FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 29549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission File Number 1-3229
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE No. 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)
(310) 553-6262
(Registrant's telephone number, including area code)
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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock outstanding as of April 17, 1998 67,681,077 shares
Northrop Grumman Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three months ended March 31,
Dollars in millions, except per share 1998 1997
- ------------------------------------------------------------------------
Net sales $2,014 $2,118
Cost of sales
Operating costs 1,542 1,705
Administrative and general expenses 265 217
- ------------------------------------------------------------------------
Operating margin 207 196
Merger costs (180)
Interest expense (55) (64)
Other, net 9 2
- ------------------------------------------------------------------------
Income(loss) before income taxes(benefit) (19) 134
Federal and foreign income taxes(benefit) (7) 50
- ------------------------------------------------------------------------
Net income(loss) $ (12) $ 84
========================================================================
Weighted average shares outstanding, in millions 67.8 66.6
Diluted earnings(loss) per share $ (.18) $ 1.27
Basic earnings(loss) per share $ (.18) $ 1.25
Dividends per share $ .40 $ .40
=========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
I-1
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF FINANCIAL POSITION
[/TABLE]
[CAPTION]
March 31, December 31,
Dollars in millions 1998 1997
- --------------------------------------------------------------------------
[S] [C] [C]
Assets
Cash and cash equivalents $ 24 $ 63
Accounts receivable, net of progress payments of
of $3,233 in 1998 and $2,999 in 1997 1,403 1,441
Inventoried costs, net of progress payments
of $521 in 1998 and $495 in 1997 1,424 1,283
Deferred income taxes 79 82
Prepaid expenses 76 67
- --------------------------------------------------------------------------
Total current assets 3,006 2,936
- --------------------------------------------------------------------------
Property, plant and equipment 3,105 3,109
Accumulated depreciation (1,778) (1,763)
- --------------------------------------------------------------------------
1,327 1,346
- --------------------------------------------------------------------------
Goodwill, net of accumulated amortization of
$267 in 1998 and $244 in 1997 3,398 3,421
Other purchased intangibles, net of accumulated
amortization of $231 in 1998 and $208 in 1997 873 896
Deferred income taxes 456 485
Prepaid pension cost, intangible pension asset
and benefit trust funds 538 452
Investments in and advances to affiliates
and sundry assets 144 141
- -------------------------------------------------------------------------
5,409 5,395
- -------------------------------------------------------------------------
$ 9,742 $ 9,677
=========================================================================
[/TABLE]
I-2
Northrop Grumman Corporation and Subsidiaries
March 31, December 31,
Dollars in millions 1998 1997
- -------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Notes payable to banks $ 6 $ 91
Current portion of long-term debt 200 200
Trade accounts payable 457 463
Accrued employees' compensation 365 366
Advances on contracts 322 410
Income taxes payable, including deferred
income taxes of $679 in 1998 and $717 in 1997 697 733
Other current liabilities 496 452
- --------------------------------------------------------------------------
Total current liabilities 2,543 2,715
- --------------------------------------------------------------------------
Long-term debt 2,630 2,500
Accrued retiree benefits 1,752 1,716
Other long-term liabilities 46 48
Deferred income taxes 82 75
Paid-in capital
Preferred stock, 10,000,000 shares authorized; none issued
Common stock, 200,000,000 shares authorized;
issued and outstanding:
1998 -- 68,449,590; 1997 -- 67,278,876 943 838
Retained earnings 1,768 1,807
Unfunded pension losses, net of taxes (22) (22)
- --------------------------------------------------------------------------
2,689 2,623
- --------------------------------------------------------------------------
$9,742 $9,677
==========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
I-3
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Three months ended March 31,
Dollars in millions 1998 1997
- -----------------------------------------------------------------------------
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 404 $ 567
Other collections 1,587 1,476
Income tax refunds received 5
Interest received 1 1
- -----------------------------------------------------------------------------
Cash provided by operating activities 1,997 2,044
- -----------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 1,949 1,970
Interest paid 58 30
Income taxes paid 5 9
Other cash disbursements 22
- -----------------------------------------------------------------------------
Cash used in operating activities 2,034 2,009
- -----------------------------------------------------------------------------
Net cash provided by (used in) operating activities (37) 35
- -----------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment (40) (36)
Proceeds from sale of property, plant and equipment 3 1
Proceeds from sale of affiliates/operations 20
Other investing activities 1
- -----------------------------------------------------------------------------
Net cash used in investing activities (36) (15)
- -----------------------------------------------------------------------------
Financing Activities
Borrowings under lines of credit 95 50
Principal payments of long-term debt (50) (50)
Proceeds from issuance of stock 16 3
Dividends paid (27) (24)
- -----------------------------------------------------------------------------
Net cash provided by (used in) financing activities 34 (21)
- -----------------------------------------------------------------------------
Decrease in cash and cash equivalents (39) (1)
Cash and cash equivalents balance at beginning of period 63 123
- -----------------------------------------------------------------------------
Cash and cash equivalents balance at end of period $ 24 $ 122
=============================================================================
I-4
Northrop Grumman Corporation and Subsidiaries
Three months ended March 31,
Dollars in millions 1998 1997
- ------------------------------------------------------------------------------
Reconciliation of Net Income(Loss) to Net Cash
Provided by(used in) Operating Activities
Net income(loss) $ (12) $ 84
Adjustments to reconcile net income(loss) to net
cash provided(used)
Depreciation 46 49
Amortization of intangible assets 46 46
Common stock issued to employees 88 1
Loss(gain) on disposals of property, plant and equipment 2 (1)
Retiree benefits income (47) (11)
Decrease(increase) in
Accounts receivable (196) (243)
Inventoried costs (163) (97)
Prepaid expenses (9) 12
Increase(decrease) in
Progress payments 260 166
Accounts payable and accruals (23) (7)
Provisions for contract losses 12 28
Deferred income taxes 1 15
Income taxes payable 2 37
Retiree benefits (45) (47)
Other transactions 1 3
- ------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (37) $ 35
==============================================================================
The accompanying notes are an integral part of these consolidated financial statements.
I-5
Northrop Grumman Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended March 31,
Dollars in millions 1998 1997
- ------------------------------------------------------------------------
Paid-in Capital
At beginning of year $ 838 $ 784
Employee stock awards and options exercised 105 6
- ------------------------------------------------------------------------
943 790
- ------------------------------------------------------------------------
Retained Earnings
At beginning of year 1,807 1,502
Net income(loss) (12) 84
Cash dividends (27) (24)
- ------------------------------------------------------------------------
1,768 1,562
- ------------------------------------------------------------------------
Unfunded Pension Losses, Net of Taxes (22) (4)
- -----------------------------------------------------------------------
Total shareholders' equity $2,689 $2,348
=========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
I-6
Northrop Grumman Corporation and Subsidiaries
SELECTED INDUSTRY SEGMENT INFORMATION
Three months ended March 31,
Dollars in millions 1998 1997
- -------------------------------------------------------------------------------
Net Sales
Aircraft $ 970 $ 985
Electronics 900 975
Information Technology and Services 235 243
Intersegment sales (91) (85)
- -------------------------------------------------------------------------------
$ 2,014 $ 2,118
===============================================================================
Operating Profit
Aircraft $ 147 $ 134
Electronics 78 82
Information Technology and Services 23 24
- -------------------------------------------------------------------------------
Total operating profit 248 240
Adjustments to reconcile operating profit to operating margin:
Other deductions included above 1
State and local income taxes (10) (13)
General corporate expenses (32) (31)
- -------------------------------------------------------------------------------
Operating margin $ 207 $ 196
===============================================================================
Contract Acquisitions
Aircraft $ 850 $ 635
Electronics 666 1,225
Information Technology and Services 250 228
Intersegment acquisitions (87) (95)
- -------------------------------------------------------------------------------
$ 1,679 $ 1,993
===============================================================================
Funded Order Backlog
Aircraft $ 5,873 $ 6,695
Electronics 5,228 5,408
Information Technology and Services 462 496
Intersegment backlog (36) (57)
- -------------------------------------------------------------------------------
$11,527 $12,542
===============================================================================
I-7
Northrop Grumman Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared by management in accordance with the instructions to
Form 10-Q of the Securities and Exchange Commission. They do not
include all information and notes necessary for a complete presentation
of financial position, results of operations, changes in shareholders'
equity, and cash flows in conformity with generally accepted accounting
principles. They do, however, in the opinion of management, include all
adjustments (all of which were normal recurring accruals) necessary for
a fair statement of the results for the periods presented. The
financial statements should be read in conjunction with the Notes and
Independent Auditors' Report contained in the company's 1997 Annual
Report on Form 10-K.
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. Under the terms of the agreement, 1.1923 shares of Lockheed
Martin common stock would be exchanged for each share of Northrop
Grumman common stock. On February 26, 1998, shareholders of Northrop
Grumman approved the merger. Subsequently, the Department of Justice
filed suit to block the combination. A September 8, 1998, trial date
has been set, and a decision is expected by year end. The outcome
cannot be predicted at this time.
The company recorded a charge of $180 million in the first quarter
of 1998 for costs related to the proposed combination. The charge
covers vesting of restricted stock which became issuable following
shareholder approval of the merger and other costs associated with the
pending combination, such as investment banking fees, legal and
accounting fees, and costs related to responding to the Government's
request for information.
Comprehensive Income
The company has adopted Statement of Financial Accounting Standards No.
130 - Reporting Comprehensive Income. This standard establishes new standards
for the presentation and disclosure of other comprehensive income. There were
no material items in the first quarter of 1998.
Earnings per Share
Basic earnings per share are 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.
I-8
Northrop Grumman Corporation and Subsidiaries
Basic and diluted earnings per share are calculated as follows:
Earnings
Net Income (Loss)
Three months ended March 31, (Loss) Shares per Share
---------- ------- ----------
(millions) (millions)
1998
Basic EPS $ (12) 67.89 $ (.18)
====== =======
Dilutive effect of stock options
and awards 1.37
-----
Diluted EPS $ (12) 69.26 $ (.18)
====== ===== =======
1997
Basic EPS $ 84 66.58 $ 1.27
====== =======
Dilutive effect of stock options
and awards 1.12
-----
Diluted EPS $ 84 67.70 $ 1.25
===== ===== =======
I-9
Northrop Grumman Corporation and Subsidiaries
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND THE RESULTS OF ITS OPERATIONS
Sales were 5 percent lower in the first quarter of 1998 versus the first
quarter of 1997, reflecting decreases in all three business segments -
aircraft, electronics, and information technology and services.
The decline in aircraft segment sales was due to the sale last year
of the company's Grumman Allied Industries subsidiary and a reduction in
B-2 revenue, partially offset by increased Boeing jetliner shipset
deliveries and increased F/A-18E/F sales.
Electronics segment sales decreased in the first quarter of 1998 as
compared to the first quarter of 1997 due to lower volume in the
electronics systems, automation, and marine business areas, partially
offset by increased surveillance aircraft sales.
Sales by major program/business area and units delivered in the
first quarter were:
$ in millions 1998 1997
--------------------------------------------------------------------
B-2 $ 327 $ 365
Surveillance Aircraft (E-8 Joint Stars, E-2) 286 245
Boeing Jetliners 233 204
Airborne Radar 148 145
Marine 114 132
F/A-18 146 129
ECM 106 103
Space 73 86
Airspace Management 63 66
C-17 60 67
Information Technology and Services 231 241
All Other 227 335
--------------------------------------------------------------------
$2,014 $2,118
====================================================================
Units 1998 1997
--------------------------------------------------------------------
B-2 1
747 13 11
F/A-18 C/D 9 10
C-17 2 2
Operating margin includes pension income, net of related state
taxes, of $59 million in the first quarter of 1998, a $30 million
increase from the first quarter of 1997. Substantially all of the
pension income is attributable to the aircraft segment.
I-10
Northrop Grumman Corporation and Subsidiaries
The amount and rate of operating profit increased in the aircraft
segment in the first quarter of 1998 as compared with the first quarter
of 1997. The aircraft segment benefited from increased pension income as
well as the delivery of one B-2 bomber versus none in the first quarter
of 1997. These improvements were partially offset by a decrease in B-2
production sales and lower operating margin rates on Boeing jetliners.
Electronics segment operating profit in the first quarter of 1998
decreased by 5 percent on a sales decline of 8 percent, as compared with
last years first quarter. Although sales of surveillance aircraft
increased in the first quarter of 1998 compared with the first quarter of
1997, the operating margin rate declined. First quarter 1998 electronics
segment operating profit also declined in the electronics systems,
automation, and marine business areas due to lower sales volume.
Electronics segment operating margin in the first quarter of 1997 was
reduced by a $13 million pretax charge related to an increase in the cost
estimate to complete the work on the Directional Infrared Countermeasures
(DIRCM) program.
The company recorded a $180 million pretax charge ($1.70 per share
after tax) in the first quarter of 1998 for merger costs related to the
company's proposed combination with Lockheed Martin Corporation. The
charge covers vesting of restricted stock that became issuable following
the February 1998 shareholder approval of the merger as well as other
costs associated with the pending combination such as investment banking
fees, legal and accounting fees, and costs related to responding to the
Government's request for information.
Interest expense for this year's first quarter was $55 million, down
$9 million from the first quarter of 1997. The decrease resulted
principally from a lower average level of borrowings in the first quarter
of 1998 compared with the same period a year ago.
The company's effective tax rate was 36.8 percent for the first
quarter of 1998, down slightly from the 37.3 percent for the comparable
period in 1997.
During the quarter, $37 million of cash was used by operations
versus the $35 million that was generated by operations in last year's
first quarter. The decrease is primarily due to the merger related
expenses as well as an increase in working capital for Boeing jetliners
in support of increased production levels. Cash generated from operating
activities and sale of assets is expected to increase in the last half of
this year and is expected to be sufficient to finance capital
expenditures, service debt and pay dividends. The company's liquidity
and financial flexibility will continue to be provided by cash flow
generated by operating activities, supplemented by the unused borrowing
capacity available under the company's credit agreement and other short-
term credit facilities.
I-11
Northrop Grumman Corporation and Subsidiaries
Forward-Looking Information
Certain statements and assumptions in Management's Discussion and
Analysis contain or are based on "forward-looking" information (as
defined in the Private Securities Litigation and Reform Act of 1995) that
involves risk and uncertainties, including statements and assumptions
with respect to future revenues, program performance and cash flows, the
outcome of contingencies including litigation and environmental
remediation, and 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 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.
I-12
Northrop Grumman Corporation and Subsidiaries
Part II OTHER INFORMATION
Item 1. Legal Proceedings
U.S. v. Lockheed Martin Corporation and Northrop Grumman Corporation
On March 23, 1998, the United States, acting through the Department of
Justice, filed a civil action in the United States District Court for the
District of Columbia against Lockheed Martin and the company requesting
that the acquisition of the company by Lockheed Martin be adjudged to
violate Section 7 of the Clayton Act and that Lockheed Martin and the
company be permanently enjoined and restrained from carrying out the
Agreement and Plan of Merger dated July 2, 1997, or from entering into or
carrying out any agreement, understanding or plan the effect of which
would be to combine the business or assets of Lockheed Martin and the
company. The United States is also seeking costs of the action.
Lockheed Martin and the company filed an answer to the complaint on April
10, 1998. The Court has set the matter for trial September 8, 1998. The
judge advised the parties that he would issue a decision by year end.
Item 4. Submission of Matters to a ote of Security Holders
A special meeting of stockholders of Northrop Grumman was held on
February 26, 1998. The results of the vote were reported in the Annual
Report on Form 10-K filed on March 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(a) Form of Ownership Retention Agreement and
Amendment No. 1 by letter dated April 8, 1998
10(b) Master Escrow Agreement and Master Escrow
Agreement Clarification dated April 8, 1998
27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K was filed with Securities and Exchange
Commission on January 21, 1998 and was reported in the Annual Report
on Form 10-K filed on March 30, 1998.
II-1
Northrop Grumman Corporation and Subsidiaries
SIGNATURES
Pursuant to the requirements 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.
Northrop Grumman Corporation (Registrant)
Date: April 24, 1998 by/s/N. F. Gibbs
Nelson F. Gibbs
Corporate Vice President and Controller
Date: April 24, 1998 by/s/R. R. Molleur
Richard R. Molleur
Corporate Vice President and General Counsel
II-2
Ownership Retention Agreement
The undersigned elected officer (the "Officer") of Northrop
Grumman Corporation (the "Company"), and the Company, by
executing and delivering this instrument, and intending to be
legally bound, agree to the following:
I. Escrow of the Shares and Cash Payment.
1.01. The amount of federal, state and local income and
social security, medicare and any other applicable employment tax
with respect to the vesting of Restricted Performance Stock
Rights that occurred as a result of the stockholder vote on
February 26, 1998 approving the merger of the Company with a
wholly owned subsidiary of Lockheed Martin Corporation pursuant
to that certain Agreement and Plan of Merger dated as of July 2,
1997, as amended to the date hereof, shall be deemed to equal 50%
of the number of shares that vested on the date of such
stockholder vote multiplied by $138.25 per share. The amount, if
any, of such deemed tax in excess of the amount heretofore
withheld by the Company with respect to such shares shall be paid
as soon as practicable to the Officer in cash in lieu of an
appropriate number of such shares valued at $138.25 per share.
Shares equal in value (at $138.25 per share) to the amount of the
tax withholding and the in-lieu cash payment shall not be issued
and the Officer shall have no rights therein or thereto.
1.02. The shares of Common Stock to which the Officer is
entitled (net of (i) tax withholding and (ii) the in-lieu cash
payment specified in Section 1.01 hereof) are referred to herein
as the "Shares." All of the Shares shall remain the property of
the Officer but shall be subject to the restrictions contained in
this Agreement. Annex A sets forth the number of Shares subject
to this Agreement.
1.03. The Shares shall be issued in the name of the Officer
and delivered to Chase Manhattan Bank and Trust Company, National
Association, as Escrow Agent, pursuant to the terms of that
certain Master Escrow Agreement, of even date herewith, by and
among the Company, the Officer and certain other employees of the
Company, and the Escrow Agent, the form of which is attached
hereto as Annex B (the "Master Escrow Agreement"), and shall be
held by the Escrow Agent in accordance with the terms of the
Master Escrow Agreement. In lieu of delivering all of the Shares
to the Escrow Agent, the Officer may elect to substitute other
owned shares of Common Stock for an equal number (all or part) of
the Shares, and such substituted shares of Common Stock shall
thereupon become "Shares" for purposes of this Agreement in lieu
of the shares for which they were substituted. During the
pendency of this Agreement, the Officer may, in accordance with
the provisions of the Master Escrow Agreement, elect to deliver
other owned shares of Common Stock in exchange for a like number
of Shares previously contributed hereunder, and such shares so
exchanged shall be "Shares" for purposes of this Agreement. The
restrictions imposed by this Agreement shall apply only to the
Shares, and only so long as the Shares are held in escrow.
1
1.04. If, prior to March 1, 2000 (the "Payment Date"), the
Officer neither voluntarily terminates nor is terminated for
Cause as an employee of the Company, then on or before the tenth
business day after the Payment Date, the Company shall instruct
the Escrow Agent in writing to release and distribute to the
Officer the certificate representing the Shares. If, prior to
the Payment Date, the Officer dies, Retires, is terminated for a
reason other than Cause as an employee of the Company, or first
becomes Disabled, and has not previously voluntarily terminated
his or her employment with the Company or been terminated for
Cause, then on or before the twentieth business day after the
date of such death, Retirement, termination or Disability, the
Company shall instruct the Escrow Agent in writing to release and
distribute to the Officer (or his guardian or estate, as
appropriate) the certificate representing the Shares. If, prior
to the Payment Date, the Officer voluntarily terminates, other
than by Retirement, or is terminated for Cause, then the Officer
shall forfeit to the Company all of his right, title and interest
in and to the Shares and the Company is hereby empowered, in such
event, to instruct the Escrow Agent in writing to release and
distribute to the Company the certificate representing the
Shares.
1.05. The certificates representing the Shares shall have
the following legend conspicuously imprinted on the face thereof:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO AN AGREEMENT BETWEEN THE OWNER OF SUCH SHARES AND
NORTHROP GRUMMAN CORPORATION AND IN CERTAIN EVENTS SPECIFIED
IN SUCH AGREEMENT MAY BE SUBJECT TO FORFEITURE. A COPY OF
THE AGREEMENT MAY BE INSPECTED AT THE OFFICES OF NORTHROP
GRUMMAN CORPORATION.
1.06. The Shares held in escrow pursuant hereto and
pursuant to the Master Escrow Agreement may not be assigned,
alienated, sold, pledged, hypothecated, or otherwise transferred,
disposed of or encumbered, other than by will or the laws of
descent and distribution or pursuant to a qualified domestic
relations order (as defined by the Internal Revenue Code).
1.07. The Company shall promptly pay to the Officer as
owner of the Shares all dividends and distributions with respect
to the Shares as the same shall have been declared and paid by
the Company with respect to the Common Stock, provided that the
Officer shall have no right to receive any such payment if, on or
prior to the date of such payment, the Officer shall have
forfeited all his right, title and interest in and to the Shares
pursuant to the terms of this Agreement.
1.8. As owner of the Shares, the Officer shall retain all
voting rights with respect to the Shares provided to holders of
shares of Common Stock under the charter or bylaws of the Company
or the laws of the State of Delaware, provided that the Officer
shall have no such voting rights from and after the time, if any,
at which he forfeits all his right, title and interest in and to
the Shares pursuant to the terms of this Agreement.
2
1.09. The Compensation and Management Development Committee
of the Board of Directors of the Company may make such waivers
hereunder as such Committee in its sole and absolute discretion
deems appropriate.
II. Lapse of Restrictions.
2.01. All restrictions on the Shares created pursuant to
this Agreement shall lapse and the Company shall deliver written
notice to the Escrow Agent directing that the Shares be
distributed to the Officer, if the Officer is employed by the
Company at the time of the occurrence of a Change in Control that
occurs prior to March 1, 2000.
III. Payment for Taxes.
3.01. If, after a final determination for federal, state or
local tax purposes, the deposit of the Shares into the escrow
created under the Master Escrow Agreement or the subjection of
the Shares to the restrictions contained in this Agreement
results in a tax liability to the Officer in excess of what the
Officer's tax liability would have been had the Shares not been
deposited into the escrow or been made subject to the
restrictions contained in this Agreement, then the Company shall
make a payment in cash to the Officer in an amount equal to any
such excess tax liability grossed up to compensate the Officer
for any tax liability incurred with respect to any payment made
under this Section 3.01.
IV. California Law.
4.01. This Agreement shall be construed in accordance with
and governed by the laws of the State of California, without
giving effect to its conflicts of laws or choice of laws rules.
V. Definitions.
5.1. For all purposes of this Agreement, the following terms
shall have the meanings assigned thereto in this Section 5.01:
"Cause" means the occurrence of either or both of the
following: (i) the Officer's conviction for committing an act of
fraud, embezzlement, theft, or other act constituting a felony;
or (ii) the willful engaging by the Officer in gross misconduct
materially and demonstrably injurious to the Company. However,
no act, or failure to act, on the Officer's part shall be
considered "willful" unless done, or omitted to be done, by the
Officer not in good faith and without reasonable belief that his
action or omission was in the best interest of the Company.
A "Change in Control" of the Company shall be deemed to
occur if and as of the first day that any one or more of the
following conditions are satisfied:
3
(i) Any Person (other than those Persons in control of the
Company as of November 15, 1995, or other than a trustee or
fiduciary holding securities under an employee benefit plan of
the Company) becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing fifteen
percent (15%) or more of the combined voting power of the
Company's then outstanding securities and for purposes of this
section, "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended, and as used in Section 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) and for purposes
of this subsection (i) "person or "group" shall not include
underwriters acquiring newly-issued voting shares (or securities
convertible into voting shares) directly from the Company with a
view to distribution; or
(ii) during any period of two (2) consecutive years (not
including any period prior to November 15, 1995), individuals who
at the beginning of such period constitute the Board (and any new
Director, whose election by the Company's stockholders was
approved by a vote of a least two-thirds (2/3) of the Directors
then still in office who either were Directors at the beginning
of the period or whose election or nomination for election was so
approved), cease for any reason to constitute a majority thereof;
or
(iii) a merger, consolidation, or reorganization of
the Company with or involving any other entity ("Merger")
becomes effective upon the filing of all applicable legal
documents with the appropriate governmental authorities, or
an agreement for the sale or disposition of all or
substantially all of the Company's assets in one or a series
of related transactions or a plan of complete liquidation of
the Company ("Asset Sale") is consummated; provided that the
effectiveness of a Merger shall be deemed not to constitute
a Change in Control if it results in the voting securities
of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving
entity) more than seventy-five percent (75%) of the combined
voting power of the voting securities of the Company (or
such surviving entity) outstanding immediately after such
Merger; and provided, further, that if (A) a Merger becomes
effective that constitutes a Change in Control, or (B) an
Asset Sale is consummated, then the Officer (unless the
Officer has forfeited all his right, title and interest in
and to the Shares pursuant to the last sentence of Section
1.04 prior to the Change in Control) shall be deemed for all
purposes of this Agreement to be employed by the Company at
the time of the occurrence of such Change in Control if the
Officer was employed by the Company on the date of the
shareholder vote approving such Merger or Asset Sale.
"Disabled" and its correlatives mean total and permanent
disability as defined in the rules of the Social Security
Administration of the United States.
"employee of the Company" and its correlatives means
employment by the Company or any of its subsidiaries.
"Retire," "Retirement" and their correlatives mean any
retirement on or after March 1, 1999 from active service with the
Company with immediate receipt of a pension benefit under a
Company retirement or pension plan or, for Company elements not
covered by such plans, termination by the Officer at or after age
55 following 10 or more consecutive years of Company service. If
the Officer retires before March 1, 1999, such retirement shall
be treated as a voluntary termination, and not as a Retirement,
for all purposes of this Agreement.
4
VI. Amendments.
No amendment or modification to this Agreement may be made
except in writing signed by the Company and the Officer.
BY SIGNING AND DELIVERING THIS AGREEMENT, THE OFFICER
EXPRESSLY AGREES THAT THE OFFICER IS A PARTY TO AND IS BOUND BY
THIS AGREEMENT AND THE MASTER ESCROW AGREEMENT.
IN WITNESS WHEREOF, the Company and the Officer have
executed this Agreement as of the ____th day of March, 1998.
NORTHROP GRUMMAN CORPORATION
BY:---------------------------
ITS:--------------------------
OFFICER
SIGNATURE:---------------------
PRINTED NAME:------------------
5
April 8, 1998
To: Elected Officers
Subject: Ownership Retention Agreement
We want to clarify one point concerning the Ownership Retention
Agreement we sent you on April 2, 1998. Some Northrop Grumman
personnel who want to elect to be covered by the Ownership
Retention Agreement have asked what happens to their escrowed
shares if they terminate their employment under the Good Reason
provision of the Special Agreements to which they are parties.
The answer is that you will get all your escrowed shares if you
terminate your employment for "Good Reason." In other words,
it will be treated just as if you had been laid off or
otherwise terminated for reasons other than Cause, and it will
not be treated as a voluntary termination by you. The
definition of "Good Reason" will be the same as set forth in
the Special Agreement to which you are a party.
To cement this understanding of your benefits into the legal
documents, this letter will serve to modify, as Amendment No.
1, the Ownership Retention Agreement we sent you. If you sign
and return the Ownership Retention Agreement and this Amendment
No. 1, your Ownership Retention Agreement will be conclusively
deemed to include a new Article VII stating that:
"Termination for Good Reason (as defined in the Company's
Special Agreement to which the Company and the Officer are
parties) by the Officer as an employee of the Company
shall be treated identically to a termination of the
Officer by the Company for reasons other than Cause, for
all purposes of this Agreement, the Master Escrow
Agreement."
We trust that this Amendment No. 1 clarifies and confirms the
extensive protections of your interests that we built into the
Ownership Retention Agreement. The undersigned, on behalf of
Northrop Grumman Corporation, has executed this Amendment No.
1, intending to be legally bound thereby.
Northrop Grumman Corporation
Kent Kresa
___________________________
Officer Name (print)
___________________________
Officer Signature
Master Escrow Agreement
This MASTER ESCROW AGREEMENT, dated as of March 25, 1998, is
entered into by and among Northrop Grumman Corporation, a
Delaware corporation (the "Company"), the persons named on
Exhibit A hereto (each an "Employee," and collectively, the
"Employees") and Chase Manhattan Bank and Trust Company, National
Association, as escrow agent.
W I T N E S S E T H:
WHEREAS, the Company and each Employee have entered into an
Ownership Retention Agreement dated as of March 25, 1998 (the
"Ownership Retention Agreements") pursuant to which the Company
has agreed to issue in the future certain shares of its common
stock to the Employee if certain conditions are met and the
Employee has agreed to place in escrow, for receipt in the future
if certain other conditions are met (the "Conditions"), certain
shares of the Company's Common Stock that Employee owns (the
"Shares"); and
WHEREAS, each Employee desires to deposit certificates
evidencing the Shares with the Escrow Agent pending the
occurrence of events that will determine whether the Conditions
are met.
NOW THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for other good and
valuable consideration, receipt of which is hereby acknowledged,
the parties hereto hereby agree as follows:
1. Appointment of Escrow Agent; Acceptance. The Company
and each Employee hereby appoints Chase Manhattan Bank and Trust
Company, National Association (the "Escrow Agent") to act as
escrow agent in accordance with the terms and provisions of this
Master Escrow Agreement, and the Escrow Agent hereby accepts such
appointment on the terms and provisions of this Master Escrow
Agreement.
2. Deposit of Certificates. The Company, on behalf of the
Employees, has deposited with the Escrow Agent certificates
representing the Shares.
3. Receipt by Escrow Agent. Escrow Agent hereby
acknowledges receipt of certificates representing the total
number of Shares specified in Exhibit A hereto.
4. Release of the Shares.
(a) The Escrow Agent will hold the certificates
representing the Shares owned by an Employee in the Escrow
Agent's possession until the first business day following the
date upon which the Escrow Agent receives notice as provided in
Section 4(b) hereof.
(b) The Company shall give notice to the Escrow Agent
as follows:
(i) If, prior to the Payment Date, an Employee
neither voluntarily terminates nor is terminated for Cause as an
employee of the Company, then on or before the tenth business day
after the Payment Date, the Company shall instruct the Escrow
Agent to release and distribute to the Employee the certificate
representing the Shares owned by the Employee;
(ii) If, prior to the Payment Date, an Employee
dies, Retires, is terminated for a reason other than Cause, or
first becomes Disabled, and has not previously voluntarily
terminated his or her employment with the Company or been
terminated for Cause, then on or before the twentieth business
day after the date of such death, Retirement, termination or
Disability, the Company shall instruct the Escrow Agent to
release and distribute to the Employee (or his guardian or
estate, as appropriate) the certificate representing the Shares
owned by the Employee;
(iii) If an Employee is employed by the Company
at the time of the occurrence of a Change in Control that occurs
prior to March 1, 2000, then on or before the tenth business day
after such occurrence, the Company shall instruct the Escrow
Agent to release and distribute to the Employee the certificate
representing the Shares owned by the Employee; or
(iv) If, prior to the Payment Date, an Employee
voluntarily terminates, other than by Retirement, or is
terminated for Cause, then the Employee shall forfeit to the
Company all of his right, title and interest in and to the Shares
and the Company is hereby empowered, in such event, to instruct
the Escrow Agent to release and distribute to the Company the
certificate representing the Shares owned by the Employee prior
to such forfeiture.
(c) Forthwith upon the receipt of the notice referred
to in Sections 4(b)(i), (ii) or (iii), the Escrow Agent shall
release and distribute to the Employee designated in such notice
(or his guardian or estate, as appropriate), the certificates
representing the Shares owned by such Employee or Employees;
forthwith upon the receipt of the notice referred to in
Section 4(b)(iv), the Escrow Agent shall release and distribute
to the Company the certificates representing the Shares owned by
the Employee prior to such forfeiture; provided in either case
that such action shall not then be enjoined, either preliminarily
or permanently, by a court of competent jurisdiction; and
provided further, that if so enjoined the Escrow Agent shall take
such action at any time thereafter when such action shall no
longer be enjoined. The Escrow Agent shall take all actions as
are specified in this Section 4(c) as promptly as practicable
following the receipt of any such notice.
(d) An Employee may give notice to the Escrow Agent
that such Employee desires to substitute a number of shares of
the Company's common stock held by the Employee (the "Input
Shares") for an equal number of shares held in escrow pursuant to
this Master Escrow Agreement (the "Output Shares"). Such notice
shall be accompanied by certificates representing the Input
Shares and a declaration of the Employee with guaranteed
signature that the Input Shares are held by the Employee free and
clear of any and all pledges, liens, encumbrances or other rights
whatsoever and are freely transferable by the Employee. Upon
receipt of such notice, such certificates and such declaration,
the Escrow Agent shall promptly give notice of such receipt to
the Company, which notice shall include a copy of each such
document. Thirty days after sending such notice to the Company,
the Escrow Agent shall release and distribute to the Employee the
certificates representing the Output Shares, unless prior to the
thirtieth day the Escrow Agent shall have received from the
Company notice that in the opinion of legal counsel to the
Company the Input Shares are not held by the Employee free and
clear of any and all pledges, liens, encumbrances or other rights
whatsoever or are not freely transferable by the Employee. If
the Escrow Agent timely receives the notice from the Company
described in the preceding sentence, the Escrow Agent shall not
release and distribute to the Employee certificates representing
the Output Shares, and the dispute shall be handled pursuant to
Section 5 hereof.
5. Settlement of Disputes. Any dispute which may arise
under this Master Escrow Agreement with respect to the rights of
any of the parties hereto in respect of the Shares or any part
thereof or the duties of the Escrow Agent hereunder shall be
settled either by mutual agreement of the parties concerned
(evidenced by appropriate instructions in writing to the Escrow
Agent, signed by the Company and each Employee who is a party to
such dispute) or by a final order, decree or judgment of a court
of competent jurisdiction (the time for appeal having expired and
no appeal having been perfected), all costs and expenses of which
shall be borne equally by the Company and such Employee or
Employees. The Escrow Agent shall be under no duty whatsoever to
institute or defend any such proceedings.
6. Concerning the Escrow Agent.
(a) The Escrow Agent shall be entitled to compensation
for its services hereunder at its usual and customary rates,
payable in advance on an annual basis upon the establishment of
the escrow with respect to all of the Shares, and the Escrow
Agent shall be reimbursed for all reasonable expenses,
disbursements and advances incurred or made by the Escrow Agent
in performance of its duties hereunder, including the fees and
disbursements of its counsel. The payment of such fees,
disbursements, expenses and advances to the Escrow Agent shall be
borne by the Company.
(b) The Escrow Agent may resign and be discharged from
its duties hereunder at any time by giving notice of such
resignation to the Company and each Employee specifying a date
not less than ten business days following the date of such notice
when such resignation shall take effect. Upon such notice, a
successor escrow agent shall be selected by the Company, such
successor escrow agent to become the Escrow Agent hereunder upon
the resignation date specified in such notice. The Escrow Agent
shall continue to serve until its successor accepts the escrow
and receives the Shares.
(c) The Escrow Agent undertakes to perform only such
duties as are specifically set forth herein and may conclusively
rely and shall be protected in acting or refraining from acting
on any written notice, instrument or signature believed by it to
be genuine and to have been signed or presented by the proper
party or parties duly authorized to do so. The Escrow Agent
shall have no responsibility for the contents of any writing
contemplated herein and may rely without any liability upon the
contents thereof. Notwithstanding anything to the contrary in
this Master Escrow Agreement, where any action is specified to be
taken by the Escrow Agent upon delivery by the Company or an
Employee (or both the Company and one or more Employees) of a
notice, certificate or instructions to the Escrow Agent, the
Escrow Agent shall not be obligated to take any action until the
appropriate party (or parties) has acted by delivering the
certificate, notice or instructions to the Escrow Agent (none of
which shall be binding upon the Escrow Agent unless in writing)
as to the action to be taken hereunder indicating in writing that
a copy of such certificate, notice or instructions has been
delivered to the other party to this Master Escrow Agreement. It
is acknowledged by the Company and each Employee that the Escrow
Agent is bound only by the terms of this Master Escrow Agreement
and the Escrow Agent may, but shall not be required to, use its
discretion with respect to any matter that is the subject of this
Master Escrow Agreement or with respect to instructions received
under this Master Escrow Agreement.
(d) The Escrow Agent shall not be liable for any
action taken or omitted to be taken by it in good faith and
believed by it to be authorized hereby or within the rights or
powers conferred upon it hereunder, nor for action taken or
omitted to be taken by it in good faith and in accordance with
the advice of counsel (which counsel may be of the Escrow Agent's
own choosing), and shall not be liable for any mistakes of fact
or errors of judgment or for any acts or omissions of any kind
unless caused by its own willful misconduct or gross negligence.
In no event shall the Escrow Agent be liable for special,
indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits) even if the Escrow
Agent has been advised of the likelihood of such loss or damage
and regardless of the form of action.
(e) The Company and each Employee hereby severally,
but not jointly, agree to indemnify and hold harmless the Escrow
Agent and its officers, employees and agents from and against any
and all costs, damages, claims, liabilities, judgments and
expenses (including reasonable attorney's fees) incurred by it in
connection with or arising out of the performance of its
obligations pursuant to this Master Escrow Agreement.
(f) Any corporation into which the Escrow Agent in its
individual capacity may be merged or converted or with which it
may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Escrow Agent in
its individual capacity shall be a party, or any corporation to
which substantially all the corporate trust business of the
Escrow Agent in its individual capacity may be transferred, shall
be the Escrow Agent under the Escrow Agent Agreement without
further act.
7. Miscellaneous.
(a) This Master Escrow Agreement shall be construed
and the rights and duties of the parties determined in accordance
with the laws of the State of California, without giving effect
to the principles of conflict of laws thereof.
(b) This Master Escrow Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their
respective successors.
(c) This Master Escrow Agreement may be executed in
any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute but one and
the same instrument.
(d) Section headings contained in this Master Escrow
Agreement have been inserted for reference purposes only, and
shall not be construed as part of this Master Escrow Agreement.
Capitalized terms not otherwise defined herein shall have the
meaning assigned such terms in the Ownership Retention
Agreements. The term "employee of the Company" and its
correlatives mean employee of the Company or any of its
subsidiaries.
(e) Any notice required or permitted to be given
hereunder shall be in writing and shall be sufficient in all
respects if delivered in person or mailed by registered,
certified or express mail, postage prepaid, as follows:
If to Company: Northrop Grumman Corporation
1840 Century Park East
Los Angeles, California 90067
Attention: Corporate Vice
President, Human Resources
If to Employees: As stated in Exhibit A hereto
If to Escrow Agent: Chase Manhattan Bank and Trust
Company, National Association
101 California Street, Suite 2725
San Francisco, California 94111
Attention: Corporate Trust Department
or at such other address as any party hereto shall have
designated by notice in writing to the other parties hereto.
IN WITNESS WHEREOF, the undersigned duly authorized
representatives of the Company and the Escrow Agent have hereunto
set their hands as of the date first above written.
NORTHROP GRUMMAN CORPORATION CHASE MANHATTAN BANK AND TRUST
COMPANY, NATIONAL ASSOCIATION
By: __________________________ By: _________________________
Name:_________________________ Name:________________________
Its: _________________________ Its:__________________________
EMPLOYEES
All employees of the Company who execute and deliver the
Ownership Retention Agreements automatically become parties to
this Master Escrow Agreement as of the date first above written,
by the express terms of the Ownership Retention Agreements.
April 8, 1998
To: Recipients of the Ownership Retention Plan
Subject: Master Escrow Agreement Clarification
In order to help make your decision with respect to the
Ownership Retention Agreement easier, Northrop Grumman agrees
to the following undertakings with respect to the Master Escrow
Agreement between it and Chase Manhattan Bank and Trust
Company, N.A. (the "Escrow Agent").
First, Northrop Grumman agrees to bear the full costs of any
indemnification of the Escrow Agent under Section 6(e) of the
Master Escrow Agreement and will indemnify and hold you
harmless from and against any such costs, damages, claims,
liabilities, judgments and expenses (including reasonable
attorney's fees) incurred by the Escrow Agent in connection
with or arising out of the performance of its obligations
pursuant to the Master Escrow Agreement.
Second, if there is a dispute between you and Northrop Grumman
over whether your Shares of Northrop Grumman Common Stock held
by the Escrow Agent are to be released to you or are to be
forfeited, and such dispute is not settled by mutual agreement
within ten (10) business days after it arises, then Northrop
Grumman agrees that you may demand that such dispute be
promptly submitted to arbitration in accordance with the then-
current Model Employment Arbitration Procedures of the American
Arbitration Association ("AAA") before a panel of three (3)
arbitrators each of whom is then currently licensed to practice
law in the state in which the arbitration is convened. The
arbitration shall be held in the city in which you are or were
last employed by Northrop Grumman in the nearest office of the
AAA. You and Northrop Grumman shall each designate one
arbitrator, and the two so selected shall select the third
arbitrator, in accordance with AAA practice. The decision of
two of the three arbitrators shall be the decision of the panel
and shall be communicated to the Escrow Agent, which shall
immediately release the Shares to the party designated by the
arbitration panel.
Northrop Grumman agrees that if you elect arbitration in the
preceding paragraph to settle a dispute under the Master Escrow
Agreement, all expenses of such arbitration, including the fees
and expenses of your legal counsel, shall be advanced and borne
by Northrop Grumman; provided, however, that if the arbitration
panel determines that you did not commence the arbitration in
good faith and had no reasonable basis therefor, you shall
repay all such advanced fees and expenses to Northrop Grumman
and shall reimburse Northrop Grumman for its reasonable fees
and expenses in connection therewith, all notwithstanding
anything to the contrary stated in Sections 5 and 6(e) of the
Master Escrow Agreement. If you elect arbitration as provided
herein, Northrop Grumman agrees that the provisions stated in
this letter are in lieu of and shall supersede anything to the
contrary in Section 5 of the Master Escrow Agreement.
I hope that these agreements and undertakings by Northrop
Grumman will make your decision easier with respect to the
Ownership Retention Agreement or, if you have already signed
and returned it, will provide you with a bit more comfort that
Northrop Grumman will act fairly and in your interests.
Sincerely,
/s/
Marv Elkin
5
3-MOS
DEC-31-1998
MAR-31-1998
24
0
1,486
83
1,424
3,006
3,105
1,778
9,742
2,543
2,836
0
0
943
1,746
9,742
2,014
2,014
1,807
1,807
171
0
55
(19)
(7)
(12)
0
0
0
(12)
(.18)
(.18)
