
undertaking or engaged in any negotiations in response to the Offer that
relate to (1) a tender offer for or other acquisition of the Company's
securities by the Company, any subsidiary of the Company or any other person;
(2) an extraordinary transaction, such as a merger, reorganization or
liquidation, involving the Company or any subsidiary of the Company; (3) a
purchase, sale or transfer of a material amount of assets of the Company or
any subsidiary of the Company; or (4) any material change in the present
dividend rate or policy, or indebtedness or capitalization of the Company.
Except as set forth in this Statement, there are no transactions,
resolutions of the Board, agreements in principle, or signed contracts in
response to the Offer that relate to one or more of the events referred to in
the preceding paragraph.
Item 8. Additional Information.
(a) Purchaser's Designation of Persons to be Elected to the Board.
The Information Statement attached as Annex B to this Statement is being
furnished in connection with the possible designation by Northrop Grumman,
pursuant to the terms of the Merger Agreement, of certain persons to be
elected to the Board other than at a meeting of the Company's stockholders.
(b) Delaware General Corporation Law.
The Company is incorporated under the laws of the State of Delaware.
Short-form Merger. Under Section 253 of the DGCL, if Purchaser acquires,
pursuant to the Offer or otherwise, at least 90% of the outstanding Common
Shares and at least 90% of the outstanding Preferred Shares, Purchaser will be
able to effect the Merger after consummation of the Offer without a vote of
the Company's stockholders. However, if Purchaser does not acquire at least
90% of the Common Shares and 90% of the Preferred Shares pursuant to the Offer
or otherwise, under Section 251 of the DGCL, a vote of the Company's
stockholders will be required to adopt and approve the Merger Agreement. As a
result, the Company will also have to comply with the Federal securities laws
and regulations governing the solicitation of proxies. Among other things, the
Company will be required to prepare and distribute a proxy statement and as a
consequence a
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longer period of time will be required to effect the Merger. However, because
Purchaser and Northrop Grumman have agreed to cause all of the Common Shares
and Preferred Shares owned by them to be voted in favor of the adoption of the
Merger Agreement, approval is assured.
Delaware Anti-takeover Statute. In general, Section 203 of the DGCL
("Section 203") prevents an "interested party" (defined to include a person
who owns or has the right to acquire 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (defined
to include mergers and certain other transactions) with a Delaware corporation
for three years following the date such person became
an interested stockholder unless, among other things, the "business
combination" is approved by the board of directors of such company prior to
that date. On December 21, 2000, the Company's Board approved the Offer and
the Merger. Accordingly, Section 203 is inapplicable to the Offer and the
Merger.
Appraisal Rights. No appraisal rights are available in connection with the
Offer. However, if the Merger is consummated, persons who are holders of
Common Shares at the effective time of the Merger will have certain rights
under Section 262 of the DGCL to demand appraisal of their shares. Such
rights, if the statutory procedures are complied with, could entitle the
holder to a judicial determination of the "fair value" of the Common Shares at
the effective time (excluding any element of value arising from the
accomplishment or the expectation of the Merger), to be paid in cash, in lieu
of the Merger Consideration of $80.00 per Common Share. The value so
determined could be more or less than the $80.00 offer price.
Appraisal rights cannot be exercised at this time. Stockholders who will be
entitled to appraisal rights in connection with the Merger will receive
additional information concerning those rights and the procedures to be
followed in order to perfect them before such stockholders have to take any
action in connection with such rights.
(c) Amendment to the Rights Agreement.
As of December 21, 2000, the Company and The Bank of New York, as Rights
Agent, executed Amendment No. 1 to the Rights Agreement, dated as of August
17, 1994. Pursuant to the Amendment, neither Northrop Grumman nor Purchaser
shall be deemed to be an Acquiring Person (as defined in the Rights Agreement)
by virtue of (i) the execution and delivery of the Merger Agreement, (ii) the
consummation of the Offer, (iii) the conversion of Common Shares into the
right to receive Merger Consideration (as defined in the Merger Agreement) or
(iv) the consummation of the Merger. The Amendment further provides that none
of the events described in clauses (i)-(iv) shall cause a Shares Acquisition
Date or a Distribution Date (each as defined in the Rights Agreement).
(d) Regulatory Approvals.
United States Antitrust Compliance. Under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") and the rules that have
been promulgated thereunder by the Federal Trade Commission (the "FTC"),
certain acquisition transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the FTC and certain waiting period
requirements have been satisfied. The purchase of Common Shares pursuant to
the Offer is subject to such requirements.
Pursuant to the requirements of the HSR Act, Purchaser has advised the
Company that it expects to file a Notification and Report Form with respect to
the Offer and Merger with the Antitrust Division and the FTC on or about
January 5, 2001. As a result, the waiting period applicable to the purchase of
Common Shares pursuant to the Offer would be scheduled to expire at 11:59
p.m., New York City time, 15 days after such filing. However, prior to such
time, the Antitrust Division or the FTC may extend the waiting period by
requesting from Purchaser additional information or documentary material
relevant to the Offer. If a second request is made, the waiting period will be
extended until 11:59 p.m., New York City time, on the tenth day after
substantial compliance by Purchaser with such request. Thereafter, such
waiting period can be extended only by court order or by agreement of the
parties.
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The Antitrust Division and the FTC scrutinize the legality under the
antitrust laws of transactions such as the acquisition of Common Shares by
Purchaser pursuant to the Offer. At any time before or after the consummation
of any such transactions, the Antitrust Division or the FTC could take such
action under the antitrust laws of the United States as it deems necessary or
desirable in the public interest, including seeking to enjoin the purchase of
Common Shares pursuant to the Offer or seeking divestiture of the Common
Shares so acquired or divestiture of substantial assets of Northrop Grumman or
the Company. Private parties (including individual States) may also bring
legal actions under the antitrust laws of the United States. The Company does
not, and Purchaser has advised the Company that it does not, believe that the
consummation of the Offer will result in a violation of any applicable
antitrust laws. However, there can be no assurance that a challenge to the
Offer on antitrust grounds will not be made, or if such a challenge is made,
what the result will be.
Under the Merger Agreement the Company and Northrop Grumman have agreed to
use their best efforts to resolve any objections that the antitrust regulators
may raise with respect to the contemplated transactions. The Company and
Northrop Grumman have agreed to use their best efforts to avoid or vacate any
injunction restraining the Merger, including litigating any claim raised by
any party through all available appeals. Further, Northrop Grumman and the
Company have agreed to avoid any impediment asserted by the antitrust
regulators, including making such divestitures as may be required or accepting
any restriction on any of their businesses, provided that Northrop Grumman is
not required to take any action that would have a material adverse effect on
the business, assets, long-term earning capacity or financial condition of
Northrop Grumman, the Company and their subsidiaries, taken as a whole.
Other Filings. The Company and Northrop Grumman intend to file with the
antitrust authorities of the European Union. The Company intends to make the
required filings with and to supply such documentation as may be requested by
the Defense Security Service of the U.S. Department of Defense and the Office
of Defense Trade Controls of the U.S. Department of State in connection with
the transactions contemplated by the Merger Agreement.
(e) Certain Projected Financial Data
Prior to entering into the Merger Agreement, the Company and its financial
advisors provided to Northrop Grumman and its financial advisors certain
information which was not publicly available, including certain projected
financial data (the "Projections") for the fiscal years 2001 through 2005. The
Company does not publicly disclose projections, and the latest Projections
were not prepared with a view to public disclosure. The Projections included,
among other things, the following forecasts of the Company's revenues, net
income (excluding pension income) and earnings per share (excluding pension
income), respectively (in millions, except per share data): $5,850.0, $151.9
and $3.31 in 2001; $6,473.0, $186.4 and $4.06 in 2002; $6,827.0, $220.8 and
$4.81 in 2003; $7,183.0, $248.4 and $5.41 in 2004; and $7,436.0, $278.7 and
$6.07 in 2005. Including pension income, the projected net income and earnings
per share were, respectively (in millions, except per share data): $220.5 and
$4.80 in 2001; $254.9 and $5.55 in 2002; $289.4 and $6.30 in 2003; $317.0 and
$6.90 in 2004; and $347.3 and $7.56 in 2005.
The Projections were not prepared with a view to public disclosure or
compliance with published guidelines of the Securities Exchange Commission,
the guidelines established by the American Institute of Certified Public
Accountants for Prospective Financial Information or generally accepted
accounting principles. The Company's certified public accountants have not
examined or compiled any of the Projections. The Projections were not prepared
with the approval of the Board. The Projections are included herein to give
the Company's stockholders access to information that was not publicly
available and that the Company provided to Northrop Grumman.
The Projections are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those statements and should be read with caution. The Projections are
subjective in many respects and thus susceptible to interpretations and
periodic revisions based on actual experience and recent developments. While
presented with numerical specificity, the Projections were not prepared by the
Company in the ordinary course and are based upon a variety of estimates and
hypothetical
17
<PAGE>
assumptions made by management of the Company with respect to, among other
things, industry performance, general economic, market, interest rate and
financial conditions, sales, cost of goods sold, operating and other revenues
and expenses, capital expenditures and working capital of the Company, and
other matters which may not be realized and are inherently subject to
significant business, economic and competitive uncertainties and
contingencies, all of which are difficult to predict and many of which are
beyond the Company's control. The Company's operations are subject to various
additional risks and uncertainties resulting from its position as a supplier,
either directly or as subcontractor or team member, to the U.S. Government and
its agencies as well as to foreign governments and agencies; actual outcomes
are dependent upon factors, including, without limitation, the Company's
successful performance of internal plans; government customers' budgetary
restraints; customer changes in short-range and long-range plans; domestic and
international competition in both the defense and commercial areas; product
performance; continued development and acceptance of new products; performance
issues with key suppliers and subcontractors; government import and export
policies; acquisition or termination of government contracts; the outcome of
political and legal processes; legal, financial, and governmental risks
related to international transactions and global needs for military aircraft,
military and civilian electronic systems and support and information
technology. Accordingly, there can be no assurance that the assumptions made
in preparing the Projections will prove accurate, and actual results may be
materially greater or less than those contained in the Projections. In
addition, the Projections do not take into account any of the transactions
contemplated by the Merger Agreement, including the Offer and the Merger.
These events may cause actual results to differ materially from the
Projections.
For these reasons, as well as the bases and assumptions on which the
Projections were compiled, the inclusion of such Projections herein should not
be regarded as an indication that the Company, Northrop Grumman, Purchaser or
any of their respective affiliates or representatives considers such
information to be an accurate prediction of future events, and the Projections
should not be relied on as such. Northrop Grumman, Purchaser, and their
affiliates assume no responsibility for the reasonableness, completeness,
accuracy or reliability of such Projections. No party nor any of their
respective affiliates or representatives has made, or makes, any
representation to any person regarding the information contained in the
Projections and none of them intends to update or otherwise revise the
Projections to reflect circumstances existing after the date when made or to
reflect the occurrences of future events even in the event that any or all of
the assumptions are shown to be in error.
Item 9. Exhibits.
The following Exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
(a)(1)(i) Offer to Purchase, dated January 5, 2001 (incorporated by
reference to Exhibit (a)(1)(i) to the Schedule TO of Purchaser
filed on January 5, 2001).
(a)(1)(ii) Form of Letter of Transmittal (incorporated by reference to
Exhibit (a)(1)(ii) to the Schedule TO of Purchaser filed on
January 5, 2001).
(a)(2)(i) Letter to Stockholders of the Company, dated January 5, 2001.*
(a)(2)(ii) Opinion of Merrill Lynch & Co., dated December 21, 2000 (included
as Annex A hereto).*
(a)(2)(iii) Joint Press Release issued by Northrop Grumman and the Company on
December 21, 2000 (incorporated by reference to Exhibit 99.1 to
the Schedule 14D-9 of the Company filed on December 21, 2000).
(e)(1) Agreement and Plan of Merger, dated as of December 21, 2000, among
Northrop Grumman, Purchaser and the Company (incorporated by
reference to Exhibit (d)(1) to the Schedule TO of Purchaser filed
on January 5, 2001).
(e)(2) Confidentiality Agreement, dated June 23, 2000, between Northrop
Grumman and the Company (incorporated by reference to Exhibit
(d)(2) to the Schedule TO of Purchaser filed on January 5, 2001).
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
(e)(3) The Information Statement of the Company, dated January 5, 2001
(included as Annex B to the Statement).*
(e)(4) Form of Change of Control Employment Agreement between the Company
and certain executive officers (filed as Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1993, and incorporated herein by reference).
(e)(5) Letter Agreement dated June 21, 2000 between the Company and
Ronald D. Sugar (filed as Exhibit 10.1 to the Company's Report on
Form 8-K dated June 22, 2000, and incorporated herein by
reference).
(e)(6) Amendment dated as of December 21, 2000 to the Change of Control
Employment Agreement by and between Ronald D. Sugar and the
Company, dated as of June 21, 2000.
(e)(7) Letter Agreement dated December 21, 2000 between Northrop Grumman
Corporation and Ronald D. Sugar.
(e)(8) Litton Industries, Inc. Restoration Plan filed as an Exhibit 10.16
to the Company's Annual Report on Form 10-K for the fiscal year
ending July 31, 1989, and incorporated herein by reference).
(e)(9) Litton Industries, Inc. Non-Employee Director Deferred
Compensation Plan (filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ending October 31,
1998, and incorporated herein by reference).
(e)(10) Litton Industries, Inc. Supplemental Executive Retirement Plan, as
amended and restated as of August 1, 2000 (filed as Exhibit 10.27
to the Company's Annual Report on Form 10-K for the fiscal year
ending July 31, 2000, and incorporated herein by reference).
(e)(11) Amendment No. 1, dated as of December 21, 2000 to Litton
Industries, Inc. Supplemental Executive Retirement Plan, as
amended and restated as of August 1, 2000.
(e)(12) Litton Industries, Inc. Performance Award Plan (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
period ending October 31, 1996, and incorporated herein by
reference).
(e)(13) Fiscal Year 2001 Annual Incentive Plan.
(g) None.
</TABLE>
--------
* Included with the Statement mailed to stockholders.
19
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
LITTON INDUSTRIES, INC.
By: /s/ John E. Preston
_____________________________________
Name: John E. Preston
Title: Senior Vice President and
General Counsel
Dated: January 5, 2001
20
<PAGE>
ANNEX A
Investment Banking
Corporate and
Institutional
Client Group
10877 Wilshire Boulevard
Suite 1900
Los Angeles, California
90024
310 209 4000
FAX 310 209 3957
[LOGO OF MERRILL LYNCH]
December 21, 2000
Board of Directors
Litton Industries, Inc.
21240 Burbank Boulevard
Woodland Hills, CA 91367
Members of the Board of Directors:
Litton Industries, Inc. (the "Company"), Northrop Grumman Corporation (the
"Acquiror") and LII Acquisition Corp., a wholly owned subsidiary of the
Acquiror (the "Acquisition Sub") propose to enter into an Agreement and Plan
of Merger (the "Agreement") pursuant to which (i) the Acquiror and the
Acquisition Sub would commence a tender offer (the "Tender Offer") for all
outstanding shares of common stock, par value $1.00 per share, of the Company
(the "Company Shares") for $80 per share, net to the seller in cash (the
"Consideration"), and (ii) Acquisition Sub would be merged with and into the
Company in a merger (the "Merger"), in which each Company Share not acquired
in the Tender Offer, other than Company Shares held in treasury or held by the
Acquiror or any affiliate of the Acquiror or as to which dissenter's rights
have been perfected, would be converted into the right to receive the
Consideration. The Tender Offer and the Merger, taken together, are referred
to as the "Transaction".
You have asked us whether, in our opinion, the Consideration to be received
by the holders of the Company Shares pursuant to the Transaction is fair from
a financial point of view to such holders, other than the Acquiror and its
affiliates.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets (including among others,
the potential recovery in certain litigation matters), liabilities and
prospects of the Company, furnished to us by the Company;
(3) Conducted discussions with members of senior management and
representatives of the Company concerning the matters described in
clauses 1 and 2 above;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and compared them with those of certain publicly traded
companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and compared them
with those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Transaction with the
financial terms of certain other transactions that we deemed to be
relevant;
A-1
<PAGE>
(7) Participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial and
legal advisors;
(8) Reviewed a draft dated December 20, 2000 of the Agreement; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have
not assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of the Company. With
respect to financial forecasts furnished to us by the Company or discussed
with us, we have assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgment of the Company's
management as to the expected future financial performance of the Company. We
have also assumed that the final form of the Agreement will be substantially
similar to the last draft reviewed by us. We have further assumed that the
Transaction will be consummated in accordance with the terms of the Agreement
without waiver of any of the conditions precedent to the Transaction contained
in the Agreement.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available
to us as of, the date hereof.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, offers from any person other than the Acquiror for the acquisition
of the Company.
We are acting as financial advisor to the Company in connection with the
Transaction and will receive a fee from the Company for our services, a
significant portion of which is contingent upon the consummation of the
Transaction. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement. We are currently assisting the
Company in connection with the possible sale of the Company's advanced
electronics business and have, in the past, provided financial advisory and
financing services to the Company and the Acquiror and/or its affiliates and
may continue to do so and have received, and may receive, fees for the
rendering of such services. In addition, in the ordinary course of our
business, we may actively trade the Company Shares and other securities of the
Company, as well as securities of the Acquiror for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Transaction and does not constitute a
recommendation to any shareholder as to whether such shareholder should tender
any Company Shares pursuant to the Tender Offer and how such shareholder
should vote on the proposed Merger or any matter related thereto.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be received by the holders of the
Company Shares pursuant to the Transaction is fair from a financial point of
view to the holders of such shares, other than the Acquiror and its
affiliates.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner &
Smith
MERRILL LYNCH, PIERCE, FENNER &
SMITH
INCORPORATED
A-2
<PAGE>
ANNEX B
LITTON INDUSTRIES, INC.
21240 Burbank Boulevard
Woodland Hills, California 91367-6675
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE ACT
OF 1934 AND RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about January 5, 2001 as
part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Statement") of Litton Industries, Inc. (the "Company"). You are receiving
this Information Statement in connection with the possible election of persons
designated by Northrop Grumman Corporation ("Northrop Grumman") to a majority
of seats on the Board of Directors (the "Board") of the Company. On December
21, 2000, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Northrop Grumman and LII Acquisition Corp. (the
"Purchaser"), a Delaware corporation and a wholly owned subsidiary of Northrop
Grumman, pursuant to which Purchaser is required to commence a tender offer to
purchase all outstanding shares of common stock, par value $1.00 per share, of
the Company (the "Common Stock"), including the associated preferred stock
purchase rights (the "Rights", and together with the Common Stock, the "Common
Shares"), at a price per Common Share of $80.00, net to the seller in cash
(the "Per Common Share Amount") and all the outstanding shares of the
Company's Series B $2 Cumulative Preferred Stock (the "Preferred Shares") at a
price per share of $35.00, net to the seller in cash (the "Per Preferred Share
Amount"), upon the terms and conditions set forth in Purchaser's Offer to
Purchase, dated January 5, 2001, and in the related Letters of Transmittal
(which, together with any amendments and supplements thereto, collectively
constitute the "Offer"). Copies of the Offer to Purchase and the Letters of
Transmittal have been mailed to stockholders of the Company and are filed as
Exhibits (a)(1)(i) and (a)(1)(ii), respectively, to the Tender Offer Statement
on Schedule TO (as amended from time to time, the "Schedule TO") filed by
Purchaser with the Securities and Exchange Commission (the "Commission") on
January 5, 2001.
The Merger Agreement provides that, subject to the satisfaction or waiver
of certain conditions, following completion of the Offer, and in accordance
with the Delaware General Corporation Law (the "DGCL"), Purchaser will be
merged with and into the Company (the "Merger"). Following consummation of the
Merger, the Company will continue as the surviving corporation and will become
a subsidiary of Northrop Grumman. At the effective time of the Merger (the
"Effective Time"), each issued and outstanding Common Share (other than Common
Shares owned by Northrop Grumman, Purchaser, the Company or any of their
respective subsidiaries, and Common Shares held by stockholders who have
perfected their dissenters' rights of appraisal under Section 262 of the DGCL)
will be converted into the right to receive the amount in cash per Common
Share paid pursuant to the Offer.
The Offer, the Merger, and the Merger Agreement are more fully described in
the Statement, to which this Information Statement is attached as Annex B,
which was filed by the Company with the Commission on January 5, 2001 and
which is being mailed to stockholders of the Company along with this
Information Statement.
This Information Statement is being mailed to you in accordance with
Section 14(f) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule
14f-1 promulgated thereunder. The information set forth herein supplements
certain information set forth in the Statement. Information set forth herein
related to Northrop Grumman, Purchaser or the Northrop Grumman Designees (as
defined below) has been provided by Northrop Grumman. You are urged to read
this Information Statement carefully. You are not, however, required to take
any action in connection with the matters set forth herein.
Pursuant to the Merger Agreement, Purchaser commenced the Offer on January
5, 2001. The Offer is currently scheduled to expire at 12:00 midnight, New
York City time, on Friday, February 2, 2001, unless Purchaser extends it.
B-1
<PAGE>
GENERAL
Each Common Share and Preferred Share entitles the holder to one vote. In
the election of directors the holders of Common Shares and Preferred Shares
vote together as a single class. As of December 31, 2000, there were
45,577,834 Common Shares outstanding and 410,643 Preferred Shares outstanding.
RIGHTS TO DESIGNATE DIRECTORS AND NORTHROP GRUMMAN DESIGNEES
The information contained herein concerning Northrop Grumman Designees (as
defined below) has been furnished to the Company by Northrop Grumman and its
designees. Accordingly, the Company assumes no responsibility for the accuracy
or completeness of this information.
The Merger Agreement provides that, promptly upon the purchase of and
payment for Common Shares and Preferred Shares by Purchaser pursuant to the
Offer, Purchaser will be entitled to designate such number of directors (the
"Northrop Grumman Designees") on the Board, rounded up to the next whole
number, as is equal to the product obtained by multiplying the total number of
directors on the Board by the percentage that the number of Common Shares and
Preferred Shares so purchased and paid for bears to the total number of Common
Shares and Preferred Shares then outstanding.
The Merger Agreement provides that the Company will, upon request of
Purchaser, promptly increase the size of the Board or obtain the resignations
of such number of directors as is necessary to enable the Northrop Grumman
Designees to be elected to the Board and, subject to Section 14(f) of the
Exchange Act and Rule 14f-1 promulgated thereunder, will cause the Northrop
Grumman Designees to be so elected.
Notwithstanding the foregoing, if Common Shares or Preferred Shares are
purchased pursuant to the Offer, until the Effective Time, there will be at
least 3 members of the Board who were directors on the date of the Merger
Agreement.
The Northrop Grumman Designees will be selected by Northrop Grumman from
among the individuals listed below. Each of the following individuals has
consented to serve as a director of the Company if appointed or elected. None
of the Northrop Grumman Designees currently is a director of, or holds any
positions with, the Company. Northrop Grumman has advised the Company that, to
the best of Northrop Grumman's knowledge, except as set forth below, none of
the Northrop Grumman Designees or any of their affiliates beneficially owns
any equity securities or rights to acquire any such securities of the Company,
nor has any such person been involved in any transaction with the Company or
any of its directors, executive officers or affiliates that is required to be
disclosed pursuant to the rules and regulations of the Commission other than
with respect to transactions between Northrop Grumman and the Company that
have been described in the Schedule TO or the Statement.
The name, age, present principal occupation or employment and five-year
employment history of each of the individuals who may be selected as Northrop
Grumman Designees are set forth below. Each is a citizen of the United States.
Unless otherwise noted, the business address of each person listed below is
1840 Century Park East, Los Angeles, California 90067 and their telephone
number at that address is (310) 553-6262.
B-2
<PAGE>
<TABLE>
<CAPTION>
Present Principal Occupation or Employment;
Name and Age Material Positions Held During the Past Five Years
------------ --------------------------------------------------
<C> <S>
Kent Kresa............. Chairman, President and Chief Executive Officer of Northrop Grumman
Age: 62 since 1990.
Herbert E. Anderson.... Corporate Vice President of Northrop Grumman, President and Chief
Age: 61 Executive Officer, Logicon, Inc. since 1998; formerly, Corporate Vice
President and General Manager, Data Systems & Services Division.
Ralph D. Crosby........ Corporate Vice President of Northrop Grumman and President,
Age: 53 Integrated Systems and Aerostructures Sector since 1998; formerly
Corporate Vice President and General Manager, Commercial Aircraft
Division; Prior to September 1996, Corporate Vice President and
Deputy General Manager, Commercial Aircraft Division, prior to March
1996, Corporate Vice President and Deputy General Manager, Military
Aircraft Systems Division; prior to January 1996, Corporate Vice
President and General Manager, B-2 Division.
J. Michael Hateley..... Corporate Vice President of Northrop Grumman and Chief Human
Age: 54 Resources and Administrative Officer since 2000; formerly Vice
President--Personnel; prior to January 1999, Vice President, Human
Resources, Security and Administration, Military Aircraft systems
Division; prior to 1996, Vice President, Human Resources, Security
and Administration, B-2 Division.
Robert W. Helm......... Corporate Vice President, Government Relations since 1994.
Age: 49
John H. Mullan......... Corporate Vice President and Secretary of Northrop Grumman since
Age: 58 1999; formerly Acting Secretary; prior to May 1998, senior corporate
Counsel.
Albert F. Myers........ Corporate Vice President and Treasurer since 1994.
Age: 54
Rosanne P. O'Brien..... Corporate Vice President, Communications since August, 2000. Prior to
Age: 57 this, Ms. O'Brien was Vice President, Communications since January,
1999. Ms. O'Brien was Senior Consultant of Alleghany Teledyne, Inc.
from 1996 to 1999, and Vice President, Corporate Relations for
Teledyne, Inc. from 1993 through 1995.
James G. Roche......... Corporate Vice President of Northrop Grumman and President,
Age: 61 Electronic Sensors and Systems Sector since 1998. Prior to this, Mr.
Roche was Corporate Vice President and General Manager, Electronic
Sensors and Systems Division. Prior to 1996, he was Corporate Vice
President and Chief Advanced Development, Planning, and Public
Affairs Officer.
W. Burks Terry......... Corporate Vice President and General Counsel of Northrop Grumman
Age: 50 since August, 2000. Prior to this, Mr. Terry became Vice President,
Deputy General Counsel and Sector Counsel in October, 1998 and prior
to October, 1998 he was Vice President and Assistant General Counsel.
Robert B. Spiker....... Corporate Vice President and Controller of Northrop Grumman since
Age: 47 December, 2000. Prior to this, Mr. Spiker was Vice President, Finance
and Controller, Electronic Sensors and Systems Sector. Prior to 1999,
he was Business Manager for C3&I Naval Systems.
Robert B. Waugh, Jr. .. Corporate Vice President and Chief Financial Officer of Northrop
Age: 57 Grumman since 1993.
</TABLE>
B-3
<PAGE>
Security Ownership of Certain Beneficial Owners
Based on information available to it, the Company believes that the
following persons held beneficial ownership of more than 5% of the Common
Shares as of December 31, 2000:
<TABLE>
<CAPTION>
Amount and Percent of
Name and Address Nature of Class (as of
of Beneficial Owner Beneficial Ownership 12/31/00)
------------------- -------------------- ------------
<S> <C> <C>
Unitrin, Inc............................... 12,657,764(a) 27.8%
One East Wacker Drive
Chicago, IL 60601
Alliance Capital Management, L.P........... 4,109,975(b) 9.0%
1345 Avenue of the Americas
New York, NY 10105
</TABLE>
--------
(a) Unitrin, Inc. ("Unitrin") has reported in a filing with the SEC on
Schedule 13D that, as of December 29, 2000, Unitrin owned 1,827,893 Common
Shares and three of its direct and indirect subsidiaries, Trinity
Universal Insurance Company, Union National Life Insurance Company and
United Insurance Company of America, owned 5,052,686 Common Shares,
326,197 Common Shares and 5,450,988 Common Shares, respectively. Unitrin
reported that such subsidiaries each share voting and dispositive power
with Unitrin over the Common Shares respectively reported by them.
(b) Sanford C. Bernstein & Co., Inc. ("Bernstein") reported in a filing with
the SEC on Form 13F that, as of June 30, 2000, it exercised investment
discretion with respect to accounts holding Common Shares. Bernstein
reported that it exercised sole voting power over 468,406 Common Shares
and sole dispositive power over 4,109,975 Common Shares. Bernstein
subsequently reported in a filing with the SEC on Schedule 13G that on
October 2, 2000, Alliance Capital Management L.P. ("Alliance") acquired
beneficial ownership of the Common Shares that were formerly beneficially
owned by Bernstein through Alliance's acquisition of the investment
advisory assets of Bernstein.
B-4
<PAGE>
BOARD OF DIRECTORS
The Company's Board is composed of eleven directors, elected at the annual
meeting of stockholders to hold office for one year and until their successors
have been elected and qualified. The following table sets out the names, ages,
principal occupations and other affiliations of the current Board. Each is a
citizen of the United States. There are no family relationships between
members of the Board.
Name and Age Principal Occupation, Other Affiliations and
Past Business Experience
Alton J. Brann............... Chairman (since 1997) and former Chief
Chairman of UNOVA, Inc. Executive Officer (1997- Sept. 2000) of UNOVA,
Age: 59 Inc., a global solutions company providing
Director since 1990 information and systems integration technology
for industrial markets; Chairman of the Board
and Chief Executive Officer of Western Atlas,
Inc. (1994-1997); Former Chairman of the Board
(1994-1995), President (1990-1994) and Chief
Executive Officer (1992-1994) of the Company;
Director of the Los Angeles World Affairs
Council. Chairman of the Board of Governors of
Town Hall of Los Angeles; Vice Chairman of the
Board of Directors of the Los Angeles Area
Council of the Boy Scouts of America; Member of
the Board of Overseers of the Executive Council
on Foreign Diplomacy, the President's Cabinet
of California Polytechnic State University, the
Institute of Electrical and Electronics
Engineers, the Optical Society of America and
the Institute of Navigation; Trustee of the
Manufacturers Alliance.
Michael R. Brown............. Joined the Company in 1968; Chairman since
Chairman and Chief Executive March 1999 and Chief Executive Officer since
Officer of the Company March 1998; President (1995-June 2000); Chief
Age: 60 Operating Officer (1995-1998); Executive Vice
Director since 1995 President (1995); Group Executive--Information
Systems (1995-1997); Senior Vice President
(1992-1995) and Group Executive--Electronic
Warfare Systems (1989-1995). Member of the
Board of Governors, Chairman of the Nominating
Committee and member of the Executive Committee
of the Aerospace Industries Association.
Director of Town Hall Los Angeles and the Los
Angeles World Affairs Council.
Joseph T. Casey.............. Former Vice Chairman and Chief Financial
Retired Vice Chairman and Officer (1994-1996) of Western Atlas, Inc.;
Chief Financial Officer of Former Vice Chairman and Chief Financial
Western Atlas, Inc. Officer (1988-1994) of the Company; Director of
Age: 69 Baker Hughes, Inc., UNOVA, Inc. and Pressure
Director since 1981 Systems, Inc. Trustee, Claremont McKenna
College, RAND Center for Russia and Eurasia and
Don Bosco Technical Institute.
Carol B. Hallett............. President and Chief Executive Officer of Air
President and Chief Transport Association of America since 1995;
Executive Officer of Air Former Senior Government Relations Advisor,
Transport Association of Collier, Shannon, Rill & Scott (1993-1995);
America Commissioner of United States Customs (1989-
Age: 63 1993); U.S. Ambassador to the Commonwealth of
Director since 1993 the Bahamas (1986-1989); Director of Fleming
Companies, Inc., Mutual of Omaha Companies and
the American Association of Exporters and
Importers; Member, President's Cabinet of
California Polytechnic State University;
Trustee, Junior Statesmen of America.
B-5
<PAGE>
Name and Age Principal Occupation, Other Affiliations and
Past Business Experience
Orion L. Hoch................ Former Chairman of the Board (1988-1994),
Chairman Emeritus of the President (1982-1988) and Chief Executive
Company Officer (1986-1992) of the Company; Director of
Age: 72 UNOVA, Inc., Bessemer Trust Companies and The
Director since 1982 Bessemer Group, Inc. Trustee, Carnegie Mellon
University.
David E. Jeremiah............ Technology Strategies and Alliances is a
President of Technology consulting firm engaged in strategic planning
Strategies & Alliances for telecommunications and defense industries;
Age: 66 Retired Admiral, U.S. Navy (1994); Vice
Director since 1994 Chairman, Joint Chiefs of Staff (1990-1994);
Commander-in-Chief, U.S. Pacific Fleet (1987-
1990); Director of Alliant Techsystems Inc.,
Geobiotics, Inc., Wang Government Services,
Inc. and National Committee on U.S.-China
Relations. Board of Trustees, The MITRE
Corporation; Board of Visitors, Northrop
Grumman Corporation (Melbourne Division) and
Board of Advisors, Jewish Institute for
National Security Affairs; Member, ManTech
International Advisory Board, the National
Defense Policy Board and Congressionally
Chartered Commission to Assess U.S. National
Security Space Management and Organization.
John M. Leonis............... Joined the Company in 1959; Chairman of the
Chairman Emeritus of the Board (1995-1999), Chief Executive Officer
Company (1994-1998), President (1994-1995), Senior Vice
Age: 67 President (1990-1994) and Group Executive--
Director since 1994 Navigation, Guidance and Control Systems (1988-
1993); Director of HCC Industries, Inc.
William P. Sommers........... Former Director and President, Booz-Allen &
Former President and Chief Hamilton's Technology Management Group (1963-
Executive Officer of SRI 1993); Former Executive Vice President,
International Iameter, Inc. (1993-1994); Director of
Age: 67 Evergreen Solar, Inc., Pressure Systems, Inc.
Director since 1994 and AtomicTangerine; Trustee, Scudder/Kemper
Mutual Funds. Member, Guckenheimer Enterprises,
Inc. Advisory Board and Executive Committee of
World Affairs Council, Jacksonville.
Ronald D. Sugar.............. Joined the Company in June 2000 from TRW, Inc.,
President and Chief where he served as President and Chief
Operating Officer of the Operating Officer of TRW Aerospace &
Company Information Systems and Member of the Chief
Age: 52 Executive Office of TRW since 1998. Joined TRW
Director since September in 1981 and served as Executive Vice President
2000 and Chief Financial Officer (1994-1996) and
Executive Vice President and General Manager of
the TRW Automotive Electronics Group (1996-
1998); Member, National Security
Telecommunications Advisory Committee,
Conference Board Council of Operating
Executives and Board of Governors of the
Aerospace Industries Association. Trustee,
National Defense Industrial Association.
C.B. Thornton, Jr. .......... President (since 1981) of Thornton Corporation,
President of Thornton a corporation engaged in a variety of private
Corporation investments; Former managing partner of T Lazy
Age: 58 S Ranch in Nevada (1974-1982); Former executive
Director since 1981 of Cessna Aircraft Company; former consultant
with McKinsey & Company; Member, Society of
Experimental Test Pilots; Trustee, Harvard-
Westlake School; Overseer, Hoover Institution
and member of the Visiting Committee of the
Harvard Business School.
B-6
<PAGE>
Name and Age Principal Occupation, Other Affiliations and
Past Business Experience
James R. Wilson Former Chairman of the Board, President and
Former Chairman of the Chief Executive Officer of Cordant Technologies
Board, President and Chief Inc. (1995-2000), Director (1993- 2000),
Executive Officer of Cordant President and Chief Executive Officer (1993-
Technologies Inc. 1995), Executive Vice President and Chief
Age: 59 Financial Officer (1992-1993) and Vice
Director since September President and Chief Financial Officer (1989-
2000 1992); Director of The BFGoodrich Company,
Cooper Industries, Inc. and First Security
Corporation; Chairman of the Board of Trustees,
the College of Wooster.
GENERAL INFORMATION CONCERNING THE BOARD OF DIRECTORS
Committees of the Board
The Board has established four standing committees to assist it in carrying
out its duties: the Executive Committee, the Audit and Compliance Committee,
the Compensation and Selection Committee and the Nominating and Board
Governance Committee.
The Executive Committee consists of Alton J. Brann (Chairman), Michael R.
Brown, Joseph T. Casey, John M. Leonis and Ronald D. Sugar. The Executive
Committee exercises all powers of the Board of Directors when the full Board
is not in session and supervises the management and business of the Company.
The Audit and Compliance Committee consists of C.B. Thornton, Jr.
(Chairman), Joseph T. Casey, William P. Sommers and James R. Wilson. Each of
these individuals qualifies as an "independent" director under the current
listing standards of the New York Stock Exchange ("NYSE"). Each member has
been determined to be financially literate and to have accounting or related
financial management expertise in accordance with NYSE standards. The Audit
and Compliance Committee acts pursuant to the Audit and Compliance Committee
Charter adopted by the Board of Directors on May 18, 2000 and amended as of
December 8, 2000. The Audit and Compliance Committee's primary function is to
assist the Board in fulfilling its oversight responsibilities by regular
review of the Company's financial information, systems of internal controls
regarding finance, accounting, legal compliance and ethics and auditing,
accounting and financial reporting processes in accord with the policies
established by the Board and management.
The Compensation and Selection Committee consists of James R. Wilson
(Chairman), Carol B. Hallett, David E. Jeremiah and William P. Sommers, each
of whom has been determined to be an "outside director" for the purpose of
Section 162(m) of the Internal Revenue Code (the "Code"). The Compensation and
Selection Committee reviews and recommends succession management and
development and approves all elements of executive compensation for the
Company's senior officers.
The Nominating and Board Governance Committee consists of Carol B. Hallett
(Chairman), Alton J. Brann and David E. Jeremiah. The Nominating and Board
Governance Committee reviews and recommends policies and procedures to ensure
that the Board is properly constituted and organized to carry out its
statutory and fiduciary responsibilities. It reviews the qualifications of all
candidates for the Board as well as programs and procedures relating to the
compensation, evaluation and terms of directors. The Nominating and Board
Governance Committee considers as potential candidates for director persons
recommended by stockholders. Recommendations should be submitted to the
Nominating and Board Governance Committee in care of the Secretary.
B-7
<PAGE>
Committee Members. The members of the four standing committees are
summarized below:
<TABLE>
<CAPTION>
Compensation Nominating
and and Board Audit and
Executive Selection Governance Compliance
Name Committee Committee Committee Committee
---- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Alton J. Brann.................. X* X
Michael R. Brown................ X
Joseph T. Casey................. X X
Carol B. Hallett................ X X*
David E. Jeremiah............... X X
John M. Leonis.................. X
William P. Sommers.............. X X
Ronald D. Sugar................. X
C.B. Thornton, Jr. ............. X*
James R. Wilson................. X* X
</TABLE>
--------
*Chairperson
Board and Committee Meetings
During fiscal year 2000, the Board held ten meetings. The average
attendance at Board meetings was approximately 99%, and attendance at
committee meetings was 98.5%. During fiscal year 2000, no director attended
less than 75% of the aggregate of the total number of Board meetings (held
during the period for which such director served on the Board) and the total
number of meetings held by all committees on which such director served
(during the periods that such director served).
. The Executive Committee did not hold any meetings in fiscal year 2000
and acted ten times by unanimous written consent.
. The Audit and Compliance Committee held six meetings in fiscal year
2000.
. The Compensation and Selection Committee held seven meetings in fiscal
year 2000 and acted five times by unanimous written consent.
. The Nominating and Board Governance Committee held three meetings in
fiscal year 2000 and acted once by unanimous written consent.
Director Compensation
Directors who are employees of the Company are not paid any fee or
additional remuneration for services as members of the Board or any of its
Committees.
Annual Fees for Non-Employee Directors
Non-employee directors receive the following compensation:
. A retainer of $35,000, payable in equal quarterly installments;
. Board and Committee (except for the Executive Committee) meeting
attendance fees of $1,500 per meeting ($2,500 per meeting for the
Chairman of the Committee); and
. An additional annual fee of $12,000 for members of the Executive
Committee ($15,000 for the Chairman of the Executive Committee), payable
in equal quarterly installments.
Deferred Compensation Plan for Non-Employee Directors
Under the Litton Industries, Inc. Non-Employee Director Stock Plan (the
"Director Stock Plan"), approved by the stockholders on December 3, 1998, non-
employee directors may defer annual retainers and meeting fees (together,
"Compensation") in the form of units of Common Shares or stock options.
B-8
<PAGE>
In addition, non-employee directors may defer Compensation in the form of
cash under a deferral plan adopted by the Board in 1998. Cash deferrals bear
interest at the prime rate in effect at Morgan Guaranty Trust Company, and are
paid after the end of the director's Board service either as a lump sum
payment or in equal annual installment payments.
Non-employee directors electing to defer their Compensation into Common
Shares currently receive a premium of 10% on such Compensation. On the date
the Compensation would normally have been paid, the Company converts the
amount of the Compensation, including the premium, into a number of stock
units equal to the number Common Shares which could have been purchased at
fair market value on that date. Stock units are paid in full Common Shares
after the end of the director's Board service.
Non-employee directors may also elect to convert their Compensation into
options to purchase Common Shares at fair market value on the dates on which
their Compensation would otherwise be payable. The number of options granted
pursuant to this election reflects a formula reviewed and approved by the
Board from time to time, and are granted pursuant to the Director Stock Plan.
Currently, a non-employee director who elects to convert Compensation into
stock options receives a number of options equal to four times the amount of
the Compensation divided by the fair market value of a Common Share on the
date on which the Compensation would otherwise be payable.
Stock Options
Under the Director Stock Plan, the Board makes an initial grant of 10,000
options to each new non-employee director, and grants 2,000 options each year
thereafter to each non-employee director. The Director Stock Plan authorizes
the Board to make additional grants to non-employee directors, for example, to
reward a director's exceptional or extraordinary services as a member of the
Board or in consideration for services to the Company outside of the scope of
a director's normal duties. Options under the Director Stock Plan are granted
at fair market value, vest immediately upon grant and are exercisable for 10
years following the date of grant.
Retirement Program
In 1998, the Board amended the retirement program for directors by
terminating the retirement pension for future directors and preserving the
pension rights of directors who were non-employee directors at that time. Such
members of the Board who retire or die while in office, at or after age 65,
will receive the active Board member's annual retainer fee (or, if greater,
the fee in effect at the annual meeting immediately following the earlier of
their retirement or death) for the shorter of ten years, the number of years
as a non-employee director, or the remaining life of the director or surviving
spouse. The mandatory retirement age is 72.
Stock Ownership Guidelines
The Company implemented stock ownership guidelines in 1998 requiring that
non-employee directors own a number of Common Shares equal in value to at
least four times their annual retainer fee. Directors are given three years to
meet this ownership guideline.
Other Information on Directors
The following individuals receive certain retirement benefits by reason of
their former employment by the Company. John M. Leonis, former Chairman of the
Board, Chief Executive Officer and President of the Company, who retired on
April 1, 1999, receives a monthly benefit of $48,554 in the form of a 100%
joint and survivor annuity. Joseph T. Casey, former Vice Chairman of the
Board, receives a monthly benefit of $27,075 in the form of a 100% joint and
survivor annuity. Orion L. Hoch, a former Chairman of the Board, Chief
Executive Officer and President, receives a monthly benefit of $60,391 in the
form of a 100% joint and survivor annuity.
In addition, during fiscal year 2000, Mr. Casey received $12,000 as a
member of the Company's Investment Committee. The Investment Committee is
responsible for managing and overseeing the assets and investment
B-9
<PAGE>
choices available under certain of the Company Retirement Plans and the
Company's Financial Security and Savings Program ("FSSP"). The Investment
Committee reports to the Board.
Dr. Sugar was appointed President and Chief Operating Officer of the
Company pursuant to an agreement with the Company dated June 21, 2000. The
agreement, which is summarized in "Employment Contracts" of this Information
Statement and was filed with the Securities and Exchange Commission as an
exhibit to the Company's Current Report on Form 8-K dated June 22, 2000, also
provides that Dr. Sugar would be elected a member of the Board of Directors.
The following table sets forth, as of December 31, 2000, unless otherwise
noted, certain information about the beneficial ownership of the Company's
Common Shares for each of the Company's directors and each executive officer
named in the Summary Compensation Table of this Information Statement and by
all directors and executive officers as a group. Unless otherwise stated, the
beneficial owners exercise sole voting and/or investment power over their
shares.
No director or executive officer of the Company owns any Preferred Shares.
B-10
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Common Shares Percent of
Common Shares Subject to Options Class
Beneficially Owned Exercisable Within Deferred Stock Beneficially
as of 12/31/00 60 Days of 12/31/00 Units(#)(h) Owned*(i)
------------------ ------------------- -------------- ------------
<S> <C> <C> <C> <C>
Non-Employee Directors
Alton J. Brann.......... 3,400 19,766 1,108 *
Joseph T. Casey......... 32,954(a) 85,825 1,174 *
Carol B. Hallett........ 690 30,742 1,210 *
Orion L. Hoch........... 89,399(b) 39,916 0 *
David E. Jeremiah....... 500 21,500 2,645 *
John M. Leonis.......... 42,912 213,277 0 *
William P. Sommers...... 1,500 22,000 0 *
C. B. Thornton, Jr. .... 1,344,874 (b)(c) 38,642 0 3.0%
James R. Wilson......... 2,000 12,000 149 *
Named Executive Officers
Michael R. Brown (CEO).. 23,070 159,859 2,021 *
Ronald D. Sugar......... 77,908 (d) 0 0 *
D. Michael Steuert...... 8,333 (e) 24,800 0 *
Gerald J. St. Pe........ 30,546 57,000 3,520 *
Harry Halamandaris...... 33 38,800 9,554 *
Directors and Executive 1,731,087 (a)(b)(c)(d) 926,154 23,428 5.9%
Officers
as a Group (25)........ (e)(f)(g)
</TABLE>
--------
* Percentage of Common Shares is given only where such percentage exceeds 1%
of the Common Shares outstanding, exclusive of treasury shares, on December
31, 2000.
(a) Excludes 8,500 Common Shares held by a charitable corporation of which Mr.
Casey serves as trustee. Mr. Casey has voting and investment power with
respect to such 8,500 Common Shares and may be deemed to have incidents of
beneficial ownership.
(b) Includes Common Shares that are beneficially owned by certain family
members of certain directors and officers who disclaim beneficial
ownership of such shares. The Common Shares are reported on the
presumption that the individual may share voting and/or investment power
because of family relationships.
(c) Excludes 25,378 Common Shares owned by a private foundation of which Mr.
Thornton is an officer and trustee. Mr. Thornton shares voting and
investment power with another trustee and may be deemed to have incidents
of beneficial ownership. Includes Common Shares that are beneficially
owned by a partnership of which Mr. Thornton is a general partner.
(d) Represents shares of restricted stock granted to Dr. Sugar in connection
with his employment by the Company. See Summary Compensation Table and
"Employment Contracts."
(e) Includes 6,222 shares of restricted stock granted to Mr. Steuert in
connection with his employment by the Company. See Summary Compensation
Table.
(f) Excludes 255,126 Common Shares owned by the Litton Master Trust, which
holds certain retirement funds of the Company and its subsidiaries. Mr.
Casey and Mr. Steuert are members of the Investment Committee, which has
sole investment and voting power, and thus may be deemed to have incidents
of beneficial ownership. If these Common Shares were included as
beneficially-owned shares, then the percentage of Common Shares owned by
the group would be 6.4%.
(g) Includes 50,000 Common Shares held by the Foundation of The Litton
Industries, whose President and Treasurer vote the Common Shares and are
also officers of the Company, and whose directors have investment power
over the Common Shares and are elected and may be removed by the
Nominating and Board Governance Committee of the Board.
(h) Individuals with stock units in this column have elected to defer a
portion of their bonus awards, and in the case of directors, of their
Compensation. The bonus or Compensation is converted into a number of
stock units equal to the number of Common Shares which could have been
purchased at fair market value on the date the award is made or the
Compensation is payable. Deferred awards are paid in full Common Shares
upon termination of service, death or a change of control. Although
individuals may be deemed to have incidents of beneficial ownership, they
do not have any voting power with respect to these units.
(i) The number of Common Shares subject to options exercisable within 60 days
of December 31, 2000 held by any indicated person or group of persons have
been added to the Common Shares actually outstanding as of December 31,
2000 for the purpose of computing the percentage of outstanding Common
Shares owned by such person or such group of persons but not by any other
stockholder.
B-11
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are elected each year by the Board at
its first meeting following the Annual Meeting of Stockholders to serve during
the ensuing year and until their respective successors are elected and qualify.
There are no family relationships between any of the executive officers of the
Company. Each is a citizen of the United States. The following information
indicates the position and age of the executive officers at January 5, 2001 and
their business experience during the prior five years:
<TABLE>
<CAPTION>
Offices Presently Held and Business Experience
Name Age During Prior Five Years
---- --- ----------------------------------------------
<C> <C> <S>
Michael R. Brown...... 60 Chairman of the Board since March, 1999, Chief
Executive Officer since March, 1998 and a director
since September, 1995; prior thereto: President
(1995-2000), Chief Operating Officer (1995-1998),
Executive Vice President (1995), Group Executive of
the Information Systems Group (1995-1997), Senior
Vice President (1992-1995).
Frank G. Brandenberg.. 54 Senior Vice President and Group Executive of the
Electronic Components and Materials Group since
December, 1999; prior thereto: Chief Executive
Officer of EA Industries, Inc. (1997-1999),
President of the Client/Server Systems Business
Unit and Deputy President of the Computer Systems
Group (1990-1997) of UNISYS Corporation.
Lynne M. O. Brickner.. 48 Vice President and Secretary since February 2000;
prior thereto: Vice President, General Counsel and
Secretary of Meggitt-USA, Inc., (July 1999-February
2000); Vice President, General Counsel and
Secretary of Whittaker Corporation (1996-July
1999), private practice (1980-1995).
J. Spencer Davis...... 54 Vice President for Corporate Communications since
September 1998; prior thereto: Director of Investor
Relations for Computer Sciences Corporation, a
leading global information technology services
company (1995-September 1998).
James H. Frey......... 62 Senior Vice President and Group Executive of the
Information Systems Group since September, 2000;
prior thereto: Vice President (1997-2000);
President of TASC, Inc. (1999-2000), a subsidiary
of the Company; Vice President of Strategic
Business Development (1996-1999); President of the
Company's Itek Optical Systems Division (1988-
1996).
John E. Gordon........ 59 Vice President in charge of day-to-day
relationships with the federal government and head
of the Company's Washington office; prior
experience: Director of Federal Liaisons (since
1993); Rear Admiral and Judge Advocate General of
the Navy (until 1992).
Harry Halamandaris.... 62 Senior Vice President and Group Executive of the
Advanced Electronics Systems Group since August,
2000; prior thereto: Executive Vice President and
Chief Operating Officer of Electronics and
Information Systems (1999), Executive Vice
President and Chief Operating Officer (1999),
Senior Vice President (1996-1999), Group Executive
of the Electronic Warfare Systems Group (1995-
1999), Vice President for Strategic Planning
(1995), Vice President and Group Executive of
Kaiser Aerospace & Electronics, Inc. (1994-1995),
Director of Corporate Technology, Teledyne, Inc.
(1989-1994).
Thomas E. Hill........ 50 Senior Vice President of Human Resources since
September, 2000; prior thereto: Vice President of
Human Resources (1999-2000); Senior Vice President
of Human Resources of Dade Behring, Inc. (1995-
1999).
Richard T. Hopman..... 63 Vice President (since 1981) and Managing Director
of LITEF GmbH (since 1969) and TELDIX GmbH (since
1996).
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
Offices Presently Held and Business Experience
Name Age During Prior Five Years
---- --- ----------------------------------------------
<C> <C> <S>
Frank C. Marshall, Jr.. 53 Vice President and Associate General Counsel since
March 1994; prior thereto: Vice President and
Counsel for the Navigation, Guidance & Control
Systems (since August 1992); various in-house
counsel positions with the Company (from 1987).
Timothy G. Paulson..... 54 Vice President and Treasurer since June, 1994;
prior thereto: Vice President of Finance and
Administration of the Company's Amecom Division
(1991-1994).
John E. Preston........ 59 Senior Vice President and General Counsel since
March, 1994; prior thereto: Vice President and
Associate General Counsel (1990-1994).
Gerald J. St. Pe....... 61 Executive Vice President and Chief Operating
Officer of Litton Ship Systems since June, 1999;
prior thereto: Senior Vice President (1986-1999),
President of Ingalls Shipbuilding, Inc. (1987-
1999).
D. Michael Steuert..... 52 Senior Vice President and Chief Financial Officer
since February 1999; prior thereto: Chief
Financial Officer of GenCorp Inc. (1990-1999).
Dr. Ronald D. Sugar.... 52 President and Chief Operating Officer since June
2000; prior thereto: President and Chief Operating
Officer of TRW Aerospace & Information Systems and
Member of the Chief Executive Office of TRW, Inc.
(1998 to June 2000), Executive Vice President and
General Manager of the TRW Automotive Electronics
Group (1996-1998), Executive Vice President and
Chief Financial Officer of TRW (1994-1996).
Sandra J. Wright....... 45 Vice President and Controller since October, 2000;
prior to joining the Company in May 2000, Ms.
Wright was Vice President and Controller for
Aerojet, a GenCorp. Company based in Sacramento,
California, where she was responsible for
corporate financial accounting, and provided
financial planning and strategic planning
oversight. Ms. Wright had first joined Aerojet in
1981.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors and
executive officers of the Company and persons who own more than ten percent of
the Common Shares to file reports of ownership and changes in ownership of
Common Shares with the Commission and the New York Stock Exchange. These
persons are also required to furnish to the Company copies of all such
reports.
To the Company's knowledge, based solely on its review of the copies of
such reports received by the Company, and written representations from certain
reporting persons, the directors and executive officers of the Company and all
other reporting persons complied with all applicable filing requirements,
except for one report describing purchases of Common Shares by one director,
which was inadvertently filed with the Commission three days later than the
filing deadline.
B-13
<PAGE>
EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth the compensation for the last three fiscal
years of the Chief Executive Officer of the Company and the four other most
highly compensated executive officers of the Company serving at the end of
Fiscal Year 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Named Executive Long-Term Compensation
Officers Annual Compensation Awards
---------------- ----------------------------------- -------------------------
Securities
Other Annual Underlying All Other
Name and Principal Fiscal Salary Bonus Compensation Restricted Options/SARs Compensation
Position Year ($)(a) ($)(b) ($)(c) Stock ($)(d) (#)(e) ($)(f)
------------------ ------ ------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael R. Brown........ 2000 725,005 696,005 -- 0 0 10,355
Chairman and Chief 1999 675,772 350,000 -- 0 75,000 10,300
Executive Officer(g) 1998 497,509 570,000 -- 0 60,000 10,839
Ronald D. Sugar......... 2000 53,078 600,000 -- 3,510,729 150,000 11,482
President and Chief 1999 -- -- -- -- -- --
Operating Officer(h) 1998 -- -- -- -- -- --
D. Michael Steuert...... 2000 413,557 332,817 -- 0 0 195,496
Senior Vice President 1999 184,618 303,334 -- 448,940 74,000 8,169
and Chief Financial 1998 -- -- -- -- -- --
Officer(i)
Gerald J. St. Pe........ 2000 415,334 300,079 -- 0 0 6,866
Executive Vice
President; 1999 392,509 401,856 -- 0 15,000 5,266
Chief Operating Officer, 1998 374,454 420,992 -- 0 12,000 5,389
Litton Ship Systems
Harry Halamandaris...... 2000 372,203 283,609 -- 0 0 7,641
Senior Vice President; 1999 314,591 290,000 -- 0 21,000 7,798
Group Executive, 1998 296,088 258,750 -- 0 10,000 9,232
Advanced Electronics
</TABLE>
--------
(a) The amount included for Dr. Sugar represents salary for the period June
21, 2000, when he commenced employment with the Company, through July 31,
2000.
(b) Fiscal year 2000 bonus awards are accrued in 2000 and paid in full in
October 2000. The fiscal year 2000 bonus paid to Dr. Sugar includes (i) a
hiring bonus of $250,000, which was paid to him when he commenced
employment with the Company and (ii) a bonus of $350,000 as agreed in
connection with his employment. The fiscal year 1999 bonus paid to Mr.
Steuert includes a hiring bonus of $120,000, which was paid to him when he
commenced employment. Mr. Halamandaris elected to defer 40% of his 2000
bonus award, and as a result of such deferral, he has been credited with
2,619 stock units in the "deferred stock units" column of the "Security
Ownership of Directors and Executive Officers" table of this Information
Statement.
(c) For each year, excludes perquisites and other personal benefits,
securities or property which, in the aggregate, do not exceed the lesser
of either $50,000 or 10% of the total of annual salary and bonus for each
named executive officer.
(d) Based on the price of the Common Shares on the date of grant. The value
and number of restricted stock holdings of the named executive officers on
December 21, 2000 (based on the closing price for the Common Shares of
$61.6875 on December 20, 2000) were as follows: Dr. Sugar, $4,805,950
(77,908 shares), and Mr. Steuert, $383,820 (6,222 shares). In connection
with his employment as President and Chief Operating Officer, Dr. Sugar
received 77,908 shares of restricted stock on June 21, 2000 pursuant to
restricted stock agreements dated as of June 21, 2000, 12,710 of which
vest in equal installments over a five-year period beginning on the first
anniversary of the grant date and on each of the next four anniversaries
of the grant date, and 65,198 shares of which vest in equal installments
over a seven-year period beginning on the first anniversary of the grant
date and on each of the next six anniversaries of the grant date. The
shares of restricted stock granted to Dr. Sugar will vest immediately upon
the occurrence of certain events related to death, disability, termination
of employment, constructive termination or a change in control of the
Company. In connection with his employment as Senior Vice President and
Chief Financial Officer, Mr. Steuert received 8,333 shares of restricted
stock on
B-14
<PAGE>
February 15, 1999 pursuant to restricted stock agreements dated as of
February 15, 1999, 5,000 of which vest in equal installments over a five-
year period beginning on the first anniversary of the grant date and on
each of the next four anniversaries of the grant date, and immediately upon
termination of employment by reason of death or disability or termination
without cause, or upon a change in control of the Company, and 3,333 of
which vest in equal installments over a three-year period beginning on the
first anniversary of the grant date and on each of the next two
anniversaries of the grant date, and immediately upon termination of
employment by reason of death or disability or upon a change in control of
the Company. Dr. Sugar and Mr. Steuert are entitled to vote these shares of
restricted stock and to receive any dividends declared and paid on the
shares.
(e) No stock appreciation rights were granted to the named executive officers.
With the exception of Dr. Sugar, no stock options were issued to the named
executive officers during fiscal 2000. Grants of stock options to Dr.
Sugar were made in accordance with his employment agreement. See
Employment Contracts. The following grants of stock options under the 1984
Plan were made to the named executive officers in September 2000: Mr.
Brown, 80,500; Dr. Sugar, 50,000 (in accordance with his employment
agreement); Mr. Steuert, 35,000; Mr. St. Pe, 16,000; and Mr. Halamandaris,
15,000.
(f) Included in this column for fiscal year 2000 are the following: (i) the
Company's matching contributions under the the Company's Financial
Security and Savings Program ("FSSP") for the accounts of Mr. Brown,
$2,137; Mr. Steuert, $2,690; Mr. St. Pe, $3,400; and Mr. Halamandaris,
$1,980; (ii) taxable amounts imputed under various life insurance
arrangements provided by the Company for Mr. Brown, $5,328; Mr. St. Pe,
$3,466; and Mr. Halamandaris, $3,034; (iii) taxable amounts representing
interest imputed to the holder of the loans described in "Indebtedness of
Management to the Company" below: Mr. Brown, $2,890; Mr. Steuert, $3,551;
and Mr. Halamandaris, $2,627; and (iv) the amounts of $11,482 and $189,255
paid to Dr. Sugar and Mr. Steuert, respectively, in connection with their
relocations, including a provision for income taxes on these relocation
allowances.
(g) Mr. Brown also served as President of the Company until June 21, 2000.
(h) Dr. Sugar was elected President and Chief Operating Officer, effective
June 21, 2000.
(i) Mr. Steuert was elected Senior Vice President and Chief Financial Officer,
effective February 15, 1999.
The following table provides information about grants of performance-based
restricted stock made by the Company under the 1984 Long-Term Stock Incentive
Plan, as amended and restated (the "1984 Plan"), during fiscal year 2000 to
each of the named executive officers in the Summary Compensation Table.
Long-Term Incentive Plan Awards in 2000 Fiscal Year
<TABLE>
<CAPTION>
Estimated future payouts
under non-stock price-
Individual Grants based plans
------------------------------- --------------------------
Performance or
Number of other period
shares, units or until
other rights maturation or Threshold Target Maximum
Name (#)(a) payout(b) ($ or #) ($ or #) (#)
---- ---------------- -------------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Michael R. Brown.... 15,000 1999-2001 (c) (c) 15,000
Ronald D. Sugar..... (d) -- -- -- --
D. Michael Steuert.. 5,400 1999-2001 (c) (c) 5,400
Gerald J. St. Pe.... 5,400 1999-2001 (c) (c) 5,400
Harry Halamandaris.. 4,900 1999-2001 (c) (c) 4,900
</TABLE>
--------
(a) A grantee does not have the right to vote the performance-based restricted
stock or to receive any dividends declared or paid on Common Shares. In
addition to the shares awarded in fiscal year 2000, in September 2000 the
Company made the following maximum grants of performance-based restricted
stock under the 1984 Plan to the named executive officers: Mr. Brown,
16,500; Dr. Sugar, 13,700; Mr. Steuert, 5,900; Mr. St. Pe, 5,600; and Mr.
Halamandaris, 5,600.
(b) Shares of the performance-based restricted stock vest on the third
anniversary of the award date, provided that the grantee is still employed
by the Company on that date and the Company meets the prescribed
performance requirements set forth in the Company's Performance-Based
Restricted Stock Agreement.
(c) The number of Common Shares that a grantee can earn is based upon the
three-year internal sales growth of the Company and Cash Flow Return on
Investment ("CFROI") performance objectives, adjusted annually for certain
significant events such as acquisitions and mergers. Earn-outs over the
three-year period range from 0% to 100% of the shares of performance-based
restricted stock awarded to a grantee. In the event of death, disability
or retirement of a grantee prior to vesting of the performance-based
restricted stock, awards may be prorated and made at the end of the three-
year performance period at the discretion of the Compensation and
Selection Committee. In the event of a change in control of the Company,
shares of performance-based restricted stock will vest immediately.
(d) Dr. Sugar was elected President and Chief Operating Officer, effective
June 21, 2000.
B-15
<PAGE>
The following table provides information on option grants to purchase
Common Shares made by the Company during fiscal year 2000 to each of the named
executive officers in the Summary Compensation Table. The Company did not
grant any stock appreciation rights to the named executive officers during
fiscal year 2000.
Option Grants in 2000 Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed Annual
Rates of Stock Price
Appreciation for Option
Individual Grants Term(d)
------------------------------------------------- -------------------------
% of Hypothetical Hypothetical
Number of Total Options Exercise Value Value
Securities Granted to Price Realized at Realized at
Underlying Employees in Per 5% stock 10% stock
Options Granted Fiscal Year Share Expiration appreciation appreciation
Name (#)(a) (b) ($)(c) Date ($) ($)
---- --------------- ------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Brown........ 0 0 0 -- -- --
Ronald D. Sugar......... 150,000 45% 45.4063 6/21/10 4,283,367 10,854,892
D. Michael Steuert...... 0 0 0 -- -- --
Gerald J. St. Pe........ 0 0 0 -- -- --
Harry Halamandaris...... 0 0 0 -- -- --
</TABLE>
--------
(a) Dr. Sugar received aggregate grants of 150,000 non-qualified stock options
under the 1984 Plan on the date of his employment by the Company. The
options were granted at fair market value and vest in equal installments
over a five-year period. The term of each option is 10 years, subject to
earlier termination upon the occurrence of certain events related to
death, disability or termination of employment. The options fully vest and
become exercisable upon the earliest to occur of (i) the expiration of
five years following the date of grant, or (ii) certain events related to
death, disability, termination of employment or a change in control the
Company. See "Employment Contracts" below. With the exception of Dr.
Sugar, no stock options were issued to the named executive officers during
fiscal 2000. In September 2000, the following grants of stock options
under the 1984 Plan were made to the named executive officers: Mr. Brown,
80,500; Dr. Sugar, 50,000 (in accordance with his employment agreement);
Mr. Steuert, 35,000; Mr. St. Pe, 16,000; and Mr. Halamandaris, 15,000.
(b) The Company granted options to purchase 330,610 Common Shares to employees
in fiscal year 2000, including the grants to Dr. Sugar.
(c) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already-owned shares and/or by offset of the
underlying shares, subject to certain conditions.
(d) These amounts, based on assumed appreciation rates of the 5% and 10% rates
prescribed by Securities and Exchange Commission rules, are not intended
to forecast possible future appreciation, if any, of a Common Share. The
actual value of the options will depend on the market value of a Common
Share.
The following table provides information on option exercises in fiscal year
2000 by each of the named executive officers in the Summary Compensation Table
and the values of each of such officer's unexercised options at July 31, 2000.
There were no stock appreciation rights exercised or outstanding.
Aggregated Option Exercises in 2000 Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value Of Unexercised In-
Common Shares Options at July 31, 2000 the-Money Options at
Acquired on Value (#) July 31, 2000 ($)(b)
Exercise Realized ------------------------- -------------------------
Name (#)(a) ($)(a) Exercisable Unexercisable Exercisable Unexercisable
---- ------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Brown........ -- -- 151,259 124,600 1,197,541 76,724
Ronald D. Sugar......... -- -- 0 150,000 0 464,055
D. Michael Steuert...... -- -- 14,800 59,200 0 0
Gerald J. St. Pe........ -- -- 57,000 27,000 609,675 18,112
Harry Halamandaris...... -- -- 35,100 32,900 235,542 86,080
</TABLE>
--------
(a) None of the named executive officers exercised stock options during the
fiscal year ending July 31, 2000.
(b) Based on the difference between $48.50 (the average of the high and low
market price of a Common Share covered by in-the-money options on July 31,
2000) and the exercise price.
B-16
<PAGE>
Retirement Benefits
The FSSP and Related Retirement Plans
The Company Financial Security and Savings Program ("FSSP") is a defined
contribution plan intended to qualify under Section 401(k) of the Code.
Participation in the FSSP is generally available to U.S. employees of the
Company's corporate offices and participating subsidiaries and divisions.
Except for Dr. Sugar, all of the named executive officers in the Summary
Compensation Table participate in the FSSP.
Prior to January 1, 2000, the first 1% to 4% of pay that a participant
elected to deposit to the FSSP created an annual retirement benefit payable at
age 65 equal to the greater of (a) 60% of such deposits, or (b) 85% of such
deposits, less 75% of estimated Social Security primary insurance. The
retirement benefit is payable as an annuity and is reduced by the actuarial
equivalent of any elected lump sum distribution of the deposits, as adjusted
for earnings or losses. Participants could deposit an additional 1% to 16% of
pay into the Savings Account portion of the FSSP and receive a 50% Company
match on the first 1% to 4% of those deposits.
Effective January 1, 2000, the Company provided a 50% Company match on the
first 1% to 4% of pay that a participant elected to deposit to the FSSP, which
created an annual retirement benefit payable at age 65 equal to the greater of
(a) 60% of such deposits, or (b) 85% of such deposits, less 75% of estimated
Social Security primary insurance. The retirement benefit is payable as an
annuity and is reduced by the actuarial equivalent of any elected lump sum
distribution of the deposits, as adjusted for earnings or losses. Participants
may deposit an additional 1% to 16% of pay into the Savings Account portion of
the FSSP. For any calendar year, a participant's deposits in the FSSP may not
exceed the maximum deferral amount prescribed by Section 401(k) of the Code
or, if less, 20% of a participant's annual compensation. Beginning on January
1, 2001, the Company increased its matching contribution to 50% of the first
1% to 6% of pay that a participant elects to deposit to the FSSP.
Restoration Plan
The Litton Industries, Inc. Restoration Plan (the "Restoration Plan") is an
unfunded, nonqualified retirement plan that restores Company-provided
retirement benefits and FSSP Company-matching contributions, which an FSSP
participant could have received if it were not for the limitations prescribed
by the Code. Such benefit is payable from the Company's general assets as an
annuity at normal retirement.
The following table sets forth the current estimated annual retirement
benefits of the named executive officers, assuming their continued maximum
participation in the above described plans, retirement at age 65 and election
of a single life annuity.
<TABLE>
<CAPTION>
Company-Provided
Name Total Pension Portion
---- ------------- ----------------
<S> <C> <C>
Michael R. Brown.............................. $450,310 $404,071
Ronald D. Sugar............................... 635,972 615,943
D. Michael Steuert............................ 401,572 381,809
Gerald J. St. Pe.............................. 391,794 333,309
Harry Halamandaris............................ 126,912 118,684
</TABLE>
Supplemental Plan
The Litton Industries, Inc. Supplemental Executive Retirement Plan ("SERP")
is an unfunded, nonqualified defined benefit retirement plan that provides
certain key employees of the Company with supplemental retirement benefits.
The SERP was amended and restated as of August 1, 2000 for all SERP
participants who were actively employed by the Company on that date. For
purposes of this summary, the amended and restated SERP is referred to as the
"New SERP" and the prior SERP is referred to as the "Old SERP". SERP
participants who terminated employment prior to August 1, 2000 will have their
SERP benefits governed by the Old SERP. Individuals who become SERP
participants on or after August 1, 2000 will have their SERP benefits governed
B-17
<PAGE>
by the New SERP. All other SERP participants will receive the greater of the
benefits provided under the Old SERP or the New SERP.
In general, under the Old SERP, participants must be at least age 50, and
vesting occurs when a participant reaches age 60 and has at least fifteen
years of service with the Company. The Old SERP retirement benefit is
determined based on a participant's average earnings (for the highest three
twelve-month periods out of their last 60 months of compensation) and years of
service since the later of age 40 or the date of hire (up to a maximum of 25
years). Under the Old SERP, the credited years of service at September 30,
2000, of the Named Executive Officers are as follows: Mr. Brown, 19 years; Dr.
Sugar, 0 years; Mr. Steuert, 1 year; Mr. St. Pe, 20 years; and Mr.
Halamandaris, 5 years. The Company will credit the following named executive
officers with additional years of service for benefit accrual purposes under
the Old SERP as follows: Dr. Sugar, 5 years at date of hire; Mr. Steuert, 10
years at date of hire; and Mr. Halamandaris, 14 years at date of hire.
The following table indicates the approximate annual benefit that would be
received by a participant in the Old SERP, based on the following assumptions:
(i) retirement at age 65 and (ii) payment as a single life annuity. Such
benefit would be reduced by the Social Security benefit and the greater of the
maximum amount of Company-provided pension benefits that the employee either
actually accrued or could have accrued under other Company-sponsored
retirement plans (for those who have never participated in a Company defined
benefit pension plan).
Pension Plan Table (Old SERP)
<TABLE>
<CAPTION>
Years of Service
Remuneration ----------------------------
(Average Earnings) 15 20 25 or more
------------------ -------- -------- ----------
<S> <C> <C> <C>
200,000..................................... $ 53,215 $ 70,954 $ 88,692
400,000..................................... 119,215 158,954 198,692
600,000..................................... 185,215 246,954 308,692
800,000..................................... 251,215 334,954 418,692
1,000,000..................................... 317,215 422,954 528,692
1,200,000..................................... 383,215 510,954 638,692
1,400,000..................................... 449,215 598,954 748,692
1,600,000..................................... 515,215 686,954 858,692
1,800,000..................................... 581,215 774,954 968,692
2,000,000..................................... 647,215 862,954 1,078,692
</TABLE>
Under the New SERP, there is no minimum age limit for participants, and
vesting occurs when a participant reaches age 55 and has at least five years
of service with the Company. The New SERP retirement benefit is determined
based on a participant's average earnings for the highest three calendar year
periods out of their final 10 calendar years of employment and years of
service (up to a maximum of 25 years) since date of hire. Under the New SERP,
the credited years of service at September 30, 2000, of the named executive
officers are as follows: Mr. Brown, 25 years; Dr. Sugar, 0 years; Mr. Steuert,
1 year; Mr. St. Pe, 25 years; and Mr. Halamandaris, 5 years. The Company will
credit Mr. Steuert with an additional 10 years of service at date of hire and
Mr. Halamandaris with that number of additional years of service at age 65
necessary to give him a benefit no less than he would receive under the Old
SERP calculated using the additional 14 years of service granted under the Old
SERP.
B-18
<PAGE>
The following table indicates the approximate annual benefit that would be
received by a participant in the New SERP, based on the following assumptions:
(i) retirement at age 65 and (ii) payment as a single life annuity. Such
benefit would be reduced by the Social Security benefit and the greater of the
maximum amount of Company-provided pension benefits that the employee either
actually accrued or could have accrued under other Company-sponsored
retirement plans (for those who have never participated in a Company defined
benefit pension plan).
Pension Plan Table (New SERP)
<TABLE>
<CAPTION>
Years of Service
Remuneration ----------------------------
(Average Earnings) 15 20 25 or more
------------------ -------- -------- ----------
<S> <C> <C> <C>
200,000..................................... $ 82,500 $ 95,000 $ 100,000
400,000..................................... 165,000 190,000 200,000
600,000..................................... 247,500 285,000 300,000
800,000..................................... 330,000 380,000 400,000
1,000,000..................................... 412,500 475,000 500,000
1,200,000..................................... 495,000 570,000 600,000
1,400,000..................................... 577,500 665,000 700,000
1,600,000..................................... 660,000 760,000 800,000
1,800,000..................................... 742,500 855,000 900,000
2,000,000..................................... 825,000 950,000 1,000,000
</TABLE>
Change in Control Agreements
The Company is a party to change in control agreements with all of the
named executive officers in the Summary Compensation Table. The agreements
become operative only upon the occurrence of one of the following events: (1)
a change in the majority of the members of the Board; (2) acquisition by a
third party of at least 30% of the Company's outstanding voting stock, other
than as a result of a repurchase by the Company of its voting stock; (3) a
merger, reorganization or consolidation of the Company with another party
(other than certain limited types of mergers); (4) a sale or disposition of
substantially all of the Company's assets; or (5) stockholder approval of the
liquidation or dissolution of the Company. Each change in control agreement
provides that for three years after a change in control there will be no
adverse change in the executive's salary, bonus opportunity, benefits or
location of employment. If, during this three-year period, the executive's
employment is terminated by the Company other than for cause, the executive
terminates his or her employment for good reasons, as defined in the
agreements, or the executive voluntarily leaves during the 30-day period
following the first anniversary of the change in control, the executive is
entitled to receive an accrued salary and annual incentive payment through the
date of termination and a lump sum severance payment equal to three times the
sum of the executive's base salary and annual bonus. The Company will also
provide the executive with certain pension credits, insurance and other
welfare plan benefits.
The Old SERP, the New SERP and the Restoration Plan provide that in the
event of a change in control, all participants in such plans become fully
vested in their benefits and the Company becomes obligated to fund a trust
with sufficient assets to adequately satisfy the liabilities of the SERP and
the Restoration Plan. The Compensation and Selection Committee of the Board
may direct the Company to pay the benefits from such trust either as a lump
sum payment based upon certain actuarial factors or to pay the benefits
monthly as an annuity. The assets of such trusts would be subject to the
claims of the Company's creditors in the event of the Company insolvency or
bankruptcy.
Employment Contracts
In June 2000, the Company entered into an employment agreement with Dr.
Sugar, pursuant to which he was appointed President and Chief Operating
Officer. The Company also agreed that he would be elected a member of the
Board and that on or before December 31, 2001, he would be elected Chief
Executive Officer of
B-19
<PAGE>
the Company. It is also contemplated, according to the agreement, that by
December 31, 2002 or within a reasonable period thereafter, when the Company's
strategic status and management team support this additional position, Dr.
Sugar will be elected Chairman of the Board.
Dr. Sugar's initial annual salary was $600,000, with an increase effective
October 1, 2000. He received a hiring bonus of $250,000 and a guaranteed
incentive bonus of $350,000 for fiscal year 2000. For fiscal year 2001 and
fiscal years thereafter, he will participate in the Company's annual incentive
plan with a bonus target for the chief operating officer of 100% of annual
salary, with actual payouts ranging from 0% to 125% of the maximum
opportunity. The incentive bonus structure will not at any time be less
favorable to Dr. Sugar than the structure for fiscal year 2001, unless the
Board changes the structure for all executives.
In addition, Dr. Sugar was granted 150,000 non-qualified stock options on
June 21, 2000, which vest in equal installments over a five-year period. The
exercise price is the fair market value of a Common Share on the date of
grant. The Company also agreed that he would be eligible for a stock option
grant of at least 43,000 stock options in September 2000. All of the options
will be granted under the 1984 Plan and have a ten-year term. Any unvested
options will vest upon a termination of employment without cause, constructive
termination without cause, death or disability, or a change in control. Dr.
Sugar will have at least two years to exercise any of the options, subject to
the end of the stated term of the foregoing options. He will also be eligible
for grants of other stock options under the 1984 Plan or successor plans.
In September 2000, the Company also gave Dr. Sugar the right to receive
13,700 shares of performance-based restricted stock under the 1984 Plan at the
maximum level. The actual number of shares will depend on the Company
achieving certain cash flow return on investment and internal revenue growth
goals for the three-year period ending July 31, 2003. Any unvested restricted
stock will become vested and exercisable upon a termination of employment
without cause, constructive termination without cause, death or disability, or
a change in control.
As compensation for stock, options and benefits under certain TRW, Inc.
plans which Dr. Sugar forfeited upon termination of his employment with TRW,
the Company awarded Dr. Sugar (i) 65,198 shares of restricted stock that vest
over seven years in equal installments on each of the first seven anniversary
dates of his date of hire, provided that he is employed by the Company on the
respective date; (ii) 12,710 shares of restricted stock that vest over five
years in equal installments on each of the first five anniversary dates of his
date of hire, provided that he is employed by the Company on the respective
date; (iii) 175,000 non-qualified stock options in two grants: 100,000 on June
21, 2000 and 75,000 on August 1, 2000, which vest in equal installments over a
five-year period and have a ten-year term, subject to the terms of the 1984
Plan; (iv) in September 2000, an additional 13,700 shares of performance-based
restricted stock subject to the fulfillment of certain criteria over a two-
year performance period ending July 31, 2002; (v) an additional annual
incentive payable in 2001 with a target amount of $571,975, with the actual
amount to be paid based on an agreed-upon goal achievement ranging from 0% to
150% of the target amount; (vi) effective January 1, 2001, a $627,090 credit
into a deferred compensation account under a proposed Company Executive
Deferred Compensation Plan, or a payment of $822,000 if such Plan is not
approved; (vii) a credit of five additional years of service for vesting under
the SERP; and (viii) the right to receive additional benefits upon termination
after age 55, if his vested benefits under the SERP and the Company's defined
benefit pension plan are less than those projected as of the date of hire
under the TRW pension plan.
The agreement also provides for the granting of a change in control
employment agreement for three years following a change in control event, and
relocation assistance. Dr. Sugar will receive special severance benefits if he
is not elected to the Board or elected Chief Executive Officer or is
terminated without cause prior to December 31, 2001, including a cash payment
of $5,000,000, the vesting of restricted stock and stock options and certain
other benefits. The special severance benefits will terminate when Dr. Sugar
is elected to the Board and as Chief Executive Officer.
B-20
<PAGE>
Indebtedness of Management to the Company
As a form of additional incentive, the Company provides loans to certain
key employees. Under the Company's incentive loan program, unsecured loans,
not to exceed an aggregate of $6,000,000 outstanding at any one time, may be
made to not more than 50 employees and may not exceed the annual base salary
of the borrower. These loans presently bear interest at the rate of 4% per
annum and are payable on the Company's demand, or upon (i) termination of the
borrower's employment or (ii) December 31, 2001, whichever occurs first.
Granting of loans to executive officers, including the named executive
officers, requires the approval of the Compensation and Selection Committee.
Under the program, loans in an aggregate principal amount of $2,215,000
were outstanding as of October 27, 2000, to the following executive officers:
Mr. Brown, $275,000; Mr. Halamandaris, $250,000; Mr. Steuert, $400,000;
Dr. Sugar, $600,000 and four other executive officers, $690,000, in aggregate.
The total of these amounts also represents the largest aggregate amount
outstanding since August 1, 1999.
B-21
<PAGE>
REPORT OF THE COMPENSATION AND SELECTION COMMITTEE
The Compensation and Selection Committee of the Board of Directors (the
"Committee") establishes the salaries and other compensation of the executive
officers, including the CEO and the other individuals listed in the "Summary
Compensation Table" ("Named Executive Officers"). The Committee consists
entirely of non-employee directors.
Compensation Philosophy and Components
The Company's executive compensation program is designed to:
. provide the level of total compensation necessary to attract and retain
executives in its industries;
. link compensation to the Company's performance and to the interests of
stockholders;
. recognize both individual and team performance through incentive
compensation programs;
. balance rewards for short-term versus long-term results; and
. encourage executives to make a long-term career commitment to the
Company and its stockholders.
The program consists of, and is intended to balance, three elements: (1)
base salaries payable in cash; (2) annual performance awards payable in cash
or stock or a combination of both; and (3) long-term, stock-based incentive
awards. The market data used by the Committee to administer the executive
compensation program is provided through surveys conducted by external
compensation consultants and presented to the Committee annually as part of
the determination of the succeeding year's executive compensation structure.
Salaries
The Committee determines the salary ranges for each of the executive
officer positions based upon the scope, level and strategic impact of the
position, and on the pay level for similarly positioned executive officers in
comparable companies. Annual base salary is designed to compensate executives
for ongoing performance throughout the year.
Annual Performance Awards
The Committee administers annual performance awards under the Annual
Incentive Plan which were approved by the Committee pursuant to the Company's
Performance Award Plan approved by the Company's stockholders in 1996. Annual
performance awards are generally based on the Company's financial results as
measured against pre-determined targets. Awards are payable in full in October
following the end of the fiscal year for which the awards are granted. In
November 1999, the Committee established a Fiscal Year 2000 Annual Incentive
Plan, which established performance objectives (such as sales, earnings per
share or operating profit, cash flow return on investment ("CFROI") and free
cash flow) for approximately 450 eligible participants, including the Named
Executive Officers.
At the beginning of each fiscal year, the Committee sets the financial
performance objectives and each participant is assigned a percentage of his or
her base salary as the target of his or her bonus award. A participant's bonus
award is calculated at the end of the fiscal year based upon the participant's
individual achievement and the attainment of financial objectives by his or
her group or division. Certain senior executive officers, including three of
the Named Executive Officers, receive annual performance awards based solely
upon pre-determined financial objectives. In determining the level of awards
following the fiscal year end, the Committee reviews the accomplishments and
achievements of management as well as the Company's financial performance
during that past year.
Based upon the Company's actual performance during the 2000 fiscal year,
the performance goals were met at a level that would have entitled the
corporate participants, including corporate executive officers and two of the
Named Executive Officers (excluding Dr. Sugar who received a guaranteed bonus
in accordance with his
B-22
<PAGE>
employment agreement), to receive an award equal to approximately 104% of
their base salaries. Under the Performance Award Plan, the Committee has
discretion to approve appropriate adjustments to the performance objective if
the Committee determines that external changes or other unanticipated business
conditions have materially affected the fairness of the performance objective.
In that regard, the Committee analyzed the Company's 2000 financial results
and decided to apply a formula which would correlate the bonuses with the
Company's operating results and therefore substantially reduced the maximum
bonus amounts which would have been paid under the achievement of corporate
performance goals. Bonus awards to the corporate executive officers would have
totaled $4,099,275, but, following the adjustment by the Committee, bonus
awards totaling $3,446,573 were approved.
Long-Term Stock Incentives
The principal component of long-term compensation is stock options granted
annually. The Committee grants stock options pursuant to the Company's regular
stock options program, and sets guidelines for the number and terms of such
grants based on peer group data and the Company's business objectives. Options
granted by the Committee are at fair market value, and generally become
exercisable in cumulative installments over a period of five years.
During fiscal year 2000, a total of 330,610 stock options (including
150,000 options granted to Dr. Sugar in June 2000 as required by his
employment agreement) were granted to participants under the 1984 Plan. In
September 2000 (after the end of the 2000 fiscal year), the Committee awarded
options to purchase 1,282,300 Common Shares to approximately 600 holders under
the 1984 Plan. Of the stock options awarded in September 2000, Named Executive
Officers received options to purchase Common Shares as follows: Mr. Brown,
80,500; Dr. Sugar, 50,000; Mr. Steuert, 35,000; Mr. St. Pe, 16,000; and Mr.
Halamandaris, 15,000. Dr. Sugar also received a grant of options to purchase
75,000 Common Shares on August 1, 2000 in accordance with the terms of his
employment agreement.
In fiscal year 2000, the Committee also decided to grant performance-based
restricted stock under the 1984 Plan allowing participants to earn a maximum
of 45,400 Common Shares based upon three-year internal sales growth and CFROI
performance objectives approved by the Committee. In September 2000 the
Committee granted performance-based restricted stock to 16 participants who
will be eligible to receive a maximum of 78,750 Common Shares based upon
three-year internal sales growth and CFROI performance objectives. Of these
shares, Named Executive Officers were granted the following maximum number of
shares of performance-based restricted stock: Mr. Brown, 16,500; Dr. Sugar,
13,700; Mr. Steuert, 5,900; Mr. St. Pe, 5,600 and Mr. Halamandaris, 5,600. The
Committee also granted to Dr. Sugar a maximum of 13,700 shares of performance-
based restricted stock that will vest on July 31, 2002 based upon performance
objectives, measured upon two-years' internal sales growth and CFROI. This
grant to Dr. Sugar in September 2000 was made in accordance with the terms of
his employment agreement.
Shares of performance-based restricted stock generally vest at the end of a
three-year period upon achievement of prescribed performance objectives
determined by the Committee. The Committee has determined that grants of
performance-based restricted stock will continue as a component of the
Company's long-term compensation program.
The Committee's decisions concerning the fiscal year 2000 compensation
elements for the executive officers were made within this broad framework and
in light of each executive officer's level of responsibility, performance,
current salary, prior-year bonus and other compensation awards. The
Committee's specific decisions involving fiscal year 2000 compensation were
ultimately based upon the Committee's judgment about the individual executive
officer's performance and potential future contributions, and whether each
particular payment or award would provide an appropriate reward and incentive
for the executive to sustain and enhance the Company's long-term performance.
B-23
<PAGE>
Compensation of the Chief Executive Officer
Mr. Brown became Chief Executive Officer in March 1998, and Chairman of the
Board in March 1999. He also served as President until June 21, 2000. Mr.
Brown's total annual compensation earned for the 2000 fiscal year, including
salary and annual performance award, was $1,421,010. The Committee considered
four factors in determining Mr. Brown's total compensation: (1) a review of
the total compensation of CEOs at the Company's peer group of companies and
comparative general industry data; (2) the Company's performance during the
1999 fiscal year to determine fiscal year 2000 salary; (3) the Company's
performance during the 2000 fiscal year to determine his annual performance
award; and (4) Mr. Brown's contributions to the Company's performance.
During fiscal year 2000, Mr. Brown's salary was $725,005, which reflected
an upward adjustment in March 1999 in recognition of his additional duties as
Chairman of the Board. Based on the Company's performance for fiscal year
2000, Mr. Brown received an annual performance award of $696,005. In
determining Mr. Brown's performance award, the Committee considered the
achievements highlighted above under the heading "Annual Performance Awards"
and his contribution to those achievements. As noted above, the amount of Mr.
Brown's performance award was reduced because of the Committee's adjustment of
2000 financial performance targets following the end of the fiscal year.
During the 2000 fiscal year, Mr. Brown received a grant of a maximum of
15,000 shares of performance-based restricted stock. In September 2000, Mr.
Brown received a grant of options to purchase 80,500 Common Shares and a grant
of a maximum of 16,500 shares of performance-based restricted stock.
Tax Policy
The Committee has reviewed the potential consequences for the Company of
Section 162(m) of the Code, which imposes a limit on tax deductions for annual
compensation in excess of $1 million paid to any of the Named Executive
Officers. The Company has designed its executive compensation programs to
preserve its ability to deduct compensation paid to executives under these
programs. The Committee intends to weigh the benefits of full deductibility
with the objectives of the executive compensation program and, if the
Committee believes to do so is in the best interests of the Company and its
stockholders, it may make compensation arrangements which may not be fully
deductible under Section 162(m). This provision did not have a material impact
on the Company during the 2000 fiscal year.
B-24
<PAGE>
PERFORMANCE GRAPH
(COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*)
The following graph illustrates the performance of the Common Shares over
the five-year period from August 1, 1995 through July 31, 2000, compared to
the performance of the Standard & Poor's 500 Index ("S & P 500 Index") and the
Standard & Poor's Aerospace/Defense Index ("S & P Aerospace/Defense Index"):
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Common Shares........................ 100.00 111.69 134.90 148.86 178.57 128.41
S & P 500 INDEX...................... 100.00 116.57 177.35 211.55 254.29 277.12
S & P AEROSPACE/DEFENSE INDEX........ 100.00 129.76 183.87 139.72 146.26 145.55
</TABLE>
--------
* Assumes $100 invested on August 1, 1995 in Common Shares, the S&P 500 Index
and the S&P Aerospace/Defense Index (dividends reinvested).
B-25
