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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
----------------
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_] 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
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NORTHROP GRUMMAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1055798
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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:
TITLE NAME OF EACH EXCHANGE 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
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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. [X]
As of February 25, 1998, 67,448,258 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 $9,017 million.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SECTIONS AMENDED
This Report on Form 10-K/A is being filed to amend all items in Part III
(Items 10, 11, 12 and 13) of the Report on Form 10-K filed by the Registrant
on March 30, 1998, to comply with instruction G(3) of the Form 10-K, which
allows for an amendment thereto within 120 days after the end of the
Registrant's fiscal year, if a definitive proxy statement is not filed with
the Commission within such 120 day period.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
NAME AGE POSITION
---- --- --------
Kent Kresa 60 Chairman of the Board, President and Chief Executive
Officer
Jack R. Borsting 69 Director
John T. Chain, Jr. 63 Director
Jack Edwards 69 Director
Phillip Frost 61 Director
Robert A. Lutz 66 Director
Aulana L. Peters 56 Director
John E. Robson 67 Director
Richard M. Rosenberg 68 Director
John Brooks Slaughter 64 Director
Richard J. Stegemeier 70 Director
Herbert W. Anderson 58 Corporate Vice President and General Manager, Data
Systems and Services Division
Ralph D. Crosby, Jr. 50 Corporate Vice President and General Manager,
Commercial Aircraft Division
Marvin Elkin 62 Corporate Vice President and Chief Human Resources,
Communications and Administrative Officer
Nelson F. Gibbs 60 Corporate Vice President and Controller
John E. Harrison 62 Corporate Vice President and General Manager,
Electronics and Systems Integration Division
Robert W. Helm 46 Corporate Vice President, Government Relations
Charles L. Jones, Jr. 55 Corporate Vice President and Chief Strategic
Planning Advanced Development and Programs Officer
William H. Lawler 57 Corporate Vice President and General Manager,
Military Aircraft Systems Division
Richard R. Molleur 65 Corporate Vice President and General Counsel
Albert F. Myers 52 Corporate Vice President and Treasurer
James G. Roche 58 Corporate Vice President and General Manger,
Electronic Sensors and Systems Division
Richard B. Waugh, Jr. 54 Corporate Vice President and Chief Financial Officer
Before joining the Company, KENT KRESA was associated with the Lincoln
Laboratories of M.I.T. and the Defense Advanced Research Projects Agency. In
1975, he joined the Company as Vice President and Manager of the Company's
Research and Technology Center. He became General Manager of the Ventura
Division in 1976, Group Vice President of the Aircraft Group in 1982 and
Senior Vice President for Technology and Development in 1986. Mr. Kresa was
elected President and Chief Operating Officer of the Company in 1987. He was
named Chief Executive Officer in 1989 and Chairman of the Board in 1990. Mr.
Kresa is a member of the National Academy of Engineering and is past Chairman
of the Board of Governors of the Aerospace Industries Association. He is also
a Fellow of the American Institute of Aeronautics and Astronautics. He serves
on the Board of Directors of the W.M. Keck Foundation and on the Board of
Trustees of the California Institute of Technology, and serves as a director
of Chrysler Corporation, Atlantic Richfield Company, the Los Angeles World
Affairs Council, the John Tracy Clinic and the Board of Governors of the Los
Angeles Music Center.
DR. JACK R. BORSTING was at the Naval Postgraduate School in Monterey,
California from 1959 to 1980. During his tenure at Monterey, he was professor
of Operations Research, Chairman of the Department of Operations Research and
Administration Science, and Provost and Academic Dean. Dr. Borsting was
Assistant
2
Secretary of Defense (Comptroller) from 1980 to 1983 and Dean of the School of
Business at the University of Miami from 1983 to 1988. From 1988 to 1994, he
was the Robert R. Dockson professor and Dean of the School of Business
Administration at the University of Southern California, Los Angeles. He is
past president of both the Operations Research Society of America and the
Military Operations Research Society. He is currently Chairman of the Board of
Trustees of the Orthopaedic Hospital Foundation of Los Angeles and serves as a
director of Whitman Education Group, TRO Learning, Inc. and Bristol Retail
Systems. He is also a trustee of the Rio Hondo Foundation.
During his military career, GENERAL JOHN T. CHAIN, JR. held a number of Air
Force commands. In 1978, he became military assistant to the Secretary of the
Air Force. In 1984, he became the Director of Politico-Military Affairs,
Department of State. General Chain has been Chief of Staff for Supreme
Headquarters Allied Powers Europe, and Commander in Chief, Strategic Air
Command, the position from which he retired in February 1991. In March 1991,
he became Executive Vice President for Burlington Northern Railroad, serving
in that capacity until February 1996. In December 1996, he assumed the
position of President of Quarterdeck Equity Partners, Inc. He is a director of
RJR Nabisco, Inc., Thomas Group, Inc. and Nabisco, Inc.
JACK EDWARDS was elected in 1964 to the U.S. House of Representatives and
served in Congress for twenty years, representing the First District of
Alabama. During his tenure in the House, Mr. Edwards served on the
Appropriations Committee for sixteen years, including ten years as Senior
Republican on the Defense Subcommittee and sixteen years on the Transportation
Subcommittee. He also served on the Banking, Finance and Urban Affairs
Committee. He retired from Congress in January 1985 and became a member of his
current law firm, Hand Arendall, L.L.C. He is a director of The Southern
Company, Holnam Inc. and QMS, Inc. Mr. Edwards is also President Pro Tempore
of the Board of Trustees of the University of Alabama System.
DR. PHILLIP FROST has served as Chairman of the Board of Directors and Chief
Executive Officer of IVAX Corporation since 1987. He was the Chairman of the
Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami
Beach, Florida from 1972 to 1990. Dr. Frost was Chairman of the Board of
Directors of Key Pharmaceuticals, Inc. from 1972 to 1986. He is Chairman of
Whitman Education Group, and is Vice Chairman of the Board of Directors of
North American Vaccine, Inc. and Continucare Corporation. He is also a Vice
Chairman of the University of Miami and a member of the Board of Governors of
the American Stock Exchange.
ROBERT A. LUTZ joined Chrysler Corporation in 1986 as Executive Vice
President of Chrysler Motors Corporation and was elected a director of
Chrysler Corporation that same year. He was elected President in 1991 and Vice
Chairman in 1996. Prior to joining Chrysler Corporation, Mr. Lutz held senior
positions with Ford Motor Company, General Motors Corporation Europe and
Bavarian Motor Werke. He is an executive director of the National Association
of Manufacturers and is a member of the National Advisory Council of the
University of Michigan School of Engineering, the Board of Trustees of the
U.S. Marine Corps University Foundation and the Advisory Board of the
University of California-Berkeley, Haas School of Business. Mr. Lutz is also a
director of ASCOM Holdings, A.G. and Silicon Graphics, Inc.
AULANA L. PETERS joined the law firm of Gibson, Dunn & Crutcher in 1973. In
1980, she was named a partner in the firm and continued in the practice of law
until 1984 when she accepted an appointment as Commissioner of the Securities
and Exchange Commission. In 1988, after serving four years as a Commissioner,
she returned to Gibson, Dunn & Crutcher. Ms. Peters is a director of Callaway
Golf Company, Minnesota Mining and Manufacturing Company, Mobil Corporation
and Merrill Lynch & Co., Inc. She is also a member of the Legal Advisory Board
of the National Association of Securities Dealers.
From 1989 to 1993, JOHN E. ROBSON served as Deputy Secretary of the United
States Treasury. He was Dean and Professor of Management at the Emory
University School of Business Administration from 1986 to 1989 and President
and Chief Executive Officer and Executive Vice President and Chief Operating
Officer of G.D. Searle & Co., a pharmaceutical company, from 1977 to 1986.
Previously, he held government posts as Chairman of the U.S. Civil Aeronautics
Board, regulator of the airline industry and Under Secretary of the
3
Department of Transportation, and engaged in the private practice of law as a
partner of Sidley and Austin. Mr. Robson earned his B.A. from Yale University
and his J.D. from Harvard Law School. Mr. Robson is a director of Monsanto
Company and Security Capital Industrial Trust. He is also a Distinguished
Visiting Fellow of the Hoover Institution at Stanford University, a Visiting
Fellow at the Heritage Foundation and a Trustee of St. John's College.
RICHARD M. ROSENBERG was the Chairman of the Board and Chief Executive
Officer of BankAmerica Corporation ("BAC") and Bank of America ("BoA") from
1990 to 1996. He had served as President since February 1990 and as Vice
Chairman of the Board and a director of BAC and the BoA since 1987. Before
joining BAC, Mr. Rosenberg served as President and Chief Operating Officer of
Seafirst Corporation and Seattle-First National Bank, which he joined in 1986.
Mr. Rosenberg is a retired Commander in the U.S. Navy Reserve, a director of
Airborne Express Corporation, SBC Communications, Potlatch Corporation and
BankAmerica Corporation and a member of the Board of Trustees of the
California Institute of Technology.
DR. JOHN BROOKS SLAUGHTER earned his B.S.E.E. from Kansas State University,
an M.S. in Engineering from the University of California at Los Angeles and a
Ph.D. in Engineering Sciences from the University of California at San Diego.
He began his career as an electronics engineer with General Dynamics Convair
in San Diego in 1956. He joined the U.S. Navy Electronics Laboratory in San
Diego in 1960. In 1975, he became Director of the Applied Physics Laboratory
of the University of Washington. In 1977, he was appointed Assistant Director
for Astronomics, Atmospherics, Earth and Ocean Sciences at the National
Science Foundation. From 1979 to 1980, he served as Academic Vice President
and Provost of Washington State University. In 1980, he returned to the
National Science Foundation as its Director and served in that capacity until
1982 when he became Chancellor of the University of Maryland, College Park. In
1988, Dr. Slaughter became President of Occidental College in Los Angeles. He
is a member of the National Academy of Engineering, a fellow of the American
Academy of Arts and Sciences and serves as a director of Atlantic Richfield
Company, Avery Dennison Corporation, Solutia, Inc. and International Business
Machines Corporation.
RICHARD J. STEGEMEIER joined Union Oil Company of California, the principal
operating subsidiary of Unocal Corporation ("Unocal"), in 1951. Mr. Stegemeier
was Chairman of the Board for Unocal from April 1989 to May 1995 and was Chief
Executive Officer from 1988 to 1994. From 1985 to 1992, he was President and,
from 1985 to 1988, he was Chief Operating Officer of Unocal. Mr. Stegemeier is
a member of the National Academy of Engineering and a director of Foundation
Health Systems, Inc., Halliburton Company, Pacific Enterprises, Wells Fargo
Bank, N.A. and Montgomery Watson, Inc.
The description required by this item regarding the business experience in
the past five years of executive officers of the Company is set forth under
the heading "Executive Officers of the Registrant" in Part I of this report,
which information is incorporated herein by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission ("SEC") and the New York Stock Exchange.
The SEC requires officers, directors and greater than ten percent beneficial
owners to furnish the Company with copies of all Forms 3, 4 and 5 they file.
The Company believes that its officers, directors and greater than ten
percent beneficial owners complied with all of their applicable filing
requirements for 1997 transactions. This is based on the Company's review of
copies of Forms 3, 4 and 5 it has received and written representations from
certain reporting persons that they were not required to file a Form 5.
4
ITEM 11. EXECUTIVE COMPENSATION
The table below shows the annual and long-term compensation for services in
all capacities to the Company for the years ended December 31, 1997, 1996 and
1995 of the Chief Executive Officer ("CEO") and the other four most highly
compensated executive officers ("Named Executive Officers") at December 31,
1997:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------- ---------------------------- ----------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND COMPENSATION STOCK OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($)(5) BONUS($) ($) AWARD(S)($)(1) SARS(#) ($)(2) ($)(3)
- ------------------ ---- ------------ --------- ------------ -------------- ---------- ------- ------------
KENT KRESA(4) 1997 889,167 1,711,125 66,308(6) 6,400
Chairman of the Board, 1996 835,000 1,200,000 58,544(7) 45,000 6,339
President and Chief
Executive Officer 1995 730,000 1,000,000 42,000 480,000 5,625
RICHARD B. WAUGH, JR 1997 370,833 530,000 6,400
Corporate Vice President 1996 338,333 345,000 13,000 6,000
and Chief Financial
Officer 1995 275,000 350,000 10,000 148,400 6,000
RICHARD R. MOLLEUR 1997 334,167 490,000 6,000
Corporate Vice President 1996 302,500 275,500 11,000 5,625
and General Counsel 1995 288,333 330,000 10,000 6,000
JAMES G. ROCHE 1997 358,333 450,000 6,400
Corporate Vice President 1996 310,417 320,000 674,384(8) 315,625 12,500 6,000
and General Manager, 1995 243,333 330,000 10,000 116,870 6,000
Electronic Sensors and
Systems Divisions
RALPH D. CROSBY, JR. 1997 316,666 385,000 6,400
Corporate Vice President 1996 280,000 295,000 189,375 12,500 6,000
and General Manager,
Commercial Aircraft
Division 1995 235,000 233,000 10,000 6,000
- -------
(1) Restricted stock rights ("RSRs") generally provide for the issuance of
unrestricted Common Stock in yearly increments equal to 20% of the total
grant, commencing within one year of the grant date. The entire RSR grant
is therefore issued within five (5) years from the date of grant.
Restricted shares or rights held by Named Executive Officers, valued at
December 31, 1997, were: K. Kresa, 3,750 shares at $431,250; J. Roche,
4,000 shares at $460,000; and R. Crosby, 2,400 shares at $276,000. Upon
the Merger Vote (as defined below), (a) all Stock Options (as defined
below), under the Stock Plans (as defined below), vested and became fully
exercisable; (b) the restricted performance stock rights ("RPSRs") under
the Stock Plans vested and became payable in shares of Common Stock, which
payment is calculated based upon attainment of certain stock price
performance targets; and (c) the RSRs and restricted award shares ("RASs")
under the Stock Plans vested and became distributable.
(2) Awards granted pursuant to the Transition Project Incentive Plan whose
performance period ended December 31, 1995.
(3) "All Other Compensation" consists of Company contributions to the Northrop
Grumman Savings and Investment Plan for the Named Executive Officers.
(4) Annual Compensation in excess of $1,000,000 attributable to 1997 that
would be disallowed for tax deduction under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), will be deferred in
accordance with the Company's Executive Deferred Compensation Plan, which
provides for interest on the deferred amount and payment in installments
or lump sum at the election of the participant.
(5) The amounts listed in this column do not include amounts paid for vacation
hours accrued but not used for the following individuals in the following
years: Mr. Waugh: $10,096 in 1997 and $30,078 in 1996; Mr. Molleur: $4,692
in 1997, $5,865 in 1996 and $22,697 in 1995; Mr. Roche: $19,903 in 1997,
$33,497 in 1996 and $14,135 in 1995; and Mr. Crosby: $3,692 in 1997 and
$1,615 in 1996.
(6) Amount includes $19,872 for car allowance.
(7) Amount includes $14,953 for premium amounts paid on behalf of Mr. Kresa
for life, accidental death and dismemberment, medical, dental and long-
term disability insurance.
(8) Amount includes $352,172 in relocation expenses incurred by Dr. Roche in
his transfer to the Electronics Sensors and Systems Division and $291,387
constituting reimbursement for payment of taxes related to those expenses.
5
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT FY-END($)
ACQUIRED ON VALUE OPTIONS AT FY-END(#) EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE* UNEXERCISABLE* (1)
- ---- ------------ ------------ -------------------------- --------------------
KENT KRESA 0 0 556,300/105,100 52,593,650/5,501,050
RICHARD B. WAUGH, JR. 0 0 30,900/29,500 2,521,675/1,553,250
RICHARD R. MOLLEUR 0 0 44,000/26,000 3,692,500/1,372,625
JAMES G. ROCHE 0 0 22,200/27,500 1,739,275/1,424,375
RALPH D. CROSBY, JR. 0 0 16,830/25,850 1,331,710/1,293,612
- --------
(1) Based on the market value at December 31, 1997 of $115.
* By virtue of the Merger Vote (as defined below), all Stock Options (as
defined below) under the 1993 Stock Plan and 1987 Stock Plan vested and
became fully exercisable.
PENSION PLANS
For purposes of illustration, the following table shows the amount of annual
retirement benefits that would be accrued at age 65 under the Northrop Grumman
Pension Plan (the "Pension Plan"), as supplemented by the Northrop Corporation
ERISA Supplemental Plan I ("ERISA 1") and the ERISA Supplemental Program 2
("ERISA 2") (collectively, the "Supplemental Retirement Plans").
ANNUAL
AVERAGE
COMPENSATION
(HIGHEST 3 YEARS OF BENEFIT SERVICE
YEARS OUT OF --------------------------------------------------------------
LAST 10) 5 10 15 20 25 30 35
- ------------ -------- -------- -------- -------- -------- -------- --------
$ 100,000 $ 8,300 $ 16,700 $ 25,000 $ 33,300 $ 41,700 $ 50,000 $ 50,000
150,000 12,500 25,000 37,500 50,000 62,500 75,000 75,000
200,000 16,700 33,300 50,000 66,700 83,300 100,000 100,000
250,000 20,800 41,700 62,500 83,300 104,200 125,000 125,000
300,000 25,000 50,000 75,000 100,000 125,000 150,000 150,000
400,000 33,300 66,700 100,000 133,300 166,700 200,000 200,000
500,000 41,700 83,300 125,000 166,700 208,300 250,000 250,000
600,000 50,000 100,000 150,000 200,000 250,000 300,000 300,000
1,000,000 83,300 166,700 250,000 333,300 416,700 500,000 500,000
1,400,000 116,700 233,300 350,000 466,700 583,300 700,000 700,000
1,800,000 150,000 300,000 450,000 600,000 750,000 900,000 900,000
Compensation covered by the plans for executive officers is substantially
equivalent to salary and bonuses as reflected in the Summary Compensation
Table. Benefit Service earned after January 1, 1995 in excess of 30 years will
not be taken into account for accrual of retirement benefits. Benefits payable
under the Supplemental Retirement Plans have been secured through the
establishment of two grantor trusts. The credited years of service under the
Pension Plan and Supplemental Retirement Plans of the five individuals named
in the Summary Compensation Table are as follows: Mr. Kresa, 23 years; Mr.
Waugh, 19 years; Mr. Molleur, 7 years; Dr. Roche, 14 years; and Mr. Crosby, 17
years. Benefits are calculated on a straight life annuity basis at selected
compensation levels and years of service reflected in the table above. The
listed benefit amounts are not subject to any reduction for Social Security
benefits or other offset amounts.
The Company maintains a Supplemental Retirement Income Program for Senior
Executives ("SRI"), under which certain employees are designated by the Board
of Directors to receive benefits in lieu of benefits otherwise payable under
the Pension Plan and the Supplemental Retirement Plans. The amount of the
supplemental benefit under the SRI is equal to the greater of (1) the
participant's benefit under the Pension Plan calculated without regard to the
limits imposed under Sections 415 and 401(a)(17) of the Code, or (2) a fixed
percentage of the participant's final average salary (which term includes
bonus and is based on the highest 3 years out of the last
6
5) equal to 30% at age 55, increasing 4% for each year up to and including age
60, and increasing 2% for each year beyond age 60 to 65, in each case offset
by the benefit allowable under the Pension Plan. Mr. Kresa, who is eligible to
receive an annual benefit (estimated to be $1,566,675 payable at age 65,
assuming continued employment and based upon estimated levels of final average
salary) under SRI, is the only Named Executive Officer currently participating
in the SRI. SRI eligibility, in addition to designation by the Board of
Directors, requires the attainment of age 55 and 10 years of vesting service.
The vesting service requirement may be waived by the CEO.
On July 2, 1997, the Northrop Grumman Board adopted the Northrop Grumman
Executive Retirement Plan (the "SERP"), which had been under consideration
since 1995. The SERP is applicable to elected officers who report directly to
the CEO (which group currently consists of ten of the fourteen elected
executive officers of Northrop Grumman). The SERP provides to each participant
a pension accrual of 1.667% of final average pay for each year or portion
thereof that the participant has served as an elected officer reporting to the
CEO. This provides a pension accrual to the elected officer for the period
that he has served as such, in addition to regular pension benefits payable
from Northrop Grumman's tax qualified and supplemental retirement plans on the
basis of all creditable years of service. Assuming that the current group of
SERP participants were to retire from Northrop Grumman as of March 31, 1998
(or in the case of Richard B. Waugh, Jr., were to terminate employment as of
March 31, 1998 and commence benefits as of September 1, 1998, the earliest
date at which benefits could commence) and elected a fifty percent joint and
survivor retirement annuity, the amount of annual retirement benefits for the
named executive officers would consist of the following approximate amounts:
Richard B. Waugh, Jr. ($27,963, starting September 1, 1998); Richard R.
Molleur ($70,995); James G. Roche ($48,937); and Ralph D. Crosby, Jr. ($16,012
starting October 1, 2002). In addition, if the other six elected executive
officers who participate in the SERP were to retire as of March 31, 1998 or
were to terminate employment March 31, 1998 and commence benefits at their
earliest retirement date, and elected a fifty percent joint and survivor
retirement annuity, the highest amount of annual retirement benefits from the
SERP for such other six elected executive officers, in the aggregate, would be
$169,656.
CHANGE IN CONTROL ARRANGEMENTS
Special Agreements. In August 1996, the Company entered into special
severance agreements (the "Special Agreements") with its executive officers,
including Messrs. Kresa, Waugh, Molleur, Roche and Crosby. The purpose of the
Special Agreements is to encourage these key executives to continue to carry
out their duties in the event of the possibility of a change in control of the
Company.
Under the Special Agreements, a "Change in Control," inter alia, is deemed
to occur when the stockholders approve a merger of the Company and the Company
is not the surviving corporation or the Company's stockholders do not own more
than 75% of the voting stock of the surviving corporation. The February 26,
1998 vote in favor of the proposed merger (the "Merger") with Lockheed Martin
Corporation (the "Merger Vote") constituted a "Change in Control" for purposes
of the Special Agreements.
Although the Merger Vote constituted a "Change in Control" under the Special
Agreements, executives are generally entitled to certain benefits under the
Special Agreements only upon termination of the executive's employment by
Northrop Grumman for any reason other than "Cause" (as defined below) or by
the executive for "Good Reason" (as defined below) within two years following
a "Change in Control." Severance benefits consist of : (1) an amount equal to
three times the executive's highest annual base salary in effect at any time
up to and including the effective date of termination; (ii) an amount equal to
three times the greater of (a) the executive's average annual bonus for the
three full fiscal years prior to the effective date of termination, or (b) the
executive's target annual bonus established for the bonus plan year during
which the executive's termination occurs; (iii) an amount equal to the
executive's unpaid base salary and accrued vacation pay through the effective
date of termination, together with a pro rata portion of the executive's
target bonus for the bonus plan year during which termination occurs. (iv)
continuation for thirty-six months following the effective date of termination
of all benefits pursuant to all welfare benefit plans under which the
executive or his family is eligible to receive benefits as of the effective
date of the "Change in Control," and further continuation of medical
7
benefits for the lives of the executive and spouse; (v) a lump sum cash
payment representing the present value of benefits accrued under Northrop
Grumman's qualified defined benefit pension plan and supplemental retirement
plans (calculated as though the executive's employment had continued for three
years) offset by the actuarial present value equivalent of benefits payable to
the executive from Northrop Grumman's qualified defined benefit pension plan
accrued through the effective date of termination; and (vi) a lump sum cash
payment equal to the entire balance of the executive's deferred compensation,
if any, together with any interest thereon. The Special Agreements define
"Good Reason" to include the assignment of the executive to duties materially
inconsistent with the executive's authorities, duties, responsibilities and
status (including titles and reporting requirements) as an officer of Northrop
Grumman; a reduction of the executive's base salary as in effect on the date
of the agreement; a significant reduction of the executive's aggregate
incentive opportunities under the Northrop Grumman short and/or long term
incentive programs as such opportunities exist on the date of the agreement or
as increased thereafter; the failure to maintain the executive's relative
level of coverage and accruals under the Northrop Grumman employee benefit
and/or retirement plans, policies, practices or arrangements in which the
executive participates as of the date of the agreement; the failure of
Northrop Grumman to obtain a satisfactory agreement from any successor to
assume and agree to perform Northrop Grumman obligations in under the
agreement; and any purported termination of the executive's employment with
Northrop Grumman that is not effected pursuant to the procedures set forth in
the agreement. "Cause" is defined in the Special Agreements as (i) the
executive's conviction for fraud, embezzlement, theft or another felony, or
(ii) the willful engaging by the executive in gross misconduct materially and
demonstrably injurious to Northrop Grumman; provided that, no act or failure
to act on the executive's part can be considered willful unless done or
omitted to be done by that executive not in good faith and without reasonable
belief that the act or omission was in the best interest of Northrop Grumman.
The Special Agreements also provide that if, following a "Change in Control,"
excise taxes under Section 4999 of the Code apply to payments made under the
Special Agreements or other plans or agreements, the executive will be
entitled to receive an additional payment (net of income, Medicare and excise
taxes) to compensate the executive for any excise tax imposed.
Long-Term Incentive Stock Plans. The 1993 Stock Plan and the 1987 Stock Plan
(collectively, the "Stock Plans"), permit grants to selected employees of the
Company consisting of stock options ("Stock Options"), RPSRs, RSRs and RASs. A
Stock Option granted under the Stock Plans is a right to purchase a number of
shares of Common Stock for a specified period of time at a price per share not
less than the fair market value on the date of grant. An RPSR is a right to
receive a number of shares of Common Stock on a specified future date
conditioned upon continued employment and Northrop Grumman's achievement of
specified performance in relation to a list of peer companies. RSRs are the
right to receive a specified number of shares of Common Stock contingent upon
continued employment with the Company and other terms set forth in the Stock
Plans. RASs are restricted shares of Common Stock granted under the 1987 Stock
Plan.
Under the Stock Plans, a "Change in Control" has the same definition as used
in the Special Agreements. Consequently, the Merger Vote constituted a "Change
in Control" for purposes of the Stock Plans, and, upon the Merger Vote, (a)
all Stock Options under the Stock Plans vested and became fully exercisable;
(b) the RPSRs under the Stock Plans vested and became payable in shares of
Northrop Grumman Common Stock, which payment is calculated based upon
attainment of certain stock price performance targets; and (c) the RSRs and
RASs under the Stock Plans vested and became distributable.
1998 Restricted Stock Rights Plan. In response to the acceleration of RPSR,
RSR and RAS stock awards under the Stock Plans caused by the Merger Vote, the
uncertainty created by the Government's decision to challenge the Merger on
antitrust grounds and the Company's agreement to defer the closing of the
Merger pending resolution of the Government's antitrust challenge, the
Compensation Committee and the Board of Directors of the Company concluded
that it was in the Company's best interests to adopt a program to preserve the
incentive and employee-retention benefits of such stock awards. The
Compensation Committee and the Board of Directors also concluded that a
program pursuant to which the shares of Common Stock issuable pursuant to such
stock awards ("Shares") were placed into escrow for a period of time would
have the effect of creating an incentive for such persons to remain with the
Company and to create additional value in the Company in other ways in the
event that the Merger is not consummated. Accordingly, on March 24, 1998, the
Board of Directors
8
adopted the 1998 Restricted Stock Rights Plan and related Ownership Retention
Agreements (the "1998 Plan"). All executive officers of the Company (including
the Named Executive Officers) have voluntarily agreed to participate in the
1998 Plan and have placed their Shares (net of tax withholding as described
below) into escrow until the earlier of (i) March 1, 2000, (ii) a "Change in
Control" (which includes consummation of the Merger) or (iii) the executive
officer's death, qualifying Retirement (as defined therein) prior to March 1,
1999, disability or termination by the Company other than for Cause. They have
also agreed to forfeit their Shares if they voluntarily leave the Company
other than for Good Reason (which has the same definition as in the Special
Agreements) or if they are terminated for Cause. Pursuant to the 1998 Plan,
applicable tax owed with respect to receipt of the Shares is deemed to equal
the value of the remaining 50% of vested Shares as of the vesting date
(February 26, 1998), with any amount in excess of the amount the executive
officers previously instructed the Company to withhold for taxes paid to the
officer in cash.
The 1998 Plan also applies to the vested Shares received by Northrop Grumman
key employees other than executive officers, with the addition that, if such
key employee voluntarily places 50% of his or her Shares into escrow, any such
key employee also will receive an award of additional shares ("Additional
Shares") of Common Stock if the Merger has not been consummated on or prior to
July 1, 1998, and on the same restrictions and limitations described in the
previous paragraph. The awards made to key employees will consist of a
restricted stock right (the "Right") to receive, subject to the terms and
conditions of the 1998 Plan, a number of Additional Shares equal to 14.5% of
the total number of his or her Shares. Not more than 102,922 Additional Shares
are subject to issuance under the 1998 Plan. Of the 710,963 Shares issued to
the Company's executive officers and key employees, as of April 22, 1998,
524,546 Shares (approximately 74%) have been placed into escrow under the 1998
Plan.
The Compensation Committee of the Board is responsible for administering the
1998 Plan, and shall have full and exclusive power to interpret the 1998 Plan
and to adopt such rules, regulations and guidelines for carrying out the 1998
Plan as it may deem necessary or proper, all of which power shall be executed
in the best interests of the Company and in keeping with the objectives of the
1998 Plan.
The 1998 Plan will terminate on March 24, 2000, unless previously terminated
by the Board of Directors of the Company.
COMPENSATION OF DIRECTORS
The Company paid each director an annual retainer of $28,000 and an
additional $1,000 for each Board and committee meeting attended during 1997.
Committee chairmen are paid an annual retainer of $3,000. Any director who
performs extraordinary services for the Board at the request of the Chairman
of the Board or the chairman of a committee is paid $1,000 per day. Directors
are reimbursed for all reasonable expenses in attending these meetings and in
performing extraordinary services. Directors who are employees of the Company
do not receive any compensation for their service as directors.
The 1993 Stock Plan For Non-Employee Directors provides that 30% of the
retainer earned by each director is paid in shares of the Common Stock, issued
following the close of the fiscal year. In addition, directors may defer
payment of all or a portion of their remaining retainer fees, Committee
Chairman retainer fees and/or Board and committee meeting fees. Deferred
compensation may either be distributed in shares of the Common Stock, issued
after the close of the fiscal year, or placed in a Stock Unit account until
the conclusion of a director-specified deferral period, generally for a
minimum of two years from the time the compensation is earned. All deferral
elections must be made prior to the beginning of the year for which the
retainer and fees will be paid. Directors are credited with dividend
equivalents in connection with the shares of the Common Stock which are
distributed early in the year following the year earned or deferred into the
Stock Unit account. The Board has adopted a Company stock ownership guideline
for outside directors which provides that directors should hold shares of
Common Stock equal in market value to three times the annual retainer, to be
achieved within five years of joining the Board (for existing directors, five
years from the 1995 date of adoption).
9
The 1995 Stock Option Plan for Non-Employee Directors, as amended, provides
for the annual grant of options to each non-employee director to purchase
1,500 shares of the Common Stock with an exercise price equal to the fair
market value of the Common Stock on the grant date. The options have a term of
ten years. If the individual ceases to serve as a director, the options
continue to be exercisable for the lesser of five years or the expiration of
the original term of the options. If termination is for cause, the options
terminate when the director ceases to serve.
The Northrop Grumman Corporation Board of Directors Retirement Plan (the
"Retirement Plan") provides that outside directors, as defined in the
Company's Bylaws, are eligible to receive a retirement benefit if they retire
from the Board following completion of at least five or more consecutive years
of service as an outside Board member. Outside directors are also eligible for
benefits if they are ineligible to stand for election because they will have
attained age 70 prior to the Annual Meeting of Stockholders and have not
completed at least five consecutive years of service as an outside director.
The annual benefit payable is equal to the annual retainer then being paid to
active directors or such lesser amount as is provided for under the Retirement
Plan. Benefits are payable for ten years or less (as set forth in the
Retirement Plan), from the director's retirement date. In the case of a
director's death while receiving benefits, the benefits are payable to the
director's surviving spouse, as defined in the Retirement Plan. In the event
of a change in control, all outside directors serving on the Board at that
time shall be immediately vested and entitled to an annual benefit amount for
each year of consecutive service. In addition, benefits payable under the
Retirement Plan have been funded through the establishment of a grantor trust.
In March 1997, the Board of Directors terminated the Retirement Plan with
respect to future outside directors.
On March 19, 1997, the Board of Directors adopted the Northrop Grumman Non-
Employee Directors Equity Participation Plan (the "Equity Plan" and, together
with the Retirement Plan, collectively, the "Directors Plans"). The Equity
Plan is applicable to outside directors who become such after March 1, 1997
and directors serving prior to that date who elect to participate in the
Equity Plan. Directors who elect to participate in the Equity Plan must
terminate their participation in the Retirement Plan. Under the Equity Plan,
outside directors shall have an amount equal to 50% of their annual retainer
credited to an equity participation account and converted into stock units
based on the then fair market value of the Common Stock. Existing directors
who elect to participate in the Equity Plan will receive a special accrual
into the equity participation account equal to the present value of accrued
benefits under the Retirement Plan. Each stock unit will be credited with
dividend equivalents, which will be deemed reinvested in additional stock
units. Each outside director who terminates service after three or more years
of service shall be entitled to receive cash payments from the equity
participation account in a number of annual installments equal to the number
of years for which benefits have been accrued (not to exceed ten), each
installment to be in an amount equal to the dollar value of the equity
participation account based on Common Stock value as of the date of
determination of the installment payment, divided by the number of
installments then remaining to be paid. Upon a change in control, benefits
under the Equity Plan immediately vest. The Board of Directors believes that
the Equity Plan will further align the interests of the directors with the
interests of the stockholders by making this part of the directors' benefits
dependent upon the value of the Common Stock.
On April 26, 1998, the Board of Directors adopted resolutions pursuant to
the applicable provisions of the Directors Plans that provide that the Merger
Vote did not constitute a "Change in Control" for purposes of the Directors
Plans unless and until the Merger closes. The Directors Plans were further
amended to provide that a "Change in Control" involving a merger will occur
only upon consummation of such merger under applicable state law.
10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES
On December 31, 1997, the following entities beneficially owned, to the
Company's knowledge, more than five percent of the outstanding Common Stock:
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------------------------ ----------------- --------
Wellington Management Company, LLP (a) 4,692,215 shares 6.97%
75 State Street, Boston, MA 02109
U.S. Trust Company of California, N.A. (b)(c) 4,125,187 shares 6.13%
555 So. Flower St., Los Angeles, CA 90071-2429
FMR Corp. (d) 4,102,879 shares 6.10%
82 Devonshire Street, Boston, MA 02109
- --------
(a) This information was provided by Wellington Management Company ("WMC") in
a Schedule 13G filed with the SEC on February 10, 1998. According to WMC,
as of the date set forth above, WMC had shared dispositive power over
4,692,215 shares but shared voting power over only 1,555,500 shares.
(b) This information was provided by U.S. Trust Company of California, N.A.
("U.S. Trust Company") in a Schedule 13G filed with the SEC on February 3,
1998. U.S. Trust Company is an Investment Manager (the "Investment
Manager") for the Northrop Grumman Pension Plan and the pension plans for
certain divisions of the Company (the "Pension Plans"); under the Trust,
the Investment Manager has responsibility for the management and control
of the Northrop Grumman shares held in the Trust as assets of the Pension
Plans. The Investment Manager has shared dispositive and voting power over
4,125,187 shares.
(c) These shares are held for the account of (but not beneficially owned by)
the Trustee (Bankers Trust Company; effective January 1, 1998, State
Street Bank and Trust Company has been appointed by the Board of Directors
of the Company as Trustee). The Investment Manager has voting power over
these shares, except in the event of a contested election of directors or
in connection with a tender offer. In such cases, the shares are voted in
accordance with instructions received from eligible participants in the
Pension Plans and undirected shares are voted in the same proportion as
shares for which instructions are received.
(d) This information was provided by FMR Corp. ("FMR") in a Schedule 13G filed
with the SEC on February 11, 1998. According to FMR, as of the date set
forth above, FMR had sole dispositive power over 4,102,879 shares but sole
voting power over only 415,379 shares.
Based on records of the Northrop Grumman Savings and Investment Plan, as of
December 31, 1997, a total of approximately 5,268,461 shares (7.83%) was held
for the account of employee participants in the Employee Stock Ownership Plan
portion of the Savings and Investment Plan for which Bankers Trust Company
acts as a trustee.
11
STOCK OWNERSHIP OF OFFICERS AND DIRECTORS
The following table shows beneficial ownership (as defined by applicable
rules for proxy statement reporting purposes) of the Common Stock as of March
31, 1998 by each director and by the CEO and the other four most highly
compensated executive officers (collectively, the "Named Executive Officers")
and all directors and executive officers as a group. Each individual owned
less than 1% of the outstanding Common Stock with the exception of Mr. Kresa,
who owned 1.37% of the outstanding Common Stock. Unless otherwise indicated,
each individual has sole investment power and sole voting power with respect
to the shares owned by such person. No family relationship exists between any
of the directors or executive officers of the Company.
PERCENTAGE OF
NUMBER OF OUTSTANDING
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED OWNED
------------ -------------
Directors
Jack R. Borsting........ 3,995(1) *
John T. Chain, Jr....... 4,104 *
Jack Edwards............ 3,470 *
Phillip Frost........... 12,176 *
Robert A. Lutz.......... 1,561 *
Aulana L. Peters........ 6,559 *
John E. Robson.......... 6,565 *
Richard M. Rosenberg.... 5,463 *
John Brooks Slaughter... 3,104 *
Richard J. Stegemeier... 6,108(2) *
Named Executive Officers
Kent Kresa(3)........... 927,595(4) 1.37%
Richard B. Waugh, Jr.... 89,148(5) *
Richard R. Molleur...... 91,334 *
James G. Roche.......... 70,876 *
Ralph D. Crosby......... 47,828 *
Directors and Executive
Officers as a Group.... 1,626,892(6)(7) 2.41%
- --------
* The percentage of shares of Common Stock beneficially owned does not
exceed one percent of the outstanding shares of Common Stock.
(1) Includes 1,200 shares held in the Borsting Family Trust of which Dr.
Borsting is trustee.
(2) Includes 1,000 shares held in the Richard J. Stegemeier Family Trust of
which Mr. Stegemeier and his wife are trustees.
(3) Mr. Kresa also serves as Chairman of the Board.
(4) Includes 217,212 shares held by the Kresa Family Trust of which Mr. Kresa
is trustee.
(5) Includes 12,324 shares held by the Waugh Family Trust of which Mr. Waugh
and his wife are trustees.
(6) Includes options exercisable within 60 days and shares or share
equivalents beneficially owned under one or more of the Company's
compensation or benefit plans, respectively, as follows: J.R. Borsting --
2,000 and 0 shares; J.T. Chain -- 2,500 and 0 shares; J. Edwards -- 2,500
and 331 shares; P. Frost -- 2,000 and 0 shares; R. Lutz -- 1,500 and 0
shares; A.L. Peters -- 2,500 and 3,038 shares; J.E. Robson -- 2,500 and
1,112 shares; R.M. Rosenberg -- 2,500 and 628 shares; J. Slaughter --
2,500 and 0 shares; R.J. Stegemeier-- 2,500 and 323 shares; K. Kresa --
661,400 and 5,057 shares; R.B. Waugh -- 60,400 and 3,147 shares; R.
Molleur -- 70,000 and 0 shares; J.G. Roche -- 49,700 and 616 shares; and
R. Crosby -- 42,680 and 2,622 shares.
(7) Directors and executive officers as a group owned approximately 2.41% of
the outstanding shares as of March 31, 1998.
12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Ms. Peters is a partner of the law firm of Gibson, Dunn & Crutcher. Another
partner of Gibson, Dunn & Crutcher is a consultant for the Company, providing
analysis and advice with respect to pending and proposed legislation. The firm
also provided legal counsel in connection with various corporate matters.
Mr. Lutz is the Vice Chairman of Chrysler Corporation ("Chrysler"). Mr.
Kresa is a director of Chrysler. In December 1996, Chrysler awarded the
Company's Electronic Sensors and Systems Division facility in Puerto Rico a
contract for power trains for Chrysler's electric vehicle program. The total
amount paid by Chrysler to the Company in 1997 under this contract was
$19,916,149.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) and Section 12b-15 of
the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 30th day of April 1998.
NORTHROP GRUMMAN CORPORATION
By: /s/ Richard R. Molleur
---------------------------------
Name: Richard R. Molleur
Title: Corporate Vice President
and General Counsel
14
