SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported)
July 24, 2000
-------------------------------------------------
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)
(Former name or former address, if changed since last report)
NORTHROP GRUMMAN CORPORATION
Item 2. Acquisition or Disposition of Assets
Effective July 24, 2000, Northrop Grumman Corporation ("Northrop Grumman" or
"Registrant") completed the sale of its commercial aerostructures business
("Aerostructures") to The Carlyle Group, pursuant to an Asset Purchase Agreement
dated as of June 9, 2000 between Northrop Grumman and Vought Aircraft
Industries, Inc., an entity owned by The Carlyle Group.
Aerostructures is a unit of Northrop Grumman Corporation (Northrop)
and is not a separate legal entity. Aerostructures is a major producer of
commercial and military aircraft subassemblies. The majority of Aerostructures
products are sold to The Boeing Company (Boeing) and, for military contracts,
ultimately to the U.S. Government.
Aerostructures manufactures portions of the Boeing 737, 747, 757, 767
and 777 jetliners, of the Gulfstream IV and V business jets, and of the Boeing
C-17 military transport. Aerostructures produces the fuselage and aft body
section for the 747 as well as cargo and passenger doors, the vertical and
horizontal body stabilizers, floor beams and other structural components. The
majority of the Boeing jetliner work is performed at production sites in
Hawthorne, California; Grand Prairie, Texas; Perry and Milledgeville, Georgia;
and Stuart, Florida.
Aerostructures manufactures engine nacelles for the Gulfstream IV and
other business jets and produces the integrated wings for Gulfstream's newest
business jet, the Gulfstream V. Aerostructures also produces the empennage,
engine nacelles, and control surfaces for the C-17, the U.S. Airforce's most
advanced airlifter. This work is primarily performed at the Grand Prarie, Texas,
and Stuart, Florida facilities. The assets sold include real property, plant and
equipment as well as inventory on hand, work in process and accounts receivable.
The purchase price was composed of $667.7 million in cash and a
promissory note for $175 million, maturing in nine years, with interest payable
in kind for four years and interest payable in kind or cash thereafter. The
purchase price and form of consideration were negotiated between the parties and
their independent advisors at arms' length.
Registrant is informed and believes that The Carlyle Group, founded in
1987, is a private global investment firm based in Washington, D.C. that
originates, structures and acts as lead equity investor in management-led
buyouts, private placements and venture capital transactions.
The Carlyle Group and Northrop Grumman may enter into bonafide arm's
length agreements to purchase or sell businesses or assets to each other or
affiliates. Northrop Grumman acquired an interest in the Grand Prarie, Texas
facility, including the C-17 business, from The Carlyle Group in 1994. There
are no material relationships between The Carlyle Group and Registrant, its a
ffiliates, any director or officer of Registrant, or to the best of
Registrant's knowledge, any associate of any such director or officer.
-1-
NORTHROP GRUMMAN CORPORATION
Item 5. Other Events
Effective July 24, 2000, Northrop Grumman Corporation completed the
sale of its Aerostructures business. Northrop Grumman's consolidated
financial statements have been restated to reflect the Aerostructures
business as discontinued operations and are included as Exhibits 99
and 99.1 to this Form 8-K.
Item 7. Financial Statements and Exhibits
(c) Exhibits
99 Unaudited consolidated financial statements of Northrop
Grumman Corporation as of March 31, 2000 and for the quarter
then ended and Management's Discussion and Analysis of the
Company's Financial Condition and the Results of Operations.
99.1 Audited consolidated financial statements of Northrop
Grumman Corporation as of December 31, 1999 and
1998 and for each of the three years in the period
ended December 31, 1999 and Management's Discussion
and Analysis of the Company's Financial Condition and the
Results of Operations and Financial Statement Schedule.
99.2 Asset Purchase Agreement dated as of June 9, 2000 between
Northrop Grumman Corporation and Vought Aircraft Industries,
Inc.
99.3 Employee Matters Agreement
99.4 Promissory Note for $175 million from Vought Aircraft
Industries, Inc.
15 Letter from Independent Accountants Regarding Unaudited Interim
Financial Information
23 Independent Auditors' Consent
27 Financial Data Schedule
27 Financial Data Schedule
-2-
NORTHROP GRUMMAN CORPORATION
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 hereunto duly authorized.
NORTHROP GRUMMAN CORPORATION
(Registrant)
Date: August 8, 2000 By __________________________
R. B. Waugh, Jr.
Corporate Vice President and Chief
Financial Officer
Date: August 8, 2000 By __________________________
John H. Mullan
Corporate Vice President and Secretary
-3-
Exhibit 99
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
March 31, December 31,
Dollars in millions 2000 1999
- ----------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 41 $ 142
Accounts receivable, net of progress
payments of $1,724 in 2000 and $1,714 in 1999 1,450 1,402
Inventoried costs, net of progress payments of
$596 in 2000 and $521 in 1999 1,240 1,190
Deferred income taxes 22 23
Prepaid expenses 50 36
- ----------------------------------------------------------------------------------------------
Total current assets 2,803 2,793
- ----------------------------------------------------------------------------------------------
Property, plant and equipment 2,854 2,895
Accumulated depreciation (1,630) (1,655)
- ----------------------------------------------------------------------------------------------
1,224 1,240
- ----------------------------------------------------------------------------------------------
Goodwill, net of accumulated amortization of
$468 in 2000 and $441 in 1999 3,445 3,469
Other purchased intangibles, net of accumulated amortization
of $406 in 2000 and $388 in 1999 736 761
Prepaid pension cost, intangible pension asset
and benefit trust fund 1,106 946
Assets available for sale 26 26
Investments in and advances to affiliates and sundry assets 49 50
- -----------------------------------------------------------------------------------------------
5,362 5,252
- -----------------------------------------------------------------------------------------------
$ 9,389 $ 9,285
===============================================================================================
-1-
NORTHROP GRUMMAN CORPORATION
March 31, December 31,
Dollars in millions 2000 1999
- ------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Notes payable to banks $ 95 $ 25
Current portion of long-term debt 200 200
Trade accounts payable 436 490
Accrued employees' compensation 326 366
Advances on contracts 347 316
Income taxes payable including deferred
income taxes of $561 in 2000 and $550 in 1999 641 608
Other current liabilities 489 459
- ------------------------------------------------------------------------------------------------
Total current liabilities 2,534 2,464
- ------------------------------------------------------------------------------------------------
Long-term debt 1,800 2,000
Accrued retiree benefits 1,468 1,458
Other long-term liabilities 41 42
Deferred income taxes 137 64
Paid-in capital
Preferred stock, 10,000,000 shares authorized; none issued
Common stock, 200,000,000 shares authorized; issued and outstanding:
2000 - 69,805,396; 1999 - 69,719,164 1,035 1,028
Retained earnings 2,393 2,248
Accumulated other comprehensive loss (19) (19)
- ------------------------------------------------------------------------------------------------
3,409 3,257
- ------------------------------------------------------------------------------------------------
$ 9,389 $ 9,285
================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
-2-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three months ended March 31,
Dollars in millions, except per share 2000 1999
- --------------------------------------------------------------------------------------------
Net sales $1,802 $1,710
Cost of sales
Operating costs 1,302 1,297
Administrative and general expenses 213 210
- --------------------------------------------------------------------------------------------
Operating margin 287 203
Interest expense (46) (55)
Other, net 2 4
- --------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 243 152
Federal and foreign income taxes 87 56
- --------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 156 96
Income from discontinued operations, net of tax 17 8
- --------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 173 104
Cumulative effect of change in accounting for
start-up costs, net of income tax benefit of $11 in 1999 (16)
- --------------------------------------------------------------------------------------------
Net income $ 173 $ 88
============================================================================================
Weighted average shares outstanding, in millions 69.9 68.9
============================================================================================
Basic earnings per share:
Continuing operations $ 2.23 $ 1.39
Discontinued operations .24 .12
Cumulative effect of accounting change (.24)
- --------------------------------------------------------------------------------------------
Basic earnings per share $ 2.47 $ 1.27
============================================================================================
Diluted earnings per share:
Continuing operations $ 2.23 $ 1.38
Discontinued operations .24 .12
Cumulative effect of accounting change (.24)
- -------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.47 $ 1.26
===========================================================================================
Dividends per share $ .40 $ .40
===========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED CONDENSED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended March 31,
Dollars in millions 2000 1999
- --------------------------------------------------------------------------------------------------
Paid-in Capital
At beginning of year $1,028 $ 989
Employee stock awards and options exercised 7 1
- --------------------------------------------------------------------------------------------------
1,035 990
- --------------------------------------------------------------------------------------------------
Retained Earnings
At beginning of year 2,248 1,892
Net income 173 88
Cash dividends (28) (28)
- --------------------------------------------------------------------------------------------------
2,393 1,952
- --------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss (19) (31)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity $3,409 $2,911
==================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
-4-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three months ended March 31,
Dollars in millions 2000 1999
- -------------------------------------------------------------------------------------------------
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 380 $ 786
Other collections 1,763 1,367
Income tax refunds received 7 22
Interest received 2
Other cash receipts 1 3
- --------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,153 2,178
- --------------------------------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 2,009 1,967
Interest paid 50 59
Income taxes paid 2 8
Other cash disbursements 1 1
- --------------------------------------------------------------------------------------------------
Cash used in operating activities 2,062 2,035
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 91 143
- --------------------------------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment (36) (42)
Payment for businesses purchased (3)
Proceeds from sale of property, plant and equipment 7 9
Other investing activities (3) 4
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (35) (29)
- ---------------------------------------------------------------------------------------------------
Financing Activities
Repayment of borrowings under lines of credit (80) (53)
Principal payments of long-term debt (50) (50)
Proceeds from issuance of stock 1 2
Dividends paid (28) (28)
- --------------------------------------------------------------------------------------------------
Net cash used in financing activities (157) (129)
- --------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (101) (15)
Cash and cash equivalents balance at beginning of period 142 44
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents balance at end of period $ 41 $ 29
==================================================================================================
-5-
NORTHROP GRUMMAN CORPORATION
Three months ended March 31,
Dollars in millions 2000 1999
- ---------------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 173 $ 88
Adjustments to reconcile net income to net cash provided
Depreciation 45 43
Amortization of intangible assets 50 47
Common stock issued to employees 7
Retiree benefits income (133) (57)
Decrease(increase) in
Accounts receivable (53) (50)
Inventoried costs (127) (122)
Prepaid expenses (15) 20
Increase(decrease) in
Progress payments 85 136
Accounts payable and accruals 1 10
Provisions for contract losses (20) 4
Deferred income taxes 84 43
Income taxes payable 23 23
Retiree benefits (33) (45)
Other transactions 4 3
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 91 $ 143
====================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
-6-
NORTHROP GRUMMAN CORPORATION
SELECTED INDUSTRY SEGMENT INFORMATION
Three months ended March 31,
Dollars in millions 2000 1999
- ------------------------------------------------------------------------------
Net Sales
Integrated Systems $ 856 $ 791
Electronic Sensors & Systems 601 615
Logicon 378 353
Intersegment sales (33) (49)
- ------------------------------------------------------------------------------
$ 1,802 $ 1,710
==============================================================================
Operating Margin
Integrated Systems $ 100 $ 70
Electronic Sensors & Systems 34 45
Logicon 31 19
- ------------------------------------------------------------------------------
Total 165 134
Other items included in operating margin:
Corporate expenses (7) (8)
Deferred state tax provision (11) (5)
Pension income 140 82
- ------------------------------------------------------------------------------
Operating margin $ 287 $ 203
==============================================================================
Contract Acquisitions
Integrated Systems $ 462 $ 1,058
Electronic Sensors & Systems 595 575
Logicon 437 409
Intersegment acquisitions (35) (29)
- ------------------------------------------------------------------------------
$ 1,459 $ 2,013
==============================================================================
Funded Order Backlog
Integrated Systems $ 4,057 $ 5,166
Electronic Sensors & Systems 3,518 3,079
Logicon 668 622
Intersegment backlog (87) (149)
- ------------------------------------------------------------------------------
$ 8,156 $ 8,718
==============================================================================
-7-
NORTHROP GRUMMAN CORPORATION
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 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 1999 annual report as restated for discontinued operations in
Exhibit 99.1 to this Form 8-K.
Discontinued Operations
Effective July 24, 2000, the company completed the sale of its commercial
aerostructures ("Aerostructures") business to The Carlyle Group, pursuant to an
Asset Purchase Agreement dated as of June 9, 2000 between Northrop Grumman and
Vought Aircraft Industries, Inc., an entity owned by The Carlyle Group. The
purchase price was composed of $667.7 million in cash and a promissory note for
$175 million, maturing in nine years, with interest payable in kind for four
years and interest payable in kind or cash thereafter. An estimated loss on the
sale of $15 million will be recorded in the second quarter of 2000.
Aerostructures is a major producer of commercial and military aircraft
subassemblies, the majority of which are sold to The Boeing Company and, for
military contracts, ultimately to the U.S. Government.
The company's Consolidated Statements of Income and related footnote
disclosures have been restated to reflect Aerostructures as discontinued
operations for all periods presented. Balance sheet and cash flow data have not
been restated.
Operating results of the discontinued Aerostructures business are as
follows:
Three months ended March 31,
$ in millions 2000 1999
- ------------------------------------------------------------------------------
Net Sales $ 278 $ 383
==============================================================================
Income before income taxes $ 27 $ 12
Federal and foreign income taxes 10 4
- ------------------------------------------------------------------------------
Net income from discontinued operations $ 17 $ 8
==============================================================================
-8-
NORTHROP GRUMMAN CORPORATION
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.
Basic and diluted earnings per share are calculated as follows:
Earnings
Net Income Shares per share
---------- ------ ---------
Three months ended March 31, (millions) (millions)
2000
Basic earnings per share from continuing operations $ 156 69.9 $ 2.23
========= ==========
Dilutive effect of stock options and awards
----------
Diluted earnings per share from continuing operations $ 156 69.9 $ 2.23
========= ========== ==========
Basic earnings per share from discontinued operations $ 17 69.9 $ .24
========= ==========
Dilutive effect of stock options and awards
----------
Diluted earnings per share from discontinued operations $ 17 69.9 $ .24
========= ========== ==========
Basic earnings per share $ 173 69.9 $ 2.47
========= ==========
Dilutive effect of stock options and awards
----------
Diluted earnings per share $ 173 69.9 $ 2.47
========= ========== ==========
-9-
NORTHROP GRUMMAN CORPORATION
Earnings
Net Income Shares per share
---------- ------ ---------
Three months ended March 31, (millions) (millions)
1999
Basic earnings per share from continuing operations $ 96 68.9 $ 1.39
========= ==========
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share from continuing operations $ 96 69.3 $ 1.38
========= ========== ==========
Basic earnings per share from discontinued operations $ 8 68.9 $ .12
========= ==========
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share from discontinued operations $ 8 69.3 $ .12
========= ========== ==========
Basic earnings per share before cumulative
effect of accounting change $ 104 68.9 $ 1.51
========= ==========
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share before cumulative
effect of accounting change $ 104 69.3 $ 1.50
========= ========== ==========
Basic earnings per share $ 88 68.9 $ 1.27
========= ==========
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share $ 88 69.3 $ 1.26
========= ========== ==========
-10-
NORTHROP GRUMMAN CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND THE RESULTS OF ITS OPERATIONS
Sales for the first quarter of 2000 were $1.8 billion, up five percent from the
year ago period. Increases in Integrated Systems (ISS) segment and Logicon
segment sales were offset slightly by a decrease in Electronic Sensors and
Systems (ESS) segment sales.
ISS sales increased by 8 percent in the first quarter of 2000 compared with
the first quarter of 1999, primarily due to increased Air Combat Systems(ACS)
sales. The ACS increase reflects increased F/A-18E/F sales, as this program
transitioned from the development phase in early 1999 to the current production
phase, partially offset by lower B-2 and F/A-18C/D sales.
ESS sales for the quarter ended March 31, 2000, were 2 percent lower than
the same period a year ago. The Command, Control, Communications, Intelligence
and Naval Systems (C3I&N) business area decrease is primarily attributable to
lower air defense and air traffic control radar systems sales for international
customers.
Logicon sales were 7 percent higher in the first quarter of 2000 versus the
same period in 1999, with all three business areas reporting increased sales.
-11-
NORTHROP GRUMMAN CORPORATION
Sales by business area and units delivered in the first quarter were:
Three months ended March 31,
$ in millions 2000 1999
- ------------------------------------------------------------------------------------------------
Integrated Systems
Air Combat Systems (ACS) $ 502 $ 451
Airborne Early Warning and Electronic Warfare (AEW/EW) 183 192
Airborne Ground Surveillance and Battle Management (AGS/BM) 176 161
Intrasegment Eliminations (5) (13)
- -------------------------------------------------------------------------------------------------
856 791
- -------------------------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 257 254
Command, Control, Communications,
Intelligence and Naval Systems (C3I&N) 177 214
Defensive Electronic Systems 96 111
Other 71 36
- -------------------------------------------------------------------------------------------------
601 615
- -------------------------------------------------------------------------------------------------
Logicon
Government Information Technology 253 241
Technology Services 92 83
Commercial Information Technology 33 29
- -------------------------------------------------------------------------------------------------
378 353
- -------------------------------------------------------------------------------------------------
Intersegment eliminations (33) (49)
- -------------------------------------------------------------------------------------------------
Total sales $ 1,802 $ 1,710
=================================================================================================
Units
- -------------------------------------------------------------------------------------------------
B-2 1 1
F/A-18 C/D 9
F/A-18 E/F 7
- -------------------------------------------------------------------------------------------------
-12-
NORTHROP GRUMMAN CORPORATION
Operating margin includes pension income of $140 million in the first
quarter of 2000, a $58 million increase from the first quarter of 1999. Pension
income for 2000 is expected to be approximately $560 million.
ISS operating margin for the quarter was $100 million, up 43 percent from
the $70 million reported for the first quarter of 1999. The 2000 results reflect
the return to profitability on the Joint STARS production contracts as well as
an upward cumulative margin rate adjustment of $8 million on the F/A-18E/F
program.
ESS operating margin in the first quarter of 2000 was $34 million as
compared with $45 million in last year's first quarter. The decrease is
primarily the result of the July 1999 merger of three of the company's pension
plans into one.
Logicon operating margin for the quarter was $31 million as compared with
$19 million for the first quarter of 1999. The increase is attributable in part
to increased sales volume and improved performance in all three business areas.
Logicon also benefited from replacing several defined-contribution employee
benefit plans with a defined-benefit type pension plan in the first quarter of
2000. While the total cash cost remains the same, the cost is now included in
net pension income, in accordance with company policy. As a result, pension
income is lower than it otherwise would have been and Logicon's reported
operating margin is higher by $5 million for the quarter, with an additional $5
million expected to be recorded in each of the remaining quarters of this year.
Interest expense for this year's first quarter was $46 million, a $9
million decrease from the $55 million reported in the first quarter of 1999. The
decrease resulted principally from a lower level of average borrowings in the
quarter compared with the first quarter of 1999.
The company's effective tax rate was 36 percent for the first quarter of
2000, down slightly from 37 percent reported for the same period in 1999.
Aerostructures, reported as discontinued operations, had net income of $17
million and $8 million in the first quarter of 2000 and 1999, respectively.
Included in these amounts are related pretax pension income of $10 million and
$2 million in the first quarter of 2000 and 1999, respectively.
Effective January 1, 1999, the company adopted the new accounting standard,
SOP 98-5 - Reporting on the Costs of Start-Up Activities, which requires that
certain costs that previously had been deferred be expensed and reported as a
cumulative effect of a change in accounting principle. In 1999, the company
reported a $16 million after-tax charge, or $.24 per share, to write off the
previously deferred start-up costs. All such costs incurred after January 1,
1999, are expensed as incurred.
During the first quarter of 2000, $91 million of cash was generated by
operating activities versus the $143 million generated in the same period last
year. The decline is attributable in part to accelerated cash collections in
1999 due to customers' Year 2000 concerns. The decline is somewhat mitigated by
improved operating margin and lower pension plan contributions as a result of
the July 1999 pension plan merger. For
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NORTHROP GRUMMAN CORPORATION
the remainder of 2000, cash generated from operations, supplemented by
borrowings under the credit agreement, are expected to be more than sufficient
to service debt, finance capital expenditures, and continue paying dividends to
the shareholders. 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.
Forward-Looking Information
Certain statements and assumptions in Management's Discussion and Analysis and
elsewhere in this quarterly report on Form 8-K contain or are based on
"forward-looking" information (that the company believes to be within the
definition in the Private Securities Litigation and Reform Act of 1995) that
involves risk and uncertainties, including statements and assumptions with
respect to future revenues, program performance and cash flows, the outcome of
contingencies including litigation and environmental remediation, and
anticipated costs of capital investments and planned dispositions. The company's
operations are necessarily subject to various risks and uncertainties; actual
outcomes are dependent upon 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The company has fixed-rate long-term debt obligations, most of which are not
callable until maturity. The company also has financial instruments that are
subject to interest rate risk, principally variable-rate short- term debt
outstanding under the Credit Agreement. The company may enter into interest rate
swap agreements to offset the variable-rate characteristics of these loans. At
March 31, 2000, no interest rate swap agreements were in effect.
Only a small portion of the company's transactions are contracted in
foreign currencies. The company does not consider the market risk exposure
relating to foreign currency exchange to be material.
-14-
NORTHROP GRUMMAN CORPORATION
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Northrop Grumman Corporation
Los Angeles, California
We have reviewed the accompanying condensed consolidated balance sheet of
Northrop Grumman Corporation and Subsidiaries as of March 31, 2000, and the
related condensed consolidated statements of income and cash flows for the
three-month periods ending March 31, 2000 and 1999. These financial statements
are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Northrop Grumman Corporation and Subsidiaries as of December 31, 1999, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 26, 2000, except for discontinued
operations footnote, as to which the date is July 24, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 24, 2000,
except for discontinued operations footnote,
as to which the date is July 24, 2000.
-15-
NORTHROP GRUMMAN CORPORATION
Exhibit 99.1
Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations
BUSINESS CONDITIONS
Northrop Grumman is one of the major companies that competes in both the
domestic and international markets of the aerospace and defense industry. While
Northrop Grumman is subject to the usual vagaries of the marketplace, it is also
affected by the unique characteristics of the aerospace and defense industry and
by certain elements peculiar to its own business mix. It is common in this
industry for work on major programs to be shared among a number of companies. A
company competing to be a prime contractor can turn out to be a subcontractor.
It is not uncommon to compete with customers, and simultaneously on other
contracts, to be either a supplier to or a customer of such competitor. The
nature of major aerospace programs, conducted under binding contracts, allows
companies that perform well to benefit from a level of program continuity
unknown in many industries. While Northrop Grumman conducts most of its business
with the U.S. Government, principally the Department of Defense, domestic and
international commercial sales still represent a significant portion of total
revenue.
The collapse of communism and the subsequent reductions in the U.S. defense
budget have fundamentally altered the landscape of the global aerospace and
defense industry. Since the early 1990's the industry has been going through a
consolidation process and, along with it, significant downsizing. These actions,
in which Northrop Grumman has participated, have made competition even more
intense than in the past. Lockheed Martin Corporation, The Boeing Company, and
Raytheon Company are the largest companies in the aerospace and defense industry
at this time. Northrop Grumman competes against these and other companies for a
number of large and smaller programs. Intense competition and long operating
cycles are both characteristics of the industry's - and Northrop Grumman's -
business.
The current composition of Northrop Grumman resulted from a series of
strategic acquisitions and mergers by the former Northrop Corporation beginning
in 1992, when the company acquired a 49 percent interest in the Vought Aircraft
Company, a designer and builder of commercial and military aerostructures. The
remaining 51 percent interest in Vought Aircraft was purchased in 1994. Also in
1994, the company purchased the outstanding common stock of Grumman Corporation
and the company was renamed Northrop Grumman Corporation. In 1996, Northrop
Grumman acquired the defense electronic systems group of Westinghouse Electric
Corporation. Effective August 1, 1997, the company consummated its merger with
Logicon, Inc. (Logicon), a leading defense information technology company.
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NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the company announced that it had entered into a
definitive agreement with Lockheed Martin Corporation to combine the companies.
On February 26, 1998, shareholders of Northrop Grumman approved the merger. On
March 23, 1998, the U.S. Government filed suit to block the merger and on July
16, 1998, Lockheed Martin notified the company that it was terminating its
merger agreement with the company pursuant to the terms of the agreement. The
company recorded charges totaling $186 million in 1998 for costs related to the
terminated merger. The charges cover vesting of restricted stock which became
issuable following shareholder approval of the merger and other costs associated
with the terminated merger, including investment banking fees, legal and
accounting fees, and costs related to responding to the Government's request for
information.
In 1998 and 1999 the company acquired several businesses. Inter-
National Research Institute Inc. (INRI) was acquired in 1998 and the Information
Systems Division of California Microwave, Inc., Data Procurement Corporation
(DPC), and Ryan Aeronautical, an operating unit of Allegheny Teledyne
Incorporated, were all acquired in 1999.
Effective July 24, 2000, the company completed the sale of its
commercial aerostructures ("Aerostructures") business to The Carlyle Group,
pursuant to an Asset Purchase Agreement dated as of June 9, 2000 between
Northrop Grumman and Vought Aircraft Industries, Inc., an entity owned by The
Carlyle Group. Aerostructures is a major producer of commercial and military
aircraft subassemblies, the majority of which are sold to The Boeing Company
and, for military contracts, ultimately to the U. S. Government. The company's
Consolidated Statements of Income and related disclosures have been restated to
reflect Aerostructures as discontinued operations for all periods presented. See
the footnote titled "Discontinued Operations" for additional information.
Northrop Grumman's three reportable segments are its three operating
units: Integrated Systems (ISS), Electronic Sensors and Systems (ESS) and
Logicon, the company's information technology sector.
Integrated Systems Segment
Air Combat Systems (ACS), Airborne Early Warning and Electronics Warfare
(AEW/EW), and Airborne Ground Surveillance and Battle Management (AGS/BM) are
the three major business areas within the ISS segment.
The ACS business area includes Northrop Grumman's largest program, the
B-2 bomber, for which the company is the prime contractor. The company continues
to perform modifications to Block 20 aircraft to bring them to the fully
operational Block 30 configuration. The U.S. Air Force currently plans to
operate two B-2 bomber squadrons of eight aircraft each with an additional five
aircraft available to fill in for those in depot for periodic maintenance. The
B-2 work is performed at the ISS segment's California facilities in Palmdale and
Pico Rivera.
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NORTHROP GRUMMAN CORPORATION
The company is the principal subcontractor to The Boeing Company on the
F/A-18 program, which is also included in the ACS business area. The F/A-18 is a
fighter/ground-attack aircraft with configurations equipped for either one or
two crew members. Principally deployed by the U.S. Navy on aircraft carriers, it
also has been purchased by several other nations as a land-based combat
aircraft. The company builds approximately 40 percent of the aircraft including
the center and aft fuselage, vertical tails, and associated subsystems. The F/A-
18 single-seat E and two-seat F, enhanced versions of the F/A-18C and D models,
are currently in production and will serve as the U.S. Navy's next-generation
multimission aircraft. The F/A-18 work is performed at the company's facility in
El Segundo, California.
In July 1999, the company purchased Ryan Aeronautical and combined its
products with the existing sub-scale targets programs to form the unmanned
systems business element reported in the ACS business area. The purchase
included two major development projects, Global Hawk and the Miniature Air
Launched Decoy (MALD). Global Hawk is being developed for the U.S. Air Force to
provide battlefield commanders with intelligence imagery from high altitudes for
long periods of time. MALD is a small jet powered aerial vehicle designed to
imitate manned jet fighters in radar images and confuse enemy air defense
systems.
The AEW/EW business area produces the E-2C Hawkeye and performs
upgrades to EA-6B aircraft. Northrop Grumman is a major producer of airborne
early warning and control systems, including the all-weather E-2C Hawkeye
aircraft. The E-2C has been in active service with the U.S. Navy since 1973 and
is employed by the air forces of five other nations. The EA-6B is the armed
services only offensive tactical radar jamming aircraft. Manufacturing for both
aircraft is performed at Northrop Grumman's St. Augustine, Florida site while
engineering, program management and product development is performed in
Bethpage, New York.
The company is the prime contractor for the E-8 Joint Surveillance
Target Attack Radar System (Joint STARS), which is included in the AGS/BM
business area. Joint STARS detects, locates, classifies, tracks and targets
potentially hostile ground movement in all weather conditions. It is designed to
operate around the clock in constant communication through secure data links
with Air Force command posts, Army mobile ground stations or centers of military
analysis far from the point of conflict. The Joint STARS platform is a Boeing
707-300 airframe that is remanufactured at Northrop Grumman's Lake Charles,
Louisiana site. Final installation of electronics and testing are performed at
the company's test facility in Melbourne, Florida.
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NORTHROP GRUMMAN CORPORATION
Electronic Sensors and Systems Segment
The ESS segment comprises four business areas: Aerospace Electronic Systems;
Command, Control, Communications, Intelligence and Naval Systems (C3I&N);
Defensive Electronic Systems; and several smaller business elements referred to
as "Other". The segment's primary expertise is the ability to conceive, design,
produce and support high performance sensors and intelligence systems operating
in all environments from underseas to outer space.
Aerospace Electronic Systems includes four business elements: combat
avionics systems, land combat systems, airborne surveillance systems, and space
systems. Combat avionics systems is focused on providing radar and electro-opti
c-based avionics systems to meet the needs for targeting and strike missions for
armed forces worldwide. The AN/APG-66/68 airborne fire control radar series
aboard F-16 fighters throughout the world has set a new standard for performance
and reliability over the last two decades. More than six thousand AN/APG-66/68
radars have been produced since 1976. The basic radar, with multiple variants,
is currently on 16 airborne platforms deployed in 20 countries. Northrop Grumman
currently is leading a team developing the next-generation air-dominance radar
(AN/APG-77) featuring a low observable, active electronically scanned array with
multiple target, all-weather capability for the U. S. Air Force's F-22 aircraft.
Advanced radar concepts for the next generation Joint Strike Fighter have been
developed and flown aboard Northrop Grumman flight test aircraft. These radar
systems are produced at the company's Linthicum, Maryland facility.
Northrop Grumman's land combat systems business element, teamed with
Lockheed Martin, is producing the Longbow APG-78 fire control radar and the
Longbow Hellfire missile for the U. S. Army's AH-64 Apache attack helicopter and
the British WAH-64 Westland Apache. There is extensive international interest in
the Apache Longbow battlefield tactical weapon system. Longbow fire control
radar work is performed at the ESS segment's Linthicum facility and the Longbow
missile work is performed in Huntsville, Alabama. Additionally, Northrop Grumman
is currently in Low Rate Initial Production (LRIP) for the BAT "brilliant" anti-
armor submunition at the company's new BAT production facility at Huntsville.
BAT is an autonomous submunition that uses passive acoustic and infrared sensors
to find, attack and destroy moving tanks and other armored vehicles in hostile
territory. BAT is designed to be carried and dispensed by the U. S. Army's TACMS
(Tactical Missile System) Block II surface-to-surface missile with potential
application for ground-, air-, and sea-launched cruise missiles, artillery
rockets, and munitions dispensers.
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NORTHROP GRUMMAN CORPORATION
Airborne surveillance systems products include the Airborne Warning and
Control System (AWACS) radar (AN/APY-1, APY-2), which, integrated in the highly
reliable Boeing 707 and 767 aircraft, has been the surveillance system of choice
for U.S. and allied forces worldwide. The AWACS Radar System Improvement Program
(RSIP) is currently in production for the U.S. Air Force, the United Kingdom and
NATO. RSIP will enhance the performance of the AWACS radar against smaller cross
section targets. A new surveillance product, the Multirole Electronically
Scanned Array (MESA), is currently being developed for installation on seven
Boeing 737 aircraft for the Royal Australian Air Force. These systems are
produced at the Linthicum, Maryland facility. The E-8 Joint STARS is equipped
with the Northrop Grumman Norden Systems AN/APY-3 air-to-ground surveillance
system, which provides long-range, standoff, real-time surveillance of the
battlefield. An advanced Radar Technology Insertion Program (RTIP) is currently
under development. With its advanced active aperture, the RTIP will provide
significant performance upgrades on Joint STARS for its current mission and
opens the way for incorporation of new missions. These systems are produced at
the company's Norwalk, Connecticut facility. The space systems business element
develops space sensors and systems, with subsegments of military and
civil/commercial space, and intelligence, surveillance, reconnaissance ground-
based processing systems.
The C/3/I&N business area produces air defense and air traffic control
radar systems for domestic and international customers. The new highly mobile,
solid-state AN/TPS-70 family of radars and U. S. Air Force AN/TPS-75 are among
the products in this business area. They have been the front line U.S. Air Force
air defense system standard since 1968. These systems currently operate in more
than 30 countries, supporting air defense, air sovereignty, air traffic control,
and counter-narcotics needs. The ASR-12, a solid-state, new generation
derivative of the company's FAA standard ASR-9 terminal radar is now in full
production, with 12 systems on order and three systems operational in Peru,
Mexico, and El Salvador.
C/3/I&N is also a leader in producing marine machinery and advanced
propulsion systems, missile launchers, shipboard electronics and control
systems, mine countermeasures, and underseas vehicles. Every Nimitz-class
aircraft carrier is fitted with eight turbine generator sets. The company
produces these generators as well as the main propulsion system for the U.S.
Navy's Seawolf- and Virginia-class attack submarines at its Sunnyvale,
California site. Late in 1999, the company was one of two selected by the Navy
to develop the next generation Electro-Magnetic Launcher (EMALS), which could
ultimately replace the steam catapult. The Sunnyvale facility also has
responsibility for integration of the intercooled recuperated (ICR) gas turbine
engine, which is a candidate for the DD-21 next generation
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NORTHROP GRUMMAN CORPORATION
destroyer. The company's Annapolis, Maryland facility has responsibility for the
Advanced SEAL Delivery System (ASDS) mini-submarine and the SPQ-9B shipboard
radar, and is a significant participant in the DD-21 competition.
The Defensive Electronic Systems business area includes radio frequency
and infrared countermeasures equipment. The company's Rolling Meadows, Illinois
site produces the AN/ALQ-135, an internally mounted radar jammer deployed on F-
15 fighter aircraft as part of that aircraft's tactical electronic warfare
system. The AN/ALQ-162 Shadowbox, a jammer built specifically to counter
continuous wave radars, has been installed on the AV-8B and certain foreign
owned F/A-18 aircraft. It also is being deployed on U.S. Army helicopters and
special mission aircraft and has been sold to the air forces of three other
nations. The company is currently producing a directional infrared
countermeasures (DIRCM) system for the United Kingdom and the U.S. Special
Operations Command. DIRCM is slated for use on British helicopters and
transports and U.S. Special Operations Command C-130 transports to protect the
aircraft from heat-seeking missiles. DIRCM is the first infrared countermeasures
system of its kind and was developed to accommodate laser capabilities currently
in development. The company's Linthicum, Maryland site produces the AN/ALQ-165
airborne self-protection jammer in a joint venture with ITT Avionics. The AN/A
LQ-165 is an internally mounted system that protects tactical aircraft against
numerous radar-guided threats. It currently is installed on U. S. and
international F/A-18 and F-14 aircraft.
Included in the business area labeled "Other" is California Microwave
Systems, which was acquired by Northrop Grumman in April 1999. This unit
specializes in airborne reconnaissance and surveillance systems, government
ground-based satellite communications systems, communications gateway systems,
and mission planning. California Microwave Systems' customers include the U.S.
military services, other U.S. government agencies, and international defense
organizations. Other elements included in "Other" are systems development and
technology and automation and information systems.
Logicon Segment
The three major business areas reported in Logicon, the company's information
technology sector, are: Government Information Technology, Technology Services,
and Commercial Information Technology.
Logicon is a leading provider of advanced information technologies,
systems and services. Its areas of expertise include: command, control,
communications, computers, intelligence, surveillance and reconnaissance
(C4ISR); weapon systems; information systems; training and simulation; science
and technology; base and range support; and systems support services. Customers
include the U.S.
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NORTHROP GRUMMAN CORPORATION
Government, both Department of Defense(DoD) and non-DoD Federal agencies, state
and local governments, and commercial enterprises. Contracts with the U.S.
Government account for most of the segment's revenues.
In the following table of segment and major customer data, revenue from the
United States Government includes revenue from contracts on which Northrop
Grumman is the prime contractor as well as those on which the company is a
subcontractor and the ultimate customer is the U.S. Government.
RESULTS OF OPERATIONS BY SEGMENT AND MAJOR CUSTOMER
Year ended December 31, $ in millions 1999 1998 1997
- ------------------------------------------------------------------------------------
Net Sales
Integrated Systems
United States Government $ 3,574 $ 3,464 $ 3,643
Other customers 38 94 269
Intersegment sales 6 5 13
- ------------------------------------------------------------------------------------
3,618 3,563 3,925
- ------------------------------------------------------------------------------------
Electronic Sensors & Systems
United States Government 1,894 2,014 2,394
Other customers 673 708 490
Intersegment sales 146 177 180
- ------------------------------------------------------------------------------------
2,713 2,899 3,064
- ------------------------------------------------------------------------------------
Logicon
United States Government 1,248 948 884
Other customers 189 139 118
Intersegment sales 22 20 20
- ------------------------------------------------------------------------------------
1,459 1,107 1,022
Intersegment eliminations (174) (202) (213)
- ------------------------------------------------------------------------------------
Total net sales $ 7,616 $ 7,367 $ 7,798
====================================================================================
Operating Margin
Integrated Systems $ 387 $ 272 $ 343
Electronic Sensors & Systems 199 218 248
Logicon 80 60 67
- ------------------------------------------------------------------------------------
666 550 658
Adjustments to reconcile to total operating margin:
Corporate expenses (26) (58) (30)
Deferred state tax (provision)benefit (29) (10) 8
Mark-to-market restricted stock rights (39)
Pension income 343 270 144
- ------------------------------------------------------------------------------------
Total operating margin $ 954 $ 752 $ 741
====================================================================================
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NORTHROP GRUMMAN CORPORATION
Year ended December 31, $ in millions 1999 1998 1997
- -----------------------------------------------------------------------------------
Contract Acquisitions
Integrated Systems $ 3,164 $ 2,489 $ 3,126
Electronic Sensors & Systems 3,055 2,388 2,983
Logicon 1,481 1,205 938
- -----------------------------------------------------------------------------------
Total acquisitions $ 7,700 $ 6,082 $ 7,047
===================================================================================
Funded Order Backlog
Integrated Systems $ 4,451 $ 4,899 $ 5,968
Electronic Sensors & Systems 3,439 2,951 3,285
Logicon 609 565 447
- -----------------------------------------------------------------------------------
Total backlog $ 8,499 $ 8,415 $ 9,700
===================================================================================
Assets
Integrated Systems $ 3,497 $ 3,797 $ 3,847
Electronic Sensors & Systems 3,883 3,913 3,990
Logicon 618 618 559
- -----------------------------------------------------------------------------------
Segment assets 7,998 8,328 8,396
General corporate 1,287 1,208 1,281
- -----------------------------------------------------------------------------------
Total assets $ 9,285 $ 9,536 $ 9,677
===================================================================================
Capital Expenditures
Integrated Systems $ 85 $ 110 $ 125
Electronic Sensors & Systems 97 82 94
Logicon 19 19 17
General corporate 2
- -----------------------------------------------------------------------------------
Total expenditures $ 201 $ 211 $ 238
===================================================================================
Depreciation and Amortization
Integrated Systems $ 133 $ 142 $ 173
Electronic Sensors & Systems 222 211 208
Logicon 32 38 35
General corporate 2 2 2
- -----------------------------------------------------------------------------------
Total depreciation and amortization $ 389 $ 393 $ 418
===================================================================================
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NORTHROP GRUMMAN CORPORATION
An individual company's success in the competitive aerospace/defense
environment depends upon its ability to develop and market its products, as well
as, its ability to provide the people, facilities, equipment and financial
capacity needed to deliver those products with maximum efficiency. It is
necessary to maintain, as the company has, sources for raw materials, fabricated
parts, electronic components and major subassemblies. In this manufacturing and
systems integration environment, effective oversight of subcontractors and
suppliers is as vital to success as managing internal operations. Northrop
Grumman's operating policies are designed to enhance these capabilities. The
company also believes that it maintains good relations with its employees,
approximately 16 percent of whom are covered by collective bargaining
agreements.
U.S. Government programs in which Northrop Grumman either participates, or
strives to participate, must compete with other programs for consideration
during our nation's budget formulation and appropriation processes. Budget
decisions made in this environment will have long-term consequences for the size
and structure of Northrop Grumman and the entire defense industry. An important
factor in determining Northrop Grumman's ability to compete successfully for
future contracts will be its cost structure vis-a-vis other bidders.
Although the ultimate size of future defense budgets remains uncertain, the
defense needs of the nation are expected to provide substantial research and
development (R&D) funding and other business for the company to pursue well into
the future.
Northrop Grumman has historically concentrated its efforts in such high
technology areas as stealth, airborne surveillance, battle management, precision
weapons, systems integration, defense electronics, and information technology.
Even though a high priority has been assigned by the Department of Defense to
the company's major programs, there remains the possibility that one or more of
them may be reduced, extended or terminated.
Northrop Grumman pursues new business opportunities when justified by
acceptable financial returns and technological risks. The company examines
opportunities to acquire or invest in new businesses and technologies to
strengthen its traditional business areas. Northrop Grumman continues to
capitalize on its technologies and skills by entering into joint ventures,
partnerships or associations with other companies.
In the event of termination for the government's convenience, contractors
are normally protected by provisions covering reimbursement for costs incurred
subsequent to termination. The company received a termination for convenience
notice on the Tri-Service Standoff Attack Missile (TSSAM) program in February
1995. In December 1996, the company filed a lawsuit against the U.S. Government
in the U.S. Court of Federal Claims seeking the recovery of approximately $750
million for uncompensated performance costs, investments, and a reasonable
profit on the program. In prior years,
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NORTHROP GRUMMAN CORPORATION
the company had charged to operations in excess of $600 million related to this
program. Northrop Grumman is unable to predict whether it will realize some or
all of its claims, none of which are recorded on the balance sheet, from the
U.S. Government on the TSSAM contract.
Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, including the International Traffic in Arms Regulations
promulgated under the Arms Export Control Act, with noncompliance found by any
one agency possibly resulting in fines, penalties, debarment or suspension from
receiving additional contracts with all agencies. Given the company's dependence
on U.S. Government business, suspension or debarment could have a material
adverse effect on the company's future. Moreover, these contracts may be
terminated at the U.S. Government's convenience.
Environmental Issues
Federal, state and local laws relating to the protection of the environment
affect the company's manufacturing operations. The company has provided for the
estimated cost to complete remediation where the company has determined that it
is probable that the company will incur such costs in the future, including
those for which it has been named a Potentially Responsible Party (PRP) by the
Environmental Protection Agency or similarly designated by other environmental
agencies. The company has been designated a PRP under federal Superfund laws at
13 hazardous waste sites and under state Superfund laws at eight sites. It is
difficult to estimate the timing and ultimate amount of environmental cleanup
costs to be incurred in the future due to the uncertainties regarding the extent
of the required cleanup and the status of the law, regulations and their
interpretations. Nonetheless, to assess the potential impact on the company's
financial statements, management estimates the total reasonably possible
remediation costs that could be incurred by the company. Such estimates take
into consideration the professional judgment of the company's environmental
engineers and, when necessary, consultation with outside environmental
specialists. In most instances, only a range of reasonably possible costs can be
estimated. However, in the determination of accruals, the most probable amount
is used when determinable and the minimum is used when no single amount is more
probable. The company records accruals for environmental cleanup costs in the
accounting period in which the company's responsibility is established and the
costs can be reasonably estimated. The company does not anticipate and record
insurance recoveries before collection is probable. Management estimates that at
December 31, 1999, the range of reasonably possible future costs for
environmental remediation, including Superfund sites, is $80 million to $111
million, of which $87 million has been accrued. Should other PRPs not pay their
allocable share of remediation costs, the company may have to
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NORTHROP GRUMMAN CORPORATION
incur costs in addition to those already estimated and accrued. The company is
making the necessary investments to comply with environmental laws; the amounts,
while not insignificant, are not considered material to the company's financial
position, results of operations, or cash flows.
Year 2000 Issues
The company established and implemented its program to address the possibility
of computer failure upon entering the year 2000 (Year 2000), beginning in 1996.
The program encompassed the entire company and all aspects of Year 2000
compliance including software applications, mainframe environment, desktop
equipment, networks, telecommunications, department supported systems,
facilities systems, embedded systems in product deliverables, review of major
suppliers and major customers' Year 2000 status, and development of contingency
plans and year end support plans. All phases of the program were completed by
the end of 1999.
The company has separately identified the costs of Year 2000 remedial
efforts only for internal information services personnel, principally as a
planning and control tool. The total cost of these efforts incurred during the
years 1996 through 1999 was approximately $41 million. Year 2000 costs are
allowable costs under applicable government contracting regulations.
Accordingly, the portion of Year 2000 costs allocable to contracts are charged
as part of normal overhead pursuant to approved methods established for this
purpose.
To date, the company has not experienced any major system failures or other
adverse consequences due to Year 2000 noncompliance. While the possibility still
exists for future computer failures, internally or among its customers and
suppliers, management does not expect that these developments, should they
occur, would have a material adverse impact on the financial position, results
of operations, or cash flows of Northrop Grumman.
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NORTHROP GRUMMAN CORPORATION
MEASURES OF VOLUME
Contract Acquisitions
Contract acquisitions tend to fluctuate from year to year and are determined by
the size and timing of new and add-on orders. The effects of multiyear orders
and/or funding can be seen in the highs and lows shown in the following table.
Contract Acquisitions
$ in millions 1999 1998 1997
- -----------------------------------------------------------------------------------
Integrated Systems
ACS $ 1,421 $ 1,428 $ 1,681
AEW/EW 1,106 679 728
AGS/BM 686 434 761
Intrasegment eliminations (43) (47) (31)
- -----------------------------------------------------------------------------------
3,170 2,494 3,139
- -----------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,375 1,047 1,496
C/3/I&N 727 907 964
Defensive Electronic Systems 708 311 508
Other 308 225 176
- -----------------------------------------------------------------------------------
3,118 2,490 3,144
- -----------------------------------------------------------------------------------
Logicon
Government Information Technology 1,015 813 711
Technology Services 347 300 150
Commercial Information Technology 140 113 97
- -----------------------------------------------------------------------------------
1,502 1,226 958
- -----------------------------------------------------------------------------------
Intersegment eliminations (90) (128) (194)
- -----------------------------------------------------------------------------------
Total acquisitions $ 7,700 $ 6,082 $ 7,047
===================================================================================
ISS acquisitions in 1999 were 27 percent higher than in 1998 reflecting
increases in both the AEW/EW and AGS/BM business areas. Included in the AEW/EW
business area in 1999 is funding for the multiyear buy for 25 E-2C aircraft. The
AGS/BM business area received orders for two, one and two Joint STARS aircraft
in 1999, 1998 and 1997, respectively.
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NORTHROP GRUMMAN CORPORATION
The ACS business area recorded incremental B-2 funding for ongoing
development work, spares and other customer support for the operational aircraft
program in each of the last three years. The company still stands to gain future
post production business, such as airframe depot maintenance, repair of
components, operational software changes, and product improvement modifications.
The company received orders for 30, 20 and 12 F/A-18E/F shipsets in 1999, 1998
and 1997, respectively. Acquisitions in 1998 included orders for 6 F/A-18C/D
shipsets.
ESS acquisitions in 1999 were 25 percent higher than in 1998. The Aerospace
Electronic Systems business area received funding in 1999 for the Longbow
missile multiyear contract and the BAT LRIP contract. In the C/3/I&N business
area, a lower level of international awards for air traffic control radar
systems was posted in 1999 than in 1998. The Defensive Electronic Systems
business area recorded increased orders in 1999 for the ALQ-135 and DIRCM
programs.
Logicon acquisitions increased by 23 percent in 1999 over 1998, reflecting
higher volume in all three business areas. The increase in Government
Information Technology acquisitions is due to a higher win rate on contracts bid
as well as the inclusion of two new businesses acquired: INRI, purchased in
September 1998, and DPC, purchased in June 1999. In the third quarter of 1998,
Logicon won the Joint Base Operations Support Contract (J-BOSC), which is
reported in the Technology Services business area. Under this contract, which
has a five-year basic performance period with a five-year option, the segment
provides base operations support for NASA's Kennedy Space Center and the U.S.
Air Force's 45th Space Wing, which includes Cape Canaveral Air Station and
Patrick Air Force Base.
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NORTHROP GRUMMAN CORPORATION
Sales
Year-to-year sales vary less than contract acquisitions and reflect performance
under new and ongoing contracts.
Net Sales
$ in millions 1999 1998 1997
- -----------------------------------------------------------------------------------
Integrated Systems
ACS $ 2,059 $ 2,114 $ 2,586
AEW/EW 888 780 739
AGS/BM 714 716 631
Intrasegment Eliminations (43) (47) (31)
- -----------------------------------------------------------------------------------
3,618 3,563 3,925
- -----------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,105 1,265 1,240
C/3/I&N 843 904 887
Defensive Electronic Systems 536 544 656
Other 229 186 281
- -----------------------------------------------------------------------------------
2,713 2,899 3,064
- -----------------------------------------------------------------------------------
Logicon
Government Information Technology 971 787 770
Technology Services 346 213 156
Commercial Information Technology 142 107 96
- -----------------------------------------------------------------------------------
1,459 1,107 1,022
- -----------------------------------------------------------------------------------
Intersegment eliminations (174) (202) (213)
- -----------------------------------------------------------------------------------
Total sales $ 7,616 $ 7,367 $ 7,798
===================================================================================
ISS segment sales increased by 2 percent in 1999 as compared to 1998. The
decreasing trend in ACS revenues is primarily attributable to the B-2 program,
which decreased by $86 million in 1999 as compared to 1998, following a $291
million decrease in 1998 as compared to 1997. Current planning data indicate
that the level of overall B-2 revenue for 2000, when production is expected to
be substantially completed, will decline by approximately 40 percent from the
1999 level. Sales on the F/A-18 program increased by $74 million in 1999 as
compared to 1998. The last 17 shipsets of the C/D version of the F/A-18 were
delivered in 1999; shipsets delivered in 1998 and 1997 were 34 and 35,
respectively. In 1999 the
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NORTHROP GRUMMAN CORPORATION
company delivered the first twelve shipsets under the F/A-18E/F production
contract and the last five shipsets under the F/A-18E/F LRIP contract.
The production contract is accounted for under the units-of-delivery
method, which results in revenue being recorded as deliveries are made. The LRIP
contract, which began in 1996 and was completed in 1999, is accounted for under
the cost-to-cost type of percentage-of-completion method, resulting in revenue
being recorded as costs are incurred. In 2000 the company plans to deliver 28
F/A-18E/F shipsets under production contracts. Sales on the Kistler K-1 program
were recorded on a cost recovery basis as cash was received. Such sales declined
$10 million in 1998 from the $63 million recorded in 1997. Work on this program
was discontinued in December 1998 due to difficulties encountered by Kistler
Aerospace Corporation in obtaining financing. No operating margin was recorded
on this program.
AEW/EW sales increased in 1999 over 1998 primarily due to increased EA-6B
revenue. AGS/BM sales in 1999 were unchanged from the level reported in 1998.
Overall ISS revenue for 2000 is expected to be approximately 12 percent to 15
percent lower than 1999.
ESS segment sales declined by 6 percent in 1999 as compared to 1998. Lower
Aerospace Electronic Systems business area sales are attributable to lower space
systems and combat avionics systems sales. The C3I&N business area reflects
lower marine volume. The improvement in the "Other" business area is due to the
inclusion of California Microwave Systems, which was acquired by Northrop
Grumman in April 1999. ESS segment sales for 1998 declined 5 percent as compared
to 1997 due to lower Defensive Electronic Systems volume as well as lower
revenues on a number of programs included in the "Other" business area. Within
the C/3/I&N business area, increased 1998 airspace management sales more than
offset lower marine sales. For 2000, the company expects ESS segment sales to be
between $2.8 billion and $3.1 billion.
Logicon sales in 1999 increased by 32 percent over 1998 sales, which
follows an 8 percent increase in 1998 sales over 1997. All three business areas
improved in both 1999 and 1998 over prior year sales.
The Government Information Technology and Commercial Information Technology
business area improvements in 1999 reflect the higher level of acquisitions and
higher win rate on contracts bid. Most of the additional sales generated in the
Technology Services business area, in both 1999 and 1998, is attributable to the
commencement of work in the fourth quarter of 1998 on the J-BOSC contract, which
was won earlier in that year. The company expects Logicon sales to increase by
approximately ten percent in 2000 over 1999.
-15-
NORTHROP GRUMMAN CORPORATION
Funded Order Backlog
The year-end funded order backlog is the sum of the previous year-end backlog
plus the year's contract acquisitions minus the year's sales. Backlog is
converted into the following years' sales as costs are incurred or deliveries
are made. It is expected that approximately 60 percent of the 1999 year-end
backlog will be converted into sales in 2000.
Funded Order Backlog
$ in millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Integrated Systems
ACS $ 2,360 $2,998 $3,684
AEW/EW 1,209 991 1,092
AGS/BM 882 910 1,192
- -------------------------------------------------------------------------------------------------
4,451 4,899 5,968
- -------------------------------------------------------------------------------------------------
Electronic Sensors & Systems
Aerospace Electronic Systems 1,761 1,491 1,709
C/3/I&N 775 891 888
Defensive Electronic Systems 789 617 850
Other 199 120 81
- -------------------------------------------------------------------------------------------------
3,524 3,119 3,528
- -------------------------------------------------------------------------------------------------
Logicon
Government Information Technology 412 368 342
Technology Services 149 148 61
Commercial Information Technology 48 50 44
- -------------------------------------------------------------------------------------------------
609 566 447
- -------------------------------------------------------------------------------------------------
Intersegment Eliminations (85) (169) (243)
- -------------------------------------------------------------------------------------------------
Total backlog $ 8,499 $8,415 $9,700
=================================================================================================
-16-
NORTHROP GRUMMAN CORPORATION
Total U.S. Government orders, including those made on behalf of foreign
governments (FMS), comprised 86 percent of the backlog at the end of 1999
compared with 85 percent at the end of 1998 and 86 percent at the end of 1997.
Total foreign customer orders, including FMS, accounted for 16 percent of the
backlog at the end of 1999 compared with 17 percent in 1998 and 20 percent in
1997. Domestic commercial business in backlog was 3 percent at the end of both
1999 and 1998 and was 2 percent at the end of 1997.
MEASURES OF PERFORMANCE
The company's operating margin for 1999 was $954 million compared to $752
million for 1998, reflecting increases in the ISS and Logicon segments, as well
as increased pension income.
ISS segment operating margin in 1999 was $387 million as compared to
$272 million in 1998, reflecting increases in both the ACS and AGS/BM business
areas. In 1999 the ACS business area benefited from upward cumulative margin
rate adjustments totaling $70 million on the B-2 program and $11 million on the
F/A-18E/F program. In 1997, ACS recorded a $55 million cumulative margin rate
adjustment on the B-2 production contract. In 1999, five B-2's were delivered
under the production contract as compared to five in 1998 and four in 1997.
Following the award of the last increment of production funding for the B-2, the
company began recording future operating margin increases on all production
aircraft as these units were delivered and accepted by the customer. At the time
each unit is delivered, an assessment is made of the status of the production
contract so as to estimate the amount of any probable additional margin
available beyond that previously recognized. That unit's proportionate share of
any such unrecognized remaining balance is then recorded. In this fashion it is
believed that margin improvements will be recognized on a more demonstrable
basis. All 15 production units have been initially delivered. Three units remain
to be retrofitted and are scheduled for delivery in the first half of 2000.
Since the beginning of the Joint STARS program, the company (and prior
to 1994, the Grumman Corporation) as of December 31, 1998 had incurred over $100
million of costs in excess of revenues in the performance of the development and
production phases of the program. Including support and other work, the company
recorded on the Joint STARS program operating losses of $25 million and $29
million in 1998 and 1997, respectively. In 1998, the company submitted Requests
for Equitable Adjustment (REAs) to the U.S. Air Force seeking adjustment to
production contracts for cost increases incurred during the refurbishment and
conversion of used Boeing 707 aircraft to Joint STARS platforms. The company and
the U.S. Air Force executed an Alternate Dispute Resolution Agreement to attempt
to resolve these REAs, and in April 1999 the company filed these REAs as
certified claims. In December
-17-
NORTHROP GRUMMAN CORPORATION
1999, the company reached a settlement of these contract claims with the U.S.
Air Force. The company is now able to recognize underlying improved performance
on the production phase of this program. As a result, cumulative margin rate
adjustments totaling $37 million were recorded in the fourth quarter. The
company expects to record margin on Joint STARS in 2000 and beyond. Revenue on
the Joint STARS program is recognized using the cost-to-cost percentage-of-
completion method of accounting.
ESS segment operating margin in 1999 was $199 million, down from the
$218 million reported for 1998. The decrease is a result of lower sales volume
as well as a reduction of approximately $44 million resulting from the pension
plan merger, which is described below. The decrease also reflects lower margins
in the Defensive Electronic Systems business area, due in part to additional
costs incurred in transitioning a development program to production. ESS segment
1998 operating margin was reduced by a $21 million fourth quarter charge for
estimated future costs not considered recoverable from future revenues on the
DIRCM program. The charge resulted from increased costs associated with solving
technical design issues as well as difficulties in achieving timely completion
of the second series of live-fire tests on the large turret version. In 1997,
increases in the cost estimate to complete the company's work on DIRCM resulted
in cumulative margin rate adjustments totaling $33 million. Partially offsetting
these downward adjustments was the settlement of a claim involving work
performed in the 1980's on the MX missile Interface Test Adapter (ITA), which
resulted in an $8 million increase in operating margin and $12 million in
interest income.
Logicon operating margin in 1999 was $80 million, a 33 percent increase
over the $60 million recorded in 1998. The increase is attributable to increased
sales volume in all business areas and improved performance in the Technology
Services business area. These improvements were somewhat offset by $4 million of
nonrecurring charges related to employee termination costs and legal accruals.
Logicon operating margin in 1998 was reduced by $8 million for consolidation and
reorganization charges.
Operating margin in 1999 included $343 million of pension income
compared with $270 million in 1998 and $144 million in 1997. The increases are
primarily attributable to the high market returns on investments experienced
over the last several years. Northrop Grumman has again experienced a high rate
of return on plan assets in 1999, which in turn will affect 2000 pension income
calculations. Additionally, the discount rate on obligations used to determine
pension income for 2000 has been increased to 7.5 percent in order to reflect
market conditions at December 31, 1999. For 2000, these two factors are expected
to result in a significant increase in pension income and a small reduction to
company contributions to the plans.
-18-
NORTHROP GRUMMAN CORPORATION
In July 1999, the company merged three of its retirement plans into
one, to include the former Northrop Grumman Pension Plan, the Electronic Sensors
and Systems Sector Employees Pension Plan (non-represented), and the Commercial
Aircraft Employees Pension Plan (salaried). The pension plan merger does not
result in any changes to any participant's existing pension benefits, nor does
it alter individual plan designs. The retirement plan merger resulted in a
reduction to 1999 net income of approximately $16 million, or $.24 per share.
Included in the 1998 results are pretax costs totaling $58 million
related to activities to realign operating units, consolidate facilities and
laboratories and exit certain business areas, which reduced operating margin by
$43 million and other income by $15 million. The operating margin amount was
reflected in segment results as follows: ISS, $6 million; ESS, $13 million; and
Logicon, $8 million. The remaining $16 million was included in Corporate
expenses. The charge included $20 million for employee termination costs, $12
million for write-down to estimated fair value of assets available for sale, $3
million for losses on disposals of assets, $9 million for write-off of purchased
intangible assets no longer considered recoverable from future revenues, $9
million for loss on sale of a business, and $5 million for excess capacity lease
costs, net of estimated sublease income through 2008. The employee termination
costs represent cash severance payments made to employees.
Capital assets are transferred to assets available for sale when a
decision is made to sell the facility and selling efforts are actively underway.
In some cases, operations continue and, when costs are allowable under
government contracts, depreciation expense is recorded until the facility is
vacated or sold. In 1999, $2 million was transferred to assets available for
sale and assets with a carrying value of $13 million were sold. In 1998, $37
million was transferred to assets available for sale, $2 million in depreciation
expense on these assets was recorded, and assets with a carrying value of $46
million were sold. Assets available for sale are evaluated at least annually for
recoverability and written down to estimated fair value as necessary. In 1998, a
write down adjustment of $12 million was recorded. In 1997, recovery of $24
million of the 1996 write-down, related to the sale of the company's Perry,
Georgia, facility, was included in Other Income(Deductions). The assets
available for sale at the end of 1999 are expected to be sold in 2000.
Included in the 1998 results is a $30 million write-off of an
investment related to Kistler Aerospace Corporation's K-1 program. The
investment consisted of advances on behalf of Kistler Aerospace that were made
in 1998 to continue the company's efforts in support of the K-1. The write off
resulted from the company's assessment that the near-term likelihood of Kistler
obtaining additional financing made recovery of the investment uncertain.
-19-
NORTHROP GRUMMAN CORPORATION
Interest expense for 1999 was $224 million, an $8 million decrease from
1998, which in turn was down $25 million from the 1997 level. The 1999 interest
expense includes $11 million related to settlement of various legal and tax
issues. Total debt stood at $2.2 billion at the end of 1999 compared to $2.8
billion at the end of both 1998 and 1997.
The company's effective federal income tax rate was 36.5 percent in
1999, 37.5 percent in 1998, and 37.9 percent in 1997.
Aerostructures, reported as discontinued operations, had net income of
$9 million in 1999, $1 million in 1998, and $89 million in 1997. Included in
these amounts are related pretax pension income(expense) of $10 million, $(4)
million, and $(11) million in 1999, 1998, and 1997, respectively.
Effective January 1, 1999, the company adopted the new accounting
standard, SOP 98-5 - Reporting on the Costs of Start-Up Activities, which
requires that certain costs that previously had been deferred be expensed and
reported as a cumulative effect of a change in accounting principle. The company
reported a $16 million after-tax charge, or $.24 per share, to write off the
previously deferred start-up costs. All such costs incurred after January 1,
1999, approximately $7 million before tax, were expensed as incurred and
included in cost of sales.
MEASURES OF LIQUIDITY AND CAPITAL RESOURCES
In 1999 cash provided by operations was $1,207 million, a record level
and considerably more than the $244 million generated in 1998 and the $730
million generated in 1997. The improvement in 1999 cash from operations is
attributable to many factors, the more significant of which are: increased
operating margin, improved cash management of working capital, lower pension
plan contributions as a result of the pension plan merger, and accelerated cash
collections in part due to customers' Year 2000 concerns. The lower generation
of cash from operations in 1998 was driven by expenses related to the terminated
merger with Lockheed Martin Corporation, as well as, an increase in working
capital for Boeing jetliners in support of increased production levels.
Cash generated from operating activities in 1999 was sufficient to
finance capital expenditures, pay dividends to shareholders, acquire new
businesses for approximately $240 million in cash, and reduce
-20-
NORTHROP GRUMMAN CORPORATION
net debt (total debt less cash balances) by $704 million. In 1998 additional
borrowings under the revolving credit facility along with the cash generated by
operating activities provided sufficient cash flows to service debt, finance
capital expenditures, and pay dividends to shareholders.
The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.
1999 1998 1997
- ------------------------------------------------------------------------------------------------
Cash came from
Customers 98% 95% 94%
Lenders 3 4
Buyers of assets/other 2 2 2
- -------------------------------------------------------------------------------------------------
100% 100% 100%
=================================================================================================
Cash went to
Employees and suppliers of services and materials 84% 90% 83%
Sellers of assets 5 3 2
Lenders 9 5 10
Suppliers of facilities/other 1 1 4
Shareholders 1 1 1
- -------------------------------------------------------------------------------------------------
100% 100% 100%
=================================================================================================
The company has a credit agreement with a group of domestic and foreign
banks to provide for two credit facilities: $1.8 billion available on a
revolving credit basis through March 2002; and a variable interest rate $450
million term loan payable in quarterly installments of $50 million plus interest
through March 2002.
To provide for long-term liquidity the company believes it can obtain
additional capital from such sources as: the public or private capital markets;
the further sale of assets; sale and leaseback of operating assets; and leasing
rather than purchasing new assets.
Cash generated from operations, supplemented by borrowings under the
credit agreement, are expected to be sufficient in 2000 to service debt, finance
capital expansion projects, and continue paying dividends to the shareholders.
With the completion of the B-2 EMD contract, federal and state income taxes that
have been deferred since the inception of the contract in 1981, will become
payable. The contract is expected to be completed in 2002 with taxes of
approximately $1 billion due, to be paid that year. The company plans to use
cash generated from operations supplemented by additional borrowings under the
credit agreement and/or additional borrowings from public or private capital
markets to pay these taxes.
Capital expenditure commitments at December 31, 1999, were
approximately $145 million including $20 million for Aerostructures and $5
million for environmental control and compliance purposes. Capital expenditures
for 1999
-21-
NORTHROP GRUMMAN CORPORATION
were $201 million including $29 million for Aerostructures and $22 million for
capitalized software costs. For 2000, capital expenditures are expected to be
approximately $250 to $275 million, including approximately $30 to $40 million
for Aerostructures and $40 million for capitalized software costs.
The company will continue to provide the productive capacity to perform
its existing contracts, prepare for future contracts, and conduct R&D in the
pursuit of developing opportunities. While these expenditures tend to limit
short-term liquidity, they are made with the intention of improving the long-
term growth and profitability of the company.
FORWARD-LOOKING INFORMATION
Certain statements and assumptions in Management's Discussion and Analysis and
elsewhere in of this Form 8-K contain or are based on "forward-looking"
information (that the company believes to be within the definition in the
Private Securities Litigation and Reform Act of 1995) that involves risk and
uncertainties, including statements and assumptions with respect to future
revenues, program performance and cash flows, the outcome of contingencies
including litigation and environmental remediation, and anticipated costs of
capital investments and planned dispositions. The company's operations are
necessarily subject to various risks and uncertainties; actual outcomes are
dependent upon many factors, including, without limitation, the company's
successful performance of internal plans; government customers' budgetary
restraints; customer changes in short-range and long-range plans; domestic and
international competition in both the defense and commercial areas; product
performance; continued development and acceptance of new products; performance
issues with key suppliers and subcontractors; government import and export
policies; termination of government contracts; the outcome of political and
legal processes; legal, financial, and governmental risks related to
international transactions and global needs for military and commercial aircraft
and electronic systems and support; as well as other economic, political and
technological risks and uncertainties.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The company has fixed-rate long-term debt obligations, most of which are not
callable. The company also has financial instruments that are subject to
interest rate risk, principally variable-rate short-term debt outstanding under
the Credit Agreement. The company may enter into interest rate swap agreements
to offset the variable-rate characteristics of these loans. At December 31,
1999, no interest rate swap agreements were in effect. The company does not hold
or issue derivative financial instruments for trading purposes.
Only a small portion of the company's transactions are contracted in
foreign currencies. The company does not consider the market risk exposure
relating to foreign currency exchange to be material.
-22-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, $ in millions 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Assets:
Current assets
Cash and cash equivalents $ 142 $ 44
Accounts receivable 1,402 1,507
Inventoried costs 1,190 1,373
Deferred income taxes 23 24
Prepaid expenses 36 85
- -----------------------------------------------------------------------------------------------------------
Total current assets 2,793 3,033
- -----------------------------------------------------------------------------------------------------------
Property, plant and equipment at cost
Land and land improvements 163 170
Buildings 777 785
Machinery and other equipment 1,860 2,014
Leasehold improvements 95 89
- -----------------------------------------------------------------------------------------------------------
2,895 3,058
Accumulated depreciation (1,655) (1,784)
- -----------------------------------------------------------------------------------------------------------
1,240 1,274
- -----------------------------------------------------------------------------------------------------------
Other assets
Goodwill, net of accumulated amortization of
$441 in 1999 and $338 in 1998 3,469 3,381
Other purchased intangibles, net of accumulated
amortization of $388 in 1999 and $295 in 1998 761 795
Prepaid retiree benefits cost, intangible pension
asset and benefit trust fund 946 787
Deferred income taxes 166
Assets available for sale 26 37
Investments in and advances to affiliates and sundry assets 50 63
- -----------------------------------------------------------------------------------------------------------
5,252 5,229
- -----------------------------------------------------------------------------------------------------------
$ 9,285 $ 9,536
===========================================================================================================
-23-
NORTHROP GRUMMAN CORPORATION
December 31, $ in millions 1999 1998
- -----------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable to banks $ 25 $ 69
Current portion of long-term debt 200 200
Trade accounts payable 490 416
Accrued employees' compensation 366 337
Advances on contracts 316 354
Income taxes payable 58
Deferred income taxes 550 527
Other current liabilities 459 464
- -----------------------------------------------------------------------------------------------------
Total current liabilities 2,464 2,367
- -----------------------------------------------------------------------------------------------------
Long-term debt 2,000 2,562
Accrued retiree benefits 1,458 1,704
Other long-term liabilities 42 53
Deferred income taxes 64
Shareholders' equity
Paid-in capital
Preferred stock, 10,000,000 shares authorized; none issued
Common stock, 200,000,000 shares authorized; issued and outstanding:
1999 - 69,719,164
1998 - 68,836,810 1,028 989
Retained earnings 2,248 1,892
Accumulated other comprehensive loss (19) (31)
- -----------------------------------------------------------------------------------------------------
3,257 2,850
- -----------------------------------------------------------------------------------------------------
$ 9,285 $ 9,536
=====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, $ in millions, except per share 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Net sales $ 7,616 $ 7,367 $ 7,798
Cost of sales
Operating costs 5,634 5,604 5,980
Administrative and general expenses 1,028 1,011 1,077
- -----------------------------------------------------------------------------------------------------------
Operating margin 954 752 741
Other income (deductions)
Interest income 18 11 17
Merger costs (186) (18)
Interest expense (224) (232) (257)
Investment losses (30)
Other, net (1) (6) 29
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 747 309 512
Federal and foreign income taxes 273 116 194
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 474 193 318
Income from discontinued operations, net of tax 9 1 89
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 483 194 407
Cumulative effect of accounting change, net of income
tax benefit of $11 in 1999 (16)
- -----------------------------------------------------------------------------------------------------------
Net income $ 467 $ 194 $ 407
===========================================================================================================
Weighted average common shares outstanding, in millions 69.3 68.5 66.7
===========================================================================================================
Basic earnings per share:
Continuing operations $ 6.84 $ 2.82 $ 4.76
Discontinued operations .13 .01 1.34
- -----------------------------------------------------------------------------------------------------------
Before cumulative effect of accounting change 6.97 2.83 6.10
Accounting change (.24)
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 6.73 $ 2.83 $ 6.10
===========================================================================================================
Diluted earnings per share:
Continuing operations $ 6.80 $ 2.78 $ 4.67
Discontinued operations .13 .01 1.31
- -----------------------------------------------------------------------------------------------------------
Before cumulative effect of accounting change 6.93 2.79 5.98
Accounting change (.24)
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 6.69 $ 2.79 $ 5.98
===========================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, $ in millions 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Net income $ 467 $ 194 $ 407
Other comprehensive income
Minimum pension liability adjustments, before tax 19 (13) (28)
Income tax expense(benefit) 7 (4) (10)
- ------------------------------------------------------------------------------------------------------------
Other comprehensive income(loss), net of tax 12 (9) (18)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income $ 479 $ 185 $ 389
============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
NORTHROP GRUMMAN CORPORATION
Year ended December 31, $ in millions, except per share 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Paid-in Capital
At beginning of year $ 989 $ 838 $ 784
Stock issued in purchase of business 30
Employee stock awards and options exercised, net of forfeitures 9 151 60
Treasury stock transactions (6)
- ------------------------------------------------------------------------------------------------------------
At end of year 1,028 989 838
- ------------------------------------------------------------------------------------------------------------
Retained Earnings
At beginning of year 1,892 1,807 1,502
Net income 467 194 407
Cash dividends (111) (109) (102)
- ------------------------------------------------------------------------------------------------------------
At end of year 2,248 1,892 1,807
- ------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss
At beginning of year (31) (22) (4)
Change in excess of additional minimum pension liability over
unrecognized prior service costs, net of tax 12 (9) (18)
- ------------------------------------------------------------------------------------------------------------
At end of year (19) (31) (22)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 3,257 $2,850 $ 2,623
============================================================================================================
Book value per share $ 46.72 $41.39 $ 38.99
============================================================================================================
Cash dividends per share $ 1.60 $ 1.60 $ 1.60
============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
NORTHROP GRUMMAN CORPORATION
Year ended December 31, $ in millions 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Operating Activities
Sources of Cash
Cash received from customers
Progress payments $ 1,691 $1,844 $ 2,264
Other collections 7,450 6,929 7,050
Interest received 18 11 17
Income tax refunds received 75 26 13
Other cash receipts 7 6 7
- ------------------------------------------------------------------------------------------------
Cash provided by operating activities 9,241 8,816 9,351
- ------------------------------------------------------------------------------------------------
Uses of Cash
Cash paid to suppliers and employees 7,715 8,273 8,280
Interest paid 216 219 251
Income taxes paid 85 46 64
Other cash payments 18 34 26
- ------------------------------------------------------------------------------------------------
Cash used in operating activities 8,034 8,572 8,621
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,207 244 730
- ------------------------------------------------------------------------------------------------
Investing Activities
Payment for businesses purchased, net of cash acquired (232) (50)
Additions to property, plant and equipment (201) (211) (238)
Proceeds from sale of property, plant and equipment 40 63 106
Proceeds from sale of affiliates/operations 19
Advances to affiliate (30)
Funding of retiree benefit trust (2)
Other investing activities 1 (5)
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (392) (235) (113)
- ------------------------------------------------------------------------------------------------
Financing Activities
Borrowings under lines of credit 22 295 422
Repayment of borrowings under lines of credit (434) (55) (808)
Principal payments of long-term debt/capital leases (200) (200) (200)
Proceeds from issuance of stock 6 36 17
Dividends paid (111) (109) (102)
Other financing activities 5 (6)
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (717) (28) (677)
- ------------------------------------------------------------------------------------------------
Increase(decrease) in cash and cash equivalents 98 (19) (60)
Cash and cash equivalents balance at beginning of year 44 63 123
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents balance at end of year $ 142 $ 44 $ 63
================================================================================================
-27-
NORTHROP GRUMMAN CORPORATION
Year ended December 31, $ in millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 467 $ 194 $ 407
Adjustments to reconcile net income to net cash provided
Depreciation 193 207 232
Amortization of intangible assets 196 186 186
Common stock issued to employees 2 88 24
Loss on disposals of property, plant and equipment 21 30 18
Loss(gain) on assets available for sale 15 (8)
Loss on investment 30
Retiree benefits income (249) (194) (44)
Decrease(increase) in
Accounts receivable 170 1,212 (81)
Inventoried costs 172 (111) (147)
Prepaid expenses 45 (18) 2
Increase(decrease) in
Progress payments 21 (1,280) 66
Accounts payable and accruals (2) (115) 91
Provisions for contract losses (8) 54 (30)
Deferred income taxes 230 112 188
Income taxes payable 58 (16) (9)
Retiree benefits (129) (178) (180)
Other noncash transactions 20 28 15
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,207 $ 244 $ 730
===============================================================================================
Noncash Investing and Financing Activities:
Purchase of businesses
Fair value of assets acquired $ 328 $ 71
Cash paid (232) (51)
Stock issued (30)
- -----------------------------------------------------------------------------------------------
Liabilities assumed $ 66 $ 20
===============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Significant Accounting Estimates
The consolidated financial statements include the accounts of the corporation
and its subsidiaries. All material intercompany accounts, transactions and
profits are eliminated in consolidation.
The company's financial statements are in conformity with generally
accepted accounting principles. The preparation thereof requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Estimates have been prepared on the basis of the most current
and best available information and actual results could differ from those
estimates.
Nature of Operations
Northrop Grumman is a major producer of military and commercial aircraft
subassemblies and defense electronics and is the prime contractor on the U.S.
Air Force B-2 Stealth Bomber. The company operates within the broadly defined
aerospace industry. The majority of the company's products and services are
ultimately sold to the U.S. Government and the company is therefore affected by,
among other things, the federal budget process.
The company's three reportable segments are its three operating units:
Integrated Systems (ISS), Electronic Sensors and Systems (ESS), and Logicon, the
company's information technology sector. Included in the Management's Discussion
and Analysis section of this report are general descriptions of the company's
principal products and services under the titles Integrated Systems Segment,
Electronic Sensors and Systems Segment, and Logicon Segment (see pages 2 through
6) and segment data in the table titled Results of Operations by Segment and
Major Customer (see pages 7 and 8), which are considered to be an integral
part of these financial statements. Only these portions of Management's
Discussion and Analysis are incorporated by reference into these financial
statements.
Sales to the U.S. Government (including foreign military sales) are
reported within each segment and in total in the Selected Financial Data. The
company does not conduct a significant volume of activity through foreign
operations or in foreign currencies. Intersegment sales are transacted at cost
incurred with no profit added. Management principally uses operating margin as
the measure to evaluate segment profitability. The company does not allocate
federal income tax expense, pension income, the deferred portion of state income
tax expense, interest income, or interest expense to segments. General corporate
assets include cash and cash equivalents, corporate office furnishings and
equipment, other unallocable property, investments in affiliates, prepaid
retiree benefits cost, intangible pension asset, benefit trust fund assets,
deferred tax assets and certain assets available for sale.
-29-
NORTHROP GRUMMAN CORPORATION
Sales
Sales under cost-reimbursement, service, research and development, and
construction-type contracts are recorded as costs are incurred and include
estimated earned fees or profits calculated on the basis of the relationship
between costs incurred and total estimated costs (cost-to-cost type of
percentage-of-completion method of accounting). Construction-type contracts
embrace those fixed-price type contracts that provide for the delivery at a low
volume per year or a small number of units after a lengthy period of time over
which a significant amount of costs have been incurred. Sales under other types
of contracts are recorded as deliveries are made and are computed on the basis
of the estimated final average unit cost plus profit (units-of-delivery type of
percentage-of-completion method of accounting).
Certain contracts contain provisions for price redetermination or for cost
and/or performance incentives. Such redetermined amounts or incentives are
included in sales when the amounts can reasonably be determined. In the case of
the B-2 bomber production contract, future changes in operating margin will be
recognized on a units-of-delivery basis and recorded as each equivalent
production unit is delivered. Amounts representing contract change orders,
claims or limitations in funding are included in sales only when they can be
reliably estimated and realization is probable. In the period in which it is
determined that a loss will result from the performance of a contract, the
entire amount of the estimated ultimate loss is charged against income. Loss
provisions are first offset against costs that are included in assets, with any
remaining amount reflected in Other Current Liabilities. Other changes in
estimates of sales, costs and profits are recognized using the cumulative catch-
up method of accounting. This method recognizes in the current period the
cumulative effect of the changes on current and prior periods. Hence, the effect
of the changes on future periods of contract performance is recognized as if the
revised estimates had been the original estimates.
Contract Research and Development
Customer-sponsored research and development costs (direct and indirect costs
incurred pursuant to contractual arrangements) are accounted for like other
contracts.
Noncontract Research and Development
This category includes independent research and development costs and company-
sponsored research and development costs (direct and indirect costs not
recoverable under contractual arrangements). Independent research and
development (IR&D) costs are included in administrative and general expenses
(indirect costs allocable to U.S. Government contracts) whereas company-
sponsored research and development costs are charged against income as incurred.
-30-
NORTHROP GRUMMAN CORPORATION
Environmental Costs
Environmental liabilities are accrued when the company determines it is
responsible for remediation costs and such amounts are reasonably estimable.
When only a range of amounts is established and no amount within the range is
better than another, the minimum amount in the range is recorded. The company
does not anticipate and record insurance recoveries before collection is
probable.
Interest Rate Swap Agreements
The company may enter into interest rate swap agreements to offset the variable-
rate characteristic of certain variable-rate term loans outstanding under the
company's Credit Agreement. Interest on these interest rate swap agreements is
recognized as an adjustment to interest expense in the period incurred.
Income Taxes
Provisions for federal, state and local income taxes are calculated on reported
financial statement pretax income based on current tax law and also include, in
the current period, the cumulative effect of any changes in tax rates from those
used previously in determining deferred tax assets and liabilities. Such
provisions differ from the amounts currently payable because certain items of
income and expense are recognized in different time periods for financial
reporting purposes than for income tax purposes.
The company accounts for certain contracts in process using different
methods of accounting for financial statements and tax reporting and thus
provides deferred taxes on the difference between the financial and taxable
income reported during the performance of such contracts.
In accordance with industry practice, state and local income and franchise
tax provisions are included in administrative and general expenses.
-31-
NORTHROP GRUMMAN CORPORATION
Earnings per Share
Basic earnings per share is calculated using the weighted average number of
shares of common stock outstanding during each period, after giving recognition
to stock splits and stock dividends. Diluted earnings per share reflect the
dilutive effect of stock options and other stock awards granted to employees
under stock-based compensation plans.
Basic and diluted earnings per share are calculated as follows:
Earnings
Net Income Shares per share
---------- ------ ---------
(millions) (millions)
1999
Basic earnings per share from continuing operations $ 474 69.3 $ 6.84
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share from continuing operations $ 474 69.7 $ 6.80
========- ========== =======
Basic earnings per share from discontinued operations $ 9 69.3 $ .13
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share from discontinued operations $ 9 69.7 $ .13
========= ========== =======
Basic earnings per share before cumulative effect of
accounting change $ 483 69.3 $ 6.97
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share before cumulative effect of
accounting change $ 483 69.7 $ 6.93
========= ========== =======
Basic earnings per share $ 467 69.3 $ 6.73
========= =======
Dilutive effect of stock options and awards .4
----------
Diluted earnings per share $ 467 69.7 $ 6.69
========= ========== =======
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NORTHROP GRUMMAN CORPORATION
Earnings
Net Income Shares per share
---------- ------ ---------
(millions) (millions)
1998
Basic earnings per share from continuing operations $ 193 68.5 $ 2.82
========= ========
Dilutive effect of stock options and awards 1.0
----------
Diluted earnings per share from continuing operations $ 193 69.5 $ 2.78
========= ========== ========
Basic earnings per share from discontinued operations $ 1 68.5 $ .01
========= ========
Dilutive effect of stock options and awards 1.0
----------
Diluted earnings per share from discontinued operations $ 1 69.5 $ .01
========= ========== ========
Basic earnings per share $ 194 68.5 $ 2.83
========= ========
Dilutive effect of stock options and awards 1.0
----------
Diluted earnings per share $ 194 69.5 $ 2.79
========= ========== ========
1997
Basic earnings per share from continuing operations $ 318 66.7 $ 4.76
========= ========
Dilutive effect of stock options and awards 1.4
----------
Diluted earnings per share from continuing operations $ 318 68.1 $ 4.67
========= ========== ========
Basic earnings per share from discontinued operations $ 89 66.7 $ 1.34
========= ========
Dilutive effect of stock options and awards 1.4
----------
Diluted earnings per share from discontinued operations $ 89 68.1 $ 1.31
========= ========== ========
Basic earnings per share $ 407 66.7 $ 6.10
========= ========
Dilutive effect of stock options and awards 1.4
----------
Diluted earnings per share $ 407 68.1 $ 5.98
========= ========== ========
-33-
NORTHROP GRUMMAN CORPORATION
Cash and Cash Equivalents
Cash and cash equivalents include interest-earning debt instruments that mature
in three months or less from the date purchased.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers,
amounts currently due but unbilled (primarily related to contracts accounted for
under the cost-to-cost type of percentage-of -completion method of accounting),
certain estimated contract changes, claims in negotiation that are probable of
recovery, and amounts retained by the customer pending contract completion.
Inventoried Costs
Inventoried costs primarily relate to work in process under fixed-price type
contracts (excluding those included in unbilled accounts receivable as
previously described). They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated contract costs
include direct production costs, factory and engineering overhead, production
tooling costs, and allowable administrative and general expenses (except for
general corporate expenses and IR&D allocable to commercial contracts, which are
charged against income as incurred).
In accordance with industry practice, inventoried costs are classified
as a current asset and include amounts related to contracts having production
cycles longer than one year.
Depreciable Properties
Property, plant and equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Capital leases providing for the
transfer of ownership upon their expiration or containing bargain purchase
options are amortized over the estimated useful lives of individual assets. Most
of these assets are depreciated using declining-balance methods, with the
remainder using the straight-line method, with the following lives:
Years
- --------------------------------------------------------------------------------
Land improvements 2-20
Buildings 3-45
Machinery and other equipment 2-33
Leasehold improvements Length of lease
- --------------------------------------------------------------------------------
Goodwill and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets are amortized on a straight-line
basis over weighted average periods of 38 years and 15 years, respectively.
Goodwill and other purchased intangibles balances are included in the
identifiable assets of the industry segment to which they have been assigned and
amortization is charged against the respective industry segment operating
margin. The recoverability of goodwill and other
-34-
NORTHROP GRUMMAN CORPORATION
purchased intangibles is evaluated at least annually considering the projected
future profitability and cash flow of the operations to which they relate. When
it is determined that an impairment has occurred, an appropriate charge to
operations is recorded. Charges of $7 million and $9 million were recorded in
1999 and 1998, respectively, for purchased intangible assets no longer
considered recoverable from future revenues.
Assets Available for Sale
Capital assets are transferred to assets available for sale when a decision is
made to sell a facility and selling efforts are actively underway. In some
cases, operations continue and, when costs are allowable under government
contracts, depreciation expense is recorded until the facility is vacated or
sold. Assets available for sale are evaluated at least annually for
recoverability and written down to estimated fair value as necessary. When an
asset is written down to estimated fair value, depreciation ceases.
Financial Statement Reclassification
To conform to the presentation in 1999, certain amounts for 1998 and 1997 have
been reclassified in the Consolidated Financial Statements. The
reclassifications had no effect on net income or earnings per share for any
period presented.
DISCONTINUED OPERATIONS
Effective July 24, 2000, the company completed the sale of its commercial
aerostructures (Aerostructures) business to The Carlyle Group, pursuant to an
Asset Purchase Agreement dated as of June 9, 2000 between Northrop Grumman and
Vought Aircraft Industries, Inc., an entity owned by The Carlyle Group. The
purchase price was composed of $667.7 million in cash and a promissory note for
$175 million, maturing in nine years, with interest payable in kind for four
years and interest payable in kind or cash thereafter. An estimated loss on the
sale of $15 million will be recorded in the second quarter of 2000.
Aerostructures is a major producer of commercial and military aircraft
subassemblies, the majority of which are sold to The Boeing Company and, for
military contracts, ultimately to the U.S. Government.
The company's Consolidated Statements of Income and related footnote disclosures
have been restated to reflect Aerostructures as discontinued operations for all
periods presented. Balance sheet and cash flow data have not been restated.
Operating results of the discontinued Aerostructures business are as follows:
$ in millions 1999 1998 1997
- ----------------------------------------------------------------------------
Net Sales $ 1,379 $ 1,535 $ 1,355
============================================================================
Income before income taxes $ 15 $ 3 $ 139
Federal and foreign income taxes 6 2 50
- ----------------------------------------------------------------------------
Net income from discontinued operations $ 9 $ 1 $ 89
============================================================================
-35-
NORTHROP GRUMMAN CORPORATION
BUSINESS COMBINATIONS
Effective August 1, 1997, the company consummated the merger of its wholly owned
acquisition subsidiary with and into Logicon, Inc. a leading defense information
technology and services company. Each share of Logicon's common stock was
converted to .6161 of a share of the company's common stock. The merger was
accounted for as a pooling of interests.
ACQUISITIONS
In 1998 the company acquired Inter-National Research Institute Inc. for $55
million in cash. In 1999 the company acquired three businesses, the Information
Systems Division of California Microwave, Inc., Data Procurement Corporation,
and Ryan Aeronautical, an operating unit of Allegheny Teledyne Incorporated, for
a total of $271 million in cash and stock. The results of operations of the
acquired companies were included in the consolidated results of Northrop Grumman
Corporation from their respective acquisition dates.
The purchase method of accounting was used to record all four
acquisitions with estimated fair values being assigned to assets and
liabilities. The excess of the purchase price over the net tangible assets
acquired was assigned to identifiable intangible assets and the remaining
balance was assigned to goodwill.
Unaudited pro forma consolidated results, after giving effect to the
businesses acquired in 1998 and 1999, would not have been materially different
from the reported amounts for 1997, 1998 or 1999.
-36-
NORTHROP GRUMMAN CORPORATION
TERMINATED MERGER AGREEMENT
On July 3, 1997, the company announced that it had entered into a definitive
agreement with Lockheed Martin Corporation to combine the companies. On February
26, 1998, shareholders of Northrop Grumman approved the merger. On March 23,
1998, the U.S. Government filed suit to block the merger. On July 16, 1998,
Lockheed Martin notified the company that it was terminating its merger
agreement with the company pursuant to the terms of the agreement.
The company recorded charges totaling $186 million in 1998 for costs
related to the terminated merger. The charges cover vesting of restricted stock
which became issuable following shareholder approval of the merger and other
costs associated with the terminated merger, including investment banking fees,
legal and accounting fees, and costs related to responding to the Government's
request for information.
NEW ACCOUNTING STANDARDS
In January 1999, the company adopted Statement of Position (SOP) 98-1 -
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which requires capitalization of certain costs incurred after the date of
adoption to develop or obtain software for internal use. Adoption of this
standard had no material effect on the company's results of operations,
financial position, or cash flows.
In January 1999, the company adopted SOP 98-5 - Reporting on the Costs of
Start-Up Activities, which requires that certain costs, that previously had been
deferred, be expensed and reported as a cumulative effect of a change in
accounting principle, and all such future costs be expensed as incurred. In the
first quarter of 1999, the company recorded a $16 million after-tax charge, or
$.24 per share, as the cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133- Accounting for Derivative Instruments and Hedging Activities, which becomes
effective for fiscal years beginning after June 15, 2000. This standard provides
authoritative guidance on accounting and financial reporting for derivative
instruments. Management is currently evaluating the effect that adoption of this
standard will have on the company's results of operations, financial position,
and cash flows.
-37-
NORTHROP GRUMMAN CORPORATION
ACCOUNTS RECEIVABLE
Unbilled amounts represent sales for which billings have not been presented to
customers at year end, including differences between actual and estimated
overhead and margin rates. These amounts are usually billed and collected within
one year. Progress payments are, however, received on a number of fixed-price
contracts accounted for using the cost-to-cost type percentage-of-completion
method.
The claim receivable as of December 31, 1998, represents costs incurred
to date on the Accurate Fuselage Assembly (AFA) program that the company
expected to recover from The Boeing Company for out-of-scope work and related
delay and disruption costs incurred on the program. In the second quarter of
1999, the company resolved its claims with Boeing. The settlement had no
material effect on the company's financial results for 1999.
Accounts receivable were comprised of the following:
$ in millions 1999 1998
- -----------------------------------------------------------------------------
Due from U.S. Government, long-term contracts
Current accounts
Billed $ 424 $ 362
Unbilled 1,879 2,145
Progress payments received (1,283) (1,388)
- -----------------------------------------------------------------------------
1,020 1,119
- -----------------------------------------------------------------------------
Due from other customers, long-term contracts
Current accounts
Billed 122 141
Unbilled 165 137
Claim 29
- -----------------------------------------------------------------------------
287 307
- -----------------------------------------------------------------------------
Total due, long-term contracts 1,307 1,426
- -----------------------------------------------------------------------------
Trade and other accounts receivable
Due from U.S. Government 57 63
Due from other customers 76 65
- -----------------------------------------------------------------------------
Total due, trade and other 133 128
- -----------------------------------------------------------------------------
1,440 1,554
Allowances for doubtful amounts (38) (47)
- -----------------------------------------------------------------------------
$ 1,402 $ 1,507
=============================================================================
-38-
NORTHROP GRUMMAN CORPORATION
INVENTORIED COSTS
Inventoried costs were comprised of the following:
$ in millions 1999 1998
- -----------------------------------------------------------------------------
Production costs of contracts in process $ 1,320 $ 1,487
Excess of production cost of delivered items
over the estimated average unit cost 161 162
Administrative and general expenses 230 245
- -----------------------------------------------------------------------------
1,711 1,894
Progress payments received (521) (521)
- -----------------------------------------------------------------------------
$ 1,190 $ 1,373
=============================================================================
Inventoried costs relate to long-term contracts in process and include
expenditures for raw materials and work in process beyond what is required for
recorded orders. These expenditures are incurred to help maintain stable and
efficient production schedules. The excess of production costs of delivered and
in process items over the estimated average costs is carried in inventory under
the learning curve concept. Under this concept, production costs per unit are
expected to decrease over time due to efficiencies arising from continuous
improvement in the performance of repetitive tasks.
The ratio of inventoried administrative and general expenses to total
inventoried costs is estimated to be the same as the ratio of total
administrative and general expenses incurred to total contract costs incurred.
According to the provisions of U.S. Government contracts, the customer
has title to, or a security interest in, substantially all inventories related
to such contracts.
-39-
NORTHROP GRUMMAN CORPORATION
INCOME TAXES
Income tax expense, both federal and foreign, was comprised of the following:
$ in millions 1999 1998 1997
- ----------------------------------------------------------------------------
Currently payable
Federal income taxes $ 77 $ (13) $ 24
Foreign income taxes 4 5 3
- ----------------------------------------------------------------------------
81 (8) 27
Change in deferred federal income taxes 192 124 167
- ----------------------------------------------------------------------------
$ 273 $ 116 $194
============================================================================
Income tax expense differs from the amount computed by multiplying the
statutory federal income tax rate times the income before income taxes due to
the following:
$ in millions 1999 1998 1997
- ------------------------------------------------------------------------------
Income tax expense on continuing
operations at statutory rate $ 261 $ 108 $ 179
Goodwill amortization 15 15 16
Benefit from ESOP dividends (3) (3) (3)
Other, net (4) 2
- ------------------------------------------------------------------------------
$ 273 $ 116 $ 194
==============================================================================
Deferred income taxes arise because of differences in the treatment of
income and expense items for financial reporting and income tax purposes. The
principal type of temporary difference stems from the recognition of income on
contracts being reported under different methods for tax purposes than for
financial reporting.
The tax effects of significant temporary differences and carryforwards
that gave rise to year-end deferred federal and state tax balances, as
categorized in the Consolidated Statements of Financial Position, were as
follows:
-40-
NORTHROP GRUMMAN CORPORATION
$ in millions 1999 1998
- ------------------------------------------------------------------------------------
Deferred tax assets
Deductible temporary differences
Provision for estimated expenses $ 33 $ 41
Retiree benefit plan expense 364
Other 12
- -------------------------------------------------------------------------------------
33 417
- -------------------------------------------------------------------------------------
Taxable temporary differences
Income on contracts (10) (12)
Purchased intangibles (89)
Excess tax over book depreciation (69)
Other (57)
- -------------------------------------------------------------------------------------
(10) (227)
- -------------------------------------------------------------------------------------
$ 23 $ 190
=====================================================================================
Deferred tax liabilities
Taxable temporary differences
Income on contracts $ 913 $ 865
Goodwill amortization 95
Purchased intangibles 89
Excess tax over book depreciation 72
Administrative and general expenses
period costed for tax purposes 14 18
Other 14
- -------------------------------------------------------------------------------------
1,197 883
- -------------------------------------------------------------------------------------
Deductible temporary differences
Provision for estimated expenses (207) (174)
Retiree benefit plan expense (197) (16)
Other (50) (30)
- -------------------------------------------------------------------------------------
(454) (220)
- -------------------------------------------------------------------------------------
Tax carryforwards
Tax credits (75) (82)
Alternative minimum tax credit (54) (54)
- -------------------------------------------------------------------------------------
(129) (136)
- -------------------------------------------------------------------------------------
$ 614 $ 527
=====================================================================================
Net deferred tax liability
Total deferred tax liabilities (taxable
temporary differences above) $1,207 $ 1,110
Less total deferred tax assets (deductible
temporary differences and tax carryforwards above) 616 773
- -------------------------------------------------------------------------------------
$ 591 $ 337
=====================================================================================
The tax carryforward benefits are expected to be used in the periods in
which net deferred tax liabilities mature. These tax credit carryforwards are in
various amounts and expire over the years 2001 through 2007. The alternative
minimum tax credit can be carried forward indefinitely.
-41-
NORTHROP GRUMMAN CORPORATION
NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
The company has available short-term credit lines in the form of money market
facilities with several banks. The amount and conditions for borrowing under
these credit lines depend on the availability and terms prevailing in the
marketplace. No fees or compensating balances are required for these credit
facilities. At December 31, 1999, $25 million was outstanding at a weighted
average interest rate of 6.75 percent. At December 31, 1998, $67 million was
outstanding at a weighted average interest rate of 5.60 percent.
Additionally, the company has a credit agreement with a group of
domestic and foreign banks to provide for two credit facilities: $1.8 billion
available on a revolving credit basis through March 2002; and a term loan
payable in nine quarterly installments of $50 million plus interest through
March 1, 2002. The company pays, at least quarterly, interest on the outstanding
debt under the credit agreement at rates that vary based in part on the
company's credit rating and leverage ratio.
At December 31, 1999, $150 million at a weighted average interest rate
of 6.76 percent was outstanding under the company's revolving credit facility.
At December 31, 1998, $512 million at a weighted average interest rate of 5.66
percent was outstanding. At December 31, 1999, the $450 million term loan had a
weighted average interest rate of 6.61 percent. At December 31, 1998, $650
million was outstanding at a weighted average interest rate of 5.68 percent.
Principal payments permanently reduce the amount available under this agreement
as well as the debt outstanding. Under these agreements, in the event of a
"change in control," the banks are relieved of their commitments. Compensating
balances are not required under these agreements.
The company's credit agreements contain restrictions relating to the
payment of dividends, acquisition of the company's stock, aggregate indebtedness
for borrowed money and interest coverage. At December 31, 1999, $880 million of
retained earnings were unrestricted as to the payment of dividends.
-42-
NORTHROP GRUMMAN CORPORATION
Long-term debt consisted of the following:
$ in millions 1999 1998
- ------------------------------------------------------------------------
Notes due 2004, 8.625% $ 350 $ 350
Notes due 2006, 7% 400 400
Debentures due 2016, 7.75% 300 300
Debentures due 2024, 9.375% 250 250
Debentures due 2026, 7.875% 300 300
Revolving credit facility 150 512
Term loans payable to banks 450 650
- ------------------------------------------------------------------------
2,200 2,762
Less current portion 200 200
- ------------------------------------------------------------------------
$2,000 $2,562
========================================================================
The debt indenture contains restrictions relating to limitations on
liens, sale and leaseback arrangements and funded debt of subsidiaries.
The principal amount of long-term debt outstanding at December 31,
1999, due in each of the years 2000 and 2001 is $200 million, with $50 million
due in 2002, $350 million due in 2004 and $1,400 million due thereafter.
-43-
NORTHROP GRUMMAN CORPORATION
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in estimating its
fair value disclosures for financial instruments:
Due to the short-term nature of these items, the carrying amount
reported in the Consolidated Statements of Financial Position for Cash
and Cash Equivalents and amounts borrowed under the company's short-
term credit lines are estimated to approximate fair value.
The fair value of the long-term debt at the respective year-ends was
calculated based on interest rates available for debt with terms and
due dates similar to the company's existing debt arrangements.
The company has limited involvement with derivative financial
instruments and does not use them for trading purposes. To mitigate the variable
rate characteristic of its term loans, the company has from time to time entered
into interest rate swap agreements. No interest rate swap agreements were in
effect at December 31, 1999, or December 31, 1998. If any interest rate swap
agreements had existed, unrealized gains(losses) would be calculated based upon
the amounts at which they could have been settled at then current interest
rates.
Carrying amounts and the related estimated fair values of the company's
financial instruments at December 31 of each year are as follows:
$ in millions 1999 1998
- ------------------------------------------------------------------------------
Long-term debt
Carrying amount $ 2,200 $2,762
Fair value 2,154 2,914
- ------------------------------------------------------------------------------
-44-
NORTHROP GRUMMAN CORPORATION
RETIREMENT BENEFITS
The company sponsors several defined-benefit pension plans covering over 80
percent of employees. Pension benefits for most employees are based on the
employee's years of service and compensation during the last ten years before
retirement. It is the policy of the company to fund at least the minimum amount
required for all qualified plans, using actuarial cost methods and assumptions
acceptable under U.S. Government regulations, by making payments into a trust
separate from the company. Five of the company's fourteen qualified plans, which
cover more than 70 percent of all employees, were in a legally defined full-
funding limitation status at December 31, 1999.
The company and subsidiaries also sponsor defined-contribution plans
in which most employees are eligible to participate. Company contributions for
most plans are based on a matching of employee contributions up to 4 percent of
compensation.
In addition, the company and its subsidiaries provide certain health
care and life insurance benefits for retired employees. Employees achieve
eligibility to participate in these contributory plans upon retirement from
active service and if they meet specified age and years of service requirements.
Election to participate must be made at the date of retirement. Qualifying
dependents are also eligible for medical coverage. Approximately 70 percent of
the company's current retirees participate in the medical plans. Plan documents
reserve the company's right to amend or terminate the plans at any time.
Premiums charged retirees for medical coverage are based on years of service and
are adjusted annually for changes in the cost of the plans as determined by an
independent actuary. In addition to this medical inflation cost-sharing feature,
the plans also have provisions for deductibles, copayments, coinsurance
percentages, out-of-pocket limits, schedule of reasonable fees, managed care
providers, maintenance of benefits with other plans, Medicare carve-out and a
maximum lifetime benefit of from $250,000 to $1,000,000 per covered individual.
It is the policy of the company to fund the maximum amount deductible for income
taxes into the VEBA trust established for the Northrop Retiree Health Care Plan
for Retired Employees for payment of benefits.
-45-
NORTHROP GRUMMAN CORPORATION
The cost to the company of these plans in each of the last three years
is shown in the following table.
Pension Benefits Medical and Life Benefits
$ in millions 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost(income)
Service cost $ 200 $ 187 $ 162 $ 34 $ 27 $ 27
Interest cost 659 642 618 102 95 98
Expected return on plan assets (1,136) (1,008) (834) (30) (34) (26)
Amortization of
Prior service costs 35 35 34
Transition assets, net (42) (42) (42)
Net gain from previous years (69) (80) (71) (2) (16) (10)
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost(income)
including discontinued operations (353) (266) (133) 104 72 89
Discontinued operations 10 (4) (11) (12) (13) (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost(income)
from continuing operations $ (343) $ (270) $ (144) $ 92 $ 59 $ 80
===================================================================================================================================
Defined contribution plans cost $ 92 $ 89 $ 84
===================================================================================================================================
Major assumptions as of each year-end used in the accounting for the
defined-benefit plans are shown in the following table. Pension cost is
determined using all three factors as of the end of the preceding year, whereas
the funded status of the plans, shown later, uses only the first two factors as
of the end of each year.
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Discount rate for obligations 7.50% 6.50% 7.00%
Rate of increase for compensation 5.00 4.00 4.50
Expected long-term rate of return on plan assets 9.50 9.50 9.50
- ------------------------------------------------------------------------------------------------------
These assumptions also were used in retiree health care and life
insurance benefit calculations with one modification. Since, unlike the pension
trust, the earnings of the VEBA trust are taxable, the above 9.5 percent
expected rate of return on plan assets was reduced accordingly to 6 percent
after taxes. A significant factor used in estimating future per capita cost of
covered health care benefits for the company and its retirees is the health care
cost trend rate assumption. The rate used was 10 percent for 1999 and is assumed
to decrease gradually to 6 percent for 2006 and thereafter. A one-percentage-
point change in that rate would have the following effects:
1-Percentage- 1-Percentage-
$ in millions Point Increase Point Decrease
---------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 18 $ (15)
Effect on postretirement benefit obligation 166 (146)
-46-
NORTHROP GRUMMAN CORPORATION
The following tables set forth the funded status and amounts recognized
in the Consolidated Statements of Financial Position at each year-end for the
company's defined-benefit pension and retiree health care and life insurance
benefit plans. Pension benefits data includes the qualified plans as well as
thirteen unfunded non-qualified plans for benefits provided to directors,
officers and employees either beyond those provided by, or payable under, the
company's main plans.
Pension Benefits Medical and Life Benefits
$ in millions 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 10,164 $ 9,056 $ 1,559 $ 1,443
Service cost 200 187 34 27
Interest cost 659 642 102 95
Plan participants' contributions 7 7 26 25
Amendments 4 3
Actuarial loss(gain) (771) 851 (72) 67
Benefits paid (612) (582) (115) (98)
- -------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 9,651 10,164 1,534 1,559
- -------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 12,033 10,832 570 538
Actual return on plan assets 2,284 1,651 154 61
Employer contributions 80 125 58 44
Plan participants' contributions 7 7 26 25
Benefits paid (612) (582) (115) (98)
- -------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 13,792 12,033 693 570
- -------------------------------------------------------------------------------------------------------------------------------
Funded status 4,141 1,869 (841) (989)
Unrecognized prior service cost 169 200 2 2
Unrecognized net transition asset (120) (162)
Unrecognized net gain (3,573) (1,723) (319) (125)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset(liability) recognized $ 617 $ 184 $ (1,158) $ (1,112)
- -------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of
financial position
Prepaid benefit cost $ 851 $ 712 $ 30 $
Accrued benefit liability (234) (528) (1,188) (1,112)
Additional minimum liability (36) (64)
Intangible asset 7 16
Accumulated other comprehensive loss 29 48
- -------------------------------------------------------------------------------------------------------------------------------
Net asset(liability) recognized $ 617 $ 184 $ (1,158) $ (1,112)
- -------------------------------------------------------------------------------------------------------------------------------
For pensions plans with benefit obligations in excess of assets as of
December 31, 1999, the projected benefit obligation was $224 million, the
accumulated benefit obligation was $203 million, and the
-47-
NORTHROP GRUMMAN CORPORATION
fair value of assets was $7 million. As of December 31, 1998, the projected
benefit obligation was $1,451 million, the accumulated benefit obligation was
$1,285 million, and the fair value of assets was $784 million.
Pension plan assets at December 31, 1999, comprised 48 percent domestic
equity investments in listed companies (including 2 percent in Northrop Grumman
common stock); 14 percent equity investments listed on international exchanges;
22 percent in fixed income investments; 5 percent in venture capital and real
estate investments; and 11 percent in cash and cash equivalents. The investment
in Northrop Grumman represents 4,111,669 shares, or 6 percent of the company's
total shares outstanding.
Retiree health care and life insurance plan assets at December 31,
1999, comprised 64 percent domestic equity investments in listed companies; 24
percent equity investments on international exchanges; and 12 percent in cash
and equivalents.
COMMITMENTS AND CONTINGENCIES
The corporation and its subsidiaries have been named as defendants in various
legal actions. Based upon available information, it is the company's expectation
that those actions are either without merit or will have no material adverse
effect on the company's results of operations or financial position.
In accordance with company policy on environmental remediation, the
estimated cost to complete remediation has been accrued where it is probable
that the company will incur such costs in the future, including those for which
it has been named a Potentially Responsible Party by the Environmental
Protection Agency or similarly designated by other environmental agencies. To
assess the potential impact on the company's financial statements, management
estimates the total reasonably possible remediation costs that could be incurred
by the company, taking into account currently available facts on each site as
well as the current state of technology and prior experience in remediating
contaminated sites. These estimates are reviewed periodically and adjusted to
reflect changes in facts and technical and legal circumstances. Management
estimates that at December 31, 1999, the range of reasonably possible future
costs for environmental remediation is $80 million to $111 million, of which $87
million has been accrued. Although management cannot predict whether new
information gained as projects progress will materially affect the estimated
liability accrued, management does not anticipate that future remediation
expenditures will have a material adverse effect on the company's results of
operations, financial position, or cash flows.
The company has entered into standby letter of credit agreements and
other arrangements with financial institutions primarily relating to the
guarantee of future performance on certain contracts. Contingent liabilities on
these agreements aggregated approximately $535 million at December 31, 1999.
-48-
NORTHROP GRUMMAN CORPORATION
The company has agreed to invest an additional $30 million in Kistler
Aerospace Corporation preferred stock. This investment will only be made when
Kistler Aerospace Corporation has obtained additional funding from other sources
and will represent the last increment of funding required to complete and test
the first K-1 vehicle, and is subject to the company's then determination that
the K-1 is a viable launch system.
Minimum rental commitments under long-term noncancellable operating
leases total $394 million which is payable as follows: 2000 - $93 million, 2001-
$70 million, 2002 - $60 million, 2003 - $51 million, 2004 - $42 million, and
2005 and thereafter - $78 million.
STOCK RIGHTS
The company has a Common Stock Purchase Rights plan with one right issued in
tandem with each share of common stock. The rights will become exercisable on
the tenth business day after a person or group has acquired 15 percent or more
of the general voting power of the company, or announces an intention to make a
tender offer for 30 percent or more of such voting power, without the prior
consent of the Board of Directors. If the rights become exercisable, a holder
will be entitled to purchase one share of common stock from the company at an
initial exercise price of $250.
If a person acquires more than 15 percent of the then outstanding
voting power of the company or if the company is combined with an acquiror, each
right will entitle its holder to receive, upon exercise, shares of the company's
or the acquiror's (depending upon which is the surviving company) common stock
having a value equal to two times the exercise price of the right.
The company will be entitled to redeem the rights at $.01 per right at
any time prior to the earlier of the date that a person has acquired or obtained
the right to acquire 15 percent of the general voting power of the company or
the expiration of the rights in October 2008. The rights are not exercisable
until after the date on which the company's prerogative to redeem the rights has
expired. The rights do not have voting or dividend privilege and cannot be
traded independently from the company's common stock until such time as they
become exercisable.
STOCK COMPENSATION PLANS
At December 31, 1999, Northrop Grumman had two stock-based compensation plans -
the 1993 Long-Term Incentive Stock Plan (LTISP) applicable to employees and the
1995 Stock Option Plan for Non-Employee Directors (SOPND). The LTISP contains
change in control provisions which were activated in February 1998 upon approval
by the shareholders of the proposed merger of the company with Lockheed Martin
Corporation, causing all then unvested stock awards to become immediately
vested.
-49-
NORTHROP GRUMMAN CORPORATION
The LTISP permits grants to key employees of three general types of
stock incentive awards: stock options, stock appreciation rights (SARs) and
stock awards. Under the LTISP, each stock option grant is made with an exercise
price either at the closing price of the stock on the date of grant (market
options) or at a premium over the closing price of the stock on the date of
grant (premium options). Options generally vest in 25 percent increments two,
three, four and five years from the grant date and expire ten years after the
grant date. No SARs have been granted under the LTISP. Stock awards, in the form
of restricted performance stock rights, are granted to key employees without
payment to the company. Recipients of the rights earn shares of stock based on a
total-shareholder-return measure of performance over a five-year period with
interim distributions three and four years after grant. If at the end of the
five-year period the performance objectives have not been met, unearned rights
up to 100 percent of the original grant for five elected officers and, up to 70
percent of the original grant for all other recipients, will be forfeited.
Termination of employment can result in forfeiture of some or all of the
benefits extended under the plan. Each year 1.5% of the company's total issued
and outstanding common stock at the end of the preceding fiscal year become
available for issuance pursuant to incentive awards. During 1998 and 1999, a
number of awards granted under the LTISP contained terms, including limitations
and conditions on exercisability and vesting, that took into account and were
predicated upon future annual share availability.
The SOPND permits grants of stock options to nonemployee directors.
Each grant of a stock option is made at the closing market price on the date of
the grant, is immediately exercisable, and expires ten years after the grant
date. At December 31, 1999, 244,500 shares were available for future grants
under the SOPND.
The company applies Accounting Principles Board Opinion 25 - Accounting
for Stock Issued to Employees and related Interpretations in accounting for
awards made under the plans. When stock options are exercised, the amount of the
cash proceeds to the company is recorded as an increase to paid-in capital. No
compensation expense is recognized in connection with stock options.
Compensation expense for restricted performance stock rights is estimated and
accrued over the vesting period. The fixed 30 percent minimum distribution
portion is recorded at grant value and the variable portion is recorded at
market value. Compensation expense recognized for stock awards was $15 million
in 1999, $163 million in 1998, and $57 million in 1997.
-50-
NORTHROP GRUMMAN CORPORATION
Stock option activity for the last three years is summarized below:
Weighted-
Average
Shares Exercise Shares
Under Option Prices Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 4,027,272 $ 47 1,384,026
Granted, market options 15,000 85
Cancelled (100,932) 58
Exercised (570,182) 34
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 3,371,158 49 1,556,475
Granted, market options 992,000 74
Granted, premium options 1,986,450 95
Cancelled (5,700) 65
Exercised (766,182) 48
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 5,577,726 70 2,624,276
Granted, market options 69,200 62
Granted, premium options 106,800 93
Cancelled (221,015) 88
Exercised (702,628) 22
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 4,830,083 76 1,926,899
===========================================================================================================================
-51-
NORTHROP GRUMMAN CORPORATION
Had compensation expense been determined based on the fair value at the
grant dates for stock option awards granted in 1999, 1998 and 1997, consistent
with the method of Financial Accounting Standards Board Statement 123 -
Accounting for Stock Based Compensation, net income, basic earnings per share,
and diluted earnings per share in 1999 would have been lower by $11 million,
seventeen cents and sixteen cents, respectively. For 1998 net income, basic
earnings per share and diluted earnings per share would have been lower by $5
million, seven cents and seven cents, respectively. For 1997 net income, basic
earnings per share and diluted earnings per share would have been lower by $5
million, eight cents, and eight cents, respectively. These amounts were
determined using weighted-average per share fair values for premium options
granted in 1999 of $15 and 1998 of $15 and for market options granted in 1999,
1998 and 1997 of $18, $20 and $25 respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model based on an expected life of six years and for 1999, 1998 and 1997,
respectively, the following additional assumptions: dividend yield - 2.1
percent, 1.9 percent and 1.9 percent; expected volatility - 29 percent, 27
percent and 22 percent; and risk-free interest rate - 5.8 percent, 4.4 percent
and 6.7 percent.
At December 31, 1999 the following stock options were outstanding:
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Prices at 12/31/99 Prices
- --------------- ----------------------------------------------------------- ----------------------------
$ 16 to 35 123,458 2.8 years $ 25 123,458 $ 25
36 to 55 580,619 5.0 years 41 552,119 41
56 to 75 1,490,122 7.9 years 68 531,622 59
76 to 95 1,599,459 8.1 years 85 674,700 81
96 to 118 1,036,425 9.0 years 101 45,000 105
------------ ------------
4,830,083 1,926,899
============ ============
Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows: 1999 - 75,300 at $64; 1998 -794,050
at $73; and 1997 - 7,700 at $80.
-52-
NORTHROP GRUMMAN CORPORATION
UNAUDITED SELECTED QUARTERLY DATA
Quarterly financial results are set forth in the following tables together with
dividend and common stock price data.
1999 Quarters
$ in millions, except per share 4 3 2 1
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,180 $ 1,805 $ 1,921 $ 1,710
Operating margin 255 242 254 203
Income from continuing operations 139 116 123 96
Income before cumulative effect of accounting change 138 128 113 104
Net income 138 128 113 88
Basic earnings per share from continuing operations 1.99 1.68 1.79 1.39
Basic earnings per share before
cumulative effect of accounting change 1.97 1.84 1.65 1.51
Basic earnings per share 1.97 1.84 1.65 1.27
Diluted earnings per share from continuing operations 1.98 1.66 1.78 1.38
Diluted earnings per share before
cumulative effect of accounting change 1.96 1.83 1.64 1.50
Diluted earnings per share 1.96 1.83 1.64 1.26
Dividend per share .40 .40 .40 .40
Stock price:
High 62 5/16 75 11/16 73 5/16 73 1/4
Low 49 59 15/16 57 3/4 57
- ---------------------------------------------------------------------------------------------------------------------------
In the fourth quarter of 1999 the company reached a settlement of its
contract claims with the U.S. Air Force relating to the remanufacturing of
Joint STARS aircraft. The company was able to recognize underlying improved
performance on the production phase of the program and recorded upward
cumulative margin rate adjustments totaling $37 million. Operating margin
includes positive cumulative margin rate adjustments on the B-2 program of $23
million, $11 million and $36 million in the fourth, third and second quarters,
respectively.
-53-
NORTHROP GRUMMAN CORPORATION
1998 Quarters
$ in millions, except per share 4 3 2 1
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,079 $ 1,818 $ 1,789 $ 1,681
Operating margin 189 208 176 179
Income(loss) from continuing operations 54 97 73 (31)
Net income(loss) (3) 116 93 (12)
Basic earnings(loss) per share from continuing operations .78 1.40 1.07 (.44)
Basic earnings(loss) per share (.04) 1.68 1.36 (.18)
Diluted earnings(loss) per share from continuing operations .77 1.39 1.05 (.43)
Diluted earnings(loss) per share (.04) 1.67 1.34 (.18)
Dividend per share .40 .40 .40 .40
Stock price:
High 84 108 5/8 110 3/4 139
Low 68 7/16 59 5/16 97 3/16 102 3/4
- ------------------------------------------------------------------------------------------------------------------------------
Operating margin in the fourth quarter of 1998 includes a $21 million charge due
to an increase in the cost estimate to complete work on the test phase of
development for the Directional Infrared Countermeasures (DIRCM) program. Pretax
costs of $16 million and $42 million are included in the third and fourth
quarter, respectively, related to activities to realign operating units,
consolidate facilities and exit certain business areas. Cumulative margin rate
adjustments on the Joint STARS and E-2C programs reduced operating margin in the
second quarter by $25 million. Charges related to the company's terminated
merger with Lockheed Martin Corporation of $180 million and $6 million were
recorded in the first and second quarter, respectively. Included in the 1998
fourth quarter results is the write off of the company's $30 million investment
comprised of advances on behalf of the Kistler Aerospace Corporation. The write
off resulted from the company's assessment that the near-term likelihood of
Kistler obtaining additional financing made recovery of the investment
uncertain.
The corporation's common stock is traded on the New York and Pacific
Stock Exchanges (trading symbol NOC). The approximate number of holders of
record of the corporation's common stock at February 14, 2000, was 11,135.
-54-
NORTHROP GRUMMAN CORPORATION
Item 14
I - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Other
Balance at Changes-- Balance
Beginning Additions Add at End
Classification of Period At Cost (Deduct)/(1)/ of Period
- -------------- ---------- --------- ------------- ---------
Description:
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $55,445 $17,279 $(17,746) $54,978
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $54,978 $ 8,076 $(16,013) $47,041
Year ended December 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowances for doubtful amounts $47,041 $21,088 $(30,455) $37,674
___________
(1) Uncollectible amounts written off, net of recoveries.
-55-
NORTHROP GRUMMAN CORPORATION
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of financial
position of Northrop Grumman Corporation and Subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audit also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Northrop Grumman Corporation
and Subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the footnotes to the consolidated financial statements,
in 1999 the Company changed its method of accounting for start-up activities by
adopting Statement of Position 98-5 -- Reporting on the Costs of Start-up
Activities.
Deloitte & Touche LLP
Los Angeles, California
January 26, 2000,
except for discontinued operations footnote,
as to which the date is July 24, 2000.
-56-
EXHIBIT 99.2
________________________________________________________________________________
ASSET PURCHASE AGREEMENT
by and between
NORTHROP GRUMMAN CORPORATION
and
VAC ACQUISITION CORP. II
________________________
Date as of June 9, 2000
________________________
________________________________________________________________________________
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS................................................................................ 1
-----------
1.1 Certain Defined Terms............................................................. 1
1.2 Other Definitional Provisions..................................................... 1
ARTICLE II CLOSING; PURCHASE PRICE AND ADJUSTMENT.................................................... 7
--------------------------------------
2.1 Sale and Transfer of the Assets................................................... 7
2.2 Assets Not Transferred............................................................ 9
2.3 Assumed and Excluded Liabilities.................................................. 10
2.4 Closing; Purchase Price........................................................... 12
2.5 Purchase Price Adjustment......................................................... 13
2.6 Tax Allocation.................................................................... 15
2.7 Transfer Taxes.................................................................... 15
ARTICLE III CONDITIONS TO CLOSING.................................................................... 16
---------------------
3.1. Buyer's Obligation................................................................ 16
3.2. Sellers' Obligation............................................................... 16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER.................................................. 17
----------------------------------------
4.1 Authority; No Conflicts; Governmental Consents; Corporate Matters................. 17
4.2 Financial Statements; Absence of Changes.......................................... 18
4.3 Taxes............................................................................. 21
4.4 Assets Other than Real Property Interests......................................... 22
4.5 Real Property Interests........................................................... 23
4.6 Intellectual Property............................................................. 24
4.7 Contracts......................................................................... 25
4.8 Litigation; Decrees............................................................... 26
4.9 Employee Benefits................................................................. 27
4.10 Environmental Matters............................................................. 29
4.11 Employee and Labor Relations...................................................... 30
4.12 Compliance With Law; Permits...................................................... 30
4.13 Assets of the Business............................................................ 31
4.14 Government Contracts.............................................................. 31
4.15 Product Warranty.................................................................. 32
4.16 Government Furnished Property or Equipment........................................ 32
4.17 Customers, Distributors and Suppliers............................................. 32
4.18 Insurance......................................................................... 32
i
Page
----
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER.................................................... 33
---------------------------------------
5.1 Authority; No Conflicts; Governmental Consents.................................... 33
5.2 Actions and Proceedings, Etc...................................................... 33
5.3 Buyer's Acknowledgment............................................................ 34
5.4 Solvency.......................................................................... 34
5.5 Financing......................................................................... 34
5.6 No Knowledge of Seller's Breach................................................... 34
ARTICLE VI COVENANTS OF SELLER....................................................................... 34
-------------------
6.1 Access............................................................................ 34
6.2 Ordinary Conduct.................................................................. 35
6.3 Insurance; Administration of Insurance............................................ 36
6.4 Accounts Receivable............................................................... 36
6.5 Confidential Information.......................................................... 37
6.6 No Solicitation................................................................... 37
6.7 Covenant Not To Compete........................................................... 38
ARTICLE VII COVENANTS OF BUYER....................................................................... 38
------------------
7.1 Confidentiality................................................................... 38
7.2 Waiver of Bulk Sales Law Compliance............................................... 39
7.3 Excluded Assets................................................................... 39
7.4 Change of Company Names........................................................... 39
7.5 Government-owned and Government Furnished Property................................ 39
7.6 Title Insurance................................................................... 39
ARTICLE VIII MUTUAL COVENANTS........................................................................ 40
----------------
8.1 HSR Filings; Permits; Novations and Consents...................................... 40
8.2 Reasonable Efforts................................................................ 41
8.3 Publicity......................................................................... 42
8.4 Cooperation After Closing......................................................... 42
8.5 Records........................................................................... 42
8.6 Use of Trademark and Trade Names.................................................. 43
8.7 Intercompany Work Orders.......................................................... 43
8.8 Non-Interference.................................................................. 43
8.9 Notification of Certain Matters................................................... 43
8.10 Tax Returns of Sold Subsidiaries.................................................. 43
8.11 Section 338(h)(10) Election....................................................... 44
8.12 Leaseback Arrangements and Certain Post-Closing Support........................... 44
8.13 Information Technology Services................................................... 45
ARTICLE IX INDEMNIFICATION........................................................................... 45
---------------
9.1 Indemnification by Seller......................................................... 45
9.2 Indemnification by Buyer.......................................................... 45
9.3 Losses Net of Insurance, Etc...................................................... 46
9.4 Termination of Indemnification.................................................... 46
ii
Page
----
9.5 Procedures Relating to Indemnification (Other than for Tax Claims)................ 46
9.6 Procedures Relating to Indemnification of Tax Claims.............................. 47
9.7 Survival of Representations....................................................... 48
9.8. Environmental Liability........................................................... 48
9.9 Pre-Closing Environmental Liabilities Procedures.................................. 52
9.10 Treatment of Indemnity Payments................................................... 54
ARTICLE X GENERAL PROVISIONS......................................................................... 54
------------------
10.1 Assignment........................................................................ 54
10.2 No Third-Party Beneficiaries...................................................... 54
10.3 Termination....................................................................... 54
10.4 Expenses.......................................................................... 55
10.5 Equitable Relief.................................................................. 55
10.6 Amendments........................................................................ 55
10.7 Notices........................................................................... 55
10.8 Interpretation; Exhibits and Schedules............................................ 56
10.9 Counterparts...................................................................... 57
10.10 Entire Agreement.................................................................. 57
10.11 Fees.............................................................................. 57
10.12 Severability...................................................................... 57
10.13 Governing Law..................................................................... 58
EXHIBITS
- --------
Terms of Subordinated Note.......................................................................Exhibit A
Intellectual Property Agreement..................................................................Exhibit B
Transitional Services Agreement..................................................................Exhibit C
Employee Matters Agreement.......................................................................Exhibit D
Opinion of Special Counsel to Seller.............................................................Exhibit E
Opinion of Special Counsel to Buyer..............................................................Exhibit F
iii
List of Schedules
-----------------
Schedule 1.1 Knowledge of Seller
Schedule 2.1(a) Owned Property
Schedule 2.1(b) Leased Property
Schedule 2.1(h) Sold Subsidiaries
Schedule 2.2(d) Excluded Claims or Rights Against Third Persons
Schedule 2.2(f) Excluded Trademarks and Trade Names
Schedule 2.2(g) Excluded Intellectual Property
Schedule 2.3(h) Liabilities and Obligations Relating to Litigation Matters
Schedule 2.5(b) Purchase Price Adjustment
Schedule 3.1(d) Required Consents
Schedule 4.1(b) Seller Consents
Schedule 4.1(c) Governmental Approvals and Consents
Schedule 4.1(e) Capitalization of the Sold Subsidiaries
Schedule 4.1(g) Activities of Sold Subsidiaries
Schedule 4.2(a) Financial Statements
Schedule 4.2(b) Supplemental Statement
Schedule 4.2(c) Absence of Changes
Schedule 4.3 Taxes
Schedule 4.4 Liens
Schedule 4.5 Encumbrances
Schedule 4.6 Intellectual Property Matters
Schedule 4.7 Contracts
Schedule 4.8 Litigation
Schedule 4.9 Employee Benefits
Schedule 4.9(j) Continuation Coverage Requirements
Schedule 4.10 Environmental Matters
Schedule 4.10(e) Environmental Audits or Assessments
Schedule 4.11 Employee and Labor Relations
Schedule 4.12(a) Compliance with Law
Schedule 4.12(b) Permits
Schedule 4.14 Government Contract Matters
Schedule 4.14(i) Seller Facility Security Clearances
Schedule 4.15 Product Warranty
Schedule 4.16 Government-Furnished Property or Equipment
Schedule 4.17 Customers, Distributors and Suppliers
Schedule 4.18 Insurance
Schedule 6.2 Ordinary Conduct of Business
Schedule 7.5 Excluded Government-Owned and Government-Furnished Property
Schedule 8.7 Intercompany Work Orders
Schedule 8.12 Leaseback Property
Schedule 8.13 Information Technology Services
iv
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of June 9, 2000, among Northrop
Grumman Corporation, a Delaware corporation ("Seller"), and VAC Acquisition
Corp. II, a Delaware corporation ("Buyer").
Seller, through the Aerostructures Business Area of its Integrated
Systems and Aerostructures Sector (the "Sector"), is engaged in the business of
the manufacture and assembly of metal and composite components and structures
for commercial and military aircraft, and certain machining and fabrication
activities, substantially all of which business is conducted at its Hawthorne,
California; Dallas and Grand Prairie, Texas; Perry and Milledgeville, Georgia;
and Stuart, Florida sites (collectively, the "Business"). The parties hereto
desire that Seller sell, transfer, convey and assign to Buyer substantially all
of the assets, properties, interests in properties and rights used primarily in
the Business, and that Buyer purchase and acquire the same, subject to the
assumption by Buyer of the liabilities and obligations of Seller relating to the
Business, upon the terms and subject to the conditions hereinafter set forth.
The parties also intend to enter into certain agreements governing
their relationship and certain matters after the Closing Date as contemplated
hereby.
AGREEMENT
---------
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Accounting Arbitrator" has the meaning set forth in Section
2.5(e).
"Affiliate" means, with respect to any entity, any other entity
which directly or indirectly controls, is controlled by, or is under common
control with, such entity, where the term "control" means the ownership,
directly or indirectly, of more than fifty percent (50%) of the equity capital
or power in fact to direct the management of such entity.
"Ancillary Agreements" has the meaning set forth in Section
2.4(c).
"Assets" has the meaning set forth in Section 2.1.
"Assigned Contracts" has the meaning set forth in Section
2.1(e).
"Assignment and Assumption Agreement" means an assignment and
assumption agreement executed by Buyer and Seller in a form reasonably
acceptable to Buyer and Seller.
"Assumed Liabilities" has the meaning set forth in Section
2.3.
"Base Net Working Capital" shall mean Net Working Capital as
reflected on the Statement ($572,149,000).
"Bill of Sale" means a bill of sale in a form reasonably
acceptable to Buyer and Seller.
"Business" has the meaning set forth in the preamble.
"Business Day" means a day other than a Saturday or a Sunday
or other day on which commercial banks in New York are authorized or required by
law to close.
"Business Employee" means any individual who, at the Closing
Date, is (i) employed by Seller or a Sold Subsidiary and assigned by Seller or a
Sold Subsidiary pursuant to Seller's or such Sold Subsidiary's ongoing payroll
practice to the Business, including any individual so employed who is on
disability (but still on the payroll), and any individual so employed who is on
an approved leave of absence or lay-off with recall rights and (ii) any Shared
Service Employee.
"Business Property" has the meaning set forth in Section 4.5
hereto.
"Closing Date" means the day on which the Closing occurs
pursuant to Section 2.4.
"Closing Date Net Working Capital" has the meaning set forth
in Section 2.5(b).
"Closing Statement" has the meaning set forth in Section
2.5(a).
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Competitive Activities" has the meaning set forth in Section
6.8.
"Confidential Information" has the meaning set forth in
Section 6.7.
"Contract" means any contract, agreement, license, lease,
sales or purchase order or other legally binding commitment, whether written or
oral.
"Contractual Obligation" means, as to any Person, any provision
of any note, bond or security issued by such Person or of any mortgage,
indenture, deed of trust, lease, license, franchise, contract, agreement,
instrument or undertaking to which such Person is a party or to which it or any
of its property or assets is subject.
"Cost Accounting Standards" means regulations promulgated by the
Cost Accounting Standards Board set forth at 48 C.F.R. (S) 9901.301 et. seq. and
any guidance, interpretations, or preambles to those regulations published by
the Cost Accounting Standards Board in the Federal Register.
"Effective Time" has the meaning set forth in Section 2.4.
"Employee Benefit Arrangements" means each and all benefit
plans and arrangements which are not Employee Benefit Plans, including, without
limitation, each and all pension, supplemental pension, deferred compensation,
option or other equity-based program, accidental death and dismemberment, life
and health insurance and benefits (including medical, dental, vision and
hospitalization), fringe benefit, flexible spending account programs and other
employee benefit arrangements, plans, contracts, policies or practices providing
employee or executive compensation or benefits.
"Employee Benefit Plans" means each and all "employee benefit
plans," as defined in Section 3(3) of ERISA, maintained, sponsored or
contributed to by Seller or any of its ERISA Affiliates or in which Seller or
any of its ERISA Affiliates participates or participated or with respect to
which Seller or any of its ERISA Affiliates has any obligation to contribute.
"Employee Matters Agreement" means an agreement substantially
in the form of Exhibit D.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, covenant, condition, restriction, conditional sales agreement,
encumbrance or other right of third parties, and includes, without limitation,
any agreement to give any of the foregoing in the future, and any contingent or
other title retention agreement or lease.
"Environmental Law" means collectively all applicable federal,
state or local laws, statutes, regulations, rules, ordinances, codes or common
law relating (i) to the protection of human health or the environment, or (ii)
the handling, use, presence, disposal, release or threatened release of any
Hazardous Material as in effect on the date hereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" of any Person means any other Person that,
together with such Person as of the relevant measuring date under ERISA, is or
was required to be treated as a single employer under Section 414 of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and the rules and regulations of the SEC promulgated
from time to time thereunder.
"Excluded Assets" has the meaning set forth in Section 2.2.
"Excluded Liabilities" has the meaning set forth in Section
2.3.
"Excluded Other Intellectual Property" has the meaning set
forth in Section 2.2(g).
"Excluded Trademarks and Trade Names" has the meaning set
forth in Section 2.2(f).
"GAAP" means generally accepted accounting principles in the
United States of America.
"Government Contract" means any Contract or other commitment
listed on Schedule 4.7 that relates to the Business with i) the United States
Government, ii) any prime contractor to the United States Government, or any
subcontractor with respect to any contract described in clauses (i) or (ii).
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Government-Furnished Property" has the meaning set forth in
Section 4.16.
"Hazardous Material" means any substance which is defined as a
hazardous waste, hazardous substance, pollutant or contaminant under any
Environmental Law, including but not limited to, polychlorinated biphenyls
("PCBs"), petroleum or petroleum fractions, and asbestos.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Income Statements" has the meaning set forth in Section 4.2(a).
"Indemnified Person" means, with respect to any Loss, the Person
seeking indemnification hereunder.
"Indemnifying Person" means, with respect to any Loss, the
Person from whom indemnification is being sought hereunder.
"Intellectual Property" means know-how, trade secrets,
processes, inventions, formulae, procedures, research records and test
information, and all trademarks, trade names, patents, service marks, copyrights
(whether registered or unregistered) and pending applications for the foregoing.
"Intellectual Property Agreement" means an agreement
substantially in the form of Exhibit B.
"Interest Rate" has the meaning set forth in Section 2.5(g).
"Knowledge of Seller" with reference to any of the
representations and warranties of Seller and except as specified in Section 4.10
means the actual knowledge of the Persons listed on Schedule 1.1, and does not
refer to the knowledge of any other Person.
"Lien" means any mortgage, pledge, hypothecation, assignment,
encumbrance, lien (statutory or other) or other security agreement of any kind
or nature whatsoever.
"Loss" means any loss, liability, cost, deficiency, damage or
expense (including reasonable attorneys' fees and disbursements and the costs of
investigation) whether or not arising out of claims or lawsuits by third parties
or otherwise and including the defense or settlement of any of the foregoing.
Loss recoverable hereunder is subject to the limitations set forth in Section
9.4.
"Material Adverse Effect" means any circumstance, change or
effect that is materially adverse to the business, assets, financial condition
or results of operations of the Business taken as a whole, but excluding the
effects of changes that are generally applicable to the industries and markets
in which the Business operates unless such change relates solely to a material
customer or supplier of the Business.
"Net Working Capital" has the meaning set forth in Section
2.5(b).
"Owned Property" has the meaning set forth in Section 2.1(a).
"PDC Plume" means the Hazardous Material in ground water, and
only that Hazardous Material, present on and under the Hawthorne facility that
emanated from the Product Development Center located at 12250 So. Crenshaw
Boulevard and which has migrated to the Hawthorne facility.
"Permits" has the meaning set forth in Section 4.12.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Pre-Closing Environmental Condition" means: (1) the presence,
disposal or release as of the Closing Date of Hazardous Material in, on, under
or emanating from any facility (to the extent of the amounts of such Hazardous
Material then present) regardless of how the Hazardous Material came to rest at,
on, under or emanating from the facility, and (ii) any other act, omission or
condition prior to the Closing Date which may give rise to liability under any
Environmental Laws (to the extent of such act, omission or condition as of the
Closing Date).
"Purchase Price Adjustment" has the meaning set forth in Section
2.5(b).
"Purchase Price Adjustment Schedule" has the meaning set forth
in Section 2.5(b).
"Records" has the meaning set forth in Section 2.1(j).
"Remedial Action" means any response action, removal action,
remedial action, corrective action, monitoring program, sampling program,
investigation or other cleanup activity required by any Environmental Law to
clean up, remove, remediate, treat or abate any Hazardous Material in the
Environment and shall include: (i) obtaining any permits, consents, approvals,
or authorizations of any Governmental Authority necessary to conduct any such
work, (ii) preparing and implementing any plans or studies for such work, (iii)
obtaining a written notice from a Governmental Authority with jurisdiction over
the site in question or any portion thereof under Environmental Laws that
material additional work is required by such Governmental Authority; and (iv)
any other activities required under Environmental Laws to address the presence
of Hazardous Material at the site in question or any portion thereof.
"Required Consents" has the meaning set forth in Section 3.1(d).
"Requirement of Law" means, as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, statute, treaty, rule, regulation, ordinance, order,
decree, consent decree or similar instrument or determination or award of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"SEC" means the Securities and Exchange Commission.
"Sector" has the meaning set forth in the preamble hereto.
"Seller" has the meaning set forth in the preamble hereto.
"Seller Plans" means each and all Employee Benefit Plans and
Employee Benefit Arrangements sponsored, maintained or contributed to by Seller,
any of its ERISA Affiliates or any of the Sold Subsidiaries or to which any of
such Persons has (or has had) any obligation to contribute and which covers (or
has covered) Business Employees or former employees of Seller in the Business,
in each case only while employed in the Business.
"Selling Subsidiary" has the meaning set forth in Section 2.1.
"Shared Service Employee" means any individual who is employed
by Seller at the Closing Date but is not assigned to the Business, who provides
support services to the Business principally in the areas of finance, human
resources or procurement, and is listed on Schedule 1(a) to the Employee Matters
Agreement.
"Sold Subsidiary" has the meaning set forth in Section 2.1(h).
"Statement" means the audited statement of assets and
liabilities of the Business as of March 31, 2000, attached hereto as part of
Schedule 4.2.
"Subsidiary" means any Person of which a majority of the
outstanding equity interests or voting securities are owned, directly or
indirectly by another person.
"Tax" or "Taxes" means, with respect to any Person, any federal,
state, local or foreign net income, gross income, gross receipts, sales, use, ad
valorem, value-added, capital, unitary, intangible, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, transfer,
occupation, premium, property or windfall profit tax, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty, addition to tax or additional amount
imposed by any jurisdiction or other taxing authority, on such Person.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Transaction Documents" means (i) this Agreement, (ii) the Bill
of Sale, (iii) the Assignment and Assumption Agreement, (iv) the deeds of
conveyance of Owned Property and (v) the Ancillary Agreements.
"Transitional Services Agreement" means an agreement
substantially in the form of Exhibit C.
"Transactions" means the transactions contemplated by the
Transaction Documents.
1.2 Other Definitional Provisions.
-----------------------------
(a) Terms defined in this Agreement in Sections other than
Section 1.1 shall have the meanings as so defined when used in this Agreement.
(b) As used herein, accounting terms not defined or to the
extent not defined, shall have the respective meanings given to them under GAAP.
(c) Unless express reference is made to Business Days,
references to days shall be to calendar days.
ARTICLE II
CLOSING; PURCHASE PRICE AND ADJUSTMENT
--------------------------------------
2.1 Sale and Transfer of the Assets. Subject to the terms and
-------------------------------
conditions of this Agreement, except as otherwise specifically provided herein,
on the Closing Date Seller will sell, convey, transfer, assign and deliver to
Buyer all of Seller's right, title and interest in and to the following assets
(collectively, the "Assets"): (i) the Intellectual Property of Seller assigned
to Buyer under the Intellectual Property Agreement; and (ii) all of the
properties, rights, claims and assets other than Intellectual Property (except
the Excluded Assets), to the extent that they are used or held for use primarily
in the operations of the Business and will cause any Subsidiary of Seller having
any right, title or interest in or to any properties, rights, claims or assets
primarily used or held for use in the Business (each such Subsidiary, a "Selling
Subsidiary") to sell,
convey, transfer, assign and deliver to Buyer all of such Selling Subsidiary's
right, title and interest in and to the Assets. Subject to the terms and
conditions of this Agreement, on the Closing Date, Buyer will purchase, acquire
and accept from Seller and each Selling Subsidiary (collectively, "Sellers") all
of Sellers' right, title and interest in and to the Assets. The Assets include,
but are not limited to, the following assets or rights of Sellers (in addition
to the Intellectual Property of Seller assigned to Buyer under the Intellectual
Property Agreement):
(a) the real property (including all buildings, improvements and
structures located thereon and all rights, privileges, easements and
appurtenances thereto) described on Schedule 2.1(a) hereto (the "Owned
Property");
(b) the leasehold interests listed on Schedule 2.1(b) (the
"Leased Property");
(c) tangible personal property, including, without limitation,
the fixtures, furnishings, furniture, office supplies, vehicles, rolling stock,
tools, machinery, equipment and computer equipment, located upon or affixed to
or normally located in, at or upon, even if temporarily removed from, any of the
Business Properties (collectively, the "Equipment");
(d) inventory, including without limitation, raw materials
work-in-process, finished goods, spare parts and supplies;
(e) Contracts, including but not limited to all Contracts of
Sellers listed on Schedule 4.7, and Contracts entered into by Sellers through
the Closing Date (the "Assigned Contracts");
(f) transferable licenses, permits, approvals and authorizations
by any Governmental Authority used primarily in or relating primarily to the
Business or the Assets (the "Permits");
(g) bids, quotations and proposals for Contracts, whether oral
or written;
(h) all capital stock, partnership interests and other equity
interests in any Person listed in Schedule 2.1(h) (each, a "Sold Subsidiary");
(i) books and records (other than Tax records), or portions
thereof, including plans and specifications, surveys and title policies relating
to the Owned Property, sales literature, product information, employment records
and files and other information and/or data located at the Business Properties
(the "Records");
(j) insurance proceeds paid or payable by any insurance
provider, other than Seller or any Affiliate of Seller, for any Asset that is
destroyed or damaged after the date hereof and prior to the Closing;
(k) notes, drafts and accounts receivable, or portions thereof,
arising exclusively out of the Business;
(l) all prepaid expenses, advances and deposits (including
utility deposits), or portions thereof, arising exclusively out of the Business;
(m) causes of action, claims, demands, rights and privileges
against third parties, including, without limitation, warranties and guaranties
received from vendors, suppliers or manufacturers with respect to the Assets or
the Business and, subject to Section 6.3, causes of action, claims and rights
under insurance policies relating to the Assets or the Business;
(n) other intangible rights and assets of Seller (other than
Intellectual Property of Seller) and goodwill; and
(o) assets reflected on the Statement (other than Assets
disposed of since March 31, 2000 in accordance with Section 6.2).
2.2 Assets Not Transferred. Notwithstanding anything herein to the
----------------------
contrary, the following assets are not included in the Assets and shall be
retained by Seller (the "Excluded Assets"):
(a) all cash and cash equivalent items (except as described in
Section 2.1(m)) including, without limitation, checking accounts, bank accounts,
lock box numbers, certificates of deposit, time deposits, securities, and the
proceeds of accounts receivable, including uncashed checks in payment thereof,
received by Seller on or prior to the Closing Date;
(b) all rights, properties, and assets which have been used or
held for use in connection with the Business and which shall have been
transferred (including transfers by way of sale) or otherwise disposed of in the
ordinary course of business prior to the Closing;
(c) prepaid Taxes and rights to or claims for refunds or rebates
of Taxes and other governmental charges for periods ending on or prior to the
Closing Date and the benefit of net operating loss carryforwards or carrybacks,
or any other credits of Seller, whether or not attributable to the Business;
(d) claims or rights against third parties set forth on Schedule
2.2(d);
(e) proprietary or confidential business or technical
information, records and policies that relate generally to Seller and are not
used primarily in the Business, including, without limitation, organization
manuals, strategic plans and Tax records and related information;
(f) subject to the limited rights granted to Buyer pursuant to
the Intellectual Property Agreement, trademarks, trade names and service marks
listed on Schedule 2.2(f) (the "Excluded Trademarks and Trade Names");
(g) subject to the rights granted to Buyer pursuant to the
Intellectual Property Agreement, the know-how, trade secrets, processes,
inventions, formulae, procedures, research records, test information, patents,
copyrights, pending applications for patents and copyrights
and proprietary computer programs or other software and databases set forth on
Schedule 2.2(g) (the "Excluded Intellectual Property");
(h) all notes, drafts and accounts receivable or other
obligations for the payment of money made or owed by any Affiliate of Sellers;
(i) all Seller's rights in, to and under any commodity options,
puts, calls, forwards or similar agreements with respect to commodities used by
the Business;
(j) all causes of action, claims, demands, rights and privileges
against third parties that relate to any of the Excluded Assets or Excluded
Liabilities, including causes of actions, claims and rights under insurance
policies relating thereto;
(k) Equipment used by administrative employees of Seller who are
not assigned to the Business but who provide services to the Business;
(l) all other assets used primarily in connection with Seller's
corporate functions (including but not limited to the corporate charter,
taxpayer and other identification numbers, seals, minute books and stock
transfer books), whether or not used for the benefit of the Business;
(m) all rights and assets which are used or held for use in
connection with the B-2 program, the S-3 program (provided, however, that the
current S-3 contract with Lockheed Martin at Closing will be converted to an
intercompany contract on substantially the same terms), the A-7 program and
classified programs, if any, not related to the C-17 or V-22 programs;
(n) the equipment, tooling and fixtures used or held for use in
the premises to be leased back by the Seller from the Buyer which premises are
identified on Schedule 8.12 as "Containing Excluded Assets" (none of which
assets are reflected on the Statement);
(o) equipment or tooling to which the United States Government
has contractual right to assert title as identified on Schedule 4.16 to the
extent the Government's right to assert title does not arise out of the C-17 or
V-22 programs;
(p) the reconfigureable tool developed under Cooperative
Agreement N00014-95-2-0003 between The Office of Naval Research and Grumman
Aerospace Corporation which was novated to Northrop Grumman Corporation; and
(q) any assets in any Seller rabbi trust or voluntary employee's
beneficiaries association.
2.3 Assumed and Excluded Liabilities. On the Closing Date, Buyer
--------------------------------
shall execute and deliver to Seller the Assignment and Assumption Agreement
pursuant to which from and after the Closing Buyer shall assume and agree to
pay, perform and discharge when due, and shall indemnify Seller and its
Affiliates (including the Selling Subsidiaries) against and hold them harmless
from, all the liabilities and obligations of Sellers relating primarily to the
Business or
the Assets, of any kind or nature, whether absolute, contingent, accrued or
otherwise, and whether arising before or after the Closing (collectively, the
"Assumed Liabilities"); provided, however, that the Assumed Liabilities shall in
no event include the following liabilities (the "Excluded Liabilities"):
(a) any liability, responsibility or obligation under any Seller Plan
(including, without limitation, any liability, responsibility or obligation to
any Governmental Authority with respect to the transfer of assets under Seller
Plans), except as provided in the Employee Matters Agreement;
(b) any liability for Taxes of Seller, Taxes of the Sold Subsidiaries
and Taxes arising out of and relating to the ownership of the Assets and the
operation of the Business, in each case for any period or portion thereof ending
on or prior to the Closing Date, excluding the Taxes that are the responsibility
of Buyer pursuant to Section 2.7 or those reflected on the Closing Statement
(other than any reserves for deferred Taxes established to reflect timing
differences between book and Tax income);
(c) any obligation of Seller under and pursuant to any commodity
options, puts, calls, forwards or similar agreements with respect to commodities
used by the Business;
(d) any liability arising from or related to the Excluded Assets;
(e) all notes, drafts and accounts payable or other obligations for
the payment of money made or owed to any Affiliate of Seller;
(f) all liabilities and obligations associated with (i) the pre-
Closing offsite transportation and disposal of Hazardous Material, (ii) the
presence or release of Hazardous Material either in, on, under or from any
former facility, (iii) Remedial Action related solely to the PDC Plume and (iv)
the regulatory closure of the two remaining solid waste management units at the
Hawthorne facility;
(g) all (i) indebtedness of Sellers for borrowed money, (ii)
obligations of Sellers evidenced by bonds, notes, debentures or similar
instruments, (iii) obligations under conditional sale, title retention or
similar agreements or arrangements creating an obligation of Sellers with
respect to the deferred purchase price of property (other than customary trade
credit), and (iv) all obligations of Sellers to guarantee any of the foregoing
types of obligations on behalf of others, except any liabilities or obligations
under any personal property leases or under any letters of credit outstanding as
of the Closing and relating to any Contract being assumed under this Agreement
(each a "Financing Obligation");
(h) all liabilities and obligations relating to the litigation and
other matters disclosed on Schedule 2.3(h) (including all current and future
claims relating to the subject matter of such litigation);
(i) claims covered under Seller's policies for workmen's
compensation, except as provided in the Employee Matters Agreement;
(j) all liabilities related to any failure to obtain the required
consents from Gulfstream or Alcoa or arising out of the alternative arrangements
implemented in lieu thereof; and
(k) liabilities incurred prior to the Closing Date for employee
payroll, payroll tax and payroll withholding liabilities.
2.4 Closing; Purchase Price.
-----------------------
(a) The closing (the "Closing") of the purchase and sale of the
Assets and the assumption of the Assumed Liabilities shall be held at the
offices of Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles,
California, at 9:00 a.m. on June 30, 2000, or if the conditions to Closing set
forth in Article III shall not have been satisfied or waived by such date,
subject to Section 10.3, as soon as practicable after such conditions shall have
been satisfied or waived. The date on which the Closing shall occur is
hereinafter referred to as the "Closing Date." The Closing will be deemed
effective at 12:01 a.m. on the Closing Date (the "Effective Time").
(b) The aggregate purchase price for the Assets shall be
$842,700,000, payable on the Closing Date (i) by wire transfer in immediately
available funds to an account designated by Seller of $667,700,000 and (ii)
delivery of a subordinated note, in form and substance satisfactory to Buyer and
Seller, having the terms and conditions set forth on Exhibit A, in the principal
amount of $175,000,000 (the "Seller Note"), subject to adjustment pursuant to
Section 2.5 together with the assumption of the Assumed Liabilities as provided
in Section 2.3 (the "Purchase Price").
(c) At the Closing, Seller shall deliver or cause to be delivered to
Buyer (i) the Bill of Sale, (ii) certificates representing shares of capital
stock of the Sold Subsidiaries accompanied by stock powers, duly executed in
blank, (iii) limited warranty deeds (or the equivalent thereof in any
jurisdiction in which limited warranty deeds may not be used) in recordable form
for the Owned Property being conveyed, and (iv) such other instruments of
transfer and documents (including assignments of the Intellectual Property) as
Buyer may reasonably request, and Buyer shall deliver to Seller (i) the
Assignment and Assumption Agreement (ii) such other instruments of assumption
and documents as Seller may reasonably request and (iii) an affidavit in form
and substance reasonably satisfactory to Buyer, duly executed and acknowledged,
certifying that Seller is not a foreign person within the meaning of Section
1445(f)(3) of the Code. Not later than the Closing, the parties hereto shall
also enter into agreements embodying certain relationships between Buyer and the
Business, on the one hand, and Seller and its remaining businesses, on the other
hand, after the Closing Date. These agreements will have terms as set forth in
Exhibit A with respect to the Seller Note, and be in the forms set forth in
Exhibit B with respect to Intellectual Property, Exhibit C with respect to the
provision of certain transitional services and Exhibit D with respect to
employee matters (Exhibits A through D, collectively, the "Ancillary
Agreements"). Buyer and Seller have entered into the Employee Matters Agreement
concurrently with the execution and delivery of this Agreement.
2.5 Purchase Price Adjustment.
-------------------------
(a) Within sixty (60) days after the Closing Date, Seller shall
prepare and deliver to Buyer an audited statement of assets and liabilities of
the Business as of the Effective Time. This statement will be in a format
comparable to the Statement (such statement, the "Closing Statement"). The
Closing Statement will be prepared using the same accounting methods, policies,
practices and procedures, with consistent classifications, judgments and
estimation methodology, as was used in the preparation of the Statement and as
described in the notes to the Statement and Schedule 4.2(a), and will not
include any changes in assets or liabilities as a result of purchase accounting
adjustments arising from or resulting as a consequence of the transactions
contemplated hereby. Buyer shall cause the employees of the Business to assist
Seller in the preparation of the Closing Statement.
(b) The Closing Statement shall be accompanied by an additional
schedule of information (the "Purchase Price Adjustment Schedule") which will
identify the Purchase Price Adjustment. For purposes of this Section 2.5 the
following definitions apply:
"Purchase Price Adjustment" shall mean (i) Closing Date Net Working
Capital less (ii) Base Net Working Capital.
"Closing Date Net Working Capital" shall mean Net Working Capital as
of the Effective Time.
"Net Working Capital" as of any date shall mean (i) total current
assets of the Business as of such date, minus (ii) total current liabilities of
the Business as of such date.
The Purchase Price will be increased on a dollar-for-dollar basis if the
Purchase Price Adjustment is positive and decreased on a dollar-for-dollar basis
if the Purchase Price Adjustment is negative. Schedule 2.5(b) shall set forth an
example of the operation of the Purchase Price Adjustment.
(c) Buyer and Seller agree that the sole purpose of the Purchase
Price Adjustment contemplated by this Section 2.5 is to measure the effect of
operating activity and transactions that have occurred between March 31, 2000
and the Effective Time. The Purchase Price Adjustment is not intended to permit
the introduction of different judgments, accounting methods, policies,
practices, procedures, classifications or estimation methodology for purposes of
determining the asset and liability balances from those used in the preparation
of the Statement. Each party shall provide the other party and its
representatives with reasonable access to books and records and relevant
personnel during the preparation of the Purchase Price Adjustment Schedule
referred to in paragraph (b) above and the resolution of any disputes that may
arise under this Section 2.5.
(d) If Buyer disagrees with the determination of the Purchase Price
Adjustment and the amount of such disagreement exceeds $5,000,000, Buyer shall
notify Seller in writing of such disagreement within thirty (30) days after
delivery of the Purchase Price Adjustment Schedule, which notice shall describe
the nature of any such disagreement in
reasonable detail, identify the specific items involved and the dollar amount of
each such disagreement and provide reasonable supporting documentation for each
such disagreement. If the total amount of all disagreements with the
determination of the Purchase Price Adjustment is less than $5,000,000, the
Purchase Price Adjustment delivered by Seller shall be final for purposes of
this Section 2.5. After the end of such 30-day period, Buyer may not introduce
additional disagreements with respect to any item in the Purchase Price
Adjustment Schedule or increase the amount of any disagreement, and any item not
so identified shall be deemed to be agreed to by Buyer and will be final and
binding upon the parties. Similarly, a disagreement by Buyer does not provide
any right to Seller to introduce any changes to Purchase Price Adjustment
Schedule not directly related to the disputed item. To the extent that a Buyer
disagreement relates to an error in the Closing Statement and a similar error
also exists in the Statement, then, to the extent that such disagreement is
determined to be error, the error in the Closing Statement and the error in the
Statement shall both be corrected in determining the Purchase Price Adjustment
under this Section 2.5. Resolution of suspense amounts described in Note 1.F of
Schedule 4.2(a)(iii) will be considered the correction of an error for the
purposes of the foregoing sentence and reflected both in the Statement and in
the Closing Statement and shall not result in a purchase price adjustment.
During the 30-day period of its review, Buyer shall have reasonable access to
any documents, schedules or workpapers used in the preparation of the Purchase
Price Adjustment Schedule.
(e) Buyer and Seller agree to negotiate in good faith to resolve any
such disagreement and any resolution agreed to in writing by Buyer and Seller
shall be final and binding upon the parties. If Buyer and Seller are unable to
resolve all disagreements properly identified by Buyer pursuant to Section
2.5(d) within thirty (30) days after delivery to Seller of written notice of
such disagreement, then the disputed matters shall be referred to the Chief
Financial Officers of the respective businesses for resolution. If the Chief
Financial Officers are unable to resolve all disagreements within fifteen (15)
days, then, within fifteen (15) days thereafter, the matter shall be referred
for final determination to Pricewaterhouse Coopers LLP. If such firm is unable
to serve, Buyer and Seller shall jointly select an arbiter from one of the "Big
5" accounting firms that is not the independent auditor of either Buyer or
Seller or their respective Affiliates; if Buyer and Seller are unable to select
such an arbiter within such time period, the American Arbitration Association
shall make such selection (Pricewaterhouse Coopers LLP or any other person so
selected shall be referred to herein as the "Accounting Arbitrator"). The
Accounting Arbitrator so selected will only consider those items and amounts set
forth in the Purchase Price Adjustment Schedule as to which Buyer and Seller
have disagreed within the time periods and on the terms specified above and must
resolve the matter in accordance with the terms and provisions of this
Agreement. The Accounting Arbitrator shall deliver to Buyer and Seller, as
promptly as practicable and in any event within one hundred and twenty (120)
days after its appointment, a written report setting forth the resolution of any
such disagreement determined in accordance with the terms of this Agreement. The
Accounting Arbitrator shall select as a resolution the position of either Buyer
or Seller for each item of disagreement (based solely on presentations and
supporting material provided by the parties an not pursuant to any independent
review) and may not impose an alternative resolution. Such report shall be final
and binding upon Buyer and Seller. The fees, expenses and costs of the
Accounting Arbitrator shall be borne one-half by Buyer and one-half by Seller.
(f) If the Purchase Price Adjustment results in a reduction in the
Purchase Price, Seller shall pay to Buyer the amount of such reduction (whether
or not such reduction exceeds the $5,000,000 threshold referred to in (d)
above), and if any such adjustment results in an increase in the Purchase Price,
Buyer shall pay to Seller the amount of such increase, in each case, by wire
transfer of immediately available funds to an account designated by the party
receiving payment within five (5) Business Days after the final determination of
the amount of such reduction or increase in Purchase Price, plus interest on the
amount of such reduction or increase from the Closing Date to the date of such
payment thereof at the per annum rate equal to London Interbank Offer Rate
(LIBOR) on the Closing Date as published in the Wall Street Journal (the
"Interest Rate").
(g) For purposes of Section 2.3(b) and the Closing Statement, Taxes
shall be allocated between the Buyer and Seller as follows: (i) real and
personal property Taxes with respect to the Assets for the taxable period which
includes the Closing Date shall be prorated between Seller and Buyer, with such
Taxes being borne by Seller based on the ratio of the number of days in the
relevant period prior to the Effective Time to the total number of days in the
actual taxable period with respect to which such Taxes are assessed,
irrespective of when such Taxes are due, become a lien or are assessed, and such
Taxes being borne by the Buyer based on the ratio of the number of days in the
relevant period after the Effective Time to the total number of days in the
actual taxable period with respect to which such Taxes are assessed,
irrespective of when such Taxes are due, become a lien or are assessed; (ii)
sales and use Taxes shall be deemed to accrue as property is purchased, sold,
used, or transferred; (iii) all other Taxes shall accrue in accordance with
GAAP, except for income Taxes, which shall accrue in accordance with income Tax
principles. The parties agree that income Taxes imposed on or with respect to
the operation of the Business shall not be accrued as a liability or an asset on
the Closing Statement. In no event shall Buyer have any liability for Taxes
imposed upon or measured by the income of Seller, and in no event shall Seller
have any liability for Taxes imposed upon or measured by the income of Buyer.
2.6 Tax Allocation. Buyer and Seller agree that the aggregate fair market
--------------
value of the Assets will be appraised at Buyer's expense by an appraisal firm of
its choice (and reasonably acceptable to Seller) (the "Appraisal") within 90
days after the Closing Date. Buyer shall thereafter prepare a draft of IRS Form
8594 reflecting the allocation of the Purchase Price among the Assets based upon
the Appraisal and such other information as required by the form, and shall
forward it within 120 days after the Closing Date to Seller for its approval,
which approval will not be withheld or delayed unreasonably. If Buyer and Seller
are unable to agree on such allocation, then the Accounting Arbitrator will be
retained to determine such allocation (the cost of which shall be borne equally
by Buyer and Seller). Buyer and Seller shall report the purchase and sale of the
Assets in accordance with such allocation (as finally determined) for all tax
purposes (including the filing of the forms prescribed under Section 1060 of the
Code and the Treasury Regulations promulgated thereunder ).
2.7 Transfer Taxes. Buyer and Seller shall cooperate in preparing,
--------------
executing and filing use, sales, real estate, transfer and similar Tax returns
relating to the purchase and sale of the Assets. Buyer shall bear, and to the
extent permitted by law shall pay, all such transfer Taxes, including any
penalties, interest and additives to tax, incurred in connection with the
purchase and sale of the Assets, and Buyer shall reimburse Seller for any
transfer Taxes paid by Seller, plus interest thereon at the Interest Rate,
within five (5) days of Seller's written request. Under no circumstances shall
Buyer's obligation hereunder or the Taxes giving rise thereto be reflected as a
liability on the Closing Statement. Such Tax returns shall be prepared in a
manner that is consistent with the allocation of the Purchase Price and Assumed
Liabilities contemplated by Section 2.6.
ARTICLE III
CONDITIONS TO CLOSING
---------------------
3.1 Buyer's Obligation. The obligations of Buyer to purchase and pay for
------------------
the Assets are subject to the satisfaction (or waiver by Buyer) as of the
Closing of the following conditions:
(a) The representations and warranties of Seller made in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except for those made as of a specific date or as otherwise
specifically contemplated by this Agreement, on and as of the Closing, as though
made on and as of the Closing Date, and Seller shall have performed or complied
in all material respects with all obligations and covenants required by this
Agreement to be performed or complied with by Seller by the time of the Closing;
and Seller shall have delivered to Buyer a certificate dated the Closing Date
and signed by an authorized officer of Seller confirming the foregoing.
(b) No injunction or order shall have been granted by any court or
administrative agency or instrumentality of competent jurisdiction that would
restrain or prohibit any of the Transactions.
(c) The waiting period under the HSR Act shall have expired or been
terminated.
(d) The consents set forth on Schedule 3.1(d) shall have been
obtained (the "Required Consents") or alternative arrangements for the
Gulfstream and/or Alcoa contracts pursuant to Sections 8.1(d) or (e) shall be in
effect.
(e) Buyer shall have received an opinion dated the Closing Date of
Gibson, Dunn & Crutcher LLC, special counsel to Seller, substantially in the
form set forth in Exhibit E.
3.2 Seller's Obligation. The obligation of Seller to sell and deliver the
-------------------
Assets to Buyer is subject to the satisfaction (or waiver by Seller) as of the
Closing of the following conditions:
(a) The representations and warranties of Buyer made in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except for those made as of a specific date or as otherwise
specifically contemplated by this Agreement on and as of the Closing, as though
made on and as of the Closing Date, and Buyer shall have performed or complied
in all material respects with all obligations and covenants required by this
Agreement
to be performed or complied with by Buyer by the time of the Closing; and Buyer
shall have delivered to Seller a certificate dated the Closing Date and signed
by an authorized officer of Buyer confirming the foregoing.
(b) No injunction or order shall have been granted by any court or
administrative agency or instrumentality of competent jurisdiction that would
restrain or prohibit the Transactions.
(c) The waiting period under the HSR Act shall have expired or been
terminated.
(d) The Required Consents shall have been obtained or alternative
arrangements pursuant to Section 8.1(d) or (e) shall be in effect for the
Gulfstream and Alcoa contracts.
(e) Seller shall have received an opinion dated the Closing Date of
Latham & Watkins, special counsel to Buyer, substantially in the form set forth
in Exhibit F.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller hereby represents and warrants to Buyer as follows:
4.1 Authority; No Conflicts; Governmental Consents; Corporate Matters.
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(a) Seller is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware. Seller has all
requisite corporate power and authority to enter into the Transaction Documents
and to consummate the Transactions. All corporate acts and other proceedings
required to be taken by Seller to authorize the execution, delivery and
performance of the Transaction Documents and the consummation of the
Transactions have been duly and properly taken, including, without limitation,
any shareholder approvals. This Agreement has been, and each of the Transaction
Documents, when executed, will be, duly executed and delivered by Seller and
constitute a valid and binding obligation of Seller, enforceable against Seller
in accordance with their respective terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
(b) The execution and delivery of this Agreement does not, the
execution and delivery of the other Transaction Documents will not, and the
consummation of the Transactions and compliance with the terms of the
Transaction Documents will not conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
loss of a benefit under, or result in the creation of any material Lien upon any
of the properties or assets of Seller or the Sold Subsidiaries under, any
provision of (i) the Certificate of Incorporation or By-Laws or other
organizational or governing documents of Seller or the Sold Subsidiaries, (ii)
subject to the matters disclosed in Schedule 4.1(b), any material Contractual
Obligation of Seller or the Sold Subsidiaries or (iii) any material judgment,
order or decree or, subject to the matters described in clause (c) below,
Requirement of Law applicable to Seller or the Sold Subsidiaries or their
respective property or assets.
(c) No material consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any Governmental
Authority is required to be obtained or made by or with respect to Seller in
connection with the execution and delivery of the Transaction Documents or the
consummation of the Transactions contemplated hereby, other than (A) compliance
with and filings under the Exchange Act, (B) compliance with and filings and
notifications under applicable Environmental Laws, (C) compliance with and
filings under the HSR Act and (D) those set forth on Schedule 4.1(c).
(d) Each of the Sold Subsidiaries is duly incorporated, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized, and has all requisite corporate power and authority to own, lease and
operate its properties and to conduct its business as it is now being conducted.
Each of the Sold Subsidiaries is duly licensed or qualified and in good standing
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of the business conducted by it is such as to require it
to be so licensed or qualified, except where the failure to be so licensed or
qualified would not have a Material Adverse Effect on the Business.
(e) The authorized outstanding shares of each of the Sold
Subsidiaries consists of the shares listed on Schedule 4.1(e), all of which are
duly authorized, validly issued and fully paid, nonassessable and free of
preemptive rights, except as provided by applicable law.
(f) None of the Sold Subsidiaries has granted any outstanding
options, warrants, rights or other securities convertible into or exchangeable
or exercisable for its shares or any other commitments or agreements providing
for the issuance of additional shares, the sale of treasury shares, or for the
repurchase or redemption of such company's shares. There are no agreements of
any kind which obligate any of the Sold Subsidiaries to issue, purchase, redeem
or otherwise acquire any of its shares.
(g) The activities of each of the Sold Subsidiaries since their
formation have been limited to the activities described on Schedule 4.1(g)
4.2 Financial Statements; Absence of Changes.
----------------------------------------
(a) Schedule 4.2(a) contains a true and complete copy of the
following:
(i) the description of accounting methods, policies, practices
and procedures used in preparation of the audited statement of assets and
liabilities of the Business at March 31, 2000;
(ii) the audited statement of assets and liabilities of the
Business (titled as "Statement of Net Assets Subject to Section 4.2 of the
Asset Purchase Agreement March 31, 2000"), excluding all cash accounts,
pension plan assets and liabilities, other post-retirement liabilities,
income and franchise related tax accounts, workers' compensation assets and
liabilities and employee payroll, payroll tax and payroll withholding
liabilities, at March 31, 2000 and the notes thereto (the "Statement"); and
(iii) the unaudited statements of revenues, costs and expenses of
the Business for each of the three fiscal years ended December 31, 1999 and
for the three months ended March 31, 2000 and the notes thereto (the
"Income Statements").
The financial statements described in the foregoing clauses (i), (ii) and (iii)
are collectively referred to herein as the "Financial Statements." The Financial
Statements: (A) were prepared from the books and records of Seller and in
accordance with the numbered notes to such Financial Statements and the
accounting policies, practices and procedures set forth on Schedule 4.2(a), (B)
are complete and accurate in all material respects except as reflected in the
numbered notes thereto, on Schedule 4.2(a)(i) or for the exclusions described in
Section 4.2(a)(ii), (C) in the case of the Statement, fairly presents the assets
and liabilities of the Business (exclusive of pension assets and liabilities and
other post-retirement employee liabilities) that would have been transferred to
Buyer as if the Closing Date had been March 31, 2000, and (D) in the case of the
Income Statements and except as described in the numbered notes thereto, are
consistent with the internal financial statements of Seller used by management
to manage the Business during the periods covered by such Income Statements and
fairly present the results of operations for the periods reflected therein. The
amounts set forth on the Statement were prepared in accordance with GAAP, except
as otherwise referred to in the numbered notes thereto, in Schedule 4.2(a)(i)
and in the exclusions described in Section 4.2(a)(ii) above, and except that
certain disclosure requirements of GAAP were not met, which noncompliance would
not materially impact the accuracy of any of the amounts shown on the Statement.
The amounts set forth on the Income Statements for the fiscal year ended
December 31, 1999 and for the three months ended March 31, 2000, except as
otherwise referred to in the numbered notes thereto set forth on Schedule
4.2(a)(iii), were prepared in accordance with GAAP, except that certain
disclosure requirements of GAAP were not met, which noncompliance with GAAP
would not materially impact the accuracy of any of the amounts shown on such
Income Statements except as otherwise disclosed on the such statements or in the
numbered notes thereto. Notwithstanding all of the foregoing, with respect to
any matters in the Financial Statements that are based on estimates and
judgments (e.g., estimates at completion) Section 4.2(a) shall be deemed to be
only a representation and warranty that such estimates and judgments were made
in good faith and are permissible under GAAP.
(b) Schedule 4.2(b) sets forth an unaudited statement of all pension
plan assets and liabilities and other post-retirement liabilities to be
transferred to or assumed by Buyer pursuant to this Agreement or the Employee
Matters Agreement, estimated as of July 31, 2000 and the notes thereto (the
"Supplemental Statement"). The Supplemental Statement (A) was prepared from the
books and records of Seller and in accordance with the notes thereto, (B) is
complete and accurate in all material respects, (C) was prepared in accordance
with GAAP and applicable Cost Accounting Standards except as otherwise referred
to in the notes thereto,
(D) with respect to the Seller Pension Plan (as defined in the Employee Matters
Agreement), was prepared in accordance with the principles of Section 4.2(b) of
the Employee Matters Agreement (including, without limitation, the assumptions
set forth or referenced therein), and (E) with respect to retiree health and
life insurance benefits, was prepared in accordance with the principles and
assumptions set forth on Schedule 4.2(b) hereof. The assets and liabilities
conveyed as of the Closing Date may differ from those shown in Schedule 4.2(b)
based on the actual results of plan performance, actual payments and changes in
employees during the period from January 1, 2000 to the Closing Date.
(c) Absence of Changes. Except as expressly contemplated by this
------------------
Agreement or as set forth on Schedule 4.2(c), since March 31, 2000, the Business
has been operated in the ordinary course and consistent with past practice, and
with respect to the Business there have not been any:
(i) changes in the assets, liabilities, earnings or financial
condition of the Business that have had or are reasonably likely to result
in a Material Adverse Effect;
(ii) occurrences resulting in the damage, destruction or loss
(whether or not covered by insurance) affecting any tangible asset or
property of the Business in excess of $500,000 for any single loss or
$2,000,000 for all such losses;
(iii) (a) increases in the benefits payable or potentially
payable under any Seller Plans, (b) increases in salary, bonus or other
compensation or benefits payable or potentially payable to any Business
Employee other than in the ordinary course of the business of the Business
and consistent with past practice; (c) grants of severance, continuation or
termination pay to any Business Employee,(d) new employment, deferred
compensation or other similar agreements (or any amendment to any such
existing agreement) with any Business Employee, (e) changes in the terms of
any bonus, pension, insurance, health or other Seller Plan, or (f)
representations to any employee or former employee of Seller that Buyer
would assume or continue to maintain any Seller Plan after the Closing
Date.
(iv) changes in the accounting methods or practices followed by
or with respect to the Business, or any changes in depreciation or
amortization policies or rates theretofore adopted;
(v) agreements or commitments to merge or consolidate with or
otherwise acquire any other Person, or any part or division thereof;
(vi) other material transactions relating to the Business, other
than in the ordinary course of the Business and consistent with past
practice;
(vii) agreements or understandings, whether in writing or
otherwise, for Seller to take any of the actions specified in items (i)
through (vi) above;
(viii) cancellation or termination by Seller of any material
Contract or entry by Seller into any material Contract which is not in
the ordinary course of the business of Seller; or
(ix) sale, assignment or transfer of any material portion of
the Assets, other than in the ordinary course of business.
(d) Absence of Undisclosed Liabilities. Except as and to the
----------------------------------
extent reflected on the Statement or the Supplemental Statement, Seller does not
have any liabilities relating to the Business required to be reflected on a
balance sheet prepared in accordance with GAAP other than liabilities and
obligations incurred since the date of the Statement or the Supplemental
Statement in the ordinary course of business and consistent with past practice
which have not had or will not have a Material Adverse Effect.
4.3 Taxes. Except as otherwise provided in Schedule 4.3:
-----
(a) (i) Seller has filed or caused to be filed all material Tax
returns of Seller which have become due (taking into account valid extensions of
time to file) prior to the date hereof, such returns are accurate and complete
in all material respects and Seller has paid or caused to be paid all Taxes due,
in each case to the extent Buyer or any Affiliate of Buyer would incur liability
for Seller's failure to file such returns or pay such Taxes, (ii) there are no
outstanding Tax Liens that have been filed by any Tax authority against any
property or assets of the Business or of any Sold Subsidiary (other than for
Taxes not yet due and payable) and (iii) no claims are being asserted in writing
with respect to any Taxes relating to the Business for which Buyer reasonably
could be held liable and Seller knows of no basis for the assertion of any such
claim.
(b) (i) none of the Assets or the assets of any Sold Subsidiary
comprises "tax exempt use property" within the meaning of Section 168(h) of the
Code, (ii) secures any debt the interest on which is tax exempt under Code
Section 103 and (iii) the Assigned Contracts and the assets of the Sold
Subsidiaries do not include any lease made pursuant to former Section 168(f)(8)
of the Internal Revenue Code of 1954, or Section 7701(h) of the Code.
(c) Seller is not a "foreign person" within the meaning of Section
1445(f)(3) of the Code.
(d) No amount payable to, or for the benefit of, any Business
Employee under any Seller Plan or any other agreement, contract, or arrangement
(including, without limitation, the Assigned Contracts) in effect on or before
the Closing Date will fail to be deductible by Buyer for Federal income tax
purposes by virtue of Section 280G or Section 162(m) of the Code.
(e) The Sold Subsidiaries have filed, or been included in, all
Tax Returns required to be filed through the date hereof and will timely file
any such Tax Returns required to be filed on or prior to the Closing Date, in
each case, subject to any applicable extensions. All such Tax Returns are
complete and accurate in all material respects;
(f) All Taxes of the Sold Subsidiaries that accrue or are payable (i)
in respect of taxable periods that end on or before the Closing Date and (ii)
for any taxable period that begins before the Closing Date and ends thereafter,
to the extent such Taxes are attributable to the portion of such period ending
on the Closing Date under the terms of Section 2.5(h), have or will have been
timely paid on or before the Closing Date unless a reserve for such amount has
been or will be established therefor in the Closing Statement (other than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income);
(g) None of Sold Subsidiaries has a Tax deficiency or claim assessed
or, to the best of the Sold Subsidiaries' knowledge, proposed or threatened
(whether orally or in writing) against any Sold Subsidiary;
(h) None of the Sold Subsidiaries (i) has filed a consent under Code
Section 341(f) concerning collapsible corporations or (ii) has been a United
States real property holding corporation within the meaning of Code Section
897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii);
(i) None of the Sold Subsidiaries is a party to, or is bound by, or
has any obligation under any Tax allocation or sharing agreement (including
indemnity arrangements), and, after the Closing Date, no Sold Subsidiary shall
be a party to, bound by or have any obligation under any Tax allocation or
sharing agreement or have any liability thereunder for amounts due in respect of
periods prior to the Closing Date;
(j) None of the Sold Subsidiaries (i) has been a member of any
affiliated group filing a consolidated federal income Tax Return (other than a
group the common parent of which is Seller) and (ii) has any liability for the
Taxes of any other person (other than an entity that is a member of the
consolidated group of corporations that has Seller as its common parent) as
defined in Section 7701(a)(1) of the Code under Treas. Reg. ss. 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise; and
(k) None of the Sold Subsidiaries has agreed to or is required to
make any adjustment pursuant to Code Section 481(a) by reason of a change in
accounting method initiated by such Sold Subsidiary and none of the Sold
Subsidiaries have knowledge that the Internal Revenue Service has proposed any
such adjustment or change in accounting method.
4.4 Assets Other than Real Property Interests. Seller has and will
-----------------------------------------
transfer good and marketable title to all assets reflected on the Statement or
thereafter acquired, except those sold or otherwise disposed of since the date
of the Statement in the ordinary course of business consistent with past
practice, in each case free and clear of all Liens except: (a) such as are
disclosed on Schedule 4.4 or in the Financial Statements and (b) (i) mechanics',
carriers', workmen's, repairmen's or other like Liens arising or incurred in the
ordinary course of business for amounts not yet due or which are being contested
in good faith, (ii) Liens arising under original purchase price conditional
sales contracts and equipment leases with third parties entered into in the
ordinary course of business, (iii) Liens for Taxes and other governmental
charges which are not due and payable or which may thereafter be paid without
penalty, (iv)
Liens occurring by operation of law or regulation in connection with progress
payments or performance based payments paid under Government Contracts and (v)
other imperfections of title, restrictions or encumbrances, if any, which Liens,
imperfections of title, restrictions or other encumbrances do not, individually
or in the aggregate, materially impair the value or continued use and operation
of the specific assets to which they relate (the Liens described in the
preceding clause (b) are hereinafter referred to collectively as "Permitted
Liens").
This Section 4.4 does not relate to real property or interests in real
property, such items being the subject of Section 4.5.
4.5 Real Property Interests.
-----------------------
(a) Schedule 2.1(a) sets forth a complete list of all Owned
Properties and Schedule 2.1(b) sets forth a complete list of all Leased
Properties and, as to Leased Property, identifies any leases relating thereto
(an Owned Property or Leased Property being sometimes referred to herein
individually as a "Business Property" and collectively as "Business
Properties"). Seller has and will transfer good and marketable fee simple title
to all Owned Property, free and clear of all Liens, easements, covenants,
rights-of-way and other similar restrictions of any nature whatsoever, except:
(i) mechanics', carriers', workmen's, repairmen's or other like Liens arising or
incurred in the ordinary course of business for amounts not yet due or which are
being contested in good faith, (ii) Liens for Taxes and other governmental
charges which are not due and payable or which may thereafter be paid without
penalty, (iii) Encumbrances listed on Schedule 4.5 (as supplemented in
accordance with the last sentence of this Section 4.5), and (iv) (1) zoning,
building and other similar government-imposed restrictions, (2) Liens that have
been placed by any developer, landlord or other third party on property over
which Seller has easement rights or on any Leased Property and subordination or
similar agreements relating thereto and (3) unrecorded Encumbrances, none of
which items set forth in clauses (1), (2) and (3) above, individually or in the
aggregate, (A) materially impair the continued use and operation of the property
to which they relate, (B) materially impair the fair market value of the
property to which they relate, (C) secure any Financing Obligation or (D)
constitute a lease, sublease or other occupancy agreement that gives any third
party any right to occupy or use all or any portion of the Owned Property.
Notwithstanding anything in this Section to the contrary, Seller shall have the
right, by written notice to Buyer, to supplement Schedule 4.5 from time to time
with additional Encumbrances after the date of this Agreement (and prior to the
closing) and Buyer shall be deemed to have accepted such Encumbrances, provided
that such additional Encumbrances do not (A) materially impair the continued use
and operation of the property to which they relate, (B) materially impair the
fair market value of the property to which they relate, (C) secure any Financing
Obligation or (D) constitute a lease, sublease or other occupancy agreement that
gives any third party any right to occupy or use all or any portion of the Owned
Property.
(b) Real Property Leases or Other Agreements. Seller is the lessee
----------------------------------------
of each of the Leased Properties and is in possession of the premises purported
to be leased thereunder, and each such lease is a valid obligation of the Seller
without any material default thereunder by Seller or, to the knowledge of
Seller, by the applicable lessor. Except for the Leases listed on Schedule
2.1(b) and the documents listed on Schedule 4.5, there are no material leases,
subleases, licenses, occupancy agreements, options, rights, concessions or other
agreements or arrangements, written or oral, granting to any Person the right to
purchase, use or occupy any Business Property. With respect to each Leased
Property, Seller has and will transfer to Buyer at the Closing a valid leasehold
interest in the leasehold estate, and Seller has in all material respects
performed all the material obligations required to be performed by it through
the date hereof with respect to such Leases, and each Lease is assignable (upon
receipt of necessary landlord consents) in connection with the transactions
contemplated hereby. Seller has not assigned, pledged or placed any Encumbrance
on the Leases or its leasehold estate in and to the Leased Properties (other
than any Encumbrance which would not individually or in the aggregate materially
adversely effect the use or value in respect of its current use of the Leased
Property).
(c) Actions. There are no pending or, to the Knowledge of Seller,
-------
threatened condemnation proceedings with respect to any Business Property, or
material litigation or administrative actions relating to any Business Property.
(d) Certificate of Occupancy. Seller has received all required
------------------------
material approvals of governmental authorities (including, without limitation,
Permits and material certificates of occupancy or other similar certificates
permitting lawful occupancy of the Business Property) required in connection
with the present use of the Real Property and all improvements thereon.
(e) Utilities. All Business Property and the improvements thereon are
---------
supplied with utilities and other services necessary for the operation of such
facilities as currently operated.
(f) No Special Assessment. Seller has not received notice of any
---------------------
special assessment relating to any Business Property or any portion thereof, and
Seller has no knowledge of any pending or threatened special assessment.
(g) Improvements, Fixtures and Equipment. The Leasehold Improvements
------------------------------------
and the fixtures, equipment and other tangible assets owned, leased or used by
Seller on the Business Property are adequate in all material respects for the
operation of the Business as presently conducted by Seller.
4.6 Intellectual Property. Schedule A to the Intellectual Property
---------------------
Agreement sets forth a list of all of Seller's material patents and pending
patent applications that are practiced or utilized in the operations of the
Business as currently conducted. Seller is the owner and will transfer to Buyer,
free and clear of any Liens other than Permitted Liens or third party ownership
interests, of all patents or applications therefor listed on Schedule A to the
Intellectual Property Agreement. Except as disclosed on Schedule 4.6 and except
for licenses of software or firmware used in the Business that are generally
available "off-the-shelf" through commercial software vendors, Seller owns or
has the right to use, without payment to any other party, all material
Intellectual Property practiced or utilized in the operations of the Business as
currently conducted by Seller. Except as set forth on Schedule 4.8, no material
claims are pending or, to the Knowledge of Seller, threatened against Seller by
any person with respect to the ownership, validity, enforceability or use of any
Intellectual Property, challenging or questioning the validity
or effectiveness of any such Intellectual Property or alleging that Seller (in
respect of the Business) is infringing upon the intellectual property rights of
others. To the Knowledge of Seller, except as disclosed on such Schedule, Seller
(in respect of the Business) is not infringing on any third party's intellectual
property in the operation of the Business except for such infringement which,
individually or in the aggregate, would not have a Material Adverse Effect. The
Intellectual Property listed on Schedule A to the Intellectual Property
Agreement together with the other Intellectual Property being assigned (in whole
or as to a one-half ownership interest) to Buyer under the Intellectual Property
Agreement constitutes all of the material Intellectual Property necessary to
conduct the Business in the manner presently conducted, except for any rights in
respect of trade names, trademarks or service marks used by Seller in connection
with the conduct of the Business other than "Vought" and "Vought Aircraft".
4.7 Contracts. Schedule 4.7 sets forth a list of each of the following
---------
types of Contracts to which any of the Sellers are a party and which relate
primarily to the Business:
(a) any employment or relocation agreement not subject to termination
by Seller without cost or liability in excess of $200,000 and any severance
agreement that provides for severance compensation in excess of $200,000,
including, without limitation, such Contracts (A) to employ or terminate
executive officers or other personnel and with present or former officers,
directors or shareholders of Seller or (B) that will result in the payment by,
or the creation of any commitment or obligation (absolute or contingent) to pay
on behalf of Buyer or Seller any severance, termination, "golden parachute," or
other similar payments to any present or former personnel following termination
of employment or otherwise as a result of the consummation of the transactions
contemplated by this Agreement;
(b) any employee collective bargaining agreement or other contract
with any labor union covering Business Employees;
(c) any Contract (including purchase orders) involving the obligation
of Seller to purchase products or services pursuant to which the aggregate of
payments to become due from Seller or a Sold Subsidiary is equal to or exceeds
$500,000;
(d) any Contract (including sales orders) involving the obligation of
Seller or a Sold Subsidiary to deliver products or services with an unfilled
order balance of more than $500,000;
(e) any distributor, dealer, sales, advertising, agency,
manufacturer's representative, franchise or similar Contract currently in effect
requiring the payment of any commissions in excess of $500,000 per year;
(f) any option or other agreement to purchase or otherwise acquire or
sell or otherwise dispose of any interest in real property;
(g) any agreement under which Seller has agreed to indemnify any
third party with respect to, or to share, the Tax liability of any third party;
(h) any commitment to make a capital expenditure or to purchase a
capital asset, not contemplated by the capital expenditure budget of Seller for
the Business, copies of which have been provided to Buyer by or on behalf of
Seller or the Sold Subsidiaries in connection with the operation of the
Business;
(i) any agreement or commitment with a third party other than an
employee relating to the location of employees or minimum number of employees to
be employed by Seller with respect to the Business;
(j) any power of attorney (other than powers of attorney given in the
ordinary course of Business with respect to routine export, tax or securities
matters);
(k) any indenture, note, loan or credit agreement or other Contract
relating to the borrowing of money or to the direct or indirect guarantee or
assumption of the obligations of any other Person for borrowed money;
(l) any covenant not to compete; or
(m) any lease or similar agreement under which (i) Seller is the
lessee of, or holds or uses, any machinery, equipment, vehicle or other tangible
personal property owned by any third Person for an annual rent in excess of
$250,000 or (ii) Seller is the lessor of, or makes available for use by any
third Person, any tangible personal property owned by Seller for an annual rent
in excess of $250,000.
Except as disclosed on Schedule 4.7, each Contract listed on Schedule 4.7
(and to the extent leases are not listed on Schedule 4.7, each Lease in respect
of Leased Property) is valid, binding and in full force and effect and is
enforceable by Seller or the Sold Subsidiary that is party thereto in accordance
with its terms. Except as disclosed in Schedule 4.7, Seller has performed all
material obligations required to be performed by it to date under the Contracts
and is not in breach or default in any material respect thereunder and, to the
Knowledge of Seller, no other party to any of the Contracts is in breach or
default in any material respect thereunder, or has repudiated any material
provision thereof.
Section 4.7 also sets forth any proposals which, if accepted, would require
capital expenditures in excess of $250,000 not contemplated by the capital
expenditure budget.
4.8 Litigation; Decrees. Schedule 4.8 sets forth, as of the date of this
-------------------
Agreement, a list of all pending and, to the Knowledge of Seller, threatened in
writing, lawsuits, litigations, arbitrations, government audits or
investigations or claims relating to the Business which (a) involves a claim for
damages in excess of $500,000, (b) seeks any injunctive relief or (c) seeks to
prevent the Transactions. Neither Seller nor any Company is in default under any
judgment, order, writ, injunction or decree of any court, administrative agency
or commission or other Governmental Authority applicable to the Business. No
representation and warranty is being made in this Section 4.8 as to the matters
covered by Sections 4.9, 4.10, 4.11, 4.12 and 4.15.
4.9 Employee Benefits.
-----------------
(a) Schedule 4.9 sets forth a complete and correct list of all Seller
Plans.
(b) Each of the Seller Plans intended to qualify under Section 401 of
the Code (the "Qualified Plans") has received a current and valid determination
letter from the Internal Revenue Service that it does so qualify, and to the
Knowledge of Seller, no event has occurred and no condition exists that could
reasonably be expected to result in the revocation of such determination letter
or the loss of such qualification or exemption. Except as disclosed on Schedule
4.9(b), Seller is not aware of any operational defect with respect to any such
plan which would be reasonably likely to cause the loss of such qualification or
exemption and which cannot be corrected without payment of more than $250,000
(including the amount of any additional contributions to such plans) by Buyer
through an Internal Revenue Service Compliance Resolution Program described in
Revenue Procedure 2000-16.
(c) Except as set forth on Schedule 4.9(c),with respect to any Seller
Plan subject to Title IV of ERISA:
(i) The funding method used in connection with each such Seller
Plan which is subject to the minimum funding requirements of ERISA is
acceptable and the actuarial assumptions used in connection with funding
each such plan are reasonable. As of the last day of the last plan year of
each such Seller Plan and as of the Closing Date, the "amount of unfunded
benefit liabilities" as defined in Section 4001(a)(18) of ERISA (but
excluding from the definition of "current value" of "assets" of such Seller
Plan, accrued but unpaid contributions) did not and will not exceed zero.
No "accumulated funding deficiency" (for which an excise tax is due or
would be due in the absence of a waiver) as defined in Section 412 of the
Code or as defined in Section 302(a)(2) of ERISA, whichever may apply, has
been incurred with respect to any such Seller Plan with respect to any plan
year, whether or not waived. Neither Seller nor any ERISA Affiliate has
failed to pay when due any "required installment," within the meaning of
Section 412(m) of the Code and Section 302(e) of ERISA, whichever may
apply, with respect to any such Seller Plan. Neither Seller nor any ERISA
Affiliate is required to provide security to any such Seller Plan under
Section 401(a)(29) of the Code.
(ii) No such Seller Plan has been terminated so as to subject,
directly or indirectly, any assets of Seller or its ERISA Affiliates to any
liability, contingent or otherwise, or the imposition of any liens under
Title IV of ERISA.
(iii) No proceeding has been initiated or threatened by any
person, including the Pension Benefit Guaranty Corporation ("PBGC"), to
terminate any such Seller Plan.
(iv) No condition or event exists or is expected to occur with
respect to any such Seller Plan that could subject, directly or indirectly,
any assets of Seller or its ERISA Affiliates to any liability, contingent
or otherwise, or the imposition of any lien under Title IV of ERISA,
whether to the PBGC or to any other person.
(v) No "reportable event," as defined in Section 4043 of ERISA
(to the extent that the reporting of such event to the PBGC has not been
waived) has occurred and is continuing with respect to any such Seller
Plan.
(d) True, correct and complete copies of the following documents,
with respect to each of the Seller Plans, have been delivered or made available
to Buyer: (i) any plans and related trust documents, and all amendments thereto;
(ii) the most recent Forms 5500 and schedules thereto; (iii) the most recent
financial statements and actuarial valuations; (iv) the most recent Internal
Revenue Service determination letter; and (v) the most recent summary plan
descriptions (including letters or other documents updating such descriptions).
(e) There are no pending legal proceedings which have been asserted
or instituted against any of the Seller Plans, the assets of any such plans or
the Seller, or the plan administrator of the Seller Plans with respect to the
operation of such plans (other than routine benefit claims) which would have a
Material Adverse Effect and, except as disclosed on Schedule 4.9(e), to the
Knowledge of Seller there are no facts or circumstances which could reasonably
be expected to form the basis for any such legal proceeding.
(f) Except as set forth on Schedule 4.9(f), each of the Seller Plans
has been maintained, in all material respects, in accordance with its terms and
all Requirements of Law. Seller and its ERISA Affiliates have made full and
timely payment of all amounts required to be contributed with respect to
Business Employees and Retired Business Employees (as defined in the Employee
Matters Agreement) under the terms of each Seller Plan, all Requirements of Law
or any collective bargaining or other agreement, or required to be paid as
expenses with respect to Business Employees and Retired Business Employees under
such Seller Plan through the Closing Date. All amendments and actions required
to bring each of the Seller Plans into conformity in all material respects with
all of the applicable provisions of ERISA and other applicable Requirements of
Law have been made or taken except to the extent that such amendments or actions
are not required to be made or taken until a date after the Closing Date.
(g) Except as disclosed on Schedule 4.9(g), neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment or benefit (including, without limitation,
any "parachute payment" within the meaning of Section 280G of the Code) becoming
due to any Business Employee or former employee of Seller in the Business and
with respect to which Buyer would be liable or responsible, (ii) materially
increase any benefits otherwise payable under any Seller Plan or (iii) result in
the acceleration of the time of payment or vesting of any compensation or
employee benefits and with respect to which Buyer would be liable or
responsible.
(h) No Seller Plan maintained, sponsored or contributed to at any
time during the five year period ending on the date of this Agreement
constitutes a "multiemployer plan" as defined in Section 3(37) of ERISA.
(i) Neither Seller nor any ERISA Affiliate has any liability for
delinquent or unpaid contributions under Section 515 of ERISA with respect to
any Seller Plan which is subject to regulation under Title IV of ERISA.
(j) Except as set forth on Schedule 4.9(j), neither Seller nor any of
its ERISA Affiliates sponsors or has previously sponsored, maintained,
contributed to or incurred an obligation to contribute to any Seller Plan that
provides or will provide benefits described in Section 3(1) of ERISA to any
former employee or retiree of Seller or any of its ERISA Affiliates, except as
required under Section 4980B of the Code and Part 6 of Title I of ERISA. With
respect to each Seller Plan which constitutes or has constituted a "group health
plan" (within the meaning of Section 5000(b)(1) of the Code), Seller and its
ERISA Affiliates have complied in all material respects with the provisions of
Section 4980B of the Code and Part 6 of Title I of ERISA.
(k) No Seller Plan is sponsored outside the United States. No Sold
Subsidiary maintains any Employee Benefit Plan or Employee Benefit Arrangement
within the United States that is not a Seller Plan. With respect to each
Employee Benefit Plan and Employee Benefit Arrangement maintained by any Sold
Subsidiary outside the United States (collectively, the "Non-U.S. Plans"), each
of the following is true:
(i) each Non-U.S. Plan is in compliance in all material
respects with the laws and regulations applicable to such plan;
(ii) each Non-U.S. Plan and related funding arrangement that is
intended to qualify for tax-favored status has been reviewed and approved
for such status by the appropriate Governmental Authority (or has been
submitted for such review and approval within the applicable time period),
and nothing has occurred and no condition exists that is likely to cause
the loss or denial of such tax-favored status; and
(iii) as of the most recent valuation date, there are no material
unfunded benefit liabilities.
4.10 Enviromental Matters. Except as disclosed on Schedule 4.10:
---------------------
(a) The Business is, and has at all times since June 1, 1997 been in
compliance with all applicable Environmental Laws, except where any instance of
non-compliance would not have a Material Adverse Effect.
(b) Since June 1, 1997, Seller has not received written notice of any
claim, investigation, demand or notice by any Person alleging non-compliance
with or liability under any Environmental Law in respect of the Business which
would individually or in the aggregate have a Material Adverse Effect.
(c) There is no existing contamination by, and there has not been the
release of, any Hazardous Material on, at or under any Business Property that
has or would have a Material Adverse Effect.
(d) Seller is not and has not been required to place any notice or
restriction relating to the presence of any Hazardous Material at any Owned
Property or in any deed to any Owned Property.
(e) Schedule 4.10(e) sets forth a complete and correct list of all
environmental audits or assessments in possession of Seller which have been
conducted at any Business Property within the past three years either by Seller
or any attorney, environmental consultant or engineer engaged for such purpose;
copies of all such audits or assessments have been made available to Buyer.
No representation or warranty is made in this Agreement as to any matters
relating to compliance with Environmental Laws or the presence of Hazardous
Materials except in this Section 4.10.
4.11 Employee and Labor Relations. Except as set forth on Schedule 4.11:
----------------------------
(a) there is no labor strike, dispute, or work stoppage or lockout
pending, or, to the Knowledge of Seller, threatened, involving the Business;
(b) to the Knowledge of Seller, no union organization campaign is in
progress with respect to the Business Employees, and no question concerning
representation exists respecting such employees;
(c) there is no material unfair labor practice charge or complaint
against Seller or any Sold Subsidiaries pending, or, to the Knowledge of Seller,
threatened in writing, before the National Labor Relations Board or similar
governmental agency outside of the United States involving the Business;
(d) there is no pending, or, to the Knowledge of Seller, threatened
in writing, grievance, arbitration or demand letter involving a Business
Employee claiming damages in excess of $500,000; and
(e) there is no material discrimination charges with respect to or
relating to Seller or any Sold Subsidiary in respect of the Business are pending
before the Equal Employment Opportunity Commission or any other similar
Governmental Authority responsible for the prevention of unlawful employment
practices.
4.12 Compliance With Law; Permits.
----------------------------
(a) Except as set forth in Schedule 4.12(a), since January 1, 1998
each of Seller and the Sold Subsidiaries has been in compliance with all
Requirements of Law applicable to the Business, except where failure to be in
compliance has not had, or cannot reasonably be expected to have, a Material
Adverse Effect. No representation and warranty is being made in this Section
4.12 as to the matters covered by Sections 4.3, 4.5(d), 4.9, 4.10, 4.11 and
4.14.
(b) Except as set forth in Schedule 4.12(b), (i) Seller and the Sold
Subsidiaries have all licenses, permits, orders, approvals and other
authorizations of or from all Governmental Authorities which are necessary in
the conduct of the Business as presently being conducted by Seller ("Permits"),
(ii) such Permits are in full force and effect, and (iii) no material violations
or claimed violations are pending before any Governmental Authority with respect
to such Permits.
4.13 Assets of the Business. Except for any Excluded Assets, the Assets,
----------------------
the assets of the Sold Subsidiaries and the rights conferred by the Ancillary
Agreements comprise all of the properties, assets (including, without
limitation, computer software and licenses therefor) and rights of Sellers and
the Sold Subsidiaries material to the conduct of the Business as presently
conducted. EXCEPT AS EXPRESSLY PROVIDED HEREIN, SELLER MAKES NO REPRESENTATION
OR WARRANTY CONCERNING THE ASSETS OR THE BUSINESS, INCLUDING AS TO THE QUALITY,
CONDITION, MERCHANTABILITY, SALABILITY, OBSOLESCENCE, WORKING ORDER OR FITNESS
FOR A PARTICULAR PURPOSE THEREOF. EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE
ASSETS ARE SOLD TO BUYER "AS IS AND WHERE IS."
4.14 Government Contracts. Except as set forth on Schedule 4.14:
--------------------
(a) Seller has not received a final decision of a contracting
officer or prime contractor asserting any claim or equitable adjustment against
Seller with respect to any Government Contract; and there are no material
disputes between Seller and the United States Government for any prime contract
under the Contract Dispute Act nor are there any such material disputes as to
which Seller has received notice in writing under any other Federal statute
arising under or relating to any Government Contract.
(b) Seller has not received any written notice of the intention of
any contracting officer or prime contractor to terminate any Government Contract
for either convenience or default. Seller has not received any show cause
notices, cure notices, or negative determinations of responsibility with respect
to any Government Contract.
(c) Seller has not asserted any claim or request for equitable
adjustment requesting money, interpretation of contract terms, or other relief
under any Government Contract.
(d) Seller has not received written notice of any failure to comply
in all material respects with the Truth in Negotiations Act (10 U.S.C.(S) 2306a,
41 U.S.C.(S) 254(d)) or to submit where required cost or pricing data that were
accurate, complete and current.
(e) Seller has not received written notice that either Seller or any
of its directors, officers, employees, agents, or consultants is under
administrative, civil, or criminal investigation, indictment or information,
audit or internal investigation with respect to any irregularity, misstatement,
or omission regarding any Government Contract.
(f) Seller has not received written notice that any suspension or
debarment action has been commenced against the Company with respect to any
Government Contract.
(g) Seller has fully complied with all of its obligations under
applicable Government Contracts relating to any government furnished property or
similar property or equipment owned by the United States, except for such
matters as would not, individually or in the aggregate, have a Material Adverse
Effect.
31
(h) The Business has complied with all Cost Accounting Standards and
has accounted for all Government Contracts in accordance with disclosure
statements furnished to and reviewed by the United States Government, except for
such matters as would not, individually or in the aggregate, have a Material
Adverse Effect.
(i) Seller possesses all necessary facility security clearances and
permits for the execution of its obligations under any Government Contract and
Schedule 4.14(i) sets forth all facility security clearances held by Seller
(except to the extent disclosure thereof is prohibited by the Industrial
Security Manual).
4.15 Product Warranty. Except as set forth on Schedule 4.15, since
----------------
January 1, 1998, Seller has not received any claims for product liability or
breach of warranty (whether or not covered by insurance) nor has Seller given
written notice to any customer of any defect or deficiency with respect to
products designed, manufactured, assembled, repaired, maintained, delivered or
installed or services rendered prior to the Closing.
4.16 Government-Furnished Property or Equipment. Schedule 4.16
------------------------------------------
identifies to the Knowledge of Seller (i) by description or inventory number all
material Government-Furnished Property that is or should be in the possession of
Seller and (ii) each Government Contract to which each such item of
Government-Furnished Property relates. "Government-Furnished Property" shall
mean all machinery, equipment, tools, dies, spare parts and all other personal
property and fixtures loaned, bailed or otherwise furnished by the United States
government to the Seller pursuant to the Government Contracts. Buyer and Seller
shall cooperate after the Closing Date to correct any inaccuracies in Schedule
4.16 and effect any appropriate transfers of property.
4.17 Customers, Distributors and Suppliers. Schedule 4.17 sets
-------------------------------------
forth a complete and accurate list of the names and addresses of Seller's (i)
ten (10) largest customers for the most recent fiscal year, showing the
approximate total sales in dollars by Seller to each such customer during such
fiscal year; and (ii) the ten (10) largest suppliers for the most recent fiscal
year showing the approximate total purchases in dollars by Seller from each such
supplier during such fiscal year. As of the date hereof, Seller has not received
any written notice from any customer or supplier named on Schedule 4.17 of any
intention to terminate or materially reduce purchases from or supplies to
Seller.
4.18 Insurance. Schedule 4.18 contains a complete list of the
---------
current insurance policies held by Seller in respect of the Business, copies of
which have been made available to Buyer. All policies listed on Schedule 4.18
(i) are valid, outstanding and enforceable policies and (ii) will not terminate
or lapse by reason of the transactions contemplated by this Agreement. Seller
has not received (i) any written notice of cancellation of any such policies or
refusal of coverage thereunder, (ii) any written notice that any issuer of any
of such policies has filed for protection under applicable bankruptcy laws or is
otherwise in the process of liquidating or has been liquidated, or (iii) any
other written notice that such policies are no longer in full force and effect
or that the issuer of any of such policies is no longer willing or able to
perform its obligations thereunder.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to Seller as follows:
5.1 Authority; No Conflicts; Governmental Consents.
----------------------------------------------
(a) Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite corporate power and authority to enter into the Transaction Documents
and to consummate the Transactions. All corporate acts and other proceedings
required to be taken by Buyer to authorize the execution, delivery and
performance of the Transaction Documents and the Transactions have been duly and
properly taken. This Agreement has been, and the Transaction Documents, when
executed, will be, duly executed and delivered by Buyer and constitute valid and
binding obligations of Buyer, enforceable against Buyer in accordance with their
respective terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally or by general principles (regardless of
whether such enforceability is considered in a proceeding in equity or law).
(b) The execution and delivery of this Agreement does not and
of the other Transaction Documents will not, and the consummation of the
Transactions and compliance with the terms of the Transaction Documents will
not, conflict with, or result in any violation of or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under, or result in the creation of any material Lien upon any of the properties
or assets of Buyer under, any provision of (i) the Certificate of Incorporation
or By-Laws of Buyer, (ii) any Contractual Obligation of Buyer or (iii) any
material judgment, order or decree or, subject to the matters described in
clause (c) below, statute, law, ordinance, rule or regulation applicable to
Buyer or its property or assets.
(c) No material consent, approval, license, permit order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other Governmental Authority is required
to be obtained or made by or with respect to Buyer or its Affiliates in
connection with the execution and delivery of the Transaction Documents or the
consummation by Buyer of the Transactions, other than (A) compliance with and
filings and notifications under applicable state environmental laws and (B)
compliance with and filings under the HSR Act.
5.2 Actions and Proceedings, Etc. There are no: (a) outstanding
-----------------------------
judgments, orders, writs, injunctions or decrees of any court, governmental
agency or arbitration tribunal against Buyer or (b) actions, suits, claims or
legal, administrative or arbitration proceedings or investigations pending or,
to the knowledge of Buyer, threatened against Buyer in either case that are
reasonably likely to materially and adversely affect the ability of Buyer to
enter into and perform its obligations under this Agreement.
5.3 Buyer's Acknowledgment. Buyer acknowledges and agrees that,
-----------------------
(a) other than the representations and warranties of Seller specifically
contained in this Agreement, there are no representations or warranties of
Seller either expressed or implied with respect to Seller, the Business or the
Transactions and (b) it shall have a right to indemnification solely as provided
in Article IX hereof and shall have no claim or right to indemnification with
respect to any information, documents or materials furnished by either Seller or
any of its officers, directors, employees, agents or advisors, or otherwise
available to Buyer.
5.4 Solvency. Immediately after giving effect to the Transactions,
--------
Buyer will be able to pay its debts as they become due and will own property
which has a fair salable value greater than the amounts required to pay its
debts (including a reasonable estimate of the amount of all contingent
liabilities). Immediately after giving effect to the Transactions, Buyer will
have adequate capital to carry on its businesses. No transfer of property is
being made and no obligation is being incurred in connection with the
transactions contemplated by this Agreement with the intent to hinder, delay or
defraud either person or future creditors of Buyer.
5.5 Financing. Buyer has obtained (i) from certain financial
---------
institutions firm commitments pursuant to a commitment letter dated June 5, 2000
to provide debt financing and (ii) from Carlyle Partners III, L.P. and its
affiliates firm commitments pursuant to a commitment letter dated June 5, 2000
to provide equity financing, which together are sufficient to enable it to
consummate the transactions contemplated hereby. A true and complete copy of
such commitment letters has been provided to Seller.
5.6 Limitations on Representations and Warranties. Buyer acknowledges
---------------------------------------------
that neither Seller nor any other Person has made any representation or
warranty, express or implied, as to the accuracy or completeness of any
information regarding the Business or the Assets or other matters that is not
included in this Agreement or the Schedules hereto. Without limiting the
generality of the foregoing, except as expressly covered by a representation or
warranty set forth in Article IV, neither Seller nor any other Person has made a
representation or warranty to Buyer with respect to (i) any projections,
estimates or budgets for the Business made available to Buyer, (ii) any
material, documents or information relating to the Business made available to
Buyer or its counsel, accountants or advisors in Seller's data room or
otherwise, or (iii) the information contained in the Confidential Management
Presentation made April 20 and 21, 2000.
ARTICLE VI
COVENANTS OF SELLER
-------------------
Seller covenants and agrees as follows:
6.1 Access. Subject to the provisions of Section 7.1 hereof, prior to
------
the Closing, Seller will give Buyer and its representatives, employees, counsel
and accountants reasonable access during normal business hours and upon
reasonable notice, to the personnel, properties, books and records of the
Business for purposes of investigating its assets, operations, prospects,
obligations and liabilities; provided, however, (i) that such access does not
unreasonably disrupt the normal operations of the Business, and (ii) that Seller
is under no obligation to disclose to
Buyer any (A) "Classified Information" other than in compliance with the DIS
Industrial Security Regulations, the DIS Industrial Security Manual and any
other applicable government security regulations, (B) any information, the
disclosure of which is restricted by Contract or the Requirement of Law, except
in strict compliance with the applicable Contract or Requirement of Law and (C)
any information as to which the attorney-client privilege may be available,
until a mutually satisfactory joint defense agreement has been executed by Buyer
and Seller.
6.2 Ordinary Conduct. Except as contemplated by this Agreement or as
-----------------
set forth in Schedule 6.2, from the date hereof to the Closing, Seller agrees to
cause the business of the Business to be conducted in the ordinary course in
substantially the same manner as presently conducted and will make all
reasonable efforts, consistent with past practices, to preserve relationships
with employees, customers, suppliers and others with whom the Business deals.
Except as contemplated by this Agreement or as set forth in Schedule 6.2, Seller
will not, without the prior written consent of Buyer, which consent will not be
unreasonably withheld or delayed, (i) take any action which would cause the
representations and warranties of Seller herein to be untrue in any material
respect or (ii) transfer any employee of the Business to another business of
Seller or transfer any employee of another Seller business to the Business.
Seller will provide Buyer with interim monthly financial statements of the
Business and other management reports as and when they are available. Without
limiting the generality of the foregoing, Seller shall not, except as
specifically contemplated by this Agreement:
(a) enter into, extend, materially modify, terminate or renew
any Contract or Lease, except in the ordinary course of business;
(b) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any material Assets, or any interests therein,
except in the ordinary course of business;
(c) (i) except as otherwise required by law, take any action
with respect to the grant of any bonus, severance, continuation or
termination pay (otherwise than pursuant to policies or agreements of
Seller in effect on the date hereof) or with respect to any increase of
benefits payable under its severance or termination pay policies or
agreements in effect on the date hereof or increase in any material respect
the compensation or fringe benefits of any employee or pay any benefits not
required by any existing Employee Benefit Plan or Employee Benefit
Arrangement, in each case other than in the ordinary course of business,
consistent with past practice.
(ii) make any change in the key management structure of
Seller, including, without limitation, the hiring of additional officers or
the termination of existing officers other than in the ordinary course of
business;
(iii) except in the ordinary course of business, adopt,
enter into or amend any Employee Benefit Plan or Employee Benefit
Arrangement (including, without limitation, any collective bargaining or
employment agreement), or any trust, fund or other arrangement for the
benefit or welfare of any employee;
(d) acquire by merger or consolidation with, or merge or
consolidate with, or purchase substantially all of the assets of, or otherwise
acquire any material assets or business of any corporation, partnership,
association or other business organization or division thereof if the assets or
business so acquired would be included in the Business;
(e) make any capital expenditure or enter into any commitment
for capital expenditures, except in accordance with the capital expenditures
budget heretofore delivered to Buyer;
(f) fail to maintain the Assets in substantially their current
state of repair, excepting normal wear and tear, and replace inoperable,
worn-out or obsolete or destroyed Assets, in each case in accordance with
Seller's past practice;
(g) make any material loans or advances to any partnership,
firm or corporation, or, except for expenses incurred in the ordinary course of
business, any individual;
(h) make any settlement or compromise with tax authorities,
apply to change any material method of accounting for Tax purposes or make any
material Tax elections, to the extent that any of the foregoing affect the
Assets of the Sold Subsidiaries;
(i) intentionally do any other act which would cause any
representation or warranty of Seller in this Agreement to be become untrue in
any material respect;
(j) enter into any agreement, or otherwise become obligated,
to do any action prohibited hereunder.
6.3 Insurance; Administration of Insurance. Seller shall keep, or
---------------------------------------
cause to be kept, all insurance policies presently maintained relating to the
Business and its properties, or replacements therefor, in full force and effect
through the close of business on the Closing Date. At the Closing, Seller and
Buyer agree to enter into an insurance administration agreement, in form
reasonably acceptable to Seller and Buyer, covering any insurance policy
maintained by Seller applicable to the Assets providing that Seller shall
continue to administer all such policies, and submit Claims of Buyer thereunder,
consistent with Seller's corporate practice (including any decision to
terminate, commute or modify any such policy), and shall include appropriate
arrangements for the allocation of deductibles under current coverage and claims
processing. From and after the Closing, Seller agrees to use all reasonable
efforts to cause Buyer to be added as an additional named insured under any such
insurance policy; provided, that, Seller shall notify Buyer of any costs
associated with the foregoing and if Buyer so elects, Seller shall proceed to
have Buyer added as an additional named insured and Buyer shall reimburse Seller
for the costs incurred by Seller in connection therewith.
6.4 Accounts Receivable. For a period of sixty (60) days after the
-------------------
Closing, on the first business day of each week after the Closing Date, and
thereafter, promptly following receipt of proceeds from accounts receivable of
the Business, Seller agrees to promptly forward to Buyer any and all proceeds
from accounts receivable of the Business that are received by Seller after the
Closing Date. If, after the Closing Date, Seller receives any payment from any
Person
who at the time of such payment has outstanding accounts payable to Seller, on
the one hand (for the purposes of this Section, "Seller Accounts Receivable"),
and to Buyer, on the other hand (for the purposes of this Section, "Buyer
Accounts Receivable"), and the payment (a) does not indicate whether it is in
respect of Seller Accounts Receivable or Buyer Accounts Receivable or (b)
indicates that it is in payment of both Seller Accounts Receivable and Buyer
Accounts Receivable without specifying the portion to be allocated to each, then
Seller and Buyer shall consult with one another to determine the proper
allocation of such payment; and, if they are unable to reach agreement on the
proper allocation, such payment shall be applied so as to retire Seller Accounts
Receivable and Buyer Accounts Receivable in chronological order based upon the
period of time such accounts receivable have existed on the books of Seller or
Buyer, as the case may be.
6.5 Confidential Information. On and after the day of the Closing,
------------------------
Seller will hold, and will use its best efforts to cause its officers,
directors, employees, accountants, counsel, consultants, advisors and agents
("Representatives") to hold, in confidence, unless compelled to disclose by any
Requirement of Law, all confidential documents and information concerning the
Business (including any confidential information or documents provided to it
pursuant to Section 8.6 and any trade secrets or other proprietary information
forming a part of the Intellectual Property) (the "Confidential Information"),
except to the extent that such information is (a) in the public domain through
no fault of Seller or any of its Representatives or (b) later lawfully acquired
by Seller on a non-confidential basis from sources other than Buyer or any of
its Affiliates. The obligation of Seller to hold any such information in
confidence shall be satisfied if it exercises the same care with respect to such
information as Seller would take to preserve the confidentiality of its own
similar information.
6.6 No Solicitation.
---------------
(a) From the date hereof through the Closing or the earlier
termination of this Agreement, Seller shall not, and shall use all reasonable
efforts to cause its representatives (including, without limitation, investment
bankers, attorneys and accountants) not to, directly or indirectly, enter into,
solicit, initiate or continue any discussions or negotiations with, or encourage
or respond to any inquiries or proposals by, or participate in any negotiations
with, or provide any information to, or otherwise cooperate in any other way
with, any Person, other than Buyer and its representatives, concerning any sale
of all or any substantial portion of the Assets or the Business, or any merger,
consolidation, liquidation, dissolution or similar transaction involving the
Business (each such transaction being referred to herein as a "Proposed
Acquisition Transaction").
(b) Seller will promptly notify Buyer if any discussions or
negotiations are sought to be initiated, any inquiry or proposal is made, or any
information is requested with respect to any Proposed Acquisition Transaction
and notify Buyer of the terms of any proposal which it may receive in respect of
any such Proposed Acquisition Transaction, including, without limitation, the
identity of the prospective purchaser or soliciting party, except to the extent
that any such notification would violate any existing agreement of Seller.
6.7 Covenant Not To Compete. Seller agrees that for a period of six
-----------------------
years from and after the Closing Date, it shall not, directly or indirectly
through any of its Affiliates, engage in any business that competes directly
with the Business in supplying any existing customer of the Business or Airbus
any of the commercial or C-17 products currently manufactured by the Business
directly for third party customers or any natural follow-on products
representing modifications or improvements of such products for existing third
party customers on current or successor programs or any similar products in the
case of Airbus (collectively "Competitive Activities"); provided, however, that
nothing herein shall prohibit:
(i) an investment of less than 20% of the equity
securities (as determined at the time of the investment) in a Person;
(ii) any acquisition by Seller of another Person
which is engaged in a Competitive Activity, if such Competitive Activity
represents (A) during the first three years from and after the Closing
Date, the lesser of (x) less than one-third of such Person's revenues and
less than one-third of such Person's assets or (y) $300,000,000 in revenues
of such Person and (B) thereafter, less than one-third of such Person's
revenue and less than one-third of such Person's assets; or
(iii) any such Competitive Activity by another Person
if such Person has acquired Seller or substantially all of its assets;
provided, however, that the restrictions of this Section 6.7 shall remain
applicable to Seller and its assets after such acquisition whether the
business of Seller is held as a separate legal entity or a division of such
acquiring Person.
The provisions of this Section 6.7 shall be deemed to be a separate
covenant in each country in which the Business is currently engaged in
Competitive Activities. Seller acknowledges and agrees that the time, scope,
geographic area and other provisions of this covenant not to compete have been
specifically negotiated by sophisticated parties and that such provisions are
reasonable under the circumstances. The parties further agree that if, despite
the foregoing acknowledgment, a court or other tribunal of competent
jurisdiction holds that any of the restrictions of this covenant not to compete
are unenforceable, the maximum restrictions of time, scope or geographic area
reasonable under the circumstances, as determined by such court or tribunal,
shall be substituted for any such restrictions held unenforceable.
ARTICLE VII
COVENANTS OF BUYER
------------------
Buyer covenants and agrees as follows:
7.1 Confidentiality. Buyer acknowledges that the information being
---------------
provided to it by Seller is subject to the terms of a confidentiality letter
agreement dated January 31, 2000 between Buyer and Seller (the "Confidentiality
Agreement"), the terms of which are incorporated herein by reference. Effective
upon, and only upon, the Closing, the Confidentiality Agreement will terminate;
provided, however, that Buyer acknowledges that the Confidentiality Agreement
will
terminate only with respect to information relating solely to the Business; and
provided, further, however, that Buyer acknowledges that any and all other
information provided to it by Seller or Seller's representatives concerning
Seller shall remain subject to the terms and conditions of the Confidentiality
Agreement after the date of the Closing.
7.2 Waiver of Bulk Sales Law Compliance. Buyer hereby waives
-----------------------------------
compliance by Seller with the requirements, if any, of Article 6 of the Uniform
Commercial Code as in force in any state in which Assets are located and all
other similar Requirements of Law applicable to bulk sales and transfers, to the
extent applicable to the Transactions.
7.3 Excluded Assets. If, after the Closing Date, and except as
---------------
otherwise provided in Section 7.5, Excluded Assets shall remain on the premises
utilized or controlled by Buyer, then Buyer shall take reasonable steps at the
request and expense of Seller to deliver such Excluded Assets to such Seller,
and so long as such assets remain in Buyer's control, shall exercise reasonable
care with respect thereto, and in no event less care than with respect to its
own properties.
7.4 Change of Company Names. Effective on or promptly after the
-----------------------
Closing Date, Buyer will take such actions as are necessary under local law to
remove the name "Northrop" from that of any of the Sold Subsidiaries it will
operate after the Closing; provided, however, that Buyer may use such name until
the earlier of (i) effectiveness of the name change or (ii) the second
anniversary of the Closing Date.
7.5 Government-owned and Government Furnished Property. Except for
--------------------------------------------------
those items listed on Schedule 7.5, on and after the Closing Date, Buyer shall
assume responsibility for all property or equipment owned or leased by the
United States located at any of the Business Properties, including, but not
limited to, managing, maintaining, storing, tracking, reporting on, accounting
for, protecting, repairing, preserving, and disposing of any such property or
equipment, as well as any loss, destruction, or damage to such property or
equipment. Seller shall retain responsibility for all items of such property or
equipment listed on Schedule 7.5; provided, however, Buyer agrees to store such
items at its facilities without charge to Seller until such time as either
Seller or the United States provides instructions to the Buyer regarding the
disposition of such items.
7.6 Title Insurance. Buyer agrees to use its reasonable best
----------------
efforts to obtain title insurance, at its expense, for Owned Properties, in
amounts equal to Buyer's good faith estimate as to the value thereof.
ARTICLE VIII
MUTUAL COVENANTS
----------------
Each of Seller and Buyer covenant and agree as follows:
8.1 HSR Filings; Permits; Novations and Consents.
--------------------------------------------
(a) Seller and Buyer will as promptly as practicable, but in no
event later than five Business Days following the execution and delivery of this
Agreement, file with the United States Federal Trade Commission (the "FTC") and
the United States Department of Justice (the "DOJ") the notification and report
form, if any, required for the Transactions and any supplemental information
requested in connection therewith pursuant to the HSR Act. Any such notification
and report form and supplemental information will be in substantial compliance
with the requirements of the HSR Act. Seller and Buyer shall furnish to the
other such necessary information and reasonable assistance as the other may
request in connection with its preparation of any filing or submission which is
necessary under the HSR Act. Seller and Buyer shall keep each other apprised of
the status of any communications with, and inquiries or requests for additional
information from, the FTC and the DOJ and shall comply promptly with any such
inquiry or request. Seller and Buyer will use all reasonable efforts to obtain
any clearance required under the HSR Act for the Transactions.
(b) As promptly as practicable after the date hereof, Buyer and
Seller shall make all other filings with governmental bodies and other
regulatory authorities, and use all reasonable efforts to obtain all permits,
approvals, authorizations and consents of all third parties, required to
consummate the Transactions. Buyer and Seller shall furnish promptly to each
other all information that is not otherwise available to the other party and
that such party may reasonably request in connection with any such filing. Buyer
and Seller shall use reasonable efforts to obtain such consents to the
assignment of the Assigned Contracts as may be required; provided, however, that
Seller shall not be required to commence any litigation or offer or grant any
accommodation (financial or otherwise) to any third party.
(c) As soon as practicable following the Closing, Buyer shall
prepare (with Seller's assistance), in accordance with Federal Acquisition
Regulations Part 42, (P) 42.12 and any applicable agency regulations or
policies, a written request meeting the requirements of the Federal Acquisition
Regulations Part 42, as reasonably interpreted by the Responsible Contracting
Officer (as such term is defined in Federal Acquisition Regulations Part 42, (P)
42.1202(a)), which shall be submitted by Seller to each Responsible Contracting
Officer, for the United States Government to (i) recognize Buyer as Seller's
successor in interest to all the Assigned Contracts constituting Government
Contracts, and (ii) to enter into a novation agreement (a "Novation Agreement")
in form and substance reasonably satisfactory to Buyer and Seller and their
respective counsel, pursuant to which, subject to the requirements of the
Federal Acquisition Regulations Part 42, all of Seller's right, title and
interest in and to, and all of Seller's obligations and liabilities under, each
such Government Contract shall be validly conveyed, transferred and assigned and
novated to Buyer by all parties thereto. Buyer shall provide to Seller promptly
any information regarding Buyer required in connection with such request.
Seller and Buyer shall each use reasonable efforts to obtain all consents,
approvals and waivers required for the purpose of processing, entering into and
completing the Novation Agreements with regard to any of the Government
Contracts, including responding to any requests for information by the United
States Government with regard to such Novation Agreements; provided, however,
that Seller shall not be required to commence any litigation or offer or grant
any accommodation (financial or otherwise) to any third party.
(d) In the event that any and all novations, transfer or other
agreements, consents, approvals or waivers necessary for the assignments,
transfer or novation of any Assigned Contract, or any claim, right or benefit
arising thereunder or resulting therefrom, shall not have been obtained prior to
the Closing Date, then as of the Closing, this Agreement, to the extent
permitted by law, shall constitute full and equitable assignment by Seller to
Buyer of all of Seller's right, title and interest in and to, and all of
Seller's obligations and liabilities under, such Assigned Contracts, and Buyer
shall be deemed Seller's agent for purpose of completing, fulfilling and
discharging all of Seller's liabilities under any such Assigned Contract. The
parties shall take all necessary steps and actions to provide Buyer with the
benefits of such Assigned Contracts, and to relieve Seller of the performance
and other obligations thereunder, including entry into subcontracts for the
performance thereof. Buyer agrees to pay, perform and discharge, and indemnify
Seller against and hold Seller harmless from, all obligations and liabilities of
Seller relating to such performance or failure to perform under such Assigned
Contracts subject to the provisions of Section 2.3(j).
(e) In the event Seller shall be unable to make the equitable
assignment described in Section 8.1(d), or if such attempted assignment would
give rise to any right of termination, or would otherwise adversely affect the
rights of Seller or Buyer under such Assigned Contract, or would not assign all
Seller's rights thereunder at the Closing, Seller and Buyer shall continue to
cooperate and use all reasonable efforts to provide Buyer with all such rights.
To the extent that any such consents and waivers are not obtained, or until the
impediments to such assignment are resolved, Seller shall use all reasonable
efforts (without the expenditure, in the aggregate, of any material sum) to (i)
provide to Buyer, at the request of Buyer, the benefits of any such Assigned
Contract to the extent related to the Business, (ii) cooperate in any lawful
arrangement designed to provide such benefits to Buyer and (iii) enforce, at the
request of and for the account of Buyer, any rights of Seller arising from any
such Assigned Contract against any third Person (including any Governmental
Authority) including the right to elect to terminate in accordance with the
terms thereof upon the advice of Buyer. To the extent that Buyer is provided the
benefits of any Assigned Contract referred to herein (whether from Seller or
otherwise), Buyer shall perform at the direction of Seller and for the benefit
of any third Person (including any Governmental Authority) the obligations of
Seller thereunder or in connection therewith, and Buyer agrees to pay, perform
and discharge, and indemnify Seller against and hold Seller harmless from, all
obligations and liabilities of Seller relating to such performance or failure to
perform, and in the event of a failure of such indemnity, Seller shall cease to
be obligated under this Agreement in respect of the Assigned Contract which is
the subject of such failure subject to the provisions of Section 2.3(j).
8.2 Reasonable Efforts. Subject to the terms and conditions of this
------------------
Agreement (including the limitations set forth in Section 8.1), each party will
use all reasonable efforts to
cause the Closing to occur. Each of Seller and Buyer will promptly notify the
other promptly after learning of the occurrence of any event or circumstance
which would reasonably be expected to cause any condition to Closing not to be
satisfied. In connection with the foregoing: (i) neither Buyer nor Seller shall
be required to make any material payments; and (ii) Buyer shall not be required
to agree to any material modifications to the terms of any Contract, Lease or
Permit or to dispose of any material portion of the Assets or any other assets
owned by Buyer.
8.3 Publicity. Seller and Buyer agree that, from the date hereof through
---------
the Closing Date, no public release or announcement concerning the Transactions
shall be issued without the prior consent of each party (which consent shall not
be unreasonably withheld or delayed), except as such release or announcement may
be required by any Requirement of Law, in which case the party required to make
the release or announcement shall allow the other party reasonable time to
comment on such release or announcement in advance of such issuance.
Notwithstanding the foregoing, Seller shall provide Buyer access to, and
facilitate meetings with, the employees of the Business for the purposes of
making announcements concerning, and preparing for the consummation of, the
Transactions.
8.4 Cooperation After Closing. Buyer and Seller shall cooperate with each
-------------------------
other and shall cause their officers, employees, agents, auditors and
representatives to cooperate with each other after the Closing to ensure the
orderly transition of the Business to Buyer and to minimize any disruption to
the respective businesses of Seller or the Business that might result from the
Transactions. Neither party shall be required by this Section 8.4 to take any
action that would unreasonably interfere with the conduct of its business.
8.5 Records. After the Closing, upon reasonable written notice and at
-------
Buyer's sole expense, Seller agrees to furnish or cause to be furnished to Buyer
and its representatives (including its auditors), access at reasonable times and
during normal business hours to such information relating to the Business in
Seller's possession as is reasonably necessary for financial reporting and
accounting matters, the preparation and filing of any Tax returns, reports or
forms, the defense of any Tax Claim or assessment, or otherwise and will permit
Buyer or such representatives to make abstracts from, or copies of, any of such
information, or to obtain temporary possession of any thereof as may be
reasonably required by Buyer at Buyer's sole cost and expense; provided,
however, that such access does not unreasonably disrupt the normal operations of
such Seller. After the Closing, upon reasonable written notice and at Seller's
sole expense Buyer will afford authorized representatives of Seller (including
its auditors) access to such Records in Buyer's possession at reasonable times
and during normal business hours at the principal business office of the
Business, or at such other location or locations at which such Records may be
stored or maintained from time to time, and will permit such representatives to
make abstracts from, or copies of, any of such Records, or to obtain temporary
possession of any thereof as may be reasonably required by Seller at such
Seller's sole cost and expense; provided, however, that such access does not
unreasonably disrupt the normal operations of Buyer. After the Closing, Buyer
will, at Seller's expense (limited, however, to Buyer's reasonable out-of-pocket
expenditures without regard to any employee cost or other overhead expenses),
cooperate with Seller in furnishing information, evidence, testimony, and other
reasonable assistance in connection with any action, proceeding, Tax audit, or
investigation to which such Seller or any of its Affiliates is subject relating
to the business of the Business prior to the
Closing. In respect of the Records subject to this Section 8.5, Seller and Buyer
will follow the same retention and disposal procedures as are used by Seller for
similar documents and records in its other businesses.
8.6 Use of Trademark and Trade Names. Notwithstanding anything to the
--------------------------------
contrary in this Agreement, Buyer shall not have the right to use any trademark
or trade name of Seller, except to the extent provided for in the Intellectual
Property Agreement.
8.7 Intercompany Work Orders. Seller and Buyer agree that at the date of
------------------------
this Agreement there are in place certain intercompany work orders ("IWO's") as
set forth on Schedule 8.7 pursuant to which the Business is performing work for
other business units of Seller and/or other business units of Seller are
performing work for the Business. Seller and Buyer agree that prior to the
Closing, the IWO's listed on Schedule 8.7 and any additional such orders which
are entered into after the date hereof will be converted into fixed price
contracts using Seller's standard procurement terms and conditions (including
the establishment of appropriate base line scope of work and procedures for
equitable adjustment) for the relevant program and reflecting that portion of
the budgeted value of the IWO (which budgeted value should represent the fully
burdened, estimated cost of performance) that has not been incurred and
transferred to the benefiting organization. In the case of Buyer, the IWO's as
converted shall become Assigned Contracts as of the Closing Date.
8.8 Non-Interference. Each of Seller and Buyer agrees that for a period
----------------
of two years following the Closing, it will not solicit or attempt to solicit
any salaried employee, officer, representative, consultant, or other agent of
the other (whether such person is presently or may hereinafter be employed by
such person) to leave such person's employ or otherwise interfere with the
employment relationship between any such person and Buyer or Seller (as the case
may be); provided, however, that this Section shall not preclude advertisements
for open jobs.
8.9 Notification of Certain Matters. From the date hereof through the
-------------------------------
Closing, Seller shall give prompt notice to Buyer and Buyer shall give prompt
notice to Seller of (a) the occurrence or failure to occur of an event which
occurrence or failure would be likely to cause any of Seller's or Buyer's
respective representations or warranties contained in this Agreement to be
untrue or inaccurate in any material respect and (b) any material failure of
Seller or Buyer to comply with or satisfy any of its covenants, conditions or
agreements to be complied with or satisfied by it under this Agreement;
provided, however, that such disclosure shall not be deemed to cure any breach
of a representation, warranty, covenant or agreement, or to satisfy any
condition.
8.10 Tax Returns of Sold Subsidiaries. Seller shall cause to be prepared
--------------------------------
in a manner consistent with past practices all Tax Returns of each Sold
Subsidiary and all Tax Returns required to include one or more of the Sold
Subsidiaries for taxable years or periods ending on or before the Closing Date
but which are due to be filed after the Closing Date (taking into account any
applicable extensions of time for filing). Seller shall cause such Tax Returns
to be filed in a timely fashion (taking into account any applicable extensions
of time for filing). Seller shall cause to be timely paid all Taxes required to
be paid for the periods covered by such tax Returns. Notwithstanding the
foregoing, Seller shall not be required to pay any Taxes required to be paid
for the period covered by such Tax Returns to the extent reserves for such Taxes
are established on the Closing Statement of Assets and Liabilities (other than
any reserves for deferred Taxes established to reflect timing differences
between book and Tax income). Buyer shall cause to be prepared all federal,
state and local Tax Returns of each Sold Subsidiary for periods that begin
before the Closing Date and end after the Closing Date. Buyer shall cause such
Tax Returns to be filed in a timely fashion (taking into account any applicable
extensions of time for filing).
8.11 Section 338(h)(10) Election.
---------------------------
(a) Buyer may elect to cause Seller, any relevant Selling Subsidiary
and Buyer to jointly make the election provided by Section 338(h)(l0) of the
Code for the acquisition of the stock of the Sold Subsidiaries in accordance
with Treas. Reg. (S) 1.338(h)(l0)-1(d) on IRS Form 8023, and to make a joint
election under any corresponding state, local or foreign tax law (the
"Election") with respect to the purchase and sale of the stock of the Sold
Subsidiaries by notifying Seller in writing (the "Section 338 Election Notice")
at any time on or before the date that is 60 days prior to the deadline for
filing the Election (the "Election Deadline"). Seller and Buyer shall provide to
the other all necessary information to permit the Election to be made. Seller,
any relevant Selling Subsidiary and Buyer shall, as promptly as practicable
following the receipt of a 338 Election Notice, take all actions necessary and
appropriate (including filing IRS From 8023 and other such forms, returns,
elections, schedules, attachments and other documents as may be required (the
"Forms")) to effect and preserve a timely Election.
(b) Buyer, Seller and any relevant Selling Subsidiary agree that the
aggregate fair market value of the assets of each Sold Subsidiary (the
"Aggregate Fair Market Value") will be appraised at Buyer's expense as part of
the Appraisal under Section 2.6 hereof.
(c) In connection with the Election, Buyer and Seller shall mutually
determine (i) the amount of the modified aggregated deemed sales price ("MADSP")
of the Target Shares (within the meaning of Treas. Reg.(S) l.338(h)(l0)-1(f))
and (ii) based on the Aggregate Fair Market Value as determined in the
Appraisal, the proper allocation of the MADSP among the assets of each Sold
Subsidiary for which an Election is made in accordance with Treas. Reg.(S)
1.338(h)(l0)-1(f). The allocations referred to in the preceding sentence are
referred to herein as the "338 Allocations." Buyer, Seller and any relevant
Selling Subsidiary will calculate the gain or loss, if any, in a manner
consistent with the Allocations, and Buyer, Seller and any relevant Selling
Subsidiary will not take any position inconsistent with the 338 Allocations in
any Tax Return (subject to appropriate adjustments pursuant to Treas. Reg.(S)
1.338(h)(l0)-1(f)(4)).
(d) In the event Buyer delivers a Section 338 Election Notice to
Seller, Buyer shall prepare each Form based on the 338 Allocations, and shall,
no later than thirty (30) days prior to the latest date for the filing of each
Form, deliver each Form to Seller for Seller's approval, which approval shall
not be unreasonably withheld.
8.12 Leaseback Arrangements and Certain Post-Closing Support. Prior to the
-------------------------------------------------------
Closing, Seller and Buyer agree to enter into a lease, license or other
occupancy agreement, in form reasonably satisfactory to Seller and Buyer, to
provide for the continued occupancy by Seller after the Closing of certain space
in the Business Property for specified periods as more fully
described in Schedule 8.12. Seller shall occupy the space rent free but shall be
responsible for utilities, operating maintenance, insurance and real property
taxes and other reasonable allocated overhead (including for support services
specified in Schedule 8.12) to the extent such overhead benefits Seller with
respect to the portion of the Business Property occupied by Seller. Upon
vacating the foregoing space, Seller shall return the same in its condition as
of the date hereof, reasonable wear and tear excepted. Seller shall maintain
reasonable and customary insurance covering its occupancy of such space. At no
additional charge to Seller, Buyer shall provide to Seller the additional
support described in Schedule 8.12.
8.13 Information Technology Services. Seller and Buyer shall enter into,
-------------------------------
prior to the Closing, an agreement to provide the information technology
services defined in Schedule 8.13 on terms and conditions substantially the same
as those reflected on Schedule 8.13.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Seller. Subject to the terms and conditions of this
-------------------------
Article IX and except with respect to the matters that are the subject of
Sections 9.8 and 9.9, Seller shall indemnify Buyer and each of its Affiliates,
officers, directors, employees and agents against, and hold them harmless from,
any Loss suffered or incurred by any such Indemnified Person to the extent
arising from (a) if the Closing occurs, any breach of any representation or
warranty of Seller contained in this Agreement or any Ancillary Agreement which
survives the Closing or in any certificate, instrument or other document
delivered pursuant hereto, (b) any material breach of any covenant of Seller
contained in this Agreement or any Ancillary Agreement or (c) if the Closing
occurs, the existence of, or the failure of Seller to pay, perform and discharge
when due, any of the Excluded Liabilities, whether such Excluded Liabilities are
liabilities of Seller or of any of the Sold Subsidiaries (including, without
limitation, any Losses as a result of the failure of Seller to comply with any
Bulk Sales Laws referred to in Section 7.3); provided, however, that Seller
shall have no liability under Section 9.1(a) unless the aggregate of all Losses
relating thereto for which Seller would, but for this proviso, be liable exceeds
$15,000,000 (Fifteen Million Dollars) (and then only to the extent of any such
excess); and provided further, however, that Seller's aggregate liability under
Section 9.1(a) shall in no event exceed $150,000,000 (One Hundred Fifty Million
Dollars).
9.2 Indemnification by Buyer. Subject to the terms and conditions of this
------------------------
Article IX, Buyer shall indemnify Seller and each of its Affiliates, officers,
directors, employees and agents against, and hold them harmless from, any Loss
suffered or incurred by any such Indemnified Person to the extent arising from
(a) if the Closing occurs, any breach of any representation or warranty of Buyer
contained in this Agreement or any Ancillary Agreement which survives the
Closing or in any certificate, instrument or other document delivered pursuant
hereto or in connection herewith, (b) any material breach of any covenant of
Buyer contained in this Agreement or any Ancillary Agreement, (c) if the Closing
occurs, the existence of, or the failure of Buyer to pay, perform and discharge
when due, any of the Assumed Liabilities and (d) if the Closing occurs, any Loss
caused by the ongoing operations of the Business and the Assets after the
Closing Date; provided, however, that Buyer shall have no liability under clause
9.2(a) unless
the aggregate of all Losses relating thereto for which Buyer would, but for this
proviso, be liable exceeds on a cumulative basis $15,000,000 (Fifteen Million
Dollars) (and then only to the extent of any such excess); and provided further,
however, that Buyer's aggregate liability under Section 9.2(a) shall in no event
exceed $150,000,000 (One Hundred Fifty Million Dollars).
9.3 Losses Net of Insurance, Etc.
----------------------------
(a) The amount of any Loss for which indemnification is provided
under this Article IX shall be net of any amounts actually recovered by the
Indemnified Person, or which the Indemnified Party is entitled to recover, under
insurance policies with respect to such Loss and of any related reserve in
respect thereof reflected on the Closing Statement.
(b) Notwithstanding anything to the contrary elsewhere in this
Agreement, no Indemnifying Person shall, in any event, be liable to the other
party for any damages not proximately caused by its breach hereunder, any
damages for loss of business reputation, or any punitive or exemplary damages.
The foregoing shall not be interpreted, however, to limit indemnification for
Losses incurred as a result of the assertion by a claimant (other than the
parties hereto and their successors and assigns) in a Third-Party Claim of
claims for damages of the foregoing type.
(c) The parties hereto agree that any matter that is subject to
resolution by the Accounting Arbitrator pursuant to Section 2.5 shall not be the
basis of an indemnification claim under this Article IX, it being the intent of
the parties that the Purchase Price adjustment provided in Section 2.5 shall be
the sole and exclusive remedy therefor.
(d) Except as expressly set forth in Section 10.5 as to equitable
remedies, the parties hereto agree that the indemnification provisions of this
Article IX are intended to provide the exclusive remedy as to all Losses either
may incur arising from or relating to the Transactions, and each party hereby
waives, to the extent they may do so, any other rights or remedies that may
arise under any applicable statute, rule or regulation.
9.4 Termination of Indemnification. The obligations to indemnify and hold
------------------------------
harmless a party hereto, pursuant to Sections 9.1(a) and 9.2(a), shall terminate
when the applicable representation or warranty terminates pursuant to Section
9.8; provided, however, that such obligations to indemnify and hold harmless
shall not terminate with respect to any item as to which the person to be
indemnified shall have, before the expiration of the applicable period,
previously made a claim by delivering a notice (stating in reasonable detail the
basis of such claim) to the Indemnifying Person.
9.5 Procedures Relating to Indemnification (Other than for Tax Claims). In
------------------------------------------------------------------
order for an Indemnified Person to be entitled to any indemnification provided
for under this Agreement (other than for Tax Claims) in respect of, arising out
of or involving a claim or demand made by any Person against the Indemnified
Person (a "Third-Party Claim"), such Indemnified Person must notify the
Indemnifying Person in writing, and in reasonable detail, of the Third-Party
Claim within 10 Business Days after receipt by such Indemnified Person of
written notice of the Third-Party Claim; provided, however, that failure to give
such notification shall not affect the
indemnification provided hereunder except to the extent the Indemnifying Person
shall have been actually prejudiced as a result of such failure (except that the
Indemnifying Person shall not be liable for any Losses incurred during the
period in which the Indemnified Person failed to give such notice). Thereafter,
the Indemnified Person shall deliver to the Indemnifying Person, within five
Business Days after the Indemnified Person's receipt thereof, copies of all
notices and documents (including court papers) received by the Indemnified
Person relating to the Third-Party Claim.
If a Third-Party Claim is made against an Indemnified Person, the
Indemnifying Person will be entitled to participate in the defense thereof and,
if it so chooses, to assume the defense thereof with counsel selected by the
Indemnifying Person and reasonably satisfactory to the Indemnified Person.
Should the Indemnifying Person so elect to assume the defense of a Third-Party
Claim, the Indemnifying Person will not be liable to the Indemnified Person for
legal fees and expenses subsequently incurred by the Indemnified Person in
connection with the defense thereof. If the Indemnifying Person assumes such
defense, the Indemnified Person shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Person, it being understood that the
Indemnifying Person shall control such defense. The Indemnifying Person shall be
liable for the reasonable fees and expenses of counsel employed by the
Indemnified Person for any period during which the Indemnifying Person has not
assumed the defense thereof (other than during any period in which the
Indemnified Person shall have failed to give notice of the Third-Party Claim as
provided above). If the Indemnifying Person chooses to defend or prosecute any
Third-Party Claim, all the parties hereto shall cooperate in the defense or
prosecution thereof. Such cooperation shall include the retention and (upon the
Indemnifying Person's request) the provision to the Indemnifying Person of
records and information which are reasonably relevant to such Third-Party Claim,
and making employees available on a mutually convenient basis in the manner
specified in Section 8.5 hereof to provide additional information and
explanation of any material provided hereunder. Whether or not the Indemnifying
Person shall have assumed the defense of a Third-Party Claim, the Indemnified
Person shall not admit any liability with respect to, or settle, compromise or
discharge, such Third-Party Claim without the Indemnifying Person's prior
written consent (which consent shall not be unreasonably withheld or delayed).
All Tax Claims (as defined in Section 9.6) shall be governed by Section 9.6.
9.6 Procedures Relating to Indemnification of Tax Claims.
----------------------------------------------------
(a) If notice of an audit, examination or other proceeding is
received from any Tax authority, which, if successful, might result in an
indemnity payment to any Person hereunder (a "Tax Indemnitee"), the Tax
Indemnitee shall promptly notify the party against whom indemnification is
sought (the "Tax Indemnitor") in writing of such potential claim (a "Tax
Claim"). If notice of a Tax Claim is not given to the Tax Indemnitor within a
sufficient period of time to allow the Tax Indemnitor to effectively participate
in such audit, examination or proceeding, or in reasonable detail to apprise the
Tax Indemnitor of the nature of the Tax Claim, in each case taking into account
the facts and circumstances with respect to such Tax Claim, the Tax Indemnitor
shall not be liable to the Tax Indemnitee to the extent that the Tax
Indemnitor's ability to effectively contest such Tax Claim is actually
prejudiced as a result thereof.
(b) With respect to any Tax Claim for which it agrees that any
resulting Tax is covered by the indemnity given in this Article IX, the Tax
Indemnitor shall control that portion of any audit, examination and other
proceeding in connection with such Tax Claim (including, without limitation,
selection of counsel) and, without limiting the foregoing, may in its sole
discretion pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with any taxing authority with respect thereto and may,
in its sole discretion, either pay any Tax claimed and sue for a refund where
applicable law permits such refund suits or contest the Tax Claim in any
permissible manner; provided, however, that (i) the Tax Indemnitor shall keep
the Tax Indemnitee informed regarding the progress and substantive aspects of
any such Tax Claim and (ii) the Tax Indemnitor shall not settle or compromise a
Tax Claim without giving 15 days' prior notice to the Tax Indemnitee, and
without the Tax Indemnitee's consent, which shall not be unreasonably withheld
or delayed. The Tax Indemnitee, and each of its Affiliates, shall cooperate with
the Tax Indemnitor in contesting any Tax Claim, which cooperation shall include,
without limitation, the retention and (upon the Tax Indemnitor's request) the
provision to Tax Indemnitor of Records and information which are reasonably
relevant to such Tax Claim, and making employees available on a mutually
convenient basis to provide additional information or explanation of any
material provided hereunder or to testify at proceedings relating to such Tax
Claim.
9.7 Survival of Representations. The representations and warranties in
---------------------------
this Agreement and in any other document delivered in connection herewith shall
survive the Closing solely for purposes of this Article IX and, except as set
forth in the next two sentences, shall terminate at the close of business
eighteen (18) months after the Closing Date. The representations and warranties
in Sections 4.1(a), the first sentence of Section 4.4 and the second sentence of
Section 4.5 shall survive indefinitely, the representations and warranties in
Section 4.9 shall survive for seven (7) years after the Closing Date and the
representations and warranties in Section 4.3 shall survive for the applicable
statute of limitations pertaining to the underlying liability plus 60 days.
Survival of the representations and warranties in Section 4.10 is covered by
Section 9.8 dealing with environmental indemnification.
9.8 Environmental Liability.
-----------------------
(a) Subject to the limitations set forth below, Seller shall
indemnify Buyer and each of its Affiliates, officers, directors, employees and
agents against, and hold them harmless from, any Loss suffered or incurred by
any such indemnified Person to the extent arising from (i) any breach of any
representation or warranty of Seller set forth in Section 4.10 of this Agreement
or (ii) any Assumed Liability arising from any Pre-Closing Environmental
Condition (any of the matters described in clauses (i) or (ii) above are
collectively referred to as "Pre-Closing Environmental Liabilities"). Seller
shall not have any financial obligation or liability for Pre-Closing
Environmental Liabilities unless the aggregate of all Pre-Closing Environmental
Liabilities for which Seller, but for this sentence, would be liable exceeds an
amount equal to $7,500,000, in which case Seller's liability shall be for eighty
percent (80%) and Buyer's liability shall be for twenty percent (20%) of any
such excess over $7,500,000 until the amount of such excess reaches a total
amount of $30,000,000, and thereafter Seller shall be liable for 100% of any
such excess over $30,000,000. The provisions of Section 9.3 shall be applicable
to this
Section 9.8. In accordance with the foregoing, Buyer's maximum total liability
for Pre-Closing Environmental Liabilities shall be $12,000,000.
(b) Buyer shall indemnify Seller and each of its Affiliates,
officers, directors, employees and agents against, and hold them harmless from,
any Loss suffered or incurred by any such indemnified Person to the extent
arising from:
(i) The first $7,500,000 in Pre-Closing Environmental
Liabilities, and for 20% of any excess over $7,500,000 until the amount
of such excess over $7,500,000 reaches a total amount of $30,000,000,
Buyer having no liability for any such excess over $30,000,000; and
(ii) All liability and costs incurred to address, investigate,
assess, characterize, monitor, remove, contain and/or remediate any
contamination by Hazardous Material caused by Buyer or its agents,
representatives or consultants after the Closing.
(c) Buyer acknowledges and agrees that its sole and exclusive remedy
with respect to any and all claims against Seller relating to environmental,
health and safety matters shall be pursuant to the indemnification provisions
set forth in this Section 9.8. In furtherance of the foregoing, Buyer hereby
waives, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action it may have against Seller, its officers,
directors, employees and agents arising under or based upon any Environmental
Law.
(d) Seller acknowledges and agrees that its sole and exclusive remedy
with respect to any and all claims against Buyer relating to environmental
health and safety matters shall be pursuant to the indemnification provisions
set forth in this Section 9.8. In furtherance of the foregoing, Seller hereby
waives, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action it may have against Buyer, its officers,
directors, employees and agents arising under or based upon any Environmental
Law.
(e) Notwithstanding any other provision of this Agreement to the
contrary, Seller shall have no liability pursuant to this Section 9.8 for Pre-
Closing Environmental Liabilities: (i) not made known to Seller by Buyer in a
written statement within ten (10) years of the Closing Date setting forth in
reasonable detail the nature and extent of each Pre-Closing Environmental
Liability covered thereby and (ii) as to Remedial Actions, for which any
expenditures are made or costs incurred twenty (20) years or more after the date
of Closing; provided, however, that expenditures for Pre-Closing Environmental
Liabilities that are not Remedial Actions (e.g., a Third Party Claim based on a
common law tort cause of action) are not subject to the 20 year time limit
provided in this Section 9.8(e)(ii).
(f) To the extent that Seller shall have indemnification obligations
for the cost and performance of Remedial Action, such Remedial Action shall be
limited to that required under Environmental Laws by any Governmental Authority.
Seller's obligations to conduct Remedial Action shall cease to the extent that
it has paid the costs of such Remedial Action and has received notice from the
pertinent Governmental Authority that no further Remedial Action is required or,
if such Governmental Authority has not responded within a reasonable time to
Seller's request for such written notice, a certification by Seller's
environmental consultant that no such further Remedial Action is required;
provided, however, that Seller's obligations to conduct Remedial Action shall
revive if the Governmental Authority requires further Remedial Action.
(g) Seller's obligations for the cost and performance of Remedial
Action on an Owned Property shall be limited to the continued industrial use of
the Owned Property. Seller shall not be required to conduct a Remedial Action to
the extent that Remedial Action is related to the use of the Owned Property for
any residential or other non-industrial purpose.
(h) Seller's obligations to conduct a Remedial Action do not include
any obligation to remediate:
(i) Hazardous Material used as construction materials in, on or
otherwise affixed to structures or improvements on any Owned Property,
including asbestos, urea formaldehyde foam insulation, lead-based paint or
coatings;
(ii) Hazardous Material introduced after the Closing into the
soil or groundwater of the Owned Property (other than introductions into
the environment as a result of the migration of Hazardous Materials
actually present in the environment prior to the Closing, such as the
migration through soil or groundwater after the Closing of Hazardous
Material released prior to the Closing);
(iii) Any increase in soils or groundwater contamination or
exacerbation of existing contamination as a result of the acts or omissions
after the Closing of Buyer.
(i) (i) Seller shall remain responsible for and shall direct the
performance of Remedial Action related to any Pre-Closing Environmental
Condition and the costs of such Remedial Action shall be allocated pursuant
to subsection (a) of this Section 9.8. In addition, with the written
approval of the other party, either party may undertake such Remedial
Action as is required under any Environmental Law or otherwise is
appropriate. In the event Seller shall no longer desire to direct the
performance of Remedial Action for Pre-Closing Environmental Conditions at
one or more sites, Seller may request that Buyer direct such performance.
Buyer may, at its sole discretion, agree to direct the performance of the
Remedial Action, and Buyer and Seller may allocate responsibilities for
such direction subject to such terms and conditions as they may determine.
(ii) Buyer shall, for the first $7,500,000 of expenditures, have
the right to review and approve (i) Seller's selection of any consultant or
contractor designated to perform the Remedial Action and (ii) the
development of the scope of work for, and type of, Remedial Action to be
implemented. Thereafter, when $7,500,000 has been expended, Buyer shall,
for any further Remedial Action, have the right to review and provide
Seller with written comments on (i) and (ii) which comments Seller shall
reasonably review and consider.
(iii) Prior to commencing any Remedial Action after the
Closing or presenting after the Closing any plan for Remedial Action to any
Governmental Authority having jurisdiction over such Remedial Action or to
any person making a Third Party Claim for which Seller is in whole or in
part responsible, Seller shall meet and consult with Buyer in good faith
concerning such remedial Action. In connection with the performance of any
Remedial Action by Seller, Seller shall:
(1) Provide the Buyer with reasonable notice of any
meetings with any such Governmental Authority or any such other
Person to afford Buyer or its representatives the right to
participate in such meetings;
(2) Provide the Buyer with a reasonable opportunity
to preview and comment upon any submissions Seller plans to
deliver or submit to any such Governmental Authority or any such
other Person;
(3) Meet and consult with the Buyer in good faith
over the time, manner and conditions for the completion of the
Remedial Action
(4) Avoid unreasonable interference with business
conducted or planned to be conducted at the site in question;
(5) Provide the Buyer with five (5) Business Days'
prior notice (which may be oral) of material actions to be taken
at the site in question in connection with Remedial Action
undertaken by Seller, and permit the Buyer the opportunity to
have its representatives present to observe such Remedial Action;
(6) Properly dispose of all Hazardous Materials
removed from the soil or groundwater of the site in question in
connection with such Remedial Action;
(7) After completion of any Remedial Action, to
restore the surface of the site in question to a condition
substantially similar to its condition prior to the performance
of the Remedial Action, subject to any intervening changes in
surface conditions not caused by such Remedial Action.
(j) With respect to the Seller's rights and obligations in
respect of Remedial Action, Buyer agrees as follows:
(i) It will grant to Seller access (in form and substance
reasonably acceptable to Seller and at no cost to Seller) allowing Seller
and its representatives and agents under reasonable terms and conditions so
as to not interfere with normal business operations, to enter upon the real
property included in the Owned Property and use all facilities or equipment
located thereon and to install equipment for the purpose of performing the
Remedial Action and carrying out its rights and obligations under this
Section;
(ii) Except as necessary for the reasonable
operation or disposition of the business, it will not relocate, disturb
or interfere with such equipment or the performance of such Remedial
Action in compliance with the provisions of this Section;
(iii) It will provide Seller and its representatives
and agents with reasonable access to environmental and other relevant,
non-privileged records respecting the site for the purpose of carrying
out such Remedial Action and will provide Seller with copies of all
material and communications with any Governmental Authority about
existing soils contamination, Remedial Action or other matters
pertaining to Seller's obligations;
(iv) It will not submit, or cause to be submitted,
to any Governmental Authority any information or comments concerning
any Pre-Closing soils contamination or Remedial Action undertaken by
Seller except for information routinely submitted to a Governmental
Authority or as may be otherwise required by Environmental Law; and
(v) It will consult with Seller in good faith prior
to extracting, excavating or removing any soil or groundwater at any
Owned Property or otherwise disturbing or disrupting the same and,
except as provided in Section 9.9(b)(vi) will otherwise make reasonable
efforts to avoid taking any action, and will take reasonable steps to
cause others to avoid taking any action, that will increase or
accelerate any obligation to commence or implement Remedial Action.
(k) The parties shall allocate all costs arising from any
Remedial Action of Pre-Closing Environmental Conditions in accordance with
subsection (a) of this Section 9.8. These costs shall include the out-of-pocket
costs of planning for and conducting Remedial Action and the reasonable
out-of-pocket oversight costs thereof; provided, however, that Seller's and
Buyer's employee and other overhead costs shall not be included in the costs of
any Remedial Action. For the first $7,500,000, Seller shall provide Buyer with
invoices identifying the costs incurred. Seller shall provide Buyer with
invoices identifying the percentage (20%) of such Costs incurred in excess of
$7,500,000 and up to $30,000,000. Buyer shall pay all invoices within thirty
(30) calendar days of their submission.
(l) The parties shall make a good faith effort to resolve
any disputes related to this Section 9.8 through informal negotiation, including
the use of third-party technical consultants where appropriate. If the parties
are unable to resolve the dispute, the matter shall be submitted to binding
arbitration as provided in Section 9.9.
9.9 Pre-Closing Environmental Liabilities Procedures.
------------------------------------------------
(a) After the Closing, each of Buyer and Seller shall
notify the other in writing, and in reasonable detail, of any claim in respect
of, arising out of or involving a claim made by any Person against the notifying
party (the "Notifying Party") constituting a Pre-Closing Environmental
Liability, within 15 business days after receipt by the Notifying Party of
written notice of such claim; provided, however, that failure to give such
notification shall not affect the indemnification provided hereunder except to
the extent the indemnifying party shall
have been actually prejudiced as a result of such failure and except that the
indemnifying party shall not be liable for any expenses incurred during the
period in which the Notifying Party failed to give such notice. Thereafter, each
party shall deliver to the other party, promptly after such party's receipt
thereof, copies of all non-privileged notices and documents (including court
papers) received by such party relating to the Pre-Closing Environmental
Liability claim.
(b) Excepting the provisions of Section 9.8 regarding Seller's
responsibility for and direction of Remedial Action:
(i) Buyer and Seller shall each be entitled to participate in
the defense of any Pre-Closing Environmental Liability claim; provided,
that if either Buyer or Seller shall have one hundred percent of the
liability in respect thereof, the procedures applicable to a Third Party
Claim under Section 9.5 shall apply;
(ii) Buyer and Seller shall each cooperate in the defense or
prosecution of any Pre-Closing Environmental Liability, including the
retention and (upon request) the provision to the requesting party of non-
privileged records and information which are reasonably relevant to such
claim, and making employees (including any Transferred Employees familiar
with such claim), available on a mutually convenient basis to provide
additional information and explanation of any such records and information;
(iii) Buyer and Seller shall consult with each other and shall
mutually agree on any settlement, compromise or discharge of any Pre-
Closing Environmental Liability Claim (which agreement shall not be
unreasonably withheld);
(iv) neither Buyer nor Seller shall admit any liability with
respect to, or settle, compromise or discharge, any Pre-Closing
Environmental Liability Claim without the other party's prior written
consent (which consent shall not be unreasonably withheld); and
(v) If Seller and Buyer, despite reasonable good faith
efforts, cannot agree as to any decision under this Section 9.9, either
party may elect to have the disputed matters presented for binding
arbitration, provided, further, that, unless Seller and Buyer agree
otherwise, any such arbitration shall be completed prior to any deadline
set by the applicable Governmental Authority relating to the matter in
dispute.
(vi) Seller shall permit Buyer, if it shall so elect and for
the purpose of determining the need for Remedial Action, to make tests,
take samples and soil borings and/or conduct groundwater studies and such
other investigations. All plans for such testing must be provided to Seller
a reasonable period of time before their commencement so as to allow Seller
an opportunity to comment and allow Buyer adequate time to incorporate such
comments to the extent they are reasonable and appropriate.
(c) In order to effect the provisions of Section 9.9 and Section
9.8, the parties may, with regard to one or more of the sites, enter into such
agreements and other contractual arrangements as they see fit to implement
Remedial Action.
9.10 Treatment of Indemnity Payments. All indemnity payments made
-------------------------------
under this Agreement shall be treated by the parties for all Tax purposes as
adjustments to the Purchase Price.
ARTICLE X
GENERAL PROVISIONS
------------------
10.1 Assignment. This Agreement and the rights and obligations
----------
hereunder shall not be assignable or transferable by either party other than by
operation of law or in connection with a merger or sale of substantially all the
assets of such party without the prior written consent of the other, which
consent will not be unreasonably withheld; provided, however, that Buyer may
without the prior written consent of Seller (a) assign its rights hereunder to
any lender providing financing in connection with the Transactions as collateral
security or (b) assign its rights and obligations hereunder to an Affiliate of
Buyer which shall assume Buyers obligations and liabilities hereunder; provided
further, however, that no assignment shall release the assigning party from its
obligations hereunder.
10.2 No Third-Party Beneficiaries. Except as provided in Article IX
----------------------------
as to Indemnified Persons and in the Employee Matters Agreement, this Agreement
is for the sole benefit of the parties hereto and their permitted assigns and
nothing herein expressed or implied shall give or be construed to give to any
person or entity, other than the parties hereto and such assigns, any legal or
equitable rights hereunder.
10.3 Termination.
-----------
(a) Anything contained herein to the contrary notwithstanding,
this Agreement may be terminated (except as set forth in Section 10.3(c)) and
the Transactions abandoned at any time prior to the Closing Date:
(i) by mutual written consent of Seller and Buyer;
(ii) by Seller if any of the conditions set forth in
Section 3.1 shall have become incapable of fulfillment, and shall not have
been waived by Seller;
(iii) by Buyer if any of the conditions set forth in
Section 3.2 shall have become incapable of fulfillment, and shall not have
been waived by Buyer; or
(iv) by either party hereto, if the Closing does not
occur on or prior to August 31, 2000; provided, however, that such date may
be extended by either party for up to 30 days if necessary to satisfy the
condition in Sections 3.1(c) and 3.2(c).
(b) In the event of termination by Seller or Buyer pursuant to
this Section 10.3, written notice thereof shall forthwith be given to the other
party and the Transactions shall be terminated, without further action by either
party. If the Transactions are terminated as provided herein:
(i) Buyer shall return all documents and copies and other
material received from Seller relating to the Transactions, whether so
obtained before or after the execution hereof, to Seller; and
(ii) all confidential information received by Buyer with
respect to the Business and Seller shall be treated in accordance with the
Confidentiality Agreement which shall remain in full force and effect
notwithstanding the termination of this Agreement.
(c) If this Agreement is terminated and the transactions
contemplated hereby are abandoned as described in this Section 10.3, this
Agreement shall become void and of no further force and effect, except for the
provisions of (i) Section 7.1 relating to the obligation of Buyer to keep
confidential certain information and data obtained by it, (ii) Section 8.3
relating to publicity, (iii) Section 10.4 relating to certain expenses, (iv)
Section 10.11 relating to finder's fees and broker's fees and (v) this Section
10.3. Nothing in this Section 10.3 shall be deemed to release either party from
any liability for any breach by such party of the terms and provisions of this
Agreement or to impair the right of either party to compel specific performance
by the other party of its obligations under this Agreement.
10.4 Expenses. Whether or not the transactions contemplated hereby are
--------
consummated, and except as otherwise provided in this Section 10.4, Section 2.7
or elsewhere in this Agreement, all fees, costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such fees, costs or expenses.
10.5 Equitable Relief. The parties hereto agree that in the event of
----------------
Sellers' breach of its obligations to consummate the Transactions, damages may
prove insufficient and Buyer should be entitled to the remedy of specific
performance.
10.6 Amendments. No amendment to this Agreement shall be effective
----------
unless it shall be in writing and signed by the parties hereto.
10.7 Notices. All notices or other communications required or
-------
permitted to be given hereunder shall be in writing and shall be delivered by
hand or sent prepaid telex, cable or telecopy, or sent, postage prepaid, by
registered, certified or express mail, or reputable overnight courier service
and shall be deemed given when so delivered by hand, telexed, cabled or
telecopied, or if mailed, three days after mailing (one business day in the case
of express mail or overnight courier service), as follows:
(i) if to Buyer, to:
---------------
VAC Acquisition Corp. II
c/o The Carlyle Group
1001 Pennsylvania Ave., N.W.
Washington, D.C. 20004
Attention: Alan Holt
Telephone: (202) 347-2626
Telecopier: (202) 347-9250
with a copy to:
Latham & Watkins
885 Third Avenue, Suite 1000
New York, NY 10022-4802
Attention: R. Ronald Hopkinson
Telephone: 212-906-1200
Telecopier: 212-751-4864
(ii) if to Seller, to:
Office of General Counsel
Northrop Grumman Corporation
1840 Century Park East
Los Angeles, California 90067
Telephone: (310) 201-3000
Telecopier: (310) 556-4556
with a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Andrew E. Bogen, Esq.
Telephone: (213) 229-7159
Telecopier: (213) 229-7520
10.8 Interpretation; Exhibits and Schedules. The headings contained
--------------------------------------
in this Agreement, in any Exhibit or Schedule hereto and in the table of
contents to this Agreement, are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Information set
forth in each Schedule specifically refers to the article and section of this
Agreement to which such information is responsive, and such information shall
not be deemed to have been disclosed with respect to any statement in any
article and section that is not qualified by reference to the pertinent Schedule
or, except with regard to information set forth on the face of any Schedule that
makes reasonably apparent its applicability to any other Schedule,
with respect to any other article or section of this Agreement or for any other
purpose. The Schedules shall not vary, change or alter the language of the
representations and warranties contained in this Agreement. All Exhibits and
Schedules annexed hereto or referred to herein are hereby incorporated in and
made a part of this Agreement as if set forth in full herein. Any capitalized
terms used in any Schedule or Exhibit, but not otherwise defined therein, shall
have the meaning as defined in this Agreement.
10.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other party.
10.10 Entire Agreement. This Agreement and the Confidentiality
----------------
Agreement contain the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersede all prior oral
and written agreements and understandings relating to such subject matter.
10.11 Fees. Each party hereto hereby represents and warrants that (a)
----
the only brokers or finders that have acted for such party in connection with
this Agreement or the transactions contemplated hereby or that may be entitled
to any brokerage fee, finder's fee or commission in respect thereof are Lehman
Brothers Inc. with respect to Buyer and Salomon Smith Barney with respect to
Seller, and (b) each of Buyer and Seller agrees that it will pay all fees or
commissions which may be payable to such firm(s) as are describe in clause (a)
as relating to it.
10.12 Severability. If any provision of this Agreement or the
------------
application of any such provision to any person or circumstance shall be held
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision hereof.
10.13 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California applicable to
agreements made and to be performed entirely within such State, without regard
to the conflicts of law principles of such State.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
SELLER:
NORTHROP GRUMMAN CORPORATION
By: /s/
-----------------------------------------------
Name: Albert F. Myers
-----------------------------------------
Title: Corporate Vice President & Treasurer
BUYER:
VAC ACQUISITION CORP. II
By: /s/
-----------------------------------------------
Name: Allan M. Holt
------------------------------------------
Title: Managing Director
EXHIBIT 99.3
EMPLOYEE MATTERS AGREEMENT
This Employee Matters Agreement, (the "Employee Agreement") is entered
into as of this 9th day of June, 2000, by and between Northrop Grumman
Corporation, a Delaware corporation ("Seller") and VAC Acquisition Corp. II, a
Delaware corporation ("Buyer"). Seller and Buyer are sometimes hereinafter
collectively referred to as the "Parties."
W I T N E S S E T H:
WHEREAS, Seller and Buyer have entered into an Asset Purchase Agreement
(the "Purchase Agreement") dated as of the 9th day of June, 2000, relating to
the purchase by Buyer of a portion of the business and assets, and the
assumption of certain related liabilities (collectively, the "Business") of
Seller's Integrated Systems and Aerostructures Sector; and
WHEREAS, the Purchase Agreement contemplates the execution and delivery
of this Employee Agreement; and
NOW, THEREFORE, the Parties, intending to become legally bound, hereby
agree as follows:
SECTION 1
Definitions
-----------
For the purposes of this Employee Agreement, the following capitalized
terms shall have the meanings assigned to them below. Capitalized terms not
defined below shall have the meanings ascribed to them in the Purchase
Agreement.
1.1 "Business Employees" shall mean as of the Closing Date all persons
who are employed on such date by Seller or a Sold Subsidiary and assigned by
Seller or a Sold Subsidiary pursuant to the Seller's or Sold Subsidiary's
ongoing payroll practice to the Business, including each person so employed and
assigned who is on disability (but still on the payroll), and any person so
employed on an approved leave of absence, and any person so employed on layoff
with recall rights and any person listed on Schedule 1(a) as a Shared Service
Employee.
1.2 "Retired Business Employees" shall mean as of the Closing Date all
persons (a) who are not active employees of Seller but who have a defined
benefit pension accrual under either (i) the Northrop Grumman Commercial
Aircraft Division Salaried Retirement Plan portion of the Northrop Grumman
Pension Plan, (ii) the Grumman Pension Plan portion of the Northrop Grumman
Pension Plan, but only if such accrual is attributable solely to service with
the former Grumman Aerostructures business (designated Entity 58 by Seller)
("Entity 58"), (iii) the Northrop Grumman Commercial Aircraft Division Hourly
Retirement Plan, and/or (iv) the Northrop Grumman Commercial Aircraft Division
Protective Services Retirement Plan, but not under any other Seller defined
benefit pension plan; or (b) who are receiving retiree medical benefits pursuant
to either (i) the Northrop Grumman Commercial Aircraft Division Salaried Health
Care Plan (Retiree Health Program only), (ii) the Northrop Grumman Commercial
Aircraft Division Hourly Health Care Plan, or (iii) the Grumman Corporation
Group Health and
Life Plan (Retiree Health Care and Insurance Program only), and, in the case of
this clause (iii), who terminated employment with Seller while assigned to
Entity 58.
SECTION 2
General Employment Terms and Conditions
---------------------------------------
2.1 Buyer shall offer employment to each Business Employee actively at
work on the Closing Date and shall honor any obligation to reemploy any Business
Employee who is not actively at work on the Closing Date due to leave of absence
(including without limitation disability leave or military leave) or layoff with
recall rights. Seller agrees to provide to Buyer, in a complete, diligent and
timely manner, all relevant information as Buyer may reasonably request with
respect to compensation, service, and other information relating to the
employment of the Business Employees. Buyer shall also after the Closing Date
offer employment to any Shared Service Employee not listed on Schedule 1(a) but
whom Seller and Buyer mutually agree after the Closing Date shall be treated as
a Business Employee ("Delayed Business Employees") and such person(s) shall,
except as expressly provided herein, be treated as Business Employees for all
purposes hereunder.
2.2 Except as provided herein, as of the Closing Date, Business
Employees and Retired Business Employees and their beneficiaries and dependents
shall cease to participate in all Seller Plans. Except as provided herein, Buyer
shall not assume sponsorship, maintenance or administration of any Seller Plan
or any Employee Benefit Plan or Employee Benefit Arrangement that is not a
Seller Plan or receive or assume any assets or liabilities in connection with
any such plan. Notwithstanding the foregoing, all Delayed Business Employees
shall cease participation in all Seller Plans as of their respective dates of
actual transfer to Buyer (in each case, an "Applicable Transfer Date").
2.3 Buyer shall have established as of the Closing Date compensation
and employee benefit plans or arrangements (or shall have designated existing
plans or arrangements) which, for at least 24 months following the Closing Date,
provide each Business Employee who continues to be employed by Buyer and is not
a member of a collective bargaining unit or is not covered by a collective
bargaining agreement with at least the same salary or hourly wage rate as in
effect immediately prior to the Closing Date, or Applicable Transfer Date, and
with other compensation and employee benefits which are comparable in the
aggregate to those provided under the Seller Plans covering such individual
immediately prior to the Closing Date, or Applicable Transfer Date. Buyer shall
have established or designated as of the Closing Date employee benefit plans or
arrangements which, for at least 24 months following the Closing Date, provide
each Retired Business Employee who is not a member of a collective bargaining
unit or is not covered by a collective bargaining agreement with retiree
benefits (including without limitation retiree health and life insurance
coverage) which are comparable in the aggregate to those provided under the
Seller Plans covering such individual immediately prior to the Closing Date. For
purposes of this Section 2.3, compensation and employee benefits shall not
include compensation and employee benefits pursuant to any stock option, stock
purchase, phantom stock, restricted stock, stock appreciation right, or other
stock-based or equity-based compensation plan, program or arrangement.
2
2.4 From and after the Closing Date, or Applicable Transfer Date,
Buyer shall, and shall cause its affiliates and successors to, provide credit
under Buyer's plans to Business Employees and Retired Business Employees for
their service with Seller and its predecessors and affiliates for purposes of
determining eligibility to participate, vesting, and eligibility to retire (but
not for purposes of benefit accrual), to the same extent that such service was
recognized under the Seller Plans that most closely resemble such Buyer plans.
For purposes of such Buyer plans, Buyer shall recognize all amounts applied to
deductibles, co-payments and out-of-pocket maximums with respect to Business
Employees and Retired Business Employees under the Seller Plans during the plan
year in which the Closing Date occurs, and will not impose any limitations on
coverage for pre-existing conditions other than such limitations as were
applicable under the Seller Plans which most closely resemble such Buyer plans.
2.5 Effective as of the Closing Date, Buyer shall assume the
collective bargaining agreements disclosed on Schedule 4.7 to the Purchase
Agreement. Promptly after the date hereof, Seller shall advise each union which
is a party to such collective bargaining agreements of such proposed assumption.
SECTION 3
Qualified Defined Contribution Plans
------------------------------------
3.1 Prior to the Closing Date, Seller shall take all actions as are
necessary to provide that all persons who are neither Business Employees nor
Retired Business Employees shall cease accruing benefits under the Northrop
Grumman Integrated Systems & Aerostructures Represented Employee Savings and
Investment Plan in respect of periods following the Closing Date. Effective as
of the Closing Date, Buyer shall assume the sponsorship of the Northrop Grumman
Integrated Systems & Aerostructures Represented Employee Savings and Investment
Plan and in connection therewith shall assume all responsibility for the
administration of such plan and its assets and liabilities with respect to
Business Employees and Retired Business Employees. Buyer shall arrange effective
as of the Closing Date to enter into appropriate agreements or modify existing
agreements with trustees and other vendors providing services to this plan;
provided, how ever, that Seller shall use its reasonable efforts to cause such
trustees and vendors to continue to provide services to such plan until December
31, 2001 (or such earlier date as Buyer shall determine) on substantially the
same terms and conditions as such services were provided to such plan
immediately prior to the Closing Date. As soon as practicable after the Closing
Date but effective as of the Closing Date, Buyer and Seller shall cause such
plan to transfer to one or more other defined contribution plans maintained by
Seller (the "Seller Defined Contribution Plans"), in a manner consistent with
Code Section 414(l), assets and liabilities attributable to persons who are
neither Business Employees nor Retired Business Employees but who do have
account balances under such plan, and Buyer shall have no obligation or
liability with respect thereto. Such transfer of assets to the Seller Defined
Contribution Plans is subject to the receipt by Buyer of, and no such transfer
shall be made unless Buyer has received: (i) evidence reasonably satisfactory to
it that Seller has timely completed all governmental filings or submissions
needed in order for the Seller Defined Contribution Plans to receive a transfer
of assets from the Northrop Grumman Integrated Systems & Aerostructures
Represented Employee Savings and Investment Plan and (ii)(A) a current and valid
IRS qualification letter with respect to the Seller Defined Contribution Plans,
or
3
(B) a representation by Seller that the Seller Defined Contribution Plans are
designed to so qualify and that Seller shall timely make all filings necessary
to obtain such qualification and make any and all necessary amendments on a
retroactive basis to the Seller Defined Contribution Plans as are required by
the Internal Revenue Service to obtain such qualification.
3.2 All Business Employees as of the Closing Date, or Applicable
Transfer Date, shall be fully vested in their account balances under the
Northrop Grumman Savings and Investment Plan ("SIP") and Business Employees and
Retired Business Employees shall be entitled to either (i) an immediate
distribution of their account balances in accordance with the terms of such plan
and pursuant to Section 401(k)(l0)(A)(ii) or (iii) of the Code, (ii) maintain
such amounts in the SIP in accordance with its terms, or (iii) transfer their
respective account balances (including any unpaid participant loans and Seller
common stock held in such accounts) directly to one or more defined contribution
plans established or designated by Buyer (each, a "Buyer Savings Plan") each of
which is designed and intended to qualify under Code Section 401(a). As soon as
practicable after the Closing Date, Buyer shall seek a favorable Internal
Revenue Service determination letter that each Buyer Savings Plan, as organized,
satisfies all qualification requirements under Section 401(a) of the Code, and
Buyer shall make any and all necessary amendments on a retroactive basis to the
Buyer Savings Plans as are required by the Internal Revenue Service to issue
such determination letter. In the event that, pursuant to clause (iii) above,
any Business Employee or Retired Business Employee elects to transfer his or her
account balance to a Buyer Savings Plan (collectively, the "Transferred Savings
Plan Accounts"), then Seller shall cause the trustees of the SIP to transfer to
the trustees or other funding agent of such Buyer Savings Plan, in the case of
each electing Business Employee and Retired Business Employee, the assets
(including but not limited to Seller securities) allocated to the account of
each such person under SIP, such amount to be established as an account balance
or accrued benefit of such individual under the Buyer Savings Plan. Each such
transfer shall comply with Section 414(1) of the Code and the requirements of
ERISA and the regulations promulgated thereunder and no such transfer shall be
made until Buyer provides to Seller a copy of a favorable IRS determination
letter for each Buyer Savings Plan or a representation by Buyer that it has
commenced its undertaking, described above, to seek a determination letter for
each Buyer Savings Plan. Notwithstanding the foregoing, as of the Closing Date,
Buyer shall, at Seller's direction, administer unpaid participant loans under
SIP outstanding as of the Closing Date and, until such time as all of the
affected participant's SIP account is transferred to the applicable Buyer
Savings Plan, remit to SIP the collected loan repayments. The Transferred
Savings Plan Accounts shall be valued as of the date on which the transfer is
made, which value shall include the earnings, gains and losses, appreciation and
depreciation of the investment funds in which the accounts are invested through
the date on which the transfer is made. Except with respect to the Transferred
Savings Plan Accounts, (a) Buyer shall have no liability or obligation with
respect to benefits accrued under the SIP nor shall Buyer be responsible for any
other obligation or liability under the SIP, and (b) Seller shall retain and
shall be solely responsible for any and all liabilities and obligations
whatsoever under the SIP (including with respect to Business Employees or
Retired Business who do not elect to transfer their account balances to a Buyer
Savings Plan pursuant to clause (iii) above). Treatment of any Business
Employees as terminated in connection with the SIP shall not necessarily be
determinative for purposes of any other Seller Plan.
4
3.3 Effective as of the Closing Date, Buyer shall establish or
designate a defined contribution retirement plan comparable to SIP in which
Business Employees who were eligible to participate in SIP immediately prior to
the Closing Date may be eligible to participate.
3.4 Notwithstanding the foregoing, Seller shall be responsible for all
liabilities incurred by Seller or Buyer as a direct result of any failure of the
SIP to be qualified under Section 401(a) of the Code.
SECTION 4
Qualified Defined Benefit Plans
-------------------------------
4.1 Prior to the Effective Time, Seller shall take all actions as are
necessary to provide that all persons who are neither Business Employees nor
Retired Business Employees shall cease accruing benefits under the Northrop
Grumman Commercial Aircraft Division Hourly Retirement Plan and the Northrop
Grumman Commercial Aircraft Division Protective Services Retirement Plan (the
"CAD Pension Plans") as of the Effective Time. Effective as of the Closing Date,
Buyer shall assume the sponsorship of the CAD Pension Plans and in connection
therewith shall assume all responsibility for the administration of such plans
and their assets and liabilities with respect to Business Employees and Retired
Business Employees. Buyer shall be responsible for all contributions to these
plans accrued after the Closing Date. Buyer shall arrange effective as of the
Closing Date to enter into appropriate agreements or modify existing agreements
with trustees and other vendors providing services to those plans; provided,
however, that Seller shall use its reasonable efforts to cause such trustees and
vendors to continue to provide services to such plans until December 31, 2001
(or such earlier date as Buyer shall determine) on substantially the same terms
and conditions as such services were provided to the CAD Pension Plans
immediately prior to the Closing Date. As soon as practicable after the Closing
Date but effective as of the Closing Date, Seller and Buyer shall cause the CAD
Pension Plans to transfer to one or more other defined benefit plans maintained
by Seller (the "Seller Defined Benefit Plans"), in a manner consistent with Code
Section 414(l) and using the assumptions set forth in Schedule 4.1, assets and
liabilities (plus an appropriate share of earnings) attributable to persons who
are neither Business Employees nor Retired Business Employees but who did accrue
benefits under such plans, and Buyer shall have no obligation or liability with
respect thereto; provided that, in the case of each plan, if the liabilities
attributable to such employees account for less than 3 percent of the total
assets of the plan as of the Closing Date, Section 414(l) shall be applied
without an allocation under ERISA Section 4044 and the assumptions used shall be
those set forth in Schedule 4.2. Such transfer of assets to the Seller Defined
Benefit Plans is subject to the receipt by Buyer of, and no such transfer shall
be made unless Buyer has received: (i) evidence reasonably satisfactory to it
that Seller has timely completed all governmental filings or submissions needed
in order for the Seller Defined Benefit Plans to receive a transfer of assets
from the CAD Pension Plans and (ii)(A) a current and valid IRS qualification
letter with respect to the Seller Defined Benefit Plans, or (B) a representation
by Seller that the Seller Defined Benefit Plans are designed to so qualify and
that Seller shall timely make all filings necessary to obtain such qualification
and make any and all necessary amendments on a retroactive basis to the Seller
Defined Benefit Plans as are required by the Internal Revenue Service to obtain
such qualification.
5
4.2 (a) Establishment of Buyer Pension Plan. Buyer shall, effective
-----------------------------------
as of the Closing Date, establish a defined benefit plan (or designate an
existing defined benefit plan of Buyer), intended to qualify under Section
401(a) of the Code (such new or existing defined benefit plan of Buyer being
referred to herein as "Buyer Pension Plan") to provide benefits to Business
Employees and Retired Business Employees who immediately prior to the Closing
Date had accrued any benefit under the Northrop Grumman Pension Plan (the
"Seller Pension Plan"). Each Business Employee or Retired Business Employee so
participating in the Seller Pension Plan prior to the Closing Date shall
thereupon become a participant in the Buyer Pension Plan; except that Delayed
Business Employees shall cease participation in the Seller Pension Plan and
commence participation in the Buyer Pension Plan on an Applicable Transfer Date.
(b) Initial Transfer of Assets. Not later than 120 days after the
--------------------------
Closing Date and subject to the requirements of Section 4.2(d) being satisfied,
Seller shall cause an initial transfer of assets and liabilities from the Seller
Pension Plan to the Buyer Pension Plan. The value of the assets of the Seller
Pension Plan to be so transferred shall be at least 90 percent of an estimate of
the "CAS Amount." The "CAS Amount" is defined as the assets allocated with
respect to the Business Employees and Retired Business Employees under Seller's
accounting procedures to implement the segment accounting requirements of Cost
Accounting Standard CAS 413-50(c), and specifically CAS 413-50(c)(7). The CAS
Amount so defined shall equal the sum of amounts attributable to each of the
following five portions of the Seller Pension Plan (each, a "Heritage Plan"), as
indicated in clauses (i), (ii), (iii), (iv) and (v) below:
(i) An amount equal to the market value of assets of the
Northrop Grumman Retirement Plan portion of the Seller Pension Plan, multiplied
by a fraction the numerator of which is the actuarial accrued liability
attributable to Business Employees under the Northrop Grumman Retirement Plan
portion of the Seller Pension Plan and the denominator of which is the actuarial
accrued liability of all participants in the Northrop Grumman Retirement Plan
portion of the Seller Pension Plan.
(ii) An amount equal to the market value of assets of the Grumman
Pension Plan portion of the Seller Pension Plan, multiplied by a fraction the
numerator of which is the actuarial accrued liability attributable to Business
Employees and Retired Business Employees under the Grumman Pension Plan portion
of the Seller Pension Plan and the denominator of which is the actuarial accrued
liability of all participants in the Grumman Pension Plan portion of the Seller
Pension Plan.
(iii) An amount equal to the market value of assets of the
Northrop Grumman Commercial Aircraft Division Salaried Retirement Plan portion
of the Seller Pension Plan, multiplied by a fraction the numerator of which is
the actuarial accrued liability attributable to Business Employees and Retired
Business Employees under the Northrop Grumman Commercial Aircraft Division
Salaried Retirement Plan portion of the Seller Pension Plan and the denominator
of which is the actuarial accrued liability of all participants in the Northrop
Grumman Commercial Aircraft Division Salaried Retirement Plan portion of the
Seller Pension Plan.
(iv) An amount equal to the market value of assets of the Northrop
Grumman Retirement Plan--Rolling Meadows Site portion of the Seller Pension
Plan,
6
multiplied by a fraction the numerator of which is the actuarial accrued
liability attributable to Business Employees and Retired Business Employees
under the Northrop Grumman Retirement Plan--Rolling Meadows Site portion of the
Seller Pension Plan and the denominator of which is the actuarial accrued
liability of all participants in the Northrop Grumman Retirement Plan--Rolling
Meadows Site portion of the Seller Pension Plan.
(v) An amount equal to the market value of the assets of the
Northrop Grumman Electronic Sensors & Systems Sector Nonrepresented Employees
Pension Plan portion of the Seller Pension Plan, multiplied by a fraction the
numerator of which is the actuarial accrued liability attributable to Business
Employees and Retired Business Employees under the Northrop Grumman Electronic
Sensors & Systems Sector Nonrepresented Employees Pension Plan portion of the
Seller Pension Plan and the denominator of which is the actuarial accrued
liability of all participants in the Northrop Grumman Electronic Sensors &
Systems Sector Nonrepresented Employees Pension Plan portion of the Seller
Pension Plan.
For the above purposes, the assets are measured as of the last day of the month
preceding the Closing Date. The market value of assets for each of the above
Heritage Plans takes into account the result of employing an asset allocation
convention for those Heritage Plans. The funding convention requires that assets
of the Seller Pension Plan be used to fund any underfunded Heritage Plan pension
liabilities. This convention will be used to allocate pension assets for
unfunded liabilities that are determined for the period from January 1, 2000
through the Closing Date (the "Period"). The assets allocated to an underfunded
Heritage Plan are equal to the pension costs measured in accordance with CAS
412, Cost Accounting Standard for Composition and Measurement of Pension Cost,
for the Period. The funding convention is carried out by allocating a pro rata
--------
share of the actuarial surplus (defined as the excess of the market value of
assets over the actuarial accrued liability) from each overfunded Heritage Plan
to provide assets to underfunded Heritage Plans. The Heritage Plan pension costs
measured in accordance with CAS 412 include: (1) the normal cost of the Period;
(2) an amortized part of any unfunded actuarial liability; (3) an adjustment for
actuarial gains and loss; and (4) appropriate interest adjustments for the
Period.
The actuarial accrued liability shall be determined utilizing the entry
age normal cost method and assumptions set forth in Schedule 4.2 and, for both
the numerators and denominators in (i) through (v), above, based on the January
1, 2000 valuation completed by Seller's actuary in accordance with the
requirements of CAS, including the expected change in the actuarial accrued
liability projected due to additional service, benefits paid and interest for
the Period. The actuarial liability so calculated shall cover all benefits
(including ancillary benefits) accrued under the Seller Pension Plan by the
Business employees and Retired Business Employees. For purposes of this initial
transfer the CAS Amount shall be computed without regard to Delayed Business
Employees. The assets of the Seller Pension Plan to be transferred to the Buyer
Pension Plan both under the initial transfer and under any adjustment pursuant
to Section 4.2(c) hereof, shall be in the form of cash and other assets
(excluding Seller securities) reasonably representative of the Seller Pension
Plan investment portfolio as a whole but without regard to Seller securities,
and Buyer shall cause the Buyer Pension Plan to accept such transfer and, to the
extent of the assets so transferred, to assume all obligations for benefits
(including ancillary benefits) accrued under the Seller Pension Plan by the
Business Employees and Retired Business Employees.
7
(c) Subsequent Adjustments
----------------------
(i) Seller shall cause its enrolled actuary to determine
reasonably and in good faith as soon as practicable but in any case within
twelve (12) months following the Closing Date, the actual CAS Amount (taking
into account Delayed Business Employees) and an amount equal to 130 percent of
the present value of accrued benefits attributable to Business Employees and
Retired Business Employees calculated as current liability pursuant to the
principles of Code Section 412(c)(7)(B) as of the last day of the month
preceding the Closing Date using an interest rate (the "Rate") as defined in the
next sentence and the other assumptions set forth in Schedule 4.2 (the
"Guaranteed Amount"). The Rate shall be 105 percent of the weighted average of
the rates of interest on 30-year Treasury securities during the 4-year period
ending on the last day of the month preceding the Closing Date as permitted by
Code Section 412(b)(5)(B)(ii).
(ii) If the actual CAS Amount exceeds the Guaranteed Amount, then
not later than 45 days following the determination of the actual CAS Amount and
Guaranteed Amount, either Seller shall cause a transfer of assets from the
Seller Pension Plan to the Buyer Pension Plan equal to the amount, if any, by
which the actual CAS Amount exceeds the initial transfer, or Buyer shall cause a
transfer of assets from the Buyer Pension Plan to the Seller Pension Plan equal
to the amount by which the initial transfer exceeds the CAS Amount, if any. If
the Guaranteed Amount exceeds the actual CAS Amount then not later than 45 days
following the determination of the actual CAS Amount and Guaranteed Amount, then
either Seller shall cause a transfer of assets from the Seller Pension Plan to
the Buyer Pension Plan equal to the amount, if any, by which the Guaranteed
Amount exceeds the initial transfer, or Buyer shall cause a transfer of assets
from the Buyer Pension Plan to the Seller Pension Plan equal to the amount, if
any, by which the initial transfer exceeds the Guaranteed Amount.
(iii) Any amounts to be transferred between the plans more than
one day following the Closing Date in satisfaction of the of this Section 4.2
shall include investment gains or losses from the day preceding the Closing
Date, as follows:
(A) With respect to the period from the day preceding the
Closing Date to and including the date of the initial transfer of
assets hereunder ("Initial Transfer Date"), investment gains and losses
shall mean the aggregate net investment experience of the transferor
plan during such period; and
(B) With respect to the period from the Initial Transfer Date to
and including the day preceding the date of payment of any adjustment
under clause (ii), investment gains and losses shall mean interest
credited during such period at the interest rate assumption specified
in Schedule 4.2 regardless of the actual investment experience of the
assets of the transferor plan.
(d) Requirements of Transfer. The total amount transferred from the
-------------------------
Seller Pension Plan to the Buyer Pension Plan under this Section 4.2 shall in no
event be less than that required under Code Section 414(l) using the assumptions
set forth in Schedule 4.2. Further, notwithstanding any provision in the
Purchase Agreement or this Employee Agreement to the contrary, each transfer of
assets from the Seller Pension Plan is subject to the receipt by Seller of,
8
and no such transfer shall be made unless Seller has received: (i) evidence
reasonably satisfactory to it that Buyer has timely completed all governmental
filings or submissions needed in order for the Buyer Pension Plan to receive a
transfer of assets from the Seller Pension Plan and (ii)(A) a current and valid
IRS qualification letter with respect to the Buyer Pension Plan, or (B) a
representation by Buyer that the Buyer Pension Plan is designed to qualify and
that Buyer shall timely make all filings necessary to obtain such qualification
and make any and all necessary amendments on a retroactive basis to the Buyer
Pension Plan as are required by the Internal Revenue Service to obtain such
qualification. In no event shall any transfer from the Seller Pension Plan be
made prior to the lapse of thirty (30) days after Seller files a complete Form
5310A; provided that Seller shall cause such filing to be made within 90 days of
the Closing Date.
(e) Notwithstanding the foregoing, Seller shall be responsible for
all liabilities incurred by Seller or Buyer as a result of any failure of the
Seller Pension Plan to be qualified under Section 401(a) of the Code.
(f) Seller hereby represents and warrants to Buyer that the
assumptions set forth in Schedule 4.2 are the same assumptions that are utilized
for the preparation and presentation of Seller's public financial statements;
except that (i) the assumptions for current liability do not apply to the
preparation of public financial statements, and (ii) there is no assumption in
Schedule 4.2 for the annual rate of increase in the indexed limits on plan
compensation and maximum benefits inasmuch as such rate is irrelevant to CAS and
ERISA calculations, but the rate used for such purposes in Seller's public
financial reporting is 3.5 percent.
SECTION 5
Welfare Benefit Plans other than Severance
------------------------------------------
5.1 Seller shall be responsible in accordance with its applicable welfare
plans in effect prior to the Closing Date for all medical and similar claims for
expenses incurred prior to the Closing Date, or Applicable Transfer Date, by
Business Employees and Retired Business Employees and their dependents.
Reimbursement of said employees and their dependents for medical and similar
expenses associated with such claims (including claims submitted on behalf of
disabled employees and their dependents) shall be determined in accordance with
the terms of Seller's medical and similar programs as in effect immediately
prior to the Closing Date. Seller shall terminate coverage of Business Employees
and Retired Business Employees and their dependents effective for claims for
expenses incurred on and after the Closing Date, or Applicable Transfer Date.
Effective as of the Closing Date, Buyer shall be responsible in accordance with
its applicable welfare plans in effect on and after the Closing Date for all
medical and similar claims for expenses incurred on and after the Closing Date,
or Applicable Transfer Date (including, but not limited to, responsibility for
post-retirement medical and dental claims), by Business Employees and Retired
Business Employees and their dependents; provided, that Buyer's medical and
similar programs shall provide sufficient medical and dental coverage so that
Seller and its affiliates shall have no obligation to provide "COBRA"
continuation coverage to Business Employees or Retired Business Employees under
Section 4980B(f) of the Code.
9
5.2 Effective as of the Closing Date, Buyer shall be responsible for all
long-term and short term disability income benefits payable in respect of claims
asserted on or after the Closing Date, or Applicable Transfer Date, for Business
Employees or Retired Business Employees who become disabled on or after the
Closing Date, or Applicable Transfer Date, as the case may be. Seller shall be
responsible for all long-term and short-term disability income benefits payable
in respect of claims asserted by Business Employees or Retired Business
Employees who become disabled before the Closing Date.
5.3 Effective as of the Closing Date, Buyer shall be responsible for all
life insurance claims (including post-retirement life insurance claims) of
Business Employees and Retired Business Employees and their dependents for
losses incurred by such employees or dependents on and after the Closing Date,
or Applicable Transfer Date, under group life, travel and accident, and
accidental death and dismemberment insurance policies. Seller shall be
responsible solely for claims for such losses incurred prior to the Closing
Date, or Applicable Transfer Date.
5.4 Effective as of the Closing Date, Buyer shall establish a cafeteria
plan (or designate an existing plan) subject to Code Section 125 with features
which are comparable to those contained in Seller's cafeteria plan applicable to
Business Employees immediately prior to the Closing Date. Effective as of the
Closing Date, Buyer shall, pursuant to such Buyer cafeteria plan, assume
responsibility for administering all benefit or reimbursement claims of Business
Employees and Retired Business Employees, in respect to calendar year 2000,
whether arising before, on or after the Closing Date, or Applicable Transfer
Date, under the cafeteria plan applicable to such individuals at such time.
Seller shall cause to be transferred to Buyer an amount in cash equal to the sum
of all contributions to the various reimbursement accounts under Seller's
cafeteria plan prior to the Closing Date, or Applicable Transfer Date, reduced
by the sum of all claims paid with respect to such accounts prior to the Closing
Date, or Applicable Transfer Date (regardless of whether the amount paid to any
participant exceeded such participant's reimbursement account balance), and by
any amount accrued as a liability in respect of such plan on the Closing
Statement of Assets and Liabilities.
SECTION 6
Supplemental Plans
------------------
6.1 Effective as of the Closing Date, Buyer shall establish or otherwise
make available as soon as practicable thereafter one or more nonqualified plans
(the "Buyer Supplemental Plans") in which Business Employees and Retired
Business Employees shall be eligible to participate on terms which are
comparable to those applicable to Business Employees and Retired Business
Employees immediately prior to the Closing Date under the Seller Plans set forth
on Schedule 6 attached hereto (the "Seller Supplemental Plans"). Effective as of
the Closing Date, Buyer shall assume, under the Buyer Supplemental Plans, all
liabilities and obligations with respect to Business Employees and Retired
Business Employees under the Seller Supplemental Plans incurred prior to the
Effective Time. Subject to Section 2.3 hereof, Buyer may, in its discretion,
modify or terminate the Buyer Supplemental Plans at any time following the
Closing Date.
10
6.2 No termination of a Business Employee's employment shall be deemed to
occur for purposes of the Buyer Supplemental Plans as a result of any actions
taken pursuant to this Employee Agreement or otherwise as a result of the
consummation of the transactions contemplated by the Purchase Agreement,
provided that the Business Employee remains continuously employed by Buyer or an
affiliate of Buyer immediately after the Effective Time.
SECTION 7
Severance, Retention and Similar Agreements
-------------------------------------------
Effective as of the Closing Date, Buyer shall assume and be responsible for
the Relocation Agreement between Paul Coco (assuming Mr. Coco accepts employment
with Buyer in connection with the closing of the transaction contemplated by the
Purchase Agreement) and Northrop Grumman Corporation dated April 28, 2000, and
the Special Severance Agreements and the Retention Incentive Bonus Agreements
for the following Business Employees (assuming the employee accepts employment
with Buyer in connection with the closing of the transaction contemplated by the
Purchase Agreement):
Vernon Broomall
Stephen A. Davis
William R. LePoint
William J. McKenna
Judith W. Northup
Tommy D. Risley
Erich G. Smith
Mark A. Tucker
W. B. White, Jr.
SECTION 8
Workers' Compensation
---------------------
Seller currently sponsors a program that provides workers compensation
benefits for eligible Business Employees and Retired Business Employees
("Seller's Workers Compensation Program"). Seller shall be responsible for all
claims for workers compensation benefits which are incurred prior to the Closing
Date, or Applicable Transfer Date, by such Business Employees or Retired
Business Employees that are payable under the terms and conditions of Seller's
Workers Compensation Program, and Buyer shall have no obligation or liability
with respect thereto. Effective as of the Closing Date, Buyer shall take all
necessary and appropriate action to adopt or designate a workers compensation
program which shall cover the Business Employees or Retired Business Employees
covered by such Seller program ("Buyer's Workers Compensation Program"). Buyer's
Workers Compensation Program shall be responsible for all claims for benefits
which are incurred from and after the Closing Date, or Applicable Transfer Date,
by Business Employees or Retired Business Employees that are payable under the
terms and conditions of Buyer's Workers Compensation Program. For purposes of
this Section 8, a claim for workers compensation benefits shall be deemed to be
incurred when the first event giving rise to the claim occurs.
11
SECTION 9
WARN Act
--------
Seller agrees to provide any required notice under the Worker Adjustment
and Retraining Notification Act, as amended (the "WARN Act"), and any similar
statute, and otherwise to comply with any such statute with respect to any
"plant closing" or "mass layoff" (as defined in the WARN Act) or similar event
affecting Business Employees or Retired Business Employees and occurring prior
to the Closing Date. Seller shall indemnify and hold harmless Buyer with respect
to any liability under the WARN Act or similar statute arising from the actions
or inactions of Seller prior to the Closing Date. Buyer agrees to provide any
required notice under the WARN Act, and any similar statute, and otherwise to
comply with any such statute with respect to any plant closing or mass layoff or
similar event affecting Business Employees or Retired Business Employees and
occurring on or after the Closing Date. Buyer shall indemnify and hold harmless
Seller with respect to any liability under the WARN Act or similar statute
arising from the actions or inactions of Buyer on or after the Closing Date.
SECTION 10
Payroll
-------
Seller and Buyer agree that, with respect to Business Employees who accept
employment with Buyer upon the Closing Date, or Applicable Transfer Date, they
will take the position that they respectively meet the definitions of
"predecessor" and "successor," each as defined in Revenue Procedure 96-60 and
IRS Regulation Section 31.3121(a)(1)-1(b). Absent a mutual agreement with
respect to Procedure 96-60, Seller shall supply to Buyer, with respect to all
Business Employees who accept employment with Buyer upon the Closing Date, or an
Applicable Transfer Date, all cumulative payroll information as of the Closing
Date, or Applicable Transfer Date, that Buyer shall reasonably request in order
to employ IRS Regulation Section 31.3121(a)(1)-1(b).
SECTION 11
Vacation and Sick Pay
---------------------
Buyer shall assume responsibility for accrued vacation and sick pay
attributable to Business Employees as of the Closing Date, or Applicable
Transfer Date, to the extent such amounts are accrued as a liability on the
Closing Statement of Assets and Liabilities.
SECTION 12
Miscellaneous
-------------
12.1 (a) Further Agreements. Each Party shall be responsible for its own
------------------
expenses incurred before, on or after the Closing Date that are attributable to
the costs of disposing of the Seller Plans and establishing of plans by Buyer
pursuant to this Employee Agreement.
12
(b) The Parties agree to reasonably cooperate and to respond to
reasonable requests for information to implement the terms of this Employee
Agreement
12.2 No Third Party Beneficiaries. This Employee Agreement and any
-----------------------------
Schedule attached hereto are for the sole benefit of the parties hereto and
their permitted assigns and nothing herein expressed or implied shall give or be
construed to give to any person or entity, other than the parties hereto and
such assigns, any legal or equitable rights hereunder
12.3 No Right to Continued Employment. Nothing contained in this Employee
--------------------------------
Agreement shall confer upon any Business Employee any right with respect to
continuance of employment by Buyer, nor shall anything herein interfere with the
right of Buyer to terminate the employment of any Business Employee at any time,
with or without cause, or, except as expressly provided herein, restrict Buyer
in the exercise of its independent business judgment in modifying any of the
terms and conditions of the employment of the Business Employees..
12.4 Severability. If any provision of this Employee Agreement or
------------
Schedules hereto, or the application of any such provision to any person or
circumstance shall be held invalid, illegal or unenforceable in any respect by a
court of competent jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision hereof.
12.5 Governing Law. To the extent not governed by federal law, this
-------------
Employee Agreement shall be governed by and construed in accordance with the
internal laws of the State of California applicable to agreements made and to be
performed entirely within such State, without regard to the conflicts of law
principles of such State.
12.6 Schedules Attached To Employee Agreement. The Schedules attached to
----------------------------------------
this Employee Agreement are incorporated herein by reference as though fully
set forth herein.
12.7 Entire Agreement. This Employee Agreement and the Schedules attached
----------------
hereto contain the entire agreement and understanding between the parties hereto
with respect to the subject matter hereof and supersede all prior oral and
written agreements and understandings relating to such subject matter.
12.8 Order of Precedence. The parties agree that if any terms of this
-------------------
Employee Agreement conflict with terms in the Purchase Agreement, the terms of
this Employee Agreement shall govern with respect to the resolution of such
conflict.
12.9 Counterparts. This Employee Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other party.
12.10 Notices. All notices or other communications required or permitted
-------
to be given hereunder shall be in writing and shall be delivered by hand or sent
prepaid telex, cable or telecopy, or sent, postage prepaid, by registered,
certified or express mail, or reputable overnight courier service and shall be
deemed given when so delivered by hand, telexed, cabled or telecopied, or if
mailed, three days after mailing (one business day in the case of express mail
or overnight courier service), as follows:
13
(i) if to Buyer, to:
VAC Acquisition Corp. II
c/o The Carlyle Group
1001 Pennsylvania Ave., N.W.
Washington, D.C. 20004
Attention: Alan Holt
Telephone: (202) 347-2626
Telecopier: (202) 347-9250
with a copy to:
Latham & Watkins
885 Third Avenue, Suite 1000
New York, NY 10022-4802
Attention: R. Ronald Hopkinson
Telephone: (212) 906-1200
Telecopier: (212) 751-4864
(ii) if to Seller, to:
Office of General Counsel
Northrop Grumman Corporation
1840 Century Park East
Los Angeles, California 90067
Telephone: (310) 201-3000
Telecopier: (310) 556-4556
with a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Andrew E. Bogen, Esq.
Telephone: (213) 229-7159
Telecopier: (213) 229-7520
12.11 Descriptive Headings. The Section and clause headings of this
--------------------
Employee Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Employee Agreement.
12.12 Expenses. Except as otherwise provided elsewhere in this Employee
--------
Agreement, all fees, costs and expenses incurred in connection with this
Employee Agreement and the transactions contemplated hereby shall be paid by the
party incurring such fees, costs or expenses.
12.13 Amendments. No amendment to this Employee Agreement shall be
----------
effective unless it shall be in writing and signed by the parties hereto.
14
12.14 Assignment. This Employee Agreement and the rights and obligations
----------
hereunder shall not be assignable or transferable by either party other than by
operation of law or in connection with a merger or sale of substantially all the
assets of such party without the prior written consent of the other, which
consent will not be unreasonably withheld; provided, however, that no assignment
shall limit or affect assigning party's obligations hereunder.
12.15 Termination. This Employee Agreement shall terminate and be of no
-----------
force or effect in the event the Purchase Agreement is terminated prior to the
Closing.
IN WITNESS WHEREOF, Seller and Buyer have each caused this Employee
Agreement to be duly signed and delivered to the other parties.
SELLER
By: /s/
-------------------------------------
Title: Corporate Vice President & Treasurer
-------------------------------------
BUYER
By: /s/
Title: Managing Director
15
Exhibit 99.4
SELLER NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
IT MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
VAC HOLDINGS II, INC.
11 1/2% SELLER NOTE
DUE July 21, 2009
$175,000,000 July 24, 2000
VAC HOLDINGS II, INC., a Delaware corporation ("Payor"), for value
received, promises to pay to the order of NORTHROP GRUMMAN CORPORATION, a
Delaware corporation ("Payee"), or its permitted assigns, the principal amount
of ONE HUNDRED AND SEVENTY-FIVE MILLION DOLLARS ($175,000,000), together with
interest accrued thereon at the time or times set forth below (this Note
together with any PIK Notes issued pursuant to Section 1.1 below, the "Notes").
The principal of and interest on this Note is payable in lawful money of the
United States of America in immediately available funds at such place in the
United States as Payee may from time to time designate in writing to Payor.
This Note is made pursuant to that certain Asset Purchase Agreement
dated June 9, 2000 (the "Purchase Agreement" as amended, modified supplemented
or waived from time to time), by and between Payee and VAC Acquisition Corp. II,
a Delaware corporation and a wholly-owned subsidiary of Payor ("Buyer") and is
the "Seller Note" referred to therein. Payee is receiving this Seller Note
pursuant to the Purchase Agreement. For the avoidance of doubt, this Note does
not provide the Payee with, nor does it imply to the Payee, any right
against any subsidiary of the Payor. All capitalized terms used herein and not
defined herein shall have the meanings assigned to such terms in the Purchase
Agreement.
1. Payment of Principal and Interest
---------------------------------
1.1 Calculation and Payment of Interest.
-----------------------------------
Interest on the principal balance of this Note outstanding from time
to time shall accrue at the rate of eleven and one-half percent (11 1/2%) per
annum computed on the basis of a 365 or 366-day year, as appropriate, for the
actual number of days elapsed, commencing on the date hereof (and on the date of
issuance with respect to any PIK Note). Such interest shall be payable semi-
annually in arrears, beginning on January 24, 2001 and thereafter on each July
24/th/ and January 24/th/ (each, an "Interest Payment Date") through and
including July 24, 2004 by the issuance of a promissory note in a principal
amount equal to interest accrued but not otherwise paid (by the issuance of a
PIK Note or otherwise) on the principal amount hereof through and including such
Interest Payment Date and otherwise having such terms and provisions that are
the same as the terms and provisions of this Note (each such promissory note a
"PIK Note"), and (without limiting the Payor's obligation to issue in each such
instance, a PIK Note) Payor shall be deemed to have issued a PIK Note to Payee
for any such interest regardless of whether Payor shall have actually delivered
any such PIK Note to Payee. On and after January 24, 2005, payment of such
interest shall be made semi-annually in arrears on each Interest Payment Date
until the Maturity Date (as defined below) and on the Maturity Date in cash;
provided, however, that such payment shall instead be made by the issuance of a
- -------- -------
PIK Note for such interest, and (without limiting the Payor's obligation to
issue in each such instance a PIK Note) Payor shall be deemed to have issued a
PIK Note to Payee for any such interest regardless of whether Payor shall have
actually delivered any such PIK Note, if (a) a payment default under the Credit
Agreement or the other Bank Debt Documents has occurred and is continuing, (b)
the Leverage
2
Ratio for the most recently ended fiscal quarter is greater than 2.0:1 or (c)
after giving effect to such payment, the ratio of (I) Consolidated Total Debt
plus the aggregate principal amount of outstanding Notes to (II) Consolidated
Adjusted EBITDA for the four Fiscal Quarter period then most recently ended
would be greater than 3.0:1. Payee, by acceptance hereof, acknowledges (i) that
Payor is contractually bound hereunder to pay interest in cash only if the
conditions specified in Sections 1.1 (a) or (b) or (c) above are not met, (ii)
that any interest not paid in cash shall be paid in the form of a PIK Note, and
(iii) the failure to pay cash interest as a result of Sections 1.1(a), (b) or
(c) shall not constitute a default or Event of Default under this note.
1.2 Payment on Maturity Date. The principal balance of, and any
------------------------
accrued and unpaid interest on, this Note shall be payable on July 21, 2009 (the
"Maturity Date").
1.3 Voluntary Prepayment.
--------------------
(a) Payor may, at its option at any time, to the extent not
prohibited by the Bank Debt Documents, without premium or penalty,
prepay all or any portion of this Note.
(b) Any prepayment of this Note shall be applied as follows:
first, to payment of accrued interest; and second, to payment of
----- ------
principal. Upon any partial prepayment, at the request either of Payee
or Payor, this Note shall be surrendered to Payor in exchange for a
substitute note, which shall set forth the revised principal amount.
In the event that this Note is prepaid in its entirety, this Note
shall be surrendered to Payor for cancellation as a condition to any
such prepayment.
1.4 Mandatory Prepayment. Subject to any limitations on the ability
--------------------
of Payor's Subsidiaries to pay dividends arising under applicable law, the Net
Proceeds from the
3
sale of more than two-thirds of the fair market value of the assets of Payor's
Significant Subsidiaries to any person that is not a Significant Subsidiary of
Payor in a transaction or a series of related transactions shall be applied
first, to prepay all or a portion of the Bank Debt then outstanding, to the
extent required under the Bank Debt Documents, and second, to prepay all or a
portion of the principal balance of the Notes then outstanding.
1.5 Prepayment of Notes at the Option of Payee upon a Change of
-----------------------------------------------------------
Control. In the event that a Change of Control has occurred, Payee will have the
- -------
right, at Payee's option (subject to compliance with applicable federal and
state laws), to require Payor to pay all or any part of the Note on a date no
later than 30 days after the occurrence of such Change of Control, at a cash
price equal to 101% of the principal amount then outstanding, which such
principal amount shall include the principal amount of any PIK Notes issued
pursuant to Section 1.1 hereof.
1.6 Payment Only on Business Days. Any payment hereunder which, but
-----------------------------
for this Section 1.6, would be payable on a day which is not a Business Day,
shall instead be due and payable on the Business Day next following such date
for payment.
2. Events of Default
-----------------
The following shall constitute "Events of Default" under this Note:
(a) Failure by Payor to make any payment or prepayment of
principal required under this Note when the same shall become due and
payable (whether at maturity, by acceleration or otherwise) and the
continuation of such failure for a period of ten (10) days; or failure
by Payor to make any payment of interest when the same shall become
due and payable and the continuation of such failure for a period of
thirty (30) days; or
4
(b) A breach of the covenant set forth in Section 3.1(a) which
breach shall continue uncured for a period of five (5) days; or
(c) Other than as set forth in 2(b) above; a breach of any
covenant under Section 3.1 or Section 3.2 of this Note, which breach,
if curable, shall continue uncured for a period of thirty (30) days
after the date on which written notice specifying such breach and
stating that such notice is a "Notice of Default" hereunder, shall
have been given by Payee to Payor; or
(d) Payor or Material Subsidiaries pursuant to or within the
meaning of any Bankruptcy Law:
(i) commence a voluntary case or proceeding;
(ii) consent to the entry of an order for relief against
them in an involuntary case or proceeding;
(iii) consent to the appointment of a Custodian of them or
for all or substantially all of their property or assets;
(iv) make a general assignment for the benefit of the
creditors; or
(e) an involuntary case or proceeding is commenced against Payor
or Material Subsidiaries under any Bankruptcy Law and is not
dismissed, bonded or discharged within ninety (90) days thereafter, or
a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(i) is for relief against Payor or Material Subsidiaries
in an involuntary case or proceeding;
5
(ii) appoints a Custodian of Payor or Material
Subsidiaries for all or substantially all of their properties or
assets; or
(iii) orders the liquidation of Payor or Material
Subsidiaries; and in each case the order or decree remains unstayed
and in effect for ninety (90) days.
If an Event of Default specified in Section 2(a), 2(b) or 2(c) shall
have occurred and be continuing Payee may, at its option, declare the entire
principal amount of this Note and the interest accrued thereon to be due and
payable upon the date which is five Business Days after the date of delivery by
Payee to Payor of a written notice of acceleration, and upon any such
declaration the same shall become due and payable at such time. If an Event of
Default specified in Section 2(d) or 2(e) hereof occurs, the principal balance
of and accrued interest on this Note shall become due and payable immediately
without any declaration or other act on the part of Payee.
If any Event of Default shall have occurred and be continuing,
Payee may proceed to protect and enforce its rights either by suit in equity or
by action at law, or both, whether for specific performance of any provision of
this Note or in aid of the exercise of any power granted to Payee under this
Note.
3. Covenants.
---------
3.1 Affirmative Covenants. Payor covenants and agrees that for so
---------------------
long as any indebtedness evidenced by this Note shall remain outstanding, unless
waived by Payee, Payor shall:
(a) promptly give notice to Payee of (i) any default or Event of
Default hereunder upon any senior officer of Payor obtaining knowledge
of any such default or Event of Default or (ii) any notice of an
"Event of Default" (as defined
6
in the Bank Debt Documents) permitting the holder or holders of the
Bank Debt to accelerate such Bank Debt given to Payor or any of its
Subsidiaries by any holder of Bank Debt or its agent; and
(b) deliver to Payee copies of quarterly and annual financial
statements of Payor.
3.2 Negative Covenants. Payor covenants and agrees that for so long
-------------------
as any indebtedness evidenced by this Note remains outstanding, Payor will not
without the written consent of Payee;
(a) liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, lease, transfer or
otherwise dispose of, in one transaction or a series of related
transactions, all or substantially all of its assets other than to a
Significant Subsidiary; or
(b) consolidate with, or merge with or into, any Person unless
(i) Payor shall be the continuing Person, or the Person (if other than
Payor) formed by such consolidation or into which Payor is merged
shall be a corporation organized and existing under the laws of the
United States or any state thereof or of the District of Columbia and,
in the event Payor is merged with or into any other Person, such
Person shall expressly assume, by an agreement executed and delivered
to Payee, in form and substance reasonably satisfactory to Payee the
obligations of Payor under this Note, (ii) following the transaction,
the Payor on this Note shall be in compliance with Section 3.2(c)
below, and (iii) no Event of Default has occurred and is continuing or
would occur after giving effect to such consolidation or merger. Upon
any consolidation or merger of Payor in
7
accordance with this Section 3.2(b), the successor corporation formed
by such consolidation or into which Payor is merged shall succeed to,
and be substituted for and may exercise any right and power of, Payor
under this Note with the same effect as if such successor corporation
had been named as Payor herein; or
(c) incur, assume or suffer to exist any Indebtedness or permit
any of its Significant Subsidiaries to incur, assume or suffer to
exist any Indebtedness, except that Payor and its Significant
Subsidiaries may incur indebtedness if (x) no Event of Default shall
have occurred and be continuing at the time of, or would occur after
giving effect to such incurrence of Indebtedness on a pro forma basis
(including a pro forma application of the net proceeds therefrom) as
though it had been incurred on the first day of the most recently
ended period of four consecutive full Fiscal Quarters for which
internal financial statements are available immediately preceding the
date on which such Indebtedness is incurred and (y) the Interest
Coverage Ratio of Payor for the most recently ended period of four
consecutive full Fiscal Quarters for which internal financial
statements are available prior to the date on which such Indebtedness
is incurred, on a pro forma basis (including a pro forma application
of the net proceeds therefrom), would be not less than 2.0:1.0.
Without regard to the foregoing limitations, the Payor and its
Significant Subsidiaries may incur, assume or suffer to exist the following
("Permitted Indebtedness"):
(i) Indebtedness under the Notes;
8
(ii) Indebtedness under the Credit Agreement and the other
Bank Debt Documents, provided that the aggregate principal amount
--------
at any time outstanding thereunder shall not exceed $850,000,000;
(iii) Indebtedness of any Significant Subsidiary of Payor
owing to Payor or owing to another Subsidiary of Payor or
Indebtedness of any Subsidiary owing to Payor;
(iv) Indebtedness incurred by Payor or its Significant
Subsidiaries arising from agreements providing for
indemnification, adjustment of purchase price or similar
obligations, or from guaranties or letters of credit, surety
bonds or performance bonds securing the performance of Payor,
Buyer or any of their Subsidiaries pursuant to such agreements;
(v) Payor or any of its Significant Subsidiaries may
become and remain liable with respect to promissory notes
incurred in connection with an Acquisition and payable to the
seller in connection therewith, provided that the aggregate
--------
principal amount of such promissory notes outstanding at any time
shall not exceed $25,000,000;
(vi) Indebtedness incurred by Payor or its Significant
Subsidiaries which may be deemed to exist pursuant to any
guaranties, performance, surety, statutory, appeal or similar
obligations incurred in the ordinary course of business;
9
(vii) Indebtedness incurred by Payor or its Significant
Subsidiaries in respect of netting services, overdraft
protections and otherwise in connection with deposit accounts;
(viii) guaranties in the ordinary course of business of the
obligations of suppliers, customers, franchisees and licensees of
Payor, or any Subsidiary of Payor;
(ix) Indebtedness with respect to any lease of any
property by a Payor or its Significant Subsidiaries as lessee
that, in conformity with generally accepted accounting principles
is or should be accounted for as a capital lease in an aggregate
amount not to exceed at any time $25,000,000;
(x) A Significant Subsidiary acquired pursuant to an
Acquisition may become or remain liable with respect to
Indebtedness of such Significant Subsidiary existing at the time
of Acquisition by Payor or its Subsidiary of such Significant
Subsidiary or assets obtained pursuant to an Acquisition;
provided that such Indebtedness was not incurred in connection
--------
with or in anticipation of such acquisition, and the aggregate
principal amount of all such indebtedness does not exceed
$20,000,000;
(xi) Indebtedness incurred by Payor or its Significant
Subsidiaries with respect to Interest Rate Agreements and
Currency Agreements;
(xii) purchase money Indebtedness incurred by Payor or its
Significant Subsidiaries in an aggregate amount not to exceed at
any time
10
$30,000,000 provided, any such Indebtedness shall be secured only
by the asset acquired in connection with the incurrence of such
Indebtedness and proceeds thereof;
(xiii) other unsecured Indebtedness of Payor and its
Significant Subsidiaries, in an aggregate amount not to exceed at
any time $30,000,000;
(xiv) Indebtedness of the Payor or any of its Significant
Subsidiaries outstanding on the date hereof; and
(xv) refinancings and extensions of any such
Indebtedness;
(d) except as set forth in this Section 3.2(d) incur, assume or
suffer to exist, any Lien of any kind securing any Indebtedness upon
any of its assets now owned or acquired or upon any income or profits
therefrom except:
(i) Liens with which the Notes are equally and ratably
secured;
(ii) Liens incurred to secure indebtedness under the
Credit Agreement or any Bank Debt Document;
(iii) Liens for taxes if obligations with respect to such
taxes are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted;
(iv) statutory Liens of landlords, banks (and rights of
set-off), of carriers, warehousemen, mechanics, repairmen,
workmen and materialmen, and other Liens imposed by law; (other
than any such Lien imposed pursuant to Section 401 (a)(29) or
412(n) of the Internal Revenue Code or by ERISA), in each case
incurred in the ordinary course of
11
business (A) for amounts not yet overdue or (B) for amounts that
are overdue and that are being contested in good faith by
appropriate proceedings, so long as such reserves or other
appropriate provisions, if any, as shall be required by GAAP
shall have been made for any such contested amounts;
(v) Liens incurred in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, trade contracts, performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money or other
Indebtedness);
(vi) easements, rights-of-way, restrictions,
encroachments, and other minor defects or irregularities in
title, in each case which do not and will not interfere in any
material respect with the ordinary conduct of the business of
Payor;
(vii) any interest or title of a lessor or sublessor under
any lease of real estate;
(viii) Liens solely on any cash earnest money deposits made
by Payor in connection with any letter of intent or purchase
agreement permitted hereunder;
12
(ix) purported Liens evidenced by the filing of
precautionary UCC financing statements relating solely to
operating leases for personal property entered into in the
ordinary course of business;
(x) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in
connection with the importation of goods;
(xi) any zoning or similar law or right reserved to or
vested in any governmental office or agency to control or
regulate the use of any real property;
(xii) licenses of patents, trademarks and other
intellectual property rights granted by Payor in the ordinary
course of business and not interfering in any respect with the
ordinary conduct of the business of Payor;
(xiii) Liens securing Indebtedness permitted pursuant to
3.2(c)(xi); provided, any such Lien shall encumber only the asset
acquired with the proceeds of such Indebtedness and proceeds
thereof; and;
(xiv) existing Liens on assets acquired pursuant to
acquisitions (so long as such Liens were not created in
anticipation of such acquisition); and
(xv) any land use restrictions consistent with the terms
of Section 9.8(g) of the Purchase Agreement.
(e) except as set forth in this Section 3.2(e), enter into or
suffer to exist any contract, agreement, arrangement or transaction
with any Affiliate or permit
13
its Significant Subsidiaries to enter into or suffer to exist any
contract, agreement, arrangement or transaction with any other
Affiliate other than those contracts, agreements, arrangements or
transactions on terms that are no less favorable to Payor or any
Significant Subsidiary of Payor than those that might be obtained from
a Person who is not an Affiliate of Payor except:
(i) any transaction between Payor and any Subsidiary of
Payor or any Subsidiary of Payor and any other Subsidiary of
Payor;
(ii) reasonable and customary fees paid to members of the
board of directors (or similar governing body) of Payor;
(iii) compensation arrangements for officers and other
employees of Payor entered into in the ordinary course of
business;
(iv) annual management and oversight fees paid to Sponsor
and its Affiliates in reliance on this clause (iv) in amounts not
in excess of $5,000,000 per Fiscal Year and expense
reimbursements paid to Sponsor and its Affiliates; and
(f) except as permitted under this Section 3.2(f), engage in any
business or permit Buyer to engage in any business other than the
businesses engaged in by Payor or Buyer, similar or related businesses
and reasonable extensions thereof.
4. Certain Definitions.
-------------------
"Acquisition" means any acquisition by Payor or its Subsidiaries,
-----------
whether by purchase, merger or otherwise, of all or substantially all of the
assets of or the Capital Stock of, or a business line or unit or a division of,
any Person.
14
"Affiliate" means, as applied to any Person, any other Person directly
---------
or indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as applied to any Person, means the possession, directly or
indirectly, of the power (i) to vote 15% or more of the Securities having
ordinary voting power for the election of directors of such Person or (ii) to
direct or cause the direction of the management and policies of that Person,
whether through the ownership of voting securities or by contract or otherwise.
"Agent" means Lehman Commercial Paper, Inc., as administrative agent
-----
for the lenders under the Credit Agreement, and its successors and assigns.
"Bank Debt" means all obligations of Payor and its Subsidiaries
---------
(including without limitation contingent obligations, interest rate protection
incurred to satisfy the requirements of the Credit Agreement and fees and
expenses payable thereunder or pursuant thereto) (i) arising under the Credit
Agreement or (ii) with respect to Refinancing Debt.
"Bank Debt Documents" means the Credit Agreement and any other
-------------------
agreement, indenture, mortgage, guaranty, pledge, security agreement or
instrument evidencing or securing Bank Debt or pursuant to which Bank Debt is
incurred, in each case as such documents may be amended, modified, supplemented
or waived from time to time in accordance with the terms thereof.
"Bankruptcy Law" means Title 11, United States Code, or any similar
--------------
federal, state or foreign law for the relief of debtors or any arrangement,
reorganization, assignment for the benefit of creditors or any other marshalling
of the assets and liabilities of Payor.
15
"Business Day" means each day other than Saturdays, Sundays and days
------------
when commercial banks are authorized or required by law to be closed for
business in New York, New York.
"Capital Stock" means any and all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a corporation),
including, without limitation, partnership interests and membership interests,
and any and all warrants, rights or options to purchase or other arrangements or
rights to acquire any of the foregoing.
"Cash" means money, currency or a credit balance in any demand or
----
deposit account.
"Change of Control" means, at any time, (i) (a) prior to consummation
-----------------
of an initial public offering by Payor, Sponsor and its Affiliates and other
Permitted Investors shall cease to beneficially own and control in excess of 50%
on a fully diluted basis of the economic and voting interests in the Capital
Stock of Payor (b) after consummation of any initial public offering, Sponsor,
its Affiliates and other Permitted Investors shall cease to own and control at
least 25% of the Capital Stock of Payor or such higher percentage that exceeds
the highest percentage owned by any Person or "group" (within the meaning of
Rules 13d-3 and 13d-5 under the Exchange Act) other than Sponsor and its
Affiliate and the other Permitted Investors, or (ii) Payor shall cease to
beneficially own and control 100% on a fully diluted basis of the Capital Stock
of Buyer.
"Consolidated Adjusted EBITDA" means, for any period, the sum, for
----------------------------
Payor and its Subsidiaries (determined on a consolidated basis without
duplication in accordance with GAAP), of the following: (a) net operating income
(calculated before taxes, Consolidated
16
Interest Expense, extraordinary and unusual items and income or loss
attributable to equity in Affiliates) for such period plus (b) depreciation and
amortization, and all other non-cash charges, in each case for such period and
to the extent deducted in computing net operating income for such period plus
(c) the amount by which the amount of deferred learning costs, tooling costs and
similar assets were reduced from the first day of such period to the last day of
such period, and minus (d) the amount by which the amount of deferred learning
costs, tooling costs and similar assets were increased from the first day of
such period to the last day of such period; provided that the foregoing shall be
subject to the adjustments described in Schedule 1.
"Consolidated Cash Interest Expense" means, for any period,
----------------------------------
Consolidated Interest Expense for such period, excluding any amount not paid or
received in Cash during such period.
"Consolidated Interest Expense" means, for any period, total interest
-----------------------------
expense (including that portion attributable to capital leases in accordance
with GAAP and capitalized interest) of Payor and its Subsidiaries on a
consolidated basis with respect to all outstanding Indebtedness of Payor and its
Subsidiaries, including all commissions, discounts and other fees and charges
owed with respect to letters of credit and plus the net amount paid (or minus
the net amount received) under Interest Rate Agreements (whether or not actually
paid or received during such period), but excluding, however, any fees payable
to agents under the Credit Agreement on or before the date hereof and minus the
amount of consolidated interest income, if any, for such period.
"Consolidated Total Debt" means as at any date of determination, the
-----------------------
aggregate stated balance sheet amount of all Indebtedness of Payor and its
Subsidiaries, other than the Notes, determined on a consolidated basis in
accordance with GAAP.
17
"Credit Agreement" means the Credit Agreement among the Payor, Lehman
----------------
Commercial Paper, Inc., as administrative agent and as collateral agent and the
other parties thereto, together with the related documents thereto (including
without limitation any guarantee agreements and security documents), in each
case as such agreement or document may be amended, modified, supplemented or
waived from time to time, including without limitation any agreement or document
extending the maturity of, refinancing, replacing or otherwise restructuring all
or any part of the Indebtedness under such agreement or document or any
replacement or successor agreement or document and whether by the same or any
other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency
------------------
swap agreement, futures contract, option contract, synthetic cap or other
similar agreement or arrangement, each of which is for the purpose of hedging
the foreign currency risk associated with Payors' and its Subsidiaries'
operations and not for speculative purposes.
"Custodian" means any receiver, trustee, assignee, liquidator,
---------
custodian or similar official under any Bankruptcy Law.
"Event of Default" means any of the occurrences specified under
----------------
Sections 2(a) through 2(e) of this Note.
"Fiscal Quarter" means a fiscal quarter of any Fiscal Year.
--------------
"Fiscal Year" means the fiscal year of Payor and its Subsidiaries.
-----------
"Indebtedness" means, to the extent the following would be reflected
------------
on a consolidated balance sheet of Payor and its Subsidiaries prepared in
accordance with generally accepted accounting principles, the principal amount
of all indebtedness of Payor and its Subsidiaries with respect to (i) borrowed
money, evidenced by debt securities, debentures,
18
acceptances, notes or other similar instruments, (ii) obligations under capital
leases, (iii) reimbursement obligations for letters of credit and financial
guarantees (without duplication), (other than ordinary course of business
contingent reimbursement obligations) or (iv) the deferred purchase price of
property or services, (except for accounts payable and accrued expenses and
receipt of progress and advance payments related to such purchase price, in each
case arising in the ordinary course of business).
"Interest Coverage Ratio" means the ratio as of the last day of any
-----------------------
Fiscal Quarter of (i) Consolidated Adjusted EBITDA for the four- Fiscal Quarter
Period then ended to (ii) Consolidated Cash Interest Expense for such four-
Fiscal Quarter Period.
"Interest Rate Agreements" means any interest rate swap agreement,
------------------------
interest rate cap agreement, interest rate collar agreement, interest rate
hedging agreement or other similar agreement or arrangement, each of which is
for the purpose of hedging the interest rate exposure associated with Payors'
and its Subsidiaries' operations and not for speculative purposes.
"Leverage Ratio" means the ratio as of the last day of any Fiscal
--------------
Quarter of (i) Consolidated Total Debt to (ii) Consolidated Adjusted EBITDA for
the four-Fiscal Quarter period ending on or immediately prior to such date.
"Lien" means any lien, mortgage, deed of trust, pledge, assignment,
----
security interest, charge or encumbrance of any kind (including any agreement to
give any of the foregoing, any conditional sale or other title retention
agreement, and any lease in the nature thereof) and any option, trust or other
preferential arrangement having the practical effect of any of the foregoing.
"Material Subsidiaries" means a Subsidiary or Subsidiaries of Payor
---------------------
that individually or in the aggregate (a) own 25% or more of the total assets of
Payor and its
19
Subsidiaries on a consolidated basis or (b) earn 25% or more of the net revenues
of the Payor and its Subsidiaries on a consolidated basis during Payor's latest
completed fiscal year.
"Net Proceeds" means an amount equal to (i) Cash payments (including
------------
any Cash received by way of deferred payment pursuant to, or by monetization of,
a note receivable or otherwise, but only as and when so received) received by
Payor from a sale of assets, minus (ii) any bona fide fees, costs and expenses
incurred in connection with such sale including (a) taxes payable as a result of
such sale, (b) payment of the outstanding principal amount of, premium or
penalty, if any, and interest on any indebtedness that is secured by a Lien on
the assets in question and that is required to be repaid under the terms thereof
as a result of such sale of assets and (c) a reasonable reserve for any
indemnification payments (fixed or contingent) attributable to seller's
indemnities and representations and warranties to purchaser in respect of such
sale of assets undertaken by Payor or any of its Subsidiaries in connection with
such sale of assets.
"Permitted Investors" means management investors and other co-
-------------------
investors with or Affiliates of Sponsor.
"Person" means any individual, corporation, partnership, joint
------
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PIK Notes" means the PIK Notes issued pursuant to Section 1.1 hereof
---------
in lieu of cash interest and containing terms substantially identical to this
Note.
"Refinancing Debt" means any indebtedness incurred to repay, refinance
----------------
or otherwise replace indebtedness or obligations in whole or in part (including,
without limitation, commitments) under the Credit Agreement or any such
Refinancing Debt.
20
"Securities" means any stock, shares, partnership interests, voting
----------
trust certificates, certificates of interest or participation in any profit-
sharing agreement or arrangement (other than any such agreement or arrangement
entered into with a customer or supplier in the ordinary course of business),
options, warrants, bonds, debentures, notes, or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in temporary or interim certificates for the purchase
or acquisition of, or any right to subscribe to, purchase or acquire, any of the
foregoing.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Seller Note" means each of this Note and each other subordinated
-----------
promissory note made by Payor pursuant to the Purchase Agreement, including
without limitation, in each case, any PIK Notes issued pursuant to the terms
thereof.
"Significant Subsidiary" means a Subsidiary of Payor (a) owning 10% or
----------------------
more of the total assets of Payor and its Subsidiaries on a consolidated basis
or (b) which earned 10% or more of the net revenues of the Payor and its
Subsidiaries on a consolidated basis during Payor's latest completed fiscal
year, provided, however, that if less than 75% of the total assets of Payor and
its Subsidiaries on a consolidated basis are owned by Payor or its Significant
Subsidiaries, then the definition of Significant Subsidiary shall include one or
more additional entities, to be designated by the board of directors of Payor,
such that at least 75% of the total assets of Payor and its Subsidiaries on a
consolidated basis will be held by Payor or its Significant Subsidiaries as of
the end of each Fiscal Quarter.
"Sponsor" means TC Group, L.L.C., d/b/a The Carlyle Group.
-------
21
"Subsidiary" means, with respect to any Person, any corporation or
----------
other entity, whether such corporation or entity now exists or shall hereafter
be created, of which a majority of the Capital Stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
5. Miscellaneous
-------------
5.1 Section Headings. The section headings contained in this Note are
----------------
for reference purposes only and shall not affect the meaning or interpretation
of this Note.
5.2 Amendment and Waiver. Subject to Section 6.10 hereof, no
--------------------
provision of this Note may be amended or waived unless Payor shall have obtained
the written agreement of Payee. No failure or delay in exercising any right,
power or privilege hereunder shall imply or otherwise operate as a waiver of any
rights of Payee, nor shall any single or partial exercise thereof preclude any
other or future exercise thereof or the exercise of any other right, power or
privilege.
5.3 Successors, Assigns and Transferors. This Note shall be freely
-----------------------------------
assignable and transferable by Payee except that this Note may not be assigned
or transferred by Payee to (x) any competitor, customer or supplier of Payor or
its Subsidiaries or any Subsidiaries of the foregoing or (y) to any other Person
if such assignment or transfer would cause any interest payments due under this
Note to become non-deductible as an expense for any tax purposes provided,
--------
however, after (a) the occurrence and continuance of an Event of Default under
- -------
the Bank Debt Documents and (b) receipt by Payor of notice of such Event of
Default from Payee or Agent or an authorized representative of the holders of
the Bank Debt, any assignment or transfer of this Note shall require the consent
of the Agent. Payor may not assign its obligations under this Note without the
prior written consent of Payee except in connection with a transaction
22
permitted under Section 3.2(b) hereof. Subject to the foregoing, the obligations
of Payor and Payee under this Note shall be binding upon, and inure to the
benefit of, and be enforceable by, Payor and Payee, and their respective
successors and permitted assigns, whether or not so expressed.
5.4 Governing Law. This Note shall be governed by, and construed in
-------------
accordance with, the laws of the State of New York without giving effect to any
conflicts of laws principles thereof that would otherwise require the
application of the law of any other jurisdiction.
5.5 Lost, Stolen, Destroyed or Mutilated Note. Upon receipt of
-----------------------------------------
evidence reasonably satisfactory to Payor of the loss, theft, destruction or
mutilation of this Note and of indemnity arrangements reasonably satisfactory to
Payor from or on behalf of the holder of this Note, and upon surrender or
cancellation of this Note if mutilated, Payor shall make and deliver a new note
of like tenor in lieu of such lost, stolen, destroyed or mutilated Note, at
Payee's expense.
5.6 Waiver of Presentment, Etc. Except as otherwise provided herein,
--------------------------
presentment, demand, protest, notice of dishonor and all other notices are
hereby expressly waived by Payor.
5.7 Usury. Nothing contained in this Note shall be deemed to
-----
establish or require the payment of a rate of interest in excess of the maximum
rate legally enforceable. If the rate of interest called for under this Note at
any time exceeds the maximum rate legally enforceable, the rate of interest
required to be paid hereunder shall be automatically reduced to the maximum rate
legally enforceable. If such interest rate is so reduced and thereafter the
maximum rate legally enforceable is increased, the rate of interest required to
be paid hereunder
23
shall be automatically increased to the lesser of the maximum rate legally
enforceable and the rate otherwise provided for in this Note.
5.8 Notices. Any notice, request, instruction or other document to be
-------
given hereunder by either party to the other shall be in writing and shall be
deemed given when received and shall be (i) delivered personally or (ii) mailed
by certified mail, postage prepaid, return receipt requested or (iii) delivered
by Federal Express or a similar overnight courier or (iv) sent via facsimile
transmission to the fax number given below, as follows:
If to Payor, addressed to:
-------------------------
VAC Holdings II, Inc.
9314 West Jefferson Avenue
Dallas, TX 75211
Attention: William McMillan
Fax Number: (972) 946-5683
With a copy to:
--------------
The Carlyle Group
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004
Attention: Allan Holt
Fax Number: (202) 347-9250
and
---
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, DC 20004-2505
Attention: James Ritter
Fax Number: 202-637-2201
If to Payee, addressed to:
-------------------------
Office of General Counsel
Northrop Grumman Corporation
1840 Century Park East
Los Angeles, California 90067
Attention: Burks Terry
Fax Number: (310) 556-4556
24
With a copy to:
--------------
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California
Attention: Andrew E. Bogen, Esq.
Fax Number: (213) 229-7520
or to such other place and with such other copies as either party may designate
as to itself by written notice to the other party.
In the event that any notice under this Note is required to be
made on or as of a day which is not a Business Day, then such notice shall not
be required to be made until the first day thereafter which is a Business Day.
5.9 Representations and Warranties of Payor. Payor hereby
---------------------------------------
represents and warrants to Payee that: (a) Payor is duly incorporated, validly
existing and in good standing under the laws of the State of Delaware; (b) Payor
has duly authorized, executed and delivered this Note; and (c) this Note
constitutes a legally valid and binding obligation of Payor, enforceable against
Payor in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to or affecting the rights or remedies of creditors and the
effect of general principles of equity, whether enforcement is considered in a
proceeding in equity or at law, and the discretion of the court before which any
proceeding therefor may be brought.
25
IN WITNESS WHEREOF, Payor has executed and delivered this Note as
of the date hereinabove first written.
VAC HOLDINGS II, INC.
By: /s/
----------------------------
Name: William McMillan
Title:
26
Acknowledgment
--------------
Northrop Grumman Corporation, Payee under the attached 11 1/2% Seller Note,
dated as of July 24, 2000 (the "Note") hereby acknowledges the provisions of
Section 5.3 of the Note and agrees to be bound by the provisions thereof.
/s/
-------------------------------------------
By: Albert F. Myers
------------------------------------
Title: Corporate Vice President & Treasurer
------------------------------------
27
SCHEDULE 1
----------
Certain Calculations
With respect to any calculation of Consolidated Adjusted EBITDA required to be
made prior to the completion of four Fiscal Quarters following the date hereof,
such calculation for the relevant period shall equal the product of (A) the
respective measurement of Consolidated Adjusted EBITDA above for the period from
the date hereof to the date of measurement multiplied by (B) a fraction, the
-------------
numerator of which is 365 and the denominator of which is the number of days
during the period from the date hereof to the date of measurement.
NORTHROP GRUMMAN CORPORATION
EXHIBIT 15
Letter from Independent Accountants Regarding Unaudited Interim
Financial Information
August 8, 2000
Northrop Grumman Corporation
Los Angeles, California
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of Northrop Grumman
Corporation and subsidiaries for the periods ended March 31, 2000
and 1999, as indicated in our report dated April 24, 2000;
because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included
in your Current Report on Form 8-K dated August 8, 2000, is
incorporated by reference in Registration Statement
Nos. 33-59815, 333-59853 and 333-680030 on Form S-8 and
Registration Statement Nos. 333-78251 and 333-85633 on Form S-3
and Registration Statement No. 333-40862 on Form S-4.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered a
part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Los Angeles, California
August 8, 2000
NORTHROP GRUMMAN CORPORATION
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements Nos. 333-59815 and 33-59853 and 333-68003 of Northrop
Grumman Corporation on Form S-8 and Registration Statements Nos.
333-78251 and 333-85633 of Northrop Grumman Corporation on Form S-
3 and Registration Statement No. 333-40862 of Northrop Grumman
Corporation on Form S-4 of our report dated January 26, 2000,
except for discontinued operations footnote, as to which the date
is July 24, 2000, appearing in this Report on Form 8-K of
Northrop Grumman Corporation dated August 8, 2000.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 8, 2000
