SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from Commission file number
to 1-3229
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-1055798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East
Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 553-6262
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
Securities Registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of February 14, 1997, 57,972,721 shares of Common Stock were
outstanding, and the aggregate market value of the Common Stock (based upon
the closing price of the stock on the New York Stock Exchange) of the
Registrant held by nonaffiliates was approximately $4,400 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders. Part III
NORTHROP GRUMMAN CORPORATION
PART I
Item 1. Business
Northrop Corporation was incorporated in Delaware in 1985. Effective
May 18, 1994, Northrop Corporation was renamed Northrop Grumman
Corporation. Northrop Grumman is an advanced technology company operating
in the aircraft and electronics industry segments of the broadly defined
aerospace industry. The aircraft segment includes the design, development
and manufacturing of aircraft and aircraft subassemblies. The electronics
segment includes the design, development, manufacturing and integration of
electronic systems for military and commercial use and the operation and
support of computer systems for scientific and management information.
Additional information required by this Item is contained in Part II
Item 7 of this Annual Report on Form 10-K.
NORTHROP GRUMMAN CORPORATION
Item 2. Properties
The major locations, general status of the company's interest in the
property and identity of the industry segments that use the property
described, are indicated in the following table.
Location Property Interest
Annapolis, Maryland (2) (a) (b) (c) (d) Owned
Arlington, Virginia (1) (3) (a) Leased
Auburn, Washington (1) (c) Leased
Baltimore, Maryland (2) (b) (c) (d) Leased
Benton, Pennsylvania (2) (b) Leased
*Bethpage, New York (2) (3) (a) (b) (c) (d) Owned, Leased
Bohemia, New York (2) (a) Owned, Leased
Bridgeport, West Virginia (2) (a) (b) Owned, Leased
Burlington, Canada (2) (a) (b) (c) (d) Owned
Calverton, New York (2) (a) (b) (c) (d) (e) Owned
Carson, California (1) (c) Leased
Chandler, Arizona (1) (a) (b) Owned
Cincinnati, Ohio (2) (b) Leased
Cleveland, Ohio (2) (b) Owned
College Station, Texas (2) (b) Owned
Compton, California (1) (b) (c) Owned, Leased
El Segundo, California (1) (a) (b) (c) (d) Owned
Fairborn, Ohio (2) (a) Leased
Fort Tejon, California (1) (d) Owned, Leased
Gardena, California (1) (c) Owned
Glen Arm, Maryland (2) (b) Owned
Glen Burnie, Maryland (2) (a) Owned
Grand Prairie, Texas (1) (a) (b) (c) (d) Owned, Leased
Great River, New York (2) (a) (b) Owned
Hanover, Maryland (2) (b) Leased
Hawthorne, California (1) (2) (3) (a) (b) (c) (d) Owned, Leased
Herndon, Virginia (1) (2) (a) Leased
*Hicksville, New York (2) (a) (d) (e) Owned
Houston, Texas (2) (a) Leased
Hunt Valley, Maryland (2) (b) Leased
Kent, Washington (1) (c) Leased
NORTHROP GRUMMAN CORPORATION
Lake Charles, Louisiana (1) (a) (b) (c) Leased
Lawton, Oklahoma (1) (a) (c) Owned, Leased
Lexington, South Carolina (1) (a) (c) Owned
Linthicom, Maryland (2) (a) (b) (c) Owned, Leased
Los Angeles, California (1) (2) (3) (a) Leased
Melbourne, Florida (2) (a) (b) (c) (e) Owned, Leased
Melville, New York (2) (b) Leased
Milledgeville, Georgia (1) (b) (c) (e) Owned
Mojave, California (1) (e) Owned, Leased
Montgomery, Pennsylvania (1) (b) Owned
New Town, North Dakota (2) (b) (c) Owned, Leased
Newbury Park, California (3) (a) (b) (c) (d) Owned
Norwalk, Connecticut (2) (a) (b) (c) (d) Leased
Norwood, Massachusetts (3) (b) (c) (e) Owned, Leased
Orlando, Florida (2) (a) (b) (c) (d) Leased
Palatine, Illinois (2) (c) Leased
Palmdale, California (1) (a) (b) (c) (d) (e) Owned, Leased
Perry, Georgia (1) (3) (a) (b ) (c) Owned
Pico Rivera, California (1) (a) (b) (c) (d) Owned, Leased
Pittsburgh, Pennsylvania (2) (d) Leased
Portsmouth, Rhode Island (1) (b) (e) Owned, Leased
Rolling Meadows, Illinois (2) (a) (b) Owned, Leased
St. Augustine, Florida (1) (a) (b) (c) (e) Owned, Leased
Stuart, Florida (1) (b) (c) Leased
Sturgis, Michigan (1) (a) (b) (c) Owned, Leased
Sunnyvale, California (2) (a) (b) (c) (d) Owned
Sykesville, Maryland (2) (b) Owned
Titusville, Florida (2) (a) (d) Owned, Leased
Torrance, California (1) (b) (c) Owned, Leased
Tulare, California (1) (b) Owned
Warner Robins, Georgia (2) (a) Owned, Leased
Warren, Michigan (1) (b) Leased
__________
* Certain portions of the properties at each of these locations are leased
or subleased to others. The company believes that in the aggregate the
property covered by such leases or subleased to others is not material
compared to the property actually utilized by the company in its
business.
NORTHROP GRUMMAN CORPORATION
Following each described property are numbers indicating the industry
segments utilizing the property:
(1) Aircraft
(2) Electronics
(3) General Corporate Asset
Following each described property are letters indicating the types of
facilities located at each location:
(a) office
(b) manufacturing
(c) warehouse
(d) research and testing
(e) other
Government-owned facilities used or administered by the company
consist of 9 million square feet at various locations across the United
States.
The company believes its properties are well-maintained and in good
operating condition. Under present business conditions and the company's
volume of business, productive capacity is currently in excess of
requirements.
NORTHROP GRUMMAN CORPORATION
Item 3. Legal Proceedings
False Claims Act Litigation
On June 9, 1987, a Complaint, entitled U.S. ex rel, David Peterson and
Jeff Kroll v. Northrop Corporation, was filed in the U.S. District Court
for the Central District of California alleging violations by the company
of the False Claims Act in connection with the operation of petty cash
funds, inspection, testing, and pricing for the MX Peacekeeper Missile
program. On September 1, 1989, the government intervened and reduced the
scope of the lawsuit by filing an amended complaint. The amended complaint
did not completely specify the total amount being sought but, rather,
sought damages in excess of $1.2 million. On May 7, 1990, the Court ruled
that the original plaintiffs could proceed with portions of the lawsuit
that the government had declined to include in the amended complaint. In
1994, the court granted summary judgment for the company on the
government's fraud allegations related to petty cash, integrated test
stations, extended work week and experimental change orders.
A Federal jury trial commenced in the first quarter of 1996 with
respect to the government's remaining allegations. The relators' severed
allegations were resolved prior to trial. The government had asserted
three separate claims totaling approximately $13.5 million, including a
claim for alleged mischarging of approximately $12 million in violation of
the False Claims Act. Damages awarded under the False Claims Act are
subject to doubling or trebling and possible additional penalties including
disallowance of attorneys' fees. In the second quarter of 1996, the
Federal jury returned a unanimous verdict for the company. The
government's motion for a new trial, filed May 30, 1996, was denied on
August 16, 1996. A notice of appeal was filed by the government on
October 10, 1996.
NORTHROP GRUMMAN CORPORATION
In addition, the company is a party to a number of civil actions
brought by private parties alleging violation of the False Claims Act in
which the government has declined to intervene. These actions, which have
been previously reported, relate to the MX Peacekeeper Missile, the Air
Launched Cruise Missile and the Advanced Technology Bomber (B-2) programs.
In a number of these actions, plaintiffs also allege employment-related
claims including claims of wrongful termination. Damages sought include
claims for compensatory and punitive damages. A number of these civil
actions were initially reported when it was unclear what position, if any,
the government would take in the litigation. In light of the government's
decision not to intervene or otherwise pursue the litigation, as well as
the amounts involved, the cases will not be individually reported.
Further, the company learns from time to time that it has been named as a
defendant in lawsuits that are filed under seal pursuant to the False
Claims Act. Since these matters remain under seal, the company does not
possess sufficient information to report accurately on the particular
allegations.
Walsh, et al. v. Northrop Grumman Corporation
In November 1994, a class action complaint was filed against Northrop
Grumman Corporation, Grumman Corporation, Renso Caporali, Howard J. Dunn,
Jr., Robert Denien and Robert E. Foster in the U.S. District Court for the
Eastern District of New York, Case No. CV 94-5105 (Platt C.J.). A first
amended complaint was filed on November 29, 1994 alleging that Grumman
Corporation's March 8 and April 4, 1994 Form 14D-9 filings with the
Securities and Exchange Commission incorporated a statement concerning the
Grumman Severance Plan which violated Sections 10(b) and 14(e) of the
Securities and Exchange Act of 1934 (the "Act") and Rule 10b-5 of the Rules
and Regulations under the Act. The complaint also contains a cause of
NORTHROP GRUMMAN CORPORATION
action for equitable estoppel based upon the same statement and plaintiffs'
alleged reliance thereon. The complaint also alleges that the trustees of
Grumman's Investment Plan violated their fiduciary obligations by voting
the Plan's shares in favor of the merger without consulting the class
members. The complaint seeks an order enjoining the defendants from
amending or discontinuing the Severance Plan for a period of thirty (30)
months from the date of the merger and an order mandating that defendants
permit class members who have accepted voluntary termination with severance
pay to rescind their elections. On December 8, 1994, the court denied
plaintiffs' application for a preliminary injunction but declined to
dismiss the action. On April 7, 1995, the court granted plaintiffs' motion
to amend their complaint to add a claim for damages based on post
acquisition changes to Grumman benefit plans. In July 1995 the court
certified a class of plaintiffs consisting of all employees who, at the
time of the tender offer, were Grumman employees, owned Grumman stock
either directly or beneficially through the Employee Investment Plan, and
were injured as a result of defendants' conduct. Absent dispositive
motions, this matter will proceed to trial in 1997. The defendants intend
to vigorously defend this litigation and the company does not expect this
matter to have a material adverse effect on its financial condition.
NORTHROP GRUMMAN CORPORATION
Executive Officers of the Registrant
The following individuals were the elected officers of the company as
of February 1997:
Business Experience
Name Age Office Held Since Last Five Years
Kent Kresa 58 Chairman, 1990
President & CEO
Herbert W. Anderson 57 Corporate Vice 1995 Vice President and
President and Deputy General
General Manager, Manager, Data
Data Systems & Systems and
Services Division Services Division;
Prior to 1994,
Vice President and
Center General
Manager, Northrop
Information
Services Center
Ralph D. Crosby, Jr. 49 Corporate Vice 1996 Corporate Vice
President and President and
General Manager, Deputy General
Commercial Manager, Commercial
Aircraft Division 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;
Prior to 1994,
Vice President
Business and
Advanced Systems
Development at
the B-2 Division;
Prior to 1992,
Vice President
Business Development
and Administration
B-2 Division
Marvin Elkin 60 Corporate Vice 1996 Corporate Vice President
President and Chief and Chief Human Resources
Human Resources, and Administrative Officer;
Communications and Prior to 1994, Corporate
Administrative Officer Vice President
Administration and Services
Nelson F. Gibbs 59 Corporate Vice 1992 Vice President and
President and Controller
Controller
John E. Harrison 61 Corporate Vice 1994 Senior Vice President
President and and General Manager,
General Manager, Electronics Programs,
Electronics and Systems Aerospace and Electronics
Integration Division Group, Grumman Corporation;
Prior to 1992, President,
Electronics Division,
Grumman Corporation
Robert W. Helm 45 Corporate Vice 1994 Vice President,
President, Legislative Affairs
Government Relations
James C. Johnson 44 Corporate Vice 1996 Corporate Vice
President and President and
Secretary and Assistant Secretary; Prior
General Counsel to 1995, Senior
Corporate Counsel;
Prior to 1992,
Senior Counsel
Charles L. Jones, Jr. 55 Corporate Vice 1996 Corporate Vice
President and President, Quality
Chief Strategic Operations; Prior
Planning Advanced to 1992, Vice
Development and President, Quality
Programs Officer Operations
William H. Lawler 56 Corporate Vice 1997 Vice President and
President and Deputy General
General Manager, Manager, Military
Military Aircraft Aircraft Systems
Systems Division Division; Prior to
1996, Vice President
and Deputy General
Manager, B-2 Division;
Prior to 1995, Vice
President and B-2
Program Manager;
Prior to June 1994,
Vice President,
Business and Advanced
Systems Development,
B-2 Division; Prior to
1994, Vice President
and Deputy, Chief
Engineer, Business
and Advanced
Systems Development,
B-2 Division; Prior
to 1993, Vice President
Engineering and B-2
Chief Engineer, B-2
Division
Richard R. Molleur 64 Corporate Vice 1991
President and
General Counsel
Albert F. Myers 51 Corporate Vice 1994 Vice President, Business
President and Strategy; Prior to 1992,
Treasurer Vice President, Test
Operations, at B-2
Division
James G. Roche 57 Corporate Vice 1996 Corporate Vice
President and President and Chief
General Manager, Advanced Development,
Electronic Sensors Planning, and Public
and Systems Division Affairs Officer; Prior
to 1993, Corporate Vice
President Advanced
Development and
Planning Officer;
Prior to 1992, Vice
President, Advanced
Development and Planning
Richard B. Waugh, Jr. 53 Corporate Vice 1993 Vice President,
President and Chief Taxes, Risk
Financial Officer Management and
Business Analysis
NORTHROP GRUMMAN CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
No information is required in response to this Item.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information required by this Item is contained in Part II,
Item 8 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data
The information required by this Item is contained in Part II, Item 7
of this Annual Report on Form 10-K.
NORTHROP GRUMMAN CORPORATION
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business Conditions
Northrop Grumman's industry segments - aircraft and electronics - are each
a factor in the broadly defined aerospace industry. While Northrop Grumman
is subject to the usual vagaries of the marketplace, it is also affected by
the unique characteristics of the aerospace industry and by certain
elements peculiar to its own business mix.
Northrop Grumman is one of the major companies that compete for the
relatively small number of large, long-term programs that characterize both
the defense and commercial segments of the aerospace business. It is
common in the aerospace industry for work on major programs to be shared
between a number of companies. A company competing to be a prime
contractor can turn out to be a subcontractor. It is not uncommon to
compete with customers, and simultaneously to be both a supplier to and
customer of a given competitor. Over the past several years the aerospace
industry has been going through a consolidation process and along with it,
significant downsizing. These actions, in which Northrop Grumman has
participated, have made competition even more intense than in the
past. The nature of major aerospace programs, conducted under binding
contracts, allows companies that perform well to benefit from a level of
program continuity unknown in many industries. Lockheed Martin and The
Boeing Company, which in late 1996 announced its intention to acquire
McDonnell Douglas, are the largest companies in the aerospace industry at
this time. Northrop Grumman also competes against these and other
companies for a number of large and smaller programs in the electronics and
systems integration areas. Thus, intense competition and long operating
cycles are both characteristic of the industry's - and Northrop Grumman's -
business.
In the first quarter of 1996 Northrop Grumman acquired the defense and
electronics systems business (ESG) of Westinghouse Electric Corporation at
a cost of $2.9 billion. The business acquired is being operated as a
component of the electronics industry segment. The company purchased the
outstanding common stock of Grumman Corporation (Grumman) for $2.1 billion
in the second quarter of 1994. Northrop Corporation was renamed Northrop
Grumman Corporation effective May 18, 1994. In August 1994 the company
purchased the remaining 51 percent interest in Vought Aircraft Company
(Vought) for $130 million. The company had purchased a 49 percent interest
in Vought in 1992.
NORTHROP GRUMMAN CORPORATION
The B-2 bomber, for which the company is the prime contractor, is
Northrop Grumman's largest program. The aircraft segment is responsible
for final assembly of the B-2's airframe and systems integration at its
Palmdale, California facility. The company also manufactures the fuselage
and elements of the B-2's navigation and electronic warfare/situation
awareness system. Major subcontractors include Boeing, which produces the
aft center section, outboard wing sections, landing gear and fuel system,
and Hughes Electronics Corporation, which produces the radar systems. The
U. S. Air Force currently plans to operate two B-2 bomber squadrons of
eight aircraft each with an additional five aircraft available to fill in
for those in depot for periodic maintenance.
The company also is the principal subcontractor to McDonnell Douglas
on the F/A-18 program. The F/A-18 is a fighter/ground-attack aircraft with
configurations equipped for either one or two crew members. Principally
deployed by the U.S. Navy on aircraft carriers, it has also been purchased
by several other nations as a land-based combat aircraft. The company
builds approximately 40 percent of the aircraft including the center and
aft fuselage, vertical tails, and associated subsystems. Of the versions
of the F/A-18 currently in production, the C is a single-seat combat
aircraft that was first delivered to the U.S. Navy in 1987 and the D is a
two-seat version principally used for training. The F/A-18 single-seat E
and two-seat F are enhanced versions currently in the test phase of
development and will serve as the U.S. Navy's next-generation multimission
aircraft.
The company manufactures portions of the Boeing 747, 757, 767 and 777
jetliners, the Gulfstream IV and V business jets, and the McDonnell Douglas
C-17 military transport. Northrop Grumman has been a principal airframe
subcontractor for the Boeing 747 jetliner since the program began in 1966,
producing the fuselage and aft body section for the 747 as well as cargo
and passenger doors, the vertical and horizontal body stabilizers, floor
beams and smaller structural components. The majority of the Boeing
jetliner work is performed at the aircraft segment's production sites in
Hawthorne, California; Grand Prairie, Texas; and Stuart, Florida. Northrop
Grumman manufactures engine nacelles for the Gulfstream IV and other
business jets and has begun production of the wings for Gulfstream's newest
business jet, the Gulfstream V. The company also produces the empennage,
engine nacelles and control surfaces for the McDonnell Douglas C-17, the
U.S. Air Force's most advanced airlifter. The work performed on the C-17,
Gulfstream IV and V, 757, 767, 777 and some of the components of the 747
were added as a result of the Grumman and Vought acquisitions.
NORTHROP GRUMMAN CORPORATION
Northrop Grumman also is a major producer of early warning and
surveillance/battle management aircraft. The company designed and built
all-weather E-2C Hawkeye airborne early warning command-and-control
aircraft that has been in active service with the U.S. Navy since 1973,
also is employed by the air forces of five other nations. The E-2C is
produced by the company's electronics segment.
The company also serves as prime contractor for the E-8 Joint
Surveillance Target Attack Radar System (Joint STARS). Joint STARS
detects, locates, classifies, tracks and targets potentially hostile ground
movement in all weather conditions. It is designed to operate around the
clock, in constant communication through secure data links with air force
command posts, army mobile ground stations or centers of military analysis
far from the point of conflict. The Joint STARS platform is a
remanufactured Boeing 707-300 airframe. The 707 is remanufactured at
Northrop Grumman's Lake Charles, Louisiana site. Final installation of
electronics and testing are performed at the electronics segment
integration and test facility in Melbourne, Florida.
ECM denotes electronic countermeasures equipment manufactured by the
company's electronics segment. The company's Rolling Meadows, Illinois
site produces the AN/ALQ-135, currently the largest program in this
business area. The AN/ALQ-135 is an internally mounted radar jammer
deployed on F-15 fighter aircraft as part of that aircraft's Tactical
Electronic Warfare System. The AN/ALQ-162 Shadowbox, a jammer built
specifically to counter continuous wave radars, has been installed on the
AV-8B and certain foreign F/A-18 aircraft. It is also being deployed on
U.S. Army helicopters and special mission aircraft and has been sold to the
air forces of three other nations. The company is also under contract to
develop and produce a directional infrared countermeasures (DIRCM) system
for the United Kingdom and the U.S. Special Operations Command slated for
use on British helicopters, transports, and U.S. Special Operations Command
C-130 transports to reduce vulnerability to heatseeking missiles. DIRCM is
designed to provide high-powered jamming required to counter more advanced
seekers expected in the twenty-first century.
The company's Baltimore, Maryland site produces the Airborne Self-
Protection Jammer (ASPJ) in a joint venture with ITT-Avionics. The ASPJ is
an internally mounted system that protects tactical aircraft against
numerous radar guided threats. It is currently installed on selected F/A-18
and F-14 aircraft.
Northrop Grumman as the prime contractor to the U.S. Army is
developing a "brilliant" anti-armor submunition, designated as BAT, with
production scheduled to commence in 1998. BAT is a three-foot-long, 44
pound, wide-area-attack submunition that will be used to disable and
destroy armored vehicles and trucks.
NORTHROP GRUMMAN CORPORATION
BATs are meant to be carried and dispensed by a larger missile and designed
to be ejected over an armored vehicle column or attacking formation. Each
BAT has an acoustic sensor that can home in on the noise created by the
tank's or truck's engine and an infrared sensor that can home in on the
heat generated by a vehicle's engine.
The company's electronics segment is a major producer of airborne
radar systems. Included in this business area are the AN/APG-66 and
AN/APG-68 fire control radars for the F-16 aircraft of which more than
6,000 have been produced since 1976. The AN/APG-66 is presently on 16
airborne platforms and is deployed in 20 countries. Northrop Grumman is
currently leading a joint venture with Texas Instruments to develop the
AN/APG-77 radar for the F-22 aircraft. The AN/APG-77 is designed for
air-superiority and strike operations and features a low observable,
active aperture, electronically-scanned array with multi-target all-weather
capability. The company's electronics segment also produces the AN/APY-1/2
surveillance radar system which provides air-to-air surveillance capability for
the E-3 Airborne Warning And Control System (AWACS). AWACS is designed to
detect and track both enemy and friendly aircraft throughout a large volume of
airspace.
The company is a leader in producing marine machinery and advanced
propulsion systems, missile launchers, shipboard instrumentation and
control systems, mine countermeasures and undersea vehicles. Every Nimitz-
class aircraft carrier is fitted with eight turbine generator sets that are
produced at the electronics segment Sunnyvale, California site. Each
shipset of these powerful generators develops enough power to supply a
city of 75,000 people. The company also produces the main propulsion
system for the Navy's Seawolf-class attack submarines.
In addition, the company produces air defense and air traffic control
radar systems for airspace management for both domestic and foreign
customers. The three-dimensional AN/TPS-70/75 radars and predecessor
AN/TPS-43 are among the products in this business area. They have been the
U.S. Air Force air defense system standard since 1968. They are currently
in operation in more than 30 countries, supporting air defense, air
sovereignty, air traffic control and counternarcotics needs. The ASR-9
Terminal Radar detects and displays aircraft and weather simultaneously,
helping air traffic controllers guide aircraft through the crowded skies
surrounding airports.
NORTHROP GRUMMAN CORPORATION
Northrop Grumman designs, develops, operates and supports computer
systems for scientific and management information. Services provided
include systems integration, systems service, information conversion and
training for federal, state and local governments and private industry.
The company also provides military base support functions and aircraft
maintenance at a number of U.S. Government facilities.
Tables of contract acquisitions, net sales and funded order backlog
follow and complement industry segment data. The reporting of industry
segment data has been realigned based upon the company's current mix of
products. Operating results for those programs formerly reported in the
missiles and unmanned vehicles segment along with aircraft services
programs previously included in the data systems and other services segment
(DSOS) are now included in the aircraft segment. The balance of the
programs included in the DSOS and all of the operations of ESG are included
in the electronics industry segment. Data for prior years has been
restated. B-2, F/A-18, Boeing Jetliners (the 747, 757, 767 and 777) and
C-17 are currently the major programs of the aircraft industry segment.
Surveillance Aircraft (the E-2C Hawkeye and E-8 Joint STARS), ECM, Airborne
Radar, Marine, Space and Airspace Management are included in the
electronics industry segment.
Individual companies prosper in the competitive aerospace/defense
environment according to their ability to develop and market innovative
products. They also must have the ability to provide the people,
facilities, equipment and financial capacity needed to deliver those
products with maximum efficiency. It is necessary to maintain, as the
company has, sources for raw materials, fabricated parts, electronic
components and major subassemblies. In this manufacturing and systems
integration environment, effective oversight of subcontractors and
suppliers is as vital to success as managing internal operations. Northrop
Grumman's operating policies are designed to enhance these capabilities.
The company also believes that it maintains good relations with its
employees, approximately 13 percent of whom are covered by collective
bargaining agreements.
U.S. Government programs in which Northrop Grumman either
participates, or strives to participate, must compete with other programs
for consideration during our nation's budget formulation and appropriation
processes. As a consequence of the continued pressure to reduce the
federal budget deficit, the U.S. defense budget is not expected to increase
substantially in the near term. Budget decisions made in this environment
will have long-term consequences for the size and structure of Northrop
Grumman and the entire defense industry. An important factor in
determining Northrop Grumman's ability to compete successfully for future
contracts will be its cost structure vis-a-vis other bidders.
NORTHROP GRUMMAN CORPORATION
Although the ultimate size of future defense budgets remains
uncertain, the defense needs of the nation are expected to provide
substantial research and development (R&D) funding and other business for
the company to pursue well into the future.
Northrop Grumman has historically concentrated its efforts in such
high technology areas as stealth, airborne surveillance, battle management,
precision weapons and systems integration. Even though a high priority has
been assigned by the Department of Defense to the company's major programs,
there remains the possibility that one or more of them may be reduced,
stretched or terminated.
Business conditions in the commercial aircraft industry appear to be
on the upswing. The major producers of jetliners recorded more than twice
the number of new aircraft orders in 1995 than in 1994. This positive
trend continued in 1996, potentially signifying a new commercial airplane
buying cycle. Northrop Grumman, with its involvement on various Boeing
jetliners, remains optimistic about the long-term prospects for its
commercial structures business.
Northrop Grumman pursues new business opportunities when justified by
acceptable financial returns and technological risks. The company examines
opportunities to acquire or invest in new businesses and technologies to
strengthen its traditional business areas. Northrop Grumman continues to
capitalize on its technologies and skills by entering into joint ventures,
partnerships or associations with other companies.
NORTHROP GRUMMAN CORPORATION
Results Of Operations By Industry Segment And Major Customer
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Revenue
Aircraft
United States Government $ 3,217 $ 3,735 $ 4,434 $ 3,899 $ 4,281
Other customers 802 837 703 567 583
Intersegment sales 256 188 74 1 1
4,275 4,760 5,211 4,467 4,865
Electronics
United States Government 3,482 1,969 1,238 582 677
Other customers 570 277 336 15 9
Intersegment sales 42 103 106 114 120
4,094 2,349 1,680 711 806
Intersegment eliminations (298) (291) (180) (115) (121)
Total revenue $ 8,071 $ 6,818 $ 6,711 $ 5,063$ 5,550
Operating Profit
Aircraft $ 515 $ 471 $ 487 $ 251 $ 269
Electronics 344 211 141 59 65
Total operating profit 859 682 628 310 334
Adjustments to reconcile
operating profit to operating margin:
Other income included above (17) (6) (3) (2)
State and local income taxes (48) (37) (28) (18) (12)
General corporate expenses (123) (109) (113) (96) (102)
Mark-to-market restricted stock rights (13)
Special termination benefits (282)
Operating margin $ 658 $ 536 $ 199 $ 193 $ 218
</TABLE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Contract Acquisitions
Aircraft $ 4,056 $ 1,986 $ 8,580 $ 4,191 $ 3,596
Electronics 6,468 2,606 3,385 616 568
Total acquisitions $10,524 $ 4,592 $11,965 $ 4,807 $ 4,164
Funded Order Backlog
Aircraft $ 7,114 $ 7,077 $ 9,663 $ 6,220 $ 6,495
Electronics 5,286 2,870 2,510 699 680
Total backlog $12,400 $ 9,947 $12,173 $ 6,919 $ 7,175
Identifiable Assets
Aircraft $ 2,387 $ 2,537 $ 3,222 $ 1,993 $ 2,148
Electronics 5,970 2,367 2,181 404 448
Operating assets 8,357 4,904 5,403 2,397 2,596
General corporate 1,065 551 644 542 566
Total assets $ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
Capital Expenditures
Aircraft $ 85 $ 86 $ 89 $ 80 $ 54
Electronics 108 44 44 54 67
General corporate 1 3 1 1 2
Total expenditures $ 194 $ 133 $ 134 $ 135 $ 123
Depreciation and Amortization
Aircraft $ 118 $ 172 $ 166 $ 150 $ 96
Electronics 247 110 103 63 63
General corporate 2 1 1 1
Total depreciation and amortization $ 367 $ 283 $ 269 $ 214 $ 160
</TABLE>
NORTHROP GRUMMAN CORPORATION
Northrop Grumman, as well as many other companies in the defense
industry, suffered the effects of the Department of Defense's practice in
the 1980s of structuring high-risk research and development contracts,
such as the Tri-Service Standoff Attack Missile (TSSAM), as fixed-price or
capped cost-reimbursement type contracts. Although Northrop Grumman has
stopped accepting these types of contracts, it has experienced financial
losses on TSSAM and other similar programs acquired under them in the past.
In the event of termination for convenience, contractors are normally
protected by provisions covering reimbursement for costs incurred
subsequent to termination. The company received a termination for
convenience notice on the TSSAM program in February 1995. In December
1996, the company filed a lawsuit against the U.S. Government in the U.S.
Court of Federal Claims seeking the recovery of approximately $750 million
for uncompensated performance costs, investments, and a reasonable profit.
In prior years, the company had charged to operations in excess of $600
million related to this program. Northrop Grumman is unable to predict
whether it will realize some or all its claims against the U.S. Government
from the TSSAM contract. The company does not expect that these actions
will have a material adverse effect on the company's financial position.
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, with noncompliance found by any one agency
possibly resulting in fines, penalties, debarment or suspension from
receiving additional contracts with all agencies. Given the company's
dependence on U. S. Government business, suspension or debarment could have
a material adverse affect on the company's future. Moreover, these
contracts may be terminated at the U. S. Government's convenience as was
done with the TSSAM program. While Northrop Grumman conducts most of its
business with the U.S. Government, principally the Department of Defense,
commercial sales still represent a significant portion of total revenue.
NORTHROP GRUMMAN CORPORATION
Federal, state and local laws relating to the protection of the
environment affect the company's manufacturing operations. The company has
provided for the estimated cost to complete remediation where it is
probable that the company will incur such costs in the future, including
those for which it has been named a Potentially Responsible Party (PRP) by
the Environmental Protection Agency or similarly designated by other
environmental agencies. The company has been designated a PRP under
federal Superfund laws at 16 hazardous waste sites and under state
Superfund laws at six sites. It is difficult to estimate the timing and
ultimate amount of environmental cleanup costs to be incurred in the future
due to the uncertainties regarding the extent of the required cleanup and
the status of the law, regulations and their interpretations. Nonetheless,
to assess the potential impact on the company's financial statements,
management estimates the total reasonably possible remediation costs that
could be incurred by the company. Such estimates take into consideration
the professional judgment of the company's environmental engineers and,
when necessary, consultation with outside environmental specialists. In
most instances, only a range of reasonably possible costs can be estimated.
However, in the determination of accruals the most probable amount is used
when determinable and the minimum is used when no single amount is more
probable. The company records accruals for environmental cleanup costs in
the accounting period in which the company's responsibility is
established and the costs can be reasonably estimated. Management
estimates that at December 31, 1996, the reasonable range of future costs
for environmental remediation, including Superfund sites, is $63 million to
$107 million, of which $64 million has been accrued. The amount accrued
has not been offset by potential recoveries from insurance carriers or
other PRPs. Should other PRPs not pay their allocable share of remediation
costs, the company may have to incur costs in addition to those already
estimated and accrued. The company is making the necessary investments to
comply with environmental laws; the amounts, while not insignificant, are
not considered material to the company's financial position or results of
its operations.
NORTHROP GRUMMAN CORPORATION
Measures of Volume
Contract acquisitions tend to fluctuate and are determined by the size and
timing of new and add-on orders. The effects of multiyear orders and/or
funding can be seen in the highs and lows shown in the following table.
The funded order backlog of ESG, Grumman and Vought on the date the
businesses were acquired are reflected as acquisitions in the years they
were acquired. The Airborne Radar, Marine and Airspace Management business
areas were added as part of the ESG acquisition. The 757, 767, 777
(included in Boeing Jetliners category), Surveillance Aircraft (E-2 and E-8
Joint STARS) and C-17 programs were acquired as part of Grumman and Vought.
B-2 acquisitions in 1996 included $453 million for the upgrade of test
vehicle AV-1 to operational status increasing the program to 21 operational
aircraft. The balance of B-2 acquisitions in 1996 and acquisitions for
1995 include incremental funding for ongoing development work, spares and
other customer support for the operational aircraft program. In 1994,
$2.4 billion of funding to complete five B-2 production aircraft was
received as well as incremental funding for ongoing development work,
spares and other customer support. The company still stands to gain future
new post production business, such as airframe depot maintenance, repair of
components, operational software changes and product improvement
modifications. The debate over the future of the B-2, which is built in
the nation's only active bomber producing facility, is now taking place.
Without future production orders the nation's multibillion-dollar
investment in this capability will be disassembled and become retrievable
only at a large additional cost.
Contract Acquisitions
$ in millions 1996 1995 1994 1993 1992
B-2 $ 1,682 $ 475 $ 3,646 $ 2,632 $ 2,235
Surveillance Aircraft 1,330 1,084 2,287
F/A-18 759 888 462 832 707
Boeing Jetliners 737 464 1,177 242 76
Airborne Radar 1,639
Marine 901
ECM 335 592 323 445 361
Space 414
C-17 383 208 434
Airspace Management 629
Data Systems 240 198 251
All other 1,475 683 3,385 656 785
$10,524 $ 4,592 $11,965 $ 4,807 $ 4,164
NORTHROP GRUMMAN CORPORATION
Acquisitions in 1996 included orders for 62 F/A-18C/D shipsets. In
1996 the company also received long-lead funding for the first phase of the
Low Rate Initial Production (LRIP) of the F/A-18E/F along with continued
funding of the engineering and manufacturing development (EMD) phase of the
program. Orders for 128 F/A-18C/D shipsets were finalized in 1995. In
1994 the company received long-lead funding from the McDonnell Douglas
Corporation for new F/A-18C/D shipsets.
The company received final authorization to produce 50 additional 747
jetliner shipsets in 1996. Advance funding was received from The Boeing
Company in 1995 for the current phase of the 747 jetliner program.
The company recorded orders for 18, 16, and 5 wing shipsets for the
Gulfstream V business jet in 1996, 1995 and 1994 respectively. The company
is producing the Gulfstream V wings under a revenue-sharing agreement with
Gulfstream Aerospace (Gulfstream). The company will recognize revenue for
its proportionate share of the revenue of each business jet when they are
delivered to the ultimate customer by Gulfstream. Gulfstream has received
70 orders for the Gulfstream V through December 1996. The Gulfstream V
received provisional certification in December 1996 and full certification
is expected late in the first quarter of 1997. The company is using
program accounting for the Gulfstream V with an estimated program of 250
shipsets to be delivered over a ten-year period. Inventoried costs at
December 31, 1996 include $56 million of learning-curve costs for this
program. The learning-curve costs represent the excess of production cost
of delivered and in process items over the estimated average unit cost.
This concept assumes that production cost per unit decreases over time due
to efficiencies from continuous improvements in the performance of
repetitive tasks. All nonrecurring costs for the development of the wings
have been expensed as incurred.
ECM acquisitions for 1995 included an award of $279 million from the
United Kingdom Ministry of Defence to develop and produce the DIRCM
systems.
The balance of ESG, Grumman and Vought funded order backlog at the
dates of acquisition, for those programs not listed in the table, is
included in the "all other" category. ESG accounts for the major increase
in the "all other" category in 1996 over 1995 and Grumman and Vought
account for the increase in 1994 over 1993.
NORTHROP GRUMMAN CORPORATION
Year-to-year sales vary less than contract acquisitions and reflect
performance under new and ongoing contracts. The 1996 results of
operations include ESG since the acquisition in March 1996. Comparative
results for 1995 and prior do not include ESG data. The 1994 results of
operations include Grumman and Vought since the acquisitions in April and
August 1994, respectively. Comparative results for 1993 and prior do not
include Grumman and Vought data.
Sales for 1996 were the highest in the company's history and were 18
percent higher than the previous record registered in 1995. Without the
ESG acquisition, sales for 1996 would have declined 11 percent from the
1995 level. Sales for 1995 were 2 percent higher than in 1994 and without
the Grumman and Vought acquisitions, sales for 1994 would have declined 10
percent from the 1993 level.
Net Sales
$ in millions 1996 1995 1994 1993 1992
B-2 $ 1,725 $ 1,914 $ 2,392 $ 2,881 $ 3,212
Surveillance Aircraft 1,104 1,179 754
F/A-18 715 822 817 641 610
Boeing Jetliners 569 569 483 531 549
Airborne Radar 560
Marine 496
ECM 398 351 357 372 378
Space 315
C-17 249 244 121
Airspace Management 223
Data Systems 208 187 120
All other 1,509 1,552 1,667 638 801
$ 8,071 $ 6,818 $ 6,711 $ 5,063 $ 5,550
The decreasing trend in the B-2 revenues from both EMD and production
work continued in 1996. The level of EMD effort, included in amounts
reported as contract R&D, constituted 33 percent of the total B-2 revenue,
up from 30 percent in 1995 and 26 percent in 1994. Current planning data
indicate that the level of overall B-2 revenue will decline roughly 20
percent per year for the remainder of the decade.
Sales increased in 1996 for the C/D version of the F/A-18 program with
an increase of deliveries to 68, as compared to 56 shipsets delivered in
1995 and 42 delivered in 1994. The company currently plans to deliver 35
F/A-18C/D shipsets in 1997. F/A-18E/F revenue was lower in 1996 with the
delivery of the final three shipsets for the EMD phase of the program. A
total of seven shipsets were delivered under the F/A-18E/F EMD contract in
1995. The LRIP phase of the F/A-18E/F program began in late 1996.
NORTHROP GRUMMAN CORPORATION
Deliveries of 747 shipsets were 28 in 1996, 24 in 1995 and 31 in 1994.
The change in the mix of Boeing jetliners delivered in 1996 resulted in the
same level of sales as in 1995. Forty-eight 747 shipsets are expected to
be delivered in 1997. Increased deliveries of all Boeing jetliners planned
for 1997 is expected to result in more than a 50 percent increase in
revenue from these programs.
The electronics industry segment revenues increased 74 percent in 1996
as a result of the inclusion of the ESG operations, which more than offset
the reduction in revenue on the company's other electronics programs.
Higher revenues on the E-2 Hawkeye and E-8 Joint STARS programs were the
primary reason for the 40 percent increase in 1995 electronics revenues.
The increase in 1994 was due to the acquisition of Grumman which more than
offset the decrease from lower BAT development revenue and lower ECM sales.
The year-end funded order backlog is the sum of the previous year-end
backlog plus the year's contract acquisitions minus the year's sales.
Backlog is converted into the following years' sales as costs are incurred
or deliveries are made. It is expected that approximately 54 percent of
the 1996 year-end backlog will be converted into sales in 1997.
Funded Order Backlog
$ in millions 1996 1995 1994 1993 1992
B-2 $ 3,693 $ 3,736 $ 5,175 $ 3,921 $ 4,170
Surveillance Aircraft 1,664 1,438 1,533
F/A-18 675 631 565 920 729
Boeing Jetliners 1,480 1,312 1,417 723 1,012
Airborne Radar 1,079
Marine 405
ECM 684 747 506 540 467
Space 99
C-17 411 277 313
Airspace Management 406
Data Systems 174 142 131
All other 1,630 1,664 2,533 815 797
$12,400 $ 9,947 $12,173 $ 6,919 $ 7,175
Total U.S. Government orders, including those made on behalf of
foreign governments (FMS), comprised 76 percent of the backlog at the end
of 1996 compared with 77 percent at the end of 1995 and 80 percent at the
end of 1994. Total foreign customer orders, including FMS, accounted for
17 percent of the backlog at the end of 1996 compared with 13 percent in
1995 and 9 percent in 1994. Domestic commercial business in backlog at the
end of both 1996 and 1995 was 16 percent and 14 percent at the end of 1994.
NORTHROP GRUMMAN CORPORATION
Measures of Performance
The company's operating profit for 1996 was a record high and has improved
in its electronics segment for the last three years. The improvement in
1996 is due to the addition of ESG. The improvements in 1995 and 1994 stem
from both increased revenue and improved operating margin rates in the
electronics segment. Company-wide efforts to reduce costs, install tighter
business controls, improve cash management, dispose of excess assets and
more effectively utilize productive assets are all goals aimed at
contributing to the future success of Northrop Grumman. This financial
report demonstrates the degree to which the accomplishment of these goals
is being achieved.
Operating profit in the aircraft segment increased to its highest
level ever in 1996 principally as a result of increased operating margin on
the C-17 military transport and Boeing jetliners. These items offset the
reduced operating margin on the B-2 program due to lower sales volume. The
amount and rate of operating margin recognized on the 747 increased in 1996
due to increased deliveries and higher operating margin on the deliveries
of the last phase of a 300-shipset production contract.
Aircraft segment operating profit decreased in 1995 primarily as a
result of lower overall sales volume and $31 million in expenditures for
company-sponsored research and development for commercial aerostructures.
The rate and amount of operating margin recorded on the B-2 production
contract increased in 1995 as a result of negotiated contract adjustments
and a revised estimate of the overall operating margin expected to be
earned. This increase was offset by lower operating margin recorded on
decreased revenue on the other phases of the B-2 program. The rate and
amount of operating margin on the F/A-18E/F increased in 1995 due to an
increase in the rate of operating margin being recorded on the EMD
contract. This resulted from the continuing evaluation of the overall
operating margin to be earned on this phase of the program. The increase
on the F/A-18E/F more than offset reduced operating margin earned, on
higher sales volume, for the F/A-18C/D. Fewer deliveries and cost
increases related to a stretch-out of the 300-shipset production contract
for the Boeing 747 jetliner resulted in a lower rate and amount of
operating margin in 1995.
NORTHROP GRUMMAN CORPORATION
Aircraft industry segment operating profit increased in 1994 as margin
rates improved on the B-2 and F/A-18 programs. The rate and amount of
operating margin recorded on the F/A-18E/F increased in 1994 due to an
approximately one and one-half percent increase in the rate of operating
margin being recorded on the EMD contract. The F/A-18 program operating
margin improved in 1994 despite reduced F/A-18C/D shipset deliveries.
These increases were partially offset by a reduction in the rate of
operating margin on the 747 program due to increased costs allocated as a
result of establishing a separate commercial aircraft operating element in
1994 and fewer deliveries than in 1993.
B-2 operating margin improved in 1994 as the amount of margin recorded
on the delivery of four aircraft more than offset reduced operating margin
from lower production and EMD sales. Following the award of the last
increment of production funding for the B-2, the company began recording
future operating margin increases on all production aircraft as these units
are delivered and accepted by the customer. At the time each unit is
delivered an assessment is made of the status of the production contract so
as to estimate the amount of any probable additional margin available
beyond that previously recognized. That unit's proportionate share of any
such unrecognized remaining balance will then be recorded. In this fashion
it is believed that margin improvements will be recognized on a more
demonstrable basis. The current 15 production units are scheduled for
their initial delivery over a five-year period, which began in December
1993. All but two units (four equivalent units for this purpose) will be
returned for scheduled retrofitting with final deliveries beginning in 1997
and ending in 2000.
Operating profit in the electronics segment reached a record level in
1996. The improvement in 1996 is due to the addition of ESG which more
than offset the reductions in the company's other electronics programs.
The reductions were primarily due to reduced volume and a $29 million
charge recorded as a result of the write-down of a claim related to
avionics work performed by Grumman Corporation prior to its acquisition by
Northrop.
NORTHROP GRUMMAN CORPORATION
The increase in 1995 operating profit in the electronics segment was a
result of an increased rate of operating margin and higher sales volume on
the E-2 Hawkeye and increased sales volume on the E-8 Joint STARS program.
The electronics segment operating profit increased in 1994 due primarily to
the addition of the E-2 Hawkeye, E-8 Joint STARS and various other military
electronics programs associated with the Grumman acquisition and an
increased rate of margin recorded in the company's electronic
countermeasures business, which more than offset the $8 million in
provisions recorded by the electronics segment Norwood operation for
unrecoverable costs incurred.
Operating margin in 1996 included $39 million of pension income
compared with $23 million in 1995 and $36 million in 1994. Also impacting
operating margin is the cost of providing retiree health care and life
insurance benefits - $91 million in 1996 versus $87 million in 1995 and $69
million in 1994. A major contributor to the increase in retiree health
care and life insurance benefits cost was the addition of the Grumman and
Vought retiree plans in 1994. Operating margin in 1994 was reduced by $282
million to record the effect of an early retirement incentive program.
In 1996 the company recorded a $90 million pretax charge related to
the closure of four plants. The charge included $30 million for costs
related to the reduction of personnel and other closure activities, which
lowered operating profit in the aircraft and electronics industry segments
by $22 million and $8 million, respectively, and $60 million for the write-
down of facilities included in Other Deductions in the Consolidated
Statements of Income. The company recorded a $42-million pretax charge in
1994 for the planned disposal of excess real estate and other assets. This
charge is reported in Other Deductions in the Consolidated Statements of
Income. These charges were a result of the company's continuing efforts to
reduce operating costs and dispose of assets that have become excess due to
changes in the company's business strategy.
Interest expense increased $133 million in 1996, following increases
of $28 million in 1995 and $71 million in 1994. The increase in 1996 came
primarily from the issuance of debt to finance the ESG acquisition. The
increases in 1995 and 1994 came primarily from the issuance of debt related
to the financing of the acquisition of Grumman. Total debt at
December 31, 1996 stood at $3.4 billion compared to $1.4 billion at the end
of 1995 and $1.9 billion at the end of 1994.
The company's effective federal income tax rate was 39.1 percent in
1996, 38.4 percent in 1995 and 46.2 percent in 1994. The decrease in the
1995 rate was due to a reduction in the ratio of expenses not deductible
for income taxes to the tax provision at the statutory rate of 35 percent.
The higher rates in 1996 and 1994 were due to the amount of expenses not
deductible for income taxes, primarily the amortization of goodwill.
NORTHROP GRUMMAN CORPORATION
Measures of Liquidity and Capital Resources
The trend and relationship of sales volume with net accounts receivable and
inventoried costs is a useful measure in assessing the company's liquidity.
In 1994, the company's net investment in these balances represented 33
percent of sales. It decreased to 29 percent at the end of 1995 before
increasing to 30 percent at year-end 1996 with the acquisition of ESG.
Cash flows from operations over the last three years have averaged
over $600 million annually. The $701 million of cash flow from operations
in 1996 was a decrease of $43 million from 1995 which was an increase of
$303 million over 1994 which in turn was a $61 million increase over that
of 1993. These cash flows have been sufficient to service debt, finance
capital expansion projects and continue paying dividends to shareholders.
The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.
Year ended December 31 1996 1995 1994 1993 1992
Cash came from
Customers 65% 96% 71% 99% 98%
Lenders 30 2 29 1 2
Shareholders 4
Buyers of assets/other 1 2
100% 100% 100% 100% 100%
Cash went to
Employees and suppliers of
services and materials 57% 83% 65% 89% 93%
Sellers of assets 23 2 18 1
Lenders 14 12 15 8 3
Suppliers of facilities/other 5 2 1 2 2
Shareholders 1 1 1 1 1
100% 100% 100% 100% 100%
The increased cash received from lenders in 1996 and 1994 resulted
from borrowing for the acquisitions of ESG and Grumman respectively. The
cash received from shareholders in 1996 was from a public stock offering in
which the company issued approximately 8 million shares of common stock at
$63.25 per share. The net proceeds of $493 million were used to pay down
outstanding debt under the company's Credit Agreement.
NORTHROP GRUMMAN CORPORATION
In connection with the financing of the Grumman acquisition, the
company in April 1994, replaced its $400 million Credit Agreement with a
new $2.8 billion Credit Agreement. The new facility provided for
$600 million, available on a revolving credit basis through March 1999 and a
$2.2 billion term loan payable through March 1999. The Credit Agreement
was amended in May 1994 to increase the revolving credit line to
$800 million and reduce the term loan to $2 billion. In October 1994, the
company issued $350 million of notes due in 2004 and $250 million of
debentures due in 2024 pursuant to a public offering. The net proceeds
from the offering, along with other available funds, were used to prepay
$900 million under the term loan facility in addition to paying the $100
million September quarterly installment due under that facility. In
December 1994, the company amended the Credit Agreement to provide for the
repayment of the remaining $1 billion balance of the term loan in 14
quarterly installments of $62.5 million plus interest beginning in
September 1995, with a final installment of $125 million due in March 1999.
Cash flow from operations during 1994 enabled the company to prepay the
$160 million of notes payable to institutional investors due in 1995 and
acquire, in the open market, $58 million of notes due in 1999, while paying
a net premium of $5 million for the early payments of these notes. The
charge for the premium is included in Other Deductions in the Consolidated
Statements of Income. Cash flow from operations in 1995 was sufficient to
allow the company to make the $125 million required term loan payment as
well as $312 million in voluntary payments for amounts that were due
through March 1997.
During the first quarter of 1996 the company sold to institutional
investors $400 million of 7 percent notes due 2006, $300 million of 7 3/4
percent debentures due 2016 and $300 million of 7 7/8 percent debentures
due 2026. The proceeds from this issuance were used to finance a portion
of the purchase price of ESG. The debt indentures contain restrictions
relating to limitations on liens, sale and leaseback arrangements and
funded debt of subsidiaries.
To finance the balance of the purchase price of ESG the company
amended its Credit Agreement with a group of domestic and foreign banks to
provide for three credit facilities: $1.8 billion available on a revolving
credit basis through March 2002; a variable interest $500 million two-year
term loan due March 1, 1998, which was repaid in July 1996; and a variable
interest rate $1.5 billion six-year term loan due in 24 quarterly
installments of $62.5 million plus interest beginning June 1996. Effective
November 1, 1996, the Credit Agreement was further amended to reduce the
$1.5 billion term loan to $1.05 billion payable in 21 quarterly
installments of $50 million plus interest beginning March 1, 1997.
NORTHROP GRUMMAN CORPORATION
During 1995 the company entered into an agreement with a financial
institution to sell designated pools of its commercial accounts receivable,
in amounts up to $75 million. At December 31, 1995, $34 million of
accounts receivable had been sold. Northrop Grumman terminated this
agreement in 1996.
To provide for long-term liquidity the company believes it can obtain
additional capital from such sources as: the public or private capital
markets, the further sale of assets, sale and leaseback of operating
assets, and leasing rather than purchasing new assets.
The cost reduction and cash improvement programs underway throughout
the company have produced favorable results, with the expectation that
further efforts will result in minimizing the need to incur additional
borrowings during 1997. Cash generated from operations is expected to be
sufficient in 1997 to service debt, finance capital expansion projects and
continue paying dividends to the shareholders.
Capital expenditure commitments at December 31, 1996, were
approximately $127 million including $4 million for environmental control
and compliance purposes.
The company will continue to provide the productive capacity to
perform its existing contracts, dispose of assets no longer needed to
fulfill operating requirements, prepare for future contracts and conduct
R&D in the pursuit of developing opportunities. While these expenditures
tend to limit short-term liquidity, they are made with the intention of
improving the long-term growth and profitability of the company.
Forward-Looking Information
Certain statements and assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the
Private Securities Litigation and Reform Act of 1995) that involves risk
and uncertainties, including statements and assumptions with respect to
future revenues, program performance and cash flows, the outcome of
contingencies including litigation and environmental remediation, and
anticpated costs of capital investments and planned dispostions. The
company's operations are necessarily subject to various risks and
uncertainties; actual outcomes are dependent upon many 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; 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 and commercial aircraft and electronic systems
and support; as well as other economic, political and technological risks
and uncertainties.
NORTHROP GRUMMAN CORPORATION
Selected Financial Data
<TABLE>
<CAPTION>
Year ended December 31, $ in millions,
except per share 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales to
United States Government $ 6,699 $ 5,703 $ 5,672 $ 4,481 $ 4,958
The Boeing Company 569 569 483 531 549
Other customers 803 546 556 51 43
Total net sales 8,071 6,818 6,711 5,063 5,550
Net income 234 252 35 96 121
Earnings per share 4.33 5.11 .72 1.99 2.56
Cash dividends per share 1.60 1.60 1.60 1.60 1.20
Net working capital (3) 357 467 481 354
Current ratio 1.00 to 1 1.21 to 1 1.24 to 1 1.45 to 1 1.25 to 1
Total assets $ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
Long-term debt 2,950 1,163 1,633 160 160
Total long-term obligations 4,619 2,234 2,757 468 426
Long-term debt as a percentage of
shareholders'equity 138.6% 79.7% 126.6% 12.1% 12.8%
Operating margin as a percentage of
Net sales 8.2 7.9 3.0 3.8 3.9
Average operating assets 9.9 10.4 5.2 7.7 8.2
Net income as a percentage of
Net sales 2.9 3.7 .5 1.9 2.2
Average assets 3.1 4.4 .8 3.1 3.8
Average shareholders' equity 13.1 18.3 2.7 7.5 9.9
Research and development expenses
Contract $ 1,628 $ 1,175 $ 1,477 $ 1,603 $ 1,693
Noncontract 255 164 121 97 93
Payroll and employee benefits 3,096 2,656 2,661 1,906 2,001
Number of employees at year-end 46,600 37,300 42,400 29,800 33,600
Number of shareholders at year-end 10,136 10,834 11,241 11,618 12,599
Depreciation $ 204 $ 226 $ 227 $ 214 $ 160
Amortization of
Goodwill 81 36 27
Other purchased intangibles 82 21 15
Maintenance and repairs 93 80 105 87 106
Rent expense 90 89 84 47 52
Floor area (millions of square feet)
Owned 22.5 20.1 21.3 12.9 12.6
Commercially leased 8.7 7.0 7.5 3.2 4.2
Leased from United States Government 9.0 10.2 9.4 2.1 1.9
</TABLE>
NORTHROP GRUMMAN CORPORATION
Item 8. Financial Statements and Supplementary Data
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<CAPTION>
December 31, $ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Assets:
Current assets
Cash and cash equivalents $ 44 $ 18 $ 17 $ 100 $ 230
Accounts receivable 1,356 1,197 1,202 820 791
Inventoried costs 1,053 771 1,043 569 670
Deferred income taxes 77 25 38 46 38
Prepaid expenses 67 61 47 25 31
Refundable federal income taxes 84
Total current assets 2,597 2,072 2,431 1,560 1,760
Property, plant and equipment at cost
Land and land improvements 207 192 203 118 117
Buildings 801 780 857 744 719
Machinery and other equipment 2,078 1,864 2,024 1,898 1,982
Leasehold improvements 68 64 62 29 59
3,154 2,900 3,146 2,789 2,877
Accumulated depreciation (1,752) (1,724) (1,768) (1,773) (1,753)
1,402 1,176 1,378 1,016 1,124
Other assets
Goodwill, net of amortization
of $144 in 1996,
$63 in 1995 and $27 in 1994 3,436 1,403 1,359
Other purchased intangibles, net of
amortization of $116 in 1996,
$36 in 1995 and $15 in 1994 988 356 376
Prepaid pension cost, intangible
pension asset and benefit trust fund 229 99 222 278 190
Deferred income taxes 520 255 203 7 7
Investments in and advances to
affiliates and sundry assets 250 94 78 78 81
5,423 2,207 2,238 363 278
$ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
</TABLE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
December 31, $ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 228 $ 65 $ 171 $ $ 100
Current portion of long-term debt 200 144 130 250
Trade accounts payable 452 360 396 324 363
Accrued employees' compensation 315 203 228 146 144
Advances on contracts 230 98 184 40 39
Income taxes payable 25 57 55 12
Deferred income taxes 629 471 413 426 389
Other current liabilities 521 317 387 131 121
Total current liabilities 2,600 1,715 1,964 1,079 1,406
Long-term debt 2,950 1,163 1,633 160 160
Accrued retiree benefits 1,624 1,048 1,070 308 266
Other long-term liabilities 59 39 74 23 26
Deferred income taxes 61 31 16 47 50
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized;
none issued
Common stock, 200,000,000 shares authorized;
issued and outstanding
1996 - 57,928,466; 1995 - 49,462,615;
1994 - 49,241,642; 1993 - 48,913,403;
1992 - 47,398,303 784 272 264 254 205
Retained earnings 1,348 1,199 1,026 1,070 1,051
Unfunded pension losses, net of taxes (4) (12) (2) (2)
2,128 1,459 1,290 1,322 1,254
$ 9,422 $ 5,455 $ 6,047 $ 2,939 $ 3,162
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year ended December 31, $ in millions,
except per share 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales $8,071 $6,818 $6,711 $5,063 $5,550
Cost of sales
Operating costs 6,216 5,319 5,477 4,385 4,877
Administrative and general expenses 1,197 963 753 485 455
Special termination benefits 282
Operating margin 658 536 199 193 218
Other income(deductions)
Interest income 9 1 6 2 4
Other, net (13) 9 (31) 13 5
Interest expense (270) (137) (109) (38) (47)
Income before income taxes 384 409 65 170 180
Federal and foreign income taxes 150 157 30 74 59
Net income $ 234 $ 252 $ 35 $ 96 $ 121
Weighted average common shares outstanding,
in millions 54.0 49.4 49.1 48.1 47.2
Earnings per share $ 4.33 $ 5.11 $ .72 $ 1.99 $ 2.56
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
NORTHROP GRUMMAN CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<CAPTION>
Year ended December 31, $ in millions,
except per share 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Paid-in Capital
At beginning of year $ 272 $ 264 $ 254 $ 205 $ 195
Stock issuance 493
Employee stock awards and options
exercised, net of forfeitures 19 8 10 49 10
At end of year 784 272 264 254 205
Retained Earnings
At beginning of year 1,199 1,026 1,070 1,051 987
Net income 234 252 35 96 121
Cash dividends (85) (79) (79) (77) (57)
At end of year 1,348 1,199 1,026 1,070 1,051
Unfunded Pension Losses, Net of Taxes
At beginning of year (12) (2) (2)
Change in excess of additional minimum
liability over unrecognized
prior service costs 8 (12) 2 (2)
At end of year (4) (12) (2) (2)
Total shareholders' equity $ 2,128 $ 1,459 $ 1,290 $ 1,322 $ 1,254
Book value per share $ 36.74 $ 29.50 $ 26.20 $ 27.04 $ 26.46
Cash dividends per share 1.60 1.60 1.60 1.60 1.20
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 2,226 $ 2,289 $ 2,616 $ 2,028 $ 2,647
Other collections 5,822 4,355 4,767 2,924 2,914
Interest received 9 1 6 2 4
Income tax refunds received 12 48 11 3
Other cash receipts 8 7 13 6 5
Cash provided by operating activities 8,077 6,700 7,413 4,963 5,570
Uses of Cash
Cash paid to suppliers and employees 7,040 5,750 6,786 4,484 5,186
Interest paid 219 144 94 42 47
Income taxes paid 117 59 90 52 48
Other cash payments 3 2 5 5
Cash used in operating activities 7,376 5,956 6,972 4,583 5,286
Net cash provided by operating activities 701 744 441 380 284
Investing Activities
Payment for purchase, net of cash acquired, of
ESG (2,886)
Grumman Corporation (1,842)
Vought Aircraft Company (12)
Additions to property, plant
and equipment (194) (133) (134) (135) (123)
Proceeds from sale of property, plant
and equipment 58 33 17 2 5
Proceeds from sale of affiliates/
operations 45 5 8
Proceeds from sale of marketable securities 28
Funding of retiree benefit trust (25) (31)
Dividends from affiliates, net
of investments 5 2 (47)
Other investing activities 4 (21) 6
Net cash used in investing activities (2,998) (116) (1,963) (123) (165)
Financing Activities
Borrowings under lines of credit 2,734 153 2,371 55 100
Repayment of borrowings under
lines of credit (635) (259) (1,200) (155)
Proceeds from issuance of
long-term debt 1,000 600
Principal payments of long-term debt (1,090) (446) (251) (251) (140)
Proceeds from issuance of stock 499 4 7 41 5
Dividends paid (85) (79) (79) (77) (57)
Other financing activities (100) (9)
Net cash provided by (used in)
financing activities 2,323 (627) 1,439 (387) (92)
Increase(decrease) in cash and
cash equivalents 26 1 (83) (130) 27
Cash and cash equivalents balance at
beginning of year 18 17 100 230 203
Cash and cash equivalents balance
at end of year $ 44 $ 18 $ 17 $ 100 $ 230
</TABLE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 234 $ 252 $ 35 $ 96 $ 121
Adjustments to reconcile net income to
net cash provided
Depreciation 204 226 227 214 160
Amortization of intangible assets 163 57 42
Common stock issued to employees 10 1 3 3
Loss on disposals of property, plant and
equipment 32 34 33 26 11
Retiree benefits cost(income) 52 64 33 (39) (42)
Special termination benefits 282
Decrease(increase) in
Accounts receivable (101) 197 209 (4) 339
Inventoried costs 7 426 (368) 142 63
Prepaid expenses 12 (15) 10 (5) 4
Refundable income taxes 84 (84)
Increase(decrease) in
Progress payments 84 (282) 407 (90) (340)
Accounts payable and accruals 25 (111) (319) (34) (65)
Provisions for contract losses (1) (143) (84) 36 9
Provisions for disposal of real
estate and other assets 50 (8) 42 1 1
Deferred income taxes 126 84 78 26 48
Income taxes payable (32) 2 (25) 12 (25)
Retiree benefits (170) (114) (80) (1) (1)
Other noncash transactions 6 (9) 2 (3) (2)
Net cash provided by operating activities $ 701 $ 744 $ 441 $ 380 $ 284
Noncash Investing and Financing Activities:
Purchase of ESG
Fair value of assets acquired $ 4,003
Cash paid (2,888)
Liabilities assumed $ 1,115
Purchase of Grumman Corporation
Fair value of assets acquired $ 3,495
Cash paid (2,129)
Liabilities assumed $ 1,366
Purchase of Vought Aircraft Company
Fair value of assets acquired $ 722
Cash paid (130)
Liabilities assumed $ 592
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
corporation and its subsidiaries. All material intercompany accounts,
transactions and profits are eliminated in consolidation.
The company's financial statements are in conformity with generally
accepted accounting principles. The preparation thereof requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingencies at
the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Estimates have been
prepared on the basis of the most current and best available information
and actual results could differ from those estimates.
Nature of Operations
Northrop Grumman is a major producer of military and commercial aircraft
subassemblies and defense electronics and is the prime contractor on the
U.S. Air Force B-2 Stealth Bomber. The company operates in the aircraft
and electronics industry segments within the broadly defined aerospace
industry. The majority of the company's products and services are
ultimately sold to the U.S. Government and the company is therefore
affected by the federal budget process and the competition in the aerospace
and defense environment.
Sales to the U.S. Government (including foreign military sales) are
reported within each industry segment and in total in the Selected
Financial Data. The company does not conduct a significant volume of
activity through foreign operations or in foreign currencies.
Descriptions of the company's principal products and services along
with industry segment data, which is considered to be an integral part of
these financial statements, can be found in the Management's Discussion and
Analysis section of this report. Intersegment sales are transacted at cost
incurred with no profit added. Operating profit is defined to include the
Other Income earned by each industry segment, but to exclude costs
allocated to segments for General Corporate Expenses and State and Local
Income Taxes. General corporate assets include cash and cash equivalents,
corporate office furnishings and equipment, other unallocable property,
investments in affiliates, prepaid pension cost, intangible pension asset,
benefit trust fund assets, deferred tax assets and certain assets held for
sale.
NORTHROP GRUMMAN CORPORATION
Sales
Sales under cost-reimbursement, service, research and development, and
construction-type contracts are recorded as costs are incurred and include
estimated earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs (cost-to-cost
type of percentage-of-completion method of accounting). Construction-type
contracts embrace those fixed-price type contracts that provide for the
delivery at a low volume per year or a small number of units after a
lengthy period of time over which a significant amount of costs have been
incurred. Sales under other types of contracts are recorded as deliveries
are made and are computed on the basis of the estimated final average unit
cost plus profit (units-of-delivery type of percentage-of-completion method
of accounting).
Certain contracts contain provisions for price redetermination or for
cost and/or performance incentives. Such redetermined amounts or incentives
are included in sales when the amounts can reasonably be determined. In the
case of the B-2 bomber production contract, future changes in operating
margin will be recognized on a units-of-delivery basis and recorded as each
equivalent production unit is delivered. Amounts representing contract
change orders, claims or limitations in funding are included in sales only
when they can be reliably estimated and realization is probable. In the
period in which it is determined that a loss will result from the
performance of a contract, the entire amount of the estimated ultimate loss
is charged against income. Loss provisions are first offset against costs
that are included in assets, with any remaining amount reflected in Other
Current Liabilities. Other changes in estimates of sales, costs, and
profits are recognized using the cumulative catch-up method of accounting.
This method recognizes in the current period the cumulative effect of the
changes on current and prior periods. Hence, the effect of the changes on
future periods of contract performance is recognized as if the revised
estimates had been the original estimates.
NORTHROP GRUMMAN CORPORATION
Contract Research and Development
Customer-sponsored research and development costs (direct and indirect
costs incurred pursuant to contractual arrangements) are accounted for like
other contracts.
Noncontract Research and Development
This category includes independent research and development costs and
company-sponsored research and development costs (direct and indirect costs
not recoverable under contractual arrangements). Independent research and
development (IR&D) costs are included in administrative and general
expenses (indirect costs allocable to U.S. Government contracts) whereas
company-sponsored research and development costs are charged against income
as incurred.
Environmental Costs
Environmental liabilities are accrued when the company determines it is
responsible for remediation costs and such amounts are reasonably
estimable. When only a range of amounts is established and no amount
within the range is better than another, the minimum amount in the range is
recorded. The company does not anticipate and record insurance recoveries
before collection is probable.
Interest Rate Swap Agreements
The company may enter into interest rate swap agreements to offset the
variable-rate characteristic of certain variable-rate term loans
outstanding under the company's Credit Agreement. Interest on these
interest rate swap agreements is recognized as an adjustment to interest
expense in the period incurred.
NORTHROP GRUMMAN CORPORATION
Income Taxes
Provisions for federal, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and
also include, in the current period, the cumulative effect of any changes
in tax rates from those used previously in determining deferred tax assets
and liabilities. Such provisions differ from the amounts currently payable
because certain items of income and expense are recognized in different
time periods for financial reporting purposes than for income tax purposes.
The company accounts for certain contracts in process using different
methods of accounting for financial statements and tax reporting and thus
provides deferred taxes on the difference between the financial and taxable
income reported during the performance of such contracts.
In accordance with industry practice, state and local income and
franchise tax provisions are included in administrative and general
expenses.
Earnings per Share
Earnings per share are based on the weighted average number of shares of
common stock outstanding during each period, after giving recognition to
stock splits and stock dividends. The dilutive effect of common stock
equivalents, shares under stock options, was insignificant.
Cash and Cash Equivalents
Cash and cash equivalents include interest-earning debt instruments that
mature in three months or less from the date purchased.
Accounts Receivable
Accounts receivable include amounts billed and currently due from
customers, amounts currently due but unbilled (primarily related to
contracts accounted for under the cost-to-cost type of
percentage-of-completion method of accounting), certain estimated contract
changes, claims in negotiation and amounts retained by the customer pending
contract completion.
NORTHROP GRUMMAN CORPORATION
Inventoried Costs
Inventoried costs primarily relate to work in process under fixed-price
type contracts (excluding those included in unbilled accounts receivable as
previously described). They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated contract
costs include direct production costs, factory and engineering overhead,
production tooling costs, and allowable administrative and general expenses
(except for general corporate expenses and IR&D allocable to commercial
contracts, which are charged against income as incurred).
In accordance with industry practice, inventoried costs are classified
as a current asset and include amounts related to contracts having
production cycles longer than one year.
Depreciable Properties
Property, plant and equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Capital leases providing for
the transfer of ownership upon their expiration or containing bargain
purchase options are amortized over the estimated useful lives of
individual assets. Most of these assets are depreciated using
declining-balance methods, with the remainder using the straight-line
method, with the following lives:
Years
Land improvements 5-20
Buildings 5-45
Machinery and other equipment 1-18
Leasehold improvements Length of lease
NORTHROP GRUMMAN CORPORATION
Goodwill and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets are amortized on a straight-
line basis over periods of 40 years and a weighted average 15 years,
respectively. Goodwill and other purchased intangibles balances are
included in the identifiable assets of the industry segment to which they
have been assigned and amortization is charged against the respective
industry segment operating profit. The recoverability of goodwill and
other purchased intangibles is evaluated at least annually considering the
projected future profitability and cash flow at the operations to which
they relate. When it is determined that an impairment has occurred, an
appropriate charge to operations is recorded.
Acquisitions
On March 1, 1996 the company purchased substantially all of the defense and
electronics systems business (ESG) of Westinghouse Electric Corporation at
a cost of $2.9 billion and financed the transaction with new borrowings.
The operations of ESG have been consolidated with Northrop Grumman
effective March 1, 1996 and are included in the electronics industry
segment.
In April 1994 the company purchased the outstanding stock of Grumman
Corporation (Grumman) at a cost of $2.1 billion and financed the
transaction mainly with new borrowings. The operations of Grumman since
acquisition are included in the industry segments to which products are
associated.
In August 1994 the company purchased the remaining 51 percent interest
in Vought Aircraft Company (Vought) for $130 million cash. The company had
previously purchased a 49 percent interest in Vought for $45 million in
September 1992. The operations of Vought since August 1994 are included in
the aircraft industry segment.
NORTHROP GRUMMAN CORPORATION
The purchase method of accounting was used to record all three
acquisitions with estimated fair values being assigned to assets and
liabilities. The excess of the purchase price over the net tangible assets
acquired was assigned to identifiable intangible assets and the remaining
balance to goodwill.
The following unaudited pro forma financial information combines
Northrop Grumman's and ESG's results of operations as if the acquisitions
had taken place on January 1, 1995, and is not necessarily indicative of
future operating results for Northrop Grumman.
$ in millions, except per share 1996 1995
Sales $8,318 $9,158
Net income 214 136
Earnings per share 3.95 2.76
The following unaudited pro forma financial information combines
Northrop's, Grumman's and Vought's results of operations as if the
acquisitions had taken place on January 1, 1993, and is not necessarily
indicative of future operating results for Northrop Grumman.
$ in millions, except per share 1994 1993
Sales $7,770 $8,653
Net income 57 112
Earnings per share 1.16 2.33
Financial Statement Reclassification
To conform to the presentation in 1996, certain amounts for 1995 and prior
years have been reclassified in the Consolidated Financial Statements. The
reclassifications had no effect on net income or earnings per share for any
period presented.
NORTHROP GRUMMAN CORPORATION
ACCOUNTS RECEIVABLE
Unbilled amounts represent sales for which billings have not been presented
to customers at year end, including differences between actual and
estimated overhead and margin rates. These amounts are usually billed and
collected within one year. Progress payments are, however, received on a
number of fixed-price contracts accounted for using the cost-to-cost type
percentage-of-completion method.
Amounts due upon contract completion are retained by customers until
work is completed and customer acceptance is obtained.
In 1996 the company terminated an agreement that was entered into in
1995 with a financial institution to sell designated pools of its
commercial accounts receivables, with limited recourse, in amounts up to
$75 million. At December 31, 1995, $34 million of accounts receivable had
been sold.
Accounts receivable at December 31, 1996, are expected to be collected
in 1997 except for approximately $255 million due in 1998 and $188 million
due in 1999 and later. These amounts principally relate to long-term
contracts with the U.S. Government.
Allowances for doubtful amounts represent mainly estimates of overhead
type costs which may not be successfully negotiated and collected.
<TABLE>
Account receivable were comprised of the following:
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 396 $ 261 $ 420 $ 65 $ 82
Unbilled 3,463 3,235 3,140 3,050 3,100
Progress payments received (2,721) (2,426) (2,532) (2,410) (2,467)
Net current accounts 1,138 1,070 1,028 705 715
Due upon contract completion 2 9 55 14 19
1,140 1,079 1,083 719 734
Due from other customers, long-term contracts
Current accounts
Billed 78 14 74 66 31
Unbilled 47 50 41 43 48
125 64 115 109 79
Total due, long-term contracts 1,265 1,143 1,198 828 813
Trade and other accounts receivable
Due from U.S. Government 75 61 34 36 28
Due from other customers 71 61 34 13 7
Total due, trade and other 146 122 68 49 35
1,411 1,265 1,266 877 848
Allowances for doubtful amounts (55) (68) (64) (57) (57)
$ 1,356 $ 1,197 $ 1,202 $ 820 $ 791
</TABLE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
INVENTORIED COSTS
Inventoried costs were comprised of the following:
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Production costs of contracts in process $ 1,169 $ 924 $ 1,314 $ 800 $ 920
Excess of production cost of delivered items
over the estimated average unit cost 105 85 43
Administrative and general expenses 199 166 270 95 109
1,473 1,175 1,627 895 1,029
Progress payments received (533) (428) (611) (326) (359)
940 747 1,016 569 670
Product inventories - at the lower of
average cost or market 113 24 27
$ 1,053 $ 771 $ 1,043 $ 569 $ 670
</TABLE>
Inventoried costs relate to long-term contracts in process and include
expenditures for raw materials and work in process beyond what is required
for recorded orders. These expenditures are incurred to help maintain
stable and efficient production schedules. The excess of production costs
of delivered and in process items over the estimated average costs is
carried in inventory under the learning curve concept. Under this concept,
production costs per unit are expected to decrease over time due to
efficiencies arising from continuous improvement in the performance of
repetitive tasks. However, no material amount representing claims,
unamortized tooling or other deferred costs is included in inventoried
costs.
The ratio of inventoried administrative and general expenses to total
inventoried costs is estimated to be the same as the ratio of total
administrative and general expenses incurred to total contract costs
incurred.
According to the provisions of U.S. Government contracts, the customer
has title to, or a security interest in, substantially all inventories
related to such contracts.
NORTHROP GRUMMAN CORPORATION
INCOME TAXES
Income tax expense, both federal and foreign (which arises primarily from
work performed abroad by domestic operations), was comprised of the
following:
<TABLE>
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Currently payable
Federal income taxes $ 41 $ 76 $ 61 $ 41 $ 7
Foreign income taxes 2 1 1 1 1
43 77 62 42 8
Change in deferred federal income taxes 107 80 (32) 32 51
$ 150 $ 157 $ 30 $ 74 $ 59
</TABLE>
Income tax expense differs from the amount computed by multiplying the
statutory federal income tax rate times the income before income taxes due
to the following:
<TABLE>
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C>
Income tax expense at statutory rate $ 135 $ 143 $ 23 $ 59 $ 61
Goodwill amortization 16 13 9
Provision for nondeductible expenses 2 4 4 1 1
Benefit from ESOP dividends (3) (3) (4) (4) (3)
Dividend exclusion (2)
Retroactive effect of statutory rate increase 18
$ 150 $ 157 $ 30 $ 74 $ 59
</TABLE>
Deferred income taxes arise because of differences in the treatment of
income and expense items for financial reporting and income tax purposes.
The principal type of temporary difference stems from the recognition of
income on contracts being reported under different methods for tax purposes
than for financial reporting.
NORTHROP GRUMMAN CORPORATION
The tax effects of significant temporary differences and carryforwards
that gave rise to year-end deferred federal and state tax balances, as
categorized in the Consolidated Statements of Financial Position, were as
follows:
<TABLE>
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Deferred tax assets
Deductible temporary differences
Retiree benefit plan expense $ 602 $ 421 $ 409 $ 21 $ 21
Provision for estimated expenses 79 25 39 28 27
Income on contracts 49 14 17 21 13
Other 41 35 52 2 2
771 495 517 72 63
Taxable temporary differences
Purchased intangibles (110) (124) (133)
Excess tax over book depreciation (64) (71) (94)
Retiree benefit plan income (18) (48) (19) (15)
Administrative and general expenses
period costed for tax purposes (2) (1) (3)
(174) (215) (276) (19) (18)
$ 597 $ 280 $ 241 $ 53 $ 45
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 868 $ 795 $ 744 $ 811 $ 789
Administrative and general expenses
period costed for tax purposes 1 1 18 18 18
Retiree benefit plan income 9 94 64
Excess tax over book depreciation 10 2 70 89
Other 14 15 9
902 813 771 993 960
Deductible temporary differences
Provision for estimated expenses (82) (117) (145) (135) (120)
Retiree benefit plan expense (1) (2) (2) (106) (93)
Other (9) (11)
(83) (119) (147) (250) (224)
Tax carryforwards
Tax credits (39) (102) (105) (129) (140)
Alternative minimum tax credit (90) (90) (90) (87) (40)
Operating losses (54) (117)
(129) (192) (195) (270) (297)
$ 690 $ 502 $ 429 $ 473 $ 439
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $1,076 $1,028 $1,047 $1,012 $ 978
Less total deferred tax
assets (deductible temporary
differences and tax
carryforwards above) 983 806 859 592 584
$ 93 $ 222 $ 188 $ 420 $ 394
</TABLE>
NORTHROP GRUMMAN CORPORATION
The tax carryforward benefits are expected to be used in the periods
in which net deferred tax liabilities mature. The expiration dates for
these tax credit carryforwards are in various amounts over the years 1997
through 2007. The alternative minimum tax credit can be carried forward
indefinitely.
NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
The company has available short-term credit lines in the form of money
market facilities with several banks. The amount and conditions for
borrowing under these credit lines depend on the availability and terms
prevailing in the marketplace. No fees or compensating balances are
required for these credit facilities. At December 31, 1996, $226 million
was outstanding at a weighted average interest rate of 6.44 percent. At
December 31, 1995, $65 million was outstanding at a weighted average
interest rate of 6.15 percent. At December 31, 1994, $171 million was
outstanding at a weighted average interest rate of 7 percent.
Additionally, the company has a credit agreement with a group of
domestic and foreign banks to provide for three credit facilities:
$1.8 billion available on a revolving credit basis through March 2002; a
variable interest rate $500 million two-year term loan due March 1, 1998,
that was repaid in July 1996; and a variable interest rate $1.5 billion
six-year term loan due in 24 quarterly installments of $62.5 million plus
interest beginning June 1996. Effective November 1, 1996, the Credit
Agreement was further amended to reduce the $1.5 billion term loan to
$1.05 billion payable in 21 quarterly installments of $50 million plus
interest beginning March 1, 1997. The company pays, at least quarterly,
interest on the outstanding debt under the Credit Agreement at rates that
vary based in part on the company's credit rating and leverage ratio.
At December 31, 1996, $1.05 billion under the term loan was outstanding
at a weighted average interest rate of 5.97 percent. Principal payments
permanently reduce the amount available under this agreement as well as
the debt outstanding.
At December 31, 1996, $500 million at a weighted average interest rate
of 5.79 percent was outstanding under the company's revolving credit
facility. In 1995 there were no borrowings under the company's revolving
credit facility. Under these agreements, in the event of a "change in
control," the banks are relieved of their commitments. Compensating
balances are not required under these agreements.
The company's credit agreements contain restrictions relating to the
payment of dividends, acquisition of the company's stock, aggregate
indebtedness for borrowed money and interest coverage. At
December 31, 1996, $326 million of retained earnings were unrestricted as
to the payment of dividends. Total indebtedness for all types of borrowed
money is limited under the company's credit agreement covenants. At
December 31, 1996, indebtedness was limited to $7.4 billion.
NORTHROP GRUMMAN CORPORATION
<TABLE>
Long-term debt consisted of the following:
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Notes due 1999, 8.4% $ $ 143 $ 153 $ $
Notes due 2004, 8.625% 350 350 350
Notes due 2006, 7% 400
Debentures due 2016, 7.75% 300
Debentures due 2024, 9.375% 250 250 250
Debentures due 2026, 7.875% 300
Notes payable and mortgages 1 10 160 370
Revolving credit facility 500
Term loans payable to banks due in quarterly
installments through 2002 at floating rates 1,050 563 1,000 40
3,150 1,307 1,763 160 410
Less current portion 200 144 130 250
$2,950 $ 1,163 $ 1,633 $ 160 $ 160
</TABLE>
During the first quarter of 1996 the company sold to institutional
investors $400 million of 7 percent notes due 2006, $300 million of 7 3/4
percent debentures due 2016 and $300 million of 7 7/8 percent debentures
due 2026. The proceeds from this issuance were used to finance a portion
of the purchase price of ESG. The debt indenture contains restrictions
relating to limitations on liens, sale and leaseback arrangements and
funded debt of subsidiaries.
In November 1995 the notes due in 1999 were called for redemption at
face value, on January 2, 1996. The December 31, 1995 balance of $143
million was classified as current. The debentures due in 2024 are callable
after October 15, 2004 at a premium of 4 percent declining to par after
2013.
The principal amount of long-term debt outstanding at December 31, 1996,
due in each of the years 1997 through 2001 is $200 million with $2,150 million
due after five years.
NORTHROP GRUMMAN CORPORATION
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the consolidated Statements of
Financial Position for Cash and Cash Equivalents, Accounts Receivable
and amounts borrowed under the company's short-term credit lines
approximate their fair value.
The fair value of the long-term debt was calculated based on interest
rates available for debt with terms and due dates similar to the
company's existing debt arrangements.
The company has limited involvement with derivative financial instruments
and does not use them for trading purposes. To mitigate the variable rate
characteristic of the term loans, the company entered into interest rate
swap agreements maturing at various dates through May 1999 with several
banks resulting in a fixed interest rate of 6.23 percent on a notional
amount of $425 million at December 31, 1996. Unrealized gain(loss) on
interest rate swap agreements are calculated based upon the amounts at
which they could be settled at current interest rates. The market
gain(loss) on interest rate swaps was $(1) million, $(7) million and
$7 million at December 31, 1996, 1995 and 1994 respectively. The institutions
have options to extend $200 million of the swaps through May 1998. The
company expects the banks to fully satisfy their obligations under the
arrangements.
Carrying amounts and the related estimated fair values of the
company's financial instruments at December 31 of each year are as follows:
$ in millions 1996 1995 1994 1993 1992
Long-term debt
Carrying amount 3,150 1,307 1,763 160 410
Fair value 3,221 1,405 1,758 160 443
Interest rate swap agreements
Notional amount 425 300 200
Gains(losses) (1) (7) 7
NORTHROP GRUMMAN CORPORATION
RETIREMENT BENEFITS
The company sponsors several defined-benefit pension plans covering
substantially all employees. Pension benefits for most employees are based
on the employee's years of service and compensation during the last ten
years before retirement. It is the policy of the company to fund at least
the minimum amount required for all qualified plans, using actuarial cost
methods and assumptions acceptable under U.S. Government regulations, by
making payments into a trust separate from the company. Five of the
company's fifteen qualified plans which cover over 80 percent of all
employees, were in a legally defined full-funding limitation status at
December 31, 1996. To protect the assets in the master trust from a
"change in control" the trust agreement and the Northrop Grumman Pension
Plan were appropriately amended during 1991.
The company and subsidiaries also sponsor defined-contribution plans
in which most employees are eligible to participate. Company contributions,
up to 4 percent of compensation, are based on a matching of employee
contributions.
In addition, the company and its subsidiaries provide certain health
care and life insurance benefits for retired employees. Employees achieve
eligibility to participate in these contributory plans upon retirement from
active service and if they meet specified age and years of service
requirements. Election to participate must be made at the date of
retirement. Qualifying dependents are also eligible for medical coverage.
Approximately 85 percent of the company's current retirees participate in
the medical plans. The cost and funded status for the medical and life
benefits are combined in the tables that follow because (1) life benefits
constitute an insignificant amount of the combined cost, and (2) for those
plans with assets, the assets in trust for each plan can be used to pay
benefits under either plan. Plan documents reserve the company's right to
amend or terminate the plans at any time. Premiums charged retirees for
medical coverage are based on years of service and are adjusted annually
for changes in the cost of the plans as determined by an independent
actuary. In addition to this medical inflation cost-sharing feature, the
plans also have provisions for deductibles, copayments, coinsurance
percentages, out-of-pocket limits, schedule of reasonable fees, managed
care providers, maintenance of benefits with other plans, Medicare
carve-out and a maximum lifetime benefit of from $250,000 to $1,000,000 per
covered individual. It is the policy of the company to fund the maximum
amount deductible for income taxes into the VEBA trust established for the
Northrop Retiree Health Care Plan for Retired Employees for payment of
benefits.
NORTHROP GRUMMAN CORPORATION
<TABLE>
The cost to the company of these plans in each of the last five years
is shown in the following table.
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Defined benefit pension plans
Actual return on assets $(1,379) $(1,856) $ 25 $ (449) $ (298)
Deferral of actual return on assets 618 1,233 (541) 153 38
Expected return on assets (761) (623) (516) (296) (260)
Service cost 174 125 176 104 99
Interest cost 570 520 372 190 175
Amortization of unrecognized items
Transition asset, net (42) (42) (42) (42) (42)
Prior service costs 41 31 14 15 13
Net gain from previous years (21) (34) (40) (42) (68)
Net periodic pension income $ (39) $ (23) $ (36) $ (71) $ (83)
Defined contribution plans $ 73 $ 54 $ 59 $ 47 $ 48
Retiree health care and life insurance
benefit plans
Actual return on assets $ (60) $ (95) $ 22 $ (19) $ (10)
Deferral of actual return on assets 38 76 (42) (1) (10)
Expected return on assets (22) (19) (20) (20) (20)
Service cost 27 20 28 21 25
Interest cost 91 89 61 37 39
Amortization of unrecognized gain from
previous years (5) (3) (2) (6) (3)
Excess dependent cost 2
Net periodic postretirement benefit cost $ 91 $ 87 $ 69 $ 32 $ 41
</TABLE>
In addition to the net periodic pension income and postretirement
benefit cost, in 1994 the company recognized the effect of an early
retirement incentive program of $250 million for pension and $32 million
for postretirement benefits. The total $282 million effect on the
company's 1994 operating margin is shown in the Consolidated Statements of
Income under the caption Special Termination Benefits.
NORTHROP GRUMMAN CORPORATION
Major assumptions as of each year-end used in the accounting for the
defined-benefit plans are shown in the following table. Pension cost is
determined using all three factors as of the end of the preceding year,
whereas the funded status of the plans, shown later, uses only the first
two factors, as of the end of each year.
1996 1995 1994 1993 1992
Discount rate for obligations 7.50% 7.00% 8.25% 7.00% 8.00%
Rate of increase for compensation 4.50 5.00 5.25 5.50 5.50
Expected long-term rate of return
on plan assets 9.00 9.00 8.75 8.25 8.25
These assumptions were also used in retiree health care and life
insurance benefit calculations with one modification. Since, unlike the
pension trust, the earnings of the VEBA trust are taxable, the above
9 percent expected rate of return on plan assets was reduced accordingly to
5.25 percent after taxes. A significant factor used in estimating future
per capita cost, for the company and its retirees, of covered health care
benefits is the health care cost trend rate assumption. The rate used was 7
percent for 1996 and is assumed to decrease gradually to 6 percent for 2006
and remain at that level thereafter. An additional one-percentage-point of
increase each year in that rate would result in a $12 million annual
increase in the aggregate of the service and interest cost components of
net periodic postretirement benefit cost, and a $111 million increase in
the accumulated postretirement benefit obligation at December 31, 1996.
The following tables set forth the funded status and amounts
recognized in the Consolidated Statements of Financial Position at each
year-end for the company's defined-benefit pension and retiree health care
and life insurance benefit plans. The summary showing pension plans whose
accumulated benefits are in excess of assets at December 31, 1996, is
comprised of seven qualified plans along with twelve unfunded nonqualified
plans for benefits provided to directors, officers and employees either
beyond those provided by, or payable under, the company's main plans.
The company revised its estimate of the discount rate for obligations
and rate of increase for compensation assumptions in calculating the funded
status of the plans at December 31, 1996. The changes resulted in a
$483 million decrease in the projected benefit obligation for pension plans
and a $59 million decrease in the accumulated postretirement benefit
obligation.
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Pension plans whose assets exceed
accumulated benefits
Actuarial present value of benefit obligations
Vested benefits $ 6,255 $ 6,572 $ 2,487 $ 2,059 $ 1,690
Nonvested benefits 328 320 228 175 153
Accumulated benefit obligations 6,583 6,892 2,715 2,234 1,843
Effect of assumed salary rate increases 391 469 409 453 421
Projected benefit obligations 6,974 7,361 3,124 2,687 2,264
Less market value of plan assets 9,184 8,319 4,210 3,970 3,642
Excess of assets over projected benefit
obligations (2,210) (958) (1,086) (1,283) (1,378)
Unrecognized items
Net transition asset 247 289 332 374 415
Prior service costs (248) (286) (307) (114) (133)
Net gain 2,067 921 897 764 916
Accrued retiree benefits pension
asset included in Consolidated Statements
of Financial Position $ (144) $ (34) $ (164) $ (259) $ (180)
Pension plans whose accumulated benefits exceed assets
Actuarial present value of benefit obligations
Vested benefits $ 839 $ 311 $ 2,865 $ 57 $ 33
Nonvested benefits 51 8 252 3
Accumulated benefit obligations 890 319 3,117 60 33
Effect of assumed salary rate increases 145 15 16 19 3
Projected benefit obligations 1,035 334 3,133 79 36
Less market value of plan assets 436 177 2,872 16
Excess of projected benefit obligations
over assets 599 157 261 63 36
Unrecognized items
Net transition obligation (3) (3) (4) (5) (4)
Prior service costs (16) (5) (8) (14) 5
Net gain(loss) (10) (31) 1 (7) (3)
Additional minimum liability 22 29 6 12 7
Accrued retiree benefits liability
included in Consolidated Statements
of Financial Position $ 592 $ 147 $ 256 $ 49 $ 41
</TABLE>
NORTHROP GRUMMAN CORPORATION
Pension plan assets at December 31, 1996, were comprised of 49 percent
domestic equity type investments in listed companies (including 4 percent
in Northrop Grumman common stock), 17 percent equity investments listed on
international exchanges, 27 percent in fixed income type investments,
principally U.S. Government securities, 3 percent in venture capital and
real estate investments, and 4 percent in cash. The investment in Northrop
Grumman represents 4,798,523 shares, or eight percent of the company's
total shares outstanding.
Effective January 1, 1995, the company adopted amendments to two of
the company's retirement plans to cap the maximum years of service credit
that an employee can earn and adjusted the amount of service credit earned
each year. The effect of these changes was to increase the projected
benefit obligation at December 31, 1994 by $210 million.
<TABLE>
<CAPTION>
$ in millions 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Retiree health care and life insurance benefit plans
Accumulated postretirement benefit obligation (APBO)
Retirees $ 841 $ 960 $ 575 $ 274 $ 243
Fully eligible active employees 81 88 172 86 82
Active employees not yet eligible 383 288 258 192 194
1,305 1,336 1,005 552 519
Less market value of plan assets 468 433 353 373 369
Excess of APBO over assets 837 903 652 179 150
Unrecognized items
Prior service cost (2) (1)
Net gain(loss) 191 (15) 156 74 72
Accrued retiree benefits liability included in
Consolidated Statements of Financial Position $1,026 $ 887 $ 808 $ 253 $ 222
</TABLE>
Retiree health care and life insurance plan assets at December 31,
1996, were almost entirely comprised of equity type investments in listed
companies.
CONTINGENCIES
The corporation and its subsidiaries have been named as defendants in
various legal actions. Based upon available information, it is the
company's expectation that those actions are either without merit or will
have no material adverse effect on the company's results of operations or
financial position.
NORTHROP GRUMMAN CORPORATION
In accordance with company policy on environmental remediation, the
estimated cost to complete remediation has been accrued where it is
probable that the company will incur such costs in the future, including
those for which it has been named a Potentially Responsible Party by the
Environmental Protection Agency or similarly designated by other
environmental agencies. To assess the potential impact on the company's
financial statements, management estimates the total reasonably possible
remediation costs that could be incurred by the company, taking into
account currently available facts on each site as well as the current state
of technology and prior experience in remediating contaminated sites.
These estimates are reviewed periodically and adjusted to reflect changes
in facts and technical and legal circumstances. Management estimates that
at December 31, 1996, the reasonable range of future costs for
environmental remediation, including those sites acquired in the purchase
of ESG, is $63 million to $107 million, of which $64 million has been
accrued. Although management cannot predict whether new information gained
as projects progress will materially affect the estimated liability
accrued, management does not anticipate that future remediation
expenditures will have a material adverse effect on the company's results
of operations or financial position.
Minimum rental commitments under long-term noncancellable operating
leases total $239 million which is payable as follows: 1997 - $64 million,
1998 - $45 million, 1999 - $37 million, 2000 - $27 million, and 2001 -
$19 million, and 2002 and thereafter - $47 million.
NORTHROP GRUMMAN CORPORATION
STOCK RIGHTS
The company has a Common Stock Purchase Rights plan with one right issued
in tandem with each share of common stock. The rights will become
exercisable on the tenth business day after a person or group has acquired
15 percent or more of the general voting power of the company, or announces
an intention to make a tender offer for 30 percent or more of such voting
power, without the prior consent of the Board of Directors. If the rights
become exercisable, a holder will be entitled to purchase one share of
common stock from the company at an initial exercise price of $105.
If a person acquires more than 15 percent of the then outstanding
voting power of the company or if the company is combined with an acquiror,
each right will entitle its holder to receive, upon exercise, shares of the
company's or the acquiror's (depending upon which is the surviving company)
common stock having a value equal to two times the exercise price of the
right.
The company will be entitled to redeem the rights at $.02 per right at
any time prior to the earlier of the date that a person has acquired or
obtained the right to acquire 15 percent of the general voting power of the
company or the expiration of the rights in October 1998. The rights are not
exercisable until after the date on which the company's prerogative to
redeem the rights has expired. The rights do not have voting or dividend
privilege and cannot be traded independently from the company's common
stock until such time as they become exercisable.
STOCK COMPENSATION PLANS
At December 31, 1996, the company had two stock-based compensation plans --
the 1993 Long-Term Incentive Stock Plan (LTISP) and the 1995 Stock Option
Plan for Non-Employee Directors (SOPND).
The LTISP permits grants to key employees of three general types of stock
incentive awards: stock options, stock appreciation rights (SARs) and
stock awards. With shareholder approval of this plan and
subsequent amendment, a total of 4.1 million additional shares were made
available for future grants. Up to 1.8 million of these shares may be in
the form of stock awards. At December 31, 1996, 227,062 shares remained
available for future grants under the LTISP.
NORTHROP GRUMMAN CORPORATION
Under the LTISP each grant of a stock option is made at the closing
market price on the date of grant. Options generally vest in 25 percent
increments, two, three, four and five years from the grant date and expire
ten years after the grant date. No SARs have been granted under the LTISP.
Stock awards, in the form of restricted performance stock rights, are
granted to key employees without payment to the company. Recipients of the
rights earn shares of stock based on a total-shareholder-return measure of
performance over a five-year period with interim distributions three and
four years after grant. If at the end of the five-year period the
performance objectives have not been met, up to 70 percent of the original
grant will be forfeited. Termination of employment can result in
forfeiture of some or all of the benefits extended under the plan.
The shareholder approval of the SOPND in 1995 made available 300,000
shares for grants of stock options to nonemployee directors. Each grant of
a stock option is made at the closing market price on the date of the
grant, is immediately exercisable and expires ten years after the grant
date. At December 31, 1996, 289,500 shares were available for future
grants under the SOPND.
The company applies Accounting Principles Board Opinion 25 -
Accounting for Stock Issued to Employees and related Interpretations in
accounting for awards made under the plans. When stock options are
exercised, the amount of the cash proceeds to the company is recorded as an
increase to paid-in capital. No compensation expense is recognized in
connection with stock options. Compensation expense for restricted
performance stock rights is estimated and accrued over the vesting period.
The fixed 30 percent minimum distribution portion is recorded at grant
value and the variable portion is recorded at market value. Compensation
expense recognized for stock awards was $25 million in 1996, $4 million in
1995, $4 million in 1994, $5 million in 1993, and $4 million in 1992.
NORTHROP GRUMMAN CORPORATION
Stock option activity for the last five years is summarized below:
Weighted-
Average
Shares Exercise Shares
Under Option Prices Exercisable
Outstanding at January 1, 1992 2,823,870 $25 1,841,070
Granted 635,700 26
Cancelled (43,380) 20
Exercised (281,660) 21
Outstanding at December 31, 1992 3,134,530 25 1,798,550
Granted 515,300 36
Cancelled (96,640) 25
Exercised (1,405,330) 29
Outstanding at December 31, 1993 2,147,860 25 738,300
Granted 708,700 43
Cancelled (61,215) 28
Exercised (265,430) 25
Outstanding at December 31, 1994 2,529,915 30 817,660
Granted 762,500 56
Cancelled (130,885) 31
Exercised (170,810) 23
Outstanding at December 31, 1995 2,990,720 37 1,064,925
Granted 987,800 78
Cancelled (87,921) 49
Exercised (240,334) 28
Outstanding at December 31, 1996 3,650,265 49 1,236,689
Had compensation expense been determined based on the fair value at
the grant dates for stock option awards granted in 1996 and 1995,
consistent with the method of Financial Accounting Standards Board
Statement 123 - Accounting for Stock Based Compensation, net income and
earnings per share in 1996 would have been lower by $2 million and three
cents, respectively. For 1995 net income would have been unchanged and
earnings per share would have been lower by one cent. These amounts were
determined using weighted-average per share fair values of options granted
in 1996 and 1995 of $25 and $19, respectively. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model based on an expected life of six years and for 1996
and 1995, respectively, the following additional assumptions: dividend
yield - 2.1% and 2.8%; expected volatility - 28% and 31%; and risk-free
interest rate - 6.2% and 5.8%.
NORTHROP GRUMMAN CORPORATION
At December 31, 1996, the following stock options were outstanding:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Life Prices at 12/31/96 Prices
$16 to 25 632,070 3.1 years $18 632,070 $18
$26 to 40 686,001 6.3 years 32 415,846 30
$41 to 55 673,837 7.8 years 43 181,266 43
$56 to 70 796,557 8.8 years 58 7,507 57
$71 to 81 861,800 10.0 years 81
3,650,265 1,236,689
Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows: 1996 - 802,800 at $81; 1995 -
22,660 at $53; 1994 - 141,540 at $43; 1993 - 473,000 at $36; and 1992 -
none granted.
NORTHROP GRUMMAN CORPORATION
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results, previously reported are set forth in the
following tables together with dividend and common stock price data.
1996 Quarters, $ in millions, except per share 4 3 2 1
Net sales $2,282 $2,043 $2,143 $1,603
Operating margin 146 165 208 139
Net income 17 70 86 61
Earnings per share .30 1.21 1.69 1.23
Dividend per share .40 .40 .40 .40
Stock price:
High 84 1/4 80 1/4 69 1/4 67 3/8
Low 76 3/8 63 3/4 57 3/4 58 3/8
The fourth quarter of 1996 includes a $90 million pretax charge
related to the closure of four plants. The charge included $30 million for
costs related to the reduction of personnel and other closure activities
and $60 million for the write-down of facilities. The sale of shares owned
by the company in ETEC Systems, Inc. generated pretax gains of $10
million, $6 million and $12 million in the fourth, third and second
quarters, respectively. The first quarter includes a $25 million charge
related to nacelles work the company performed for Fokker Aircraft N.V.,
which declared bankruptcy in March 1996.
The sum of quarterly earnings per share for 1996 does not equal
earnings per share for the year because the average number of common shares
outstanding for the second half of 1996 was disproportionately higher than
the full year average due to the issuance in June of approximately
8 million shares of common stock in a public stock offering.
NORTHROP GRUMMAN CORPORATION
1995 Quarters, $ in millions, except per share 4 3 2 1
Net sales $1,812 $1,630 $1,759 $1,617
Operating margin 121 131 167 117
Net income 58 61 79 54
Earnings per share 1.17 1.25 1.59 1.10
Dividend per share .40 .40 .40 .40
Stock price:
High 64 1/4 62 5/8 54 49 3/4
Low 56 51 7/8 47 39 3/4
The operating margin in the second quarter of 1995 benefited from a
net $34 million in cumulative operating margin adjustments. Positive
adjustments on the B-2 stealth bomber and C-17 military transport programs
were partially offset by a downward adjustment on the Boeing 747 jetliner
program. The 747 adjustment reflected cost increases related to the
stretch-out of the current production contract. The B-2 adjustment was
made as a result of negotiated contract adjustments and a revised estimate
of the overall operating margin expected to be earned on the B-2 production
contract. The positive adjustment on the C-17 reflected improved operating
performance on this program.
The corporation's common stock is traded on the New York and Pacific
Stock Exchanges (trading symbol NOC). The approximate number of holders of
record of the corporation's common stock at January 31, 1997, was 10,106.
NORTHROP GRUMMAN CORPORATION
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of financial
position of Northrop Grumman Corporation and Subsidiaries as of December 31
for each of the years 1992 through 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Northrop Grumman
Corporation and Subsidiaries at December 31 for each of the years 1992
through 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Los Angeles, California
February 5, 1997
NORTHROP GRUMMAN CORPORATION
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
No information is required in response to this Item.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to Directors will be incorporated herein by
reference to the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
The information as to Executive Officers is contained in Part I of
this report as permitted by General Instruction G(3).
Item 11. Executive Compensation
The information required by this Item will be incorporated herein by
reference to the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item will be incorporated herein by
reference to the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item will be incorporated herein by
reference to the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's
fiscal year.
NORTHROP GRUMMAN CORPORATION
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Consolidated Statements of Financial Position
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted either because they are not applicable
or not required or because the required information is included in the
financial statements or notes thereto.
Separate financial statements of the parent company are omitted since
it is primarily an operating company and minority equity interests in
and/or nonguaranteed long-term debt of subsidiaries held by others than the
company are in amounts which together do not exceed 5 percent of the total
consolidated assets at December 31, 1996.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
NORTHROP GRUMMAN CORPORATION
Exhibits:
3(a) Certificate of Incorporation, as amended (incorporated by reference
to Form S-3 Registration Statement, filed August 18, 1994)
3(b) Northrop Grumman Corporation Bylaws, amended and restated as of
January 27, 1997.
4(a) Common Stock Purchase Rights Agreement (incorporated by reference to
Form 8-A filed September 22, 1988), amended on August 2, 1991
(incorporated by reference to Form 8 filed August 2, 1991) and
amended on September 28, 1994 (incorporated by reference to Form
8/A-A filed October 7, 1994)
4(b) Indenture Agreement dated as of October 15, 1994 (incorporated by
reference to Form 8-K filed October 25, 1994)
4(c) Form of Officer's Certificate (without exhibits) establishing the
terms of Northrop Grumman Corporation's 7% Notes Due 2006, 7 3/4%
Debentures Due 2016 and 7 7/8% Debentures Due 2026 (incorporated by
reference to Form S-4 Registration Statement, filed April 19, 1996)
4(d) Form of Northrop Grumman Corporation's 7% Notes Due 2006
(incorporated by reference to Form S-4 Registration Statement, filed
April 19, 1996)
4(e) Form of Northrop Grumman Corporation's 7 3/4% Debentures Due 2016
(incorporated by reference to Form S-4 Registration Statement, filed
April 19, 1996)
4(f) Form of Northrop Grumman Corporation's 7 7/8% Debentures Due 2026
(incorporated by reference to Form S-4 Registration Statement, filed
April 19, 1996)
10(a) Second Amended and Restated Credit Agreement dated as of April 15,
1994, Amended and Restated as of March 1, 1996 among Northrop
Grumman Corporation, Bank of American National Trust and Savings
Association, as Documentation Agent, Chemical Securities, Inc., as
Syndication Agent, The Chase Manhattan Bank (National Association),
as Administrative Agent, and the Banks Signatories thereto
(incorporated by reference to Form 8-K, filed March 18, 1996), and
amended as of November 1, 1996
10(b) Uncommitted Credit Facility dated October 10, 1994, between Northrop
Grumman Corporation and Wachovia Bank of Georgia, N.A., which is
substantially identical to facilities between Northrop Grumman
Corporation and certain banks some of which are parties to the
Credit Agreement filed as Exhibit 10(a) hereto (incorporated by
reference to Form 10-K filed February 22, 1996)
*10(c) 1973 Incentive Compensation Plan (incorporated by reference to
Form 8-B filed June 21, 1985)
*10(d) 1973 Performance Achievement Plan (incorporated by reference to
Form 8-B filed June 21, 1985)
NORTHROP GRUMMAN CORPORATION
*10(e) Northrop Supplemental Plan 2 (incorporated by reference to Form
10-K filed February 22, 1996), and amended as of June 19, 1996.
*10(f) Northrop Grumman Corporation ERISA Supplemental Plan 1
(incorporated by reference to Form 10-K filed February 28, 1994).
*10(g) Retirement Plan for Independent Outside Directors (incorporated by
reference to Form SE filed March 29, 1991), amended
September 21, 1994 (incorporated by reference to Form 10-K filed
March 21, 1995)
*10(h) 1987 Long-Term Incentive Plan, as amended (incorporated by reference
to Form SE filed March 30, 1989)
*10(i) Executive Life Insurance Policy (incorporated by reference to
Form 10-K filed February 22, 1996)
*10(j) Executive Accidental Death, Dismemberment and Plegia Insurance
Policy (incorporated by reference to Form 10-K filed
February 22, 1996)
*10(k) Executive Long-Term Disability Insurance Policy (incorporated by
reference to Form 10-K filed February 22, 1996)
*10(l) Key Executive Medical Plan Benefit Matrix (incorporated by
reference to Form 10-K filed February 22, 1996)
*10(m) Executive Dental Insurance Policy Group Numbers 5134 and 5135
(incorporated by reference to Form 10-K filed February 22, 1996)
*10(n) Group Excess Liability Policy (incorporated by reference to
Form 10-K filed February 22, 1996)
*10(o) Northrop Grumman 1993 Long-Term Incentive Stock Plan, as amended
(incorporated by reference to Northrop Grumman Corporation Proxy
Statement filed March 30, 1995), as amended (incorporated by
reference to Northrop Grumman Corporation Proxy Statement filed
April 1, 1996) and amended on December 18, 1996
NORTHROP GRUMMAN CORPORATION
*10(p) Northrop Corporation 1993 Stock Plan for Non-Employee Directors
(incorporated by reference to Northrop Corporation 1993 Proxy
Statement filed March 30, 1993), amended as of September 21, 1994
(incorporated by reference to Form 10-K filed March 21, 1995)
*10(q) Northrop Grumman Corporation 1995 Stock Option Plan for Non-Employee
Directors (incorporated by reference to 1995 Proxy Statement filed
March 30, 1995)
*10(r) Form of Northrop Grumman Corporation Special Agreement
*10(s) Executive Deferred Compensation Plan (effective December 29, 1994)
(incorporated by reference to Form 10-K filed February 22, 1996)
10(t) Memorandum of Agreement dated December 16, 1996 (W. C. Solberg
Retirement Arrangements) and Release Agreement between Northrop
Grumman Corporation and W. C. Solberg
11 Statement Re Computation of Per Share Earnings
23 Independent Auditors' Consent
24 Power of Attorney
27 Financial Data Schedule
________________
* Listed as Exhibits pursuant to Item 601(b)(10) of Regulation S-K
NORTHROP GRUMMAN CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
25th day of February 1997.
Northrop Grumman Corporation
By: Nelson F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the registrant this 25th day of
February 1997, by the following persons and in the capacities indicated.
Signature Title
Kent Kresa* Chairman of the Board, President and Chief
Executive Officer and Director (Principal
Executive Officer)
Jack R. Borsting* Director
John T. Chain, Jr.* Director
Jack Edwards* Director
Phillip Frost* Director
Aulana L. Peters* Director
John E. Robson* Director
Richard R. Rosenberg* Director
Brent Scowcroft* Director
John Brooks Slaughter* Director
Wallace C. Solberg* Director
Richard J. Stegemeier* Director
Richard B. Waugh, Jr.* Corporate Vice President and Chief
Financial Officer
*By James C. Johnson
James C. Johnson, Attorney-in-Fact
pursuant to a power of attorney
NORTHROP GRUMMAN CORPORATION
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Other
Balance at Changes-- Balance
Classification Beginning Additions Add at End
of Period At Cost(2) (Deduct)(1) of Period
Description:
<S> <C> <C> <C> <C>
Year ended December 31, 1992
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $52,001 $ 7,571 $ (2,412) $57,160
Year ended December 31, 1993
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $57,160 $ 9,304 $ (9,759) $56,705
Year ended December 31, 1994
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $56,705 $25,283 $(18,262) $63,726
Year ended December 31, 1995
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $63,726 $ 6,357 $ (2,129) $67,954
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $67,954 $19,364 $(31,873) $55,445
____________
(1) Uncollectible amounts written off, net of recoveries
(2) Additions include allowances for bad debts from acquired companies - $15,625 in 1994 and $4,751
in 1996
</TABLE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Primary:
Average shares outstanding 54,012 49,364 49,139 48,085 47,179
Net effect of the assumed exercise of
stock options - based on the
treasury stock method 1,260 1,111 758 792 251
Totals 55,272 50,475 49,897 48,877 47,430
Net Income $234,126 $252,159 $35,264 $95,755 $120,922
Earnings per share(1) $ 4.24 $ 5.00 $ .71 $ 1.96 $ 2.55
Fully diluted:
Average shares outstanding 54,012 49,364 49,139 48,085 47,179
Net effect of the assumed exercise
of stock options - based on the
treasury stock method 1,474 1,356 837 872 805
Totals 55,486 50,720 49,976 48,957 47,984
Net Income $234,126 $252,159 $35,264 $95,755 $120,922
Earnings per share(1) $ 4.22 $ 4.97 $ .71 $ 1.96 $ 2.52
</TABLE>
(1) This calculation was made in compliance with Item 601 of
Regulation S-K. Earnings per share presented elsewhere in this
report exclude from their calculation shares issuable under
employee stock options, since their dilutive effect is less than 3%.
NORTHROP GRUMMAN CORPORATION
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 2-73293, 2-98614, 33-15764, 33-49667, 33-55146, 33-59815,
33-59853, 333-03959, 333-02653 and 333-02453 of Northrop Grumman Corporation
on Form S-8 of our report appearing in this Annual Report on Form
10-K of Northrop Grumman Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 25, 1997
BYLAWS
OF
NORTHROP GRUMMAN CORPORATION
(A Delaware Corporation)
ARTICLE I
OFFICES
Section 1.01. REGISTERED OFFICE. The registered office of
Northrop Grumman Corporation (the "Corporation") in the State of Delaware
shall be at Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle, and the name of the registered agent at
that address shall be The Corporation Trust Company.
Section 1.02. PRINCIPAL EXECUTIVE OFFICE. The principal executive
office of the Corporation shall be located at 1840 Century Park East, Los
Angeles, California 90067. The Board of Directors of the Corporation (the
"Board of Directors") may change the location of said principal executive
office.
Section 1.03. OTHER OFFICES. The Corporation may also have an
office or offices at such other place or places, either within or without
the State of Delaware, as the Board of Directors may from time to time
determine or as the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. ANNUAL MEETINGS. The annual meeting of stockholders
of the Corporation shall be held between May 1 and July 1 of each year on
such date and at such time as the Board of Directors shall determine. At
each annual meeting of stockholders, directors shall be elected in accordance
with the provisions of Section 3.04 hereof and any other proper business may
be transacted.
Section 2.02. SPECIAL MEETINGS. Special meetings of stockholders
for any purpose or purposes may be called at any time by a majority of the
Board of Directors, the Chairman of the Board, or by the President and Chief
Executive Officer. Special meetings may not be called by any other person
or persons. Each special meeting shall be held at such date and time as is
requested by the person or persons calling the meeting, within the limits
fixed by law.
Section 2.03. PLACE OF MEETINGS. Each annual or special meeting
of stockholders shall be held at such location as may be determined by the
Board of Directors or, if no such determination is made, at such place as
may be determined by the Chairman of the Board. If no location is so
determined, any annual or special meeting shall be held at the principal
executive office of the Corporation.
Section 2.04. NOTICE OF MEETINGS. Written notice of each annual
or special meeting of stockholders stating the date and time when, and the
place where, it is to be held shall be delivered either personally or by
mail to stockholders entitled to vote at such meeting not less than ten (10)
nor more than sixty (60) days before the date of the meeting. The purpose or
purposes for which the meeting is called may, in the case of an annual
meeting, and shall, in the case of a special meeting, also be stated. If
mailed, such notice shall be directed to a stockholder at his address as
it shall appear on the stock books of the Corporation, unless he shall have
filed with the Secretary of the Corporation a written request that notices
intended for him be mailed to some other address, in which case such notice
shall be mailed to the address designated in such request.
Section 2.05. CONDUCT OF MEETINGS. All annual and special meetings
of stockholders shall be conducted in accordance with such rules and
procedures as the Board of Directors may determine subject to the requirements
of applicable law and, as to matters not governed by such rules and procedures,
as the chairman of such meeting shall determine. The chairman of any annual
or special meeting of stockholders shall be the Chairman of the Board. The
Secretary, or in the absence of the Secretary, a person designated by the
Chairman of the Board, shall act as secretary of the meeting.
Section 2.06. NOTICE OF BUSINESS. At any meeting of stockholders,
only such business shall be conducted as shall be a proper matter for
stockholder action under the laws of the State of Delaware and as shall have
been brought before the meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who is a stockholder
of record at the time of giving of the notice provided for in this Section
2.06 who shall be entitled to vote at such meeting and who complies with the
notice procedures set forth in this Section 2.06. For business to be properly
brought before a meeting of stockholders by a stockholder, the stockholder
shall have given timely notice thereof in writing to the Secretary. To be
timely, a stockholder's notice shall be delivered to or mailed and received
at the principal executive office of the Corporation not less than sixty (60)
days nor more than ninety (90) days prior to the meeting: provided, however,
that in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close
of business on the 10th day following the date on which such notice of the
date of the meeting was mailed or such public disclosure was made, whichever
first occurs. Such stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the meeting (a) a
brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting, and, in the event
that such business includes a proposal to amend either the Certificate of
Incorporation or these Bylaws, the language of the proposed amendment, (b)
the name and address as they appear on the Corporation's books of the
stockholder proposing such business, (c) the class and number of shares of
capital stock of the Corporation which are beneficially owned by such
stockholder and (d) any material interest of such stockholder in such
business. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at a stockholder meeting except in accordance
with the procedures set forth in this Section 2.06. The chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance
with the provisions of these Bylaws and if he should so determine, he shall
so declare to the meeting and any such business not properly brought before
the meeting shall not be transacted. Notwithstanding the foregoing provisions
of this Section 2.06, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934 as amended and the rules
and regulations thereunder with respect to the matters set forth in this
Section 2.06. Nothing in this Bylaw shall be deemed to affect any rights of
stockholders or the Corporation under Rule 14a-8 of the Securities Exchange
Act of 1934 with respect to proposals which are requested to be included in
the Corporation's proxy statement.
Section 2.07. QUORUM. At any meeting of stockholders, the presence,
in person or by proxy, of the holders of record of a majority of shares then
issued and outstanding and entitled to vote at the meeting shall constitute
a quorum for the transaction of business; provided, however, that this Section
2.07 shall not affect any different requirement which may exist under statute,
pursuant to the rights of any authorized class or series of stock, or under
the Certificate of Incorporation of the Corporation (the "Certificate") for
the vote necessary for the adoption of any measure governed thereby. In the
absence of a quorum, the stockholders present in person or by proxy, by
majority vote and without further notice, may adjourn the meeting from time
to time until a quorum is attained. At any reconvened meeting following such
an adjournment at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 2.08. VOTES REQUIRED. A majority of the votes cast at a
duly called meeting of stockholders, at which a quorum is present, shall be
sufficient to take or authorize action upon any matter which may properly
come before the meeting, unless the vote of a greater or different number
thereof is required by statute, by the rights of any authorized class of
stock or by the Certificate. Unless the Certificate or a resolution of the
Board of Directors adopted in connection with the issuance of shares of any
class or series of stock provides for a greater or lesser number of votes
per share, or limits or denies voting rights, each outstanding share of
stock, regardless of class, shall be entitled to one vote on each matter
submitted to a vote at a meeting of stockholders.
Section 2.09. PROXIES. A stockholder may vote the shares owned of
record by him either in person or by proxy executed in writing (which shall
include writings sent by telex, telegraph, cable or facsimile transmission)
by the stockholder himself or by his duly authorized attorney-in-fact. No
proxy shall be valid after three (3) years from its date, unless the proxy
provides for a longer period. Each proxy shall be in writing, subscribed
by the stockholder or his duly authorized attorney-in-fact, and dated, but
it need not be sealed, witnessed or acknowledged.
Section 2.10. STOCKHOLDER ACTION. Any action required or permitted
to be taken by the stockholders of the Corporation must be effected at a duly
called annual meeting or special meeting of stockholders of the Corporation,
unless such action requiring or permitting shareholder approval is approved
by a majority of the Continuing Directors (as defined in the Certificate),
in which case such action may be authorized or taken by the written consent
of the holders of outstanding shares of stock having not less than the
minimum voting power that would be necessary to authorize or take such action
at a meeting of stockholders at which all shares entitled to vote thereon
were present and voted, provided all other requirements of applicable law
and the Certificate have been satisfied.
Section 2.11. LIST OF STOCKHOLDERS. The Secretary of the Corporation
shall prepare and make (or cause to be prepared and made), at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical
order and showing the address of, and the number of shares registered in the
name of, each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the duration thereof, and
may be inspected by any stockholder who is present.
Section 2.12. INSPECTORS OF ELECTION. In advance of any meeting
of stockholders, the Board of Directors may appoint Inspectors of Election
to act at such meeting or at any adjournment or adjournments thereof. If
such Inspectors are not so appointed or fail or refuse to act, the chairman
of any such meeting may (and, upon the demand of any stockholder or
stockholder's proxy, shall) make such an appointment.
The number of Inspectors of Election shall be one (1) or three (3).
If there are three (3) Inspectors of Election, the decision, act or
certificate of a majority shall be effective and shall represent the
decision, act or certificate of all. No such Inspector need be a stockholder
of the Corporation.
The Inspectors of Election shall determine the number of shares
outstanding, the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of
proxies; they shall receive votes, ballots or consents, hear and determine
all challenges and questions in any way arising in connection with the right
to vote, count and tabulate all votes or consents, determine when the polls
shall close and determine the result; and finally, they shall do such acts
as may be proper to conduct the election or vote with fairness to all
stockholders. On request, the Inspectors shall make a report in writing to
the secretary of the meeting concerning any challenge, question or other
matter as may have been determined by them and shall execute and deliver to
such secretary a certificate of any fact found by them.
ARTICLE III
DIRECTORS
Section 3.01. POWERS. The business and affairs of the Corporation
shall be managed by and be under the direction of the Board of Directors.
The Board of Directors shall exercise all the powers of the Corporation,
except those that are conferred upon or reserved to the stockholders by
statute, the Certificate or these Bylaws.
Section 3.02. NUMBER. Except as otherwise fixed pursuant to the
provisions of Section 2 of Article Fourth of the Certificate in connection
with rights to elect additional directors under specified circumstances which
may be granted to the holders of any class or series of Preferred Stock, par
value One Dollar ($1.00) per share of the Corporation ("Preferred Stock"),
the number of directors shall be fixed from time to time by resolution of the
Board of Directors but shall not be less than three (3). The Board of
Directors, as of May 17, 1989, and thereafter, shall consist of fourteen (14)
directors until changed as herein provided.
Section 3.03. INDEPENDENT OUTSIDE DIRECTORS. At least sixty percent
(60%) of the members of the Board of Directors of the Corporation shall at
all times be "Independent Outside Directors", which term is hereby defined to
mean any director who:
1. has not in the last five (5) years been an officer or
employee of the Corporation or any of its subsidiaries or affiliates;
and
2. is not related to an officer of the Corporation (or an
officer of any of the Corporation's parents, subsidiaries or
affiliates) by blood, marriage or adoption (except relationships more
remote than first cousin); and
3. is not, and has not within the last two (2) years been, an
officer, director or employee of, and does not own, and has not within
the last two (2) years owned, directly or indirectly, in excess of one
percent (1%) of any firm, corporation or other business or professional
entity which has made or proposes to make during either the Corporation's
or such entity's last or next fiscal year payments for property or
services in excess of one percent (1%) of the gross revenues either of
the Corporation for its last fiscal year or of such entity for its last
fiscal year, but excluding payments determined by competitive bids,
public utility services at rates set by law or government authority,
or payments arising solely from the ownership of securities, or to
which the corporation was indebted at any time during the Corporation's
last fiscal year in an aggregate amount in excess of one percent (1%)
of the Corporation's total assets at the end of such fiscal year or
Five Million Dollars ($5,000,000), whichever is less, but excluding
debt securities which have been publicly offered or which are publicly
traded; and
4. is not a director, partner, officer or employee of an
investment banking firm which has performed services for the
Corporation in the last two (2) years or which the Corporation
proposes to have perform services in the next year other than as a
participating underwriter in a syndicate; and
5. is not a control person of the Corporation (other than
as a director of the Corporation) as defined by the regulations of
the Securities and Exchange Commission.
Section 3.04. ELECTION AND TERM OF OFFICE. Except as provided in
Section 3.07 hereof and subject to the right to elect additional directors
under specified circumstances which may be granted, pursuant to the
provisions of Section 2 of Article Fourth of the Certificate, to the holders
of any class or series of Preferred Stock, directors shall be elected by the
stockholders of the Corporation. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. The number
of directors in each class shall be the whole number contained in the
quotient obtained by dividing the authorized number of directors (fixed
pursuant to Section 3.02 hereof) by three. If a fraction is also contained
in such quotient, then additional directors shall be apportioned as follows:
if such fraction is one-third, the additional director shall be a member of
Class I; and if such fraction is two-thirds, one of the additional directors
shall be a member of Class I and the other shall be a member of Class II.
Each director shall serve for a term ending on the date of the third annual
meeting of stockholders of the Corporation following the annual meeting at
which such director was elected; provided, however, that the directors first
elected to Class I shall serve for a term ending on the date of the annual
meeting next following the end of the calendar year 1985, the directors first
elected to Class II shall serve for a term ending on the date of the second
annual meeting next following the end of the calendar year 1985 and the
directors first elected to Class III shall serve for a term ending on the
date of the third annual meeting next following the end of the calendar year
1985.
Notwithstanding the foregoing provisions of this Section 3.04: each
director shall serve until his successor is elected and qualified or until
his death, resignation or removal; no decrease in the authorized number of
directors shall shorten the term of any incumbent director; and additional
directors, elected pursuant to Section 2 of Article Fourth of the Certificate
in connection with rights to elect such additional directors under specified
circumstances which may be granted to the holders of any class or series of
Preferred Stock, shall not be included in any class, but shall serve for such
term or terms and pursuant to such other provisions as are specified in the
resolution of the Board of Directors establishing such class or series.
Nominations for the election of directors may be made by the Board
or a committee thereof or by any stockholder entitled to vote in the election
of directors; provided, however, that a stockholder may nominate a person
for election as a director at a meeting only if written notice of such
stockholder's intent to make such nomination has been given by such
stockholder to, and received by, the Secretary of the Corporation at the
principal executive offices of the Corporation not less than sixty (60) days
nor more than ninety (90) days prior to the meeting; provided, however, that
(a) in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the date on which such notice
of the date of the meeting was mailed or such public disclosure was made,
whichever first occurs; and (b) in the event that less than seventy (70) days
shall remain from the date of public disclosure of the adoption of this bylaw
provision to the date of any meeting, notice by the stockholder to be timely
with respect to such meeting must be so received not later than the close of
business on the 10th day following the date on which such public disclosure
was made. Each such notice shall set forth: (a) the name and address of
the stockholder who intends to make the nomination and of the person or
persons to be nominated; (b) the name and address as they appear on the
Corporation's books of the stockholder intending to make such nomination;
(c) the class and number of shares of capital stock of the Corporation which
are beneficially owned by such stockholder (d) a description of all
arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the stockholder;
(e) the occupations and business history for the previous five years, other
directorships, names of business entities of which the proposed nominee owns
a 10 percent or more equity interest, a list of any criminal convictions,
including federal and state securities violations and such other information
regarding each proposed nominee as may be required by the federal proxy rules
in effect at the time the notice is submitted and (f) the consent of each
nominee to serve as a director of the Corporation if so elected. No person
shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 3.04.
The Chairman of any meeting of stockholders shall direct that any nomination
not made in accordance with these procedures be disregarded.
Section 3.05. ELECTION OF CHAIRMAN OF THE BOARD. At the
organizational meeting immediately following the annual meeting of
stockholders, the directors shall elect a Chairman of the Board from among
the directors who shall hold office until the corresponding meeting of the
Board of Directors in the next year and until his successor shall have been
elected or until his earlier resignation or removal. Any vacancy in such
office may be filled for the unexpired portion of the term in the same
manner by the Board of Directors at any regular or special meeting.
Section 3.06. REMOVAL. Subject to the right to elect directors
under specified circumstances which may be granted pursuant to Section 2 of
Article Fourth of the Certificate to the holders of any class or series of
Preferred Stock, any director may be removed from office only as provided
in Article Tenth of the Certificate.
Section 3.07. VACANCIES AND ADDITIONAL DIRECTORSHIPS. Except as
otherwise provided pursuant to Section 2 of Article Fourth of the Certificate
in connection with rights to elect additional directors under specified
circumstances which may be granted to the holders of any class or series of
Preferred Stock, newly created directorships resulting from any increase in
the number of directors and any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other cause shall be
filled solely by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors.
Any director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in which
the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified. No decrease in
the number of directors constituting the Board of Directors shall shorten
the term of any incumbent director.
Section 3.08. REGULAR AND SPECIAL MEETINGS. Regular meetings of
the Board of Directors shall be held immediately following the annual meeting
of stockholders, and at 9:00 o'clock a.m. on the third Wednesday of each
succeeding month (or, should such day fall upon a legal holiday, then on the
first day thereafter which is not a legal holiday), unless a regular meeting
is otherwise called by the Chairman of the Board in accordance with applicable
law.
Special meetings of the Board of Directors shall be held upon call
by or at the direction of the Chairman of the Board, the President either of
whom may be the, Chief Executive Officer, or any two directors, except that
when the Board of Directors consists of one director, then the one director
may call a special meeting. Except as otherwise required by law, notice of
each special meeting shall be mailed to each director, addressed to him at
his residence or usual place of business, at least two days before the day
on which the meeting is to be held, or shall be sent to him at such place by
telex, telegram, cable, facsimile transmission or telephoned or delivered to
him personally, not later than the day before the day on which the meeting is
to be held. Such notice shall state the time and place of such meeting, but
need not state the purpose or purposes thereof unless otherwise required by
law, the Certificate or these Bylaws.
Notice of any meeting need not be given to any director who shall
attend such meeting in person or who shall waive notice thereof, before or
after such meeting, in a signed writing.
Section 3.09. QUORUM. At all meetings of the Board of Directors,
a majority of the fixed number of directors shall constitute a quorum for the
transaction of business, except that when the Board of Directors consists of
one director, then the one director shall constitute a quorum. In the
absence of a quorum, the directors present, by majority vote and without
notice other than by announcement, may adjourn the meeting from time to time
until a quorum shall be present. At any reconvened meeting following such
an adjournment at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 3.10. VOTES REQUIRED. Except as otherwise provided by
applicable law or by the Certificate, the vote of a majority of the directors
present at a meeting duly held at which a quorum is present shall be
sufficient to pass any measure.
Section 3.11. PLACE AND CONDUCT OF MEETINGS. Each regular meeting
and special meeting of the Board of Directors shall be held at a location
determined as follows: The Board of Directors may designate any place,
within or without the State of Delaware, for the holding of any meeting.
If no such designation is made: (i) any meeting called by a majority of the
directors shall be held at such location, within the county of the
Corporation's principal executive office, as the directors calling the
meeting shall designate; and (ii) any other meeting shall be held at such
location, within the county of the Corporation's principal executive office,
as the Chairman of the Board may designate or, in the absence of such
designation, at the Corporation's principal executive office. Subject to
the requirements of applicable law, all regular and special meetings of the
Board of Directors shall be conducted in accordance with such rules and
procedures as the Board of Directors may approve and, as to matters not
governed by such rules and procedures, as the chairman of such meeting shall
determine. The chairman of any regular or special meeting shall be the
Chairman of the Board, or in his absence a person designated by the Board
of Directors. The Secretary, or in the absence of the Secretary a person
designated by the chairman of the meeting, shall act as secretary of the
meeting.
Section 3.12. FEES AND COMPENSATION. Directors shall be paid such
compensation as may be fixed from time to time by resolutions of the Board
of Directors (a) for their usual and contemplated services as directors,
(b) for their services as members of committees appointed by the Board of
Directors, including attendance at committee meetings as well as services
which may be required when committee members must consult with management
staff, and (c) for extraordinary services as directors or as members of
committees appointed by the Board of Directors, over and above those services
for which compensation is fixed pursuant to items (a) and (b) in this
Section 3.12. Compensation may be in the form of an annual retainer fee or
a fee for attendance at meetings, or both, or in such other form or on such
basis as the resolutions of the Board of Directors shall fix. Directors
shall be reimbursed for all reasonable expenses incurred by them in attending
meetings of the Board of Directors and committees appointed by the Board of
Directors and in performing compensable extraordinary services. Nothing
contained herein shall be construed to preclude any director from serving the
Corporation in any other capacity, such as an officer, agent, employee,
consultant or otherwise, and receiving compensation therefor.
Section 3.13. COMMITTEES OF THE BOARD OF DIRECTORS. Subject to the
requirements of applicable law, the Board of Directors may from time to time
establish committees, including standing or special committees, which shall
have such duties and powers as are authorized by these Bylaws or by the Board
of Directors. Committee members, and the chairman of each committee, shall
be appointed by the Board of Directors. The Chairman of the Board, in
conjunction with the several committee chairmen, shall make recommendations
to the Board of Directors for its final action concerning members to be
appointed to the several committees of the Board of Directors. Any member
of any committee may be removed at any time with or without cause by the
Board of Directors. Vacancies which occur in any committee shall be filled
by a resolution of the Board of Directors. If any vacancy shall occur in
any committee by reason of death, resignation, disqualification, removal or
otherwise, the remaining members of such committee, so long as a quorum is
present, may continue to act until such vacancy is filled by the Board of
Directors. The Board of Directors may, by resolution, at any time deemed
desirable, discontinue any standing or special committee. Members of
standing committees, and their chairmen, shall be elected yearly at the
organizational meeting of the Board of Directors which is held immediately
following the annual meeting of stockholders.
Section 3.14. AUDIT COMMITTEE. There shall be an Audit Committee
of the Board of Directors which shall serve at the pleasure of the Board of
Directors and be subject to its control. The Committee shall have the
following membership and powers:
1. The Committee shall have at least three (3) members.
All members of the Committee shall be Independent Outside Directors.
2. The Committee shall recommend to the Board of Directors
for its action the appointment or discharge of the Corporation's
independent auditors, based upon the Committee's judgment of the
independence of the auditors (taking into account the fees charged
both for audit and non-audit services) and the quality of its audit
work. Ratification by the stockholders of the Board of Directors'
appointment of the Corporation's independent auditors may be sought
in conjunction with management's solicitation of proxies for the
annual meeting of stockholders, if so determined by the Board of
Directors. If the auditors must be replaced, the Committee shall
recommend to the Board of Directors for its action the appointment
of new auditors until the next annual meeting of stockholders.
3. The Committee shall review and approve the scope and plan
of the audit.
4. The Committee shall meet with the independent auditors
at appropriate times to review, among other things, the results of
the audit and any certification, report or opinion which the auditors
propose to render in connection with the Corporation's financial
statements.
5. The Committee shall review and approve each professional
service of a non-audit nature to be provided by the auditors.
6. The Committee shall meet with the Corporation's chief
internal auditor at least once a year to review his comments
concerning the adequacy of the Corporation's system of internal
accounting controls and such other matters as the Committee may deem
appropriate.
7. The Committee shall have the power to direct the auditors
and the internal audit staff to inquire into and report to it with
respect to any of the Corporation's contracts, transactions or
procedures, or the conduct of the Corporate Office, or any division,
profit center, subsidiary or other unit, or any other matter having
to do with the Corporation's business and affairs. If authorized by
the Board of Directors, the Committee may initiate special
investigations in these regards.
8. The Committee shall have such other duties as may be
lawfully delegated to it from time to time by the Board of Directors.
Section 3.15. COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE.
There shall be a Compensation and Management Development Committee of the
Board of Directors which shall serve at the pleasure of the Board of
Directors and be subject to its control. The Committee shall have the
following membership and powers:
1. The Committee shall be composed of at least three (3)
members. All members of the Committee shall be Independent Outside
Directors. The principal Human Resources officer of the Corporation
shall be a non-voting member of the Committee.
2. The Committee shall recommend to the Board of Directors
for its action the amount to be appropriated for awards to be made
each year to elected officers under the Corporation's incentive
compensation plan.
3. The Committee shall establish the Corporation's annual
performance objectives under the Corporation's incentive compensation
plans.
4. The Committee shall make recommendations to the Board
of Directors with respect to the base salary and incentive
compensation of the elected officers. The Committee shall take final
action with respect to the base salary and incentive compensation
of all other officers and employees receiving a base salary over an
amount as shall be determined from time to time either by the
Committee or the Board of Directors.
5. The Committee shall review management's recommendations
and take final action with respect to all awards to be made under
the Corporation's long-term incentive plans or other similar benefit
plans which may be adopted by the Board of Directors or the
stockholders and in which corporate officers or directors are
eligible to participate, provided however that all such awards
relative to the five (5) most highly compensated officers must be
reported to the Board of Directors.
6. The Committee shall review on a continuing basis the
Corporation's general compensation policies and practices, fringe
benefits and the Corporation's compliance with its various affirmative
action plans and programs. The committee shall also review and
recommend to the Board of Directors for its final action all
compensation plans in which elected officers or directors are
eligible to participate.
7. The Committee shall review from time to time and report
to the Board of Directors actions taken by management concerning the
Corporation's overall executive structure and the steps being taken
to assure the succession of qualified management.
8. The Committee shall have such other duties as may be
lawfully delegated to it from time to time by the Board of Directors.
Section 3.16. EXECUTIVE AND PUBLIC POLICY COMMITTEE. There shall
be an Executive and Public Policy Committee of the Board of Directors which
shall serve at the pleasure of the Board of Directors and be subject to its
control. The Committee shall have the following membership and powers:
1. The Committee shall have at least five (5) members. At
least sixty percent (60%) of the members shall be Independent Outside
Directors.
2. The Committee shall review, approve and monitor the
policy, organization, charter and implementation of the Northrop
Grumman Employees Political Action Committee.
3. The Committee shall review and approve the policy of the
Corporation for engaging the services of Consultants and Commission
Agents.
4. The Committee shall review and report to the Board of
Directors from time to time concerning the Corporation's compliance
with the Corporation's policies, practices and procedures with respect
to consultants and commission agents.
5. The Committee shall review and make policy and budget
recommendations to the Board of Directors for its actions concerning
proposed charitable contributions and aid to higher education to be
given by the Corporation each year.
6. The Committee shall have such other duties as lawfully
may be delegated to it from time to time by the Board of Directors.
Section 3.17. FINANCE COMMITTEE. There shall be a Finance
Committee of the Board of Directors which shall serve at the pleasure of the
Board of Directors and be subject to its control. The Committee shall have
the following membership and powers:
1. The Committee shall have at least five (5) members. At
least fifty percent (50%) of the members of the Committee shall be
Independent Outside Directors. The chief financial officer of the
Corporation shall be a non-voting member of the Committee.
2. The Committee shall review and give consideration to
management requests for required specific new financing of a long-
term nature, whether debt or equity, and make recommendations to the
Board of Directors for its final action.
3. The Committee shall review the current financial condition
of the Company and planned financial requirements.
4. The Committee shall review periodically the Corporation's
dividend policy in connection with dividend declarations and make
recommendations to the Board of Directors for its final action.
5. The Committee shall consider management's recommendations
concerning acquisitions, mergers or divestments which management has
determined to be of an unusual or material nature and shall make
recommendations to the Board of Directors for its final action.
6. The Committee shall consider management's recommendations
concerning contracts or programs which management has determined to
be of an unusual or material nature and shall make recommendations
to the Board of Directors for its final action.
7. The Committee shall periodically review the investment
performance of the employee benefit plans, capital asset requirements
and short-term investment policy when appropriate.
8. The Committee shall have such other duties as lawfully
may be delegated to it from time to time by the Board of Directors.
Section 3.18. NOMINATING COMMITTEE. There shall be a Nominating
Committee of the Board of Directors which shall serve at the pleasure of the
Board of Directors and be subject to its control. The Committee shall have
the following membership and powers:
1. The Committee shall have at least three (3) members.
All members of the Committee shall be Independent Outside Directors.
2. The Committee shall review candidates to serve as
directors and shall recommend nominees to the Board of Directors
for election at each annual meeting of stockholders or other special
meetings where directors are to be elected and shall recommend
persons to serve as proxies to vote proxies solicited by management
in connection with such meetings.
3. The Committee shall cause the names of all director
candidates that are approved by the Board of Directors to be listed
in the Corporation's proxy materials and shall support the election
of all candidates so nominated by the Board of Directors to the
extent permitted by law.
4. The Committee shall review and make recommendations to
the Board of Directors for its final action concerning the composition
and size of the Board of Directors, its evaluation of the performance
of incumbent directors, its recommendations concerning the
compensation of the Directors, its recommendations concerning
directors to fill vacancies and its evaluation and recommendations
concerning potential candidates to serve in the future on the Board
of Directors to assure the Board's continuity and succession.
5. The Committee shall have such other duties as lawfully
may be delegated to it from time to time by the Board of Directors.
Section 3.19. MEETINGS OF COMMITTEES. Each committee of the
Board of Directors shall fix its own rules of procedure consistent with the
provisions of applicable law and of any resolutions of the Board of Directors
governing such committee. Each committee shall meet as provided by such
rules or such resolution of the Board of Directors, and shall also meet at
the call of its chairman or any two (2) members of such committee. Unless
otherwise provided by such rules or by such resolution, the provisions of
these Bylaws under Article III entitled "Directors" relating to the place
of holding meetings and the notice required for meetings of the Board of
Directors shall govern the place of meetings and notice of meetings for
committees of the Board of Directors. A majority of the members of each
committee shall constitute a quorum thereof, except that when a committee
consists of one (1) member, then the one (1) member shall constitute a
quorum. In the absence of a quorum, a majority of the members present at
the time and place of any meeting may adjourn the meeting from time to time
until a quorum shall be present and the meeting may be held as adjourned
without further notice or waiver. Except in cases where it is otherwise
provided by the rules of such committee or by a resolution of the Board of
Directors, the vote of a majority of the members present at a duly
constituted meeting at which a quorum is present shall be sufficient to pass
any measure by the committee.
ARTICLE IV
OFFICERS
Section 4.01. DESIGNATION, ELECTION AND TERM OF OFFICE. The
Corporation shall have a Chairman of the Board and/or a President either of
whom may be designated Chief Executive Officer by the Board of Directors,
such Vice Presidents (each of whom may be assigned by the Board of Directors
or the Chief Executive Officer an additional title descriptive of the
functions assigned to him and one or more of whom may be designated Executive,
Group or Senior Vice President) as the Board of Directors deems appropriate,
a Secretary and a Treasurer. These officers shall be elected annually by
the Board of Directors at the organizational meeting immediately following
the annual meeting of stockholders, and each such officer shall hold office
until the corresponding meeting of the Board of Directors in the next year
or until his earlier resignation, death or removal. Any vacancy in any of
the above offices may be filled for an unexpired portion of the term by the
Board of Directors at any regular special meeting. The Chief Executive
Officer may, by a writing filed with the Secretary, designate titles for
employees and agents, as, from time to time, may appear necessary or
advisable in the conduct of the affairs of the Corporation and, in the same
manner, terminate or change such titles.
Section 4.02. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate the Chairman of the Board from among its members. The Chairman of
the Board of Directors shall preside at all meetings of the Board and the
Shareholders, and shall perform such other duties as shall be delegated to
him by the Board or the officer designated as chief executive.
Section 4.03. PRESIDENT. The President shall perform such duties and
have such responsibilities as may from time to time be delegated or assigned
to him by the Board of Directors or the officer designated as chief executive.
Section 4.04. CHIEF EXECUTIVE. The Board of Directors shall designate
either the Chairman of the Board or the President to be the chief executive
of the Corporation. The officer so designated shall be responsible for the
general supervision, direction and control of the business and affairs of
the Corporation.
Section 4.05. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
of the Corporation shall be responsible to the Chief Executive Officer for
the management and supervision of all financial matters and to provide for
the financial growth and stability of the Corporation. He shall attend all
regular meetings of the Board of Directors and keep the Directors currently
informed concerning all significant financial matters that could impact upon
the business or affairs of the Corporation. He shall also perform such
additional duties as may be assigned to him from time to time by the Board
of Directors or the Chief Executive Officer.
Section 4.06. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND
VICE PRESIDENTS. Executive vice presidents, senior vice presidents and vice
presidents of the Corporation that are elected by the Board of Directors
shall perform such duties as may be assigned to them from time to time by
the Chief Executive Officer.
Section 4.07. CHIEF LEGAL OFFICER. The chief legal officer of the
Corporation shall be the General Counsel who shall be responsible to the Chief
Executive Officer for the management and supervision of all legal matters.
The General Counsel shall attend all regular meetings of the Board of
Directors and shall keep the Directors currently informed concerning all
significant legal matters, particularly those involving important business,
legal, moral or ethical issues that could impact upon the business or affairs
of the Corporation.
Section 4.08. SECRETARY. The Secretary shall keep the minutes of
the meetings of the stockholders, the Board of Directors and all committee
meetings. The Secretary shall be the custodian of the corporate seal and
shall affix it to all documents which he is authorized by law or the Board
of Directors to sign and seal. The Secretary also shall perform such other
duties as may be assigned from time to time by the Chief Executive Officer.
Section 4.09. TREASURER. The Treasurer shall be accountable to
the Senior Vice President, Finance, and shall perform such duties as may be
assigned to the Treasurer from time to time by the Senior Vice President,
Finance.
Section 4.10. APPOINTED OFFICERS. The Chief Executive Officer may
appoint one or more Corporate Staff Vice Presidents, officers of groups or
divisions or assistant secretaries, assistant treasurers and such other
assistant officers as the business of the Corporation may require, each of
whom shall hold office for such period, have such authority and perform such
duties as may be specified from time to time by the Chief Executive Officer.
Section 4.11. ABSENCE OR DISABILITY OF AN OFFICER. In the case of
the absence or disability of an officer of the Corporation the Board of
Directors, or any officer designated by it, or the Chief Executive Officer
may, for the time of the absence or disability, delegate such officer's duties
and powers to any other officer of the Corporation.
Section 4.12. OFFICERS HOLDING TWO OR MORE OFFICES. The same person
may hold any two or more of the above-mentioned offices. However, no officer
shall execute, acknowledge or verify any instrument in more than one capacity,
if such instrument is required by law, by the Certificate or by these Bylaws,
to be executed, acknowledged or verified by any two or more officers.
Section 4.13. COMPENSATION. The Board of Directors shall have the
power to fix the compensation of all officers and employees of the
Corporation.
Section 4.14. RESIGNATIONS. Any officer may resign at any time
by giving written notice to the Board of Directors, to the Chief Executive
Officer, or to the Secretary of the Corporation. Any such resignation shall
take effect at the time specified therein unless otherwise determined by the
Board of Directors. The acceptance of a resignation by the Corporation shall
not be necessary to make it effective.
Section 4.15. REMOVAL. Any officer of the Corporation may be
removed, with or without cause, by the affirmative vote of a majority of the
entire Board of Directors. Any assistant officer of the Corporation may be
removed, with or without cause, by the Chief Executive Officer, or by the
Board of Directors.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Section 5.01. RIGHT TO INDEMNIFICATION. Each person who was or is
made a party, or is threatened to be made a party, to any actual or threatened
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she is or was a director, officer, employee, or agent of the Corporation
(hereinafter an "indemnitee") shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended, or by other
applicable law as then in effect, against all expense, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) actually and reasonably incurred
or suffered by such indemnitee in connection therewith. Any person who was
or is made a party, or is threatened to be made a party, to any proceeding
by reason of the fact that he or she is or was serving at the request of an
executive officer of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan,
shall also be considered an indemnitee for the purposes of this Article.
The right to indemnification provided by this Article shall apply whether
or not the basis of such proceeding is alleged action in an official capacity
as such director, officer, employee or agent or in any other capacity while
serving as such director, officer, employee or agent. Notwithstanding
anything in this Section 5.01 to the contrary, except as provided in Section
5.03 of this Article with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Corporation.
Section 5.02. ADVANCEMENT OF EXPENSES. (a) The right to
indemnification conferred in Section 5.01 shall include the right to have
the expenses incurred in defending or preparing for any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses")
paid by the Corporation; provided, however, that an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is to be rendered by
such indemnitee, including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking containing such terms and conditions, including the requirement
of security, as the Board of Directors deems appropriate (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal that such indemnitee is not entitled
to be indemnified for such expenses under this Article or otherwise; and
provided, further, that an advancement of expenses shall not be made if the
Corporation's Board of Directors makes a good faith determination that such
payment would violate any applicable law. The Corporation shall not be
obligated to advance fees and expenses to a director, officer, employee or
agent in connection with a proceeding instituted by the Corporation against
such person. (b) Notwithstanding anything in Section 5.02(a) to the
contrary, the right of employees or agents to advancement of expenses shall
be at the discretion of the Board of Directors and on such terms and
conditions, including the requirement of security, as the Board of Directors
deems appropriate. The Corporation may, by action of its Board of Directors,
authorize one or more executive officers to grant rights for the advancement
of expenses to employees and agents of the Corporation on such terms and
conditions as such officers deem appropriate.
Section 5.03. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under
Section 5.01 is not paid in full by the Corporation within sixty (60)
calendar days after a written claim has been received by the Corporation,
except in the case of a claim for an advancement of expenses under Section
5.02 in which case the applicable period shall be thirty (30) calendar days,
the indemnitee may at any time thereafter bring suit against the Corporation
to recover the unpaid amount of the claim. If the indemnitee is successful
in whole or in part in any such suit, the indemnitee shall also be entitled
to be paid the expense of prosecuting or defending such suit.
Section 5.04. NONEXCLUSIVITY OF RIGHTS. (a) The rights to
indemnification and to the advancement of expenses conferred in this Article
shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provisions of the Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. Notwithstanding any amendment to or repeal of this
Article, any indemnitee shall be entitled to indemnification in accordance
with the provisions hereof with respect to any acts or omissions of such
indemnitee occurring prior to such amendment or repeal. (b) The Corporation
may maintain insurance, at its expense, to protect itself and any past or
present director, officer, employee, or agent of the Corporation or another
corporation, partnership, joint venture, trust, or other enterprise against
any expense, liability, or loss, whether or not the Corporation would have
the power to indemnify such person against such expense, liability, or loss
under the Delaware General Corporation Law. The Corporation may enter into
contracts with any indemnitee in furtherance of the provisions of this
Article and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in this Article. (c) The Corporation may without reference to
Sections 5.01 through 5.04 (a) and (b) hereof, pay the expenses, including
attorneys fees, incurred by any director, officer, employee or agent of the
Corporation who is subpoenaed, interviewed or deposed as a witness or
otherwise incurs expenses in connection with any civil, arbitration,
criminal, or administrative proceeding or governmental or internal
investigation to which the Corporation is a party, target, or potentially
a party or target, or of any such individual who appears as a witness at any
trial, proceeding or hearing to which the Corporation is a party, if the
Corporation determines that such payments will benefit the Corporation and
if, at the time such expenses are incurred by such individual and paid by
the Corporation, such individual is not a party, and is not threatened to
be made a party, to such proceeding or investigation.
ARTICLE VI
STOCK
Section 6.01. CERTIFICATES. Except as otherwise provided by law,
each stockholder shall be entitled to a certificate or certificates which
shall represent and certify the number and class (and series, if appropriate)
of shares of stock owned by him in the Corporation. Each certificate shall
be signed in the name of the Corporation by the Chairman of the Board, or the
President, or a Vice President, together with the Secretary, or an Assistant
Secretary, or the Treasurer or Assistant Treasurer. Any or all of the
signatures on any certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, it may be issued by
the Corporation with the same effect as if such person were an officer,
transfer agent or registrar at the date of issue.
Section 6.02. TRANSFER OF SHARES. Shares of stock shall be
transferable on the books of the Corporation only by the holder thereof, in
person or by his duly authorized attorney, upon the surrender of the
certificate representing the shares to be transferred, properly endorsed,
to the Corporation's registrar if the Corporation has a registrar. The Board
of Directors shall have power and authority to make such other rules and
regulations concerning the issue, transfer and registration of certificates
of the Corporation's stock as it may deem expedient.
Section 6.03. TRANSFER AGENTS AND REGISTRARS. The Corporation may
have one or more transfer agents and one or more registrars of its stock
whose respective duties the Board of Directors or the Secretary may, from
time to time, define. No certificate of stock shall be valid until
countersigned by a transfer agent, if the Corporation has a transfer agent,
or until registered by a registrar, if the Corporation has a registrar.
The duties of transfer agent and registrar may be combined.
Section 6.04. STOCK LEDGERS. Original or duplicate stock ledgers,
containing the names and addresses of the stockholders of the Corporation
and the number of shares of each class of stock held by them, shall be kept
at the principal executive office of the Corporation or at the office of its
transfer agent or registrar.
Section 6.05. RECORD DATES. The Board of Directors shall fix, in
advance, a date as the record date for the purpose of determining
stockholders entitled to notice of, or to vote at, any meeting of
stockholders or any adjournment thereof, or stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or
exchange of stock, or in order to make a determination of stockholders for
any other proper purpose. Such date in any case shall be not more than sixty
(60) days, and in case of a meeting of stockholders, not less than ten (10)
days, prior to the date on which the particular action, requiring such
determination of stockholders is to be taken. Only those stockholders of
record on the date so fixed shall be entitled to any of the foregoing rights,
notwithstanding the transfer of any such stock on the books of the
Corporation after any such record date fixed by the Board of Directors.
Section 6.06. NEW CERTIFICATES. In case any certificate of stock
is lost, stolen, mutilated or destroyed, the Board of Directors may authorize
the issuance of a new certificate in place thereof upon such terms and
conditions as it may deem advisable; or the Board of Directors may delegate
such power to any officer or officers or agents of the Corporation; but the
Board of Directors or such officer or officers or agents, in their
discretion, may refuse to issue such a new certificate unless the Corporation
is ordered to do so by a court of competent jurisdiction.
ARTICLE VII
RESTRICTIONS ON SECURITIES REPURCHASES
Section 7.01. RESTRICTIONS ON SECURITIES REPURCHASES.
1. Vote required for certain acquisition of securities. Except as
set forth in Subsection 2 of this Section 7.01, in addition to any
affirmative vote of stockholders required by any provision of law, the
Certificate of Incorporation or Bylaws of this Corporation, or any policy
adopted by the Board of Directors, neither the Corporation nor any Subsidiary
shall knowingly effect any direct or indirect purchase or other acquisition
of any equity security of a class of securities which is registered pursuant
to Section 12 of the /Securities Exchange Act of 1934, as amended (the
"Exchange Act"), issued by the Corporation at a price which is in excess of
the highest Market Price of such equity security on the largest principal
national securities exchange in the United States on which such security is
listed for trading on the date that the understanding to effect such
transaction is entered into by the Corporation (whether or not such
transaction is concluded or a written agreement relating to such transaction
is executed on such date, and such date to be conclusively established by
determination of the Board of Directors), from any Interested Person, without
the affirmative vote of the holders of the Voting Shares representing at
least a majority of the aggregate voting power of all outstanding voting
shares, excluding Voting Shares beneficially owned by such Interested Person,
voting together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or any agreement with any national
securities exchange, or otherwise.
2. When A Vote Is Not Required. The provisions of Subsection 1 of
this Section 7.01 shall not be applicable with respect to:
a. any purchase, acquisition, redemption or exchange of
such equity securities, the purchase, acquisition, redemption or
exchange of which is provided for in the Corporation's Certificate of
Incorporation;
b. any purchase or other acquisition of equity securities
made as part of a tender or exchange offer by the Corporation to
purchase securities of the same class made on the same terms to all
holders of such securities and complying with the applicable
requirements of the Exchange Act of 1934, as amended and the rules
and regulations thereunder (or any successor provisions to such Act,
rules or regulations);
c. any purchase or acquisition of equity securities made
pursuant to an open market purchase program which has been approved
by the Board of Directors.
3. Certain definitions. For the purpose of this Section:
a. "Affiliate" and "Associate" shall have their respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Exchange Act, as in effect on
January 1, 1991.
b. "Beneficial Owner" and "Beneficial Ownership" shall
have the meanings ascribed to such terms in Rule 13d-3 and Rule
13d-5 of the General Rules and Regulations under the Exchange Act,
as in effect on January 1, 1991.
c. "Interested person" shall mean any person (other than
the Corporation or any subsidiary) that is the direct or indirect
Beneficial Owner of five percent (5%) or more of the aggregate voting
power of the Voting Shares, and any Affiliate or Associate of any such
person. For the purpose of determining whether a person is an
Interested Person, the outstanding Voting Shares include unissued
shares of voting stock of the Corporation of which the Interested
Person is the Beneficial Owner, but shall not include any other shares
of voting stock of the Corporation which may be issuable pursuant
to any agreement, arrangement or understanding, or upon exercise
or conversion of rights, warrants or options, or otherwise to any
person who is not the Interested Person.
d. "Market Price" of shares of the class of equity security
of the Corporation on any day shall mean the highest sale price
(regular way) of shares of such class of such equity security on
such day, or, if that day is not a trading day, on the trading day
immediately preceding such day, on the largest principal national
securities exchange on which such class of stock is then listed or
admitted to trading, or if not listed or admitted to trading on any
national securities exchange, then the highest reported sale price
for such shares in the over-the-counter market as reported on the
NASDAQ National Market System, or if such sale price shall not be
reported thereon, the highest bid price so reported, or, of such
price shall not be reported thereon, as the same shall be reported
by the National Quotation Bureau, Incorporated, or if the price is
not determinable as set forth above, as determined in good faith
by the Board of Directors.
e. "Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or
other entity, as well as any syndicate or group deemed to be a person
pursuant to Section 13(d)(3) of the Exchange Act, as in effect on
January 1, 1991.
f. "Subsidiary" shall mean any company or entity of which
the Corporation owns, directly or indirectly, (i) a majority of the
outstanding shares of equity securities, or (ii) shares having a
majority of the voting power represented by all of the outstanding
Voting Stock of such company entitled to vote generally in the
election of directors. For the purpose of determining whether a
company is a Subsidiary, the outstanding voting stock and shares of
equity securities thereof shall include unissued shares of which
The Corporation is the beneficial owner but, except for the purpose
of determining whether a company is a Subsidiary for the purpose of
Subsection 3(c) hereof shall not include any shares which may be
issuable pursuant to any agreement, arrangement,or understanding, or
upon the exercise of conversion rights, warrants or options, or
otherwise to any Person who is not the Corporation.
g. "Voting shares" shall mean the outstanding shares of
capital stock of the Corporation entitled to vote generally in the
election of directors.
ARTICLE VIII
SUNDRY PROVISIONS
Section 8.01. FISCAL YEAR. The fiscal year of the Corporation
shall end on the 31st day of December of each year.
Section 8.02. SEAL. The seal of the Corporation shall bear the
name of the Corporation and the words "Delaware" and "Incorporated
March 12, 1985."
Section 8.03. VOTING OF STOCK IN OTHER CORPORATIONS. Any shares
of stock in other corporations or associations, which may from time to time
be held by the Corporation, may be represented and voted at any of the
stockholders' meetings thereof by the Chief Executive Officer or his
designee. The Board of Directors, however, may by resolution appoint some
other person or persons to vote such shares, in which case such person or
persons shall be entitled to vote such shares upon the production of a
certified copy of such resolution.
Section 8.04. AMENDMENTS. These Bylaws may be adopted, repealed,
rescinded, altered or amended only as provided in Articles Fifth and Sixth
of the Certificate.
January 27, 1997
EXECUTION COPY
NORTHROP GRUMMAN CORPORATION AMENDMENT NO. 1
Dated as of November 1, 1996
to
SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as
of April 15, 1994
Amended and Restated as of March 1, 1996
CHASE SECURITIES INC.,
as Arranger
THE CHASE MANHATTAN BANK,
as Administrative Agent
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Syndication Agent
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Documentation Agent
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of November 1, 1996, between
NORTHROP GRUMMAN CORPORATION, a corporation duly organized and validly
existing under the laws of the State of Delaware (the "Company"); each of
the lenders that is a signatory hereto (individually, a "Bank" and,
collectively, the "Banks"); THE CHASE MANHATTAN BANK, as Swingline Bank;
and THE CHASE MANHATTAN BANK, as agent for the Banks (in such capacity,
together with its successors in such capacity, the "Administrative Agent").
The Company, the Banks, and certain other banks listed
on Schedule II hereto (hereinafter the "Non-Continuing Banks") and the
Administrative Agent are parties to a Second Amended and Restated Credit
Agreement dated as of April 15, 1994 amended and restated as of March 1,
1996 (as heretofore modified and supplemented and in effect on the date
hereof, the "Credit Agreement"), providing, subject to the terms and
conditions thereof, for loans to be made by said Banks to the Company in an
aggregate principal amount not exceeding $3,800,000,000. The Company, the
Banks and the Administrative Agent wish to amend the Credit Agreement in
certain respects, and accordingly, the parties hereto hereby agree as
follows:
Section 1. Definitions. Except as otherwise defined in this Amendment
No. 1, terms defined in the Credit Agreement are used herein
as defined therein.
Section 2. Amendments. Subject to the satisfaction of the
conditions precedent specified in Section 4 below, but effective as of the
date hereof, the Credit Agreement shall be amended as follows:
2.01. References in the Credit Agreement to "this Agreement" (and
indirect references such as "hereunder", "hereby", "herein" and "hereof")
shall be deemed to be references to the Credit Agreement as amended hereby.
2.02. Section 1.01 of the Credit Agreement is amended by amending and
(to the extent not already included in said Section 1.01) adding the
following definitions and inserting the same in the appropriate alphabetical
locations:"'Amendment No. 1' shall mean the Amendment No. 1 dated as
of November 1, 1996 to this Agreement among the Company, the Banks party
thereto and the Administrative Agent.
"'Amendment No. 1 Effective Date' shall mean the date on which Amendment
No. 1 became effective.
"'Applicable Facility Fee Rate' and 'Applicable Margin' shall mean,
during any period when the Rating is in one of the Rating Groups specified
below, the percentage set forth below opposite the reference to such fee or
to the relevant Class and Type of Syndicated Loan:
REVOLVING CREDIT LOANS
Rating Rating Rating Rating
Group Group Group Group
Fee or Loan I II III IV
Applicable .10% .125% .15% .25%
Facility Fee
Rate
Applicable .20% .25% .30% .50%
Margin for
Eurodollar
Loans
Applicable 0% 0% 0% 0%
Margin for
Base Rate
Loans
TERM LOANS
Rating Rating Rating Rating
Group Group Group Group
Fee or Loan I II III IV
Applicable .30% .375% .45% .75%
Margin for
Eurodollar
Loans
Applicable 0% 0% 0% 0%
Margin for
Base Rate
Loans
Any change in the Applicable Facility Fee Rate or in the Applicable Margin
by reason of a change in the Moody's Rating or the S&P Rating shall become
effective on the date of announcement or publication by the respective Rating
Agency of a change in such Rating or, in the absence of such announcement or
publication, on the effective date of such changed Rating."
"'Facility' shall mean the Revolving Credit Facility."
"'Majority Banks' shall mean Banks holding more than 50% of the aggregate
amount of (a) the Revolving Credit Commitments or, if the Revolving Credit
Commitments shall have terminated, the sum of (i) the aggregate unpaid
principal amount of the Revolving Loans plus (ii) the aggregate unpaid
principal amount of the Competitive Bid Loans plus (b) the aggregate
principal amount of the Series II Term Loans." "Mandatory Prepayment Period"
shall mean any period during which one or more of the following conditions
is satisfied: (a) the Leverage Ratio is greater than 50%; or (b) an
Investment Grade Rating Period does not exist.
"'Rating' shall mean a Moody's Rating or an S&P Rating."
"'Rating Agency' shall mean Moody's or S&P."
"'Rating Group' shall mean any of Rating Group I, Rating Group II,
Rating Group III and Rating Group IV."
"'Rating Group I' shall mean (a) no Event of Default has occurred and
is continuing and (b) the Moody's Rating is at or above Baa1 (or a Substitute
Rating is at the corresponding rating level or higher) or the S&P Rating is
at or above BBB+ (or a Substitute Rating is at the corresponding rating level
or higher); "Rating Group II" shall mean (a) no Event of Default has occurred
and is continuing, (b) the Moody's Rating is at or above Baa2 (or a
Substitute Rating is at the corresponding rating level or higher) or the S&P
Rating is at or above BBB (or a Substitute Rating is at the corresponding
rating level or higher) and (c) Rating Group I is not in effect; "Rating
Group III" shall mean (a) no Event of Default has occurred and is continuing,
(b) the Moody's Rating is at or above Baa3 (or a Substitute Rating is
at the corresponding rating level or higher) or the S&P Rating is at
or above BBB- (or a Substitute Rating is at the corresponding rating
level or higher) and (c) neither Rating Group I nor Rating Group II is
in effect; and "Rating Group IV" shall mean none of Rating Group I,
Rating Group II or Rating Group III is in effect; provided that, (A)
if the Moody's Rating and the S&P Rating (or, in either case, a
Substitute Rating) shall be at different Rating levels and one of such
Ratings is no more than one Rating level lower than the other of such
Ratings, then the applicable Rating Group shall be based upon the
higher of such Ratings and (B) if the Moody's Rating and the S&P
Rating (or, in either case, a Substitute Rating) shall be at different
Rating levels and one of such Ratings is two or more Rating levels
lower than the other of such Ratings, then the applicable Rating Group
shall be based upon a Rating that is one level lower than the higher
of such Ratings."
"'Revolving Credit Banks' shall mean (a) on the Amendment No. 1
Effective Date, the Banks having Revolving Credit Commitments as set forth
in Schedule I hereto and (b) thereafter, the Banks from time to time holding
Revolving Loans and/or Revolving Credit Commitments after giving effect to
any assignments thereof permitted by Section 11.06 hereof."
"'Series II Principal Payment Date' shall mean each Quarterly Date in
each year, commencing with the second such Quarterly Date following the
Amendment No. 1 Effective Date through and including the Series II
Term Loan Final Maturity Date."
"'Series II Term Loan Banks' shall mean (a) on the Amendment
No. 1 Effective Date, the Banks having Series II Term Loans as set forth in
Schedule I hereto and (b) thereafter, the Banks from time to time
holding Series II Term Loans after giving effect to any assignments
thereof permitted by Section 11.06 hereof."
"'Term Loan Banks' shall mean the Series II Term Loan Banks."
"'Term Loans' shall mean the Series II Term Loans."
2.03. Clause (i) of the fourth sentence of the definition of
"Interest Period" is amended to read in its entirety as follows:
"(i) no Interest Period for any Revolving Loan may end after the
Revolving Commitment Termination Date;".
2.04. The definitions of "Equity Issuance", "Excess Cash
Flow", "Principal Office", "Rating Level 1", "Rating Level 2", "Series I Term
Loans", "Series I Term Loan Banks", "Series I Term Loan Commitment", "Series
I Term Loan Facility", "Series I Term Loan Final Maturity Date", "Series II
Term Loan Commitment", "Series II Term Loan Facility" and "Term Loan
Commitments" in Section 1.01 of the Credit Agreement are deleted in their
entirety.
2.05. The second sentence of Section 1.03 is amended to
delete the following: "a Series I Term Loan,".
2.06. Section 2.01 is amended to read in its entirety as
follows:
"2.01 Syndicated Loans. Subject to and upon the terms and
conditions herein set forth, each Bank severally agrees (i) to make
Revolving Loans (together with the Series II Term Loans, the "Syndicated
Loans" and each a "Syndicated Loan") to the Company in Dollars up to
such Bank's Commitment under the Revolving Credit Facility and (ii) to
effect a prepayment and reallocation of, and thereafter to maintain, its
Series II Term Loans, all as set forth below:
(a) [Intentionally omitted].
(b) Series II Term Loans. Subject to the terms
and conditions of this Agreement and Amendment No. 1, Series II Term
Loans shall be prepaid and reallocated pursuant to Section 4.03(a) of
Amendment No. 1 and thereafter may, at the option of the Company, be
maintained as, and/or Converted into, Base Rate Loans or Eurodollar
Loans.
(c) Revolving Loans. Syndicated Loans under the
Revolving Credit Facility shall be available at any time and from time
to time from and after the Amendment Effective Date to and including the
Revolving Commitment Termination Date. Subject to the terms and
conditions of this Agreement, during such period, Revolving Loans may
be borrowed, repaid and reborrowed and may, at the option of the
Company, be borrowed and maintained as, and/or Converted into, Base
Rate Loans or Eurodollar Loans. Notwithstanding the foregoing, no
Revolving Loan shall be made if the sum of (i) such Revolving Loan
(together with all other Revolving Loans and Competitive Bid Loans to
be made on the same day as such Revolving Loan) plus (ii) the
aggregate principal amount of all outstanding Competitive Bid Loans
plus (iii) the aggregate principal amount of all outstanding Revolving
Loans plus (iv) the aggregate principal amount of all outstanding
Swingline Loans exceeds the aggregate amount of the Revolving Credit
Commitments at such time."
2.07. The second sentence of Section 2.02(a) of the
Credit Agreement is amended to read in its entirety as follows:
"Not later than 1:00 p.m. New York time on the date specified for
each Syndicated Loan borrowing hereunder, each Bank shall make available
the amount of the Syndicated Loan to be made by it on such date to the
Administrative Agent, at an account in New York designated by the
Administrative Agent, in immediately available funds, for account of the
Company."
2.08. Subsection (f) of Section 2.03 of the Credit Agreement
is amended to read in its entirety as follows:
"(f) Any Bank whose offer to make any Competitive Bid Loan
has been accepted shall, not later than 1:00 p.m. New York time on the
date specified for the making of such Loan, make the amount of such Loan
available to the Administrative Agent at an account in New York
designated by the Administrative Agent in immediately available funds.
The amount so received by the Administrative Agent shall, subject to the
terms and conditions of this Agreement, be made available to the Company
on such date by depositing the same, in immediately available funds, in
an account designated by the Company."
2.09. Subsection (b) of Section 2.04 is amended to read
in its entirety as follows:
"(b) Termination of Commitments. The Revolving
Credit Commitments and the Swingline Commitment shall terminate on the
Revolving Commitment Termination Date."
2.10. Subsection (a) of Section 2.08 is amended to read
in its entirety as follows:
(a) The Syndicated Loans made by each Bank shall
be evidenced (i) if Series II Term Loans, by a single promissory note of
the Company in substantially the form of Exhibit A-2 hereto, dated the
Restatement Date, payable to such Bank in a principal amount equal to
its Series II Term Loan and otherwise duly completed (each a "Series II
Term Note", collectively the "Series II Term Notes" or the "Term Notes")
and (ii) if Revolving Loans, by a single promissory note of the Company
substantially in the form of Exhibit A-3 hereto, dated the Restatement
Date, payable to such Bank in a principal amount equal to its Revolving
Credit Commitment and otherwise duly completed (each a "Revolving Note"
and collectively the "Revolving Notes"). The date, amount, Type and
interest rate of each Series II Term Loan and each Revolving Loan made
by each Bank, and all payments made on account of the principal thereof,
shall be recorded by such Bank on its books and, prior to any transfer
of the Note evidencing the same, endorsed by such Bank on the schedule
attached to such Note or any continuation thereof; provided that the
failure by such Bank to make such recordation or endorsement shall not
relieve the Company of any of its obligations hereunder or under such
Note.
2.11. Section 2.09 is amended to delete the word "first" and
the following phrase: "and second to the aggregate outstanding principal
amount of the Series I Term Loans".
2.12. Subsections (a), (b) and (e) of Section 2.10 of the
Credit Agreement are each amended to read in their entirety as follows:
"[Intentionally omitted]."
2.13. Subsection (c) of Section 2.10 of the Credit Agreement
is amended to read in its entirety as follows:
"(c) Sale of Assets. Without limiting the obligation
of the Company to obtain the consent of the Majority Banks pursuant to
Section 8.09 hereof to any Disposition not otherwise permitted under
Section 8.09 hereof, in the event that the Net Available Proceeds of
any individual Disposition made after the Amendment Effective Date
while a Mandatory Prepayment Period is in effect (or if, after giving
effect to any such Disposition, a Mandatory Prepayment Period would
exist) (herein, the "Current Disposition") exceeds $5,000,000 and,
together with the Net Available Proceeds that individually exceed
$5,000,000 of each prior Disposition as to which a prepayment has not
yet been made under this Section 2.10(c), shall in the aggregate exceed
$50,000,000 then, (i) at the time the Company gives notice to the
Administrative Agent pursuant to Section 4.07 of the prepayment to be
made pursuant to this Section 2.10(c), the Company will deliver to the
Administrative Agent a statement, certified by a senior financial
officer of the Company, in form and detail satisfactory to the
Administrative Agent, of the aggregate amount of the Net Available
Proceeds of such Current Disposition and prior Dispositions and (ii)
the Company shall prepay the Term Loans in an aggregate amount equal
to 100% of the Net Available Proceeds received for such Current
Disposition and such prior Dispositions (except that Net Available
Proceeds consisting of Permitted Buyer Indebtedness need not be
applied to such prepayment until the earlier of any payment or
Disposition of such Permitted Buyer Indebtedness and then only to the
extent of such payment or the Net Available Proceeds of such
Disposition), such prepayment to be effected as provided in paragraph
(f) of this Section 2.10.
2.14. Subsections (i) and (ii) of Section 2.10(f) shall be
amended to read in their entirety as follows:
"(i) Prepayments of Term Loans described in paragraph (d)
of this Section 2.10 shall be applied to the then remaining
installments of the Series II Term Loans ratably.
(ii) Prepayments of Term Loans described in paragraph
(c) of this Section 2.10 shall be applied (A) to the extent that any
such prepayment, together with all such prepayments theretofore made in
any fiscal year after the Amendment No. 1 Amendment Effective Date, does
not exceed $100,000,000, to the then remaining installments of the
Series II Term Loans in direct order of their maturities and (B)
thereafter to the then remaining installments of the Series II Term
Loans ratably."
2.15. The second sentence of Section 2.11(b) of the
Credit Agreement is amended to read in its entirety as follows:
"Not later than 3:00 p.m. New York time, on the date specified in
each Swingline Borrowing Notice hereunder, the Swingline Bank shall,
subject to the terms of this Agreement, make the amount of the Swingline
Loan to be made by it on such date available to the Administrative Agent
at an account in New York designated by the Administrative Agent in
immediately available funds, for account of the Company."
2.16. Subsection (c) of Section 3.01 of the Credit
Agreement is amended to read in its entirety as follows: "[Intentionally
omitted]".
2.17. Subsection (d) of Section 3.01 of the Credit
Agreement is amended to read in its entirety as follows:
"(d) The Company hereby promises to pay to the
Administrative Agent for account of the Banks the aggregate principal
amount of the Series II Term Loans outstanding on the Amendment No. 1
Effective Date in 21 equal consecutive quarterly installments payable
on the Series II Principal Payment Dates."
2.18. The first sentence of Section 4.01 of the
Credit Agreement is amended to read in its entirety as follows:
"Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Company under
this Agreement and the Notes shall be made in Dollars, in immediately
available funds, to the Administrative Agent at an account in New
York designated by the Administrative Agent, not later than 1:00 p.m.
New York time on the date on which such payment shall become due
(each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day)."
2.19. Subsection (b) of Section 4.02 is amended to read in
its entirety as follows:
"(b) the making, Conversion and Continuation of Revolving Loans,
and the Conversion and Continuation of Series II Term Loans, of a
particular Type (other than Conversions provided for by Section 5.04
hereof) shall be made pro rata among the relevant Banks according to
the amounts of their respective Revolving Credit Commitments (in the
case of making of Loans) or their respective Revolving Credit and Series
II Term Loans (in the case of Conversions and Continuations of Loans);
2.20. Subsection (c) of Section 8.01 of the Credit
Agreement is amended to read in its entirety as follows:
"(c) with each of the financial statements required to be
delivered under Section 8.01(a) or 8.01(b) hereof, a certificate of an
authorized financial or accounting officer of the Company, in form and
substance satisfactory to the Administrative Agent setting forth (i) the
Net Available Proceeds of each Disposition in excess of $5,000,000 that
has occurred in the fiscal period to which such financial statements
relate and (ii) the aggregate amount of Net Available Proceeds for each
other Disposition in excess of $5,000,000 that has occurred in prior
fiscal periods and for which no prepayment has been made pursuant to
Section 2.10(c) hereof;".
2.21. Clause (i) of Section 8.09(d) of the Credit Agreement is
amended to read in its entirety as follows: "[Intentionally omitted];".
2.22. Section 8.19 of the Credit Agreement is amended to read
in its entirety as follows: "[Intentionally omitted]."
2.23. The first sentence of Section 10.09 of the Credit
Agreement is amended to read in its entirety as follows:
"The Documentation Agent, the Syndication Agent and the
Arranger identified on the cover page of this Agreement, or on the cover
page of any amendment hereto, shall have no duties or responsibilities
hereunder other than, in the case of the Documentation Agent and the
Syndication Agent, as Banks hereunder."
2.24. Schedule I of the Credit Agreement is amended to read
in its entirety as Schedule I hereto.
2.25. Exhibit A-1 is amended to read in its entirety as
follows:
"[Intentionally omitted]."
Section 3. Representations and Warranties. The Company
represents and warrants to the Banks that (i) the representations and
warranties set forth in Section 7 of the Credit Agreement are true and
complete on the date hereof as if made on and as of the date hereof (or, if
any such representation or warranty is expressly stated to have been made as
of a specific date, as of such specific date) and as if each reference in
said Section 7 to "this Agreement" included reference to this Amendment No. 1,
(ii) after giving effect to the amendments in Section 2 of this Amendment
No. 1, no Default shall have occurred and be continuing, (iii) the making
and performance by the Company of this Amendment No. 1, and the Revolving
Notes and Series II Term Notes delivered pursuant to Section 4.04 hereof,
have been duly authorized by all necessary corporate action and (iv) this
Amendment No. 1, and the Credit Agreement as amended by Amendment No. 1,
constitute, and each of such Notes (when executed and delivered for value)
will constitute, legal, valid and binding obligations of the Company,
enforceable in accordance with its terms, except as such enforceability may
be limited by (a) bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general applicability affecting the enforcement of
creditors' rights and (b) the application of general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
Section 4. Conditions Precedent. As provided in Section 2
above, the amendments to the Credit Agreement set forth in said Section 2
shall become effective, as of the date hereof, upon the satisfaction of the
following conditions precedent:
4.01. Execution by All Parties. This Amendment No. 1 shall
have been executed and delivered by each of the parties hereto.
4.02. Payment of Interest and Fees. Each Bank and Non-
Continuing Bank shall have been paid in full all interest and fees accrued
under the Credit Agreement to the Amendment No. 1 Effective Date (as defined
in the Credit Agreement as hereby amended).
4.03. Reallocation. The Series II Term Loans shall have been
prepaid under Section 2.09 of the Credit Agreement on November 1, 1996, but
prior to the effectiveness of the amendments to the Credit Agreement set forth
in Section 2 above, in an aggregate principal amount of $257,500,000; and
immediately thereafter the Banks and the Non-Continuing Banks shall be deemed
to have made and taken such assignments, as the case may be, of the remaining
Series II Term Loans such that, after giving effect thereto, each Bank shall
hold a Series II Term Loan in an aggregate principal amount set forth in
opposite the name of such Bank in Schedule I hereto. In order to fund such
assignments and thereby effect the reallocations of the Series II Term Loans,
each Bank listed in Part A of Schedule III will pay on the Amendment No. 1
Effective Date to the Administrative Agent the amount set forth opposite such
Bank's name in Part A of Schedule III, out of which aggregate amounts the
Administrative Agent will pay on the Amendment No. 1 Effective Date to each
Bank and Non-Continuing Bank listed in Part B of Schedule III the amount set
forth opposite its name in Part B of Schedule III.
4.04. Notes. The Administrative Agent shall have received
Revolving Notes and Series II Term Notes, duly completed and executed by the
Company in exchange for the Revolving Notes and Series II Term Notes of the
Company previously delivered pursuant to the Credit Agreement.
4.05. Documents. The Administrative Agent shall have
received such other documents as the Administrative Agent or any Bank or
special New York counsel to Chase may reasonably request.
Section 5. Miscellaneous. Except as herein provided, the
Credit Agreement shall remain unchanged and in full force and effect. This
Amendment No. 1 may be executed in any number of counterparts, all of which
taken together shall constitute one and the same amendatory instrument and
any of the parties hereto may execute this Amendment No. 1 by signing any
such counterpart. This Amendment No. 1 shall be governed by, and construed
in accordance with, the law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be duly executed and delivered as of the day and year
first above written.
NORTHROP GRUMMAN CORPORATION
By
Title:
THE BANKS
THE CHASE MANHATTAN BANK
By
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By
Title:
FIRST AMENDMENT TO THE
NORTHROP SUPPLEMENTAL PLAN 2
This amendment to the Northrop Supplemental Plan 2, as described
below, is intended to include compensation deferred under the Northrop
Grumman Corporation Executive Deferred Compensation Plan within the
definition of compensation used to calculate Northrop Supplemental
Retirement Income Program For Senior Executives benefits.
1. Section A.04 is modified to read as follows:
A.04 Amount of Retirement Benefit. A Participant entitled to a
benefit under Section A.03 will receive a benefit equal in
value to the excess of (a) over (b) as follows:
(a) is the greater of
(1) the amount of the Participant's retirement
income under the Retirement Plan on a straight
life annuity basis, computed
(A) without regard to the limitations on
benefits and the cap on counted
compensation imposed by Code sections
415 and 401(a)(17), and
(B) by modifying Rate of Annual Salary
under the Retirement Plan to include
compensation deferred under the
Northrop Grumman Corporation Executive
Deferred Compensation Plan, or
(2) the amount of a straight life annuity with
annual payments equal to the Participant's
Final Average Salary (as defined under the
Retirement Plan except that Rate of Annual
Salary is modified to include compensation
deferred under the Northrop Grumman
Corporation Executive Deferred Compensation
Plan) in effect on the date of his or her
Termination of Employment multiplied by the
appropriate percentage shown in the following
schedule:
Percentage of Final Average
Age at Termination Date* Salary at Termination Date**
55 30%
56 34%
57 38%
58 42%
59 46%
60 50%
61 52%
62 54%
63 56%
64 58%
65 and over 60%
(b) is the amount of the Participant's retirement income
under the Retirement Plan on a straight life annuity
basis, computed as of his or her Termination of
Employment, taking into account the limitations on
benefits and the cap on counted compensation imposed
by Code sections 415 and 401(a)(17).
* Calculated to years and completed months on the Termination Date.
** The applicable percentage shall be straight line interpolation depending
on the Participant's age on his termination date. The percentage thus
determined shall be rounded to the nearest hundredth. For example, if a
Participant terminates when he is 55 years and 8 months old, the applicable
percentage is 30.00% + 2.67% = 32.67%.
NORTHROP GRUMMAN CORPORATION
SPECIAL AGREEMENT
THIS AGREEMENT is made and entered into as of this _____ day of ____,
1996, by and between Northrop Grumman Corporation, a Delaware corporation
(hereinafter referred to as the "Company") and _____________________________
(hereinafter referred to as the "Executive").
RECITALS
The Board of Directors of the Company has approved the Company
entering into severance agreements with certain key executives of the
Company.
The Executive is a key executive of the Company.
Should the possibility of a Change in Control of the Company arise,
the Board believes it imperative that the Company and the Board should be
able to rely upon the Executive to continue in his position, and that the
Company should be able to receive and rely upon the Executive's advice, if
requested, as to the best interests of the Company and its shareholders
without concern that the Executive might be distracted by the personal
uncertainties and risks created by the possibility of a Change in Control.
Should the possibility of a Change in Control arise, in addition to
his regular duties, the Executive may be called upon to assist in the
assessment of such possible Change in Control, advise management and the
Board as to whether such Change in Control would be in the best interests
of the Company and its shareholders, and to take such other actions as the
Board.
The Executive and the Company desire that, with respect to those
Executives who have previously entered an Amended and Restated Special
Severance Pay Agreement, might determine to be appropriate, the terms of this
Agreement shall completely replace and supersede the provisions set forth
in the Amended and Restated Special Severance Pay Agreement, entered into
by and between the Company and the Executive prior to the date hereof
(setting forth terms and provisions with respect to the Executive's
entitlement to payments and benefits following a Change in Control of the
Company);
NOW THEREFORE, to assure the Company that it will have the continued
dedication of the Executive and the availability of his advice and counsel
notwithstanding the possibility, threat, or occurrence of a Change in Control
of the Company, and to induce the Executive to remain in the employ of the
Company in the face of these circumstances and for other good and valuable
consideration, the Company and the Executive agree as follows:
Article 1. Certain Definitions
Whenever used in this Agreement, the following terms shall have the
meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized:
(a) "Agreement" means this Special Agreement.
(b) "Base Salary" means the salary of record paid to the
Executive as annual salary, excluding amounts received under
incentive or other bonus plans, whether or not deferred.
(c) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under
the Exchange Act.
(d) "Beneficiary" means the persons or entities designated or
deemed designated by the Executive pursuant to Section 9.2
herein.
(e) "Board" means the Board of Directors of the Company.
(f) "Cause" shall mean the occurrence of either or both of the
following:
(i) The Executive's conviction for committing an act of
fraud, embezzlement, theft, or other act constituting
a felony; or
(ii) The willful engaging by the Executive in gross
misconduct materially and demonstrably injurious to
the Company. However, no act or failure to act, on
the Executive's part shall be considered "willful"
unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that
his action or omission was in the best interest of
the Company.
(g) "Change in Control" of the Company shall be deemed to have
occurred as of the first day that any one or more of the
following conditions shall have been satisfied:
(i) Any Person (other than those Persons in control of
the Company as of the Effective Date, or other than
a trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes
the Beneficial Owner, directly or indirectly, of
securities of the Company representing fifteen percent
(15%) or more of the combined voting power of the
Company's then outstanding securities, and for
purposes of this subsection (i) "Person" or "group"
shall not include underwriters acquiring newly-issued
voting securities (or securities convertible into
voting securities) directly from the Company with a
view towards distribution; or
(ii) During any period of two (2) consecutive years (not
including any period prior to the execution of this
Agreement), individuals who at the beginning of such
period constitute the Board (and any new Director,
whose election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of
the Directors then still in office who either were
Directors at the beginning of the period or whose
election or nomination for election was so approved),
cease for any reason to constitute a majority thereof;
or
(iii) The stockholders of the Company approve: (A) a plan
of complete liquidation of the Company; or (B) an
agreement for the sale or disposition of all or
substantially all the Company's assets in one or a
series of related transactions; or (C) a merger,
consolidation, or reorganization of the Company with
or involving any other corporation, other than a
merger, consolidation, or reorganization that would
result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by
being converted into voting securities of the
surviving entity), more than seventy-five percent
(75%) of the combined voting power of the voting
securities of the Company (or such surviving entity)
outstanding immediately after such merger,
consolidation, or reorganization.
(h) "Code" means the United States Internal Revenue Code of 1986,
as amended.
(i) "Committee" means the Compensation and Management Development
Committee of the Board, or any other committee appointed by
the Board to perform the functions of the Compensation and
Management Development Committee.
(j) "Company" means Northrop Grumman Corporation, a Delaware
corporation (including any and all subsidiaries), or any
successor thereto as provided in Article 8 herein.
(k) "Disability" means permanent and total disability, within
the meaning of Code Section 22(e)(3), as determined by the
Committee in the exercise of good faith and reasonable
judgment, upon receipt of and in reliance on sufficient
competent medical advice from one or more individuals
licensed and qualified to give professional medical advice.
(l) "Effective Date" means the date this Agreement is approved
by the Board or its delagatee, or such other date as the
Board or its delagatee shall determine.
(m) "Effective Date of Termination" means the date on which a
Qualifying Termination occurs.
(n) "Exchange Act" means the United States Securities Exchange
Act of 1934, as amended.
(o) "Executive" means the individual identified in the first
sentence and on the signature page of this Agreement.
(p) "Good Reason" means, without the Executive's express written
consent, the occurrence after a Change in Control of the
Company of any one or more of the following:
(i) The assignment of the Executive to duties materially
inconsistent with the Executive's authorities, duties,
responsibilities, and status (including titles and
reporting requirements) as an officer of the Company,
or a material reduction or alteration in the nature
or status of the Executive's authorities, duties, or
responsibilities, from their highest level during the
ninety (90) days prior to the Change in Control, other
than an insubstantial and inadvertent act that is
remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(ii) A reduction by the Company of the Executive's Base
Salary as in effect on the Effective Date, or as the
same shall be increased from time to time;
(iii) A significant reduction by the Company of the
Executive's aggregate incentive opportunities under
the Company's short- and long-term incentive programs,
as such opportunities exist on the Effective Date, or
as such opportunities may be increased after the
Effective Date. For this purpose, a significant
reduction in the Executive's incentive opportunities
shall be deemed to have occurred in the event his
targeted annualized award opportunities and/or the
degree of probability of attainment of such annualized
award opportunities are diminished from the levels
and probability of attainment that existed as of the
Effective Date;
(iv) The failure of the Company to maintain the
Executive's relative level of coverage and accruals
under the Company's employee benefit and/or retirement
plans, policies, practices, or arrangements in which
the Executive participates as of the Effective Date,
both in terms of the amount of benefits provided,
amounts accrued and the relative level of the
Executive's participation on a basis at least as
beneficial as, or substantially equivalent to that
on which the Executive participated in such plans
immediately prior to the Effective Date. For this
purpose, the Company may eliminate and/or modify
existing programs and coverage levels; provided,
however, that the Executive's level of coverage under
all such programs must be at least as great as is
such coverage provided to executives who have the
same or lesser levels of reporting responsibilities
within the Company's organization;
(v) The failure of the Company to obtain a satisfactory
agreement from any successor to the Company to assume
and agree to perform the Company's obligations under
this Agreement, as contemplated in Article 8 herein;
and
(vi) Any purported termination by the Company of the
Executive's employment that is not effected pursuant
to a Notice of Termination satisfying the
requirements of Section 2.8 herein, and for purposes
of this Agreement, no such purported termination shall
be effective.
The Executive's right to terminate employment for Good Reason
shall not be affected by the Executive's incapacity due to
physical or mental illness. The Executive's continued
employment shall not constitute a consent to, or a waiver
of rights with respect to, any circumstance constituting Good
Reason herein.
(q) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections
13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d).
(r) "Qualifying Termination" means any of the events described
in Section 2.3 herein.
(s) "Severance Benefits" means the payments provided in Section
2.4 herein.
Article 2. Severance Benefits
2.1. Right to Severance Benefits. The Executive shall be entitled
to receive from the Company Severance Benefits as described in Section 2.4
herein, if there has been a Change in Control of the Company and if, within
the six (6) full calendar month period prior to the effective date of a
Change in Control, or within twenty-four (24) calendar months thereafter,
the Executive's employment with the Company shall end for any reason
specified in Section 2.3 herein.
The Executive shall not be entitled to receive Severance Benefits
if he is terminated for Cause, or if his employment with the Company ends
due to death or voluntary termination of employment by the Executive without
Good Reason.
2.2. Services During Certain Events. In the event a Person begins
a tender or exchange offer, circulates a proxy to shareholders of the
Company, or takes other steps seeking to effect a Change in Control, the
Executive agrees that he will not voluntarily leave the employ of the Company
and will render services until such Person has abandoned or terminated his
or its efforts to effect a Change in Control, or until six (6) months after
a Change in Control has occurred; provided, however, that the Company may
terminate the Executive for Cause at any time, and the Executive may
terminate his employment any time after the Change in Control for Good
Reason.
2.3. Qualifying Termination. The occurrence of any one or more
of the following events within twenty-four (24) calendar months after a
Change in Control of the Company shall cause the Company or any successor
to pay immediately the Severance Benefits to the Executive under this
Agreement:
(a) An involuntary termination of the Executive's employment by
the Company for reasons other than Cause;
(b) A voluntary termination of employment by the Executive for
Good Reason;
(c) A successor company fails or refuses to assume by written
instrument the Company's obligations under this Agreement,
as required by Article 8 herein; or
(d) The Company or any successor company repudiates or breaches
any of the provisions of this Agreement.
2.4. Description of Severance Benefits. In the event that the
Executive becomes entitled to receive Severance Benefits, as provided in
Sections 2.1 and 2.3 herein, the Company shall pay to the Executive and
provide him with the following:
(a) An amount equal to three (3) times the highest rate of the
Executive's annual Base Salary in effect at any time up to and
including the Effective Date of Termination.
(b) An amount equal to three (3) times the greater of: (i) the
Executive's average annual bonus earned over the three (3)
full fiscal years prior to the Effective Date of Termination;
or (ii) the Executive's target annual bonus established for
the bonus plan year in which the Executive's Effective Date
of Termination occurs.
(c) An amount equal to the Executive's unpaid Base Salary and
accrued vacation pay through the Effective Date of
Termination, together with a portion of the Executive's
target bonus under the bonus plan in which he participates
for that year, calculated by multiplying the target bonus by
a fraction the numerator of which is the number of days from
January 1 through the Effective Date of Termination and the
denominator of which is 365.
(d) A continuation of all benefits pursuant to any and all
welfare benefit plans under which the Executive and/or
the Executive's family is eligible to receive benefits and/or
coverage as of the effective date of the Change in Control,
including, but not limited to, group life insurance,
hospitalization, disability, medical, dental, and thrift
plans. Such benefits shall be provided to the Executive at
the same premium cost, and at the same coverage level, as in
effect as of the Executive's Effective Date of Termination.
The welfare benefits described in this Subsection 2.4(d)
shall continue following the Effective Date of Termination
for three (3) years; provided, however, that such benefits
shall be discontinued prior to the end of such period in the
event the Executive receives substantially similar benefits
from a subsequent employer, as determined by the Committee.
(e) A lump sum cash payment of the actuarial present value
equivalent of the aggregate benefits accrued by the
Executive as of the Effective Date of Termination under the
terms of the Northrop Grumman Corporation ERISA Supplemental
Plan 1 and ERISA Supplemental Plan 2, and if applicable, the
Grumman Corporation Supplemental Retirement Plan and all
similar excess benefit plans applicable to the Executive.
For this purpose, such benefits shall be calculated under
the assumption that the Executive's employment continued
following the Effective Date of Termination for three (3)
years (i.e., three (3) additional years of service credits
shall be added to the Executive's record of service with the
Company and three (3) additional years to his chronological
age for status and actuarial purposes); provided, however,
that for purposes of determining "final average pay" under
the benefit calculation, the Executive's actual pay history
as of the Effective Date of Termination shall be used,
including for this purpose the higher of (x) the average of
the last three bonuses received by the Executive or (y) the
Executive's target bonus for the year in which the Effective
Date of Termination occurs.
(f) A lump sum cash payment of the entire balance of the
Executive's compensation which has been deferred under any
plan or program of the Company together with all interest that
has been credited with respect to such deferred compensation
balance.
(g) For purposes of this Agreement, any acceleration of vesting,
lapse of restrictions and/or payout occasioned by the Change
in Control pursuant to the provisions of long-term incentive
plans and/or individual award agreements under such long-term
incentive plans shall be deemed a benefit within the meaning
of this Section 2.4. Any amounts paid either directly to, or
for the benefit of the Executive pursuant to Article 7 of this
Agreement shall also be deemed a benefit within the meaning
of this Section 2.4.
2.5. Termination for Total and Permanent Disability. Following a
Change in Control of the Company, if the Executive's employment is terminated
due to Disability, the Executive shall receive his Base Salary through the
Effective Date of Termination, at which point in time the Executive's benefits
shall be determined in accordance with the Company's retirement, insurance,
and other applicable plans and programs then in effect, provided, however,
that if immediately prior to the condition or event leading to, or the
commencement of, the Disability of the Executive, the Executive would have
been entitled to invoke any of the subsections of Section 2.3 of this Special
Agreement if he had terminated at that time, then upon termination of his
employment for Disability he shall be entitled to collect immediately his
full Severance Benefits hereunder.
2.6. Termination on Executive's Death. Following a Change in
Control of the Company, if the Executive's employment is terminated by reason
of his death, the Executive's benefits shall be determined in accordance with
the Company's retirement, survivor's benefits, insurance, and other applicable
programs of the Company then in effect.
2.7. Termination for Cause or by the Executive Other Than for Good
Reason. Following a Change in Control of the Company, if the Executive's
employment is terminated either: (i) by the Company for Cause; or (ii) by the
Executive other than for Good Reason, the Company shall pay the Executive his
full Base Salary and accrued vacation through the Effective Date of
Termination, at the rate then in effect, plus all other amounts to which the
Executive is entitled under any compensation plans of the Company, at the time
such payments are due, and the Company shall have no further obligations to
the Executive under this Agreement.
2.8. Notice of Termination. Any termination by the Company for
Cause or by the Executive for Good Reason shall be communicated by Notice
of Termination to the other party. For purposes of this Agreement, a "Notice
of Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination of the Executive's employment under the provision so
indicated. If the Executive is terminating for Good Reason hereunder, the
Notice of Termination shall be effective on the date specified in Section
9.7 of this Agreement.
Article 3. Form and Timing of Severance Benefits
3.1. Form and Timing of Severance Benefits. The Severance Benefits
described in Sections 2.4(a), 2.4(b), 2.4(c), 2.4(e), and 2.4(f) herein shall
be paid in cash to the Executive in a single lump sum as soon as practicable
following the Effective Date of Termination, but in no event beyond thirty
(30) days from such date.
3.2. Withholding of Taxes. The Company shall be entitled to
withhold from any amounts payable under this Agreement all taxes as legally
shall be required (including, without limitation, any United States Federal
taxes, and any other state, city, or local taxes).
Article 4. Excise Tax Gross-Up
4.1. Equalization Payment. If upon or following a Change in
Control, the tax imposed by Section 4999 of the Code or any similar or
successor tax (the "Excise Tax") applies, solely because of the Change in
Control, to any payments, benefits and/or amounts received by the Executive
as Severance Benefits or otherwise, including, without limitation, any fees,
costs and expenses paid under Article 7 of this Agreement and/or any amounts
received or deemed received, within the meaning of any provision of the Code,
by the Executive as a result of (and not by way of limitation) any automatic
vesting, lapse of restrictions and/or accelerated target or performance
achievement provisions, or otherwise, applicable to outstanding grants or
awards to the Executive under any of the Company's incentive plans, including
without limitation, the 1993 Long Term Incentive Stock Plan, the 1987 Long
Term Incentive Plan and the 1981 Long-Term Incentive Plan, the Company shall
pay to the Executive in cash an additional amount or amounts (the "Gross-Up
Payment(s)") such that the net amount retained by the Executive after the
deduction of any Excise Tax on such payments, benefits and/or amounts so
received and any Federal, state and local income tax and Excise Tax upon the
Gross-Up Payment(s) provided for by this Section 4.1 shall be equal to such
payments, benefits and/or amounts so received had they not been subject to
the Excise Tax. Such payment(s) shall be made by the Company to the Executive
as soon as practicable following the receipt or deemed receipt of any such
payments, benefits and/or amounts so received, and may be satisfied by the
Company making a payment or payments on Executive's account in lieu of
withholding for tax purposes but in all events shall be made within thirty
(30) days of the receipt or deemed receipt by the Executive of any such
payment, benefit and/or amount.
4.2. Tax Computation. For purposes of determining whether any
payments, benefits and/or amounts, including amounts paid as Severance
Benefits, will be subject to Excise Tax, and the amount of any such Excise
Tax:
(a) Any other payments, benefits and/or amounts received or to be
received by the Executive in connection with or contingent
upon a Change in Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement
with the Company, or with any Person whose actions result in
a Change in Control of the Company or any Person affiliated
with the Company or such Persons) shall be combined to
determine whether the Executive has received any "parachute
payment" within the meaning of Section 280G(b)(2) of the Code,
and if so, the amount of any "excess parachute payments"
within the meaning of Section 280G(b)(1) that shall be treated
as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors and
acceptable to the Executive, such other payments, benefits
and/or amounts (in whole or in part) do not constitute
parachute payments, or unless such excess parachute payments
represent reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the Code
in excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the
Excise Tax;
(b) The value of any noncash benefits or any deferred payment or
benefit shall be determined by the Company's independent
auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay Federal income taxes at the
highest marginal rate of Federal income taxation in the calendar year
in which the Gross-Up Payment is to be made and such highest marginal
rate shall take into account the loss of itemized deductions by the
Executive and shall also include the Executive's share of the
hospital insurance portion of FICA and state and local income taxes
at the highest marginal rate of taxation in the state and locality
of the Executive's residence on the Effective Date of Termination,
net of the maximum reduction in Federal income taxes that could be
obtained from the deduction of such state and local taxes.
4.3. Subsequent Recalculation. In the event the Internal Revenue
Service adjusts the computation of the Company under Section 4.2 herein, so
that the Executive did not receive the greatest net benefit, the Company shall
reimburse the Executive as provided herein for the full amount necessary to
place the Executive in the same after-tax position as he would have been in
had no Excise Taxapplied.
Article 5. The Company's Payment Obligation
5.1. Payment Obligations Absolute. The Company's obligation to
make the payments and the arrangements provided for herein shall be absolute
and unconditional, and shall not be affected by any circumstances, including,
without limitation, any offset, counterclaim, recoupment, defense, or other
right which the Company may have against the Executive or anyone else. All
amounts payable by the Company hereunder shall be paid without notice or
demand. Each and every payment made hereunder by the Company shall be final,
and the Company shall not seek to recover all or any part of such payment
from the Executive or from whomsoever may be entitled thereto, for any
reasons whatsoever, except as otherwise provided in Article 7 hereof.
The Executive shall not be obligated to seek other employment in
mitigation of the amounts payable or arrangements made under any provision
of this Agreement, and the obtaining of any such other employment shall in
no event effect any reduction of the Company's obligations to make the
payments and arrangements required to be made under this Agreement, except
to the extent provided in Section 2.4(d) herein.
5.2. Contractual Rights to Benefits. This Agreement establishes
and vests in the Executive a contractual right to the benefits to which he is
entitled hereunder and the Company expressly waives any ability, if possible,
to deny liability for any breach of its contractual commitment hereunder upon
the grounds of lack of consideration, accord and satisfaction or any other
defense. In any dispute arising after a Change in Control as to whether
Executive is entitled to benefits under this Agreement, there shall be a
presumption that Executive is entitled to such benefits and the burden of
proving otherwise shall be on the Company. However, nothing herein contained
shall require or be deemed to require, or prohibit or be deemed to prohibit,
the Company to segregate, earmark, or otherwise set aside any funds or other
assets, in trust or otherwise, to provide for any payments to be made or
required hereunder.
5.3. All payments, benefits and amounts provided under this
Agreementshall be in addition to and not in substitution for any pension
rights under the Company's tax-qualified pension plan, and any disability,
workers' compensation or other Company benefit plan distribution that
Executive is entitled to at his Effective Date of Termination.
Article 6. Term of Agreement
This Agreement will commence on the Effective Date and shall continue
in effect for three (3) full calendar years. However, at the end of such
three-year (3) period and, if extended, at the end of each additional year
thereafter, the term of this Agreement shall be extended automatically for
one (1) additional year, unless the Committee delivers written notice six
(6) months prior to the end of such term, or extended term, to the
Executive, that the Agreement will not be extended. In such case, the
Agreement will terminate at the end of the term, or extended term, then in
progress.
However, in the event a Change in Control occurs during the original
or any extended term, this Agreement will remain in effect for the longer
of: (i) twenty-four (24) months beyond the month in which such Change in
Control occurred; or (ii) until all obligations of the Company hereunder have
been fulfilled, and until all benefits required hereunder have been paid to
the Executive.
Article 7. Legal Remedies
7.1. Payment of Legal Fees. To the extent permitted by law, the
Company shall pay in advance all legal fees, costs of litigation, prejudgment
interest, and other expenses incurred in good faith by the Executive as a
result of the Company's refusal to provide the Severance Benefits to which
the Executive becomes entitled under this Agreement, or as a result of the
Company's contesting the validity, enforceability, or interpretation of this
Agreement, or as a result of any conflict between the parties pertaining to
this Agreement; provided, however, that if it is finally adjudicated that
the Participant did not commence the litigation in good faith and had no
reasonable basis therefor, the Participant shall repay all advanced fees and
expenses and reimburse the Company for its reasonable legal fees and expenses
in connection therewith.
7.2. Arbitration. The Executive shall have the right and option
to elect (in lieu of litigation) to have any dispute or controversy arising
under or in connection with this Agreement settled by arbitration, conducted
before a panel of three (3) arbitrators sitting in a location selected by the
Executive within fifty (50) miles from the location of his job with the
Company, in accordance with the rules of the American Arbitration Association
then in effect.
Judgment may be entered on the award of the arbitrator in any court
having proper jurisdiction. All expenses of such arbitrations, including
the fees and expenses of the counsel for the Executive, shall be advanced
and borne by the Company; provided however, that if it is finally adjudicated
that the Participant did not commence the arbitration in good faith and had
no reasonable basis therefor, the Participant shall repay all advanced fees
and expenses and reimburse the Company for its reasonable legal fees and
expenses in connection therewith.
Article 8. Successors
The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation, or otherwise) of all or substantially all
of the business and/or assets of the Company or of any division or subsidiary
thereof (the business and/or assets of which constitute at least fifty percent
(50%) of the total business and/or assets of the Company) to expressly assume
and agree to perform the Company's obligations under this Agreement in the
same manner and to the same extent that the Company would be required to
perform them if no such succession had taken place but a Change in Control
had occurred. Failure of the Company to obtain such assumption and agreement
in a written instrument prior to the effective date of any such succession
shall be a breach of this Agreement and shall entitle the Executive to
compensation from the Company in the same amount and on the same terms as he
would be entitled to hereunder if he had terminated his employment with the
Company voluntarily for Good Reason and in such case, the date on which any
such succession becomes effective shall be deemed the Effective Date of
Termination if the Executive so elects, but any delay or failure by the
Executive to so elect shall not be a waiver or release of any rights hereunder
which may be asserted at any time.
This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If the Executive
should die while any amount would still be payable to him hereunder had he
continued to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement, to the Executive's
Beneficiary. If the Executive has not named a Beneficiary, then such amounts
shall be paid to the Executive's devisee, legatee, or other designee, or if
there is no such designee, to the Executive's estate.
Article 9. Miscellaneous
9.1. Employment Status. The Executive and the Company acknowledge
that, except as may be provided under any other agreement between the
Executive and the Company, the employment of the Executive by the Company is
"at will," and, prior to the effective date of a Change in Control, may be
terminated by either the Executive or the Company at any time, subject to
applicable law.
9.2. Beneficiaries. The Executive may designate one or more
persons or entities as the primary and/or contingent Beneficiaries of any
Severance Benefits owing to the Executive under this Agreement. Such
designation must be in the form of a signed writing acceptable to the
Committee. The Executive may make or change such designation at any time.
9.3. Entire Agreement. This Agreement contains the entire
understanding of the Company and the Executive with respect to the subject
matter hereof. In particular, this Agreement completely replaces and
supersedes the terms of the Amended and Restated Special Severance Pay
Agreement, entered into by and between the Company and the Executive, setting
forth the terms and provisions with respect to the Executive's entitlement
to payments and benefits following a Change in Control of the Company. [to
be used for Executives with prior agreement]
9.4. Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular, and the singular shall include the plural.
9.5. Severability. In the event any provision of this Agreement
shall be held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Agreement, and the Agreement
shall be construed and enforced as if the illegal or invalid provision had
not been included. Further, the captions of this Agreement are not part of
the provisions hereof and shall have no force and effect.
9.6. Modification. No provision of this Agreement may be
modified, waived, or discharged unless such modification, waiver, or
discharge is agreed to in writing and signed by the Executive and by an
authorized member of the Committee, or by the respective parties' legal
representatives and successors.
9.7. Notice. For purposes of this Agreement, notices including
Notice of Termination for Good Reason and all other communications provided
for in this Agreement shall be in writing and shall be deemed to have been
duly given when delivered or on the date stamped as received by the U.S.
Postal Service for delivery by certified or registered mail, postage prepaid,
address: (i) if to Executive, to his latest address as reflected on the
records of the Company, and if to Company: Northrop Grumman Corporation,
1840 Century Park East, Los Angeles, California 90067, Attn: President, or
to such other address as Company may furnish to Executive in writing with
specific reference to this Agreement and the importance of the notice,
except that notice of change of address shall be effective only upon receipt.
9.8. Applicable Law. To the extent not preempted by the laws of
the United States, the laws of the State of California shall be the
controlling law in all matters relating to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
____ day of ______________________, 1996.
Northrop Grumman Corporation Executive
By: _______________________
____________________________ Attest: ___________________
Memorandum
To W.C. Solberg
From K. Kresa
Subject Memorandum of Agreement
February 22, 1997
This memorandum confirms your recent discussions with Marv Elkin regarding
your retirement arrangements.
You have agreed to retire from employment and resign from the Board of
Directors effective February 28, 1997. The Company has agreed to provide
you with the following benefits:
1. Upon retirement, you will be provided with a total pension benefit payable
from all sources (excluding the Northrop Grumman Savings and Investment Plan)
equivalent to a single life annuity of $342,664.91 per year. This amount is
calculated to equal 50% of your pensionable earnings averaged over the highest
three of your last ten years of employment. Of course, if you elect to
receive this benefit in a joint annuity form under the qualified defined
benefit plans, and/or take lump sum equivalents from one or more of the
Company's non-qualified benefit plans, the dollar amount that you (and your
spouse) actually receive will be adjusted according to the normal actuarial
factors that apply under the plans with respect to such benefit forms.
2. On or before February 28, 1997, you will receive a bonus under the
Incentive Compensation Plan for your work in 1996. You will also receive
a pro-rata Incentive Compensation Plan bonus for your work from January 1
through February 28, 1997, paid in February 1998. These bonuses will be
calculated in accordance with the normal ICP factors, including my judgment
as to the performance of the Company.
You will receive the following portion of your unvested outstanding grants
(as of February 28, 1997) of stock and stock options:
RPSR granted 11/93: 3,600 shares if the performance of Northrop Grumman
stock results in a 100% performance factor being applied.
Options granted 11/92: 5,600
Options granted 11/93: 3,000
Options granted 12/94: 3,000
Options granted 11/95: 2,500
You will be responsible for paying all taxes which may be due as a result
of your receipt of shares of stock or stock options.
3. You will be reimbursed for eligible expenses you incur in 1997 for income
tax preparation fees and for financial counseling in accordance with the
terms of the Company's executive perquisite program.
4. You will have an option to purchase your Company-provided automobile
at 25% of the wholesale Blue Book value, if you make a written election to
do so not later than February 14, 1997. If you elect this option, you will
be fully responsible for all tax consequences, including taxes on imputed
income, and will be required to pay the Company applicable withholding taxes
at the time you exercise this option.
5. If the Company undergoes a Change of Control (as that term is defined in
your Special Agreement dated August 1, 1996) prior to February 28, 1997, you
will receive the benefits set forth in the Special Agreement, and you will
not receive any of the benefits in this Memorandum of Agreement except for
the pension benefits described in paragraph 1.
6. If the Company undergoes a Change of Control (as that term is defined
in your Special Agreement dated August 1, 1996) between March 1 and
December 31, 1997, you will receive the benefits provided by your Special
Agreement, and the benefit of the Change of Control provisions in the Long
Term Incentive Plans governing the unvested stock and stock options you
forfeited upon retirement as if you were an employee at the time of the
Change of Control, except that:
The stock or stock options you receive as a result of the Change of
Control will be offset by the options you receive at retirement.
Any benefits you receive from ERISA Supplemental Plan I and ERISA
Supplemental Plan II as a result of the Change of Control will be
offset by any ERISA Supplemental Plan I and ERISA Supplemental
Plan II benefits you receive following your retirement.
Your right to Severance Benefits under the Special Agreement shall
be determined by whether or not, as of the date of the Change of
Control, the employee incumbent in the position you now hold terminates
from employment after the Change of Control and before December 31, 1997,
under circumstances which would entitle that employee to such Severance
Benefits if he had a Special Agreement identical to yours at the time
of the Change of Control.
Your receipt of these benefits upon your retirement is conditioned upon your
signing this Memorandum of Agreement and the attached Release Agreement,
which is incorporated herein by reference.
If you are in agreement with these terms, please sign and date where
indicated below.
Kent Kresa
Chairman, President and
Chief Executive Officer
AGREED TO:
Wallace C. Solberg
Date
RELEASE AGREEMENT
1. PARTIES: The parties to this Release Agreement
(referred to hereafter as "Agreement") are Wallace C.
Solberg (referred to hereafter as "Mr. Solberg") and
Northrop Grumman Corporation (referred to hereafter as
"Northrop Grumman" or "the Company").
2. COMPLETE RELEASE: In consideration of the promises
contained herein and in the attached Memorandum of
Agreement which is incorporated herein by reference, and
for other good and valuable consideration the receipt of
which is hereby acknowledged, Mr. Solberg does hereby
acknowledge full and complete satisfaction of and does
hereby agree to release, absolve and discharge Northrop
Grumman, its subsidiaries, affiliated and related
companies, past, present and future, and each of them,
as well as its and their employees, officers, directors,
and agents (collectively referred to hereafter as
"Releases"), past and present, and each of them, from
all claims, causes of action, demands, damages or costs
he may have against Releasees on behalf of himself or
others arising out of or relating to his employment with
Northrop Grumman or the termination of such employment.
2.1 This waiver and release includes, but is not
limited to, any rights, claims, causes of action,
demands, damages or costs arising under the Age
Discrimination in Employment Act, which prohibits
discrimination in employment based on age; Title
VII of the Civil Rights Act of 1964, which
prohibits discrimination in employment based on
race, color, religion, sex or national origin; the
California Fair Employment and Housing Act, which
prohibits discrimination in employment based on
race, color, religion, sex, national origin,
ancestry, physical handicap, medical condition,
marital status or age; the Americans with
Disabilities Act, which prohibits discrimination in
employment based on disability; or any other
federal, state or local laws or regulations
prohibiting employment discrimination or
retaliation whether such claim be based upon an
action filed by Mr. Solberg or by a governmental
agency.
2.2 This waiver and release also includes, but is not
limited to,
any rights, claims, causes of action, demands,
damages or costs arising under or in relation to
Northrop Grumman's employee handbook and personnel
policies, or any oral or written representations or
statements made by officers, directors, lawyers,
employees or agents of Northrop Grumman, past and
present, and each of them, or under any state or
federal law regulating wage, hours, compensation or
employment, or any claim for severance benefits
under any Company severance plan, or any claim for
retaliation, wrongful discharge, breach of
contract, breach of the implied covenant of good
faith and fair dealing, intentional or negligent
infliction of emotional distress, intentional or
negligent misrepresentation, or defamation.
2.3 This waiver and release also includes, but is not
limited to, any rights, claims, causes of action, demands or
costs arising under the federal False Claims Act.
2.4 This release covers both claims that Mr. Solberg
knows about and those he may not know about. Mr.
Solberg hereby specifically waives and relinquishes
all rights and benefits provided by Section 1542 of
the Civil Code of the State of California, and does
so understanding and acknowledging the significance
of this specific waiver of Section 1542. Section
1542 of the Civil Code of the State of California
states as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his
favor at the time of executing the release, which
if known by him must have materially affected his
settlement with the debtor."
2.5 Notwithstanding the provisions of Section 1542 and
for the purpose of implementing a full and complete
release, Mr. Solberg expressly acknowledges that
this Agreement is intended to include all claims
which he does not know or suspect to exist in his
favor at the time of his signature of the
Agreement, and that this Agreement will extinguish
any such claims.
2.6 Notwithstanding anything to the contrary herein,
this Agreement does not waive or release: (i) any
rights or claims which Mr. Solberg may have under
the Age Discrimination in Employment Act which
arise after the date he signs this Agreement; (ii)
any rights or claims which Mr. Solberg may have for
employee benefits pursuant to the terms of any of
Northrop Grumman's retirement plans, the Northrop
Grumman Savings Plan, or any Northrop Grumman
employee welfare benefit plan providing medical,
surgical or hospital benefits; or (iii) any rights
or claims Mr. Solberg may have for breach of this
Agreement.
3. COVENANT NOT TO SUE: Mr. Solberg agrees and promises
that he will not file any suit or action against
Releasees with any court of law based upon the matters
released in this Agreement. Mr. Solberg represents and
warrants that he has not filed any suit or action
relating to the matters herein as of the date he
executes this Agreement.If Mr. Solberg violates this
Agreement by filing such a lawsuit based on claims that
he has released, Mr. Solberg agrees (1) to immediately
return to Northrop Grumman all consideration provided to
him pursuant to this Agreement, and (2) to pay all costs
incurred by Releasees, including reasonable attorney's
fees, in defending against Mr. Solberg's claims.
4. CONFIDENTIALITY: Mr. Solberg represents and agrees that
he will keep the terms, amount and fact of this
Agreement completely confidential, and that he will not
hereafter disclose any information concerning this
Agreement to anyone other than his immediate family,
attorney(s) or accountant(s). Should Mr. Solberg choose
to disclose any information concerning this Agreement to
his immediate family, attorney(s) or accountant(s), Mr.
Solberg represents and agrees that he will advise them
that they will also be under an obligation to keep the
terms, amount and fact of this Agreement completely
confidential. Nothing in this Section shall prohibit
Mr. Solberg or his legal counsel or accountants from
disclosing the facts, terms or amounts of this Agreement
when required to do so by any court or administrative
agency (including state or federal taxing authorities)
or tribunal of appropriate jurisdiction.
5. INDEMNIFICATION: If Mr. Solberg, his estate, or his
current spouse (hereinafter referred to as
"indemnitees") is made a party, or is threatened to be
made a party, to any actual or threatened action, suit,
or proceeding, whether civil, criminal, administrative,
or investigative, by reason of the fact that Mr. Solberg
was a Northrop Grumman officer and employee or by his
action or inaction within the general scope of his
employment, indemnitees (and each of them) shall be
indemnified and held harmless by Northrop Grumman to the
fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter by
amended, or by other applicable law as then in effect,
against all expense, liability, and loss (including
attorneys fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) actually and
reasonably incurred by indemnitees in connection
therewith.
6. PERIOD FOR REVIEW AND CONSIDERATION OF AGREEMENT; ADVICE OF COUNSEL:
Mr. Solberg agrees and understands that he has been given a period
of twenty-one (21) calendar days from his receipt of this Agreement
to review and consider this Agreement before signing it. Mr.
Solberg further understands that he may use as much of this review
period as he wishes prior to signing; he can sign this Agreement at
any time prior to the expiration of the twenty-one calendar day
period. Mr. Solberg is advised and encouraged to consult with his
own legal counsel prior to signing this agreement.
7. RIGHT TO REVOKE AGREEMENT: Mr. Solberg may revoke this Agreement
within seven (7) calendar days of signing it. Revocation can be
made by delivering a written notice of revocation to Mr. Marv Elkin,
Corporate Vice President and Chief Human Resources, Communications
and Administrative Officer, Northrop Grumman Corporation, 1840
Century Park East, Los Angeles, CA 9067. For this revocation to be
effective, written notice must be received by Mr. Elkin no later
than 5:00 p.m. PST on the seventh calendar day after Mr. Solberg
signs this Agreement. If Mr. Solberg revokes this Agreement, it
shall not be effective or enforceable, and Mr. Solberg will not
receive the benefits described in the attached Memorandum of
Agreement.
8. SEVERABILITY: The provisions of the Agreement and the attached
Memorandum of Agreement are severable, and if any part of either
document is found to be illegal or invalid and thereby
unenforceable, the validity of the remaining parts, terms or
provisions shall not be affected and shall remain fully enforceable.
The unenforceable part, terms or provision, shall be deemed not to
be a part of this Agreement or the Memorandum of Agreement.
9. SOLE AND ENTIRE AGREEMENT: This Agreement and the attached
Memorandum of agreement which is incorporated herein by reference
set forth the entire agreement between the parties hereto, and fully
supersede any and all discussions, prior agreements or
understandings between the parties hereto pertaining to the subject
matter of this Agreement and the attached Memorandum of Agreement.
10. GOVERNING LAW: This Agreement and the attached Memorandum of
Agreement shall be interpreted and enforced in accordance with the
law of the State of California without regard to rules regarding
conflicts of laws.
MR. SOLBERG ACKNOWLEDGES THAT HE HAS HAD AN OPPORTUNITY TO ASK
QUESTIONS, CONFER WITH COUNSEL, AND TO CAREFULLY CONSIDER ALL OF THE
PROVISIONS OF THIS AGREEMENT BEFORE SIGNING IT. HE FURTHER AGREES THAT
HE HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND IS VOLUNTARILY ENTERING
INTO IT.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL
KNOWN AND UNKNOWN CLAIMS.
DATED: BY:
NORTHROP GRUMMAN
CORPORATION
DATED: BY:
TITLE:
POWER OF ATTORNEY IN CONNECTION WITH THE
1996 ANNUAL REPORT ON FORM 10-K
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors
and officers of NORTHROP GRUMMAN CORPORATION, a Delaware corporation,
does hereby appoint RICHARD R. MOLLEUR and JAMES C. JOHNSON, and each of
them as his agents and attorneys-in-fact (the "Agents"), in his
respective name and in the capacity or capacities indicated below to
execute and/or file the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (the "Report") under the Securities Exchange Act
of 1934, as amended (the "Act"), and any one or more amendments to any
part of the Report that may be required to be filed under the Act
(including the financial statements, schedules and all exhibits and
other documents filed therewith or constituting a part thereof) and to
any part or all of any amendment(s) to the Report, whether executed and
filed by the undersigned or by any of the Agents. Further, each of the
undersigned does hereby authorize and direct the Agents to take any and
all actions and execute and file any and all documents with the
Securities and Exchange Commission (the "Commission"), which they deem
necessary or advisable to comply with the act and the rules and
regulations or orders of the Commission adopted or issued pursuant
thereto, to the end that the Report shall be properly filed under the
Act. Finally, each of the undersigned does hereby ratify each and every
act and documents which the Agents may take, execute or file pursuant
thereto with the same force and effect as though such action had been
taken or such document had been executed or filed by the undersigned,
respectively.
This Power of Attorney shall remain in full force and effect until
revoked or superseded by written notice filed with the Commission.
IN WITNESS THEREOF, each of the undersigned has subscribed these
presents this 19th day of February, 1997.
\s\ Kent Kresa Chairman of the Board, President and Chief
Executive Kent Kresa Officer and Director (Principal
Executive Officer)
\s\ Jack R. Borsting Director
Jack R. Borsting
\s\ John T. Chain, Jr. Director
John T. Chain, Jr.
\s\ Jack Edwards Director
Jack Edwards
\s\ Phillip Frost Director
Phillip Frost
\s\ Aulana L. Peters Director
Aulana L. Peters
\s\ John E. Robson Director
John E. Robson
\s\ Richard M. Rosenberg Director
Richard M. Rosenberg
\s\ Brent Scowcroft Director
Brent Scowcroft
\s\ John Brooks Slaughter Director
John Brooks Slaughter
\s\ Wallace C. Solberg Director
Wallace C. Solberg
\s\ Richard J. Stegemeier Director
Richard J. Stegemeier
\s\ Richard B. Waugh, Jr. Corporate Vice President
Richard B. Waugh, Jr. and Chief Financial Officer
(Principal Financial Officer)
\s\ Nelson F. Gibbs Corporate Vice President
Nelson F. Gibbs and Controller
(Principal Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-96
<PERIOD-END> Dec-31-96
<CASH> 44
<SECURITIES>
<RECEIVABLES> 4,312
<ALLOWANCES> 73
<INVENTORY> 1,053
<CURRENT-ASSETS> 2,597
<PP&E> 3,154
<DEPRECIATION> 1,752
<TOTAL-ASSETS> 9,422
<CURRENT-LIABILITIES> 2,600
<BONDS> 3,150
0
0
<COMMON> 784
<OTHER-SE> 1,344
<TOTAL-LIABILITY-AND-EQUITY> 9,422
<SALES> 8,071
<TOTAL-REVENUES> 8,071
<CGS> 7,413
<TOTAL-COSTS> 7,413
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 384
<INCOME-TAX> 150
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> 4.33
<EPS-DILUTED> 4.33
</TABLE>
