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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Northrop Grumman Corporation
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[LOGO OF NORTHROP GRUMMAN]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
AND PROXY STATEMENT
NOTICE
The Annual Meeting of Stockholders of Northrop Grumman Corporation
("Northrop Grumman") will be held on Wednesday, May 16, 2001 at 10:00 a.m. at
the Fairmont Miramar Hotel, 101 Wilshire Boulevard, Santa Monica, California
90401.
Stockholders at the close of business on April 9, 2001 are entitled to vote
at the Annual Meeting. The following items are on the agenda:
(1) Election of three Class I directors, each for a three year term
expiring in 2004;
(2) Proposal to ratify the appointment of Deloitte & Touche LLP as
Northrop Grumman's independent auditors for fiscal year ending December 31,
2001;
(3) Proposal to approve the 2001 Long-Term Incentive Stock Plan;
(4) Proposal to approve the issuance of shares of Common Stock, par
value $1.00 per share, upon conversion of the Series B Preferred Stock to
be issued in the acquisition of Litton Industries, Inc.;
(5) Proposal to amend Northrop Grumman's Certificate of Incorporation to
increase the number of authorized shares of common stock;
(6) Stockholder proposal regarding offset commitments;
(7) Stockholder proposal regarding super majority vote;
(8) Stockholder proposal regarding classified board;
(9) Stockholder proposal regarding Shareholder Rights Plan;
(10) Other business as may properly come before the Annual Meeting or any
adjournments thereof.
In connection with the acquisition of Litton Industries, Inc. by Northrop
Grumman's wholly owned subsidiary, NNG, Inc., Northrop Grumman has agreed to a
reorganization in which NNG will change its name to Northrop Grumman
Corporation and become the holding company for both Northrop Grumman and
Litton. At this time, the timing for completion of the acquisition of a
majority of Litton's outstanding stock and the Northrop Grumman reorganization
is not known. If the transactions are completed prior to the date of the 2001
Annual Meeting of Stockholders, the Annual Meeting will be the Annual Meeting
of Stockholders of the new holding company. Consequently, this notice of
Annual Meeting will serve as notice of the Annual Meeting of Stockholders of
either Northrop Grumman Corporation, as it exists on the date hereof, or of
NNG (as the new holding company), as the case may be.
If the Northrop Grumman reorganization is completed prior to the Annual
Meeting, existing Northrop Grumman (as the sole stockholder of NNG on the
record date) will vote all of the outstanding shares of NNG "for," "against"
or "abstain" with respect to each of the proposals set forth herein in the
exact proportions of the votes indicated by stockholders in their
proxies/voting instructions with respect to the Annual Meeting, or provided in
person at the meeting.
By order of the Board of Directors,
/s/ John H. Mullan
John H. Mullan
Corporate Vice President and
Secretary
1840 Century Park East
Los Angeles, California 90067
April 16, 2001
IMPORTANT
To assure your representation at the Annual Meeting, please sign, date and
return the enclosed proxy card for which a return envelope is provided. No
postage is required if mailed in the United States.
You may also vote by telephone or over the Internet. For instructions on
electronic voting please see page 2 of this Proxy Statement or the proxy
card.
PROXY STATEMENT
GENERAL INFORMATION
This proxy statement is issued in connection with solicitation of the
enclosed proxy by the Board of Directors of Northrop Grumman Corporation
("Northrop Grumman") for use at Northrop Grumman's 2001 Annual Meeting of
Stockholders (the "Annual Meeting"). Northrop Grumman's principal office is
located at 1840 Century Park East, Los Angeles, California, 90067. This proxy
material will be sent to stockholders beginning approximately April 16, 2001.
As previously announced, Northrop Grumman has entered into an Amended and
Restated Agreement and Plan of Merger dated January 23, 2001, pursuant to
which a wholly owned Northrop Grumman subsidiary, NNG, Inc. has offered to
acquire all of the outstanding stock of Litton in exchange for cash and stock.
Immediately prior to the acquisition of a majority of the outstanding stock of
Litton, a wholly-owned subsidiary of NNG will merge with and into Northrop
Grumman, in order that Northrop Grumman will become a wholly-owned subsidiary
of NNG. That merger is referred to as the "Northrop reorganization." In the
Northrop reorganization, all of the outstanding shares of capital stock of
Northrop Grumman will become the same number of shares of the same class of
capital stock of NNG. Outstanding options to acquire common stock of Northrop
Grumman will become options to acquire common stock of NNG. The certificate of
incorporation and bylaws of NNG will be identical, in all material respects,
to the certificate of incorporation and bylaws of Northrop Grumman, and NNG
will adopt a stockholder rights plan which is identical, in all material
respects, to the stockholder rights plan of Northrop Grumman. The directors
and officers of Northrop Grumman will constitute the board of directors and
officers of NNG. Upon completion of the Northrop reorganization, the name of
NNG will be changed to "Northrop Grumman Corporation" and the name of the
present Northrop Grumman Corporation will be changed to "Northrop Grumman
Systems Corporation." The common stock of Northrop Grumman following the
Northrop reorganization (i.e., the NNG common stock) will be listed for
trading on the NYSE, and certificates representing shares of Northrop Grumman
common stock will continue to represent shares of common stock of Northrop
Grumman Corporation. No vote of the stockholders of Northrop Grumman is
required for the Northrop reorganization.
At this time, the timing for completion of the acquisition of a majority of
Litton's outstanding stock and the Northrop Grumman reorganization is not
known. If the transactions are completed prior to the date of the 2001 Annual
Meeting of Stockholders, the Annual Meeting will be the Annual Meeting of
Stockholders of the new holding company. Consequently, this proxy statement
will serve as the proxy statement of either Northrop Grumman Corporation, as
it exists on the date hereof, or of NNG (as the new holding company), as the
case may be. If the Northrop Grumman reorganization is completed prior to the
Annual Meeting, existing Northrop Grumman (as the sole stockholder of NNG on
the record date) will vote all of the outstanding shares of NNG "for,"
"against" or "abstain" with respect to each of the proposals set forth herein
in the exact proportions of the votes indicated by stockholders in their
proxies/voting instructions with respect to the Annual Meeting, or provided in
person at the meeting.
OUTSTANDING SECURITIES
On April 9, 2001 there were shares of Northrop Grumman's common stock,
par value $1.00 per share ("Common Stock"), outstanding. Holders of record of
Common Stock at the close of business on April 9, 2001 are entitled to vote at
the Annual Meeting. Each share of Common Stock is entitled to one vote on each
proposal.
VOTING AT THE MEETING OR BY PROXY
Shares represented by a properly executed proxy/voting instruction in the
accompanying form will be voted at the meeting in accordance with the
stockholder's instructions. If no instructions are given, the shares will be
voted according to the Board of Directors' recommendations. Therefore, if no
instructions are given, the persons named on the card will vote FOR Proposal
One to elect the three director nominees listed under "Election of Directors",
FOR Proposal Two to ratify the appointment of Deloitte & Touche LLP as
auditors of Northrop Grumman for the year
1
ending December 31, 2001, FOR Proposal Three to approve the 2001 Long-Term
Incentive Stock Plan, FOR Proposal Four to approve the issuance of shares of
Common Stock upon the conversion of the Preferred Stock, FOR Proposal Five to
amend Northrop Grumman's Certificate of Incorporation to increase the number
of authorized shares of Common Stock, AGAINST Proposal Six, the stockholder
proposal regarding offset commitments, AGAINST Proposal Seven, the stockholder
proposal regarding super majority vote, AGAINST Proposal Eight, the
stockholder proposal regarding classified board and AGAINST Proposal Nine, the
stockholder proposal regarding the Shareholder Rights Plan. For those shares
held in Northrop Grumman's employee stock ownership plans, if no instructions
are provided, the applicable trustee will vote the respective plan shares
according to the provisions of the applicable plan documents.
A stockholder who executes a proxy/voting instruction may revoke it at any
time before its exercise by delivering a written notice of revocation to the
Corporate Secretary or by signing and delivering another proxy that is dated
later. A stockholder attending the meeting in person may revoke the
proxy/voting instruction by giving notice of revocation to an inspector of
election at the meeting or voting at the meeting. If any other matters are
properly brought before the meeting, the enclosed proxy/voting instruction
card gives discretionary authority to the persons named on the card to vote
the shares in their best judgment.
With respect to the election of directors, stockholders may vote in favor of
all nominees, or withhold their votes as to all nominees or specific nominees.
There is no box to "abstain", but checking the box on the enclosed
proxy/voting instruction card that withholds authority to vote for a nominee
is the equivalent of abstaining. The three nominees receiving the greatest
number of votes cast for the election of directors by shares entitled to vote
and present in person or by proxy at the Annual Meeting will be elected
directors. With respect to any proposal other than the election of directors,
stockholders may vote in favor of the proposal, or against the proposal or
abstain from voting.
Brokers who hold shares of Common Stock for the accounts of their clients
may vote such shares either as directed by their clients or in their own
discretion if permitted by the stock exchange or other organization of which
they are members. Members of the New York Stock Exchange are permitted to vote
their clients' proxies in their own discretion as to the election of directors
if the clients have not furnished voting instructions within ten days of the
meeting. Certain proposals other than the election of directors are "non-
discretionary" and brokers who have received no instructions from their
clients do not have discretion to vote on those items. When a broker votes a
client's shares on some but not all of the proposals at a meeting, the missing
votes are referred to as "broker non-votes".
Broker non-votes will have no effect on the election of directors (Proposal
One) or the ratification of the selection of Deloitte & Touche as Northrop
Grumman's independent accountants (Proposal Two). Broker non-votes will have
no effect on the proposals concerning approval of the 2001 Long-Term Incentive
Stock Plan (Proposal Three) and the authorization of issuance of common stock
upon conversion of Series B preferred stock (Proposal Four), provided that
holders of over 50% of the outstanding shares of common stock cast votes on
each of these two proposals. A broker non-vote or an abstention will have the
same effect as a vote against the proposed amendment to the Certificate of
Incorporation to increase the number of authorized shares of common stock
(Proposal Five). Broker non-votes will have no effect on the stockholder
proposals (Proposals Six, Seven, Eight and Nine).
The presence in person or by proxy of stockholders entitled to cast at least
a majority of the votes that all stockholders are entitled to cast shall
constitute a quorum at the annual meeting. Both abstentions and broker non-
votes will be counted for purposes of determining the presence of a quorum.
VOTING BY TELEPHONE OR THE INTERNET
Registered stockholders and participants in Northrop Grumman's employee
stock ownership plans may vote their shares over the telephone or on the
Internet. The law of Delaware, under which Northrop Grumman is incorporated,
specifically permits electronically transmitted proxies, provided that each
such proxy contains or is submitted with information from which the inspectors
of election can determine that such proxy was authorized by the shareholder.
The voting procedures available to registered shareholders for the Annual
Meeting are
2
designed to authenticate each shareholder by use of a Control Number, to allow
shareholders to vote their shares, and to confirm that their instructions have
been properly recorded.
Registered shareholders and plan participants may go to
http://www.eproxyvote.com/noc to vote on the Internet. They will be required
to provide the Control Numbers contained on their proxy cards. After providing
the correct Control Number, the voter will be asked to complete an electronic
proxy card. The votes will be generated on the computer screen and the voter
will be prompted to submit or revise them as desired. Any registered
shareholder or plan participant using a touch-tone telephone may also vote by
calling 1-877-779-8683 (toll-free) and following the recorded instructions.
Most beneficial owners whose stock is held in street name receive voting
instruction forms from their banks, brokers or other agents, rather than
Northrop Grumman's proxy/voting instruction card. Beneficial owners may also
be able to vote by telephone or the Internet. They should follow the
instructions on the form they receive from their bank, broker, or other agent.
The method of voting used will not limit a stockholder's right to attend the
Annual Meeting.
VOTING SECURITIES
On December 31, 2000, there were 72,058,736 shares of Northrop Grumman's
Common Stock outstanding. The following entities beneficially owned, to
Northrop Grumman's knowledge, more than five percent of the outstanding Common
Stock:
Amount and Nature
of Beneficial Percent
Name and Address of Beneficial Owner Ownership of Class
------------------------------------ ----------------- --------
State Street Bank and Trust Company(a).......... 5,541,069 shares 7.69%
225 Franklin St., Boston, MA 02110
Wellington Management Company, LLP(b)........... 9,015,500 shares 12.51%
75 State Street, Boston, MA 02109
U.S. Trust Company, N.A.(c)(d).................. 9,633,326 shares 13.37%
555 So. Flower St., Los Angeles, CA 90071-2429
--------
(a) This information was provided by State Street Bank and Trust Company
("State Street") in a Schedule 13G filed with the SEC on February 12,
2001. According to State Street, as of December 31, 2000, State Street had
sole voting power over 1,263,552 shares, shared voting power over
4,238,561 shares, sole dispositive power over 5,538,758 and shared
dispositive power over 2,311 shares. This total includes 4,078,898 shares
held for the account of employee participants in the Employee Stock
Ownership Plan portion of the Northrop Grumman Savings and Investment Plan
for which State Street acts as a trustee.
(b) This information was provided by Wellington Management Company, LLP
("Wellington") in a Schedule G filed with the SEC on February 14, 2001.
According to Wellington, as of December 31, 2000, Wellington had shared
voting power over 5,838,900 and shared dispositive power over 8,991,500.
(c) This information was provided by U.S. Trust Company, N.A. ("U.S. Trust
Company") in a Schedule 13G filed with the SEC on January 18, 2001. U.S.
Trust Company is an Investment Manager (the "Investment Manager") for the
Northrop Grumman Pension Plan and the pension plans for certain divisions
of Northrop Grumman (the "Pension Plans"); Northrop Grumman has
established a Master Trust with State Street Bank and Trust Company as
Trustee ("Trustee"). Under the Master Trust, the Investment Manager has
responsibility for the management and control of the Northrop Grumman
shares held in the Master Trust as assets of the Pension Plans. The
Investment Manager has sole dispositive and voting power over
9,633,326 shares held in the Master Trust between Northrop Grumman
Corporation and the Trustee.
(d) These shares are held for the account of (but not beneficially owned by)
the Trustee. The Investment Manager has voting power over these shares,
except in the event of a contested election of directors or in connection
with a tender offer. In such cases, the shares are voted in accordance
with instructions received from eligible participants in the Pension Plans
and undirected shares are voted in the same proportion as shares for which
instructions are received.
3
Stock Ownership of Officers and Directors
The following table shows beneficial ownership (as defined by applicable
rules for proxy statement reporting purposes) of the Common Stock as of April
9, 2001 (the Annual Meeting record date) by each director and nominee, by the
Chief Executive Officer and the other four most highly compensated executive
officers (collectively, the "Named Executive Officers") and all directors and
executive officers as a group. Each individual owned less than 1% of the
outstanding Common Stock. Unless otherwise indicated, each individual has sole
investment power and sole voting power with respect to the shares owned by
such person. No family relationship exists between any of the directors or
executive officers of Northrop Grumman.
Number of Percentage of
Shares Outstanding Shares
Beneficially Owned (6) Beneficially Owned
---------------------- ------------------
Directors
Jack R. Borsting.................. 8,892(1) *
John T. Chain, Jr................. 8,974 *
Lewis W. Coleman.................. 0 *
Vic Fazio......................... 1,593 *
Phillip Frost..................... 18,664 *
Charles R. Larson................. 59 *
Robert A. Lutz.................... 8,034 *
Aulana L. Peters.................. 13,349 *
John E. Robson.................... 14,304 *
Richard M. Rosenberg.............. 11,047 *
John Brooks Slaughter............. 7,974 *
Richard J. Stegemeier............. 10,353(2) *
Named Executive Officers
Kent Kresa (3).................... 651,334(4) *
Richard B. Waugh, Jr.............. 68,544(5) *
Herbert W. Anderson............... 29,672 *
James G. Roche.................... 61,149 *
Ralph D. Crosby, Jr. ............. 56,802 *
Directors and Executive Officers as
a Group (23 persons)............... 1,101,866 [ ]
--------
* The percentage of shares of Common Stock beneficially owned does not exceed
one percent of the outstanding shares of Common Stock.
(1) Includes 1,200 shares held in the Borsting Family Trust of which Dr.
Borsting is trustee.
(2) Includes 1,000 shares held in the Richard J. Stegemeier Family Trust of
which Mr. Stegemeier and his wife are trustees.
(3) Mr. Kresa also serves as Chairman of the Board.
(4) Includes 461,925 shares held by the Kresa Family Trust of which Mr. Kresa
is trustee.
(5) Includes 46,392 shares held by the Waugh Family Trust of which Mr. Waugh
and his wife are trustees.
(6) Includes options exercisable within 60 days and shares or share
equivalents beneficially owned under one or more of Northrop Grumman's
compensation or benefit plans, respectively, as follows: J.R. Borsting
6,500 and 0 shares; J.T. Chain 7,000 and 0 shares; L.W. Coleman 0 and 0
shares; V. Fazio 1,500 and 0 shares; P. Frost 6,500 and 1,203 shares;
C.R. Larson 0 and 0 shares; R.A. Lutz 6,000 and 564 shares; A.L. Peters
7,000 and 2,777 shares; J.E. Robson 7,000 and 2,577 shares; R.M.
Rosenberg 7,000 and 0 shares; J.B. Slaughter 7,000 and 0 shares;
R.J. Stegemeier 7,000 and 0 shares; K. Kresa 184,123 and 5,286 shares;
R.B. Waugh 18,750 and 3,402 shares; H.W. Anderson 27,000 and 1,474
shares; J.G. Roche 41,250 and 606 shares; and R.D. Crosby 31,250 and
2,885 shares.
4
PROPOSAL ONE: ELECTION OF DIRECTORS
Northrop Grumman's Certificate of Incorporation provides for a classified
Board of Directors. Three directors in Class I will be elected at the 2001
Annual Meeting to hold office for three years until the 2004 Annual Meeting of
Stockholders or until their successors have been elected and qualified. Unless
instructed otherwise, the persons named in the accompanying proxy will vote
the shares represented by such proxy for the election of the three Class I
Director Nominees listed in the table below. Each of the three Class I
Director Nominees has consented to serve, and the Board does not know of any
reason why any of them would be unable to serve. If a nominee becomes
unavailable or unable to serve before the Annual Meeting (for example, due to
serious illness), the Board can either reduce its size or designate a
substitute nominee. If any nominee becomes unavailable for election to the
Board of Directors, an event that is not anticipated, the persons named as
proxies have full discretion and authority to vote or refrain from voting for
any other nominee in accordance with their judgment.
The following information, furnished with respect to each of the three
nominees for election as a Class I director, and each of the four Class II and
three Class III directors whose terms continue after the Annual Meeting, is
obtained from Northrop Grumman's records or from information furnished
directly by the individual to Northrop Grumman. All the nominees are presently
serving on the Board of Directors. Members of the Board of Directors are
generally ineligible to stand for election if they will have attained age 70
by the date of Northrop Grumman's Annual Meeting of Stockholders at which such
election is held. Jack R. Borsting, Richard M. Rosenberg and Richard J.
Stegemeier, all Class I directors, are ineligible to stand for election by
reason of this policy.
All of the following directors first became directors of NNG, Inc. in 2001.
NOMINEES DIRECTOR -- CLASS I
LEWIS W. COLEMAN, 59.President, Gordon and Betty Moore Foundation.
Director since 2001
Lewis W. Coleman became President of the Gordon and Betty Moore Foundation
in January 2001. In December 2000, he resigned as Chairman of Banc of America
Securities, LLC, a subsidiary of Bank of America Corporation after having
served in that position since joining Banc of America Securities, LLC in
December 1995. Prior to that, he spent ten years at BankAmerica Corporation
where he held various positions including Chief Financial Officer, head of
World Banking Group and head of Capital Markets. Previous to that he spent
thirteen years with Wells Fargo & Co. in a variety of wholesale and retail
banking positions. He is also on the Board of Directors of Chiron Corporation.
KENT KRESA*, 63. Chairman, President and Chief Executive Officer.
Director since 1987
Before joining Northrop Grumman, Kent Kresa was associated with the Lincoln
Laboratory of M.I.T. and the Defense Advanced Research Projects Agency of the
Department of Defense. In 1975, he joined Northrop Grumman as Vice President
and Manager of Northrop Grumman's Research and Technology Center. He became
General Manager of the Ventura Division in 1976, Group Vice President of the
Aircraft Group in 1982 and Senior Vice President for Technology and
Development in 1986. Mr. Kresa was elected President and Chief Operating
Officer of Northrop Grumman in 1987. He was named Chief Executive Officer in
1989 and Chairman of the Board in 1990. Mr. Kresa is a member of the National
Academy of Engineering and is past Chairman of
--------
* Mr. Kresa serves on the Board of Directors as part of the class of
directors with terms expiring in 2003. In order to apportion the directors
among the three classes as evenly as possible, Mr. Kresa has been nominated
for election this year and upon his election, will resign from the class of
2003, which will then be reduced to three members.
5
the Board of Governors of the Aerospace Industries Association and Chairman of
the Defense Policy Advisory Committee on Trade. He is also an Honorary Fellow
of the American Institute of Aeronautics and Astronautics and a member of the
M.I.T. Lincoln Library Advisory Board. He serves on the Board of Directors of
the W.M. Keck Foundation and on the Board of Trustees of the California
Institute of Technology, and serves as a director of Avery Dennison
Corporation, the Los Angeles World Affairs Council, the John Tracy Clinic and
Eclipse Aviation Corporation. He is also a Member of the Corporation, Draper
Laboratories, Inc. and serves on the Board of Governors of the Performing Arts
Center of Los Angeles.
AULANA L. PETERS, 59. Retired Partner, Gibson, Dunn & Crutcher.
Director since 1992
Aulana L. Peters is a retired partner of the law firm of Gibson, Dunn &
Crutcher where she was a partner from 1988 to December 2000. Effective January
1, 2001 she was elected to the Public Oversight Board of the AICPA. From 1984
to 1988 she served as Commissioner of the Securities and Exchange Commission.
Ms. Peters is a director of Callaway Golf Company, Minnesota Mining and
Manufacturing Company, and Merrill Lynch & Co., Inc. She is also a member of
the Board of Directors of Community Television for Southern California (KCET).
Ms. Peters served as a member of the Financial Accounting Standards Board
Steering Committee for its Financial Reporting Project and as a member of the
Public Oversight Board's Panel on Audit Effectiveness.
Vote Required
The vote of a plurality of the shares of Common Stock voting at the Annual
Meeting is required for the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE THREE NOMINEES FOR
DIRECTOR LISTED ABOVE.
CONTINUING DIRECTORS -- CLASS II
PHILLIP FROST, 64. Chairman of the Board and Chief Executive Officer, IVAX
Corporation, a pharmaceutical company.
Director since 1996
Dr. Phillip Frost has served as Chairman of the Board of Directors and Chief
Executive Officer of IVAX Corporation since 1987 and served as President from
1991 to 1995. Dr. Frost was Chairman of the Department of Dermatology at Mt.
Sinai Medical Center of Greater Miami, Miami Beach, Florida from 1972 to 1990
and was Chairman of the Board of Directors of Key Pharmaceuticals, Inc. from
1972 to 1986. He is Chairman of Whitman Education Group and Vice Chairman of
Continucare Corporation. He is also Vice Chairman of the Board of Trustees of
the University of Miami and is a member of the Board of Governors of the
American Stock Exchange.
ROBERT A. LUTZ, 69. Chairman of the Board and Chief Executive Officer, Exide
Corporation, a battery manufacturing company.
Director since 1997
Robert A. Lutz has served as Chairman and Chief Executive Officer of Exide
Corporation since December 1998. He also served as President of Exide
Corporation from December 1998 through May 2000. Previously he had joined
Chrysler Corporation in 1986 as Executive Vice President of Chrysler Motors
Corporation and was elected a director of Chrysler Corporation that same year.
He was elected President in 1991 and Vice Chairman in 1996. He retired from
Chrysler Corporation in July 1998. Prior to joining Chrysler Corporation, Mr.
Lutz held senior positions with Ford Motor Company, General Motors Corporation
Europe and Bavarian Motor Werke. He is an executive director of the National
Association of Manufacturers and a member of the National Advisory Council of
the University of Michigan School of Engineering, the Board of Trustees of the
U.S. Marine Corps University Foundation and the Advisory Board of the
University of California-Berkeley, Haas School of Business. Mr. Lutz is also a
director of ASCOM Holdings, A.G. and Silicon Graphics, Inc.
6
JOHN E. ROBSON, 70. Senior Advisor, Robertson Stephens, a FleetBoston
Financial Company, investment bankers.
Director since 1993
Since 1993 John E. Robson has been a Senior Advisor at Robertson Stephens.
From 1989 to 1993 he served as Deputy Secretary of the United States Treasury.
He was Dean and Professor of Management at the Emory University School of
Business Administration from 1986 to 1989 and President and Chief Executive
Officer and Executive Vice President and Chief Operating Officer of G.D.
Searle & Co., a pharmaceutical company, from 1977 to 1986. Previously, he held
government posts as Chairman of the U.S. Civil Aeronautics Board, regulator of
the airline industry and Under Secretary of the U.S. Department of
Transportation, and engaged in the private practice of law as a partner of
Sidley and Austin. Mr. Robson is a director of Pharmacia Corporation and
ProLogis Trust. He is also a Distinguished Visiting Fellow of the Hoover
Institution at Stanford University, a Visiting Fellow at the Heritage
Foundation and a director of the University of California San Francisco
Foundation.
JOHN BROOKS SLAUGHTER, 67. President and Chief Executive Officer, The National
Action Council for Minorities in Engineering, Inc.
Director since 1993
Dr. John Brooks Slaughter held electronics engineering positions with
General Dynamics Convair and the U.S. Navy Electronics Laboratory. In 1975, he
became Director of the Applied Physics Laboratory of the University of
Washington. In 1977, he was appointed Assistant Director for Astronomics,
Atmospherics, Earth and Ocean Sciences at the National Science Foundation.
From 1979 to 1980, he served as Academic Vice President and Provost of
Washington State University. In 1980, he returned to the National Science
Foundation as Director and served in that capacity until 1982 when he became
Chancellor of the University of Maryland, College Park. From 1988 to July
1999, Dr. Slaughter was President of Occidental College in Los Angeles and in
August 1999, he assumed the position of Melbo Professor of Leadership in
Education at the University of Southern California. In June 2000,
Dr. Slaughter was named President and Chief Executive Officer of The National
Action Council for Minorities in Engineering, Inc. He is a member of the
National Academy of Engineering, a fellow of the American Academy of Arts and
Sciences and serves as a director of Solutia, Inc. and International Business
Machines Corporation.
CONTINUING DIRECTORS -- CLASS III
JOHN T. CHAIN, JR., 66. General, United States Air Force (Ret.) and Chairman of
the Board, Thomas Group, Inc. a management consulting
company.
Director since 1991
General John T. Chain has been Chairman of Thomas Group, Inc. since May 1998
and has been a member of the Board of Directors of Thomas Group since May
1995. He has also served as the President of Quarterdeck Equity Partners, Inc.
since December 1996. He served as Special Assistant to the Chairman of
Burlington Northern Santa Fe Corporation from November 1995 to March 1996, and
as an Executive Via President of Burlington Northern from 1991 to November
1995. During his military career, General Chain's commands included military
assistant to the Secretary of the Air Force, Director of Politico-Military
Affairs, Department of State and Chief of Staff of Supreme Headquarters Allied
Powers Europe. After serving as Commander in Chief, Strategic Air Command, he
retired from the Air Force in February 1991. General Chain serves as a
director of R.J. Reynolds, Inc. and Kemper Insurance Company.
VIC FAZIO, 58. Senior Partner, Clark & Weinstock, a consulting firm.
Director since 2000
Vic Fazio served as a Member of Congress for 20 years representing
California's third congressional district. During that time he served as a
member of the Armed Services, Budget and Ethics Committees and was a member of
the House Appropriations Committee where he served as Subcommittee Chair or
ranking member for 18 years. Mr. Fazio was a member of the elected Democratic
Leadership in the House from 1991-1998 including four years as Chair of the
Democratic Caucus, the third ranking position in the party. From 1975 to 1978
Mr. Fazio served in
7
the California Assembly and was a member of the staff of the California
Assembly Speaker from 1971 to 1975. Upon leaving Congress in early 1999, he
became a Senior Partner at Clark & Weinstock, a strategic communications
consulting firm. He is a member of numerous boards including The California
Institute, Coro National Board of Governors, which he chairs, the U.S. Capitol
Historical Society, the Board of the U.S. Capitol Visitors Center and the
Board of Visitors, The University of California at Davis Medical School.
CHARLES R. LARSON, 64. Admiral, United States Navy (Ret.)
Director since 2000
Admiral Charles R. Larson is recognized as the first Naval officer to be
selected as a White House Fellow. He also served as Naval aide to the
President. He served as superintendent of the U.S. Naval Academy from 1983 to
1986 and in 1991 he became senior military commander in the Pacific. He
returned to U.S. Naval Academy in 1994, where he served as superintendent
until 1998. Currently, Admiral Larson is Chairman of the Board of the U.S.
Naval Academy Foundation, Vice Chairman of the Board of Regents of the
University System of Maryland and serves on the board of directors of such
organizations as Constellation Energy Group, Inc., Edge Technologies, Inc.,
Fluor Global Services, the Atlantic Council, Military.com and the National
Academy of Sciences' Committee on International Security and Arms Control. In
addition, he is a member of the Council on Foreign Relations and is a senior
fellow of The CNA Corporation.
Committees of the Board of Directors
The Board of Directors has Audit, Compensation and Management Development,
Nominating and Corporate Governance, Finance and Public Issues and Policy
Committees. The membership of these committees is usually determined at the
organizational meeting of the Board held in conjunction with the Annual
Meeting. The membership of each committee is as follows, with the chairman
listed first:
Compensation and Nominating and Public Issues
Audit Management Development Corporate Governance Finance and Policy
--------------------- ---------------------- -------------------- -------------------- ---------------------
John Brooks Slaughter John T. Chain, Jr. Jack R. Borsting Richard M. Rosenberg Aulana L. Peters
Jack R. Borsting Jack R. Borsting John T. Chain, Jr. John T. Chain, Jr. Vic Fazio
Lewis W. Coleman Lewis W. Coleman Vic Fazio Lewis W. Coleman Phillip Frost
Vic Fazio Robert A. Lutz Phillip Frost Phillip Frost Charles R. Larson
Charles R. Larson John E. Robson Richard M. Rosenberg Robert A. Lutz John Brooks Slaughter
Aulana L. Peters Richard J. Stegemeier John E. Robson
Richard J. Stegemeier
Audit Committee
The Audit Committee meets periodically with management and with both
Northrop Grumman's independent auditors and Northrop Grumman's chief internal
auditor to review audit results and the adequacy of Northrop Grumman's system
of internal controls. In addition, the Audit Committee recommends to the Board
of Directors the appointment or discharge of Northrop Grumman's independent
auditors, and reviews professional services of a non-audit nature to be
provided by the independent auditors to evaluate the impact of undertaking
such added services on the independence of the auditors. The Audit Committee
held seven meetings in 2000.
Compensation and Management Development Committee
The Compensation and Management Development Committee (the "Compensation
Committee") recommends to the Board of Directors the base salary and incentive
compensation of all executive officers and takes final action with respect to
base salary and incentive compensation for certain other officers and key
employees. It reviews Northrop Grumman's compensation policies and management
actions with respect to succession of qualified officers. The Compensation
Committee also establishes Northrop Grumman's annual performance objectives
under the incentive compensation plans and recommends to the Board of
Directors the amounts to be appropriated for awards under such plans and under
Northrop Grumman's 1973 Incentive Compensation Plan (the "1973 Incentive
Plan"). The Compensation Committee grants awards under and
8
administers Northrop Grumman's Stock Plans (as defined below) and recommends
to the Board of Directors all compensation plans in which Northrop Grumman
officers are eligible to participate. The Compensation Committee held seven
meetings in 2000.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee reviews candidates to
serve as directors and recommends to the Board of Directors nominees for
election. The activities and associations of each candidate are examined to
ensure that there is no legal impediment, conflict of interest or other
consideration that might prevent service on the Board of Directors. In making
its selection, the Board of Directors bears in mind that the foremost
responsibility of a Northrop Grumman director is to represent the interests of
the stockholders as a whole. The Nominating and Corporate Governance Committee
will consider nominees recommended by stockholders if such nominations have
been submitted in writing, accompanied both by a description of the proposed
nominee's qualifications and an indication of the consent of the proposed
nominee and relevant biographical information. The recommendation should be
addressed to the Nominating and Corporate Governance Committee in care of the
Secretary of Northrop Grumman. In addition, the Nominating and Corporate
Governance Committee makes recommendations to the Board of Directors
concerning the composition and size of the Board of Directors, candidates to
fill vacancies, the remuneration of non-employee directors, and matters of
corporate governance as appropriate. The Nominating and Corporate Governance
Committee held six meetings in 2000.
Finance Committee
The Finance Committee reviews and makes recommendations concerning proposed
dividend actions and issuance or repurchase of debt or equity securities. The
Finance Committee considers and makes recommendations for final action by the
Board on material acquisitions, mergers or divestments. The Finance Committee
also reviews the investment performance of the employee benefit plans, capital
asset requirements and short-term investment policy when appropriate. The
Finance Committee held seven meetings in 2000.
Public Issues and Policy Committee
On March 15, 2000 the Board of Directors approved a change in name of the
Executive and Public Policy Committee to the Public Issues and Policy
Committee. This Committee reviews and monitors the Northrop Grumman Employees
Political Action Committee and makes policy and budget recommendations to the
Board on proposed charitable contributions and aid to higher education. The
Public Issues and Policy Committee reviews and approves Northrop Grumman's
policy for engaging the services of consultants and commission agents. The
Public Issues and Policy Committee held two meetings in 2000.
BOARD AND COMMITTEE MEETINGS
During 2000, the Board held 10 meetings and the committees described above
held 29 meetings. Average attendance at all such meetings was 94%. Each
incumbent director attended at least 75% of the total number of board and
committee meetings he or she was eligible to attend, with the exception of
Phillip Frost who attended 64%.
COMPENSATION OF DIRECTORS
Northrop Grumman paid each director an annual retainer of $32,000 and an
additional $1,000 for each Board and committee meeting attended during 2000.
Committee chairpersons are paid an annual retainer of $3,000. Any director who
performs extraordinary services for the Board at the request of the Chairman
of the Board or the chairman of a committee is paid $1,000 per day. Directors
are reimbursed for all reasonable expenses in attending these meetings and in
performing extraordinary services. Directors who are employees of Northrop
Grumman do not receive any compensation for their service as directors.
9
The 1993 Stock Plan For Non-Employee Directors provides that 30% of the
retainer earned by each director is paid in shares of Common Stock, issued
following the close of the fiscal year. In addition, directors may defer
payment of all or a portion of their remaining retainer fees, Committee
chairperson retainer fees and/or Board and committee meeting fees. Deferred
compensation may either be distributed in shares of Common Stock, issued after
the close of the fiscal year, or placed in a stock unit account until the
conclusion of a director-specified deferral period, generally for a minimum of
two years from the time the compensation is earned. All deferral elections
must be made prior to the beginning of the year for which the retainer and
fees will be paid. Directors are credited with dividend equivalents in
connection with the shares of Common Stock, which are distributed early in the
year following the year earned or deferred into the stock unit account. The
Board has adopted a Northrop Grumman stock ownership guideline for outside
directors which encourages directors to hold shares of Common Stock equal in
market value to three times the annual retainer, to be achieved within five
years of joining the Board.
The 1995 Stock Option Plan for Non-Employee Directors, as amended, provides
for the annual grant of options to each non-employee director to purchase
1,500 shares of Common Stock with an exercise price equal to the fair market
value of the Common Stock on the grant date. The options have a term of ten
years. If the individual ceases to serve as a director, the options continue
to be exercisable for the lesser of five years or the expiration of the
original term of the options. If termination is for cause, the options
terminate when the director ceases to serve.
On March 19, 1997, the Board of Directors adopted the Northrop Grumman Non-
Employee Directors Equity Participation Plan (the "Equity Plan" and, together
with the Retirement Plan, collectively, the "Directors Plans"). The Equity
Plan is applicable to outside directors who become such after March 1, 1997
and directors serving prior to that date who elected to participate in the
Equity Plan. Directors who elected to participate in the Equity Plan
terminated their participation in the Retirement Plan. Under the Equity Plan,
outside directors shall have an amount equal to 50% of their annual retainer
credited to an equity participation account and converted into stock units
based on the then fair market value of the Common Stock. Beginning in 2001
Northrop Grumman will also credit an amount equal to 5% of their annual
retainer to the equity participation account unless: (1) no amount was
appropriated for payment of awards with respect to the preceding calendar year
pursuant to Northrop Grumman's Incentive Compensation Plan or (2) Northrop
Grumman did not attain the pre-established financial and non-financial
measures set by the Compensation and Management Development Committee for
payment of awards pursuant to such Incentive Compensation Plan with respect to
that preceding year. Each stock unit will be credited with dividend
equivalents, which will be deemed reinvested in additional stock units. Each
outside director who terminates service after three or more years of service
shall be entitled to receive cash payments from the equity participation
account in a number of annual installments equal to the number of years for
which benefits have been accrued (not to exceed ten), each installment to be
in an amount equal to the dollar value of the equity participation account
based on Common Stock value as of the date of determination of the installment
payment, divided by the number of installments then remaining to be paid. Upon
a change in control (as defined in the Equity Plan) benefits under the Equity
Plan immediately vest. The Board of Directors believes that the Equity Plan
will further align the interests of the directors with the interests of the
stockholders by making this part of the directors' benefits dependent upon the
value of the Common Stock.
REPORT OF THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation applicable to employees elected as
executive officers of Northrop Grumman. The Compensation Committee is
comprised exclusively of outside directors.
Compensation Philosophy
Northrop Grumman's executive compensation program is designed to promote
recruitment and retention of key employees of exceptional ability and to
motivate superior performance. It is comprised of linked plans that encourage
and reward participants for achieving outstanding performance, financial
results exceeding specific thresholds, and long-term prosperous growth.
10
Major components of executive compensation are at risk and vary directly in
their amount with each executive's impact on desired business results.
Successful accomplishment of business goals in both annual operating
performance and resulting stockholder value can produce significant individual
rewards. Failure to attain business goals will have a negative effect on
rewards.
In addition to variations attributable to individual performance against
business goals and Northrop Grumman performance, executive total compensation
is influenced directly by competitive considerations. Base salaries of
executives are targeted at a competitive market median on a job-by-job basis
with individual variations explained by differences in experience, skills and
sustained performance. Annual incentive compensation and long-term incentive
stock compensation vary with individual job level, scope and overall influence
on Northrop Grumman's business results and individual, business element and
Northrop Grumman performance.
Normalized for these individual variations, annual total cash compensation--
the sum of base salary and annual incentive compensation--will be lower than
competitive market median in years of below target performance and above
competitive market median in years performance exceeds target.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code generally limits the tax
deduction to $1 million for compensation paid to the corporation's chief
executive officer and the four other most highly compensated executive
officers. Qualifying performance-based compensation is not subject to the
deduction limit.
In December 1998, the Compensation Committee approved amendments to the
Incentive Compensation Plan to comply with the performance based criteria of
Section 162(m) and, in May 1999, stockholders adopted the amended and restated
Incentive Compensation Plan. As a result, compensation paid under the
Incentive Compensation Plan for 1999 and thereafter should be deductible.
Measuring Northrop Grumman Performance
Consistent with Northrop Grumman's business plan, management in each
organizational element prepares and submits for assessment an Annual Operating
Plan containing Financial and Supplemental Goals together with defined
performance measures and numerical weights.
. Financial Goals focus on operating earnings, cash flow and stockholder
value metrics.
. Supplemental Goals focus on such factors as customer satisfaction, new
product development, new business initiatives, productivity, quality
improvement, workplace diversity, management development, and
environmental management.
Annually, the Compensation Committee reviews, approves or--at its
discretion--modifies the CEO's written proposal of goals and numerical values
for Performance Measurement Factors. Performance highlights against 2000 goals
can be found below in Chief Executive Officer 2000 Compensation.
For Performance Year 2000 the Compensation Committee established Performance
Measurement Factors addressing Stockholder Value Creation, Pre-tax Return on
3-Year Average Stockholder Equity, Cash Flow and Supplemental Goals in order
to judge Northrop Grumman's performance and that of executive officers.
Determining Competitive Compensation
In determining base salaries and incentive compensation for the Named
Executive Officers, sources of competitive compensation information are
independent surveys of industry peer companies. Peer companies include:
. Companies comprising the aerospace and defense group depicted in the
performance graph in the Shareowner Return Performance Presentation
following this Report and other companies designated by the Compensation
Committee.
11
Northrop Grumman uses executive surveys provided by Hewitt Associates,
Towers Perrin and Frederic W. Cook, Inc., as well as periodic custom surveys
of companies selected by the Compensation Committee to assess competitiveness
of executive compensation.
Establishing Executive Compensation
Northrop Grumman's executive compensation program includes the following
linked elements:
. Base Salary
. Annual Incentive Compensation
. Long-Term Incentive Compensation.
Base Salary
Annually, the Compensation Committee reviews, and accepts or modifies as it
deems appropriate, base salary recommendations submitted by the CEO for
executive officers (other than the CEO). Separately, the Compensation
Committee reviews the CEO's base salary, giving consideration to competitive
compensation data, its assessment of past performance and its expectation of
future contributions. The Board then approves or modifies the Compensation
Committee's recommendations for executive officers and the CEO.
Annual Incentive Compensation
Executive officers are eligible for incentive compensation annually under
Northrop Grumman's stockholder-approved 1973 Incentive Compensation Plan as
amended. Performance criteria, as approved by shareholders, include objective
tests of financial performance. The Committee appropriates an amount
(Tentative Appropriated Incentive Compensation) to the Plan equal to 3% of
Northrop Grumman's income before income taxes. However, no appropriation shall
be made with respect to any Performance Year that would reduce the pre-tax
return on stockholder equity below 10%, or in which no dividend is declared on
common stock.
As stipulated by the Plan, the maximum potential individual incentive
compensation award for a Performance Year for an executive officer shall be
the lesser of $3,000,000 or the respective percentage of Tentative
Appropriated Incentive Compensation, as follows:
Chief Executive Officer: 30.0%
Each Other Section 162(m) Officer: 17.5%
Accompanying his annual performance report, the CEO submits recommendations
to the Compensation Committee for individual incentive awards for the
executive officers, except the CEO, which reflect judgments as to
contributions to the accomplishment of annual goals and Northrop Grumman's
long-term business plan. Separately, the Compensation Committee considers an
incentive compensation award for the CEO based on its assessment of
performance.
As part of this process, the Compensation Committee reviews the amount of
the total Tentative Appropriated Incentive Compensation for that Performance
Year and in its sole discretion may reduce (but not increase) that amount
after taking into account the overall performance of Northrop Grumman in the
attainment of predetermined financial and non-financial objectives selected by
the Compensation Committee. Each executive officer's Incentive Compensation
award is based upon the foregoing and the Compensation Committee's assessment
of the individual's performance. The incentive compensation awards for the
executive officers and the CEO must be ratified by the Board.
Long-Term Incentive Compensation
The 1993 Long Term Incentive Stock Plan and the proposed 2001 Long Term
Incentive Stock Plan provide flexibility to grant awards in a variety of forms
including stock options, restricted stock rights (RSRs) and
12
restricted performance stock rights (RPSRs). The purpose of this form of
compensation is to establish long-term performance horizons for participants.
By promoting ownership of Northrop Grumman's common stock, the Stock Plans
create stockholder-managers interested in the sustained growth and prosperity
of Northrop Grumman.
In 1998, to further promote alignment of management and stockholder
interests, the Board adopted Stock Ownership Guidelines for the CEO and other
officers of Northrop Grumman. These guidelines contemplate that officers own
Northrop Grumman stock denominated as a percentage of their annual salaries,
accumulated over a 3-year period: seven times annual salary for the CEO; three
times annual salary for other elected officers; one and one-half times annual
salary for appointed officers.
No regular awards of Options or Restricted Stock were granted to executive
officers or the CEO during 2000. The last regular awards were granted in 1999
to the CEO and Named Executive Officers. The next grant of stock options is
scheduled to occur in June 2001. If approved by shareholders, the proposed
2001 Long Term Incentive Stock Plan will govern awards issued in June.
2000 Chief Executive Officer Compensation
After considering executive compensation survey data from nationally
recognized survey sources, the Committee recommended and the Board approved a
salary increase for Mr. Kresa consistent with its pay philosophy.
In considering the performance of Mr. Kresa and establishing his annual
incentive compensation, the Committee reviewed the overall performance of
Northrop Grumman against the 2000 financial and supplemental goals and
Mr. Kresa's contributions during the year. The Committee noted that Northrop
Grumman exceeded all of the Performance Measurement Criteria set forth at the
beginning of the period. Additionally, the Committee recognized that under Mr.
Kresa's leadership:
. The year was highlighted by operational excellence and successful
execution of Northrop Grumman's strategic plan to position itself as a
premier provider of systems to meet customers needs for defense
electronics, systems integration, information systems, precision strike,
reconnaissance/intelligence and unmanned vehicles.
. Solid growth occurred with strong performance in all major programs.
Overall, contract acquisitions increased by 20% to $9.2 billion. Backlog
increased to $10.1 billion.
. Presence in the international market was strengthened by virtue of major
contract awards, new international teaming arrangements and joint
ventures. Electronic Sensors and Systems Sector was responsible for the
UAE F-16 radar system and partnering with Boeing for the Australian
Wedgetail. The strategic relationship between the Integrated Systems
Sector and EADS expands international market access based on sharing
technologies and capabilities.
. Domestic military wins included the F/A-18 MYP program, Vertical Takeoff
Unmanned Air Vehicle (VTUAV), Airborne Laser Mine Detection System
(ALMDS)--a potential new product line, JOINT Stars Total Systems
Support, and several important development contracts built on Northrop
Grumman's leadership position in unmanned systems.
. Logicon won a record level of new contracts worth over $2 billion during
the year from a wide spectrum of customers.
. Cash Management was outstanding with approximately $975 million
generated and net debt reduced by $750 million providing the financial
strength to pursue strategic mergers and acquisitions to enhance
Northrop Grumman's three growth engines--systems integration, defense
electronics and information technology. Northrop Grumman exceeded its
targeted performance goal for improvement in Warranted Equity Value.
13
. The successful acquisition and integration of Comptek Research Inc.,
Federal Data Corporation and Sterling Software's Federal Systems Group
served to augment Northrop Grumman's core business strengths.
. The sale of the aerostructures business provided extra financial
flexibility to pursue additional strategic opportunities that was
culminated by successful negotiations leading to the agreement to
acquire Litton Industries.
Based on its assessment, the Compensation Committee determined and the Board
ratified an incentive compensation award for Mr. Kresa for 2000 as depicted in
the Summary Compensation Table.
THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
JOHN T. CHAIN, JR., CHAIRMAN
JACK R. BORSTING
ROBERT A. LUTZ
JOHN E. ROBSON
RICHARD J. STEGEMEIER
14
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee of the Board assists the Board in fulfilling its oversight
responsibilities by reviewing financial reports and other financial
information provided by Northrop Grumman to the shareholders and the
Securities and Exchange Commission; Northrop Grumman's internal control
structure; Northrop Grumman's internal and external audit process; and any
other matters relating to Northrop Grumman's accounting and financial
reporting process.
During the year, the Audit Committee met seven times. In addition, the
Committee Chair, as the representative of the Audit Committee, discussed with
Northrop Grumman's Chief Financial Officer and Deloitte & Touche, Northrop
Grumman's independent auditors, the interim financial information contained in
each quarterly earnings announcement prior to its release.
In discharging its oversight responsibility for the audit process, the Audit
Committee received a letter from Deloitte & Touche regarding the firm's
independence as required under Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees," as amended by the
Independence Standards Board. The Audit Committee discussed with management,
the internal auditors and Deloitte & Touche the quality of Northrop Grumman's
internal controls. The Audit Committee reviewed the internal audit function's
organization, responsibilities, budget and staffing. The Audit Committee also
reviewed with both the internal auditor and Deloitte & Touche their respective
audit plans, audit scope and identification of audit risks.
The Audit Committee discussed and reviewed with Deloitte & Touche all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communications with Audit Committees" and, with and without management
present, discussed and reviewed the results of Deloitte & Touche's examination
of the financial statements, along with the results of internal audit's
examinations.
The Audit Committee reviewed its charter and, after appropriate review and
discussion, reaffirmed the Audit Committee Charter without amendments. A copy
of the Audit Committee Charter is attached to this proxy as Exhibit A.
The Audit Committee reviewed the audited financial statements of Northrop
Grumman as of and for the year ended December 31, 2000, with management and
Deloitte & Touche.
Management has primary responsibility for Northrop Grumman's financial
statements and the overall reporting process, including Northrop Grumman's
system of internal controls.
The independent auditors audit the annual financial statements prepared by
management, express an opinion as to whether these financial statements fairly
present the financial position, results of operations and cash flows of
Northrop Grumman in conformity with generally accepted accounting principles,
and discuss with the Audit Committee any issues they believe should be raised.
Based upon the Audit Committee's review and discussions with management and
Deloitte & Touche relative to Northrop Grumman's audited consolidated
statements of financial position as of December 31, 2000 and 1999 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, 2000, the Audit Committee recommended to the Board of
Directors that Northrop Grumman's Annual Report on Form 10-K include these
financial statements. The Audit Committee also recommended the reappointment,
subject to shareholder ratification, of Deloitte & Touche and the Board of
Directors concurred on such recommendation.
Each of the members of the Audit Committee is independent as defined under
the listing standards of the New York Stock Exchange.
Audit Committee
Dr. John Brooks Slaughter, Chair Charles R. Larson
Jack R. Borsting Aulana L. Peters
Vic Fazio Richard J. Stegemeier
15
Stockholder Return Performance Presentation
The line graph below compares the relative change for the five year period
ended December 31, 2000 in the cumulative total stockholder return on Northrop
Grumman's Common Stock against the cumulative total return of the S&P
Composite-500 Stock Index, and the S&P Aerospace/Defense Index comprised of
The Boeing Company, General Dynamics Corporation, B.F. Goodrich, Lockheed
Martin Corporation, Northrop Grumman Corporation, Raytheon Company (B),
Rockwell International Corporation and United Technologies Corporation.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG NORTHROP GRUMMAN CORPORATION,
S&P 500 INDEX S&P AEROSPACE/DEFENSE INDEX
[GRAPH OF NORTHROP GRUMMAN]
Measurement Period NORTHROP S&P S&P
(Fiscal Year Covered) GRUMMAN 500 INDEX AEROSPACE/DEFENSE
------------------- ---------- --------- -----------------
Measurement Pt-1995 $100 $100 $100
FYE 1996 $132 $123 $129
FYE 1997 $186 $163 $134
FYE 1998 $121 $210 $123
FYE 1999 $ 92 $253 $120
FYE 2000 $144 $230 $169
16
EXECUTIVE COMPENSATION
The table below shows the annual and long-term compensation for services in
all capacities to Northrop Grumman for the years ended December 31, 1998, 1999
and 2000 of the Named Executive Officers at December 31, 2000:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- ----------------------------------
Awards Payouts
--------------------- ----------
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Compensation Award(s) Options/ LTIP Compensation
Position Year Salary($)(1) Bonus($) ($) (2) ($) SARs(#) Payouts($) ($)(3)
--------- ---- ------------ --------- ------------ ---------- ---------- ---------- ------------
1) KENT KRESA.......... 2000 1,009,615 2,800,000 61,545(4) 89,125(5) 397,513 6,800
Chairman of the 1999 936,346 1,400,000 296,420(6) 1,384,250 6,400
Board, President 1998 900,000 0 50,068(7) 200,000 * 6,400
and Chief Executive
Officer
2) RICHARD B. WAUGH,
JR.................... 2000 460,192 800,000 25,602(5) 162,250 6,800
Corporate Vice 1999 436,154 400,000 565,000 6,400
President and Chief 1998 390,885 92,000 56,217(8) 329,062 75,000 * 6,400
Financial Officer
3) JAMES G. ROCHE...... 2000 474,231 825,000 60,667(9) 162,250 6,800
Corporate Vice 1999 444,231 425,000 65,299(10) 565,000 6,400
President and 1998 385,731 111,000 63,527(11) 329,062 75,000 * 6,400
President
Electronic Sensors
and Systems Sector
4) HERBERT W.
ANDERSON.............. 2000 403,269 700,000 146,025 6,800
Corporate Vice 1999 369,231 575,000(12) 508,500 7,500 6,400
President, 1998 306,827 182,000(12) 263,250 60,000 * 6,400
President and Chief
Executive Officer,
Logicon, Inc.
5) RALPH D. CROSBY,
JR.................... 2000 464,231 925,000(13) 90,873(14) 162,250 6,800
Corporate Vice 1999 436,154 400,000 59,814(15) 565,000 6,400
President and 1998 357,693 50,000 329,062 75,000 * 6,400
President,
Integrated Systems
Sector
-------
(1) The amounts listed in this column do not include amounts paid for
vacation hours accrued but not used for the following individuals in the
following years: Mr. Kresa: $15,966 in 2000; Mr. Waugh: $29,927 in 2000,
$12,100 in 1999, $9,109 in 1998; Dr. Roche: $26,318 in 2000, $23,468 in
1999, $16,053 in 1998; Mr. Anderson: $7,786 in 2000, $1,062 in 1999,
$1,292 in 1998; and Mr. Crosby: $4,185 in 1998.
(2) At December 31, 2000, (i) Mr. Kresa owned 19,600 RSRs with a value of
$1,626,800; (ii) Mr. Waugh owned 8,000 RSRs with a value of $664,000 and
4,500 time-vested RPSRs with a value of $373,500; (iii) Dr. Roche owned
8,000 RSRs with a value of $664,000 and 4,500 time-vested RPSRs with a
value of $373,500; (iv) Mr. Anderson owned 7,200 RSRs with a value of
$597,600 and 4,050 time-vested RPSRs with a value of $336,150; and (v)
Mr. Crosby owned 8,000 RSRs with a value of $664,000 and 4,500 time-
vested RPSRs with a value of $373,500. The RSRs vest over a five-year
period with 20% of the total grant vesting one year after the date of
grant and 20% vesting annually thereafter. There are no dividends paid
on RSRs. Time-vested RPSRs vest one-third three years prior to the end
of the payment period and one-third annually thereafter. Dividends are
paid on RPSRs in the form of additional shares of stock. The time-vested
RPSRs reflected in this column were previously disclosed in respect of
the year of grant in the proxy statements for years 1999 or 2000.
(3) "All Other Compensation" consists of Northrop Grumman contributions to
the Northrop Grumman Savings and Investment Plan for the Named Executive
Officers.
(4) Amount includes $21,015 for car allowance and $16,750 for tax
preparation services.
(5) All option grants in 2000 to Messrs. Kresa and Waugh were "re-load"
grants as more fully described on page 19 under the heading "Option
Grants in Last Fiscal Year."
17
(6) As a result of Northrop Grumman's decision in 1997 to relocate its
corporate offices to Northern Virginia and the subsequent abandonment of
that decision following the termination of the proposed merger with
Lockheed Martin Corporation, Northrop Grumman in 1999 paid $211,200 to a
third party relocation company in connection with the relocation
company's purchase (at appraised value) of the Alexandria, Virginia
house that Mr. Kresa had purchased in connection with the planned
Corporate office move. It also paid $31,229 to transport Mr. Kresa's
household goods to California under its applicable policies.
(7) Amount includes $20,464 for car allowance and $17,526 for premium
amounts paid on behalf of Mr. Kresa for life, accidental death and
dismemberment, medical, dental and long-term disability insurance.
(8) Amount includes $17,295 for car allowance, $15,000 for income tax
preparation services and $18,838 for premium amounts paid on behalf of
Mr. Waugh for life, accidental death and dismemberment, medical, dental
and long-term disability insurance.
(9) Amount includes, among other items, $16,423 for car allowance.
(10) Amount includes, among other items, $16,571 for spouse travel.
(11) Amount includes, among other items, $15,934 for car allowance.
(12) In connection with the merger with Logicon, Inc. and Northrop Grumman's
desire to retain certain key employees, Northrop Grumman paid Mr.
Anderson bonus compensation equal to 33 1/3% of his pre-merger base
salary one year following the merger and 66 2/3% of pre-merger base
salary two years following the merger. Under this arrangement, Mr.
Anderson received $90,000 in 1998 and $180,000 in 1999.
(13) Includes $100,000 special award to Mr. Crosby as a key participant in
Northrop Grumman's acquisition and divestiture activities and associated
transition efforts.
(14) Amount includes, among other items, $35,597 for spouse travel and $26,032
for gross-up.
(15) Amount includes $17,940 for car allowance and $18,947 for spouse travel.
* Upon the February 26, 1998 shareholder vote in favor of the proposed
merger of Northrop Grumman with Lockheed Martin Corporation (the "Merger
Vote"), the unvested RPSRs under the 1993 Stock Plan vested and became
distributable. In response to these accelerations, the Compensation
Committee and the Board of Directors adopted a program ("Program") to
preserve the incentive and employee-retention benefits of such amounts.
The Program involved placing in escrow the net shares of Northrop Grumman
stock issued to the executive officers after the acceleration. Fifty
percent of the number of RPSRs that vested upon the shareholder vote were
issued, and the remaining fifty percent was deemed tax owed with respect
to the vested RPSRs. Of the fifty percent deemed tax owed, any amount in
excess of the amount each executive officer previously instructed
Northrop Grumman to withhold for taxes was paid to the executive officer
in cash. The shares issued were placed in escrow pursuant to the terms of
the Program as described on Page 23, and remained subject to the risks of
forfeiture, company performance and overall market conditions until the
expiration of the escrow period and the release of those shares on March
1, 2000.
The 1993 Stock Plan provides for release of RPSRs in annual interim
installments in the third and fourth years, with final reconciliation in
the fifth year in the event payments are then due to the executive. For
the Named Executive Officers, the numbers of shares placed in escrow and
the aggregate dollar value of RPSR shares which vested under the 1993
Stock Plan are as follows:
Mr. Kresa, 43,926 shares, $12,145,539; Mr. Waugh, 13,276 shares,
$3,670,952; Dr. Roche, 12,328 shares, $3,408,554; Mr. Anderson, 11,899
shares, $3,290,074; and Mr. Crosby, 12,365 shares, $3,418,923. The dollar
amounts of the RPSR shares that accelerated were calculated using the
vesting date price per share of $138.25. On March 1, 2000, the date the
escrow period expired, the price of a share of Northrop Grumman stock was
$43.8125.
18
OPTION GRANTS IN LAST FISCAL YEAR
There were no stand-alone grants of stock options in 2000 and the table
below shows individual "re-load" grants of stock options made in 2000 to Named
Executive Officers.
Option Grants in Last Fiscal Year
Potential Realizable Value
At Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term (2)
---------------------------------------------------------------- ---------------------------
Number of Securities % of Total Options Exercise or
Underlying Options Granted to Employees Base Price Expiration
Granted (#) (1) in Fiscal Year ($/Sh) Date 5% (#) 10% ($)
-------------------- -------------------- ----------- ---------- ---------------------------
Kent Kresa.............. 23,059 3.45 73.0625 11/18/03 265,558 557,652
29,375 4.39 73.0625 12/21/04 462,522 996,056
36,691 5.48 70.875 11/16/05 718,463 1,587,616
Richard B. Waugh, Jr. .. 3,327 0.50 45.9375 7/19/00 7,642 15,283
4,349 0.65 45.9375 11/18/03 27,178 55,682
5,772 0.86 45.9375 11/18/02 31,491 66,128
5,251 0.78 57.125 11/18/03 47,282 99,288
6,903 1.03 57.125 12/21/04 84,981 183,010
--------
(1) All option grants in 2000 to Named Executive Officers were made pursuant
to a provision in the 1993 Plan that provides for the award of a new
option when the exercise price of an existing option has been paid by
tendering shares of Common Stock to Northrop Grumman. These new option
grants are limited to the number of shares tendered at the exercise and
the shares withheld for taxes, with the "re-load" option purchase price
set at the then fair market value and never extend beyond the remaining
term of the option exercised.
(2) The potential realizable value of each grant of options assuming that the
market price of Northrop Grumman's Common Stock from the date of grant to
the end of the option term (between one and five years, as applicable)
appreciates in value at an annualized rate of 5% and 10%.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Value of
Unexercised
Number of In-the-Money
Securities Underlying Options at
Unexercised Options at FY-End($)
Shares Acquired on FY-End(#) Exercisable/
Name Exercise (#) Value Realized ($) Exercisable/Unexercisable Unexercisable(1)
---- ------------------ ------------------ ------------------------- ----------------
Kent Kresa.............. 116,400 3,068,800 184,123/150,002 1,078,441/0
Richard B. Waugh, Jr. .. 36,942 714,061 67,810/56,250 1,133,494/0
James G. Roche.......... 0 0 41,250/56,250 291,250/0
Herbert W. Anderson..... 1,720 104,598 53,900/52,500 1,090,725/0
Ralph D. Crosby, Jr. ... 0 0 58,650/56,250 1,079,400/0
--------
(1) Based on the market value at December 31, 2000 of $83.
19
Pension Plans
For purposes of illustration, the following table shows the amount of annual
retirement benefits that would be accrued at age 65 under the Northrop Grumman
Pension Plan (the "Pension Plan"), as supplemented by the Northrop Corporation
ERISA Supplemental Plan 1 ("ERISA 1") and the ERISA Supplemental Program 2
("ERISA 2") (collectively, the "Supplemental Retirement Plans").
Annual
Average
Compensation
(highest 3 Years of Benefit Service
years out of ----------------------------------------------------------------------
last 10) 5 10 15 20 25 30 35
------------ -------- -------- -------- ---------- ---------- ---------- ----------
$ 100,000 $ 8,300 $ 16,700 $ 25,000 $ 33,300 $ 41,700 $ 50,000 $ 50,000
150,000 12,500 25,000 37,500 50,000 62,500 75,000 75,000
200,000 16,700 33,300 50,000 66,700 83,300 100,000 100,000
250,000 20,800 41,700 62,500 83,300 104,200 125,000 125,000
300,000 25,000 50,000 75,000 100,000 125,000 150,000 150,000
400,000 33,300 66,700 100,000 133,300 166,700 200,000 200,000
500,000 41,700 83,300 125,000 166,700 208,300 250,000 250,000
600,000 50,000 100,000 150,000 200,000 250,000 300,000 300,000
1,000,000 83,300 166,700 250,000 333,300 416,700 500,000 500,000
1,400,000 116,700 233,300 350,000 466,700 583,300 700,000 700,000
1,800,000 150,000 300,000 450,000 600,000 750,000 900,000 900,000
2,200,000 183,300 366,700 550,000 733,300 916,700 1,100,000 1,100,000
2,600,000 216,700 433,300 650,000 866,700 1,083,300 1,300,000 1,300,000
3,000,000 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,500,000
Compensation covered by the plans for executive officers is substantially
equivalent to salary and bonuses as reflected in the Summary Compensation
Table. Benefit Service earned after January 1, 1995 in excess of 30 years will
not be taken into account for accrual of retirement benefits. Benefits payable
under the Supplemental Retirement Plans have been secured through the
establishment of two grantor trusts. The credited years of service under the
Pension Plan and Supplemental Retirement Plans of the five individuals named
in the Summary Compensation Table are as follows: Mr. Kresa, 26 years; Mr.
Waugh, 22 years; Dr. Roche, 17 years; Mr. Anderson, 16 years; and Mr. Crosby,
20 years. Benefits are calculated on a straight life annuity basis at selected
compensation levels and years of service reflected in the table above. The
listed benefit amounts are not subject to any reduction for Social Security
benefits or other offset amounts.
Northrop Grumman maintains a Supplemental Retirement Income Program for
Senior Executives ("SRI"), under which certain employees are designated by the
Board of Directors to receive benefits in lieu of benefits otherwise payable
under the Pension Plan and the Supplemental Retirement Plans. The amount of
the supplemental benefit under the SRI is equal to the greater of (1) the
participant's benefit under the Pension Plan calculated without regard to the
limits imposed under Sections 415 and 401(a)(17) of the Code, or (2) a fixed
percentage of the participant's final average salary (which term includes
bonus and is based on the highest 3 years out of the last 5) equal to 30% at
age 55, increasing 4% for each year up to and including age 60, and increasing
2% for each year beyond age 60 to 65, in each case offset by the benefit
allowable under the Pension Plan. Mr. Kresa, who is eligible to receive an
annual benefit (estimated to be $1,566,675 payable at age 65, assuming
continued employment and based upon estimated levels of final average salary)
under SRI, is the only Named Executive Officer currently participating in the
SRI. SRI eligibility, in addition to designation by the Board of Directors
requires the attainment of age 55 and 10 years of vesting service. The vesting
service requirement may be waived by the CEO.
On February 25, 1998, the Northrop Grumman Board adopted the CPC
Supplemental Executive Retirement Program (the "CPC SERP"). The CPC SERP is
applicable to elected officers who report directly to the CEO (which group
currently consists of eight elected executive officers of Northrop Grumman as
of January 1, 2000). The CPC SERP provides to each participant a pension
accrual of 1.667% of final average pay for each year or
20
portion thereof that the participant has served as an elected officer
reporting to the CEO. The total accrual percentage under the CPC SERP cannot
exceed the greater of 1) 10% or 2) the percentage necessary for the
participant to receive an annuity of 50% of final average salary when all
pension benefits are taken in total. This provides a pension accrual to the
elected officer for the period that he has served as such, in addition to
regular pension benefits payable from Northrop Grumman's tax qualified and
supplemental retirement plans on the basis of all creditable years of service.
The benefits paid from this plan are paid in a lump sum or in installments
upon termination of employment. The amount is the actuarial equivalent of the
straight life benefit beginning on the retirement date. The compensation used
in the calculation of benefit is the same as for the qualified plan. The
pension table is applicable if benefit years of service is considered only for
CPC Service. The CPC service years for the four Named Executive Officers who
report directly to the CEO are as follows: Mr. Waugh 8.08, Dr. Roche, 8.58,
Mr. Anderson 6.00, and Mr. Crosby, 6.58.
Change in Control Arrangements
March 2000 Special Agreements. Effective March 1, 2000, Northrop Grumman
entered into special severance agreements (the "March 2000 Special
Agreements") with its executive officers, including Messrs. Kresa, Waugh,
Roche, Anderson and Crosby. The purpose of the March 2000 Special Agreements
is to encourage these key executives to continue to carry out their duties in
the event of the possibility of a change in control of Northrop Grumman.
The March 2000 Special Agreements are generally effective until February 28,
2003. The term of the March 2000 Special Agreements will be extended for
additional one-year periods until notice is given by Northrop Grumman that the
agreements will terminate. If a Change in Control (as defined below) occurs
during the term of the agreements, the term of the agreements will not end
earlier than two years following the Change in Control. The March 2000 Special
Agreements replace Northrop Grumman's "Special Agreements" that generally were
entered into in August 1996 and terminated in February 2000.
Under the March 2000 Special Agreements, a "Change in Control," is generally
deemed to occur when (1) certain persons acquire more than 33 1/3% of Northrop
Grumman's voting securities; (2) certain majority changes in Northrop
Grumman's Board of Directors occur during a 24-month period; (3) Northrop
Grumman is liquidated or all or substantially all of Northrop Grumman's assets
are sold in one or a series of related transactions; or (4) Northrop Grumman
is merged, consolidated, or reorganized and Northrop Grumman's stockholders
before the event do not own more than 50% of the voting stock of the resulting
or surviving entity.
Executives are entitled to severance benefits under the March 2000 Special
Agreements only (1) upon a termination of the executive's employment that
constitutes a Qualifying Termination (as defined below), and (2) only if the
termination occurs during a Protected Period (as defined below) prior to a
Change in Control or in the 24-month period following a Change in Control. A
"Qualifying Termination" generally means that the executive's employment by
Northrop Grumman is terminated for any reason other than Cause (as defined
below) or by the executive for Good Reason (as defined below), that Northrop
Grumman breaches the agreement, or that a successor breaches or fails to
assume the agreement.
The "Protected Period" is the period of time that the executive is entitled
to severance protections under the March 2000 Special Agreement prior to a
Change in Control. Depending on the nature of the Change in Control, the
Protected Period may commence as early as six months prior to a Change in
Control event.
The March 2000 Special Agreements define "Cause" as: (1) the executive's
conviction for committing an act of fraud, embezzlement, theft, or other act
constituting a felony; or (2) the willful engaging by the executive in
misconduct which would have resulted in the executive's termination by
Northrop Grumman under its policies and practices applicable to the executive
on September 1, 1999. However, no act or failure to act, on an executive's
part, will be considered "willful" for this purpose unless done, or omitted to
be done, by the executive not in good faith and without reasonable belief that
the act or omission was in the best interest of Northrop Grumman.
21
"Good Reason" is defined in the March 2000 Special Agreements to include:
(1) certain material reductions in the nature or status of the executive's
authorities, duties and/or responsibilities (when such authorities, duties,
and/or responsibilities are viewed in the aggregate); (2) a reduction of the
executive's base salary as in effect on the date of the agreement or as
increased thereafter; (3) a significant reduction of the executive's aggregate
incentive opportunities under the Northrop Grumman short and/or long term
incentive programs as such opportunities exist on the date of the agreement or
as increased thereafter; (4) Northrop Grumman's failure to maintain the
executive's relative level of coverage and accruals under Northrop Grumman's
employee benefit and/or retirement plans, policies, practices or arrangements
in which the executive participates as of the date of the agreement; (5) the
failure of Northrop Grumman to obtain a satisfactory agreement from any
successor to assume and agree to perform Northrop Grumman's obligations under
the agreement; and (6) any purported termination of the executive's employment
with Northrop Grumman that is not effected pursuant to the procedures set
forth in the agreement. If an executive is a vice president, the executive's
loss of vice president status (other than a promotion to a higher level
office) will constitute Good Reason. In addition, if an executive reports
directly to the Northrop Grumman Chief Executive Officer immediately prior to
the start of the Protected Period, Good Reason will be deemed to exist if the
executive's reporting relationship is changed such that the executive does not
report to one of the following: the Chairman of the Northrop Grumman Board of
Directors, or the Northrop Grumman Chief Executive Officer, President, or
Chief Operating Officer.
Severance benefits generally consist of: (1) an amount equal to three times
the executive's highest annualized base salary earned with respect to the
three full fiscal years prior to the date of the termination of the
executive's employment; (2) an amount equal to three times the greater of (a)
the average of the executive's bonus earned with respect to the three full
fiscal years prior to the date of the termination of the executive's
employment or (b) the executive's target annual bonus established for the
bonus plan year during which the executive's termination occurs; (3) an amount
equal to the executive's unpaid base salary and accrued vacation pay through
the effective date of termination, together with a pro rata portion of the
executive's target bonus for the bonus plan year during which termination
occurs; (4) continuation for 36 months following the effective date of
termination of all benefits pursuant to all welfare benefit plans under which
the executive or his family is eligible to receive benefits as of the
effective date of the Change in Control, and further continuation of medical
benefits for the lives of the executive and his spouse; (5) a lump sum cash
payment representing the present value of the executive's benefits accrued
under Northrop Grumman's qualified defined benefit pension plan and
supplemental retirement plans (calculated as though the executive's employment
had continued for three years) offset by the actuarial present value
equivalent of the benefits payable to the executive from Northrop Grumman's
qualified defined benefit pension plan accrued through the effective date of
termination; and (6) a lump sum cash payment equal to the entire balance of
the executive's deferred compensation, if any, together with any interest
thereon. Executives had the ability to elect, on or before March 1, 2000, an
override of the benefit described in clause (5). If an executive elected an
override, his or her supplemental retirement plan benefits will be paid in
accordance with the provisions of those plans rather than an automatic lump
sum payment.
The March 2000 Special Agreements also provide that if, following a Change
in Control, excise taxes under Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code") apply to payments made under the March 2000
Special Agreements or other plans or agreements, the executive will be
entitled to receive an additional payment (net of income, Medicare and excise
taxes) to compensate the executive for any excise tax imposed.
Long-Term Incentive Stock Plans. The 1993 Stock Plan and the 1987 Stock Plan
(collectively, the "Stock Plans"), permit grants to selected employees of
Northrop Grumman consisting of stock options ("Stock Options"), RPSRs, RSRs
and RASs. A Stock Option granted under the Stock Plans is a right to purchase
a number of shares of Common Stock for a specified period of time at a price
per share not less than the fair market value on the date of grant. An RPSR is
a right to receive a number of shares of Common Stock on a specified future
date conditioned upon continued employment and Northrop Grumman's achievement
of specified performance in relation to a list of peer companies. RSRs are the
right to receive a specified number of shares of Common Stock contingent upon
continued employment with Northrop Grumman and other terms set forth in the
Stock Plans. RASs are restricted shares of Common Stock granted under the 1987
Stock Plan.
22
Prior to amendment of the 1993 Stock Plan on November 18, 1998, under the
Stock Plans, a "Change in Control" had the same definition as used in the
Special Agreements. Consequently, the Merger Vote constituted a "Change in
Control" for purposes of the Stock Plans, and, upon the Merger Vote, (a) all
Stock Options under the Stock Plans outstanding as of February 26, 1998 vested
and became fully exercisable; (b) the RPSRs under the Stock Plans outstanding
as of February 26, 1998 vested and became payable in shares of Northrop
Grumman Common Stock, which payment is calculated based upon attainment of
certain stock price performance targets; and (c) the RSRs and RASs under the
Stock Plans outstanding as of February 26, 1998 vested and became
distributable.
On November 18, 1998, the Board amended the 1993 Stock Plan to provide that
the vesting of stock options would not accelerate upon a vote of the
Stockholders approving a change in control of Northrop Grumman. Rather,
options would accelerate: (i) if a successor company failed to continue those
options; or (ii) if continued only following both an actual close of a change
in control transaction and either termination of an option holder not for
Cause or termination by an option holder for Good Reason. Following a change
in control, RPSRs would accelerate only prorated on time lapsed from the start
of the performance period for which they were granted.
1998 Restricted Stock Rights Plan. In response to the acceleration of RPSR,
RSR and RAS stock awards under the Stock Plans caused by the Merger Vote, the
uncertainty created by the Government's decision to challenge the Merger on
antitrust grounds and Northrop Grumman's agreement to defer the closing of the
Merger pending resolution of the Government's antitrust challenge, the
Compensation Committee and the Board of Directors of Northrop Grumman
concluded that it was appropriate to adopt a program that would undertake to
ensure that receipt by Northrop Grumman's executive officers and key employees
of shares ("Shares") of Common Stock issuable pursuant to the RPSR, RSR and
RAS stock awards would not adversely affect their incentive to serve Northrop
Grumman's and the stockholders' best interests. The Compensation Committee and
the Board of Directors also concluded that a program pursuant to which the
Shares were placed into escrow for a period of time would have the effect of
creating an incentive for such persons to remain with Northrop Grumman and to
create additional value in Northrop Grumman in other ways in the event that
the Merger was not consummated. Accordingly, on March 24, 1998, the Board of
Directors adopted the 1998 Restricted Stock Rights Plan and related Ownership
Retention Agreements (the "1998 Plan"). All executive officers of Northrop
Grumman (including the Named Executive Officers) voluntarily agreed to
participate in the 1998 Plan and placed their Shares (net of tax withholding
as described below) into escrow until the earlier of (i) March 1, 2000, (ii) a
"Change in Control" (which includes consummation of the Merger) or (iii) the
executive officer's death, qualifying Retirement (as defined therein)
subsequent to March 1, 1999, disability or termination by Northrop Grumman
other than for Cause. They also agreed to forfeit their Shares if they
voluntarily left Northrop Grumman other than for Good Reason (which has the
same definition as in the Special Agreements) or if they were terminated for
Cause. Pursuant to the 1998 Plan, applicable tax owed with respect to receipt
of the Shares was deemed to equal the value of the remaining fifty percent of
vested Shares as of the vesting date (February 26, 1998), with any amount in
excess of the amount the executive officers previously instructed Northrop
Grumman to withhold for taxes paid to the executive officer in cash.
The 1998 Plan also applied to the vested Shares received by Northrop Grumman
key employees other than executive officers, with the addition that, any key
employee who voluntarily placed his or her Shares into escrow, also received
an award of additional shares ("Additional Shares") of Common Stock when the
Merger had not been consummated on or prior to July 1, 1998. The awards made
to key employees consisted of a restricted stock right (the "Right") to
receive subject to the terms and conditions of the 1998 Plan, a number of
Additional Shares equal to 14.5% of the total number of his or her Shares (29%
of the shares placed in escrow). As stated on page 18, the escrow period ended
and the shares were released on March 1, 2000. The 1998 Plan terminated on
March 24, 2000.
23
Northrop Grumman Estate Enhancement Program (the "Estate Program")
The Estate Program at present provides Mr. Kresa with the ability to elect,
as an investment alternative under the Northrop Grumman Executive Deferred
Compensation Plan (the "Executive Deferred Compensation Plan") to have all or
a portion of his deferral account balance converted to the Estate Program.
The amount and type of coverage under the life insurance policy is specified
in an individual agreement with Mr. Kresa. Northrop Grumman retains a
collateral assignment of the cash value of the policy. Upon the death of Mr.
Kresa and his wife, Northrop Grumman will receive the greater of the cash
accumulation value of the policy or the premiums paid for the policy, and Mr.
and Mrs. Kresa's beneficiaries will receive the remaining amount.
Alternatively, certain persons designated by Mr. Kresa may elect to transfer
ownership of the policy to Northrop Grumman, in which case death benefits to
the beneficiaries will be paid out of the corporation's general funds.
In the event of a Change in Control (as defined in the Estate Program), the
Estate Program becomes irrevocable, and the Company must transfer the
ownership of Mr. Kresa's policy to an irrevocable trust. Northrop Grumman or
its successor will continue to be responsible for any obligations under the
Estate Program not paid by the trust or for obligations that the trust's
assets are insufficient to cover.
As of January 1, 2001, Mr. Kresa was the only participant in the Estate
Program. Under Mr. Kresa's agreement, a $10 million policy issued by the
Travelers Life and Annuity Company covers Mr. Kresa and his wife, Joyce A.
Kresa. Northrop Grumman paid $2.175 million in premiums attributable to the
investment of Mr. Kresa's deferral amounts under the Executive Deferred
Compensation Plan. Upon the death of the last surviving of Mr. and Mrs. Kresa,
any amounts received by Northrop Grumman under the policy that are in excess
of 200% of the premiums paid by Northrop Grumman will be remitted to Mr. and
Mrs. Kresa's beneficiaries, together with the balance of Mr. Kresa's deferred
compensation plan.
Certain Transactions
Ms. Peters retired as a partner of the law firm of Gibson, Dunn & Crutcher
on December 31, 2000. A partner and a senior advisor of Gibson, Dunn &
Crutcher are consultants for Northrop Grumman, providing analysis and advice
with respect to pending and proposed legislation. The firm also provided legal
counsel during 2000 in connection with various corporate matters.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Northrop
Grumman's officers and directors, and persons who own more than ten percent of
a registered class of Northrop Grumman's equity securities, to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the SEC and the
New York Stock Exchange. The SEC requires officers, directors and greater than
ten percent beneficial owners to furnish Northrop Grumman with copies of all
Forms 3, 4 and 5 they file.
Northrop Grumman believes that all its officers, directors and greater than
ten percent beneficial owners complied with all their applicable filing
requirements for 2000 transactions. This is based on Northrop Grumman's review
of copies of Forms 3, 4 and 5 it has received and of written representations
from certain reporting persons that they were not required to file a Form 5.
24
PROPOSAL TWO: APPOINTMENT OF INDEPENDENT AUDITORS
During the year ending on December 31, 2000, Northrop Grumman paid Deloitte
& Touche, its independent auditors, the following fees:
Audit Fees....................................................... $3,690,000
Financial Information Systems Design and Implementation Fees..... $ 0
All Other Fees................................................... $4,606,000
The Board of Directors recommends that the stockholders ratify the Board's
appointment of Deloitte & Touche LLP as Northrop Grumman's independent
auditors for 2001. Deloitte & Touche LLP served Northrop Grumman as its
independent auditors for 2000. Should the stockholders fail to ratify the
appointment of Deloitte & Touche LLP, the Board of Directors will consider
this an indication to select other auditors for the following year.
A representative of Deloitte & Touche LLP will be present at the Annual
Meeting of Stockholders and will have the opportunity to make a statement if
such representative desires to do so and also will be available to answer
appropriate questions from stockholders.
Vote Required
The affirmative vote of a majority of the shares of Common Stock voting at
the annual meeting is required for approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ABOVE PROPOSAL.
25
PROPOSAL THREE: APPROVAL OF THE
NORTHROP GRUMMAN 2001 LONG-TERM INCENTIVE STOCK PLAN
Stockholders are being asked to approve the Northrop Grumman 2001 Long-Term
Incentive Stock Plan (the "Plan" or the "2001 Plan"). The Board of Directors
adopted the Plan, subject to stockholder approval, on February 21, 2001.
Northrop Grumman believes that incentives and stock-based awards focus
employees on the objective of creating stockholder value and promoting the
success of Northrop Grumman, and that incentive compensation plans like the
2001 Plan are an important attraction, retention and motivation tool for
participants in the Plan. The Board of Directors believes that the 2001 Plan
will promote the interests of Northrop Grumman and its stockholders and that
it will give Northrop Grumman flexibility to continue to provide incentives
that are based on the attainment of corporate objectives and increases in
stockholder value.
Northrop Grumman currently maintains the Northrop Grumman 1993 Long-Term
Incentive Stock Plan (the "1993 Plan"). As of January 31, 2001, 5,790,969
shares of Common Stock were subject to awards outstanding under the 1993 Plan
and an additional 330,775 shares remained available for grant purposes under
the 1993 Plan. An additional 1,080,881 shares (the 2001 evergreen installment)
became available for grant purposes under the 1993 Plan on December 31, 2000.
The Board of Directors approved the 2001 Plan based, in part, on a belief that
the aggregate number of shares available under the 1993 Plan is insufficient
to adequately provide for future incentives. Northrop Grumman's ability to
grant additional awards under the 1993 Plan will terminate if stockholders
approve the 2001 Plan. Awards then outstanding under the 1993 Plan will
continue in accordance with their terms.
Summary Description of the 2001 Plan
The following summary of the principal terms of the 2001 Plan is qualified
in its entirety by the full text of the Plan, which is Exhibit B to this Proxy
Statement.
Purpose. The purpose of the 2001 Plan is to promote the long-term success of
Northrop Grumman and to increase stockholder value by providing officers and
selected employees with incentives to create excellent performance and to
continue service with Northrop Grumman, its subsidiaries and affiliates. Both
by encouraging officers and employees to become owners of Common Stock and by
providing actual ownership through Plan awards, it is intended that Plan
participants will view Northrop Grumman from an ownership perspective.
Administration. The Compensation Committee of the Board will administer the
Plan. The Compensation Committee may delegate its authority to make grants
under the Plan to one or more committees of directors. (The appropriate acting
body, be it the Compensation Committee or another authorized committee of
directors, is referred to in this Proposal as the "Committee"). The Committee
determines the number of shares that are to be subject to awards and the terms
and conditions of awards, including the price (if any) to be paid for the
shares or the award. Subject to the other provisions of the Plan, the
Committee has the authority to make certain adjustments to an outstanding
award and to authorize the conversion, succession or substitution of an award
pursuant to Section 6 of the Plan.
The Committee may allow the purchase price of an award or shares of Common
Stock under the Plan to be paid in the form of cash, by the delivery of
already-owned shares of Common Stock, by the surrender of an award of
equivalent value, through a third-party purchase where the third party agrees
to sell a number of shares on behalf of a participant and the participant
assigns the right to receive the proceeds from such sale to Northrop Grumman
in payment of the purchase price, or any other form permitted by law.
No Repricing. The Committee may not cancel an outstanding option for the
purpose of replacing or re-granting the option with an exercise price that is
less than the exercise price of the original option. The
26
Committee may not amend an outstanding option for the purpose of reducing the
exercise price of the option. (Adjustments to reflect stock splits and similar
events will not be considered amendments for this purpose.)
Eligibility. Persons eligible to receive awards under the Plan include key
employees of Northrop Grumman and key employees of any other entity that is
directly or indirectly controlled by Northrop Grumman or in which Northrop
Grumman has a significant equity interest. All officers and employees of
Northrop Grumman and its subsidiaries (including all of Northrop Grumman's
named executive officers) are considered eligible under the 2001 Plan at the
present time. The Committee determines from time to time the participants to
whom awards will be granted.
Authorized Shares; Limits on Awards. The maximum number of shares of Common
Stock that may be issued or transferred pursuant to awards under the 2001 Plan
equals the sum of:
. 8,000,000 shares; plus
. any shares of Common Stock available but not issued under the 1993 Plan
(the approximate number of shares that are currently available or
expected to become available under the 1993 Plan is set forth above);
plus
. any shares of Common Stock that Northrop Grumman repurchases with
proceeds received from option exercises.
In addition, any shares that are forfeited back to Northrop Grumman under the
2001 Plan or the 1993 Plan, and any shares that have been exchanged by a
participant as full or partial payment to Northrop Grumman in connection with
any award under the 2001 Plan or the 1993 Plan, as well as any shares
exchanged by a participant or withheld by Northrop Grumman to satisfy the tax
withholding obligations related to an award under the 2001 Plan or the 1993
Plan, will be available for issuance under the Plan.
In instances where a stock appreciation right ("SAR") or other award granted
under the Plan or the 1993 Plan is settled in cash or a form other than
shares, the shares that would have been issued had there been no cash or other
settlement will not be counted against the share limits of that plan for
purposes of determining the number of shares that remain available for
issuance under the Plan. The payment of cash dividends and dividend
equivalents in conjunction with outstanding awards will not be counted against
the shares available for issuance under the Plan. In addition, the Plan
generally provides that shares issued in connection with awards that are
granted by or become obligations of Northrop Grumman through the assumption of
awards (or in substitution for awards) in connection with an acquisition of
another company will not count against the shares available for issuance under
the Plan.
The following other limits are also contained in the 2001 Plan:
. No more than 3,000,000 of the shares available for issuance under the
Plan may be issued pursuant to stock awards granted under Section 8(c)
of the Plan (generally, Section 8(c) contemplates awards other than
stock options and stock appreciation rights ("SARs") -such other types
of awards could include stock bonuses, restricted stock performance
shares and other types of awards).
. No more than 4,000,000 shares may be delivered under the Plan pursuant
to stock options qualified as incentive stock options ("ISOs") under
Section 422 of the Internal Revenue Code.
. No more than 900,000 shares may be awarded to any participant during any
three-year period pursuant to stock option grants and SAR grants under
the Plan.
. ""Performance-Based Awards" under Section 8(c)(ii) of the Plan (other
than stock options or SARs, and without giving effect to any related
dividend equivalents) that are granted to any participant during any
three consecutive years may not relate to or provide for payment of more
than 300,000 shares.
. Performance-Based Awards payable only in cash, not related to shares,
and granted to any participant in any calendar year may not provide for
payment of more than $3,000,000.
27
The foregoing share limits apply with respect to all 2001 Plan awards
regardless of whether the underlying shares are attributable to the fixed
8,000,000 shares to be made available for Plan award purposes or shares
available but not issued under the 1993 Plan.
As is customary in incentive plans of this nature, the number and kind of
shares available under the Plan and the then outstanding awards, as well as
exercise and purchase prices, performance targets under certain performance-
based awards, and share limits, are subject to adjustment in the event of
certain stock dividends, stock splits, combinations or exchanges of shares,
mergers, consolidations, spin-offs, recapitalizations and similar events.
The Plan will not limit the authority of the Board of Directors or the
Committee to grant awards or authorize any other compensation, with or without
reference to the Common Stock, under any other plan or authority, except, as
noted above, Northrop Grumman's ability to grant additional awards under the
1993 Plan will terminate if stockholders approve the 2001 Plan.
Types of Awards. The Plan authorizes stock options, SARs, and other forms of
awards granted or denominated in Common Stock or units of Common Stock. The
Plan retains flexibility to offer competitive incentives and to tailor
benefits to specific needs and circumstances. Any award may be paid or settled
in cash.
A stock option is the right to purchase shares of Common Stock at a future
date at a specified price per share (the "exercise price"). The per share
exercise price of an option may not be less than the fair market value of a
share of Common Stock on the date of grant. The maximum term of an option is
ten years from the date of grant. An option may either be an ISO or a
nonqualified stock option. ISO benefits are taxed differently from
nonqualified stock options, as described under "Federal Income Tax Treatment
of Awards under the 2001 Plan" below. ISOs are also subject to more
restrictive terms and are limited in amount by the Code and the Plan. ISOs may
only be granted to key employees of Northrop Grumman or a subsidiary. The
Committee may grant stock options that provide for the award of a new option
when the exercise price of the option and/or tax withholding obligations
related to the exercise of the option are paid in the form of shares or by a
reduction in the number of shares otherwise deliverable.
An SAR is the right to receive payment of an amount equal to the excess of
the fair market value of a share of Common Stock on the date of exercise of
the SAR over the base price of the SAR. The base price will be established by
the Committee at the time of grant of the SAR and generally cannot be less
than the fair market value of a share of Common Stock on the date of grant.
SARs may be granted in connection with other awards or independently. The
maximum term of an SAR is ten years from the date of grant.
The other types of awards that may be granted under the 2001 Plan include,
without limitation, stock bonuses, restricted stock, and performance shares.
Performance-Based Awards. The Committee may grant awards that are intended
to be performance-based awards within the meaning of Section 162(m) of the
Code ("Performance-Based Awards"). Performance-Based Awards are in addition to
any of the other types of awards that may be granted under the Plan (including
options and SARs which may also qualify as performance-based awards for
Section 162(m) purposes). Performance-Based Awards may be in the form of
restricted stock, performance stock, phantom stock or other rights.
The vesting or payment of Performance-Based Awards will depend on the
absolute or relative performance of Northrop Grumman on a consolidated,
segment, subsidiary, division, or plant basis. The Committee will establish
the criterion or criteria and target(s) on which performance will be measured.
The Committee must establish criteria and targets in advance of applicable
deadlines under the Code and while the attainment of the performance targets
remains substantially uncertain. The criteria that the Committee may use for
this purpose will include one or more of the following: revenue growth, net
earnings (either before or after interest, taxes, depreciation, amortization
and/or Net Pension Income (as defined below)), cash flow, return on equity or
on assets or on net investment, cost containment or reduction, stock price
appreciation, total stockholder return, or
28
EVA (as defined below). "Net Pension Income" means any positive difference
between income from employee pension plan investments less the cost of
employee pension benefits for the relevant period of time. "EVA" means
operating profit after tax (which means net earnings after tax but before tax
adjusted interest income and expense and goodwill amortization), less a charge
for the use of capital (which is based on average total capital and the
weighted average cost of capital). The performance measurement period with
respect to an award may range from one to ten years.
Performance-Based Awards may be granted only to key employees of Northrop
Grumman or a subsidiary. Performance goals will be adjusted to mitigate the
unbudgeted impact of material, unusual or nonrecurring gains and losses,
accounting charges or other extraordinary events not foreseen at the time the
goals were set.
Performance-Based Awards may be paid in stock or in cash (in either case,
subject to the limits described under the heading "Authorized Shares; Limits
on Awards" above). Before any Performance-Based Award is paid, the Committee
must certify that the performance target or targets have been satisfied. The
Committee has discretion to determine the performance target or targets and
any other restrictions or other limitations of Performance-Based Awards and
may reserve discretion to reduce payments below maximum award limits.
Dividend Equivalents; Deferrals. The Committee may provide for the deferred
payment of awards, and may determine the other terms applicable to deferrals.
The Committee may provide that awards under the Plan, and/or deferrals, earn
dividends or dividend equivalents based on the amount of dividends paid on
outstanding shares of Common Stock.
Acceleration of Awards; Possible Early Termination of Awards. Generally, if
Northrop Grumman is liquidated, all or substantially all of Northrop Grumman's
assets are sold, or Northrop Grumman is merged, consolidated or reorganized
and stockholders prior to the event do not continue to own more than 60% of
the combined voting power of Northrop Grumman or a successor after the event,
then, if outstanding Plan awards are not assumed or continued after the event,
all options granted under the Plan will vest, SARs will be paid, and any other
types of awards will vest or be paid. The Committee also has the discretion to
establish other change in control provisions with respect to awards granted
under the Plan. For example, the Committee could provide for the acceleration
of vesting or payment of an award in connection with a change in control event
that is not described above.
Transfer Restrictions. Subject to certain exceptions contained in Section 11
of the Plan, awards under the Plan are not transferable by the recipient other
than by will or the laws of descent and distribution and are generally
exercisable, during the recipient's lifetime, only by the recipient. Any
amounts payable or shares issuable pursuant to an award will be paid only to
the recipient or the recipient's beneficiary or representative.
Termination of or Changes to the 2001 Plan. The Board of Directors may amend
or terminate the Plan at any time and in any manner. Stockholder approval for
an amendment will be required only if the amendment increases the number of
shares available under the Plan or if stockholder approval is otherwise
required as a matter of law. (Adjustments as a result of stock splits or
similar events will not be considered an amendment requiring stockholder
approval.) Unless terminated earlier by the Board of Directors, the Plan will
terminate on February 21, 2011. Outstanding awards generally may be amended,
subject to the consent of the holder if the amendment materially and adversely
affects the holder.
Securities Underlying Awards. The market value of a share of Common Stock as
of [ , 2001] was [$ ].
Federal Income Tax Treatment of Awards Under the 2001 Plan
The federal income tax consequences of the 2001 Plan under current federal
law, which is subject to change, are summarized in the following discussion of
the general tax principles applicable to the 2001 Plan. This summary is not
intended to be exhaustive and, among other considerations, does not describe
state, local, or international tax consequences.
29
With respect to nonqualified stock options, Northrop Grumman is generally
entitled to deduct and the optionee recognizes taxable income in an amount
equal to the difference between the option exercise price and the fair market
value of the shares at the time of exercise. With respect to ISOs, Northrop
Grumman is generally not entitled to a deduction nor does the participant
recognize income at the time of exercise. The current federal income tax
consequences of other awards authorized under the Plan generally follow
certain basic patterns: SARs are taxed and deductible in substantially the
same manner as nonqualified stock options; nontransferable restricted stock
subject to a substantial risk of forfeiture results in income recognition
equal to the excess of the fair market value over the price paid (if any) only
at the time the restrictions lapse (unless the recipient elects to accelerate
recognition as of the date of grant); bonuses, cash and stock-based
performance awards, dividend equivalents and other types of awards are
generally subject to tax at the time of payment. Compensation otherwise
effectively deferred is taxed when paid. In each of the foregoing cases,
Northrop Grumman will generally have a corresponding deduction at the time the
participant recognizes income.
If an award is accelerated under the 2001 Plan in connection with a change
in control (as this term is used under the Code), Northrop Grumman may not be
permitted to deduct the portion of the compensation attributable to the
acceleration ("parachute payments") if it exceeds certain threshold limits
under the Code (and certain related excise taxes may be triggered).
Furthermore, the aggregate compensation in excess of $1,000,000 attributable
to awards that are not "performance-based" within the meaning of Section
162(m) of the Code may not be permitted to be deducted by Northrop Grumman in
certain circumstances.
Specific Benefits
The number, amount and type of awards to be received by or allocated to
eligible persons under the Plan cannot be determined at this time. The
Committee has not yet considered any specific awards under the Plan. If the
Plan had been in effect in 2000, Northrop Grumman expects that its 2000 award
grants would not have been substantially different for officers and employees
than those actually made under the 1993 Plan. The only awards to executive
officers of Northrop Grumman in 2000 were "re-load" options as described on
page 19.
Vote Required
The affirmative vote of a majority of the votes cast on the proposal,
provided that the total votes cast on the proposal represents over 50% in
interest of all securities entitled to vote on the proposal is required for
approval of this proposal. Members of the Board of Directors who are employed
by Northrop Grumman are eligible for awards under the 2001 Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ABOVE PROPOSAL.
30
PROPOSAL FOUR: AUTHORIZATION OF ISSUANCE OF COMMON STOCK
UPON CONVERSION OF SERIES B PREFERRED STOCK
In connection with the proposed acquisition of Litton, Northrop Grumman will
issue up to 13,000,000 shares of Common Stock and 3,500,000 shares of
Preferred Stock in exchange for shares of Litton Industries, Inc. common
stock. The shares will be issued pursuant to an Offer to Purchase or Exchange
filed with the Securities and Exchange Commission on February 1, 2001 by NNG
as a part of a Registration Statement on Form S-4 (SEC file number 333-54800).
The Offer and Registration Statement can be obtained, without charge (a) by
calling Georgeson Shareholder Communications Inc. at (800) 223-2064, (b) by
writing or calling Northrop Grumman at: Investor Relations, Northrop Grumman
Corporation, 1840 Century Park East, Los Angeles, California 90067, (310) 201-
3423, or (c) from the Securities and Exchange Commission's website at
www.sec.gov.
The Preferred Stock will be entitled to dividends at the rate of 9%
annually, unless stockholders approve the issuance of common stock upon
conversion of the preferred stock. If approved, the conversion price will be
equal to 127% of the average closing price for Northrop Grumman's common stock
for the five trading days ending two trading days prior to expiration of the
Offer. If stockholder approval is obtained, the preferred stock dividend will
be 7% annually and certain participating rights of holders of the preferred
stock will be eliminated, as described below under "Liquidation," Redemption,"
and "Change in Control."
The rules of the New York Stock Exchange generally require shareholder
approval for the issuance of common stock (or securities convertible into
common stock) in excess of 20% of the common stock outstanding. The total
number of shares of Common Stock to be issued in the Litton acquisition will
be slightly less than 20%, if the Preferred Stock is not convertible into
common stock. However, this percentage would be exceeded if the Preferred
Stock is convertible into Common Stock. Therefore, the Preferred Stock will
not be convertible without the approval of stockholders.
The Board of Directors believes that it is the best interest of Northrop
Grumman and its shareholders to authorize the issuance of Common Stock upon
conversion of the Preferred Stock and recommends that stockholders vote FOR
Proposal Four.
The affirmative vote of a majority of the votes cast on the proposal,
provided that the total votes cast on proposal represents over 50% in interest
of all securities entitled to vote on the proposal is required for approval of
this proposal.
Description of Preferred Stock
The following is a summary of the rights, preferences and privileges of the
Preferred Stock, as set forth in a Certificate of Designations, Preferences
and Rights of Series B Preferred Stock of NNG to be filed with the Secretary
of State of Delaware immediately prior to the acquisition of a majority of the
outstanding stock of Litton. A copy of the certificate of designations is
attached as Exhibit C. This summary is not a complete description such rights,
preferences and privileges and the rights of holders of the Preferred Stock
are governed by the precise language of the certificate designations, not this
summary. All references to Northrop Grumman below are to NNG, as the new
holding company for Northrop Grumman and Litton. As described above, NNG will
change its name to "Northrop Grumman Corporation" upon completion of the
Northrop reorganization and the acquisition of a majority of the outstanding
stock of Litton.
Conversion
The conversion rights of the Preferred Stock are subject to shareholder
approval of the issuance of the shares of Common Stock conversion of the
Preferred Stock. No conversion rights may be exercised unless and until such
shareholder approval is obtained.
Subject to shareholder approval, each share of Preferred Stock will be
convertible, at any time, at the option of the holder into the right to
receive shares of Common Stock. Initially, each share of Preferred Stock will
be
31
convertible into the right to receive the number of shares of Common Stock
equal to the liquidation value of $100.00 per share of Preferred Stock divided
by 127% of the average closing price of Common Stock for the five trading days
ending two trading days prior to expiration of the Offer for Litton's
outstanding stock.
The conversion ratio is subject to adjustment in the event of certain
dividends and distributions; upon a subdivision or reclassification of the
outstanding shares of Common Stock; a merger or consolidation of Northrop
Grumman or the sale of substantially all of Northrop Grumman's assets; upon
the liquidation of Northrop Grumman; upon the occurrence of certain specified
distributions with respect to the Common Stock; and certain other events
described in the Certificate of Designations.
If any adjustment in the number of shares of Common Stock into which each
share of Preferred Stock may be converted would result in an increase or
decrease of less than 1% in the number of shares of Common Stock into which
each share of Preferred Stock is then convertible, the amount of the
adjustment will be carried forward and the adjustment will be made at the time
of and together with any subsequent adjustment, which, together with any
adjustment amounts carried forward, would equal at least 1% of the number of
shares of Common Stock into which each share of Preferred Stock is then
convertible.
Liquidation
In any liquidation of Northrop Grumman, each share of Preferred Stock will
be entitled to a liquidation preference of $100.00 plus accrued but unpaid
dividends, whether or not declared, before any distribution may be made on the
Common Stock or any other class or series of capital stock of Northrop Grumman
which is junior to the Preferred Stock. In any liquidation of Northrop
Grumman, no distribution may be made on any shares of capital stock of
Northrop Grumman ranking on a parity with the Preferred Stock as to dividends,
redemption payments and rights upon liquidation dissolution or winding up of
Northrop Grumman, unless the holders of Preferred Stock participate ratably in
the distribution along with the Preferred Stock as to such matters. In the
event shareholder approval of the issuance of Common Stock upon conversion of
the Preferred Stock has not occurred, the amount payable in liquidation will
be the greater of the amount described above and the amount that would be
distributed if such share of Preferred Stock had been converted into Common
Stock pursuant to the provision for conversion.
Reacquired Shares
Any shares of Preferred Stock converted, redeemed, purchased or otherwise
acquired by Northrop Grumman will be retired and canceled. The reacquired
shares will become authorized but unissued shares of Preferred Stock, which
Northrop Grumman may reissue at a later date.
Rank
The Preferred Stock ranks with respect to payment of dividends, redemption
payments and rights upon liquidation, dissolution or winding up, prior to the
Common Stock and any class or series of preferred stock which by its terms
ranks junior to the Preferred Stock. The Preferred Stock ranks on parity with
each other class or series of preferred stock.
Voting Rights
Holders of Preferred Stock have no voting rights except in certain specified
circumstances described below or as required by applicable law. The
affirmative vote of the holders of two-thirds of the aggregate number of
outstanding shares of the Preferred Stock is required for an amendment of
Northrop Grumman's restated certificate of incorporation, for a merger of
Northrop Grumman or any other action which would:
. authorize any class or series of stock ranking prior to the Preferred
Stock as to dividends, redemption payments or rights upon liquidation,
dissolution or winding up;
32
. adversely alter the preference, special rights or powers given to the
Preferred Stock; or
. cause or permit the purchase or redemption of less than all of the
Preferred Stock unless all dividends to which such shares are entitled
have been declared and paid or provided for.
If accrued dividends on the Preferred Stock are not paid for six quarterly
dividend periods (whether or not consecutive), a majority of the holders of
the Preferred Stock, voting separately as a class, will have the right to
elect two directors. If such holders exercise their right to elect two
directors to Northrop Grumman's board, the size of Northrop Grumman's board
will be increased by two members until the dividends in default are paid in
full or payment for the past-due dividends is set aside.
Dividends
Holders of Preferred Stock will be entitled to cumulative cash dividends,
payable quarterly in April, July, October and January of each year. If the
Preferred Stock has been issued prior to the Annual Meeting, the initial
dividend rate per share will be $7.00 per year. Commencing after the dividend
payable in October 2001, the dividend rate per share will be $7.00 per year if
shareholder approval for the issuance of Common Stock upon conversion of the
Preferred Stock has been obtained, or $9.00 per year if it has not been
obtained. The dividend rate per share will be reduced from $9.00 per year to
$7.00 per year after shareholder approval of the issuance of Common Stock upon
conversion of the Preferred Stock is obtained. If the Preferred Stock is
issued after the Annual Meeting, the initial dividend rate will be $7.00 per
year if shareholder approval of the issuance of Common Stock upon conversion
of the Preferred Stock has been obtained and $9.00 per year if shareholder
approval has not been obtained. If the dividend rate per share is set at $9.00
per year, it will be reduced from $9.00 per year to $7.00 per year after
shareholder approval of the issuance of Common Stock upon conversion of the
Preferred Stock is obtained. Dividends are cumulative and payable in cash.
If dividends are payable and have not been paid or set apart in full, the
deficiency must be fully paid or set apart for payment before:
. distributions or dividends are paid on stock ranking junior to the
Preferred Stock; and
. the redemption, repurchase or other acquisition for consideration of any
shares of capital stock of Northrop Grumman ranking junior to the
Preferred Stock.
Redemption
Mandatory Redemption For Cash After Twenty Years. Northrop Grumman is
required to redeem all of the shares of Preferred Stock for cash twenty years
and one day from the date of issuance of the Preferred Stock. The redemption
price per share is equal to the liquidation value of $100.00 per share of
Preferred Stock plus accrued but unpaid dividends, whether or not declared, to
the mandatory redemption date. In the event that shareholder approval of the
issuance of Common Stock upon conversion of the Preferred Stock has not
occurred by the mandatory redemption date, the amount payable for each share
of Preferred Stock will be the greater of (a) the liquidation value of $100.00
per share of Preferred Stock plus accrued but unpaid dividends to the
redemption date, whether or not declared, and (b) the current market price on
the redemption date of the number of shares of Common Stock which would be
issued upon conversion of a share of Preferred Stock pursuant to the provision
for conversion.
Optional Redemption For Common Stock After Seven Years. Northrop Grumman has
the option to redeem shares of the Preferred Stock in exchange for Common
Stock seven years from the date of the initial issuance of the Preferred
Stock. Upon redemption, holders of Preferred Stock will receive the number of
shares of Common Stock equal to the liquidation value of $100.00 per share of
Preferred Stock plus accrued but unpaid dividends to the redemption date
dividend by the current market price of the Common Stock on the redemption
date. In the event that shareholder approval of the issuance of Common Stock
upon conversion of the Preferred Stock has not occurred by the redemption
date, the number to be divided in the above calculation will be the greater of
the
33
amount described above and the current market price on the redemption date of
the number of shares of Common Stock which would be issued if all shares of
Preferred Stock were converted on the redemption date into Common Stock
pursuant to the provision for conversion.
Change in Control
Upon a fundamental change in control of Northrop Grumman, as defined below,
holders of Preferred Stock have the right, which may be exercised during the
period of 20 business days following notice from Northrop Grumman, to exchange
their shares of Preferred Stock for Common Stock. Each share of Preferred
Stock may be exchanged in such circumstances for that number of shares of
Common Stock determined by dividing the liquidation value of $100.00 per share
of Preferred Stock, plus accrued but unpaid dividends to such date by the
current market value of the Common Stock on the exchange date. In the event
shareholder approval has not been obtained for the issuance of Common Stock
upon conversion of the Preferred Stock, the number to be divided in the above
calculation will be the greater of the amount described above or the current
market price of the number of shares of Common Stock which would be issued if
such share of Preferred Stock were converted into Common Stock pursuant to the
provision for conversion.
A "fundamental change in control" is defined as any merger, consolidation,
sale of all or substantially all of Northrop Grumman's assets, liquidation or
recapitalization (other than solely a change in the par value of equity
securities) of the Common Stock in which more than one-third of the previously
outstanding Common Stock is exchanged for cash, property or securities other
than capital stock of Northrop Grumman or another corporation.
If the fundamental change in control occurred as a result of a transaction
(excluding certain dividends or distributions on, and reclassifications of,
Common Stock) in which the previously outstanding Common Stock is changed into
or exchanged for different securities of Northrop Grumman or securities of
another corporation or interests in a non-corporate entity, the Common Stock
that would otherwise have been issued to a holder of Preferred Stock for each
share of Preferred Stock will be deemed instead to be the kind and amount of
securities and property receivable upon completion of such transaction in
respect of the Common Stock that would result in the fair market value of such
securities and property, measured as of the exchange date, being equal to the
liquidation value plus accrued and unpaid dividends. In the event that
shareholder approval of the issuance of Common Stock upon conversion of the
Preferred Stock has not occurred, the fair market value of the securities and
property will instead be calculated to be equal to the greater of the amount
described above, and the fair market value of the securities and property
which would have been issued if such share of Preferred Stock had been
converted into Common Stock, if conversion were permitted.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ABOVE PROPOSAL.
34
PROPOSAL FIVE: AMENDMENT TO CERTIFICATE OF INCORPORATION
The Board of Directors believes that it is in the best interest of Northrop
Grumman and its shareholders to amend Article IV of the Certificate of
Incorporation to increase the authorized capitalization of Northrop Grumman.
Under the proposed amendment, the number of shares of Common Stock which
Northrop Grumman is authorized to issue will be increased from 200,000,000 to
400,000,000 shares. At the close of business on April 9, 2001 there were
shares of Common Stock and no shares of Preferred Stock of Northrop Grumman
outstanding. In addition, as of such date, shares of Common Stock were
reserved for issuance under Northrop Grumman's 1987 and 1993 Plans
(collectively, the "Stock Plans"). If this proposal is approved and effected,
Northrop Grumman will have available additional authorized but unissued
and unreserved shares of Common Stock.
The Board of Directors of Northrop Grumman believes that it is prudent to
have such additional shares of Common Stock available for general corporate
purposes including future public or private offerings, acquisitions of other
businesses or properties, possible stock splits or stock dividends. Northrop
Grumman has no current plans for the issuance of any shares of Common Stock,
except pursuant to the Stock Plans and the acquisition of Litton Industries,
Inc. as previously described. As Northrop Grumman has a sufficient number of
existing authorized and unissued shares of Common Stock for purposes of the
Stock Plans and the Litton acquisition, a failure to approve Proposal Five
will not affect these uses.
Unless otherwise required by applicable law or regulation, all authorized
but unissued and unreserved shares of Common Stock will be issuable, without
any further authorization by the shareholders, on such terms and for such
consideration as may be determined by the Board of Directors of Northrop
Grumman. If applicable law or regulation does not require shareholder approval
as a condition to the issuance of shares in any particular transaction, it is
expected that such approval will not be sought.
The sale of a substantial number of shares of Common Stock to persons who
have an understanding with Northrop Grumman concerning the voting of such
shares, or the distribution or dividend of shares of Common Stock (or the
right to receive Common Stock) to the shareholders of Northrop Grumman, may
have the effect of discouraging unsolicited attempts to acquire control of
Northrop Grumman. In addition, any issuance of additional shares of Common
Stock could have the effect of diluting the earnings per share and book value
per share of existing shares of Common Stock, and such additional shares could
be used to dilute the stock ownership of a person seeking to obtain control of
Northrop Grumman. Management and the Board of Directors have no knowledge of
any effort by any person to obtain control of Northrop Grumman, and the Board
of Directors has no present intention (i) of issuing any shares of Common
Stock with the understanding that the purchasers would vote their shares in
any particular way or (ii) of distributing shares or rights to Northrop
Grumman's shareholders.
Northrop Grumman's shareholders are not entitled to preemptive or other
rights to subscribe for shares of Common Stock which may be issued in the
future.
If this proposal is approved, Article IV of Northrop Grumman's Articles of
Incorporation will be amended to read in its entirety as set forth in Exhibit
D hereto. This proposal has been unanimously approved by the Board of
Directors.
Vote Required
The affirmative vote of a majority of the outstanding shares of Common Stock
is required for approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ABOVE PROPOSAL.
35
PROPOSAL SIX: STOCKHOLDER PROPOSAL
The proponent of a stockholder proposal has stated that the proponent
intends to present a proposal at the Annual Meeting. The name, address and
number of shares held by the proponent will be furnished by Northrop Grumman
upon request to the Corporate Secretary. The proposal and supporting
statement, for which the Board of Directors accepts no responsibility, is set
forth below. The Board of Directors opposes the proposal for the reasons
stated after the proposal.
RESOLVED: Shareholders request that Northrop Grumman disclose all
significant promises (including technology transfers) made to foreign
governments or foreign firms in connection with foreign military sales,
intended to offset their U.S. dollar cost of weapons purchased by foreign
nations.
WHAT ARE OFFSETS?
Offsets are agreements by U.S. weapons manufacturers and the U.S. government
to direct some benefits--usually jobs or technology--back to the purchasing
country as condition of sale. The value of offsets sometimes exceeds the
weapons' cost.
Direct offsets transfer purchasing dollars and/or work and military technology
(often through licensing or joint production) to the recipient country to
produce a U.S. weapon system, its components, or sub-components.
Indirect offsets may involve investments in the purchasing country, counter-
trade agreements to market foreign goods, or transfers of commercial
technology.
U.S. taxpayers finance offsets by (1) paying for the research and development
of weapons and (2) providing grants, loans and loan guarantees for the sale.
Offsets also lead to the loss of U.S. jobs.
ARE OFFSET AGREEMENTS PROPRIETARY?
The U.S. arms industry guards information on offsets closely, claiming
"proprietary privilege." However, purchasing countries often disclose such
information for their own political purposes, e.g., to convince their citizens
that they are gaining some tangible benefits from the millions or billions of
dollars spent on arms.
The proponents believe that insofar as U.S. arms manufacturers (1) engage in
foreign policy by negotiating private offset agreements with foreign
governments, and (2) export domestic jobs while claiming that foreign military
sales create jobs, they forfeit their proprietary claims to this information.
Sound public policy demands transparency and public debate on these matters.
OFFSET EXAMPLES
In 1999, two U.S. companies offered lucrative production-sharing contracts
with Israeli military manufacturers, in connection with Northrop Grumman's
bidding on a contract with Israel.
Between 1993 and 1997, U.S. defense companies entered into new offset
agreements valued at $19 billion in support of $35 billion worth of defense
contracts. For every dollar a U.S. company received from an arms sale
associated with offsets, it returned 54 cents worth of offset obligations to
the purchasing country ("Offsets in Defense Trade 1999", Commerce Department)
1997 data shows that 13 U.S. prime military contractors reported 58 new offset
agreements valued at $3.85 billion in support of $5.84 billion in export
contracts. Aerospace is the sector most impacted by offsets. Between 1993 and
1997 about 90% of offset agreements and transactions were associated with
aerospace exports. The 1999 Commerce Department concludes, "offsets provide
substantial benefits to foreign firms, and in the process deny business to
otherwise competitive U.S. firms."
36
ARMS EXPORTS DON'T CREATE JOBS
The faith-based proponents submit this resolution for Board consideration
because arms exports do not create jobs. Current weapons proliferation and the
export of jobs and technology through offsets raise profound moral and
ethical, as well as fiscal, questions that shareholders should address.
MANAGEMENT'S POSITION
Northrop Grumman's offset arrangements enable it to compete in the
international defense market. Competition for defense contracts with foreign
governments has grown in recent years due to decreased defense spending and
increased reliance on local and regional contractors to fulfill military
needs. These factors confirm Northrop Grumman's belief that offset
arrangements are a positive factor in a foreign government's decision to
select a defense contractor. Any action by Northrop Grumman to alter the
current offset programs would harm its ability to participate in this market.
Typically, the terms of offset arrangements are private and not subject to
disclosure. In fact, the existing offset arrangements prohibit Northrop
Grumman from disclosing the terms of the offset and disclosing the specific
offset projects that will be implemented. Foreign governments disclose few
details about offset programs. Even the U.S. Government has taken the position
that offsets are private arrangements between the foreign government and the
defense contractor. By disclosing information about offsets, Northrop Grumman
would breach the majority of its existing offset arrangements and hinder its
chances of receiving defense contracts from foreign governments.
Northrop Grumman's international sales provide the means for Northrop
Grumman to create new jobs and maintain its current labor force. While offsets
may occasionally result in the transfer of some jobs and technology overseas,
the Company believes that international contracts allow it to maintain its
production base, add new jobs in the United States, lower the per unit price
of similar goods and services to the United States Government and ultimately
benefit its employees and shareholders.
Approval of this proposal requires the affirmative vote of a majority of the
votes cast on the porposal. Because the proposal is only a recommendation, its
approval would not effectuate the changes it references. Offset disclosure
would require separate approval by the Board of Directors.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "AGAINST" PROPOSAL NUMBER
SIX.
37
PROPOSAL SEVEN: STOCKHOLDER PROPOSAL
The proponent of a stockholder proposal has stated that the proponent
intends to present a proposal at the Annual Meeting. The name, address and
number of shares held by the proponent will be furnished by the Company upon
request to the Corporate Secretary. The proposal and supporting statement, for
which the Board of Directors accepts no responsibility, is set forth below.
The Board of Directors opposes the proposal for the reasons stated after this
proposal.
Recommend
RESTORE SIMPLE-MAJORITY VOTE
Reinstate simple-majority vote which we believe will enhance shareholder
value. Delete Northrop requirements for greater than a majority share vote to
the fullest extent possible.
An 80% vote is now required to remove a Northrop Director with cause. This
80% requirement can equal 100% in elections with an 80% turn-out.
Also, require that any future proposal impacting majority shareholder vote
be put to shareholder vote - as a separate proposal. Simple-majority vote was
the rule at Northrop for decades.
According to a Northrop December 3, 1999 press release - the directors,
elected by the shareholders - will postpone for 3 years any possible action on
this resolution and 2 other resolutions:
. shareholder right to vote on poison pills
. annual election of all directors.
The directors, elected by shareholders, gave no substantial reason for 3
years of procrastination on shareholder proposals that won impressive votes.
Shareholder votes of 52%, 63% and 64% were reported.
The board's 3-year procrastination is an added incentive for shareholders to
send a stronger vote at the 2001 shareholder meeting.
The Council of Institutional Investors (http://www.cii.org) expressed its
concern to Northrop management regarding its failure to respond to these
winning shareholder votes. Northrop is 83% owned by institutional investors.
To increase Northrop stock price:
Restore simple majority vote
Yes on 7
MANAGEMENT'S POSITION
The approval of a majority of the votes cast at a meeting, whether in person
or by proxy, is required for most proposals submitted to a vote of the
Company's stockholders. Consistent with Delaware law and the Company's
Certificate of Incorporation, which has been approved by the stockholders of
the Company, the vote of holders of at least 80% of the outstanding voting
stock is required to authorize certain significant corporate actions.
These "super-majority' provisions, contrary to the proponent's assertions,
do not preclude changes to corporate governance provisions. Super-majority
provisions operate to ensure that fundamental changes within the Company may
only be made when a broad consensus of stockholders agrees that such change is
prudent.
38
Also, contrary to the proponent's assertions, the Board promptly focused its
attention on this proposal immediately after their 1999 Annual Shareholders
Meeting and concluded the provision continued to be in the best interests of
the shareholder.
Our super-majority provisions, like those contained in the governance
documents of many public corporations, are designed to provide protection for
all stockholders against self-interested actions by one or a few large
stockholders. The provisions are not intended to, and do not, preclude
unsolicited, non-abusive offers to acquire the Company at a fair price. They
are designed, instead, to encourage any potential acquirer to negotiate
directly with the Board. This is desirable because the Board is in the best
position to evaluate the adequacy and fairness of proposed offers, to
negotiate on behalf of all stockholders and to protect stockholders against
abusive tactics during a takeover process.
Approval of this proposal requires the affirmative vote of a majority of the
votes cast on the proposal. However, because the proposal is a recommendation,
its approval would not effectuate the changes contemplated by the proposal.
Elimination of the super-majority voting requirements would require amendment
of the Company's Certificate of Incorporation, which requires approval by the
Board and holders of at least 80% of the outstanding voting stock of the
Company.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "AGAINST" PROPOSAL NUMBER
SEVEN.
39
PROPOSAL EIGHT: STOCKHOLDER PROPOSAL
The proponent of a stockholder proposal has stated that the proponent
intends to present a proposal at the Annual Meeting. The name, address and
number of shares held by the proponent will be furnished by the Company upon
request to the Corporate Secretary. The proposal and supporting statement, for
which the Board of Directors accepts no responsibility, is set forth below.
The Board of Directors opposes the proposal for the reasons stated after this
proposal.
ELECT ALL DIRECTORS EACH YEAR
Northrop shareholders request the Board of Directors take all necessary
steps to enact this resolution. This includes that less frequent than annual
election of all directors requires a shareholder vote, as a separate
resolution.
Why elect all directors each year?
Annual accountability to shareholders can improve the company response to
these challenges:
The Pentagon may split the Joint Strike Fighter (JSF) project between Boeing
and Lockheed, perhaps leaving Northrop in the cold.
Los Angeles Business Journal
Annual election of all Northrop directors is needed to address evidence of
self-interest at the highest level of the company.
This led to a federal class action suit against Northrop officers and
directors.
. Northrop director independence is compromised by directors sitting on
interlocking outside boards as cross-directors. This negatively impacts
director commitment to Northrop. For example:
Interlocking
Directors Company
------------ -------
Kresa & Slaughter Avery Dennison
Kresa & Slaughter Atlantic Richfield
Lutz & Robson Exide
. Robson and Slaughter also serve on key Board Committees, where independence
is of greater importance.
. Corporate governance experts say cross-directors tend to look out for each
others' interest, rather than shareholder interest.
Business Week
. Attorney Peters sits on the Northrop board while her firm, Gibson, Dunn &
Crutcher, collects fees from Northrop.
. Peters also sits on the key Audit Committee - additionally compromised by
the Kresa/Slaughter inter-lock cited above.
. The American Bar Association discourages directors from serving at
companies where they collect additional legal fees.
. The Council of Institutional Investors (http://www.cii.org/) recommends
independent directors on all key board committees.
40
The best boards continue to raise the bar, said Business Week.
Elect all Directors each year
Yes on 8
MANAGEMENT'S POSITION
The Board of Directors, as provided under the Company's Certificate of
Incorporation and approved by the stockholders of the Company, is divided into
three classes. Each class serves a term of three years, with one class,
constituting approximately one-third of the Board, being elected each year at
the Company's Annual Meeting of Stockholders. The Board consists of
individuals with a broad range of experience and knowledge that is invaluable
in considering issues important to the Company. This experience must be
coupled with an in-depth understanding of our business, future plans and
strategic posture in the defense industry. These characteristics are of
particular importance to our Company due to its significant investments in
research and development, which are essential to the Company's long-term
growth.
It is in the best interest of the Company and our stockholders to maintain a
high level of experience and continuity within the Board of Directors. Under
the current system, after an election, at least two-thirds of the Board will
have had at least one year of experience as a director of the Company. These
Board members will have a heightened familiarity with our Company's business
policies and practices. Thus, the current structure of the Board is
specifically tailored to ensure this minimum level of experience and
continuity.
Our classified Board structure provides an additional benefit of reducing
the likelihood of a sudden, unsolicited and possibly disadvantageous takeover.
A classified board provides the Company with the time and the leverage to
negotiate at arms length with parties seeking control of the Company.
Essentially, a classified board gives the Board the opportunity to consider
alternatives that are best for the Company and that maximize stockholder
value. Classified boards do not preclude successful takeover offers; they
enhance the Board's ability to negotiate for favorable terms. Declassification
of the Board could eliminate these benefits and make the Company a target for
unsolicited hostile overtures from parties seeking to benefit themselves at
the expense of the Company and, more importantly, its stockholders.
Directors selected to a classified Board are no less accountable to
stockholders than they would be if all directors were elected annually. Each
year at least three directors must stand for election; this gives stockholders
an opportunity to vote against management's slate of candidates.
The Board firmly disagrees with the proponent's assertion that, because of
one or more Board member's service on an outside board, its oversight or
ability to act in the best interest of the Company's stockholders is in
question. Service on an outside board can provide the Board member with
perspective and experience that potentially enhance the Board member's
contributions to Board deliberations. Also, contrary to the proponent's
assertions, the Board promptly focused its attention on the 1999 proposal
after the Shareholders Meeting and concluded the provision continued to be in
the best interests of the shareholders.
We note that Messrs. Kresa and Slaughter no longer serve as directors of
Atlantic Richfield, Mr. Robson is no longer a director of Exide, and Ms.
Peters has retired as a partner of Gibson, Dunn & Crutcher. We also note that
the federal litigation cited by the proponent was dismissed with prejudice in
orders entered in April 2000 and October 2000; the plaintiffs have filed
timely appeals of those orders, which are pending.
Approval of this proposal requires the affirmative vote of a majority of the
votes cast on the proposal. However, because the proposal is a recommendation,
its approval would not effectuate the changes contemplated by the proposal.
Elimination of the classified board would require amendment of the Company's
Certificate of Incorporation and Bylaws, which requires approval by the Board
and holders of at least 80% of the outstanding voting stock of the Company.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "AGAINST" PROPOSAL NUMBER
EIGHT.
41
PROPOSAL NINE: STOCKHOLDER PROPOSAL
The proponent of a stockholder proposal has stated that the proponent
intends to present a proposal at the Annual Meeting. The name, address and
number of shares held by the proponent will be furnished upon request to the
Corporate Secretary. The proposal and supporting statement, for which the
Board of Directors accepts no responsibilities, is set forth below. The Board
of Directors opposes the proposal for the reasons stated after this proposal.
RECOMMEND SHAREHOLDERS HAVE THE
OPPORTUNITY TO VOTE ON POISON PILLS
Proposal
RESOLVED: Recommend shareholders have the opportunity to vote on poison
pills and the Company not adopt or maintain any poison pills designed to block
the purchase of stock in excess of a specified amount, UNLESS this is approved
by shareholders.
This recommendation includes, but is not limited to the poison pill adopted
by the Board WITHOUT SHAREHOLDER APPROVAL in 1998. This Proposal, after
adoption, is recommended not to be amended, modified or repealed, except by a
shareholder vote as a separate un-bundled proposal.
A similar proposal on the subject of shareholder approval of poison pills
won 64% shareholder approval at the 1999 shareholder meeting. Two additional
shareholder proposals won majority or near-majority votes as that same
meeting:
1) Reinstate Simply Majority Shareholder Vote 62% Approval
2) Annual Election of All Directors 49% Approval
Why submit Northrop's poison pill to a shareholder vote?
. Poison pills give directors absolute veto power over any proposed business
combination, no matter how beneficial it might be for the shareholders.
Power and Accountability
By Nell Minow and Robert Monks
. The Council of Institutional Investors (www.cii.org) calls for shareholder
approval of all poison pills.
. The adoption of proposals winning majority vote is of greater significance
to Northrop.
Recommend Shareholders to have the
opportunity to vote on Poison Pills
Yes on 9
MANAGEMENT'S POSITION
The Board believes that the Company's shareholder rights plan is in the best
interests of the stockholders and recommends that you vote against this
proposal.
Northrop Grumman is one of more than 2,200 public companies that have a
rights plan in place. Our shareholder rights plan (the "Rights Plan") was
adopted by the Board as a means of preserving and maximizing value for the
Company's shareholders, by encouraging potential acquirers to negotiate
directly with the Board. Our Rights Plan provides the Board adequate
flexibility to negotiate the highest possible bid from a potential acquirer.
The Rights Plan enables the Board to evaluate any potential offer and to
develop potential alternatives to maximize stockholder value.
42
The Rights Plan also is intended to protect shareholders against partial and
two-tiered tender offers and creeping stock accumulation programs, tactics
that do not treat all shareholders fairly and equally. Contrary to the
proponent's assertions, the Rights Plan is not intended to prevent, nor does
it prevent, bidders from making offers to acquire the Company at a price and
on terms which would be in the best interests of all shareholders.
In 1997 Georgeson & Company Inc.'s Research Group analyzed data from 1992
through 1996 to determine the impact rights plans had on shareholder value.
The Georgeson's research found that premiums paid to acquire target companies
with rights plans were on average eight percentage points higher than premiums
paid for target companies without rights plans. The Georgeson research
estimates that stockholder rights plans contributed an additional $13 billion
in shareholder value during the 1992 - 1996 period, and that the stockholders
of acquired companies without rights plans gave us $14.5 billion in potential
premiums. The economic benefit of shareholder rights plans prompted 361
companies to adopt or renew rights plan in 1999.
Pursuant to the terms of our Rights Plan, the Board may redeem the rights
issued under the Rights Plan to permit an acquisition that adequately reflects
the value of the Company and is in the best interests of the stockholders.
Approval of this proposal requires the affirmative vote of a majority of the
votes cast on the proposal. However, because the proposal is a recommendation,
its approval would not effectuate the changes contemplated by the proposal.
Redemption of the existing Rights would require Board approval, and
implementation of a stockholder approval requirement for future stockholder
rights plans would require either Board approval or a shareholder amendment of
the Company's Certificate of Incorporation, which requires approval by holders
of at least 80% of the outstanding stock of the Company.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "AGAINST" PROPOSAL NUMBER 9.
43
MISCELLANEOUS
Voting on Other Matters
Management is not aware of any other business to be transacted at the Annual
Meeting other than proposals of stockholders that have been omitted from this
proxy statement in accordance with rules of the Securities and Exchange
Commission which may be sought to be presented. Northrop Grumman's Bylaws
outline procedures, including minimum notice provisions, for stockholder
nomination of directors and submission of other stockholder business to be
transacted before the Annual Meeting. A copy of the pertinent Bylaw provisions
is available on request to Corporate Secretary, Northrop Grumman Corporation,
1840 Century Park East, Los Angeles, California 90067. If any such stockholder
proposals or other business to be transacted properly come before the Annual
Meeting, it is intended that the shares represented by proxies will be voted
in accordance with the judgment of the persons authorized to vote them.
Proposal of Stockholders
Copies of proposals which stockholders of Northrop Grumman wish to be
included in Northrop Grumman's proxy statement relating to is Annual Meeting
to be held in 2002 must be received by Northrop Grumman no later than December
17, 2001.
In addition, the Bylaws of the Corporation establish an advance notice
requirement, for any proposal of business to be transacted at an annual
meeting of stockholders. Written notice must be delivered to the Secretary of
Northrop Grumman not less than 45 days nor more than 75 days prior to the
first anniversary of the date on which Northrop Grumman first mailed its proxy
materials for the 2001 Annual Meeting of Stockholders, provided, however, that
if the date of the 2002 Annual Meeting of Stockholders is advanced more than
30 days prior to, or delayed more than 30 days after, the first anniversary of
the date on which Northrop Grumman first mailed its proxy materials for the
2001 Annual Meeting of Stockholders, then such notice must be delivered on the
later of the 90th day prior to the 2002 Annual Meeting of Stockholders or the
10th day following the day on which public announcement of the date of the
2002 Annual Meeting of Stockholders is first made. Such written notice must
contain specified information concerning the matter to be brought before such
meeting and concerning the stockholder proposing such a matter. Any
stockholder desiring a copy of the Bylaws of Northrop Grumman will be
furnished one without charge upon written request to the Secretary of Northrop
Grumman.
Copies of such proposals should be sent to the Corporate Secretary, Northrop
Grumman Corporation, 1840 Century Park East, Los Angeles, California 90067.
44
Cost of Soliciting Proxies
The cost of soliciting proxies in the accompanying form will be paid by
Northrop Grumman. In addition to solicitation by mail, arrangements will,
where appropriate, be made with brokerage houses and other custodians,
nominees and fiduciaries to send proxy materials to beneficial owners.
Northrop Grumman will, upon request, reimburse them for reasonable expenses
incurred. Northrop Grumman has retained Georgeson Shareholder Communications,
Inc. of New York at an estimated fee of $12,000 plus reasonable disbursements.
Officers, directors and regular employees of Northrop Grumman may request the
return of proxies personally, by means of materials prepared for stockholders
and employee-stockholders or by telephone or telegram to the extent deemed
appropriate by the Board of Directors. No additional compensation will be paid
to such individuals for this activity. The extent to which this solicitation
will be necessary will depend upon how promptly proxies are received;
therefore, stockholders are urged to return their proxies without delay.
/s/ John H. Mullan
John H. Mullan
Corporate Vice President and
Secretary
April 16, 2001
NOTICE: NORTHROP GRUMMAN FILED AN ANNUAL REPORT ON FORM 10-K ON MARCH 1,
2001 AND 10-K/AS ON MARCH 2, AND MARCH 3, 2001. STOCKHOLDERS OF RECORD ON
APRIL 9, 2001 MAY OBTAIN A COPY OF THESE REPORTS WITHOUT CHARGE FROM THE
CORPORATE SECRETARY, NORTHROP GRUMMAN CORPORATION, 1840 CENTURY PARK EAST, LOS
ANGELES, CALIFORNIA 90067.
45
EXHIBIT A
NORTHROP GRUMMAN CORPORATION
AUDIT COMMITTEE CHARTER
AS AMENDED MAY 16, 2000
Purpose
The Audit Committee of the Board of Directors is organized to assist the Board
in fulfilling its oversight responsibilities by reviewing financial reports
and other financial information provided by the company to the shareholders
and the Securities and Exchange Commission; the company's internal control
structure; the company's internal and external audit processes; and any other
matters relating to the company's accounting and financial reporting process.
Organization
The Audit Committee is comprised of at least three directors as determined by
the Board of Directors, each of whom shall be Independent Outside Directors
(as defined by the Corporation's Bylaws).
Meetings
The Audit Committee shall meet at least four times annually, or more
frequently as circumstances dictate. The Committee shall conduct its meetings
with the following regularly invited guests: the Chairman of the Board,
President and Chief Executive Officer, the Corporate Vice President and Chief
Financial Officer, the Vice President and Controller, the Corporate Vice
President and General Counsel, the Corporate Vice President and Secretary, the
Vice President of Internal Audit, and the independent auditors.
A majority of the members of the Audit Committee shall constitute a quorum for
any meeting. Any action of a majority of the members of the Audit Committee
present at any meeting at which a quorum is present shall be an action of the
Audit Committee.
Responsibilities
The responsibilities of the Audit Committee are to:
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Recommend to the Board of Directors for its action the appointment or
discharge of the Corporation's independent auditors, based upon the
Committee's judgment of the independence of the auditors (taking into
account the fees charged both for audit and non-audit services) and the
quality of its audit work. If the auditors must be replaced, the
Committee shall recommend to the Board of Directors for its action the
appointment of new auditors until the next annual meeting of
stockholders.
3. Review and approve each professional service, considered to be consulting
services (other than audit and tax related services) to be provided by
the company's independent audit firm.
4. Review with the independent auditors and the internal auditors the scope
and plan of their respective audits and the degree of coordination of
those plans.
5. Meet with the independent auditors at appropriate times to review, among
other things, the results of the audit and any certification, report, or
opinion which the auditors propose to render in connection with the
Corporation's financial statements. The review should cover key issues
that the auditors considered during their work, leading to their
expression of an opinion on the financial statements of the company.
6. Meet with the Corporation's chief internal auditor at least once a year
to review his comments concerning the adequacy of the Corporation's
system of internal controls and such other matters as the Committee may
deem appropriate.
1
7. Meet with the independent auditors and internal auditors, without
management present, to discuss any items of significance and to ensure
that the independent auditors and internal auditors have unrestricted
access to the Audit Committee.
8. Review the Company's annual report filed with the Securities and Exchange
Commission (SEC) on SEC Form 10-K, including the Management's Discussion
and Analysis of Financial Condition and Results of Operations.
9. Direct the auditors and the internal audit staff to inquire into and
report to it with respect to any of the Corporation's contracts,
transactions or procedures, or the conduct of the Corporate Office, or
any other unit, or any other matter having to do with the Corporation's
business and affairs. If authorized by the Board of Directors, the
Committee may initiate special investigations in these regards.
10. The Committee has such other duties as may be lawfully delegated to it
from time to time by the Board of Directors.
2
EXHIBIT B
NORTHROP GRUMMAN 2001 LONG-TERM INCENTIVE STOCK PLAN
1. Purpose
The purpose of the Northrop Grumman 2001 Long-Term Incentive Stock Plan (the
"Plan") is to promote the long-term success of Northrop Grumman Corporation
(the "Company") and to increase stockholder value by providing its officers
and selected employees with incentives to create excellent performance and to
continue service with the Company, its subsidiaries and affiliates. Both by
encouraging such officers and employees to become owners of the common stock
of the Company and by providing actual ownership through Plan awards, it is
intended that Plan participants will view the Company from an ownership
perspective.
2. Term
The Plan shall become effective upon the approval by the stockholders of the
Company (the "Effective Time"). Unless previously terminated by the Company's
Board of Directors (the "Board"), the Plan shall terminate at the close of
business on the day before the tenth anniversary of the Board's approval of
the Plan. After termination of the Plan, no future awards may be granted but
previously granted awards (and the Committee's (as such term is defined in
Section 3) authority with respect thereto) shall remain outstanding in
accordance with their applicable terms and conditions and the terms and
conditions of the Plan.
3. Plan Administration
(a) The Plan shall be administered by the Compensation and Management
Development Committee (or its successor) of the Board. Subject to the
following provisions of this Section 3(a), the Compensation and Management
Development Committee (or its successor) may delegate different levels of
authority to make grants under the Plan to different committees, provided that
each such committee consists of one or more members of the Board. With respect
to awards intended to satisfy the requirements for performance-based
compensation under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), the Plan shall be administered by a committee consisting
of two or more outside directors (as this requirement is applied under Section
162(m) of the Code). Transactions in or involving awards intended to be exempt
under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), must be duly and timely authorized by the Board or a committee of
non-employee directors (as this term is used in or under Rule 16b-3). (The
appropriate acting body, be it the Compensation and Management Development
Committee or another duly authorized committee of directors, is referred to as
"Committee".)
(b) The Committee shall have full and exclusive power to interpret the Plan
and to adopt such rules, regulations and guidelines for carrying out the Plan
as it may deem necessary or proper, all of which power shall be executed in
the best interests of the Company and in keeping with the objectives of the
Plan. This power includes, but is not limited to, selecting award recipients,
establishing all award terms and conditions and adopting modifications,
amendments and procedures, including subplans and the like as may be necessary
to comply with provisions of the laws and applicable regulatory rulings of
countries in which the Company (or its subsidiaries or affiliates, as
applicable) operates in order to assure the viability of awards granted under
the Plan and to enable participants employed in such countries to receive
advantages and benefits under the Plan and such laws and rulings. In no event
other than as contemplated by Section 6, however, shall the Committee or its
designee have the right to cancel or amend outstanding stock options for the
purpose of repricing, replacing or regranting such options with a purchase
price that is less than the purchase price of the original option.
(c) In making any determination or in taking or not taking any action under
the Plan, the Committee may obtain and may rely on the advice of experts,
including employees of and professional advisors to the Company. Any action
taken by, or inaction of, the Committee relating to or pursuant to the Plan
shall be within the absolute discretion of that entity or body and shall be
conclusive and binding on all persons.
1
4. Eligibility
Any key employee of the Company shall be eligible to receive one or more
awards under the Plan. "Key Employee" shall also include any former key
employee of the Company eligible to receive an assumed or replacement award as
contemplated in Sections 5 and 8. For purposes of this Section 4, "Company"
includes any entity that is directly or indirectly controlled by the Company
or any entity in which the Company has a significant equity interest, as
determined by the Committee.
5. Shares of Common Stock Subject to the Plan and Grant Limits
(a) Subject to Section 6 of the Plan, the aggregate number of additional
shares of common stock of the Company ("Common Stock") which may be issued or
transferred pursuant to awards under the Plan shall not exceed the sum
of: (i) 8,000,000 shares; plus (ii) any shares of Common Stock which as of the
Effective Time are available or become available for issuance under the
Company's 1993 Long-Term Incentive Stock Plan (the "Prior Plan") and which are
not thereafter issued; plus (iii) any shares of Common Stock which the Company
repurchases with proceeds received from option exercises. For purposes of the
Plan, (x) any shares of Common Stock which are forfeited back to the Company
under the Plan or the Prior Plan (including, without limitation, any shares
reserved but not actually issued with respect to restricted performance stock
rights granted under the Prior Plan), and (y) any shares which have been
exchanged by a participant as full or partial payment to the Company in
connection with any award under the Plan or the Prior Plan, as well as any
shares exchanged by a Participant or withheld by the Company to satisfy the
tax withholding obligations related to an award under the Plan or the Prior
Plan, shall be available for issuance under the Plan in subsequent periods.
(b) In no event, however, shall more than 3,000,000 shares of Common Stock
available for issuance pursuant to the Plan be issued pursuant to stock awards
granted under Section 8(c) of the Plan. The maximum number of shares of Common
Stock that may be delivered pursuant to stock options qualified as incentive
stock options under Section 422 of the Code ("ISOs") is 4,000,000 shares.
(c) In instances where a stock appreciation rights ("SAR") or other award is
settled in cash or a form other than shares, the shares that would have been
issued had there been no cash or other settlement shall not be counted against
the shares available for issuance under the Plan. If an SAR or other award
that was granted under the Prior Plan and outstanding at the Effective Time is
settled in cash or a form other than shares, the shares that would have been
issued had there been no cash or other settlement shall, notwithstanding
anything to the contrary in the Prior Plan, not be counted against the shares
available for issuance under the Prior Plan for purposes of determining the
shares available for issuance under the Plan. The payment of cash dividends
and dividend equivalents in conjunction with outstanding awards shall not be
counted against the shares available for issuance under the Plan. Any shares
that are issued by the Company, and any awards that are granted by, or become
obligations of, the Company, through the assumption by the Company or an
affiliate of, or in substitution for, outstanding awards previously granted by
an acquired company (or previously granted by a predecessor employer (or
direct or indirect parent thereof) in the case of persons that become employed
by the Company (or a subsidiary or affiliate) in connection with a business or
asset acquisition or similar transaction) shall not be counted against the
shares available for issuance under the Plan.
(d) Any shares issued under the Plan may consist in whole or in part of
authorized and unissued shares or of treasury shares, and no fractional shares
shall be issued under the Plan. Cash may be paid in lieu of any fractional
shares in settlements of awards under the Plan.
(e) In no event shall the total number of shares of Common Stock that may be
awarded to any eligible participant during any three year period pursuant to
stock option grants and SAR grants hereunder exceed 900,000 shares. In no
event shall "Performance-Based Awards" under Section 8(c)(ii) (other than
stock options or SARs, and without giving effect to any related dividend
equivalents) that are granted to any eligible participant during any three
consecutive years relate to or provide for payment of more than 300,000 shares
of Common Stock.
2
(f) Adjustments to the Plan's aggregate share limit pursuant to clause (ii),
(iii), (x) and/or (y) of Section 5(a), as well as the provision of Section
5(c), are subject to any applicable limitations under Section 162(m) of the
Code with respect to awards intended as performance-based compensation
thereunder. The limits set forth in Sections 5(b) and 5(e) shall apply with
respect to all Plan awards regardless of whether the underlying shares are
attributable to the fixed 8,000,000 shares made available for Plan award
purposes or shares available but not issued under the prior Plan.
6. Adjustments and Reorganizations
(a) In the event of any stock dividend, stock split, combination or exchange
of shares, merger, consolidation, spin-off, recapitalization or other
distribution (other than normal cash dividends) of Company assets to
stockholders, or any other change affecting shares or share price, the
Committee shall make such proportionate adjustments, if any, as the Committee
in its discretion may deem appropriate to reflect such change with respect to
(i) the aggregate number and type of shares that may be issued under the Plan;
(ii) the grant limits established under the Plan; (iii) each outstanding award
made under the Plan (including, without limitation, any applicable performance
targets or criteria with respect thereto); and (iv) the exercise price per
share for any outstanding stock options, SARs or similar awards under the
Plan. Any adjustment affecting an award intended as performance-based
compensation under Section 162(m) of the Code shall be made consistent with
the requirements of Section 162(m).
(b) Notwithstanding anything to the contrary in Section 6(a), the provisions
of this Section 6(b) shall apply to an outstanding Plan award if a Change in
Control (as defined in Section 6(e)) occurs. If the Company undergoes a Change
in Control triggered by clause (iii) of the definition thereof and the Company
is not the surviving entity and the successor to the Company (if any) (or a
parent thereof) does not agree in writing prior to the occurrence of the
Change in Control to continue and assume the award following the Change in
Control, or if for any other reason the award would not continue after the
Change in Control, then upon the Change in Control: (i) if the award is a
stock option, it shall vest fully and completely, any and all restrictions on
exercisability or otherwise shall lapse, and it shall be fully exercisable;
(ii) if the award is an SAR, it shall vest fully and completely, any and all
restrictions on such SAR shall lapse, and such SAR shall be converted
completely into cash at a price per share-unit equal to the higher of (x) the
highest price paid for a share of Common Stock, as reported in the New York
Stock Exchange Composite Transactions, during the 120 days prior to and
including the date of the Change in Control, and (y) the highest price paid
(on a national stock exchange or as quoted in the NASDAQ National Market
Issues) for a share of stock of the corporation or other entity with which or
into which the Company is merged, or if such corporation or other entity is
not publicly traded, then the highest price paid on an exchange or as quoted
in the NADSAQ National Market Issues for a share of stock of a publicly traded
corporation or other entity that owns 50% or more (directly or indirectly) of
such corporation or other entity on the date of the Change in Control (subject
to adjustment pursuant to Section 6(a)); and (iii) if such award is an award
or grant under Section 8(c) of the Plan, it shall immediately vest fully and
completely, and all restrictions shall lapse, provided, however, that if the
award is performance-based, the earnout or payout of the award, as applicable,
shall be computed based on the performance terms of the award and based on
actual performance achieved to the date of the Change in Control. No
acceleration of vesting, exercisability and/or payment of an outstanding Plan
award shall occur in connection with a Change in Control if either (i) the
Company is the surviving entity, or (ii) the successor to the Company (if any)
(or a parent thereof) agrees in writing prior to the Change in Control to
assume the award; provided, however, that individual awards may provide for
acceleration under these circumstances as contemplated by Section 6(c) below.
Notwithstanding the foregoing provisions of this Section 6(b), no acceleration
of vesting, exercisability and/or payment of an outstanding Plan award shall
occur in connection with a Change in Control event that would, but for such
acceleration, be accounted for under generally accepted accounting principles
in effect on the date of such Change in Control as a pooling of interests
transaction to the extent that such acceleration would render pooling
accounting unavailable with respect to the transaction. If a stock option or
other award is fully vested or becomes fully vested as provided in this
paragraph (or would have become fully vested but for the pooling provision set
forth in the preceding sentence) but is not exercised or paid prior to a
Change in Control triggered by clause
3
(iii) of the definition thereof and the Company is not the surviving entity
and the successor to the Company (if any) (or a parent thereof) does not agree
in writing prior to the occurrence of the Change in Control to continue and
assume the award following the Changes in Control, or if for any other reason
the award would not continue after the Change in Control, then the Committee
may provide for the settlement in cash of the award (such settlement to be
calculated as though the award was paid or exercised simultaneously with the
Change in Control and based upon the then Fair Market Value of a share of
Common Stock and subject, in the case of an SAR or performance-based award, to
the Change in Control payment provisions set forth above). An option or other
award so settled by the Committee shall automatically terminate. If, in such
circumstances, the Committee does not provide for the cash settlement of an
option or other award, then upon the Change in Control such option or award
shall terminate, subject to any provision that has been made by the Committee
through a plan of reorganization or otherwise for the survival, substitution
or exchange of such option or right; provided that the option or award holder
shall be given reasonable notice of such intended termination and, subject to
the pooling provision set forth above, an opportunity to exercise the option
or award (to the extent an award other than an option must be exercised in
order for the participant to realize the intended benefits) prior to or upon
the Change in Control.
(c) Notwithstanding the provisions of Section 6(b), awards issued under the
Plan may contain specific provisions regarding the consequences of a Change in
Control and, if contained in an award, those provisions shall be controlling
in the event of any inconsistency. (For example, and without limitation, an
award may provide that (i) acceleration of vesting will occur automatically
upon a Change in Control, or (ii) acceleration will occur in connection with a
Change in Control if the participant is terminated by the Company without
cause or the participant terminates employment for good reason.) The
occurrence of a particular Change in Control under the Plan shall have no
affect on any award granted under the Plan after the date of that Change in
Control.
(d) The Committee may make adjustments pursuant of Section 6(a) and/or deem
and acceleration of vesting of awards pursuant to Section 6(b) to occur
sufficiently prior to an event if necessary or deemed appropriate to permit
the participant to realize the benefits intended to be conveyed with respect
to the shares underlying the award; provided, however, that, the Committee may
reinstate the original terms of an award if the related event does not
actually occur.
(e) A "Change in Control" of the Company shall be deemed to have occurred as
of the first day that any one or more of the following conditions shall have
been satisfied:
(i) Any Person (other than those Persons in control of the Company as of
the Effective Time, or other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company) becomes the
Beneficial Owner, directly or indirectly, of securities of the Company
representing twenty-five percent (25%) or more of the combined voting power
of the Company's then outstanding securities, and for purposes of this
subsection (i) "Person" or "group" shall not include underwriters acquiring
newly-issued voting securities (or securities convertible into voting
securities) directly from the Company with a view towards distribution.
(ii) On any day after the Effective Time (the "Measurement Date")
Continuing Directors cease for any reason to constitute a majority of the
Board. A director is a "Continuing Director" if he or she either:
(1) was a member of the Board on the applicable Initial Date (an
"Initial Director"); or
(2) was elected to the Board, or was nominated for election by the
Company's stockholders, by a vote of at least two-thirds (2/3) of the
Initial Directors then in office.
A member of the Board who was not a director on the applicable Initial Date
shall be deemed to be an Initial Director for purposes of clause (2) above
if his or her election, or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds (2/3) of the
Initial Directors (including directors elected after the applicable Initial
Date who are deemed to be Initial Directors by application of this
provision) then in office. "Initial Date" means the later of (1) the
Effective Time or (2) the date that is two (2) years before the Measurement
Date.
4
(iii) The Company is liquidated; all or substantially all of the
Company's assets are sold in one or a series of related transactions; or
the Company is merged, consolidated, or reorganized with or involving any
other corporation, other than a merger, consolidation, or reorganization
that results in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than sixty percent (60%) of the combined voting power of the
voting securities of the Company (or such surviving entity) outstanding
immediately after such merger, consolidation, or reorganization.
Notwithstanding the foregoing, an event described in this clause (iii) that
occurred prior to the Effective Time shall not constitute a Change in
Control.
"Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3
of the General Rules and Regulations under the 1934 Act. "Person" shall have
the meaning ascribed to such term in Section 3(a)(9) of the 1934 Act and used
in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section
13(d) thereof.
7. Fair Market Value
"Fair Market Value" for all purposes under the Plan shall mean the closing
price of a share of Common Stock as reported on the composite tape for
securities listed on the New York Stock Exchange (the "Exchange") for the date
in question. If no sales of Common Stock were made on the Exchange on that
date, the closing price of a share of Common Stock as reported on said
composite tape for the preceding day on which sales of Common Stock were made
on the Exchange shall be substituted.
8. Awards
The Committee shall determine the type or types of award(s) to be made to
each participant. Awards may be granted singly, in combination or in tandem.
Awards also may be made in combination or in tandem with, in replacement of,
as alternatives to, or as the payment form for grants or rights under any
other employee or compensation plan of the Company, including the plan of any
acquired entity. The types of awards that may be granted under the Plan are:
(a) Stock Options--A grant of a right to purchase a specified number of
shares of Common Stock during a specified period as determined by the
Committee. The purchase price per share for each option shall be not less than
100% of Fair Market Value on the date of the grant, except that, in the case
of a stock option granted retroactively in tandem with or as a substitution
for another award, the exercise or designated price may be no lower than the
Fair Marked Value of a share on the date such other award was granted. A stock
option may be in the form of an ISO which, in addition to being subject to
applicable terms, conditions and limitations established by the Committee,
complies with Section 422 of the Code. If an ISO is granted, the aggregate
Fair Market Value (determined on the date the option is granted) of Common
Stock subject to an ISO granted to a participant by the Committee which first
becomes exercisable in any calendar year shall not exceed $100,000.00
(otherwise, the intended ISO, to the extent of such excess, shall be rendered
a nonqualified stock option). ISOs may only be granted to key employees of the
Company or a subsidiary. The maximum term of each option (ISO or nonqualified)
shall be ten (10) years. The price at which shares of Common Stock may be
purchased under a stock option shall be paid in full at the time of the
exercise in cash or such other method permitted by the Committee, including
(i) tendering (either actually or by attestation) Common Stock; (ii)
surrendering a stock award valued at Fair Market Value on the date of
surrender; (iii) authorizing a third party to sell the shares (or a sufficient
portion thereof) acquired upon exercise of a stock option and assigning the
delivery to the Company of a sufficient amount of the sale proceeds to pay for
all the shares acquired through such exercise; or (iv) any combination of the
above. The Committee may grant stock options that provide for the award of a
new option when the exercise price of the option and/or tax withholding
obligations related to the exercise of the option have been paid by tendering
shares of Common Stock to the Company or by the Company's reduction of the
number of shares otherwise deliverable to the optionee. Any new option grant
contemplated by the preceding sentence (the re-load grant) would cover the
number of shares tendered by the optionee or withheld by the Company with the
option purchase price set at the then current Fair Market Value and would
never extend beyond the remaining term of the originally exercised option.
5
(b) SARs--A right to receive a payment, in cash and/or Common Stock, equal
to the excess of the Fair Market Value of a specified number of shares of
Common Stock on the date the SAR is exercised over the Fair Market Value on
the date the SAR was granted as set forth in the applicable award agreement,
except that, in the case of a SAR granted retroactively in tandem with or as a
substitution for another award, the exercise or designated price may be no
lower than the Fair Market Value of a share on the date such other award was
granted. The maximum term of an SAR shall be ten (10) years.
(c) Other Awards--Other awards, granted or denominated in Common Stock or
units of Common Stock, may be granted under the Plan. Awards not granted or
denominated in Common Stock or units of Common Stock (cash awards) also may be
granted consistent with clause (ii) below.
(i) All or part of any stock award may be subject to conditions and
restrictions established by the Committee, and set forth in the award
agreement, which may include, but are not limited to, continuous service
with the Company (or a subsidiary or affiliate), achievement of specific
business objectives, and other measurements of individual, business unit or
Company performance. Unless the Committee otherwise provides, awards under
this Section 8(c) to employees of the Company or a subsidiary that are
either granted or become vested, exercisable or payable based on attainment
of one or more of the performance goals related to the business criteria
identified below, shall be deemed to be intended as Performance-Based
Awards under Section 8(c)(ii).
(ii) Without limiting the generality of the foregoing, and in addition to
stock options and SAR grants, other performance-based awards within the
meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether
in the form of restricted stock, performance stock, phantom stock or other
rights, the vesting of which depends on the absolute or relative
performance of the Company on a consolidated, segment, subsidiary,
division, or plant basis with reference to revenue growth, net earnings
(either before or after interest, taxes, depreciation, amortization and/or
Net Pension Income (as defined below)), cash flow, return on equity or on
assets or on net investment, cost containment or reduction, stock price
appreciation, total stockholder return, or EVA (as defined below) relative
to preestablished performance goals, may be granted under the Plan. The
applicable business criteria and the specific performance goals for
Performance-Based Awards must be approved by the Committee in advance of
applicable deadlines under the Code and while the performance relating to
such goals remains substantially uncertain. The applicable performance
period may range from one to ten years. Performance targets shall, to the
extent determined by the Committee to be equitable and appropriate, be
adjusted to mitigate the unbudgeted impact of material, unusual or
nonrecurring gains and losses, accounting charges or other extraordinary
events not foreseen at the time the targets were set. In no even shall
share-based Performance-Based Awards granted to any eligible person under
this Plan exceed the limit set forth in Section 5(e). In no event shall
grants to any eligible person under this Plan of Performance-Based Awards
payable only in cash in any calendar year and not related to shares provide
for payment of more than $3,000,000. Except as otherwise permitted under
Section 162(m) of the Code, before any Performance-Based Award is paid, the
Committee must certify that the performance goal and any other material
terms of the performance-Based Award were in fact satisfied. The Committee
shall have discretion to determine the conditions, restrictions or other
limitations, in accordance with the terms of the Plan and Section 162(m) of
the Code, on the payment of individual Performance-Based Awards. The
Committee may reserve by express provision in any award agreement the right
to reduce the amount payable in accordance with any standards or on any
other basis (including the Committee's discretion), as the Committee may
impose. Performance-Based Awards may be granted only to key employees of
the Company or a subsidiary. "EVA" means operating profit after tax (which
means net earnings after tax but before tax adjusted interest income and
expense and goodwill amortization), less a charge for the use of capital
(which is based on average total capital and the weighted cost of capital).
"Net Pension Income" means any positive difference between income from
employee pension plan investments less the cost of employee pension
benefits for the relevant period of time.
6
9. Dividends and Dividend Equivalents
The Committee may provide that any awards under the Plan earn dividends or
dividend equivalents. Such dividends or dividend equivalents may be paid
currently or may be credited to a participant's account. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and
conditions as the Committee may establish, including reinvestment in
additional shares or share equivalents.
10. Deferrals and Settlements
Payment of awards may be in the form of cash, Common Stock, other awards or
combinations thereof as the Committee shall determine, and with such
restrictions as it may impose. The Committee may also require or permit
participants to elect to defer the issuance of shares of the settlement of
awards in cash under rules and procedures as it may establish under the Plan.
It may also provide that deferred settlements include the payment or crediting
of interest on the deferral amounts, or the payment of crediting of dividend
equivalents where the deferral amounts are denominated in shares.
11. Transferability and Exercisability
Unless otherwise expressly provided in (or pursuant to) this Section 11, by
applicable law or by the award agreement, (i) all awards are non-transferable
and shall not be subject in any manner to sale, transfer, anticipation,
alienation, assignment, pledge, encumbrance or charge; (ii) awards shall be
exercised only by the holder; and (iii) amounts payable or shares issuable
pursuant to an award shall be delivered only to (or for the account of) the
holder. The foregoing exercise and transfer restrictions shall not apply to:
(a) transfers to the Company; (b) the designation of a beneficiary to receive
benefits in the event of the participant's death or, if the participant has
died, transfers to or exercise by the participant's beneficiary, or, in the
absence of a validly designated beneficiary, transfers by will or the laws of
descent and distribution; (c) transfers pursuant to a qualified domestic
relations order (as defined in the Code) (in the case of ISOs, to the extent
such transfers are permitted by the Code); (d) if the participant has suffered
a disability, permitted transfers to or exercises on behalf of the holder by
his or her legal representative; or (e) the authorization by the Committee of
"cashless exercise" procedures. The Committee by express provision in the
award or an amendment thereto may permit an award (other than an ISO) to be
transferred to, exercised by and paid to certain persons or entities related
to the participant, including but not limited to members of the participant's
family, charitable institutions, or trusts or other entities whose
beneficiaries or beneficial owners are members of the participant's family
and/or charitable institutions, or to such other persons or entities as may be
expressly approved by the Committee, pursuant to such conditions and
procedures as the Committee may establish. Any permitted transfer shall be
subject to the condition that the Committee receive evidence satisfactory to
it that the transfer is being made for estate and/or tax planning purposes (or
to a "blind trust" in connection with the participant's termination of
employment with the Company (or a subsidiary or affiliate) to assume a
position with a governmental, charitable, educational or similar non-profit
institution) and on a basis consistent with the Company's lawful issue of
securities.
12. Award Agreements
Awards under the Plan shall be evidenced by agreements that set forth the
terms, conditions and limitations for each award which may include the term of
an award, the provisions applicable in the event the participant's employment
terminates, and the Company's authority to unilaterally or bilaterally amend,
modify, suspend, cancel or rescind any award; provided, however, that such
authority shall not extend to the reduction of the exercise price of a
previously granted option, except as provided in Section 6 hereof. The
Committee need not
require the execution of any such agreement, in which case acceptance of the
award by the respective participant shall constitute agreement to the terms of
the award.
13. Plan Amendment
The plan may only be amended by a disinterested majority of the Board of
Directors as if deems necessary or appropriate to better achieve the purpose
of the Plan, except that no such amendment shall be made without the approval
of the Company's stockholders which would increase the number of shares
available for issuance under the Plan (except for increases or adjustments
expressly contemplated by Sections 5 and 6).
7
14. Tax Withholding
The Company shall have the right to deduct from any settlement of an award
made under the Plan, including the delivery or vesting of shares, a sufficient
amount to cover withholding (at the flat percentage rates applicable to
supplemental wages) of any Federal, state or local taxes required by law or to
take such other action as may be necessary to satisfy any such withholding
obligations. The Committee may permit shares to be used to satisfy required
tax withholding and such shares shall be valued at the Fair Market Value as of
the settlement date of the applicable award.
15. Other Company Benefit and Compensation Programs
Unless otherwise specifically determined by the Committee, settlements of
awards received by participants under the Plan shall not be deemed a part of a
participant's regular, recurring compensation for purposes of calculating
payments or benefits from any benefit plan or severance program of the Company
(or a subsidiary or affiliate), or any severance pay law of any country.
Further, the Company may adopt other compensation programs, plans or
arrangements as it deems appropriate or necessary.
16. Unfunded Plan
Unless otherwise determined by the Committee, the Plan shall be unfunded and
shall not create (or be construed to create) a trust or a separate fund or
funds. The Plan shall not establish any fiduciary relationship between the
Company and any participant or other person. To the extent any person holds
any rights by virtue of a grant awarded under the Plan, such rights (unless
otherwise determined by the Committee) shall be no greater than the rights of
an unsecured general creditor of the Company.
17. Future Rights
No person shall have any claim or rights to be granted an award under the
Plan, and no participant shall have any rights under the Plan to be retained
in the employ of the Company (or any subsidiary or affiliate).
18. Governing Law; Severability; Legal Compliance
The validity, construction and effect of the Plan, any award agreements or
other documents setting forth the terms of an award, and any actions taken or
relating to the Plan shall be determined in accordance with the laws of the
State of California and applicable Federal law. If any provision of the Plan,
any award agreement, or any other document setting forth the terms of an award
shall be held by a court of competent jurisdiction to be invalid and
unenforceable, the remaining provisions of the Plan or such other document
shall continue in effect.
The Plan, the granting and vesting of awards under the Plan and the issuance
and delivery of Common Stock and/or the payment of money under the Plan or
under awards granted hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities and banking laws) and to such approvals by any
listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith.
Any securities delivered under the Plan shall be subject to such restrictions
as the Company may deem necessary or desirable to assure compliance with all
applicable legal requirements.
19. Successors and Assigns
The Plan shall be binding on all successors and assigns of a participant,
including, without limitation, the estate of such participant and the
executor, administrator or trustee of such estate, or any receiver or trustee
in bankruptcy or representative of the participant's creditors.
20. Rights as a Stockholder
Except as otherwise provided in the award agreement, a participant shall
have no rights as a stockholder until he or she becomes the holder of record
of shares of Common Stock.
8
EXHIBIT C
FORM OF
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES B CONVERTIBLE PREFERRED STOCK OF NORTHROP GRUMMAN CORPORATION
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, Northrop Grumman Corporation, a Delaware corporation (the
"Corporation"), certifies that pursuant to the authority contained in Article
FOURTH of its Certificate of Incorporation, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors has adopted the following resolution creating
a series of its Preferred Stock, par value $1.00 per share, designated as
Series B Convertible Preferred Stock:
RESOLVED, that a series of the authorized Preferred Stock, par value $1.00
per share, of the Corporation be hereby created, and that the designation
and amount thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof are as
follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as the "Series B Convertible Preferred Stock" (the "Series B
Convertible Preferred Stock") and the number of shares constituting such
series shall be 3,500,000.
Section 2. Dividends. The holders of shares of Series B Convertible
Preferred Stock shall be entitled to receive cumulative cash dividends when,
as and if declared by the Board of Directors out of any funds legally
available therefor, at the rate per year herein specified, payable quarterly
at the rate of one-fourth of such amount on the fifteenth day (or, if such day
is not a business day, on the first business day thereafter) of January,
April, July and October in each year. The rate of dividends shall [initially]
be [$9.00] per year per share/1/. [Thereafter, the rate of dividends shall be
reduced to $7.00 per year per share after the first quarterly dividend payment
following the date, if any, on which the stockholders of the Corporation shall
have approved the issuance of all common stock, par value $1.00 per share, of
the Corporation ("Common Stock") issuable upon conversion of the Series B
Convertible Preferred Stock (such stockholder approval being referred to
herein as the "Stockholder Approval").] [Thereafter, the rate of dividends
shall be increased to $9.00 per share per year after the October 2001 dividend
payment date if the stockholders of the Corporation shall not have, prior to
that time, approved the issuance of all Common Stock issuable upon conversion
of the Series B Convertible Preferred Stock.] [The rate of dividends shall be
decreased to $7.00 per share after the first quarterly dividend payment date
after Stockholder Approval is obtained.] Cash dividends upon the Series B
Convertible Preferred Stock shall commence to accrue and shall be cumulative
from the date of issuance.
If the dividend for any dividend period shall not have been paid or set
apart in full for the Series B Convertible Preferred Stock, the deficiency
shall be fully paid or set apart for payment before (i) any distributions or
dividends, other than distributions or dividends paid in stock ranking junior
to the Series B Convertible Preferred Stock as to dividends, redemption
payments and rights upon liquidation, dissolution or winding up of
--------
/1/ If the initial date of issue is after the 2001 annual meeting of
stockholders, this provision will be modified to reflect the vote at such
meeting. If Stockholder Approval was obtained, the dividend rate shall be
$7.00 per year and the provision relating to future Stockholder Approval
will be deleted. If Stockholder Approval was not obtained, the initial
dividend rate shall be $9.00 per year and the provision for a future
downward adjustment following Stockholder Approval will be retained.
If the initial date of issue is before the 2001 annual meeting, the
initial dividend rate shall be $7.00 per year. If Stockholder Approval is
obtained at the 2001 annual meeting, the dividend rate shall remain at
such level. If Stockholder Approval is not obtained at the 2001 annual
meeting, the dividend rate shall increase to $9.00 per year, after the
October 2001 dividend payment date, subject to future downward adjustment
if Stockholder Approval is obtained.
1
the Corporation, shall be paid upon or set apart for Common Stock or stock of
any other class or series of Preferred Stock ranking junior to the Series B
Convertible Preferred Stock as to dividends, redemption payments or rights
upon liquidation, dissolution or winding up of the Corporation; and (ii) any
Common Stock or shares of Preferred Stock of any class or series ranking
junior to the Series B Convertible Preferred Stock as to dividends, redemption
payments or rights upon liquidation, dissolution or winding up of the
Corporation shall be redeemed, repurchased or otherwise acquired for any
consideration other than stock ranking junior to the Series B Preferred Stock
as to dividends, redemption payments and rights upon liquidation, dissolution
or winding up of the Corporation. No distribution or dividend shall be paid
upon, or declared and set apart for, any shares of Preferred Stock ranking on
a parity with the Series B Convertible Preferred Stock as to dividends,
redemption payments or rights upon liquidation, dissolution or winding up of
the Corporation for any dividend period unless at the same time a like
proportionate distribution or dividend for the same or similar dividend
period, ratably in proportion to the respective annual dividends fixed
therefor, shall be paid upon or declared and set apart for all shares of
Preferred Stock of all series so ranking then outstanding and entitled to
receive such dividend.
Section 3. Voting Rights. Except as provided herein or as may otherwise be
required by law, the holders of shares of Series B Convertible Preferred Stock
shall not be entitled to any voting rights as stockholders with respect to
such shares.
(a) So long as any shares of Series B Convertible Preferred Stock shall be
outstanding, the Corporation shall not, without the affirmative vote of the
holders of at least two-thirds of the aggregate number of shares of Series B
Convertible Preferred Stock at the time outstanding, by an amendment to the
Restated Certificate of Incorporation, by merger or consolidation, or in any
other manner:
(i) authorize any class or series of stock ranking prior to the Series B
Convertible Preferred Stock as to dividends, redemption payments or rights
upon liquidation, dissolution or winding up of the Corporation;
(ii) alter or change the preferences, special rights, or powers given to
the Series B Convertible Preferred Stock so as to affect such class of
stock adversely, but nothing in this clause (ii) shall require such a class
vote (x) in connection with any increase in the total number of authorized
shares of Common Stock or Preferred Stock; (y) in connection with the
authorization or increase in the total number of authorized shares of any
class of stock ranking on a parity with the Series B Convertible Preferred
Stock; or (z) in connection with the fixing of any of the particulars of
shares of any other series of Preferred Stock ranking on a parity with the
Series B Convertible Preferred Stock that may be fixed by the Board of
Directors as provided in Article FOURTH of the Certificate of
Incorporation; or
(iii) directly or indirectly purchase or redeem less than all of the
Series B Convertible Preferred Stock at the time outstanding unless the
full dividends to which all shares of the Series B Convertible Preferred
Stock then outstanding shall then be entitled shall have been paid or
declared and a sum sufficient for the payment thereof set apart.
(b) If and whenever accrued dividends on the Series B Convertible Preferred
Stock shall not have been paid or declared and a sum sufficient for the
payment thereof set aside for six quarterly dividend periods (whether or not
consecutive), then and in such event, the holders of the Series B Convertible
Preferred Stock, voting separately as a class, shall be entitled to elect two
directors at any annual meeting of the stockholders or any special meeting
held in place thereof, or at a special meeting of the holders of the Series B
Convertible Preferred Stock called as hereinafter provided. Such right of the
holders of the Series B Convertible Preferred Stock to elect two directors may
be exercised until the dividends in default on the Series B Convertible
Preferred Stock shall have been paid in full or funds sufficient therefor set
aside; and when so paid or provided for, then the right of the holders of the
Series B Convertible Preferred Stock to elect such number of directors shall
cease, but subject always to the same provisions for the vesting of such
voting rights in the case of any such future default or defaults. At any time
after such voting power shall have so vested in the holders of the Series B
Convertible Preferred Stock, the Secretary of the Corporation may, and upon
the written request of the holders of record of ten percent (10%) or more in
amount of the Series B Convertible Preferred Stock then outstanding addressed
to him at the principal executive office of the Corporation shall, call a
special meeting of the holders of the Series B Convertible Preferred Stock for
the election of the directors to be elected by them as hereinafter provided,
to
2
be held within sixty (60) days after delivery of such request and at the place
and upon the notice provided by law and in the bylaws of the Corporation for
the holding of meetings of stockholders; provided, however, that the Secretary
shall not be required to call such special meeting in the case of any such
request received less than ninety (90) days before the date fixed for the next
ensuing annual meeting of stockholders. If at any such annual or special
meeting or any adjournment thereof the holders of at least a majority of the
Series B Convertible Preferred Stock then outstanding and entitled to vote
thereat shall be present or represented by proxy, then, by vote of the holders
of at least a majority of the Series B Convertible Preferred Stock present or
so represented at such meeting, the then authorized number of directors of the
Corporation shall be increased by two, and the holders of the Series B
Convertible Preferred Stock shall be entitled to elect the additional
directors so provided for. The directors so elected shall serve until the next
annual meeting or until their respective successors shall be elected and shall
qualify; provided, however, that whenever the holders of the Series B
Convertible Preferred Stock shall be divested of voting power as above
provided, the terms of office of all persons elected as directors by the
holders of the Series B Convertible Preferred Stock as a class shall forthwith
terminate and the number of the Board of Directors shall be reduced
accordingly.
(c) If, during any interval between any special meeting of the holders of
the Series B Convertible Preferred Stock for the election of directors to be
elected by them as provided in this Section 3 and the next ensuing annual
meeting of stockholders, or between annual meetings of stockholders for the
election of directors, and while the holders of the Series B Convertible
Preferred Stock shall be entitled to elect two directors, the number of
directors who have been elected by the holders of the Series B Convertible
Preferred Stock shall, by reason of resignation, death, or removal, be less
than the total number of directors subject to election by the holders of the
Series B Convertible Preferred Stock, (i) the vacancy or vacancies in the
directors elected by the holders of the Series B Convertible Preferred Stock
shall be filled by the remaining director then in office, if any, who was
elected by the holders of the Series B Convertible Preferred Stock, although
less than a quorum, and (ii) if not so filled within sixty (60) days after the
creation thereof, the Secretary of the Corporation shall call a special
meeting of the holders of the Series B Convertible Preferred Stock and such
vacancy or vacancies shall be filled at such special meeting. Any director
elected to fill any such vacancy by the remaining director then in office may
be removed from office by vote of the holders of a majority of the shares of
the Series B Convertible Preferred Stock. A special meeting of the holders of
the Series B Convertible Preferred Stock may be called by a majority vote of
the Board of Directors for the purpose of removing such director. The
Secretary of the Corporation shall, in any event, within ten (10) days after
delivery to the Corporation at its principal office of a request to such
effect signed by the holders of at least ten percent (10%) of the outstanding
shares of the Series B Convertible Preferred Stock, call a special meeting for
such purpose to be held within sixty (60) days after delivery of such request;
provided, however, that the Secretary shall not be required to call such a
special meeting in the case of any such request received less than ninety (90)
days before the date fixed for the next ensuing annual meeting of
stockholders.
Section 4. Redemption.
(a) Shares of Series B Convertible Preferred Stock shall not be redeemable
except as follows:
(i) All, but not less than all, of the shares of Series B Convertible
Preferred Stock shall be redeemed for cash in an amount equal to (X) if
prior to Stockholder Approval, the greater of (a) the Liquidation Value
plus all accrued and unpaid dividends with respect to such shares, whether
or not declared, and (b) the Current Market Price of the number of shares
of Common Stock which would be issued to such holders if all shares of
Series B Convertible Preferred Stock were converted into Common Stock on
the Redemption Date pursuant to Section 8; and (Y) after Stockholder
Approval, the Liquidation Value plus all dividends with respect to such
shares, whether or not declared, accrued and unpaid as of the Redemption
Date, as defined below, on the first day after the twentieth anniversary of
the initial issuance of the Series B Convertible Preferred Stock.
(ii) All, but not less than all, of the shares of Series B Convertible
Preferred Stock may be redeemed at the option of the Corporation at any
time after the seventh anniversary of the initial issuance of the Series B
Convertible Preferred Stock. Any redemption pursuant to this clause (ii)
shall be solely for Common
3
Stock of the Corporation and at the Redemption Date each holder of shares
of Series B Convertible Preferred Stock shall be entitled to receive, in
exchange and upon surrender of the certificate therefor, that number of
fully paid and nonassessable shares of Common Stock determined by dividing
(X) if prior to Stockholder Approval, the greater of (a) the Liquidation
Value plus all accrued and unpaid dividends with respect to such shares,
whether or not declared, and (b) the Current Market Price of the number of
shares of Common Stock which would be issued if all shares of Series B
Convertible Preferred Stock were converted into Common Stock pursuant to
Section 8 on the Redemption Date; or (Y) if after Stockholder Approval, the
Liquidation Value plus all accrued and unpaid dividends with respect to
such shares, whether or not declared thereon to the Redemption Date, by (Z)
the Current Market Price of the Common Stock as of the Redemption Date;
provided, however, that if prior to the Redemption Date there shall have
occurred a Transaction, as defined in Section 8(b)(iii), the consideration
deliverable in any such exchange shall be the Alternate Consideration as
provided in Section 12.
(b) Notice of every mandatory or optional redemption shall be mailed at
least thirty (30) days but not more than fifty (50) days prior to the
Redemption Date to the holders of record of the shares of Series B Convertible
Preferred Stock so to be redeemed at their respective addresses as they appear
upon the books of the Corporation. Each such notice shall specify the date on
which such redemption shall be effective (the "Redemption Date"), the
redemption price or manner of calculating the redemption price and the place
where certificates for the Series B Convertible Preferred Stock are to be
surrendered for cancellation.
(c) On the date that redemption is being made pursuant to paragraph (a) of
this Section 4, the Corporation shall deposit for the benefit of the holders
of shares of Series B Convertible Preferred Stock the funds, or stock
certificates for Common Stock, necessary for such redemption with a bank or
trust company in the Borough of Manhattan, the City of New York, having a
capital and surplus of at least $1,000,000,000. Dividends paid on Common Stock
held for the benefit of the holders of shares of Series B Convertible
Preferred Stock hereunder shall be held for the benefit of such holders and
paid over, without interest, on surrender of certificates for the Series B
Convertible Preferred Stock. Any monies or stock certificates so deposited by
the Corporation and unclaimed at the end of one year from the Redemption Date
shall revert to the Corporation. After such reversion, any such bank or trust
company shall, upon demand, pay over to the Corporation such unclaimed amounts
or deliver such stock certificates and thereupon such bank or trust company
shall be relieved of all responsibility in respect thereof and any holder of
shares of Series B Convertible Preferred Stock shall look only to the
Corporation for the payment of the redemption price. Any interest accrued on
funds deposited pursuant to this paragraph (c) shall be paid from time to time
to the Corporation for its own account.
(d) Upon the deposit of funds or certificates for Common Stock pursuant to
paragraph (c) in respect of shares of Series B Convertible Preferred Stock
being redeemed pursuant to paragraph (a) of this Section 4, notwithstanding
that any certificates for such shares shall not have been surrendered for
cancellation, the shares represented thereby shall on and after the Redemption
Date no longer be deemed outstanding, and all rights of the holders of shares
of Series B Convertible Preferred Stock shall cease and terminate, excepting
only the right to receive the redemption price therefor. Nothing in this
Section 4 shall limit the right of a holder to convert shares of Series B
Convertible Preferred Stock pursuant to Section 8 at any time prior to the
Redemption Date, even if such shares have been called for redemption pursuant
to Section 4(a).
(e) In connection with any redemption pursuant to clause (ii) of paragraph
(a) of this Section 4, no fraction of a share of common stock shall be issued,
but in lieu thereof the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to such fractional interest
multiplied by the Current Market Price per share of Common Stock on the
Redemption Date.
Section 5. Fundamental Change in Control.
(a) Not later than 10 business days following a Fundamental Change in
Control, as defined below, the Corporation shall mail notice to the holders of
Series B Convertible Preferred Stock stating that a Fundamental Change in
Control has occurred and advising such holders of their right to exchange (the
"Exchange Right")
4
any and all shares of Series B Convertible Preferred Stock for shares of
Common Stock as provided herein; provided, however, that if prior to the
Exchange Date (as defined below) there shall have occurred a Transaction, as
defined in Section 8(b)(iii), the consideration deliverable in any such
exchange shall be the Alternate Consideration as provided in Section 12. Such
notice shall state: (i) the date on which such exchanges shall be effective
(the "Exchange Date"), which shall be the 21st business day from the date of
giving such notice; (ii) the number of shares of Common Stock (or Alternate
Consideration) for which each share of Series B Convertible Preferred Stock
may be exchanged; and (iii) the method by which each holder may give notice of
its exercise of the Exchange Right; and (iv) the method and place for delivery
of certificates for Series B Convertible Preferred Stock in connection with
exchanges pursuant hereto. For a period of twenty (20) business days following
the notice provided herein, each holder of Series B Convertible Preferred
Stock may exercise the Exchange Right as provided herein.
(b) Pursuant to the Exchange Right, each share of Series B Convertible
Preferred Stock shall be exchanged for that number of shares of Common Stock
determined by dividing an amount equal to (X) if prior to Stockholder
Approval, the greater of (a) the Liquidation Value plus all dividends accrued
and unpaid with respect to such share as of the Exchange Date, whether or not
declared, and (b) the Current Market Price of the number of shares of Common
Stock which would be issued if such share of Series B Convertible Preferred
Stock were converted into Common Stock pursuant to Section 8 on the Exchange
Date; or (Y) if after Stockholder Approval, the Liquidation Value plus all
dividends accrued and unpaid with respect to such share as of the Exchange
Date, whether or not declared, in each case by the Current Market Price per
share of Common Stock as of the Exchange Date.
(c) The holder of any share of Series B Convertible Preferred Stock may
exercise the Exchange Right by surrendering for such purpose to the
Corporation, at its principal office or at such other office or agency
maintained by the Corporation for that purpose, a certificate or certificates
representing the shares of Series B Convertible Preferred Stock to be
exchanged accompanied by a written notice stating that such holder elects to
exercise the Exchange Right as to all or a specified number of such shares in
accordance with this Section 5 and specifying the name or names in which such
holder wishes the certificate or certificates for shares of Common Stock to
which such holder is entitled to be issued and such other customary documents
as are necessary to effect the exchange. In case such notice shall specify a
name or names other than that of such holder, such notice shall be accompanied
by payment of all transfer taxes payable upon the issuance in such name or
names of shares of Common Stock to which such holder has become entitled.
Other than such taxes, the Corporation will pay any and all issue and other
taxes (other than taxes based on income) that may be payable in respect of any
issue or delivery of shares of Common Stock to which such holder has become
entitled on exchange of shares of Series B Convertible Preferred Stock
pursuant hereto. As promptly as practicable, and in any event within five (5)
business days after the surrender of such certificate or certificates and the
receipt of such notice relating thereto and, if applicable, payment of all
transfer taxes (or the demonstration to the satisfaction of the Corporation
that such taxes have been paid), the Corporation shall deliver or cause to be
delivered certificates representing the number of validly issued, fully paid
and nonassessable shares of Common Stock to which the holder of shares of
Series B Convertible Preferred Stock so exchanged shall be entitled.
(d) From and after the Exchange Date, a holder of shares of Series B
Convertible Preferred Stock who has elected to exchange such shares for Common
Stock as herein provided shall have no voting or other rights with respect to
the shares of Series B Convertible Preferred Stock subject thereto, other than
the right to receive the Common Stock provided herein upon delivery of the
certificate or certificates evidencing shares of Series B Convertible
Preferred Stock.
(e) In connection with the exchange of any shares of Series B Convertible
Preferred Stock, no fraction of a share of Common Stock shall be issued, but
in lieu thereof the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied
by the Current Market Price per share of Common Stock on the Exchange Date.
5
(f) The Corporation shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of the Exchange
Rights provided herein, such number of shares of Common Stock as shall from
time to time be sufficient to effect the exchange provided herein. The
Corporation shall from time to time, in accordance with the laws of Delaware,
increase the authorized amount of Common Stock if at any time the number of
authorized shares of Common Stock remaining unissued shall not be sufficient
to permit the exchange of all then outstanding shares of Series B Convertible
Preferred Stock.
(g) As used herein, the term "Fundamental Change in Control" shall mean any
merger, consolidation, sale of all or substantially all of the Corporation's
assets, liquidation or recapitalization (other than solely a change in the par
value of equity securities) of the Common Stock in which more than one-third
of the previously outstanding Common Stock shall be changed into or exchanged
for cash, property or securities other than capital stock of the Corporation
or another corporation ("Non Stock Consideration"). For purposes of the
preceding sentence, any transaction in which shares of Common Stock shall be
changed into or exchanged for a combination of Non Stock Consideration and
capital stock of the Corporation or another corporation shall be deemed to
have involved the exchange of a number of shares of Common Stock for Non Stock
Consideration equal to the total number of shares exchanged multiplied by a
fraction in which the numerator is the Fair Market Value of the Non Stock
Consideration and the denominator is the Fair Market Value of the total
consideration in such exchange, each as determined by a resolution of the
Board of Directors of the Corporation.
Section 6. Reacquired Shares. Any shares of Series B Convertible Preferred
Stock converted, redeemed, exchanged, purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their cancellation,
and upon the filing of an appropriate certificate with the Secretary of State
of the State of Delaware, become authorized but unissued shares of Preferred
Stock, par value $1.00 per share, of the Corporation and may be reissued as
part of another series of Preferred Stock, par value $1.00 per share, of the
Corporation subject to the conditions or restrictions on issuance set forth
herein.
Section 7. Liquidation, Dissolution or Winding Up.
(a) Except as provided in paragraph (b) of this Section 7, upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of
capital stock of the Corporation ranking junior as to dividends, redemption
payments and rights upon liquidation, dissolution or winding up of the
Corporation to the Series B Convertible Preferred Stock unless, prior thereto,
the holders of shares of Series B Convertible Preferred Stock shall have
received (X) if prior to Stockholder Approval, the greater of (a) the
Liquidation Value plus all accrued and unpaid dividends with respect to such
shares, whether or not declared, and (b) the amount which would be distributed
to such holders if all shares of Series B Convertible Preferred Stock had been
converted into Common Stock pursuant to Section 8; and (Y) after Stockholder
Approval, the Liquidation Value plus all accrued and unpaid dividends with
respect to such shares, whether or not declared or (ii) to the holders of
shares of capital stock ranking on a parity with the Series B Convertible
Preferred Stock as to dividends, redemption payments and rights upon
liquidation, dissolution or winding up of the Corporation, except
distributions made ratably on the Series B Convertible Preferred Stock and all
such parity stock in proportion to the total amounts to which the holders of
all such shares are entitled upon such liquidation, dissolution or winding up.
The Liquidation Value shall be $100.00 per share.
(b) If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in
an involuntary case under any such law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or
make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or
order for relief in respect of the Corporation shall be entered by a court
having jurisdiction in the premises in an involuntary case under the Federal
bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or
6
ordering the winding up or liquidation of its affairs, and on account of any
such event the Corporation shall liquidate, dissolve or wind up, no
distribution shall be made (i) to the holders of shares of capital stock of
the Corporation ranking junior to the Series B Convertible Preferred Stock as
to dividends, redemption payments and rights upon liquidation, dissolution or
winding up of the Corporation unless, prior thereto, the holders of shares of
Series B Convertible Preferred Stock shall have received (X) if prior to
Stockholder Approval, the greater of (a) the Liquidation Value plus all
accrued and unpaid dividends with respect to such shares, whether or not
declared, and (b) the amount which would be distributed to such holders if all
shares of Series B Convertible Preferred Stock had been converted into Common
Stock pursuant to Section 8; and (Y) after Stockholder Approval, the
Liquidation Value plus all accrued and unpaid dividends with respect to such
shares, whether or not declared, or (ii) to the holders of shares of capital
stock ranking on a parity with the Series B Convertible Preferred Stock as to
dividends, redemption payments and rights upon liquidation, dissolution or
winding up of the Corporation, except distributions made ratably on the Series
B Convertible Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
(c) Neither the consolidation, merger or other business combination of the
Corporation with or into any other Person or Persons nor the sale of all or
substantially all of the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 7.
Section 8. Conversion. Subject to the condition that the Stockholder
Approval shall first have been obtained, each share of Series B Convertible
Preferred Stock shall be convertible, at any time, at the option of the holder
thereof into the right to receive shares of Common Stock, on the terms and
conditions set forth in this Section 8.
(a) Subject to the provisions for adjustment hereinafter set forth, each
share of Series B Convertible Preferred Stock shall be converted into the
right to receive a number of fully paid and nonassessable shares of Common
Stock, which shall be equal to the Liquidation Value divided by the Conversion
Price, as herein defined. Initially the Conversion Price shall be 127% of
$ ./2/ The Conversion Price shall be subject to adjustment as provided in
this Section 8.
(b) The Conversion Price shall be subject to adjustment from time to time as
follows:
(i) In case the Corporation shall at any time or from time to time
declare a dividend, or make a distribution, on the outstanding shares of
Common Stock in shares of Common Stock or subdivide or reclassify the
outstanding shares of Common Stock into a greater number of shares or
combine or reclassify the outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or shall declare, order, pay or make a
dividend or other distribution on any other class or series of capital
stock, which dividend or distribution includes Common Stock then, and in
each such case, the Conversion Price shall be adjusted to equal the number
determined by multiplying (A) the Conversion Price immediately prior to
such adjustment by (B) a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such
dividend, distribution, subdivision or reclassification, and the numerator
of which shall be the number of shares of Common Stock outstanding
immediately before such dividend, distribution, subdivision or
reclassification. An adjustment made pursuant to this clause (i) shall
become effective (A) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
determination of holders of shares of Common Stock entitled to receive such
dividend or distribution, or (B) in the case of any such subdivision,
reclassification or combination, at the close of business on the day upon
which such corporate action becomes effective.
(ii) In case the Corporation shall at any time or from time to time
declare, order, pay or make a dividend or other distribution (including,
without limitation, any distribution of stock, evidences of indebtedness or
other securities, cash or other property or rights or warrants to subscribe
for securities of
--------
/2/ The blank will be filled with an amount equal to the Average Parent Price,
as defined in the Amended and Restated Agreement and Plan of Merger.
7
the Corporation or any of its Subsidiaries by way of distribution, dividend or
spinoff, but excluding regular ordinary cash dividends as may be declared from
time to time by the Corporation) on its Common Stock, other than a
distribution or dividend of shares of Common Stock that is referred to in
clause (i) of this paragraph (b), then, and in each such case, the Conversion
Price shall be adjusted to equal the number determined by multiplying (A) the
Conversion Price immediately prior to the record date fixed for the
determination of stockholders entitled to receive such dividend or
distribution by (B) a fraction, the denominator of which shall be the Current
Market Price per share of Common Stock on the last Trading Day on which
purchasers of Common Stock in regular way trading would be entitled to receive
such dividend or distribution and the numerator of which shall be the Current
Market Price per share of Common Stock on the first Trading Day on which
purchasers of Common Stock in regular way trading would not be entitled to
receive such dividend or distribution (the "Ex-dividend Date"); provided that
the fraction determined by the foregoing clause (B) shall not be greater than
1. An adjustment made pursuant to this clause (ii) shall be effective at the
close of business on the Ex-dividend Date. If the Corporation completes a
tender offer or otherwise repurchases shares of Common Stock in a single
transaction or a related series of transactions, provided such tender offer or
offer to repurchase is open to all or substantially all holders of Common
Stock (not including open market or other selective repurchase programs), the
Conversion Price shall be adjusted as though (A) the Corporation had effected
a reverse split of the Common Stock to reduce the number of shares of Common
Stock outstanding from (x) the number outstanding immediately prior to the
completion of the tender offer or the first repurchase for which the
adjustment is being made to (y) the number outstanding immediately after the
completion of the tender offer or the last repurchase for which the adjustment
is being made and (B) the Corporation had paid a dividend on the Common Stock
outstanding immediately after completion of the tender offer or the last
repurchase for which the adjustment is being made in an aggregate amount equal
to the aggregate consideration paid by the Corporation pursuant to the tender
offer or the repurchases for which the adjustment is being made (the
"Aggregate Consideration"); provided that in no event shall the Conversion
Price be increased as a result of the foregoing adjustment. In applying the
first two sentences of this Section 8(b)(ii) to the event described in clause
(B) of the preceding sentence, the Current Market Price of the Common Stock on
the date immediately following the closing of any such tender offer or on the
date of the last repurchase shall be taken as the value of the Common Stock on
the Ex-dividend Date, and the value of the Common Stock on the day preceding
the Ex-dividend Date shall be assumed to be equal to the sum of (x) the value
on the Ex-dividend Date and (y) the per share amount of the dividend described
in such clause (B) computed by dividing the Aggregate Consideration by the
number of shares of Common Stock outstanding after the completion of such
tender offer or repurchase. In the event that any of the consideration paid by
the Corporation in any tender offer or repurchase to which this Section
8(b)(ii) applies is in a form other than cash, the value of such consideration
shall be determined by an independent investment banking firm of nationally
recognized standing to be selected by the Board of Directors of the
Corporation.
(iii) In case at any time the Corporation shall be a party to any
transaction (including, without limitation, a merger, consolidation, sale
of all or substantially all of the Corporation's assets, liquidation or
recapitalization (other than solely a change in the par value of equity
securities) of the Common Stock and excluding any transaction to which
clause (i) or (ii) of this paragraph (b) applies) in which the previously
outstanding Common Stock shall be changed into or exchanged for different
securities of the Corporation or common stock or other securities of
another corporation or interests in a noncorporate entity or other property
(including cash) or any combination of any of the foregoing (each such
transaction being herein called the "Transaction"), then each share of
Series B Convertible Preferred Stock then outstanding shall thereafter be
convertible into, in lieu of the Common Stock issuable upon such conversion
prior to consummation of such Transaction, the kind and amount of shares of
stock and other securities and property receivable (including cash) upon
the consummation of such Transaction by a holder of that number of shares
of Common Stock into which one share of Series B Convertible Preferred
Stock would have been convertible (without giving effect to any restriction
on convertibility) immediately prior to such Transaction including, on a
pro rata basis, the cash, securities or property received by holders of
Common Stock in any such transaction. The Corporation shall not be a party
to a Transaction that does not expressly contemplate and provide for the
foregoing.
8
(iv) If any event occurs as to which the foregoing provisions of this
Section 8(b) are not strictly applicable but the failure to make any
adjustment to the Conversion Price or other conversion mechanics would not
fully and equitably protect the conversion rights of the Series B Preferred
Stock in accordance with the essential intent and principles of such
provisions, then in each such case the Board of Directors of the Corporation
shall make such appropriate adjustments to the Conversion Price or other
conversion mechanics (on a basis consistent with the essential intent and
principles established in this Section 8) as may be necessary to fully and
equitably preserve, without dilution or diminution, the conversion rights of
the Series B Convertible Preferred Stock.
(c) If any adjustment required pursuant to this Section 8 would result in an
increase or decrease of less than 1% in the Conversion Price, the amount of
any such adjustment shall be carried forward and adjustment with respect
thereto shall be made at the time of and together with any subsequent
adjustment, which, together with such amount and any other amount or amounts
so carried forward, shall aggregate at least 1% of the Conversion Price.
(d) The Board of Directors may at its option increase the number of shares
of Common Stock into which each share of Series B Convertible Preferred Stock
may be converted, in addition to the adjustments required by this Section 8,
as shall be determined by it (as evidenced by a resolution of the Board of
Directors) to be advisable in order to avoid or diminish any income deemed to
be received by any holder for federal income tax purposes of shares of Common
Stock or Series B Convertible Preferred Stock resulting from any events or
occurrences giving rise to adjustments pursuant to this Section 8 or from any
other similar event.
(e) The holder of any shares of Series B Convertible Preferred Stock may
exercise his right to receive in respect of such shares the shares of Common
Stock or other property or securities, as the case may be, to which such
holder is entitled by surrendering for such purpose to the Corporation, at its
principal office or at such other office or agency maintained by the
Corporation for that purpose, a certificate or certificates representing the
shares of Series B Convertible Preferred Stock to be converted, accompanied by
a written notice stating that such holder elects to convert all or a specified
number of such shares in accordance with this Section 8 and specifying the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock or other property or securities, as the case may be, to
which such holder is entitled to be issued and such other customary documents
as are necessary to effect the conversion. In case such notice shall specify a
name or names other than that of such holder, such notice shall be accompanied
by payment of all transfer taxes payable upon the issuance in such name or
names of shares of Common Stock or other property or securities, as the case
may be, to which such holder has become entitled. Other than such taxes, the
Corporation will pay any and all issue and other taxes (other than taxes based
on income) that may be payable in respect of any issue or delivery of shares
of Common Stock or such other property or securities, as the case may be, to
which such holder has become entitled on conversion of Series B Convertible
Preferred Stock pursuant hereto. As promptly as practicable, and in any event
within five (5) business days after the surrender of such certificate or
certificates and the receipt of such notice relating thereto and, if
applicable, payment of all transfer taxes (or the demonstration to the
satisfaction of the Corporation that such taxes have been paid), the
Corporation shall deliver or cause to be delivered certificates representing
the number of validly issued, fully paid and nonassessable full shares of
Common Stock to which the holder of shares of Series B Convertible Preferred
Stock so converted shall be entitled or such other property or assets, as the
case may be, to which such holder has become entitled. The date upon which a
holder delivers to the Corporation a notice of conversion and the accompanying
documents referred to above is referred to herein as the "Conversion Date."
(f) From and after the Conversion Date, a holder of shares of Series B
Convertible Preferred Stock shall have no voting or other rights with respect
to the shares of Series B Convertible Stock subject thereto, other than the
right to receive upon delivery of the certificate or certificates evidencing
shares of Series B Convertible Preferred Stock as provided by paragraph 8(e),
the securities or property described in this Section 8.
(g) In connection with the conversion of any shares of Series B Convertible
Preferred Stock, no fraction of a share of Common Stock shall be issued, but
in lieu thereof the Corporation shall pay a cash adjustment in
9
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Current Market Price per share of Common Stock on
the day on which such shares of Series B Convertible Preferred Stock are
deemed to have been converted.
(h) Upon conversion of any shares of Series B Convertible Preferred Stock,
if there are any accrued but unpaid dividends thereon, the Corporation shall,
at its option, either pay the same in cash or deliver to the holder an
additional number of fully paid and nonassessable shares of Common Stock
determined by dividing the amount of such accrued and unpaid dividends by the
Conversion Price.
(i) The Corporation shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Series B Convertible Preferred Stock, such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of Series B Convertible Preferred
Stock. The Corporation shall from time to time, in accordance with the laws of
Delaware, increase the authorized amount of Common Stock if at any time the
number of authorized shares of Common Stock remaining unissued shall not be
sufficient to permit the conversion at such time of all then outstanding
shares of Series B Convertible Preferred Stock.
Section 9. Reports as to Adjustments. Whenever the Conversion Price is
adjusted as provided in Section 8 hereof, the Corporation shall (i) promptly
place on file at its principal office and at the office of each transfer agent
for the Series B Convertible Preferred Stock, if any, a statement, signed by
an officer of the Corporation, setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment was
calculated and specifying the new Conversion Price, and (ii) promptly mail to
the holders of record of the outstanding shares of Series B Convertible
Preferred Stock at their respective addresses as the same shall appear in the
Corporation's stock records a notice stating that the number of shares of
Common Stock into which the shares of Series B Convertible Preferred Stock are
convertible has been adjusted and setting forth the new Conversion Price (or
describing the new stock, securities, cash or other property) as a result of
such adjustment, a brief statement of the facts requiring such adjustment and
the computation thereof, and when such adjustment became effective.
Section 10. Definitions. For the purposes of the Certificate of
Designations, Preferences and Rights of Series B Convertible Redeemable
Preferred Stock which embodies this resolution:
"Current Market Price" per share of Common Stock on any date for all
purposes of Section 8 shall be deemed to be the closing price per share of
Common Stock on the date specified. For all other purposes hereunder, "Current
Market Price" on any date shall be deemed to be the average of the closing
prices per share of Common Stock for the five (5) consecutive trading days
ending two trading days prior to such date. The closing price for each day
shall be the last sale price, regular way or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New
York Stock Exchange or, if the Common Stock is not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the last quoted sale price or, if
not so quoted, the average of the high bid and low asked prices in the over-
the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then
in use, or, if on any such date the Common Stock is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by
a professional market maker making a market in the Common Stock selected by
the Board of Directors. If the Common Stock is not publicly held or so listed
or publicly traded, "Current Market Price" shall mean the Fair Market Value
per share as determined in good faith by the Board of Directors of the
Corporation.
"Fair Market Value" means the amount which a willing buyer would pay a
willing seller in an arm's-length transaction as determined in good faith by
the Board of Directors of the Corporation, unless otherwise provided herein.
10
"Person" means any individual, firm, corporation or other entity, and shall
include any successor (by merger or otherwise) of such entity.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open
for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, any day other than a
Saturday, Sunday, or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
Section 11. Rank. The Series B Convertible Preferred Stock shall, with
respect to payment of dividends, redemption payments and rights upon
liquidation, dissolution or winding up of the Corporation, rank (i) prior to
the Common Stock of the Corporation and any class or series of Preferred Stock
which provides by its terms that it is to rank junior to the Series B
Preferred Stock and (ii) on a parity with each other class or series of
Preferred Stock of the Corporation.
Section 12. Alternate Consideration. For purposes of determining the
consideration payable upon exercise of the optional redemption provided in
Section 4(a)(ii) and upon the exercise of the Exchange Right provided in
Section 5, if there shall have occurred a Transaction, as defined in Section
8(b)(iii), the Common Stock that would otherwise have been issued to a holder
of Series B Convertible Preferred Stock for each share of Series B Convertible
Preferred Stock pursuant to Section 4(a)(ii) or Section 5, as applicable,
shall be deemed to instead be the kind and amount of shares of stock or other
securities and property receivable (including cash) upon consummation of such
Transaction (the "Alternate Consideration") in respect of the Common Stock
that would result in the Fair Market Value of such Alternate Consideration,
measured as of the Redemption Date or Exchange Date, as applicable, being
equal to (X) if prior to Stockholder Approval, the greater of (a) the
Liquidation Value plus all dividends accrued and unpaid with respect to such
share of Series B Convertible Preferred Stock, whether or not declared,
measured as of the Redemption Date or the Exchange Date, as applicable, and
(b) the Fair Market Value of the kind and amount of shares of stock and other
securities and property receivable (including cash) pursuant to Section
8(b)(iii) which would have been issued if such share of Series B Convertible
Preferred Stock had been converted pursuant to Section 8 immediately prior to
the consummation of the Transaction; or (Y) if after Stockholder Approval, the
Liquidation Value plus all dividends accrued and unpaid with respect to such
share of Series B Convertible Preferred Stock, whether or not declared,
measured as of the Redemption Date or Exchange Date, as applicable. In the
event the subject Transaction provides for an election of the consideration to
be received in respect of the Common Stock, then each holder of Series B
Convertible Preferred Stock shall be entitled to make a similar election with
respect to the Alternate Consideration to be received by it under Section
4(a)(ii) or Section 5, as applicable. Any determination of the Fair Market
Value of any Alternate Consideration (other than cash) shall be determined by
an independent investment banking firm of nationally recognized standing
selected by the Board of Directors of the Corporation. The Fair Market Value
of any Alternate Consideration that is listed on any national securities
exchange or traded on the NASDAQ National Market shall be deemed to be the
Current Market Price of such Alternate Consideration.
11
IN WITNESS WHEREOF, NORTHROP GRUMMAN CORPORATION has caused this Certificate
of Designations, Preferences and Rights of Series B Convertible Preferred
Stock to be duly executed by its and attested to by its Secretary
this day of , 2001.
NORTHROP GRUMMAN CORPORATION
By: _________________________________
Name:
ATTEST:
By: _________________________________
Name:
12
EXHIBIT D
RESTATED CERTIFICATE OF INCORPORATION
OF
NORTHROP GRUMMAN CORPORATION
FIRST: The name of the corporation is Northrop Grumman Corporation (the
"Corporation").
SECOND: The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name and address of the Corporation's
registered agent in the State of Delaware is The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, State of Delaware 19801.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
General Corporation Law of the State of Delaware.
FOURTH: 1. The total number of shares of stock which the Corporation shall
have authority to issue is Four Hundred Ten Million (410,000,000), consisting
of Four Hundred Million (400,000,000) shares of Common Stock, par value One
Dollar ($1.00) per share (the "Common Stock"), and Ten Million (10,000,000)
shares of Preferred Stock, par value One Dollar ($1.00) per share (the
"Preferred Stock").
2. Shares of Preferred Stock may be issued from time to time in one or more
classes or series, each of which class or series shall have such distinctive
designation or title as shall be fixed by resolution of the Board of Directors
of the Corporation (the "Board of Directors") prior to the issuance of any
shares thereof. Each such class or series of Preferred Stock shall have such
voting powers, full or limited, or no voting powers, and such preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated in
such resolution providing for the issuance of such class or series of
Preferred Stock as may be adopted from time to time by the Board of Directors
prior to the issuance of any shares thereof pursuant to the authority hereby
expressly vested in it, all in accordance with the laws of the State of
Delaware. The Board of Directors is further authorized to increase or decrease
(but not below the number of shares of such class or series then outstanding)
the number of shares of any class or series subsequent to the issuance of
shares of that class or series.
FIFTH: In furtherance and not in limitation of the powers conferred by
statute and subject to Article Sixth hereof, the Board of Directors is
expressly authorized to adopt, repeal, rescind, alter or amend in any respect
the bylaws of the Corporation (the "Bylaws").
SIXTH: Notwithstanding Article Fifth hereof, the Bylaws may be adopted,
repealed, rescinded, altered or amended in any respect by the stockholders of
the Corporation, but only by the affirmative vote of the holders of not less
than eighty percent (80%) of the voting power of all outstanding shares of
Voting Stock (as defined in paragraph (f) of Section 3 of Article Fourteenth
hereof), regardless of class and voting together as a single voting class and,
where such action is proposed by an Interested Stockholder (as defined in
paragraph (d) of Section 3 of Article Fourteenth hereof, or by any Affiliate
or Associate (each as defined in paragraph (g) of Section 3 of Article
Fourteenth hereof) of an Interested Stockholder, including the affirmative
vote of the holders of a majority of the voting power of all outstanding
shares of Voting Stock, regardless of class and voting together as a single
voting class, other than shares held by the Interested Stockholder which
proposed (or the Affiliate or Associate of which proposed) such action, or any
Affiliate or Associate of such Interested Stockholder, provided, however, that
where such action is approved by a majority of the Continuing Directors (as
defined in paragraph (a) of Section 3 of Article Fourteenth hereof), the
affirmative vote of a majority of the voting power of all outstanding shares
of Voting Stock, regardless of class and voting together as a single voting
class shall be required for approval of such action.
1
SEVENTH: The business and affairs of the Corporation shall be managed by and
under the direction of the Board of Directors. Except as may otherwise be
provided pursuant to Section 2 of Article Fourth hereof in connection with
rights to elect additional directors under specified circumstances which may
be granted to the holders of any class or series of Preferred Stock, the exact
number of directors of the Corporation shall be determined from time to time
by a Bylaw or amendment thereto.
EIGHTH: The Board of Directors shall be and is divided into three classes:
Class I, Class II and Class III. The number of directors in each class shall
be the whole number contained in the quotient obtained by dividing the
authorized number of directors by three. If a fraction is also contained in
such quotient, then additional directors shall be apportioned as follows: if
such fraction is one-third, the additional director shall be a member of Class
I; and if such fraction is two-thirds, one of the additional directors shall
be a member of Class I and the other shall be a member of Class II. Each
director shall serve for a term ending on the date of the third Annual Meeting
of Stockholders of the Corporation (the "Annual Meeting") following the Annual
Meeting at which such director was elected; provided, however, that the
directors first elected to Class I shall serve for a term ending on the date
of the first Annual Meeting next following the end of the calendar year 1985,
the directors first elected to Class II shall serve for a term ending on the
date of the second Annual Meeting next following the end of the calendar year
1985 and the directors first elected to Class III shall serve for a term
ending on the date of the third Annual Meeting next following the end of the
calendar year 1985.
Notwithstanding the foregoing provisions of this Article Eighth: each
director shall serve until his successor is elected and qualified or until his
death, resignation or removal; no decrease in the authorized number of
directors shall shorten the term of any incumbent director, and additional
directors, elected pursuant to Section 2 of Article Fourth hereof in
connection with rights to elect such additional directors under specified
circumstances which may be granted to the holders of any class or series of
Preferred Stock, shall not be included in any class, but shall serve for such
term or terms and pursuant to such other provisions as are specified in the
resolution of the Board of Directors establishing such class or series.
NINTH: Except as may otherwise be provided pursuant to Section 2 of Article
Fourth hereof in connection with rights to elect additional directors under
specified circumstances which may be granted to the holders of any class or
series of Preferred Stock, newly created directorships resulting from any
increase in the number of directors, or any vacancies on the Board of
Directors resulting from death, resignation, removal or other causes, shall be
filled solely by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors. Any
director elected in accordance with the preceding sentence shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified or until such director's
death, resignation or removal, whichever first occurs.
TENTH: Except as may otherwise be provided pursuant to Section 2 of Article
Fourth hereof in connection with rights to elect additional directors under
specified circumstances which may be granted to the holders of any class or
series of Preferred Stock, any director may be removed from office only for
cause and only by the affirmative vote of the holders of not less than eighty
percent (80%) of the voting power of all outstanding shares of Voting Stock
entitled to vote in connection with the election of such director, regardless
of class and voting together as a single voting class; provided, however, that
where such removal is approved by a majority of the Continuing Directors, the
affirmative vote of a majority of the voting power of all outstanding shares
of Voting Stock entitled to vote in connection with the election of such
director, regardless of class and voting together as a single voting class,
shall be required for approval of such removal.
ELEVENTH: Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called Annual Meeting or at a
special meeting of stockholders of the Corporation, unless such action
requiring or permitting shareholder approval is approved by a majority of the
Continuing Directors, in which case such action may be authorized or taken by
the written consent of the holders of outstanding shares of Voting Stock
having not less than the minimum voting power that would be necessary to
authorize or take
2
such action at a meeting of stockholders at which all shares entitled to vote
thereon were present and voted, provided all other requirements of applicable
law and this Certificate have been satisfied.
TWELFTH: Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by a majority of the Board of
Directors or by the Chairman of the Board. Special meetings may not be called
by any other person or persons. Each special meeting shall be held at such
date and time as is requested by the person or persons calling the meeting,
within the limits fixed by law.
THIRTEENTH: Meetings of stockholders of the Corporation may be held within
or without the State of Delaware, as the Bylaws may provide. The books of the
Corporation may be kept (subject to any provision of applicable law) outside
the State of Delaware at such place or places as may be designated from time
to time by the Board of Directors or in the Bylaws.
FOURTEENTH: 1. Subject to the provisions of Section 2 of this Article
Fourteenth, in addition to any vote required by law, a Business Combination
(as defined in paragraph (b) of Section 3 of this Article Fourteenth) shall be
approved by the affirmative vote of the holders of not less than:
(a) eighty percent (80%) of the voting power of all outstanding shares of
Voting Stock, regardless of class and voting together as a single voting
class; and
(b) a majority of the voting power of all outstanding shares of Voting
Stock, other than shares held by any Interested Stockholder which is (or
the Affiliate or Associate of which is) a party to such Business
Combination or by any Affiliate or Associate of such Interested
Stockholder, regardless of class and voting together as a single voting
class.
The affirmative votes referred to in paragraphs (a) and (b) of this Section
1 shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage or proportion may be specified, by law, or in any
agreement between the Corporation and any national securities exchange or any
other person, or otherwise.
2. Notwithstanding the provisions of Section 1 of this Article Fourteenth, a
Business Combination may be approved if all of the conditions specified in
either of the following paragraphs (a) or (b) have been satisfied:
(a) both of the following conditions specified in clauses (i) and (ii) of
this paragraph (a) have been satisfied:
(i) there are one or more Continuing Directors and a majority of such
Continuing Directors shall have approved such Business Combination; and
(ii) such Business Combination shall have been approved by the
affirmative vote of the Corporation's stockholders required by law, if
any such vote is so required: or
(b) all of the following conditions satisfied in clauses (i) through
(vii) of this paragraph (b) have been satisfied:
(i) such Business Combination shall have been approved by the
affirmative vote of holders of a majority of the voting power of all
outstanding shares of Voting Stock, regardless of class and voting
together as a single voting class;
(ii) the aggregate amount of (A) the cash and (B) the Fair Market
Value (as defined in paragraph (i) of Section 3 of this Article
Fourteenth), as of the date of the consummation of the Business
Combination (the "Consummation Date"), of consideration other than cash
received or to be received, per share, by holders of shares of Common
Stock in such Business Combination, shall be at least equal to the
higher of the following:
(I) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid or agreed to be paid by the Interested Stockholder which is (or
the Affiliate or Associate of which is) a party to such Business
Combination for any shares of Common Stock (x) within the two-year
period immediately prior to and including the date of the
3
final public announcement of the terms of the proposed Business
Combination (the "Announcement Date"), or (y) in the transaction in
which it became an interested Stockholder, whichever is higher; or
(II) the Fair Market Value per share of Common Stock (x) on the
Announcement Date, or (y) on the date on which the Interested
Stockholder became an Interested Stockholder (the "Determination
Date"), whichever is higher;
(iii) the aggregate amount of (A) the cash and (B) the Fair Market
Value, as of the Consummation Date, of consideration other than cash
received or to be received, per share, by holders of shares of any
class of outstanding Voting Stock other than Common Stock in such
Business Combination, shall be at least equal to the highest of the
following (it being intended that the requirements of this clause (iii)
shall be required to be met with respect to every class of outstanding
Voting Stock other than Common Stock, whether or not such Interested
Stockholder (or such Affiliate or Associate) has previously acquired
any shares of a particular class of Voting Stock):
(I) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid or agreed to be paid by the Interested Stockholder for any
shares of such class of Voting Stock (x) within the two-year period
immediately prior to the Announcement Date, or (y) in the
transaction in which it became an Interested Stockholder, whichever
is higher;
(II) (if applicable) the highest preferential amount per share to
which the holders of shares of such class of Voting Stock are
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(III) the Fair Market Value per share of such class of Voting
Stock (x) on the Announcement Date, or (y) on the Determination
Date, whichever is higher;
(iv) the consideration to be received by the holders of a particular
class of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as the Interested Stockholder has previously
paid (or agreed to pay) for shares of such class of Voting Stock; if
the Interested Stockholder has paid for shares of any class of Voting
Stock with varying forms of consideration, the form of consideration to
be received by holders of shares of such class of Voting Stock shall be
either cash or the form used to acquire the largest number of shares of
such class of Voting Stock previously acquired by such Interested
Stockholder, and the price determined in accordance with clauses (ii)
and (iii) of this paragraph (b) shall be subject to appropriate
adjustment in the event of any stock dividend, stock split, combination
of shares or similar event;
(v) after such Interested Stockholder has become an Interested
Stockholder, and prior to the consummation of such Business
Combination, neither such Interested Stockholder nor any of its
Affiliates or Associates shall have become the beneficial owner of any
additional shares of Voting Stock, except (A) as part of the action
which resulted in such Interested Stockholder becoming an Interested
Stockholder, or (B) upon conversion of convertible securities acquired
by it prior to such Interested Stockholder becoming an Interested
Stockholder, upon exercise of warrants acquired by it prior to such
Interested Stockholder becoming an Interested Stockholder, or as a
result of a stock split or a pro rata stock dividend;
(vi) after such Interested Stockholder has become an Interested
Stockholder, neither such Interested Stockholder nor any of its
Affiliates or Associates shall have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation, whether in
anticipation of or in connection with such Business Combination or
otherwise; and
(vii) a proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules
4
and regulations thereunder (or any subsequent provisions replacing such
Act, rules and/or regulations) shall be mailed to stockholders of the
Corporation at least thirty (30) days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act, plea and/or
regulations or such subsequent provisions).
3. For the purposes of this Certificate of Incorporation, the following
definitions shall apply:
(a) "Continuing Director" means (i) any member of the Board of Directors
who (A) is not an Interested Stockholder or an Affiliate or Associate of an
Interested Stockholder and (B) was a member of the Board of Directors prior
to the time that an Interested Stockholder became an Interested
Stockholder, and (ii) any person who is elected or nominated to succeed a
Continuing Director, or to join the Board of Directors, by a majority of
the Continuing Directors.
(b) "Business Combination" means any one or more of the following
transactions referred to in clauses (i) through (vi) of this paragraph (b):
(i) any merger or consolidation of the Corporation or any Subsidiary
(as defined in paragraph (h) of this Section 3) with or into (A) any
Interested Stockholder or (B) any other corporation (whether or not
itself an Interested Stockholder) which immediately before is, or after
such merger or consolidation would be, an Affiliate or Associate of an
Interested Stockholder;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions) to
or with any Interested Stockholder, Affiliate and/or any Associate of
any Interested Stockholder of any assets of the Corporation and/or any
Subsidiary, where such assets have an aggregate Fair Market Value of
Twenty-Five Million Dollars ($25,000,000) or more;
(iii) the issuance or transfer by the Corporation and/or any
Subsidiary (in one transaction or a series of related transactions) of
any equity securities of the Corporation and/or any Subsidiary to a
person which, immediately prior to such issuance or transfer, is an
Interested Stockholder or an Affiliate or Associate of an Interested
Stockholder, where such equity securities have an aggregate Fair Market
Value of Ten Million Dollars ($10,000,000) or more;
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation;
(v) any reclassification of securities (including any reverse stock
split) or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise involving
an Interested Stockholder), which has the effect, directly or
indirectly, of increasing the percentage of the outstanding shares of
any class of equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any Interested
Stockholder or by any Affiliate and/or Associate of any Interested
Stockholder; or
(vi) any agreement, contract or other arrangement providing for any
of the transactions described in clauses (i) through (v) of this
paragraph (b).
(c) A "person" means an individual, firm, partnership, trust, corporation
or other entity.
(d) "Interested Stockholder" means any person who or which, together with
its Affiliates and Associates, as of the record date for the determination
of stockholders entitled to notice of, and to vote on, any Business
Combination, the removal of a director or the adoption of any proposed
amendment, alteration, rescission or repeal of any provision of this
Certificate of Incorporation or any Bylaw, or immediately prior to the
Consummation Date:
(i) is the beneficial owner (as defined in paragraph (e) of this
Section 3), directly or indirectly, of ten percent (10%) or more of the
voting power of (A) all outstanding shares of Voting Stock or (B) all
outstanding shares of the capital stock of a Subsidiary having general
voting power ("Subsidiary Stock"); or
5
(ii) is an assignee of or has otherwise succeeded to any share of
Voting Stock or Subsidiary Stock which was, at any time within the two
year period prior thereto, beneficially owned by any person who at such
time was an Interested Stockholder, and such assignment or succession
shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933, as amended, and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules
and/or regulations);
provided, however, that the term "Interested Stockholder" shall not include
(A) the Corporation or any Subsidiary or (B) any profit-sharing, employee
stock ownership or other employee benefit plan of the Corporation or any
Subsidiary, or any trustee of, or fiduciary with respect to, any such plan
when acting in such capacity.
(e) A person is the "beneficial owner" of any shares of capital stock:
(i) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such person or any of its Affiliates or Associates has (A)
the right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement, arrangement
or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any
other person with which such first-mentioned person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation or a
Subsidiary, as the case may be.
(f) "Voting Stock" means the capital stock of the Corporation having
general voting power. For the purpose of determining whether a person is an
Interested Stockholder pursuant to paragraph (d) of this Section 3, the
number of shares of Voting Stock or Subsidiary Stock, as the case may be,
deemed to be outstanding shall include shares deemed owned by a beneficial
owner through application of paragraph (e) of this Section 3, but shall not
include any other shares of Voting Stock or Subsidiary Stock, as the case
may be, which may be issuable to any other person pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise,
(g) "Affiliate" and "Associate" have the respective meanings given to
those terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended, as in effect on January 1,
1985.
(h) "Subsidiary" means any corporation of which a majority of any class
of equity security (as defined in Rule 3a 11-l of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, as in
effect on January 1, 1985) is owned, directly or indirectly, by the
Corporation.
(i) "Fair Market Value" means (i) in the case of stock (A) the highest
closing sale price during the 30-day period including and immediately
preceding the date in the question of a share of such stock on the
Composite Tape for New York Stock Exchange-Listed Stocks, or (B) if such
stock is not quoted on the Composite Tape, the highest closing sale price
during such 30-day period on the New York Stock Exchange, or (C) if such
stock is not listed on such Exchange, the highest closing sale price during
such 30-day period on the principal United States securities exchange
registered under the Securities Exchange Act of 1934, as amended, on which
such stock is listed, or (D) if such stock is not listed on any such
exchange, the highest closing bid quotation with respect to a share of such
stock on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use during such 30-day period, or
(E) if no such quotations are available, the fair market value on the date
in question of a share of such stock as determined in good faith by a
majority of the Continuing Directors (or if there are no Continuing
Directors, then by a majority of the Board of Directors), and (ii) in the
case of property other than cash or stock, the fair market
6
value of such property on the date in question as determined in good faith
by a majority of the Continuing Directors (or if there are no Continuing
Directors, then by a majority of the Board of Directors).
(j) In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash received or to be
received" as used in clauses (ii) and (iii) of paragraph (b) of Section 2
of this Article Fourteenth shall include the shares of Common Stock and/or
the shares of any other class of Voting Stock retained by the holder of
such shares.
4. A majority of the Continuing Directors shall have the power and duty to
determine, for purposes of this Article Fourteenth, on the basis of
information known to them: (a) whether a person is an Interested Stockholder,
(b) the number of shares of Voting Stock or Subsidiary Stock beneficially
owned by any person, (c) whether a person is an Affiliate or Associate of
another person, (d) whether a person has an agreement, arrangement or
understanding with another person as to the matters referred to in clause (vi)
of paragraph (b), or clause (ii) or (iii) of paragraph (e), of Section 3 of
this Article Fourteenth, (e) whether any particular assets of the Corporation
and/or any Subsidiary have an aggregate Fair Market Value of Twenty-Five
Million Dollars ($25,000,000) or more, or (f) whether the consideration
received for the issuance or transfer of securities by the Corporation and/or
any Subsidiary has an aggregate Fair Market Value of Ten Million Dollars
($10,000,000) or more. In furtherance and not in limitation of the preceding
powers and duties set forth in this Section 4, a majority of the Continuing
Directors shall have the power and duty to interpret all of the terms and
provisions of this Article Fourteenth.
5. Nothing contained in this Article Fourteenth shall be construed to
relieve any Interested Stockholder or any Affiliate or Associate thereof from
any fiduciary obligation imposed by law.
6. The fact that any action or transaction complies with the provisions of
this Article Fourteenth shall not be construed to impose any fiduciary duty,
obligation or responsibility on the Board of Directors or any member thereof
to approve such action or transaction or recommend its adoption or approval to
the stockholders of the Corporation, nor shall such compliance limit, prohibit
or otherwise restrict in any manner the Board of Directors, or any member
thereof, with respect to evaluations of, or actions and responses taken with
respect to, such action or transaction.
FIFTEENTH: To the maximum extent permissible under Section 262 of the
General Corporation Law of the State of Delaware, the stockholders of the
Corporation shall be entitled to the statutory appraisal rights provided
therein, notwithstanding any exception otherwise provided therein, with
respect to any Business Combination involving the Corporation and any
Interested Stockholder (or any Affiliate or Associate of any Interested
Stockholder), which requires the affirmative vote specified in paragraph (a)
of Section I of Article Fourteenth hereof.
SIXTEENTH: The provisions set forth in this Article Sixteenth and in
Articles Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh,
Twelfth, Fourteenth and Fifteenth hereof may not be repealed, rescinded,
altered or amended in any respect, and no other provision or provisions may be
adopted which impair(s) in any respect the operation or effect of any such
provision, except by the affirmative vote of the holders of not less than
eighty percent (80%) of the voting power of all outstanding shares of Voting
Stock regardless of class and voting together as a single voting class and,
where such action is proposed by an Interested Stockholder or by any Associate
or Affiliate of an Interested Stockholder, the affirmative vote of the holders
of a majority of the voting power of all outstanding shares of Voting Stock,
regardless of class and voting together as a single class, other than shares
held by the Interested Stockholder which proposed (or the affiliate or
Associate of which proposed) such action, or any Affiliate or Associate of
such Interested Stockholder, provided, however, that where such action is
approved by a majority of the Continuing Directors, the affirmative vote of a
majority of the voting power of all outstanding shares of Voting Stock,
regardless of class and voting together as a single voting class, shall be
required for approval of such action.
SEVENTEENTH: The Corporation reserves the right to adopt, repeal, rescind,
alter or amend in any respect any provision contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by applicable law, and
all rights conferred on stockholders herein are granted subject to this
reservation.
7
Notwithstanding the preceding sentence, the provisions set forth in Articles
Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth,
Fourteenth, Fifteenth and Sixteenth may not be repealed, rescinded, altered or
amended in any respect, and no other provision or provisions may be adopted
which impair(s) in any respect the operation or effect of any such provision,
unless such action is approved as specified in Article Sixteenth hereof.
EIGHTEENTH: A director of the Corporation shall not be personally liable to
the Corporation or to its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or to its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) for any transaction from which the
director derives any improper personal benefit. If, after approval of this
Article by the stockholders of the Corporation, the General Corporation Law of
the State of Delaware is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent permitted
by the General Corporation Law of the State of Delaware, as so amended.
Any repeal or modification of this Article by the stockholders of the
Corporation as provided in Article Seventeen hereof shall not adversely affect
any right or protection of a director of the Corporation existing at the time
of such repeal or modification.
8
DIRECTIONS TO
NORTHROP GRUMMAN CORPORATION
2001 ANNUAL MEETING
OF STOCKHOLDERS
Fairmont Miramar Hotel
101 Wilshire Boulevard
Santa Monica, California
Take Santa Monica Freeway (10) west to City of Santa Monica. Take Lincoln
Boulevard exit and turn right (heading in a northwest direction).
Go approximately 3/4 of a mile to Wilshire Boulevard and turn left. Go seven
blocks to Ocean Avenue and turn right. You will immediately see signs for
valet parking on the right side of Ocean Avenue.
PROXY
PROXY/VOTING
INSTRUCTION
NORTHROP GRUMMAN CORPORATION
This Proxy/Voting Instruction is Solicited on Behalf of
The Board of Directors for the 2001 Annual Meeting of Stockholders
The undersigned hereby constitutes and appoints W. Burks Terry and John H.
Mullan and each of them, attorneys and proxies with full power of substitution,
to represent the undersigned and to vote all shares of Common Stock, $.01 per
value, of Northrop Grumman Corporation (the "Company"), that the undersigned
would be entitled to vote if personally present at the 2001 Annual Meeting of
Stockholders of the Company to be held on Wednesday, May 16, 2001 at 10:00 a.m.
(Pacific Daylight Time) at the Fairmont Miramar Hotel, 101 Wilshire Boulevard,
Santa Monica, California 90401, and at any and all adjournments or postponements
thereof (the "Meeting"), as herein specified (or, if no direction is given, FOR
the nominees named below) and in such proxyholder's discretion upon any other
matter that may properly come before the Meeting. If the Meeting occurs after
the completion of the Northrop reorganization described in the accompanying
proxy statement), the directions on this proxy/voting instruction card shall
constitute the instructions of the undersigned as to how the Company should vote
its shares of NNG, Inc. In such event, the Company (as the sole stockholder of
NNG, Inc. on the record date for the Meeting) will vote all of shares of NNG
outstanding as of the record date with respect to the following proposals in the
exact proportions of the votes indicated by stockholders in their proxy/voting
instructions with respect to the Meeting, or voted in person at the Meeting.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NOT OTHERWISE DIRECTED, THIS PROXY WILL
BE VOTED "FOR" PROPOSALS 1, 2, 3, 4 AND 5 AND AGAINST PROPOSALS 6, 7, 8 AND 9.
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY, EVEN IF YOU PLAN
TO ATTEND THE ANNUAL MEETING.
(Continued and to be signed on the other side)
SEE REVERSE SIDE
FOLD AND DETACH HERE
NORTHROP GRUMMAN CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
MAY 16, 2001
10:00 A.M.
Fairmont Miramar Hotel
101 Wilshire Boulevard
Santa Monica, California 90401
X
Please mark your
votes as indicated in this example.
5398
This proxy/voting instruction is solicited by the Board of Directors of the
Company. This proxy will be voted as marked. If not otherwise marked, this proxy
will be voted "for" Proposals 1, 2, 3, 4 and 5 and "against" Proposals 6, 7, 8
and 9.
The Board of Directors recommends a vote "for" Proposals 1, 2, 3, 4 and 5.
Proposal 1-Election of Class 1 directors to hold office for three years.
FOR AGAINST
WITHHELD, for the following nominee(s) only (write name(s) below):
Directors:
01. Lewis W. Coleman
02. Kent Kresa
03. Aulana L. Peters
FOR AGAINST ABSTAIN
Proposal 2-Proposal to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditor.
Proposal 3-Proposal to approve 2001 Long Term Incentive Stock Plan.
Proposal 4-Proposal to approve issuance of shares of Common Stock upon
conversion of Series B Preferred Stock.
Proposal 5-Proposal to amend Articles of Incorporation to increase number of
authorized shares of Common Stock.
The Board of Directors recommends a vote "AGAINST" proposals 6, 7, 8 and 9.
Proposal 6-Shareholder proposal regarding offset commitments.
Proposal 7-Shareholder proposal regarding super majority vote.
Proposal 8-Shareholder proposal regarding classified boards.
Proposal 9-Shareholder proposal regarding Shareholder Rights Plan.
SIGNATURE (S) DATE
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
FOLD AND DETACH HERE
NORTHROP GRUMMAN CORPORATION
PROXY/VOTING INSTRUCTION CARD
Your vote is important. Please consider the issues discussed in the proxy
statement and cast your vote by:
* Accessing the World Wide Web site http://www.eproxyvote.com/noc to vote via
the internet.
* Using a touch-tone telephone to vote by phone toll free from the U.S. or
Canada. Simply dial 1-877-779-8683 and follow the instructions. When you are
finished voting, your vote will be confirmed and the call will end.
* Completing, dating, signing and mailing the proxy/instruction card in the U.S.
postage paid envelope included with the proxy statement.
You can vote by phone or via the internet anytime on or before May 11, 2001. You
will need the control number printed at the top of this instruction card to vote
by phone or via the internet. If you do so, you do not need to mail in your
proxy card. If you mail your proxy card, it must be received by May 15, 2001.
If shares are held on your behalf under any of the Company Savings Plans, the
proxy serves to provide confidential instructions to the plan trustee who then
votes the shares. Instructions must be received by May 10, 2001 to be included
in the tabulation for the Trustee's vote. If no instructions are provided, the
applicable Trustee will vote the respective plan shares according to the
provisions of the applicable plan documents.