<PAGE>
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, 1999
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, 2000, 69,733,243 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 $3,225 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders.
Part III
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NORTHROP GRUMMAN CORPORATION
PART I
Item 1. Business
Northrop Corporation was incorporated in Delaware in 1985. In 1994, the
company purchased the outstanding common stock of Grumman Corporation and,
effective May 18, 1994, Northrop Corporation was renamed Northrop Grumman
Corporation. Northrop Grumman is an advanced technology company operating in
the Integrated Systems and Aerostructures (ISA), Electronic Sensors and Systems
(ESS), and Information Technology (Logicon) segments of the broadly defined
aerospace and defense industry. The ISA segment includes the design,
development and manufacturing of aircraft and aircraft subassemblies. The ESS
segment includes the design, development, manufacturing and integration of
electronic systems and components for military and commercial use. Logicon, the
company's information technology segment, includes the design, development,
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.
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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) (b) (e) Owned, Leased
Arlington, Virginia (2) (3) (4) (a) (c) Leased
Baltimore, Maryland (2) (3) (a) (c) (e) Leased
Belcamp, Maryland (2) (a) Leased
Benton, Pennsylvania (2) (b) Leased
Bethpage, New York (1) (2) (a) (b) (c) (d) (e) Owned
Bohemia, New York (3) (a) Owned, Leased
Bremerton, Washington (2) (e) Leased
Bridgeport, West Virginia (2) (b) Owned
Burlington, Canada (2) (b) Owned
Calverton, New York (1) (a) (d) (e) Owned
Carson, California (1) (c) Leased
Chandler, Arizona (1) (b) Owned
Chesapeake, Virginia (1) (3) (a) Leased
Cincinnati, Ohio (2) (b) Leased
Clearfield, Utah (1) (c) Leased
Cleveland, Ohio (1) (2) (a) (b) Owned, Leased
Colorado Springs, Colorado (3) (a) Leased
Compton, California (1) (c) (e) Owned, Leased
Dahlgren, Virginia (3) (a) Leased
Dallas, Texas (1) (a) (b) (c) (d) (e) Owned
El Segundo, California (1) (a) (b) (c) (d) (e) Owned, Leased
Elk Grove Village, Illinois (2) (c) Leased
Elkridge, Maryland (2) (c) (d) Leased
Fairfax, Virginia (3) (a) Leased
Falls Church, Virginia (3) (a) Leased
Fort Tejon, California (1) (d) Owned
Grand Prairie, Texas (1) (a) (b) (c) (d) (e) Owned, Leased
Hagerstown, Maryland (2) (e) Leased
Hawthorne, California (1) (2) (4) (a) (b) (c) (d) (e) Owned, Leased
Herndon, Virginia (3) (a) (c) Leased
Hicksville, New York (1) (a) (d) (e) Owned, Leased
Hunt Valley, Maryland (2) (a) (b) (e) Owned, Leased
Huntsville, Alabama (2) (3) (a) (b) (c) (e) Leased
Jacksonville, Florida (1) (a) (c) (d) (e) Leased
Knoxville, Tennessee (2) (3) (a) Leased
Lake Charles, Louisiana (1) (a) (b) (c) (e) Owned, Leased
Lexington, South Carolina (1) (c) Owned
Linthicum, Maryland (1) (2) (a) (b) (c) (e) Owned, Leased
Los Angeles, California (3) (4) (a) Leased
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NORTHROP GRUMMAN CORPORATION
Melbourne, Florida (1) (a) (b) (c) (e) Owned, Leased
Melville, New York (2) (d) Leased
Milledgeville, Georgia (1) (a) (b) (c) (d) (e) Owned, Leased
New Town, North Dakota (1) (b) (c) Owned, Leased
Newport News, Virginia (3) (a) Leased
Northfields, United Kingdom (2) (a) Leased
Norwalk, Connecticut (2) (b) Leased
Palmdale, California (1) (a) (b) (c) (d) (e) Owned, Leased
Perry, Georgia (1) (a) (b) (c) (e) Leased
Pico Rivera, California (1) (a) (b) (d) (e) Owned, Leased
Pittsburgh, Pennsylvania (2) (d) Leased
Point Mugu, California (1) (a) (b) (c) (e) Owned, Leased
Reston, Virginia (3) (a) Leased
Rolling Meadows, Illinois (2) (3) (a) (b) (c) (e) Owned, Leased
San Diego, California (1) (2) (3) (a) (b) (c) Owned, Leased
San Pedro, California (3) (a) (c) (e) Leased
Santa Isabel, Puerto Rico (2) (b) Leased
St. Augustine, Florida (1) (a) (b) (c) (e) Owned, Leased
Stuart, Florida (1) (a) (b) (c) (e) Leased
Sunnyvale, California (2) (3) (a) (b) Owned, Leased
Sykesville, Maryland (2) (b) Owned
Tacoma, Washington (3) (a) Leased
Torrance, California (1) (3) (a) (b) (c) (e) Owned, Leased
Warner Robins, Georgia (1) (2) (3) (a) (c) Owned, Leased
Woodland Hills, California (2) (a) Leased
Following each described property are numbers indicating the reporting segments
utilizing the property:
(1) Integrated Systems and Aerostructures
(2) Electronic Sensors and Systems
(3) Logicon
(4) 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
8 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.
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NORTHROP GRUMMAN CORPORATION
Item 3. Legal Proceedings
U.S. ex rel Jordan v. Northrop Grumman Corporation
- --------------------------------------------------
In October 1999, the company was served with a fifth amended complaint that
was filed by the government in the U.S. District Court for the Central District
of California in this action which was commenced in May 1995. The complaint
alleges that the company violated the False Claims Act by knowingly supplying
BQM-74C aerial target drones that contained various defective components between
1992 and 1995. The government seeks to recover damages up to $139,860,632 under
theories of fraud, payment by mistake, unjust enrichment, breach of warranty and
breach of contract and penalties up to $3,380,000. The company intends to
vigorously defend this matter.
Zabielski and related cases
- ---------------------------
In July and August 1998, three shareholder derivative lawsuits,
respectively encaptioned Zabielski v. Kent Kresa, et al., Harbor Finance
-----------------------------------------------
Partners v. Kent Kresa et al., and Clarren v. Kent Kresa, et al., were filed in
- ----------------------------------------------------------------
the Superior Court of California for the County of Los Angeles. These lawsuits
each contain similar allegations that the directors of the company and certain
of its officers breached their fiduciary duties in connection with the
shareholder vote approving the proposed acquisition of the company by Lockheed
Martin Corporation, and that certain defendants engaged in stock trades in
violation of federal and state securities laws. The lawsuits are purportedly
brought on the company's behalf and do not seek relief against the company. The
defendants deny the allegations made in these actions and intend to defend the
actions vigorously.
Fanni and related cases
- -----------------------
Five shareholder class action lawsuits, making similar allegations, were
filed between July and September, 1998 in the United States District Court for
the Central District of California against the company, its directors, and
certain of its officers. Three of these lawsuits, respectively encaptioned
Fanni v. Northrop Grumman Corp., et al., Schnee v. Northrop Grumman Corp., et
- -----------------------------------------------------------------------------
al., and Florida State Board of Admin. v. Northrop Grumman Corp., et al. allege
- --- ---------------------------------------------------------------
that defendants issued misleading proxy materials in connection with the
proposed acquisition of the company by Lockheed Martin Corporation, in violation
of the federal securities laws. These actions seek unspecified damages on
behalf of a class of shareholders related to the accelerated vesting of stock
incentive plans upon the shareholder vote to approve the merger. Two of these
lawsuits, respectively encaptioned Burroughs v. Northrop Grumman Corp., et al.,
-------------------------------------------
and Miller, et al. v. Northrop Grumman Corp., et al., allege that defendants
------------------------------------------------
disseminated misleading information in connection with the proposed acquisition,
in violation of the federal securities laws, thereby artificially inflating the
market price of the company's common stock. These actions seek unspecified
damages for a class of shareholders who purchased Northrop Grumman stock between
July 3, 1997 and March 9, 1998. The District Court consolidated Fanni, Schnee
-------------
and Florida State Board of Admin. into one action, and Burroughs and Miller into
----------------------------- --------- ------
another action. The company and the individual defendants deny the allegations
made in these actions and intend to defend the actions vigorously.
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NORTHROP GRUMMAN CORPORATION
U.S. ex rel. McMorrough v. Northrop Grumman Corporation
- -------------------------------------------------------
In October 1998, the United States, acting through the Department of
Justice, intervened in a portion of this civil action initially filed under seal
in the U.S. District Court for the Western District of Louisiana in March 1995.
The government intervened in the portion of the complaint that alleges the
company knowingly supplied improperly heat-treated parts for Joint STARS
aircraft in 1994 and 1995, in violation of the False Claims Act. Thereafter in
March 1999 the government filed a separate complaint with respect to the heat
treating issues. The government seeks unspecified damages in connection with
the alleged violations. The company intends to vigorously defend this matter.
General
- -------
The company, as a government contractor, is from time to time subject
to U.S. Government investigations relating to its operations. Government
contractors that are found to have violated the False Claims Act, or are
indicted or convicted for violations of other Federal laws, or are considered
not to be responsible contractors may be suspended or debarred from government
contracting for some period of time. Such convictions could also result in
fines. Given the company's dependence on government contracting, suspension or
debarment could have a material adverse effect on the company.
The company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which the company's management believes
will have a material adverse effect on the company's financial condition.
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NORTHROP GRUMMAN CORPORATION
Executive Officers of the Registrant
The following individuals were the executive officers of the company as of
February 2000:
<TABLE>
<CAPTION>
Business Experience
Name Age Office Held Since Last Five Years
- ---- --- ----------- ----- ------------------
<S> <C> <C> <C> <C>
Kent Kresa 61 Chairman, President & CEO 1990
Herbert W. Anderson 60 Corporate Vice President, 1998 Corporate Vice President and
President and Chief Executive General Manager, Data Systems &
Officer, Logicon, Inc Services Division
Ralph D. Crosby, Jr 52 Corporate Vice President and 1998 Corporate Vice President and General
President, Integrated Systems Manager, Commercial Aircraft
and Aerostructures Sector Division; Prior to September 1996,
Corporate Vice President and Deputy
General Manager, Commercial Aircraft
Division; Prior to March 1996, Corporate
Vice President and Deputy General
Manager, Military Aircraft Systems
Division; Prior to January 1996
Corporate Vice President and
General Manager, B-2 Division
J. Michael Hateley 53 Corporate Vice President and 2000 Vice President, Personnel; Prior to
Chief Human Resources and January 1999, Vice President Human
Administrative Officer Resources, Security and Administration,
Military Aircraft Systems Division;
Prior to 1996, Vice President, Human
Resources, Security and Administration,
B-2 Division
Robert W. Helm 48 Corporate Vice President, 1994
Government Relations
Richard R. Molleur 67 Corporate Vice 1991
President and General Counsel
John H. Mullan 57 Corporate Vice President 1999 Acting Secretary; Prior to
and Secretary May 1998 Senior Corporate Counsel
Albert F. Myers 54 Corporate Vice 1994
President and Treasurer
James G. Roche 60 Corporate Vice President 1998 Corporate Vice President and
And President, Electronic General Manager, Electronic
Sensors and Systems Sensors and Systems Division;
Sector Prior to 1996, Corporate Vice
President and Chief Advanced
Development, Planning, and Public
Affairs Officer
Richard B. Waugh, Jr. 56 Corporate Vice 1993
President and Chief
Financial Officer
</TABLE>
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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.
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Item 7. Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations
BUSINESS CONDITIONS
Northrop Grumman is one of the major companies that competes in both the
domestic and international markets of the aerospace and defense industry. While
Northrop Grumman is subject to the usual vagaries of the marketplace, it is also
affected by the unique characteristics of the aerospace and defense industry and
by certain elements peculiar to its own business mix. It is common in this
industry for work on major programs to be shared among 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 on other
contracts, to be either a supplier to or a customer of such competitor. 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. While Northrop Grumman conducts most of its
business with the U.S. Government, principally the Department of Defense,
domestic and international commercial sales still represent a significant
portion of total revenue.
The collapse of communism and the subsequent reductions in the U.S. defense
budget have fundamentally altered the landscape of the global aerospace and
defense industry. Since the early 1990's the 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. Lockheed Martin Corporation, The Boeing Company,
and Raytheon Company are the largest companies in the aerospace and defense
industry at this time. Northrop Grumman competes against these and other
companies for a number of large and smaller programs. Intense competition and
long operating cycles are both characteristics of the industry's and Northrop
Grumman's business.
The current composition of Northrop Grumman resulted from a series of
strategic acquisitions and mergers by the former Northrop Corporation beginning
in 1992, when the company acquired a 49 percent interest in the Vought Aircraft
Company, a designer and builder of commercial and military aerostructures. The
remaining 51 percent interest in Vought Aircraft was purchased in 1994. Also in
1994, the company purchased the outstanding common stock of Grumman Corporation
and the company was renamed Northrop Grumman Corporation. In 1996, Northrop
Grumman acquired the defense electronic systems group of Westinghouse Electric
Corporation. Effective August 1, 1997, the company consummated its merger with
Logicon, Inc. (Logicon), a leading defense information technology company.
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NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the company announced that it had entered into a
definitive agreement with Lockheed Martin Corporation to combine the companies.
On February 26, 1998, shareholders of Northrop Grumman approved the merger. On
March 23, 1998, the U.S. Government filed suit to block the merger and on July
16, 1998, Lockheed Martin notified the company that it was terminating its
merger agreement with the company pursuant to the terms of the agreement. The
company recorded charges totaling $186 million in 1998 for costs related to the
terminated merger. The charges cover vesting of restricted stock which became
issuable following shareholder approval of the merger and other costs associated
with the terminated merger, including investment banking fees, legal and
accounting fees, and costs related to responding to the Government's request for
information.
In 1998 and 1999 the company acquired several businesses. Inter-National
Research Institute Inc. (INRI) was acquired in 1998 and the Information Systems
Division of California Microwave, Inc., Data Procurement Corporation (DPC), and
Ryan Aeronautical, an operating unit of Allegheny Teledyne Incorporated, were
all acquired in 1999.
Northrop Grumman's three reportable segments are its three operating units:
Integrated Systems and Aerostructures (ISA), Electronic Sensors and Systems
(ESS) and Logicon, the company's information technology sector.
Integrated Systems and Aerostructures Segment
Air Combat Systems (ACS), Aerostructures, Airborne Early Warning and Electronics
Warfare (AEW/EW), and Airborne Ground Surveillance and Battle Management
(AGS/BM) are the four major business areas within the ISA segment.
The ACS business area includes Northrop Grumman's largest program, the B-2
bomber, for which the company is the prime contractor. The company continues to
perform modifications to Block 20 aircraft to bring them to the fully
operational Block 30 configuration. 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
B-2 work is performed at the ISA segment's California facilities in Palmdale and
Pico Rivera.
The company is the principal subcontractor to The Boeing Company on the
F/A-18 program, which is also included in the ACS business area. 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 also has 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. The
F/A-18 single-seat E and two-seat F, enhanced versions of the F/A-18C and D
models, are
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NORTHROP GRUMMAN CORPORATION
currently in production and will serve as the U.S. Navy's next-generation
multimission aircraft. The F/A-18 work is performed at the company's facility
in El Segundo, California.
In July 1999, the company purchased Ryan Aeronautical and combined its
products with the existing sub-scale targets programs to form the unmanned
systems business element reported in the ACS business area. The purchase
included two major development projects, Global Hawk and the Miniature Air
Launched Decoy (MALD). Global Hawk is being developed for the U.S. Air Force to
provide battlefield commanders with intelligence imagery from high altitudes for
long periods of time. MALD is a small jet powered aerial vehicle designed to
imitate manned jet fighters in radar images and confuse enemy air defense
systems.
The company's Aerostructures business area manufactures portions of the
Boeing 737, 747, 757, 767 and 777 jetliners, the Gulfstream IV and V business
jets, and the Boeing 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 other structural components. The majority of the Boeing
jetliner work is performed at the ISA segment's production sites in Hawthorne,
California and Grand Prairie, Texas.
Northrop Grumman manufactures engine nacelles for the Gulfstream IV and
other business jets and produces the integrated wings for Gulfstream's newest
business jet, the Gulfstream V. The company also produces the empennage, engine
nacelles, and control surfaces for the C-17, the U.S. Air Force's most advanced
airlifter. This work is performed at the Grand Prairie, Texas and Stuart,
Florida facilities.
The AEW/EW business area produces the E-2C Hawkeye and performs upgrades to
EA-6B aircraft. Northrop Grumman is a major producer of airborne early warning
and control systems, including the all-weather E-2C Hawkeye aircraft. The E-2C
has been in active service with the U.S. Navy since 1973 and is employed by the
air forces of five other nations. The EA-6B is the armed services only offensive
tactical radar jamming aircraft. Manufacturing for both aircraft is performed
at Northrop Grumman's St. Augustine, Florida site while engineering, program
management and product development is performed in Bethpage, New York.
The company is the prime contractor for the E-8 Joint Surveillance Target
Attack Radar System (Joint STARS), which is included in the AGS/BM business
area. 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 Boeing 707-300
airframe that is remanufactured at Northrop Grumman's Lake Charles, Louisiana
site. Final installation of electronics and testing are performed at the
company's test facility in Melbourne, Florida.
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NORTHROP GRUMMAN CORPORATION
Electronic Sensors and Systems Segment
The ESS segment comprises four business areas: Aerospace Electronic Systems;
Command, Control, Communications, Intelligence and Naval Systems (C3I&N);
Defensive Electronic Systems; and several smaller business elements referred to
as "Other". The segment's primary expertise is the ability to conceive, design,
produce and support high performance sensors and intelligence systems operating
in all environments from underseas to outer space.
Aerospace Electronic Systems includes four business elements: combat
avionics systems, land combat systems, airborne surveillance systems, and space
systems. Combat avionics systems is focused on providing radar and electro-
optic-based avionics systems to meet the needs for targeting and strike missions
for armed forces worldwide. The AN/APG-66/68 airborne fire control radar series
aboard F-16 fighters throughout the world has set a new standard for performance
and reliability over the last two decades. More than six thousand AN/APG-66/68
radars have been produced since 1976. The basic radar, with multiple variants,
is currently on 16 airborne platforms deployed in 20 countries. Northrop
Grumman currently is leading a team developing the next-generation air-dominance
radar (AN/APG-77) featuring a low observable, active electronically scanned
array with multiple target, all-weather capability for the U. S. Air Force's F-
22 aircraft. Advanced radar concepts for the next generation Joint Strike
Fighter have been developed and flown aboard Northrop Grumman flight test
aircraft. These radar systems are produced at the company's Linthicum, Maryland
facility.
Northrop Grumman's land combat systems business element, teamed with
Lockheed Martin, is producing the Longbow APG-78 fire control radar and the
Longbow Hellfire missile for the U. S. Army's AH-64 Apache attack helicopter and
the British WAH-64 Westland Apache. There is extensive international interest
in the Apache Longbow battlefield tactical weapon system. Longbow fire control
radar work is performed at the ESS segment's Linthicum facility and the Longbow
missile work is performed in Huntsville, Alabama. Additionally, Northrop Grumman
is currently in Low Rate Initial Production (LRIP) for the BAT "brilliant" anti-
armor submunition at the company's new BAT production facility at Huntsville.
BAT is an autonomous submunition that uses passive acoustic and infrared sensors
to find, attack and destroy moving tanks and other armored vehicles in hostile
territory. BAT is designed to be carried and dispensed by the U. S. Army's
TACMS (Tactical Missile System) Block II surface-to-surface missile with
potential application for ground-, air-, and sea-launched cruise missiles,
artillery rockets, and munitions dispensers.
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NORTHROP GRUMMAN CORPORATION
Airborne surveillance systems products include the Airborne Warning and
Control System (AWACS) radar (AN/APY-1, APY-2), which, integrated in the highly
reliable Boeing 707 and 767 aircraft, has been the surveillance system of choice
for U.S. and allied forces worldwide. The AWACS Radar System Improvement Program
(RSIP) is currently in production for the U.S. Air Force, the United Kingdom and
NATO. RSIP will enhance the performance of the AWACS radar against smaller
cross section targets. A new surveillance product, the Multirole Electronically
Scanned Array (MESA), is currently being developed for installation on seven
Boeing 737 aircraft for the Royal Australian Air Force. These systems are
produced at the Linthicum, Maryland facility. The E-8 Joint STARS is equipped
with the Northrop Grumman Norden Systems AN/APY-3 air-to-ground surveillance
system, which provides long-range, standoff, real-time surveillance of the
battlefield. An advanced Radar Technology Insertion Program (RTIP) is currently
under development. With its advanced active aperture, the RTIP will provide
significant performance upgrades on Joint STARS for its current mission and
opens the way for incorporation of new missions. These systems are produced at
the company's Norwalk, Connecticut facility. The space systems business element
develops space sensors and systems, with subsegments of military and
civil/commercial space, and intelligence, surveillance, reconnaissance ground-
based processing systems.
The C3I&N business area produces air defense and air traffic control
radar systems for domestic and international customers. The new highly mobile,
solid-state AN/TPS-70 family of radars and U. S. Air Force AN/TPS-75 are among
the products in this business area. They have been the front line U.S. Air Force
air defense system standard since 1968. These systems currently operate in more
than 30 countries, supporting air defense, air sovereignty, air traffic control,
and counter-narcotics needs. The ASR-12, a solid-state, new generation
derivative of the company's FAA standard ASR-9 terminal radar is now in full
production, with 12 systems on order and three systems operational in Peru,
Mexico, and El Salvador.
C3I&N is also a leader in producing marine machinery and advanced
propulsion systems, missile launchers, shipboard electronics and control
systems, mine countermeasures, and underseas vehicles. Every Nimitz-class
aircraft carrier is fitted with eight turbine generator sets. The company
produces these generators as well as the main propulsion system for the U.S.
Navy's Seawolf- and Virginia-class attack submarines at its Sunnyvale,
California site. Late in 1999, the company was one of two selected by the Navy
to develop the next generation Electro-Magnetic Launcher (EMALS), which could
ultimately replace the steam catapult. The Sunnyvale facility also has
responsibility for integration of the intercooled recuperated (ICR) gas turbine
engine, which is a candidate for the DD-21 next generation destroyer. The
company's Annapolis, Maryland facility has responsibility for the Advanced SEAL
Delivery System (ASDS) mini-submarine and the SPQ-9B shipboard radar, and is a
significant participant in the DD-21 competition.
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The Defensive Electronic Systems business area includes radio frequency and
infrared countermeasures equipment. The company's Rolling Meadows, Illinois
site produces the AN/ALQ-135, 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
owned F/A-18 aircraft. It also is 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 currently producing a directional infrared
countermeasures (DIRCM) system for the United Kingdom and the U.S. Special
Operations Command. DIRCM is slated for use on British helicopters and
transports and U.S. Special Operations Command C-130 transports to protect the
aircraft from heat-seeking missiles. DIRCM is the first infrared
countermeasures system of its kind and was developed to accommodate laser
capabilities currently in development. The company's Linthicum, Maryland site
produces the AN/ALQ-165 airborne self-protection jammer in a joint venture with
ITT Avionics. The AN/ALQ-165 is an internally mounted system that protects
tactical aircraft against numerous radar-guided threats. It currently is
installed on U.S. and international F/A-18 and F-14 aircraft.
Included in the business area labeled "Other" is California Microwave
Systems, which was acquired by Northrop Grumman in April 1999. This unit
specializes in airborne reconnaissance and surveillance systems, government
ground-based satellite communications systems, communications gateway systems,
and mission planning. California Microwave Systems' customers include the U.S.
military services, other U.S. government agencies, and international defense
organizations. Other elements included in "Other" are systems development and
technology and automation and information systems.
Logicon Segment
The three major business areas reported in Logicon, the company's information
technology sector, are: Government Information Technology, Technology Services,
and Commercial Information Technology.
Logicon is a leading provider of advanced information technologies, systems
and services. Its areas of expertise include: command, control, communications,
computers, intelligence, surveillance and reconnaissance (C4ISR); weapon
systems; information systems; training and simulation; science and technology;
base and range support; and systems support services. Customers include the U.S.
Government, both Department of Defense(DoD) and non-DoD Federal agencies, state
and local governments, and commercial enterprises. Contracts with the U.S.
Government account for most of the segment's revenues.
13
<PAGE>
NORTHROP GRUMMAN CORPORATION
In the following table of segment and major customer data, revenue from the
United States Government includes revenue from contracts on which Northrop
Grumman is the prime contractor as well as those on which the company is a
subcontractor and the ultimate customer is the U.S. Government.
RESULTS OF OPERATIONS BY SEGMENT AND MAJOR CUSTOMER
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Integrated Systems & Aerostructures
United States Government $3,925 $3,755 $3,932
The Boeing Company 733 1,075 883
Other customers 333 263 452
Intersegment sales 6 5 13
- ----------------------------------------------------------------------------------------
4,997 5,098 5,280
- ----------------------------------------------------------------------------------------
Electronic Sensors & Systems
United States Government 1,894 2,014 2,394
Other customers 673 708 490
Intersegment sales 146 177 180
- ----------------------------------------------------------------------------------------
2,713 2,899 3,064
- ----------------------------------------------------------------------------------------
Logicon
United States Government 1,248 948 884
Other customers 189 139 118
Intersegment sales 22 20 20
- ----------------------------------------------------------------------------------------
1,459 1,107 1,022
- ----------------------------------------------------------------------------------------
Intersegment eliminations (174) (202) (213)
- ----------------------------------------------------------------------------------------
Total net sales $8,995 $8,902 $9,153
=======================================================================================
Operating Margin
Integrated Systems & Aerostructures $ 392 $ 280 $ 493
Electronic Sensors & Systems 199 218 248
Logicon 80 60 67
- ----------------------------------------------------------------------------------------
671 558 808
Adjustments to reconcile to total operating margin:
Corporate expenses (26) (58) (30)
Deferred state tax (provision)benefit (29) (10) 8
Mark-to-market restricted stock rights (39)
Pension income 353 266 133
- ----------------------------------------------------------------------------------------
Total operating margin $ 969 $ 756 $ 880
=======================================================================================
</TABLE>
14
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Contract Acquisitions
Integrated Systems & Aerostructures $ 4,434 $ 3,896 $ 4,427
Electronic Sensors & Systems 3,055 2,388 2,983
Logicon 1,481 1,205 938
- ----------------------------------------------------------------------
Total acquisitions $ 8,970 $ 7,489 $ 8,348
======================================================================
Funded Order Backlog
Integrated Systems & Aerostructures $ 6,376 $ 6,933 $ 8,130
Electronic Sensors & Systems 3,439 2,951 3,285
Logicon 609 565 447
- ----------------------------------------------------------------------
Total backlog $10,424 $10,449 $11,862
======================================================================
Assets
Integrated Systems & Aerostructures $ 3,497 $ 3,797 $ 3,847
Electronic Sensors & Systems 3,883 3,913 3,990
Logicon 618 618 559
- ----------------------------------------------------------------------
Segment assets 7,998 8,328 8,396
General corporate 1,287 1,208 1,281
- ----------------------------------------------------------------------
Total assets $ 9,285 $ 9,536 $ 9,677
======================================================================
Capital Expenditures
Integrated Systems & Aerostructures $ 85 $ 110 $ 125
Electronic Sensors & Systems 97 82 94
Logicon 19 19 17
General corporate 2
- ----------------------------------------------------------------------
Total expenditures $ 201 $ 211 $ 238
======================================================================
Depreciation and Amortization
Integrated Systems & Aerostructures $ 133 $ 142 $ 173
Electronic Sensors & Systems 222 211 208
Logicon 32 38 35
General corporate 2 2 2
- ----------------------------------------------------------------------
Total depreciation and amortization $ 389 $ 393 $ 418
======================================================================
</TABLE>
15
<PAGE>
NORTHROP GRUMMAN CORPORATION
An individual company's success in the competitive aerospace/defense
environment depends upon its ability to develop and market its products, as well
as, its 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 16 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. 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.
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, systems integration, defense electronics, and information technology.
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, extended or terminated.
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.
In the event of termination for the government's 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 Tri-Service Standoff Attack Missile (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 on the program. 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 of its claims, none of which are
recorded on the balance sheet, from the U.S. Government on the TSSAM contract.
16
<PAGE>
NORTHROP GRUMMAN CORPORATION
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, including the International Traffic in Arms Regulations
promulgated under the Arms Export Control Act, 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 effect on the company's future. Moreover, these contracts may
be terminated at the U.S. Government's convenience.
Environmental Issues
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 the company has determined that 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
13 hazardous waste sites and under state Superfund laws at eight 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. The company does not anticipate and
record insurance recoveries before collection is probable. Management estimates
that at December 31, 1999, the range of reasonably possible future costs for
environmental remediation, including Superfund sites, is $80 million to $111
million, of which $87 million has been accrued. 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,
results of operations, or cash flows.
17
<PAGE>
NORTHROP GRUMMAN CORPORATION
Year 2000 Issues
The company established and implemented its program to address the possibility
of computer failure upon entering the year 2000 (Year 2000), beginning in 1996.
The program encompassed the entire company and all aspects of Year 2000
compliance including software applications, mainframe environment, desktop
equipment, networks, telecommunications, department supported systems,
facilities systems, embedded systems in product deliverables, review of major
suppliers and major customers' Year 2000 status, and development of contingency
plans and year end support plans. All phases of the program were completed by
the end of 1999.
The company has separately identified the costs of Year 2000 remedial
efforts only for internal information services personnel, principally as a
planning and control tool. The total cost of these efforts incurred during the
years 1996 through 1999 was approximately $41 million. Year 2000 costs are
allowable costs under applicable government contracting regulations.
Accordingly, the portion of Year 2000 costs allocable to contracts are charged
as part of normal overhead pursuant to approved methods established for this
purpose.
To date, the company has not experienced any major system failures or other
adverse consequences due to Year 2000 noncompliance. While the possibility
still exists for future computer failures, internally or among its customers and
suppliers, management does not expect that these developments, should they
occur, would have a material adverse impact on the financial position, results
of operations, or cash flows of Northrop Grumman.
18
<PAGE>
NORTHROP GRUMMAN CORPORATION
MEASURES OF VOLUME
Contract Acquisitions
Contract acquisitions tend to fluctuate from year to year 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.
Contract Acquisitions
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Systems & Aerostructures
ACS $1,421 $1,430 $1,607
Aerostructures 1,302 1,453 1,425
AEW/EW 1,106 679 728
AGS/BM 686 434 761
Intrasegment eliminations (75) (95) (81)
- ------------------------------------------------------------------------
4,440 3,901 4,440
- ------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,375 1,047 1,496
C3I&N 727 907 964
Defensive Electronic Systems 708 311 508
Other 308 225 176
- ------------------------------------------------------------------------
3,118 2,490 3,144
- ------------------------------------------------------------------------
Logicon
Government Information Technology 1,015 813 711
Technology Services 347 300 150
Commercial Information Technology 140 113 97
- ------------------------------------------------------------------------
1,502 1,226 958
- ------------------------------------------------------------------------
Intersegment eliminations (90) (128) (194)
- ------------------------------------------------------------------------
Total acquisitions $8,970 $7,489 $8,348
========================================================================
</TABLE>
19
<PAGE>
NORTHROP GRUMMAN CORPORATION
ISA acquisitions in 1999 were 14 percent higher than in 1998 reflecting
increases in both the AEW/EW and AGS/BM business areas. Included in the AEW/EW
business area in 1999 is funding for the multiyear buy for 25 E-2C aircraft.
The AGS/BM business area received orders for two, one and two Joint STARS
aircraft in 1999, 1998 and 1997, respectively.
The ACS business area recorded incremental B-2 funding for ongoing
development work, spares and other customer support for the operational aircraft
program in each of the last three years. The company still stands to gain
future post production business, such as airframe depot maintenance, repair of
components, operational software changes, and product improvement modifications.
The company received orders for 30, 20 and 12 F/A-18E/F shipsets in 1999, 1998
and 1997, respectively. Acquisitions in 1998 included orders for 6 F/A-18C/D
shipsets.
The Aerostructures business area received authorization to produce 25, 50
and 50 747 jetliner shipsets in 1999, 1998 and 1997, respectively. The company
recorded orders for 30, 27 and 6 wing shipsets for the Gulfstream V business jet
in 1999, 1998 and 1997, respectively.
ESS acquisitions in 1999 were 25 percent higher than in 1998. The
Aerospace Electronic Systems business area received funding in 1999 for the
Longbow missile multiyear contract and the BAT LRIP contract. In the C3I&N
business area, a lower level of international awards for air traffic control
radar systems was posted in 1999 than in 1998. The Defensive Electronic Systems
business area recorded increased orders in 1999 for the ALQ-135 and DIRCM
programs.
Logicon acquisitions increased by 23 percent in 1999 over 1998, reflecting
higher volume in all three business areas. The increase in Government
Information Technology acquisitions is due to a higher win rate on contracts bid
as well as the inclusion of two new businesses acquired: INRI, purchased in
September 1998, and DPC, purchased in June 1999. In the third quarter of 1998,
Logicon won the Joint Base Operations Support Contract (J-BOSC), which is
reported in the Technology Services business area. Under this contract, which
has a five-year basic performance period with a five-year option, the segment
provides base operations support for NASA's Kennedy Space Center and the U.S.
Air Force's 45th Space Wing, which includes Cape Canaveral Air Station and
Patrick Air Force Base.
20
<PAGE>
NORTHROP GRUMMAN CORPORATION
Sales
Year-to-year sales vary less than contract acquisitions and reflect performance
under new and ongoing contracts.
Net Sales
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Systems & Aerostructures
ACS $2,059 $2,114 $2,446
Aerostructures 1,411 1,583 1,545
AEW/EW 888 780 739
AGS/BM 714 716 631
Intrasegment Eliminations (75) (95) (81)
- ------------------------------------------------------------------------
4,997 5,098 5,280
- ------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,105 1,265 1,240
C3I&N 843 904 887
Defensive Electronic Systems 536 544 656
Other 229 186 281
- ------------------------------------------------------------------------
2,713 2,899 3,064
- ------------------------------------------------------------------------
Logicon
Government Information Technology 971 787 770
Technology Services 346 213 156
Commercial Information Technology 142 107 96
- ------------------------------------------------------------------------
1,459 1,107 1,022
- ------------------------------------------------------------------------
Intersegment eliminations (174) (202) (213)
- ------------------------------------------------------------------------
Total sales $8,995 $8,902 $9,153
========================================================================
</TABLE>
ISA segment sales declined by 2 percent in 1999 as compared to 1998. The
decreasing trend in ACS revenues is primarily attributable to the B-2 program,
which decreased by $86 million in 1999 as compared to 1998, following a $291
million decrease in 1998 as compared to 1997. Current planning data indicate
that the level of overall B-2 revenue for 2000, when production is expected to
be substantially completed, will decline by approximately 40 percent from the
1999 level. Sales on the F/A-18 program increased by $74 million in 1999 as
compared to 1998. The last 17 shipsets of the C/D version of the F/A-18 were
delivered in 1999; shipsets delivered in 1998 and 1997 were 34 and 35,
respectively. In 1999 the company delivered the first twelve shipsets under the
F/A-18E/F production contract and the last five shipsets under the F/A-18E/F
LRIP contract.
21
<PAGE>
NORTHROP GRUMMAN CORPORATION
The production contract is accounted for under the units-of-delivery method,
which results in revenue being recorded as deliveries are made. The LRIP
contract, which began in 1996 and was completed in 1999, is accounted for under
the cost-to-cost type of percentage-of-completion method, resulting in revenue
being recorded as costs are incurred. In 2000 the company plans to deliver 28
F/A-18E/F shipsets under production contracts. Sales on the Kistler K-1 program
were recorded on a cost recovery basis as cash was received. Such sales
declined $10 million in 1998 from the $63 million recorded in 1997. Work on
this program was discontinued in December 1998 due to difficulties encountered
by Kistler Aerospace Corporation in obtaining financing. No operating margin
was recorded on this program.
Aerostructures sales declined in 1999 from 1998 levels due to a $251
million reduction in Boeing commercial aerostructures sales partially offset by
a $69 million increase in C-17 revenue. The small increase in Aerostructures
sales in 1998 over 1997 reflects a $192 million increase in Boeing commercial
aerostructures sales and a reduction in other aerostructures revenue due to the
sale in late 1997 of the company's Grumman Allied Industries subsidiary.
Deliveries of 747 fuselage shipsets were 32 in 1999, 56 in 1998, and 46 in 1997.
Northrop Grumman is producing the Gulfstream V wings under a revenue-sharing
agreement with Gulfstream Aerospace (Gulfstream). Northrop Grumman recognizes
revenue for its proportionate share of the revenue of each business jet when
delivered to the ultimate customer by Gulfstream. The company is using program
accounting for the Gulfstream V with an estimated 300 shipsets to be delivered
over a fourteen-year period. Northrop Grumman has received 133 orders for the
Gulfstream V through December 1999. Inventoried costs at December 31, 1999,
include $116 million of costs representing the excess of the production cost of
delivered units over the estimated average unit cost. All costs for the
development of the wings have been expensed as incurred. The company expects
commercial aerostructures revenues to be lower in 2000 than in 1999.
AEW/EW sales increased in 1999 over 1998 primarily due to increased EA-6B
revenue. AGS/BM sales in 1999 were unchanged from the level reported in 1998.
Overall ISA revenue for 2000 is expected to be approximately 12 percent to 15
percent lower than 1999.
ESS segment sales declined by 6 percent in 1999 as compared to 1998. Lower
Aerospace Electronic Systems business area sales are attributable to lower space
systems and combat avionics systems sales. The C3I&N business area reflects
lower marine volume. The improvement in the "Other" business area is due to the
inclusion of California Microwave Systems, which was acquired by Northrop
Grumman in April 1999. ESS segment sales for 1998 declined 5 percent as
compared to 1997 due to lower Defensive Electronic Systems volume as well as
lower revenues on a number of programs included in the "Other" business area.
Within the C3I&N business area, increased 1998 airspace management sales more
than offset lower marine sales. For 2000, the company expects ESS segment sales
to be between $2.8 billion and $3.1 billion.
Logicon sales in 1999 increased by 32 percent over 1998 sales, which
follows an 8 percent increase in 1998 sales over 1997. All three business areas
improved in both 1999 and 1998 over prior year sales.
22
<PAGE>
NORTHROP GRUMMAN CORPORATION
The Government Information Technology and Commercial Information Technology
business area improvements in 1999 reflect the higher level of acquisitions and
higher win rate on contracts bid. Most of the additional sales generated in the
Technology Services business area, in both 1999 and 1998, is attributable to the
commencement of work in the fourth quarter of 1998 on the J-BOSC contract, which
was won earlier in that year. The company expects Logicon sales to increase by
approximately ten percent in 2000 over 1999.
Funded Order Backlog
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 60 percent of the 1999 year-end
backlog will be converted into sales in 2000.
Funded Order Backlog
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Integrated Systems & Aerostructures
ACS $ 2,360 $ 2,998 $ 3,682
Aerostructures 1,925 2,034 2,164
AEW/EW 1,209 991 1,092
AGS/BM 882 910 1,192
- ---------------------------------------------------------------------------
6,376 6,933 8,130
- ---------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,761 1,491 1,709
C3I&N 775 891 888
Defensive Electronic Systems 789 617 850
Other 199 120 81
- ---------------------------------------------------------------------------
3,524 3,119 3,528
- ---------------------------------------------------------------------------
Logicon
Government Information Technology 412 368 342
Technology Services 149 148 61
Commercial Information Technology 48 50 44
- ---------------------------------------------------------------------------
609 566 447
- ---------------------------------------------------------------------------
Intersegment Eliminations (85) (169) (243)
- ---------------------------------------------------------------------------
Total backlog $10,424 $10,449 $11,862
===========================================================================
</TABLE>
23
<PAGE>
NORTHROP GRUMMAN CORPORATION
Total U.S. Government orders, including those made on behalf of foreign
governments (FMS), comprised 74 percent of the backlog at the end of 1999
compared with 73 percent at the end of 1998 and 72 percent at the end of 1997.
Total foreign customer orders, including FMS, accounted for 13 percent of the
backlog at the end of 1999 compared with 15 percent in 1998 and 17 percent in
1997. Domestic commercial business in backlog was 16 percent at the end of 1999
and was 17 percent at the end of both 1998 and 1997.
MEASURES OF PERFORMANCE
The company's operating margin for 1999 was $969 million compared to $756
million for 1998, reflecting increases in the ISA and Logicon segments, as well
as increased pension income.
ISA segment operating margin in 1999 was $392 million as compared to $280
million in 1998, reflecting increases in both the ACS and AGS/BM business areas.
In 1999 the ACS business area benefited from upward cumulative margin rate
adjustments totaling $70 million on the B-2 program and $11 million on the F/A-
18E/F program. In 1997, ACS recorded a $55 million cumulative margin rate
adjustment on the B-2 production contract. In 1999, five B-2's were delivered
under the production contract as compared to five in 1998 and four in 1997.
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 were 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 is then recorded. In this
fashion it is believed that margin improvements will be recognized on a more
demonstrable basis. All 15 production units have been initially delivered.
Three units remain to be retrofitted and are scheduled for delivery in the first
half of 2000.
Since the beginning of the Joint STARS program, the company (and prior to
1994, the Grumman Corporation) as of December 31, 1998 had incurred over $100
million of costs in excess of revenues in the performance of the development and
production phases of the program. Including support and other work, the company
recorded on the Joint STARS program operating losses of $25 million and $29
million in 1998 and 1997, respectively. In 1998, the company submitted Requests
for Equitable Adjustment (REAs) to the U.S. Air Force seeking adjustment to
production contracts for cost increases incurred during the refurbishment and
conversion of used Boeing 707 aircraft to Joint STARS platforms. The company and
the U.S. Air Force executed an Alternate Dispute Resolution Agreement to attempt
to resolve these REAs, and in April 1999 the company filed these REAs as
certified claims. In December 1999, the company reached a settlement of these
contract claims with the U.S. Air Force. The company is now able to recognize
underlying improved performance on the production phase of this program. As a
result, cumulative margin rate adjustments totaling $37 million were recorded in
the fourth quarter. The company expects to record margin on Joint STARS in 2000
and beyond. Revenue on the Joint STARS program is recognized using the cost-to-
cost percentage-of-completion method of accounting.
24
<PAGE>
NORTHROP GRUMMAN CORPORATION
ISA segment operating margin in 1999 was reduced by downward cumulative
rate adjustments on several Boeing commercial aerostructures contracts totaling
$77 million, as well as by lower overall margin rates on this work. Operating
margin in the ISA segment in 1998 was reduced by $104 million in charges on the
Boeing 747 fuselage program. This included a charge of $47 million resulting
from an increase in the estimated cost to complete work on the current
production block due to reduced deliveries on the current contract; and a charge
of $57 million for certain nonrecurring costs of the Accurate Fuselage Assembly
(AFA) precision manufacturing system, which are no longer considered recoverable
from sales of future deliveries. The company committed to the AFA program in
1996 as a condition of its current fuselage contract with Boeing, which
completes in 2006. The AFA program involves the conversion to a digital
manufacturing design and the implementation of advanced precision manufacturing
techniques. The company's investment in this program was intended to be
amortized over the life of the current production contract. The decline in
production rates to two per month on the 747 program for an indefinite period
significantly reduced the recoverability of this investment through future
profits, thus causing the company to take the $57 million charge. In 1998 the
company began discussions with Boeing regarding the company's claims for
recovery of incurred and estimated future out-of-scope work and related delay
and disruption costs associated with the AFA program. In the second quarter of
1999, the company resolved its claims with Boeing. The settlement had no
material effect on the company's financial results for 1999.
ESS segment operating margin in 1999 was $199 million, down from the $218
million reported for 1998. The decrease is a result of lower sales volume as
well as a reduction of approximately $44 million resulting from the pension plan
merger, which is described below. The decrease also reflects lower margins in
the Defensive Electronic Systems business area, due in part to additional costs
incurred in transitioning a development program to production. ESS segment 1998
operating margin was reduced by a $21 million fourth quarter charge for
estimated future costs not considered recoverable from future revenues on the
DIRCM program. The charge resulted from increased costs associated with solving
technical design issues as well as difficulties in achieving timely completion
of the second series of live-fire tests on the large turret version. In 1997,
increases in the cost estimate to complete the company's work on DIRCM resulted
in cumulative margin rate adjustments totaling $33 million. Partially offsetting
these downward adjustments was the settlement of a claim involving work
performed in the 1980's on the MX missile Interface Test Adapter (ITA), which
resulted in an $8 million increase in operating margin and $12 million in
interest income.
25
<PAGE>
NORTHROP GRUMMAN CORPORATION
Logicon operating margin in 1999 was $80 million, a 33 percent increase
over the $60 million recorded in 1998. The increase is attributable to increased
sales volume in all business areas and improved performance in the Technology
Services business area. These improvements were somewhat offset by $4 million of
nonrecurring charges related to employee termination costs and legal accruals.
Logicon operating margin in 1998 was reduced by $8 million for consolidation and
reorganization charges.
Operating margin in 1999 included $353 million of pension income compared
with $266 million in 1998 and $133 million in 1997. The increases are primarily
attributable to the high market returns on investments experienced over the last
several years. Northrop Grumman has again experienced a high rate of return on
plan assets in 1999, which in turn will affect 2000 pension income calculations.
Additionally, the discount rate on obligations used to determine pension income
for 2000 has been increased to 7.5 percent in order to reflect market conditions
at December 31, 1999. For 2000, these two factors are expected to result in a
significant increase in pension income and a small reduction to company
contributions to the plans.
In July 1999, the company merged three of its retirement plans into one, to
include the former Northrop Grumman Pension Plan, the Electronic Sensors and
Systems Sector Employees Pension Plan (non-represented), and the Commercial
Aircraft Employees Pension Plan (salaried). The pension plan merger does not
result in any changes to any participant's existing pension benefits, nor does
it alter individual plan designs. The retirement plan merger resulted in a
reduction to 1999 net income of approximately $16 million, or $.24 per share.
Included in the 1998 results are pretax costs totaling $58 million related
to activities to realign operating units, consolidate facilities and
laboratories and exit certain business areas, which reduced operating margin by
$43 million and other income by $15 million. The operating margin amount was
reflected in segment results as follows: ISA, $6 million; ESS, $13 million; and
Logicon, $8 million. The remaining $16 million was included in Corporate
expenses. The charge included $20 million for employee termination costs, $12
million for write-down to estimated fair value of assets available for sale, $3
million for losses on disposals of assets, $9 million for write-off of purchased
intangible assets no longer considered recoverable from future revenues, $9
million for loss on sale of a business, and $5 million for excess capacity lease
costs, net of estimated sublease income through 2008. The employee termination
costs represent cash severance payments made to employees.
Capital assets are transferred to assets available for sale when a decision
is made to sell the facility and selling efforts are actively underway. In some
cases, operations continue and, when costs are allowable under government
contracts, depreciation expense is recorded until the facility is vacated or
sold. In 1999, $2 million was transferred to assets available for sale and
assets with a carrying value of $13 million were sold. In 1998, $37 million was
transferred to assets available for sale, $2 million in depreciation expense on
these assets was
26
<PAGE>
NORTHROP GRUMMAN CORPORATION
recorded, and assets with a carrying value of $46 million were sold. Assets
available for sale are evaluated at least annually for recoverability and
written down to estimated fair value as necessary. In 1998, a write down
adjustment of $12 million was recorded. In 1997, recovery of $24 million of the
1996 write-down, related to the sale of the company's Perry, Georgia, facility,
was included in Other Income(Deductions). The assets available for sale at the
end of 1999 are expected to be sold in 2000.
Included in the 1998 results is a $30 million write-off of an investment
related to Kistler Aerospace Corporation's K-1 program. The investment
consisted of advances on behalf of Kistler Aerospace that were made in 1998 to
continue the company's efforts in support of the K-1. The write off resulted
from the company's assessment that the near-term likelihood of Kistler obtaining
additional financing made recovery of the investment uncertain.
Interest expense for 1999 was $224 million, a $9 million decrease from
1998, which in turn was down $24 million from the 1997 level. The 1999 interest
expense includes $11 million related to settlement of various legal and tax
issues. Total debt stood at $2.2 billion at the end of 1999 compared to $2.8
billion at the end of both 1998 and 1997.
The company's effective federal income tax rate was 36.6 percent in 1999,
37.8 percent in 1998, and 37.5 percent in 1997.
Effective January 1, 1999, the company adopted the new accounting standard,
SOP 98-5 - Reporting on the Costs of Start-Up Activities, which requires that
certain costs that previously had been deferred be expensed and reported as a
cumulative effect of a change in accounting principle. The company reported a
$16 million after-tax charge, or $.24 per share, to write off the previously
deferred start-up costs. All such costs incurred after January 1, 1999,
approximately $7 million before tax, were expensed as incurred and included in
cost of sales.
27
<PAGE>
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
1999, the company's year-end net investment in these balances represented 29
percent of sales, compared with 32 percent in 1998 and 30 percent in 1997.
In 1999 cash provided by operations was $1,207 million, a record level and
considerably more than the $244 million generated in 1998 and the $730 million
generated in 1997. The improvement in 1999 cash from operations is attributable
to many factors, the more significant of which are: increased operating margin,
improved cash management of working capital, lower pension plan contributions as
a result of the pension plan merger, and accelerated cash collections in part
due to customers' Year 2000 concerns. The lower generation of cash from
operations in 1998 was driven by expenses related to the terminated merger with
Lockheed Martin Corporation, as well as, an increase in working capital for
Boeing jetliners in support of increased production levels.
Cash generated from operating activities in 1999 was sufficient to finance
capital expenditures, pay dividends to shareholders, acquire new businesses for
approximately $240 million in cash, and reduce net debt (total debt less cash
balances) by $704 million. In 1998 additional borrowings under the revolving
credit facility along with the cash generated by operating activities provided
sufficient cash flows to service debt, finance capital expenditures, and pay
dividends to shareholders.
The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.
<TABLE>
<CAPTION>
Year ended December 31 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Cash came from
Customers 98% 95% 94%
Lenders 3 4
Buyers of assets/other 2 2 2
- ----------------------------------------------------------
100% 100% 100%
==========================================================
Cash went to
Employees and suppliers of
services and materials 84% 90% 83%
Sellers of assets 5 3 2
Lenders 9 5 10
Suppliers of facilities/other 1 1 4
Shareholders 1 1 1
- ----------------------------------------------------------
100% 100% 100%
==========================================================
</TABLE>
28
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NORTHROP GRUMMAN CORPORATION
The company has a credit agreement with a group of domestic and foreign
banks to provide for two credit facilities: $1.8 billion available on a
revolving credit basis through March 2002; and a variable interest rate $450
million term loan payable in quarterly installments of $50 million plus interest
through March 2002.
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.
Cash generated from operations, supplemented by borrowings under the credit
agreement, are expected to be sufficient in 2000 to service debt, finance
capital expansion projects, and continue paying dividends to the shareholders.
With the completion of the B-2 EMD contract, federal and state income taxes that
have been deferred since the inception of the contract in 1981, will become
payable. The contract is expected to be completed in 2002 with taxes of
approximately $1 billion due, to be paid that year. The company plans to use
cash generated from operations supplemented by additional borrowings under the
credit agreement and/or additional borrowings from public or private capital
markets to pay these taxes.
Capital expenditure commitments at December 31, 1999, were approximately
$145 million including $5 million for environmental control and compliance
purposes. Capital expenditures for 1999 were $201 million including $22
million for capitalized software costs. For 2000, capital expenditures are
expected to be approximately $250 to $275 million, including approximately $40
million for capitalized software costs.
The company will continue to provide the productive capacity to perform its
existing contracts, 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 and
elsewhere in Part I of this Form 10-K contain or are based on "forward-looking"
information (that the company believes to be within the definition 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 anticipated costs of
capital investments and planned dispositions. 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
29
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NORTHROP GRUMMAN CORPORATION
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The company has fixed-rate long-term debt obligations, most of which are not
callable. The company also has financial instruments that are subject to
interest rate risk, principally variable-rate short-term debt outstanding under
the Credit Agreement. The company may enter into interest rate swap agreements
to offset the variable-rate characteristics of these loans. At December 31,
1999, no interest rate swap agreements were in effect. The company does not
hold or issue derivative financial instruments for trading purposes.
Only a small portion of the company's transactions are contracted in
foreign currencies. The company does not consider the market risk exposure
relating to foreign currency exchange to be material.
30
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Selected Financial Data
<S> <C> <C> <C> <C> <C>
Year ended December 31, $ in millions,
except per share 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
Net sales to
United States Government $ 7,067 $ 6,717 $ 7,210 $ 7,224 $ 6,148
The Boeing Company 733 1,075 883 569 569
Other customers 1,195 1,110 1,060 814 555
Total net sales $ 8,995 $ 8,902 $ 9,153 $ 8,607 $ 7,272
Operating margin $ 969 $ 756 $ 880 $ 703 $ 572
Net income 467 194 407 264 277
Basic earnings per share 6.73 2.83 6.10 4.22 4.79
Diluted earnings per share 6.69 2.79 5.98 4.15 4.71
Cash dividends per share 1.60 1.60 1.60 1.60 1.60
Net working capital 329 666 221 106 435
Current ratio 1.13 to 1 1.28 to 1 1.08 to 1 1.04 to 1 1.25 to 1
Total assets $ 9,285 $ 9,536 $ 9,677 $ 9,645 $ 5,642
Long-term debt 2,000 2,562 2,500 2,950 1,163
Total long-term obligations 3,564 4,319 4,339 4,694 2,281
Long-term debt as a percentage of
shareholders' equity 61.4% 89.9% 95.3% 129.3% 73.3%
Operating margin as a percentage of
Net sales 10.8 8.5 9.6 8.2 7.9
Average segment assets 11.9 9.0 10.4 10.3 10.8
Net income as a percentage of
Net sales 5.2 2.2 4.5 3.1 3.8
Average assets 4.9 2.0 4.2 3.5 4.7
Average shareholders' equity 15.3 7.1 16.6 13.6 18.5
Research and development expenses
Contract $ 1,149 $ 1,489 $ 1,670 $ 1,632 $ 1,179
Noncontract 197 203 256 255 164
Payroll and employee benefits 3,304 3,476 3,504 3,378 2,883
Number of employees at
year-end 44,600 49,600 52,000 51,600 42,300
Number of shareholders at
year-end 11,173 11,774 11,400 11,773 12,471
Depreciation $ 193 $ 207 $ 232 $ 210 $ 231
Amortization of
Goodwill 103 94 94 83 38
Other purchased intangibles 93 92 92 82 21
Maintenance and repairs 92 92 107 93 80
Rent expense 117 106 108 110 106
Floor area (millions of square feet)
Owned 18.8 19.2 20.5 22.5 20.1
Commercially leased 10.6 10.6 10.0 9.9 8.2
Leased from United States
Government 7.5 7.6 8.8 9.0 10.2
</TABLE>
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NORTHROP GRUMMAN CORPORATION
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31, $ in millions 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets
Cash and cash equivalents $ 142 $ 44
Accounts receivable 1,402 1,507
Inventoried costs 1,190 1,373
Deferred income taxes 23 24
Prepaid expenses 36 85
- --------------------------------------------------------------------------------------
Total current assets 2,793 3,033
- --------------------------------------------------------------------------------------
Property, plant and equipment at cost
Land and land improvements 163 170
Buildings 777 785
Machinery and other equipment 1,860 2,014
Leasehold improvements 95 89
- --------------------------------------------------------------------------------------
2,895 3,058
Accumulated depreciation (1,655) (1,784)
- --------------------------------------------------------------------------------------
1,240 1,274
- --------------------------------------------------------------------------------------
Other assets
Goodwill, net of accumulated amortization of $441 in 1999
and $338 in 1998 3,469 3,381
Other purchased intangibles, net of accumulated
amortization of $388 in 1999 and $295 in 1998 761 795
Prepaid retiree benefits cost, intangible
pension asset and benefit trust fund 946 787
Deferred income taxes 166
Assets available for sale 26 37
Investments in and advances to affiliates and sundry assets 50 63
- --------------------------------------------------------------------------------------
5,252 5,229
- --------------------------------------------------------------------------------------
$ 9,285 $ 9,536
======================================================================================
</TABLE>
32
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
December 31, $ in millions 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 25 $ 69
Current portion of long-term debt 200 200
Trade accounts payable 490 416
Accrued employees' compensation 366 337
Advances on contracts 316 354
Income taxes payable 58
Deferred income taxes 550 527
Other current liabilities 459 464
- ------------------------------------------------------------------------
Total current liabilities 2,464 2,367
- ------------------------------------------------------------------------
Long-term debt 2,000 2,562
Accrued retiree benefits 1,458 1,704
Other long-term liabilities 42 53
Deferred income taxes 64
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized;
none issued
Common stock, 200,000,000 shares authorized;
issued and outstanding:
1999 - 69,719,164
1998 - 68,836,810 1,028 989
Retained earnings 2,248 1,892
Accumulated other comprehensive loss (19) (31)
- ------------------------------------------------------------------------
3,257 2,850
- ------------------------------------------------------------------------
$9,285 $9,536
========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, $ in millions,
except per share 1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $8,995 $8,902 $9,153
Cost of sales
Operating costs 6,852 6,930 7,040
Administrative and general expenses 1,174 1,216 1,233
- ---------------------------------------------------------------------------------
Operating margin 969 756 880
Other income(deductions)
Interest income 18 11 17
Merger costs (186) (18)
Interest expense (224) (233) (257)
Investment losses (30)
Other, net (1) (6) 29
- ---------------------------------------------------------------------------------
Income before income taxes 762 312 651
Federal and foreign income taxes 279 118 244
- ---------------------------------------------------------------------------------
Income before cumulative effect
of accounting change 483 194 407
Cumulative effect of accounting change (16)
- ---------------------------------------------------------------------------------
Net income $ 467 $ 194 $ 407
=================================================================================
Weighted average common shares
outstanding, in millions 69.3 68.5 66.7
=================================================================================
Basic earnings per share:
Before cumulative effect of accounting change $ 6.97 $ 2.83 $ 6.10
Accounting change (.24)
- ---------------------------------------------------------------------------------
Basic earnings per share $ 6.73 $ 2.83 $ 6.10
=================================================================================
Diluted earnings per share:
Before cumulative effect of accounting change $ 6.93 $ 2.79 $ 5.98
Accounting change (.24)
- ---------------------------------------------------------------------------------
Diluted earnings per share $ 6.69 $ 2.79 $ 5.98
=================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 467 $ 194 $ 407
Other comprehensive income
Minimum pension liability adjustments, before tax 19 (13) (28)
Income tax expense(benefit) 7 (4) (10)
- ------------------------------------------------------------------------------
Other comprehensive income(loss), net of tax 12 (9) (18)
- ------------------------------------------------------------------------------
Comprehensive income $ 479 $ 185 $ 389
==============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31, $ in millions,
except per share 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Paid-in Capital
At beginning of year $ 989 $ 838 $ 784
Stock issued in purchase of business 30
Employee stock awards and options
exercised, net of forfeitures 9 151 60
Treasury stock transactions (6)
- -----------------------------------------------------------------------------
At end of year 1,028 989 838
- -----------------------------------------------------------------------------
Retained Earnings
At beginning of year 1,892 1,807 1,502
Net income 467 194 407
Cash dividends (111) (109) (102)
- -----------------------------------------------------------------------------
At end of year 2,248 1,892 1,807
- -----------------------------------------------------------------------------
Accumulated Other Comprehensive Loss
At beginning of year (31) (22) (4)
Change in excess of additional minimum pension
liability over unrecognized prior
service costs, net of tax 12 (9) (18)
- -----------------------------------------------------------------------------
At end of year (19) (31) (22)
- -----------------------------------------------------------------------------
Total shareholders' equity $3,257 $2,850 $2,623
=============================================================================
Book value per share $46.72 $41.39 $38.99
=============================================================================
Cash dividends per share $ 1.60 $ 1.60 $ 1.60
=============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $1,691 $1,844 $2,264
Other collections 7,450 6,929 7,050
Interest received 18 11 17
Income tax refunds received 75 26 13
Other cash receipts 7 6 7
- -----------------------------------------------------------------------------------
Cash provided by operating activities 9,241 8,816 9,351
- -----------------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 7,715 8,273 8,280
Interest paid 216 219 251
Income taxes paid 85 46 64
Other cash payments 18 34 26
- -----------------------------------------------------------------------------------
Cash used in operating activities 8,034 8,572 8,621
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 1,207 244 730
- -----------------------------------------------------------------------------------
Investing Activities
Payment for businesses purchased,
net of cash acquired (232) (50)
Additions to property, plant and equipment (201) (211) (238)
Proceeds from sale of property, plant
and equipment 40 63 106
Proceeds from sale of affiliates/operations 19
Advances to affiliate (30)
Funding of retiree benefit trust (2)
Other investing activities 1 (5)
- -----------------------------------------------------------------------------------
Net cash used in investing activities (392) (235) (113)
- -----------------------------------------------------------------------------------
Financing Activities
Borrowings under lines of credit 22 295 422
Repayment of borrowings under lines of credit (434) (55) (808)
Principal payments of long-term
debt/capital leases (200) (200) (200)
Proceeds from issuance of stock 6 36 17
Dividends paid (111) (109) (102)
Other financing activities 5 (6)
- -----------------------------------------------------------------------------------
Net cash used in financing activities (717) (28) (677)
- -----------------------------------------------------------------------------------
Increase(decrease) in cash and
cash equivalents 98 (19) (60)
Cash and cash equivalents balance
at beginning of year 44 63 123
- -----------------------------------------------------------------------------------
Cash and cash equivalents balance
at end of year $ 142 $ 44 $ 63
===================================================================================
</TABLE>
36
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
Year ended December 31, $ in millions 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 467 $ 194 $ 407
Adjustments to reconcile net income to net cash provided
Depreciation 193 207 232
Amortization of intangible assets 196 186 186
Common stock issued to employees 2 88 24
Loss on disposals of property,
plant and equipment 21 30 18
Loss(gain) on assets available for sale 15 (8)
Loss on investment 30
Retiree benefits income (249) (194) (44)
Decrease(increase) in
Accounts receivable 170 1,212 (81)
Inventoried costs 172 (111) (147)
Prepaid expenses 45 (18) 2
Increase(decrease) in
Progress payments 21 (1,280) 66
Accounts payable and accruals (2) (115) 91
Provisions for contract losses (8) 54 (30)
Deferred income taxes 230 112 188
Income taxes payable 58 (16) (9)
Retiree benefits (129) (178) (180)
Other noncash transactions 20 28 15
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities $1,207 $ 244 $ 730
=========================================================================================
Noncash Investing and Financing Activities:
Purchase of businesses
Fair value of assets acquired $ 328 $ 71
Cash paid (232) (51)
Stock issued (30)
- -----------------------------------------------------------------------------------------
Liabilities assumed $ 66 $ 20
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
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NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Significant Accounting Estimates
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 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,
among other things, the federal budget process.
The company's three reportable segments are its three operating units:
Integrated Systems and Aerostructures (ISA), Electronic Sensors and Systems
(ESS), and Logicon, the company's information technology sector. Included in
the Management's Discussion and Analysis section of this report are general
descriptions of the company's principal products and services under the titles
Integrated Systems and Aerostructures Segment, Electronic Sensors and Systems
Segment, and Logicon Segment (see pages 9 through 13) and segment data in the
table titled Results of Operations by Segment and Major Customer (see pages 14
and 15), which are considered to be an integral part of these financial
statements. Only these portions of Management's Discussion and Analysis are
incorporated by reference into these financial statements.
Sales to the U.S. Government (including foreign military sales) are
reported within each 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. Intersegment sales are transacted at cost
incurred with no profit added. Management principally uses operating margin as
the measure to evaluate segment profitability. The company does not allocate
federal income tax expense, pension income, the deferred portion of state income
tax expense, interest income, or interest expense to segments. General
corporate assets include cash and cash equivalents, corporate office furnishings
and equipment, other unallocable property, investments in affiliates, prepaid
retiree benefits cost, intangible pension asset, benefit trust fund assets,
deferred tax assets and certain assets available for sale.
38
<PAGE>
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.
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.
39
<PAGE>
NORTHROP GRUMMAN CORPORATION
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.
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.
40
<PAGE>
NORTHROP GRUMMAN CORPORATION
Earnings per Share
Basic earnings per share is calculated using the weighted average number of
shares of common stock outstanding during each period, after giving recognition
to stock splits and stock dividends. Diluted earnings per share reflect the
dilutive effect of stock options and other stock awards granted to employees
under stock-based compensation plans.
Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
Earnings
Net Income Shares per share
- -----------------------------------------------------------------------------------------
(millions) (millions)
<S> <C> <C> <C>
1999
Basic earnings per share before
cumulative effect of accounting change $483 69.3 $6.97
==== =====
Dilutive effect of stock options and awards .4
----
Diluted earnings per share before
cumulative effect of accounting change $483 69.7 $6.93
==== ==== =====
Basic earnings per share $467 69.3 $6.73
==== =====
Dilutive effect of stock options and awards .4
----
Diluted earnings per share $467 69.7 $6.69
==== ==== =====
1998
Basic earnings per share $194 68.5 $2.83
==== =====
Dilutive effect of stock options and awards 1.0
----
Diluted earnings per share $194 69.5 $2.79
==== ==== =====
1997
Basic earnings per share $407 66.7 $6.10
==== =====
Dilutive effect of stock options and awards 1.4
----
Diluted earnings per share $407 68.1 $5.98
==== ==== =====
</TABLE>
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 that are probable of
recovery, and amounts retained by the customer pending contract completion.
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<PAGE>
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:
<TABLE>
<S> <C>
Years
- --------------------------------------------------------------------------------
Land improvements 2-20
Buildings 3-45
Machinery and other equipment 2-33
Leasehold improvements Length of lease
- --------------------------------------------------------------------------------
</TABLE>
Goodwill and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets are amortized on a straight-line
basis over weighted average periods of 38 years and 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
margin. The recoverability of goodwill and other purchased intangibles is
evaluated at least annually considering the projected future profitability and
cash flow of the operations to which they relate. When it is determined that an
impairment has occurred, an appropriate charge to operations is recorded.
Charges of $7 million and $9 million were recorded in 1999 and 1998,
respectively, for purchased intangible assets no longer considered recoverable
from future revenues.
42
<PAGE>
NORTHROP GRUMMAN CORPORATION
Assets Available for Sale
Capital assets are transferred to assets available for sale when a decision is
made to sell a facility and selling efforts are actively underway. In some
cases, operations continue and, when costs are allowable under government
contracts, depreciation expense is recorded until the facility is vacated or
sold. Assets available for sale are evaluated at least annually for
recoverability and written down to estimated fair value as necessary. When an
asset is written down to estimated fair value, depreciation ceases.
Financial Statement Reclassification
To conform to the presentation in 1999, certain amounts for 1998 and 1997 have
been reclassified in the Consolidated Financial Statements. The
reclassifications had no effect on net income or earnings per share for any
period presented.
43
<PAGE>
NORTHROP GRUMMAN CORPORATION
BUSINESS COMBINATIONS
Effective August 1, 1997, the company consummated the merger of its wholly owned
acquisition subsidiary with and into Logicon, Inc. a leading defense information
technology and services company. Each share of Logicon's common stock was
converted to .6161 of a share of the company's common stock. The merger was
accounted for as a pooling of interests.
ACQUISITIONS
In 1998 the company acquired Inter-National Research Institute Inc. for $55
million in cash. In 1999 the company acquired three businesses, the Information
Systems Division of California Microwave, Inc., Data Procurement Corporation,
and Ryan Aeronautical, an operating unit of Allegheny Teledyne Incorporated, for
a total of $271 million in cash and stock. The results of operations of the
acquired companies were included in the consolidated results of Northrop Grumman
Corporation from their respective acquisition dates.
The purchase method of accounting was used to record all four 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 was assigned to
goodwill.
Unaudited pro forma consolidated results, after giving effect to the
businesses acquired in 1998 and 1999, would not have been materially different
from the reported amounts for 1997, 1998 or 1999.
44
<PAGE>
NORTHROP GRUMMAN CORPORATION
TERMINATED MERGER AGREEMENT
On July 3, 1997, the company announced that it had entered into a definitive
agreement with Lockheed Martin Corporation to combine the companies. On
February 26, 1998, shareholders of Northrop Grumman approved the merger. On
March 23, 1998, the U.S. Government filed suit to block the merger. On July 16,
1998, Lockheed Martin notified the company that it was terminating its merger
agreement with the company pursuant to the terms of the agreement.
The company recorded charges totaling $186 million in 1998 for costs
related to the terminated merger. The charges cover vesting of restricted stock
which became issuable following shareholder approval of the merger and other
costs associated with the terminated merger, including investment banking fees,
legal and accounting fees, and costs related to responding to the Government's
request for information.
NEW ACCOUNTING STANDARDS
In January 1999, the company adopted Statement of Position (SOP) 98-1 -
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which requires capitalization of certain costs incurred after the date of
adoption to develop or obtain software for internal use. Adoption of this
standard had no material effect on the company's results of operations,
financial position, or cash flows.
In January 1999, the company adopted SOP 98-5 - Reporting on the Costs of
Start-Up Activities, which requires that certain costs, that previously had been
deferred, be expensed and reported as a cumulative effect of a change in
accounting principle, and all such future costs be expensed as incurred. In the
first quarter of 1999, the company recorded a $16 million after-tax charge, or
$.24 per share, as the cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133-
Accounting for Derivative Instruments and Hedging Activities, which becomes
effective for fiscal years beginning after June 15, 2000. This standard provides
authoritative guidance on accounting and financial reporting for derivative
instruments. Management is currently evaluating the effect that adoption of this
standard will have on the company's results of operations, financial position,
and cash flows.
45
<PAGE>
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.
The claim receivable as of December 31, 1998, represents costs incurred to
date on the Accurate Fuselage Assembly (AFA) program that the company expected
to recover from The Boeing Company for out-of-scope work and related delay and
disruption costs incurred on the program. In the second quarter of 1999, the
company resolved its claims with Boeing. The settlement had no material effect
on the company's financial results for 1999.
Accounts receivable at December 31, 1999, are expected to be collected in
2000 except for approximately $89 million due in 2001 and $16 million due in
2002 and later.
Allowances for doubtful amounts represent mainly estimates of overhead type
costs which may not be successfully negotiated and collected.
Accounts receivable were comprised of the following:
<TABLE>
<CAPTION>
$ in millions 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 424 $ 362
Unbilled 1,879 2,145
Progress payments received (1,283) (1,388)
- ---------------------------------------------------------------------
1,020 1,119
- ---------------------------------------------------------------------
Due from other customers, long-term contracts
Current accounts
Billed 122 141
Unbilled 165 137
Claim 29
- ---------------------------------------------------------------------
287 307
- ---------------------------------------------------------------------
Total due, long-term contracts 1,307 1,426
- ---------------------------------------------------------------------
Trade and other accounts receivable
Due from U.S. Government 57 63
Due from other customers 76 65
- ---------------------------------------------------------------------
Total due, trade and other 133 128
- ---------------------------------------------------------------------
1,440 1,554
Allowances for doubtful amounts (38) (47)
- ---------------------------------------------------------------------
$ 1,402 $ 1,507
=====================================================================
</TABLE>
46
<PAGE>
NORTHROP GRUMMAN CORPORATION
INVENTORIED COSTS
Inventoried costs were comprised of the following:
<TABLE>
<CAPTION>
$ in millions 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Production costs of contracts in process $1,320 $1,487
Excess of production cost of delivered items
over the estimated average unit cost 161 162
Administrative and general expenses 230 245
- --------------------------------------------------------------------
1,711 1,894
Progress payments received (521) (521)
- --------------------------------------------------------------------
$1,190 $1,373
====================================================================
</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
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.
47
<PAGE>
NORTHROP GRUMMAN CORPORATION
INCOME TAXES
Income tax expense, both federal and foreign, was comprised of the following:
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable
Federal income taxes $ 63 $ 6 $ 26
Foreign income taxes 4 5 3
- ------------------------------------------------------------------
67 11 29
Change in deferred federal income taxes 212 107 215
- ------------------------------------------------------------------
$ 279 $ 118 $ 244
==================================================================
</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 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at statutory rate $ 267 $ 109 $ 228
Goodwill amortization 16 16 17
Benefit from ESOP dividends (3) (3) (3)
Other, net (1) (4) 2
- -----------------------------------------------------------------
$ 279 $ 118 $ 244
=================================================================
</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.
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:
48
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
$ in millions 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Deductible temporary differences
Provision for estimated expenses $ 33 $ 41
Retiree benefit plan expense 364
Other 12
- ----------------------------------------------------------------------------
33 417
- ----------------------------------------------------------------------------
Taxable temporary differences
Income on contracts (10) (12)
Purchased intangibles (89)
Excess tax over book depreciation (69)
Other (57)
- ----------------------------------------------------------------------------
(10) (227)
- ----------------------------------------------------------------------------
$ 23 $ 190
============================================================================
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 913 $ 865
Goodwill amortization 95
Purchased intangibles 89
Excess tax over book depreciation 72
Administrative and general expenses
period costed for tax purposes 14 18
Other 14
- ----------------------------------------------------------------------------
1,197 883
- ----------------------------------------------------------------------------
Deductible temporary differences
Provision for estimated expenses (207) (174)
Retiree benefit plan expense (197) (16)
Other (50) (30)
- ----------------------------------------------------------------------------
(454) (220)
- ----------------------------------------------------------------------------
Tax carryforwards
Tax credits (75) (82)
Alternative minimum tax credit (54) (54)
- ----------------------------------------------------------------------------
(129) (136)
- ----------------------------------------------------------------------------
$ 614 $ 527
============================================================================
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $1,207 $1,110
Less total deferred tax assets (deductible
temporary differences and tax carryforwards above) 616 773
- ----------------------------------------------------------------------------
$ 591 $ 337
============================================================================
</TABLE>
The tax carryforward benefits are expected to be used in the periods in
which net deferred tax liabilities mature. These tax credit carryforwards are
in various amounts and expire over the years 2001 through 2007. The alternative
minimum tax credit can be carried forward indefinitely.
49
<PAGE>
NORTHROP GRUMMAN CORPORATION
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, 1999, $25 million was outstanding at a weighted
average interest rate of 6.75 percent. At December 31, 1998, $67 million was
outstanding at a weighted average interest rate of 5.60 percent.
Additionally, the company has a credit agreement with a group of domestic
and foreign banks to provide for two credit facilities: $1.8 billion available
on a revolving credit basis through March 2002; and a term loan payable in nine
quarterly installments of $50 million plus interest through March 1, 2002. 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, 1999, $150 million at a weighted average interest rate of
6.76 percent was outstanding under the company's revolving credit facility. At
December 31, 1998, $512 million at a weighted average interest rate of 5.66
percent was outstanding. At December 31, 1999, the $450 million term loan had a
weighted average interest rate of 6.61 percent. At December 31, 1998, $650
million was outstanding at a weighted average interest rate of 5.68 percent.
Principal payments permanently reduce the amount available under this agreement
as well as the debt outstanding. 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, 1999, $880 million of
retained earnings were unrestricted as to the payment of dividends.
50
<PAGE>
NORTHROP GRUMMAN CORPORATION
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
$ in millions 1999 1998
- ------------------------------ ------ ------
<S> <C> <C>
Notes due 2004, 8.625% $ 350 $ 350
Notes due 2006, 7% 400 400
Debentures due 2016, 7.75% 300 300
Debentures due 2024, 9.375% 250 250
Debentures due 2026, 7.875% 300 300
Revolving credit facility 150 512
Term loans payable to banks 450 650
- ------------------------------ ------ ------
2,200 2,762
Less current portion 200 200
- ------------------------------ ------ ------
$2,000 $2,562
====== ======
</TABLE>
The debt indenture contains restrictions relating to limitations on liens,
sale and leaseback arrangements and funded debt of subsidiaries.
The principal amount of long-term debt outstanding at December 31, 1999,
due in each of the years 2000 and 2001 is $200 million, with $50 million due in
2002, $350 million due in 2004 and $1,400 million due thereafter.
51
<PAGE>
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:
Due to the short-term nature of these items, the carrying amount reported
in the Consolidated Statements of Financial Position for Cash and Cash
Equivalents and amounts borrowed under the company's short-term credit
lines are estimated to approximate fair value.
The fair value of the long-term debt at the respective year-ends 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 its term loans, the company has from time to time entered into
interest rate swap agreements. No interest rate swap agreements were in effect
at December 31, 1999, or December 31, 1998. If any interest rate swap
agreements had existed, unrealized gains(losses) would be calculated based upon
the amounts at which they could have been settled at then current interest
rates.
Carrying amounts and the related estimated fair values of the company's
financial instruments at December 31 of each year are as follows:
<TABLE>
<CAPTION>
$ in millions 1999 1998
- ------------------- ------- -------
<S> <C> <C>
Long-term debt
Carrying amount $2,200 $2,762
Fair value 2,154 2,914
- ------------------- ------ ------
</TABLE>
52
<PAGE>
NORTHROP GRUMMAN CORPORATION
RETIREMENT BENEFITS
The company sponsors several defined-benefit pension plans covering over 80
percent of 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 fourteen qualified plans,
which cover more than 70 percent of all employees, were in a legally defined
full-funding limitation status at December 31, 1999.
The company and subsidiaries also sponsor defined-contribution plans in
which most employees are eligible to participate. Company contributions for most
plans are based on a matching of employee contributions up to 4 percent of
compensation.
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 70 percent of
the company's current retirees participate in the medical plans. 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.
53
<PAGE>
NORTHROP GRUMMAN CORPORATION
The cost to the company of these plans in each of the last three years is
shown in the following table.
<TABLE>
<CAPTION>
Pension Benefits Medical and Life Benefits
$ in millions 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost(income)
Service cost $ 200 $ 187 $ 162 $ 34 $ 27 $ 27
Interest cost 659 642 618 102 95 98
Expected return on plan assets (1,136) (1,008) (834) (30) (34) (26)
Amortization of
Prior service costs 35 35 34
Transition assets, net (42) (42) (42)
Net gain from previous years (69) (80) (71) (2) (16) (10)
- ----------------------------------------------------------------------------------------------
Net periodic benefit cost(income) $ (353) $ (266) $(133) $ 104 $ 72 $ 89
==============================================================================================
Defined contribution plans cost $ 92 $ 89 $ 84
==============================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for obligations 7.50% 6.50% 7.00%
Rate of increase for compensation 5.00 4.00 4.50
Expected long-term rate of return on plan assets 9.50 9.50 9.50
- ------------------------------------------------------------------------------------
</TABLE>
These assumptions also were 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 9.5 percent expected rate
of return on plan assets was reduced accordingly to 6 percent after taxes. A
significant factor used in estimating future per capita cost of covered health
care benefits for the company and its retirees is the health care cost trend
rate assumption. The rate used was 10 percent for 1999 and is assumed to
decrease gradually to 6 percent for 2006 and thereafter. A one-percentage-point
change in that rate would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
$ in millions Point Increase Point Decrease
--------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest
cost components $ 18 $ (15)
Effect on postretirement benefit obligation 166 (146)
</TABLE>
54
<PAGE>
NORTHROP GRUMMAN CORPORATION
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. Pension benefits data includes the qualified plans as well as
thirteen unfunded non-qualified plans for benefits provided to directors,
officers and employees either beyond those provided by, or payable under, the
company's main plans.
<TABLE>
<CAPTION>
Pension Benefits Medical and Life Benefits
$ in millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning
of year $10,164 $ 9,056 $ 1,559 $ 1,443
Service cost 200 187 34 27
Interest cost 659 642 102 95
Plan participants' contributions 7 7 26 25
Amendments 4 3
Actuarial loss(gain) (771) 851 (72) 67
Benefits paid (612) (582) (115) (98)
- --------------------------------------------------------------------------------------------
Benefit obligation at end of year 9,651 10,164 1,534 1,559
- --------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year 12,033 10,832 570 538
Actual return on plan assets 2,284 1,651 154 61
Employer contributions 80 125 58 44
Plan participants' contributions 7 7 26 25
Benefits paid (612) (582) (115) (98)
- --------------------------------------------------------------------------------------------
Fair value of plan assets at
end of year 13,792 12,033 693 570
- --------------------------------------------------------------------------------------------
Funded status 4,141 1,869 (841) (989)
Unrecognized prior service cost 169 200 2 2
Unrecognized net transition asset (120) (162)
Unrecognized net gain (3,573) (1,723) (319) (125)
- --------------------------------------------------------------------------------------------
Net asset(liability) recognized $ 617 $ 184 $(1,158) $(1,112)
============================================================================================
Amounts recognized in the statement of
financial position
Prepaid benefit cost $ 851 $ 712 $ 30 $
Accrued benefit liability (234) (528) (1,188) (1,112)
Additional minimum liability (36) (64)
Intangible asset 7 16
Accumulated other comprehensive loss 29 48
- --------------------------------------------------------------------------------------------
Net asset(liability) recognized $ 617 $ 184 $(1,158) $(1,112)
============================================================================================
</TABLE>
55
<PAGE>
NORTHROP GRUMMAN CORPORATION
For pensions plans with benefit obligations in excess of assets as of
December 31, 1999, the projected benefit obligation was $224 million, the
accumulated benefit obligation was $203 million, and the fair value of assets
was $7 million. As of December 31, 1998, the projected benefit obligation was
$1,451 million, the accumulated benefit obligation was $1,285 million, and the
fair value of assets was $784 million.
Pension plan assets at December 31, 1999, comprised 48 percent domestic
equity investments in listed companies (including 2 percent in Northrop Grumman
common stock); 14 percent equity investments listed on international exchanges;
22 percent in fixed income investments; 5 percent in venture capital and real
estate investments; and 11 percent in cash and cash equivalents. The investment
in Northrop Grumman represents 4,111,669 shares, or 6 percent of the company's
total shares outstanding.
Retiree health care and life insurance plan assets at December 31, 1999,
comprised 64 percent domestic equity investments in listed companies; 24 percent
equity investments on international exchanges; and 12 percent in cash and
equivalents.
COMMITMENTS AND 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.
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, 1999, the range of reasonably possible future
costs for environmental remediation is $80 million to $111 million, of which $87
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, financial position, or cash flows.
The company has entered into standby letter of credit agreements and other
arrangements with financial institutions primarily relating to the guarantee of
future performance on certain contracts. Contingent liabilities on these
agreements aggregated approximately $535 million at December 31, 1999.
56
<PAGE>
NORTHROP GRUMMAN CORPORATION
The company has agreed to invest an additional $30 million in Kistler
Aerospace Corporation preferred stock. This investment will only be made when
Kistler Aerospace Corporation has obtained additional funding from other sources
and will represent the last increment of funding required to complete and test
the first K-1 vehicle, and is subject to the company's then determination that
the K-1 is a viable launch system.
Minimum rental commitments under long-term noncancellable operating leases
total $394 million which is payable as follows: 2000 - $93 million, 2001 - $70
million, 2002 - $60 million, 2003 - $51 million, 2004 - $42 million, and 2005
and thereafter - $78 million.
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 $250.
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 $.01 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 2008. 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, 1999, Northrop Grumman had two stock-based compensation plans -
the 1993 Long-Term Incentive Stock Plan (LTISP) applicable to employees and the
1995 Stock Option Plan for Non-Employee Directors (SOPND). The LTISP contains
change in control provisions which were activated in February 1998 upon approval
by the shareholders of the proposed merger of the company with Lockheed Martin
Corporation, causing all then unvested stock awards to become immediately
vested.
57
<PAGE>
NORTHROP GRUMMAN CORPORATION
The LTISP permits grants to key employees of three general types of stock
incentive awards: stock options, stock appreciation rights (SARs) and stock
awards. Under the LTISP, each stock option grant is made with an exercise price
either at the closing price of the stock on the date of grant (market options)
or at a premium over the closing price of the stock on the date of grant
(premium options). 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, unearned rights
up to 100 percent of the original grant for five elected officers and, up to 70
percent of the original grant for all other recipients, will be forfeited.
Termination of employment can result in forfeiture of some or all of the
benefits extended under the plan. Each year 1.5% of the company's total issued
and outstanding common stock at the end of the preceding fiscal year become
available for issuance pursuant to incentive awards. During 1998 and 1999, a
number of awards granted under the LTISP contained terms, including limitations
and conditions on exercisability and vesting, that took into account and were
predicated upon future annual share availability.
The SOPND permits 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, 1999, 244,500 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 $15 million
in 1999, $163 million in 1998, and $57 million in 1997.
58
<PAGE>
NORTHROP GRUMMAN CORPORATION
Stock option activity for the last three years is summarized below:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Exercise Shares
Under Option Prices Exercisable
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 4,027,272 $47 1,384,026
Granted, market options 15,000 85
Cancelled (100,932) 58
Exercised (570,182) 34
- ----------------------------------------------------------------------------
Outstanding at December 31, 1997 3,371,158 49 1,556,475
Granted, market options 992,000 74
Granted, premium options 1,986,450 95
Cancelled (5,700) 65
Exercised (766,182) 48
- ----------------------------------------------------------------------------
Outstanding at December 31, 1998 5,577,726 70 2,624,276
Granted, market options 69,200 62
Granted, premium options 106,800 93
Cancelled (221,015) 88
Exercised (702,628) 22
- ----------------------------------------------------------------------------
Outstanding at December 31, 1999 4,830,083 76 1,926,899
============================================================================
</TABLE>
59
<PAGE>
NORTHROP GRUMMAN CORPORATION
Had compensation expense been determined based on the fair value at the
grant dates for stock option awards granted in 1999, 1998 and 1997, consistent
with the method of Financial Accounting Standards Board Statement 123 -
Accounting for Stock Based Compensation, net income, basic earnings per share,
and diluted earnings per share in 1999 would have been lower by $11 million,
seventeen cents and sixteen cents, respectively. For 1998 net income, basic
earnings per share and diluted earnings per share would have been lower by $5
million, seven cents and seven cents, respectively. For 1997 net income, basic
earnings per share and diluted earnings per share would have been lower by $5
million, eight cents, and eight cents, respectively. These amounts were
determined using weighted-average per share fair values for premium options
granted in 1999 of $15 and 1998 of $15 and for market options granted in 1999,
1998 and 1997 of $18, $20 and $25 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 1999, 1998 and 1997,
respectively, the following additional assumptions: dividend yield - 2.1
percent, 1.9 percent and 1.9 percent; expected volatility - 29 percent, 27
percent and 22 percent; and risk-free interest rate - 5.8 percent, 4.4 percent
and 6.7 percent.
At December 31, 1999 the following stock options were outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Prices at 12/31/99 Prices
- ------------ ----------- ---------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$16 to 35 123,458 2.8 years $ 25 123,458 $ 25
36 to 55 580,619 5.0 years 41 552,119 41
56 to 75 1,490,122 7.9 years 68 531,622 59
76 to 95 1,599,459 8.1 years 85 674,700 81
96 to 118 1,036,425 9.0 years 101 45,000 105
--------- ---------
4,830,083 1,926,899
========= =========
</TABLE>
Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows: 1999 - 75,300 at $64; 1998 -
794,050 at $73; and 1997 - 7,700 at $80.
60
<PAGE>
NORTHROP GRUMMAN CORPORATION
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results are set forth in the following tables together with
dividend and common stock price data.
<TABLE>
<CAPTION>
1999 Quarters
$ in millions, except per share 4 3 2 1
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,506 $ 2,122 $ 2,274 $ 2,093
Operating margin 253 262 238 216
Income before cumulative effect
of accounting change 138 128 113 104
Net income 138 128 113 88
Basic earnings per share before
cumulative effect of accounting change 1.97 1.84 1.65 1.51
Basic earnings per share 1.97 1.84 1.65 1.27
Diluted earnings per share before
cumulative effect of accounting change 1.96 1.83 1.64 1.50
Diluted earnings per share 1.96 1.83 1.64 1.26
Dividend per share .40 .40 .40 .40
Stock price:
High 62 5/16 75 11/16 73 5/16 73 1/4
Low 49 59 15/16 57 3/4 57
- ---------------------------------------------------------------------------------------
</TABLE>
In the fourth quarter of 1999 the company reached a settlement of its
contract claims with the U. S. Air Force relating to the remanufacturing of
Joint STARS aircraft. The company was able to recognize underlying improved
performance on the production phase of the program and recorded upward
cumulative margin rate adjustments totaling $37 million. Operating margin
includes positive cumulative margin rate adjustments on the B-2 program of $23
million, $11 million and $36 million in the fourth, third and second quarters,
respectively. Charges on Boeing commercial aerostructures work, to reflect
increases in cost estimates to complete work on several contracts, of $27
million in the fourth quarter, $10 million in the third quarter and $40 million
in the second quarter were also recorded.
61
<PAGE>
NORTHROP GRUMMAN CORPORATION
<TABLE>
<CAPTION>
1998 Quarters
$ in millions, except per share 4 3 2 1
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,536 $ 2,213 $ 2,139 $ 2,014
Operating margin 103 238 208 207
Net income(loss) (3) 116 93 (12)
Basic earnings(loss) per share (.04) 1.68 1.36 (.18)
Diluted earnings(loss) per share (.04) 1.67 1.34 (.18)
Dividend per share .40 .40 .40 .40
Stock price:
High 84 108 5/8 110 3/4 139
Low 68 7/16 59 5/16 97 3/16 102 3/4
- --------------------------------------------------------------------------------
</TABLE>
Operating margin in the fourth quarter of 1998 includes charges of $104
million related to the 747 fuselage program and $21 million due to an increase
in the cost estimate to complete work on the test phase of development for the
Directional Infrared Countermeasures (DIRCM) program. The Boeing 747 charge
resulted from a reduction in future fuselage deliveries that caused an increase
in the estimated cost to complete work on the current production block and a
charge to operations of certain nonrecurring costs for the Accurate Fuselage
Assembly (AFA) precision manufacturing system, which are no longer considered
recoverable from sales of future deliveries. Pretax costs of $16 million and
$42 million are included in the third and fourth quarter, respectively, related
to activities to realign operating units, consolidate facilities and exit
certain business areas. Cumulative margin rate adjustments on the Joint STARS
and E-2C programs reduced operating margin in the second quarter by $25 million.
Charges related to the company's terminated merger with Lockheed Martin
Corporation of $180 million and $6 million were recorded in the first and second
quarter, respectively. Included in the 1998 fourth quarter results is the write
off of the company's $30 million investment comprised of advances on behalf of
the Kistler Aerospace Corporation. The write off resulted from the company's
assessment that the near-term likelihood of Kistler obtaining additional
financing made recovery of the investment uncertain.
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 February 14, 2000, was 11,135.
62
<PAGE>
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,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audit 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 these
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 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.
As discussed in the footnotes to the consolidated financial statements, in
1999 the Company changed its method of accounting for start-up activities by
adopting Statement of Position 98-5 -- Reporting on the Costs of Start-up
Activities.
Deloitte & Touche LLP
Los Angeles, California
January 26, 2000
63
<PAGE>
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 2000 Annual Meeting of Stockholders to be filed
within 120 days after the end of the company's fiscal year. Information with
respect to Executive Officers is included in Part I under the caption
"Executive Officers of the Registrant".
Item 11. Executive Compensation
The information as to Executive Compensation will be incorporated herein by
reference to the Proxy Statement for the 2000 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 as to Security Ownership of Certain Beneficial Owners and
Management will be incorporated herein by reference to the Proxy Statement for
the 2000 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 as to Certain Relationships and Related Transactions will
be incorporated herein by reference to the Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed within 120 days after the end of the
company's fiscal year.
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, 1999.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
64
<PAGE>
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, as amended and restated February 16,
2000
4(a) Common Stock Purchase Rights Agreement (incorporated by reference to Form
8-A filed November 13, 1998)
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 America 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 (incorporated by
reference to Form 10-K filed February 25, 1997)
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 as amended December 16, 1998
(incorporated by reference to Form 10-K filed March 23, 1999)
10(d) 1973 Performance Achievement Plan (incorporated by reference to Form 8-B
filed June 21, 1985)
10(e) Northrop Supplement Plan 2 (incorporated by reference to Form 10-K filed
February 22, 1996) and amended as of June 19, 1996 (incorporated by
reference to Form 10-K filed March 30, 1998)
10(f) Northrop Grumman Corporation ERISA Supplemental Plan I (incorporated by
reference to Form 10-K filed February 28, 1994)
65
<PAGE>
NORTHROP GRUMMAN CORPORATION
10(g) Retirement Plan for Independent Outside Directors as amended April 24,
1998 (incorporated by reference to Form 10-K filed March 23,1999)
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 and
restated (incorporated by reference to Northrop Grumman Corporation Form
S-8 Registration Statement filed November 25, 1998)
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 March 2000 Special Agreement
(effective March 1, 2000) (incorporated by reference to Form 10-Q filed
November 4, 1999).
10(s) Executive Deferred Compensation Plan (effective December 29, 1994)
(incorporated by reference to Form 10-K filed February 25, 1997)
10(t) Northrop Grumman Corporation Non-Employee Directors Equity Participation
Plan, as amended December 16, 1998 (incorporated by reference to Form 10-
K filed March 23, 1999)
10(u) CPC Supplemental Executive Retirement Program (incorporated by reference
to Form 10-K filed March 30, 1998)
10(v) Form of Ownership Retention Agreement and Amendment No. 1 by letter dated
April 18, 1998 (incorporated by reference to Form 10-Q filed April 24,
1998)
10(w) Master Escrow Agreement and Master Escrow Agreement Clarification dated
April 8, 1998 (incorporated by reference to Form 10-Q filed April 24,
1998)
66
<PAGE>
NORTHROP GRUMMAN CORPORATION
10(x) Northrop Grumman 1998 Restricted Stock Rights Plan (incorporated by
reference to Form S-8 Registration Statement filed November 25, 1998)
10(y) Special Officer Retiree Medical Plan as amended August 18, 1999.
10(z) Northrop Grumman Corporation March 2000 Change-in-Control Severance Plan
(incorporated by reference to Form 10-Q filed November 4, 1999)
21 Subsidiaries
23 Independent Auditors' Consent
24 Power of Attorney
27 Financial Data Schedule
67
<PAGE>
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 24th day of
February 2000.
Northrop Grumman Corporation
By: Richard B. Waugh, Jr.
---------------------------------------
Richard B. Waugh, Jr.
Corporate Vice President and
Chief Financial Officer
(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 the 24th day of February 2000,
by the following persons and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
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
Vic Fazio Director
Phillip Frost* Director
Robert A. Lutz* Director
Aulana L. Peters* Director
John E. Robson* Director
Richard R. Rosenberg* Director
John Brooks Slaughter* Director
Richard J. Stegemeier* Director
</TABLE>
*By John H. Mullan
-------------------------------
John H. Mullan
Attorney-in-Fact
pursuant to a power of attorney
68
<PAGE>
NORTHROP GRUMMAN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Dollars in Thousands)
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Other
Balance at Changes-- Balance
Beginning Additions Add at End
Classification of Period At Cost (Deduct)(1) of Period
- -------------- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Description:
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $55,445 $17,279 $(17,746) $54,978
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $54,978 $ 8,076 $(16,013) $47,041
Year ended December 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $47,041 $21,088 $(30,455) $37,674
</TABLE>
___________
(1) Uncollectible amounts written off, net of recoveries.
69
<PAGE>
NORTHROP GRUMMAN CORPORATION
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 333-68029 and 333-75363 of Northrop Grumman Corporation on Form S-8
and Registration Statements Nos. 333-78251 and 333-85633 of Northrop Grumman
Corporation on Form S-3 of our report dated January 26, 2000 appearing in this
Annual Report on Form 10-K of Northrop Grumman Corporation for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 24, 2000
70
<PAGE>
EXHIBIT 3(B)
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.
<PAGE>
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 STOCKHOLDER BUSINESS AND NOMINATIONS.
Nominations of persons for election to the Board and the proposal of business to
be transacted by the stockholders may be made at an annual meeting of
stockholders (a) pursuant to the Corporation's notice with respect to such
meeting, (b) by or at the direction of the Board or (c) by any stockholder of
record of the Corporation who was a stockholder of record at the time of the
giving of the notice provided for in the following paragraph, who is entitled to
vote at the meeting and who has complied with the notice procedures set forth in
this section.
For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of the foregoing
paragraph, (1) the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation, (2) such business must be a proper matter
for stockholder action under the General Corporation Law of the State of
Delaware, (3) if the stockholder, or the beneficial owner on whose behalf any
such proposal or nomination is made, has provided the Corporation with a
Solicitation Notice, as that term is defined in subclause (c )(iii) of this
paragraph, such stockholder or beneficial owner must, in the case of a proposal,
have delivered a proxy statement and form of proxy to holders of at least the
percentage of the Corporation's voting shares required under applicable law to
carry any such proposal, or, in the case of a nomination or nominations, have
delivered a proxy statement and form of proxy to holders of a percentage of the
Corporation's voting shares reasonably believed by such stockholder or
beneficial holder to be sufficient to elect the nominee or nominees proposed to
be nominated by such stockholder, and must, in either case, have included in
such materials the Solicitation Notice and (4) if no Solicitation Notice
relating thereto has been timely provided pursuant to this section, the
stockholder or beneficial owner proposing such business or nomination must not
have solicited a number of proxies sufficient to have required the delivery of
such a Solicitation Notice under this section. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not less than 45 or more than 75 days prior to the first
anniversary (the "Anniversary") of the date on which the Corporation first
mailed its proxy materials for the preceding year's annual meeting of
stockholders; provided, however, that if the date of the annual meeting is
advanced more than 30 days prior to or delayed by more than 30 days after the
anniversary of the preceding year's annual meeting, notice by the stockholder to
be more timely must be so delivered not later than the close of business on the
later of (i) the 90/th/ day prior to such annual meeting or (ii) the 10/th/ day
following the day on which public announcement of the date of such meeting is
first made. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the filing of a stockholder's
notice as described herein. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or reelection
as a director all information relating to such person as would be required to be
disclosed in solicitations of proxies for the election of such nominees as
directors pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such
person's written consent to serve as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of such business, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the Corporation that are owned
beneficially and of record by such stockholder and such beneficial owner, and
(iii) whether either such stockholder or beneficial owner intends to deliver a
proxy statement and form of proxy to holders of, in the case of a proposal, at
least the percentage of the Corporation's voting shares required under
applicable law to carry the proposal or, in the case of a nomination or
2
<PAGE>
nominations, a sufficient number of holders of the Corporation's voting shares
to elect such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").
Notwithstanding anything in the second sentence of the second
paragraph of this Section 2.06 to the contrary, in the event that the number of
directors to be elected to the Board is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board made by the Corporation at least 55 days prior to the
Anniversary, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10/th/ day following the day on which such public announcement
is first made by the Corporation.
Only persons nominated in accordance with the procedures set forth in
this Section 2.06 shall be eligible to serve as directors and only such business
shall be conducted at an annual meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
section. The chair of the meeting shall have the power and the duty to
determine whether a nomination or any business proposed to be brought before the
meeting has been made in accordance with the procedures set forth in these
Bylaws and, if any proposed nomination or business is not in compliance with
these Bylaws, to declare that such defective proposed business or nomination
shall not be presented for stockholder action at the meeting and shall be
disregarded.
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board may be made at a special meeting of stockholders at which directors are to
be elected pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board or (b) by any stockholder of record of the Corporation
who is a stockholder of record at the time of giving of notice provided for in
this paragraph, who shall be entitled to vote at the meeting and who complies
with the notice procedures set forth in this Section 2.06. Nominations by
stockholders of persons for election to the Board may be made at such a special
meeting of stockholders if the stockholder's notice required by the second
paragraph of this Section 2.06 shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the later of the 90/th/ day prior to such special meeting or the
10/th/ day following on which public announcement is first made of the date of
the special meeting an of the nominees proposed by the Board to be elected at
such meeting.
For purposes of this section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this Section 2.06, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 2.06. Nothing in this Section 2.06 shall be deemed to affect
any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
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
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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
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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 has 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.
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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 10/th/ 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
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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. Promptly after, and on
the same day as, each annual election of directors by the shareholders, the
Board shall, if a quorum be present, meet in an organizational meeting to elect
a chairman, appoint members of the standing committees of the Board, elect
officers of the Corporation and conduct other business as appropriate.
Additional notice of such meeting need not be given if such meeting is conducted
promptly after the annual meeting to elect directors and if the meeting is held
in the same location where the election of directors was conducted. Regular
meetings of the Board shall be held at such times and places as the Board shall
determine. Notice of regular meetings shall be mailed to each director at least
five days before the meeting, addressed to the director's usual place of
business or to his or her residence address or to an address specifically
designated by the director.
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
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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 Directors, which term is
hereby defined to mean any director that is "Independent" within the
meaning of Rule 303.01 of the New York Stock Exchange Listed Company
Manual, as such rule (or any successor rule) may be amended from time
to time.
2. The Committee shall recommend to the Board of Directors for
its action the appointment or
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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
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 the ten (10)
employees, who are not elected officers, receiving the highest base
salaries immediately preceding the date of any such action.
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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
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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 AND CORPORATE GOVERNANCE COMMITTEE. There
shall be a Nominating and Corporate Governance 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 and its evaluation and
recommendations on matters of corporate governance as appropriate.
11
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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.
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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
13
<PAGE>
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.
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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.
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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
16
<PAGE>
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.
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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 31/st/ 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.
February 16, 2000
18
<PAGE>
EXHIBIT 10(Y)
SPECIAL OFFER RETIREE MEDICAL PLAN
----------------------------------
ARTICLE I
Eligibility and Benefits
------------------------
1.01 Purpose. The purpose of the Special Officer Retiree Medical Plan ("Plan")
-------
is to provide lifetime retiree medical benefits to eligible elected
officers of Northrop Grumman Corporation ("the Company") and their
spouses.
1.02 Eligibility. Eligibility for benefits under this Plan will be limited to
-----------
those elected officers of the Company listed in Exhibit A. Officers may be
added or removed from Exhibit A in accordance with the amendment provision
of the Plan.
(a) An elected officer listed in Exhibit A is a "Participant" under the
Plan.
(b) A Participant will become an "Eligible Participant" under the Plan
if he or she has either five years of service as an elected officer or 30
years of total service with the Company and its affiliates.
1.03 Benefits. The Company will provide an Eligible Participant with a
--------
continuation of medical benefits.
(a) The benefits will be provided for the life of the Eligible
Participant and the life of his or her surviving spouse, if any. (The
only spouse covered will be a surviving spouse who is married to the
Eligible participant both at the time of termination of employment
with the Company and its affiliates and at the time of the Eligible
Participant's death.
(b) The benefits provided will be a continuation of the medical benefits
the Eligible Participant was eligible to receive from the Company as
of December 31, 1998. In particular, the following will remain frozen
as of that date:
(1) Participant contributions.
(2) Copayments.
(3) Deductibles.
(4) Medical benefit coverage.
(c) Following the death of the Eligible Participant or his or her spouse,
the participant contributions, copayments and deductibles will be
adjusted to what they would have been for the Eligible participant
for individual coverage as of December 31, 1998.
<PAGE>
(d) The benefits under the Plan will be coordinated with and paid
secondary to any benefits that the Eligible Participant or his or her
spouse receives from another plan of the Company or another employer
or from Medicare (For this purpose, Medicare benefits are deemed to
include any benefits the Eligible Participant and his or her spouse
would receive from Medicare if they made proper application for
benefits.)
ARTICLE 2
General Provisions
------------------
2.01 Amendment and Plan Termination. The Company may amend or terminate the
------------------------------
Plan with respect to any Participant only with the consent of the
Participant or, after the Participant's death, with the consent of his or
her spouse. Otherwise, the Company may amend the Plan at any time.
2.02 Assignment of Benefits. An Eligible Participant or surviving spouse may
----------------------
not, either voluntarily or involuntarily, assign, anticipate, alienate,
commute, sell, transfer, pledge or encumber any benefits to which he or
she is or may become entitled under the Plan, nor may Plan benefits be
subject to attachment or garnishment by any of their creditors or to legal
process.
2.03 Nonduplication of Benefits. This Section applies if, despite Section
--------------------------
2.02, with respect to any Eligible Participant (or his or her spouse), the
Company is required to make payments under this Plan to a person or entity
other than the payees described in the Plan. In such a case, any coverage
due the Participant (or his or her spouse) under the Plan will be reduced
by the actuarial value of the coverage extended or payments made to such
other person or entity.
2.04 Funding. Participants have the status of general unsecured creditors of
-------
the Company and the Plan constitutes a mere promise by the Company to make
benefit payments in the future. Any funding of benefits under this Plan
will be in the Company's sole discretion.
2.05 Construction. The Company shall have full discretionary authority to
------------
determine eligibility and to construe and interpret the terms of the Plan,
including the power to remedy possible ambiguities, inconsistencies or
omissions.
2.06 Governing Law. This Plan shall be governed by the law of the State of
-------------
California, except to the extent superseded by federal law.
2.07 Actions By Company. Any powers exercisable by the Company under the Plan
------------------
shall be utilized by written resolution adopted by the Board of Directors
of the Company or its delegate. The Board may be written resolution
delegate any of the Company's powers under the Plan and any such
delegations may provide for subdelegations, also by written resolution.
<PAGE>
EXHIBIT 21
NORTHROP GRUMMAN CORPORATION SUBSIDIARIES
Address for subsidiaries (unless otherwise noted) is:
c/o Northrop Grumman Corporation
Office of the Corporate Secretary
1840 Century Park East
Los Angeles, CA 90067
. Allied Holdings, Inc.
. Allied Transportation Products, Inc.
. Grumman Credit Corporation
. California Microwave, Inc.
. Data Procurement Corporation, Inc. (d.b.a. DPC Technologies)
. Grumman International, Inc.
. Grumman Ohio Corporation
. Grumman Sensor Systems, Inc.
. Grumman Systems Support Corporation
. Iran-Northrop Grumman Programs Service Company
. Logicon, Inc.
. Logicon International, Inc.
. International Research Institute, Inc.
. INRI, UK LTD*
Alpha House
Chilworth Research Centre
Southampton S016 7NS
United Kingdom
. Logicon Technical Services, Inc.
. Logicon Syscon Services, Inc.
. Logicon Syscon (B.V.I.) Limited *
. Logicon Canada Limited*
. MOCIT, Inc.
. Northrop Grumman Aviation, Inc.
. Northrop Grumman Commercial Aircraft Company
. Northrop Grumman Electronic Sensors and Systems International, Inc.
. WESCAN Europe Ltd.*
3 Burlington Road,
Dublin 4, Ireland
. Northrop Grumman Electronic Systems International Company
. Northrop Grumman Electronics Systems Integration International, Inc.
. Northrop Grumman Electronic Systems Integration Limited*
Senator House
85 Queen Victoria Street
London EC4V 4IL
1 OF 3
<PAGE>
. Northrop Grumman Field Support Services, Inc.
. Northrop Grumman Foreign Sales Corporation (Barbados)*
c/o Chase Trade, Inc.
Stevmar House, Suite 2
Rockley, Christ Church, Barbados
. Northrop Grumman International, Inc.
. Northrop Grumman (Singapore) Private Limited (Singapore)*
250 North Bridge Road #15-04
Raffles City Tower
Singapore 179101
. Northrop Grumman International Services Company, Inc.
. Northrop Grumman ISA International, Inc.
. Northrop Grumman Overseas Holdings, Inc.
. Northrop Grumman-Canada, LTD. (Canada)*
c/o Gowling, Strathy & Henderson
120 King Street West
Suite 600
Hamilton, Ontario
L8P 4V2
. Northrop Grumman Electronicos, Inc.
. Northrop Grumman Overseas Holdings (UK), Ltd.*
c/o Baker & McKenzie
100 New Bridge Street
London EC4V 6JA
United Kingdom
. Park Air Electronics Ltd. (UK)*
Northfields
Market Deeping
Peterborough,
PE6 8LG, England
. Northrop Grumman Overseas Service Corporation
. Northrop Grumman Space Operations, LP
. Northrop Grumman Tactical Systems LLC
. Northrop Grumman Technical Services Corporation
. Northrop Grumman Technical Services, Inc.
. Northrop International Aircraft, Inc.
. Park Air Electronics, Inc.
. Perceptics Corporation
2 OF 3
<PAGE>
. Remotec, Inc. (96% owned)
. VAC Industries, Inc.
. Xetron Corporation
* Foreign Subsidiaries
3 OF 3
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY IN CONNECTION WITH THE
1999 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 JOHN H. MULLAN, and each of them as his agents
and attorneys-in-fact (the "Agents"), in his or her 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, 1999 (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
16th day of February, 2000.
<PAGE>
__________________________ Chairman of the Board, President and Chief Executive
Kent Kresa Officer and Director (Principal Executive Officer)
__________________________ Director
Jack R. Borsting
__________________________ Director
John T. Chain, Jr.
__________________________ Director
Jack Edwards
__________________________ Director
Vic Fazio
__________________________ Director
Phillip Frost
__________________________ Director
Robert A. Lutz
__________________________ Director
Aulana L. Peters
__________________________ Director
John E. Robson
__________________________ Director
Richard M. Rosenberg
__________________________ Director
John Brooks Slaughter
__________________________ Director
Richard J. Stegemeier
__________________________ Corporate Vice President
Richard B. Waugh, Jr. and Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 142
<SECURITIES> 0
<RECEIVABLES> 1,440
<ALLOWANCES> 38
<INVENTORY> 1,190
<CURRENT-ASSETS> 2,793
<PP&E> 2,895
<DEPRECIATION> 1,655
<TOTAL-ASSETS> 9,285
<CURRENT-LIABILITIES> 2,464
<BONDS> 2,200
0
0
<COMMON> 1,028
<OTHER-SE> 2,229
<TOTAL-LIABILITY-AND-EQUITY> 9,285
<SALES> 8,995
<TOTAL-REVENUES> 8,995
<CGS> 8,026
<TOTAL-COSTS> 8,026
<OTHER-EXPENSES> (17)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224
<INCOME-PRETAX> 762
<INCOME-TAX> 279
<INCOME-CONTINUING> 483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (16)
<NET-INCOME> 467
<EPS-BASIC> 6.73
<EPS-DILUTED> 6.69
</TABLE>
