FILED PURSUANT TO
RULE 424(b)(5)
REGISTRATION NO. 333-71290
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 26, 2001)
6,000,000 Equity Security Units
[LOGO] Northrop Grumman
7.25% Equity Security Units
This is an offering of equity security units of Northrop Grumman Corporation.
Each equity security unit has a stated amount of $100 and will initially
consist of (a) a contract to purchase, for $100, shares of common stock of
Northrop Grumman Corporation on November 16, 2004 and (b) a senior note with a
principal amount of $100. The senior note will initially be held as a component
of your unit and be pledged to secure your obligation to purchase our common
stock under the related purchase contract.
We will make quarterly contract adjustment payments to you under the
purchase contract at the annual rate of 2.0% of the stated amount of $100 per
purchase contract. In addition, you will receive quarterly interest payments on
the senior note at the initial annual rate of 5.25%. We have the right to defer
the contract adjustment payments until November 16, 2004 but not the interest
payments on the senior note, as described in this prospectus supplement. The
interest rate on the senior note will be reset, and the senior note remarketed,
as described in this prospectus supplement. The senior notes are unsecured and
rank equally with all of our other unsecured senior indebtedness. The units
will be sold in a minimum number of 10 units.
On November 15, 2001, the last reported sale price of our common stock on
the New York Stock Exchange was $89.02 per share.
The units have been approved for listing on the New York Stock Exchange
under the symbol "NOC PrE."
Concurrently with this offering, we are also offering 8,000,000 shares of
our common stock. Neither offering is conditioned on the other.
See "Risk Factors Relating to the Units" beginning on page S-25 and
"Forward-Looking Statements and Important Factors" beginning on page S-29 to
read about important factors you should consider before buying units.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
-----------------
Per Unit Total
-------- ------------
Public offering price........................ $100.00 $600,000,000
Underwriting discount........................ $ 3.00 $ 18,000,000
Proceeds to Northrop Grumman, before expenses $ 97.00 $582,000,000
The public offering price set forth above does not include accumulated
contract adjustment payments and accrued interest, if any. Contract adjustment
payments on the purchase contracts and interest on the senior notes will accrue
from the date of original issuance of the units, expected to be November 21,
2001, and such amounts that have accrued from the date of issuance to the date
of delivery must be paid by a purchaser if the units are delivered after
November 21, 2001.
To the extent that the underwriters sell more than 6,000,000 units, the
underwriters have the option to purchase up to an additional 900,000 units from
us at the initial public offering price less the underwriting discount.
The underwriters of the concurrent offering of our common stock, which
include the underwiters of this offering, will donate 25,000 of the 8,000,000
shares of common stock they are purchasing from us in the concurrent offering
to the Twin Towers Fund. Each such underwriter's donation will be based on its
proportionate participation in the concurrent offerings.
The underwriters expect to deliver the units in book-entry form only through
the facilities of The Depository Trust Company against payment in New York, New
York, on November 21, 2001.
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Joint Bookrunning Managers
JPMorgan Salomon Smith Barney
-----------------
Goldman, Sachs & Co. Lehman Brothers Merrill Lynch & Co. SG Cowen
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November 15, 2001
TABLE OF CONTENTS
Page
----
Prospectus Supplement
SUMMARY............................................................. S-3
RISK FACTORS RELATING TO THE UNITS.................................. S-25
FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS.................... S-29
ACCOUNTING TREATMENT................................................ S-31
USE OF PROCEEDS..................................................... S-31
CAPITALIZATION...................................................... S-32
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY..................... S-33
DESCRIPTION OF THE EQUITY SECURITY UNITS............................ S-34
DESCRIPTION OF THE SENIOR NOTES..................................... S-52
U.S. FEDERAL INCOME TAX CONSEQUENCES................................ S-55
ERISA CONSIDERATIONS................................................ S-62
UNDERWRITING........................................................ S-63
LEGAL MATTERS....................................................... S-65
EXPERTS............................................................. S-65
WHERE YOU CAN FIND MORE INFORMATION................................. S-65
Prospectus
ABOUT THIS PROSPECTUS............................................... 2
WHERE YOU CAN FIND MORE INFORMATION................................. 3
FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS.................... 4
NORTHROP GRUMMAN CORPORATION........................................ 6
USE OF PROCEEDS..................................................... 7
RATIO OF EARNINGS TO FIXED CHARGES.................................. 7
DESCRIPTION OF DEBT SECURITIES...................................... 8
DESCRIPTION OF PREFERRED STOCK...................................... 14
DESCRIPTION OF COMMON STOCK......................................... 19
DESCRIPTION OF WARRANTS............................................. 20
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS 21
PLAN OF DISTRIBUTION................................................ 22
VALIDITY OF THE DEBT AND EQUITY SECURITIES.......................... 23
EXPERTS............................................................. 23
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This document is in two parts. The first is this prospectus supplement,
which describes the specific terms of the securities we are offering and also
adds to and updates information contained in the accompanying prospectus and
the documents incorporated by reference in that prospectus. The second part,
the accompanying prospectus, gives more general information about securities we
may offer from time to time, including securities other than we are offering in
this prospectus supplement.
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference is accurate only as of
their respective dates. Our business, financial condition, results of
operations and prospects may have changed since those dates.
S-2
SUMMARY
This summary highlights certain information incorporated by reference or
appearing elsewhere in this prospectus supplement and the accompanying
prospectus. As a result, it is not complete and does not contain all of the
information that you should consider before purchasing our units. You should
read the following summary in conjunction with the more detailed information
contained in this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference. References to "Northrop Grumman" refer to
Northrop Grumman Corporation. Unless the context requires otherwise, references
to "we," "us" or "our" refer collectively to Northrop Grumman and its
subsidiaries.
Northrop Grumman
We are a leading global aerospace and defense company providing a wide range
of products and services in defense and commercial electronics, systems
integration, information technology and non-nuclear shipbuilding and systems.
As a prime contractor, principal subcontractor, partner, or preferred supplier,
we participate in many high-priority defense and commercial technology programs
in the United States and abroad.
We are aligned into five business sectors: Electronic Systems, Information
Technology, Integrated Systems, Ship Systems and Component Technologies.
Electronic Systems designs, develops and manufactures a wide variety of
defense electronics and systems, airspace management systems, precision
weapons, marine systems, logistic systems, space systems and automation and
information systems. These include fire control radars for the F-16 fighter
aircraft, the F-22 air dominance fighter and the Longbow Apache helicopter.
Other key products include the AWACS airborne early warning radar, the Joint
STARS air-to-ground surveillance radar sensor, the Longbow Hellfire missile and
the BAT "brilliant" anti-armor submunition. This sector also provides tactical
military radars and countrywide air defense systems, as well as airborne
electronic countermeasures systems intended to jam enemy aircraft and weapons
systems. Electronic Systems is an international leader in airspace management
as a producer of civilian air traffic control systems. The sector also makes
sophisticated undersea warfare systems and naval propulsion and power
generation systems, as well as postal automation, image processing, material
management, asset track and trace and data communication systems. In addition,
this sector designs, develops and manufactures inertial navigation, guidance
and control, IFF (identification friend or foe) and marine electronic systems,
and provides electronic warfare systems and integrates avionics systems and
shipboard information and communication systems.
Information Technology is a leader in advanced information technologies,
systems and services. Information Technology includes our information systems
businesses, which design, develop, integrate and support computer-based
information systems and provide information technology and services primarily
for government customers. This sector is the prime contractor with the General
Services Administration ANSWER and Millennia programs. Information Technology
is also part of a team working with the Internal Revenue Service to modernize
the U.S. federal tax system. Information Technology has extensive expertise in
command, control, communications, computers, intelligence, surveillance and
reconnaissance (C4ISR). It is a key management support element for major
weapons systems, such as the U.S. Navy's AEGIS class destroyer as well as
mission planning for the U.S. Navy, Air Force and Special Operations Command.
Information Technology provides base operations support for NASA's Kennedy
Space Center, Cape Canaveral Air Station and Patrick Air Force Base, among
others. In addition, this sector provides information technology services to
commercial customers and to our other sectors.
Integrated Systems is a leader in design, development and production of
airborne early warning, electronic warfare and surveillance and battlefield
management systems. Integrated Systems is the prime contractor for the
S-3
Joint STARS advanced airborne targeting and battle management system and the
U.S. Air Force's B-2 Spirit stealth bomber. It has a principal role in
producing the U.S. Navy's F/A-18 Hornet strike fighter. The sector also is
upgrading the EA-6B Prowler electronic countermeasures aircraft and produces
the E-2C Hawkeye early-warning aircraft. We have a principal role in the Global
Hawk program, a development stage integrated unmanned aerial vehicle for
reconnaissance and surveillance. We are also a principal member of the Lockheed
Martin Joint Strike Fighter Team.
Ship Systems is engaged in the building of large multimission non-nuclear
surface ships for the U.S. Navy as well as other government and commercial
customers and is a provider of overhaul, repair modernization, ship design and
engineering services. Key products include amphibious assault ships (WASP LHD 1
Class, San Antonio LPD 17 Class), destroyers (Arleigh Burke DDG 51 Class),
sealift transport ships (T-AKR Ro/Ro) and double-hulled oil tankers. In
addition, the new Full Service Center, a standalone business within the sector,
offers its customers a full range of ship-related services, which cover the
entire spectrum of an acquisition program, as well as a worldwide network of
fleet support services. If the pending acquisition of Newport News is
consummated, we will have expanded shipbuilding capabilities, including a
nuclear platform. See "--Recent Developments."
Component Technologies is a premier international supplier of complex
backplanes, connectors, laser crystals, solder materials, specialty products,
oxygen generating systems and other electronic components used primarily in the
aerospace, telecommunications, industrial and computer markets.
Strategy
We intend to grow our sales, enhance our profitability and strengthen our
position as a leader in the defense industry. Our strategy to achieve these
objectives includes:
. Leveraging our position as a systems integrator, defense electronics
leader and information technology provider to meet the defense needs of
the United States and allied foreign governments;
. Broadening further our business mix by diversifying program positions
and sources of revenues as well as enhancing our importance to, and
expanding our relationships with, our existing customers;
. Targeting business areas with significant growth prospects;
. Pursuing initiatives of continuous improvement in our manufacturing
operations, product quality and customer support with a view to
improving operating margins, efficiency and shareholder value; and
. Capitalizing on strategic acquisition opportunities to enhance and
expand our existing product offerings and capabilities in areas
synergistic with our present businesses and consistent with our outlook
on future customer needs and requirements.
Acquisitions and Dispositions
Strategic acquisitions have played a critical role in our transformation
into a leading diversified technology company for the U.S. Department of
Defense. In 1992 we acquired 49% of Vought Aircraft Company (Vought). In 1994
we made the first of our major acquisitions by purchasing Grumman Corporation.
In the same year we also acquired the remaining 51% of Vought. We followed
these acquisitions by acquiring the defense electronic systems group of
Westinghouse Electric Corporation in 1996. In August 1997, we completed our
merger with Logicon, Inc. In 1998, we acquired Inter-National Research
Institute Inc. (INRI). In 1999, we acquired the Information Systems Division of
California Microwave, Inc., Data Procurement Corporation (DPC), and Ryan
Aeronautical, an operating unit of Allegheny Teledyne Inc. In 2000, we acquired
Navia Aviation SA, Comptek Research, Federal Data Corporation and Sterling
Software FSG. Also in 2000, we divested our Commercial Aerostructures business
(including Vought), which generated $1.38 billion in net sales in 1999.
S-4
In April 2001, we acquired Litton Industries, Inc. (Litton) for a
combination of cash, common stock and our Series B Preferred Stock in a
transaction valued at $5.2 billion, including assumed debt. We have combined
the related Litton operations into our Electronic Systems and Information
Technology sectors, and have added the Ship Systems and Component Technologies
sectors to reflect business segments acquired in the Litton acquisition.
In October 2001, we completed our acquisition of the Electronics and
Information Systems (EIS) Group of AeroJet-General Corporation, a wholly owned
subsidiary of GenCorp Inc., for $315 million in cash. The EIS business unit
provides space-borne sensing for early warning systems, weather and ground
systems that process C4ISR data from space-based platforms, and smart weapons
technology for high-priority U.S. government national security programs. This
operation is now part of our Electronic Systems sector's newly formed Space
Systems Division.
Northrop Grumman is a holding company formed in connection with our
acquisition of Litton in April 2001. Our principal executive offices are
located at 1840 Century Park East, Los Angeles, California 90067 and our
telephone number is (310) 553-6262.
Recent Developments
Newport News
On May 23, 2001, we announced the commencement of an exchange offer to
acquire all of the outstanding shares of common stock of Newport News
Shipbuilding Inc. (Newport News). Under the terms of our offer, as amended,
Newport News shareholders will be provided the option to receive for their
shares $67.50 per share in cash or shares of our common stock designed to
provide a value of $67.50 per share, subject to certain proration and other
limitations. The exact exchange ratio will be determined by dividing $67.50 by
the average of the closing sale prices for a share of our common stock over a
trading period established in the exchange offer. However, the exchange ratio
will in no event be more than 0.84375 ($67.50/$80.00) or less than 0.675
($67.50/$100.00).
On October 23, 2001, the Department of Defense recommended to the Department
of Justice that our proposed acquisition of Newport News be approved and the
Department of Justice filed suit to block the proposed acquisition of Newport
News by General Dynamics Corporation. Newport News and General Dynamics
subsequently announced that they had terminated their merger agreement. On
November 2, 2001, we were informed that the Department of Justice had closed
its investigation of our proposed acquisition of Newport News, thereby allowing
us to proceed with the acquisition. On November 8, 2001, we and Newport News
announced that we had signed a definitive agreement under which we will acquire
Newport News pursuant to the terms of the exchange offer described above.
Subject to the tender of a majority of the outstanding shares of Newport News
common stock, the transaction is expected to close by the end of November 2001.
The exchange offer will be followed by a second-step merger in which the same
consideration of cash or shares of our common stock will be paid. There is no
assurance that the Newport News acquisition will be consummated. This offering
is not conditioned upon completion of the Newport News acquisition. See
"--Unaudited Pro Forma Condensed Combined Financial Statements."
S-5
Third Quarter Results
On November 1, 2001, we reported an adjustment to our previously reported
third quarter and nine month results to reflect a charge of $60 million to
operating margin attributable to the cessation of construction of two cruise
ships in the Project America program, as described below. As adjusted, we
reported:
. Net sales of $3,605 million for the third quarter, up from $1,731 million
in the third quarter of 2000;
. Operating margin of $225 million for the third quarter, compared with $242
million in the third quarter of 2000; and
. Net income of $79 million for the third quarter of 2001, compared with
$132 million for the third quarter of 2000, and diluted earnings per share
of $0.84 for the third quarter of 2001, compared with $1.86 for the third
quarter of 2000.
Net sales increased primarily due to our acquisition of Litton and organic
growth in Electronic Systems and Information Technology. Sector operating
margin increases in Integrated Systems, Electronic Systems and Information
Technology were offset by operating losses in Ship Systems and Component
Technologies.
Following American Classic Voyages Co.'s (AMCV) bankruptcy filing on October
19, 2001, we stopped work on Project America, an AMCV cruise ship program to
build two 1,900-passenger cruise ships. This decision followed negotiations
with the U.S. Maritime Administration, which has decided not to continue the
guaranteed funding necessary to complete the construction of the ships.
New President
On September 20, 2001, we announced that Ronald D. Sugar has been named
president and chief operating officer of Northrop Grumman. We also announced
that we have established an Office of the Chairman, which will consist of Kent
Kresa, Northrop Grumman's chairman and chief executive officer, and Mr. Sugar.
The Office of the Chairman will be responsible for our total operations.
Joint Strike Fighter
On October 26, 2001, we announced that, as a result of the selection by the
U.S. Department of Defense of the Lockheed Martin Joint Strike Fighter team, we
are a principal member in the largest defense procurement in U.S. history. The
Joint Strike Fighter is a stealthy, supersonic aircraft designed for the U.S.
Airforce, Navy and Marine Corps, as well as the British Royal Air Force and
Navy.
S-6
Summary Historical Consolidated Financial Data
The following table sets forth a summary of our historical financial data
for the periods and as of the dates presented and should be read together with
the consolidated financial statements and notes thereto filed by us and our
subsidiaries with the SEC and which are incorporated in this prospectus
supplement by reference. The financial data for each of the years ended
December 31, 1996 through 2000 are derived from our audited consolidated
financial statements. The financial data for the nine months ended September
30, 2000 and 2001 are derived from our unaudited consolidated financial
statements. We have prepared the unaudited information on the same basis as the
audited financial statements and have included all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for these periods.
Historical results are not necessarily indicative of our future results and
interim period results are not necessarily indicative of our annual results.
Nine Months
ended September 30, Year ended December 31,
------------------ ----------------------------------------
2001 2000 2000 1999 1998 1997 1996
------- ------ ------- ------ ------ ------ -------
(in millions, except per share data and ratios)
Operating data(a):
Product sales and service revenue..... $ 9,254 $5,389 $ 7,618 $7,616 $7,367 $7,798 $ 7,667
Operating margin...................... 690 846 1,098 954 752 741 752
Interest expense (net)................ (237) (114) (146) (206) (221) (240) (261)
Income from continuing operations
before income taxes and accounting
change.............................. 485 756 975 747 309 512 478
Income from continuing operations
before accounting change............ 296 481 625 474 193 318 330
Diluted earnings per share from
continuing operations before
accounting change................... $ 3.50 $ 6.84 $ 8.82 $ 6.80 $ 2.78 $ 4.67 $ 5.18
Cash dividends per common share....... 1.20 1.20 1.60 1.60 1.60 1.60 1.60
Balance sheet data:
Total assets.......................... $17,214 $9,354 $ 9,622 $9,285 $9,536 $9,667 $ 9,645
Net working capital................... 51 271 (162) 329 666 221 106
Total debt(b)......................... 5,319 1,820 1,615 2,225 2,831 2,791 3,378
Mandatorily redeemable preferred
stock............................... 350 -- -- -- -- -- --
Shareholders' equity.................. 5,275 3,805 3,919 3,257 2,850 2,623 2,282
Other data:
Net cash from operations.............. $ 192 $ 596 $ 1,010 $1,207 $ 244 $ 730 $ 743
Funded order backlog.................. 15,972 9,080 10,106 8,499 8,415 9,700 10,451
Pension income........................ 249 410 538 343 270 114 28
Depreciation and amortization......... 469 281 381 353 359 380 340
Amortization of goodwill and other
purchased intangibles............... 278 149 206 191 180 180 159
Earnings before interest, taxes,
depreciation and amortization
(EBITDA)(c)......................... 1,191 1,151 1,502 1,306 889 1,132 1,079
Ratio of earnings to fixed charges(d). 2.32 5.32 5.26 3.78 2.11 2.68 2.50
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(a)Reflects the acquisition of Litton on April 3, 2001. The 2001 financial data
includes preliminary estimates of the fair market value of the assets
acquired and liabilities assumed and the related allocations of the purchase
price related to the Litton acquisition. Final valuations and allocations,
which are expected to be completed by December 31, 2001, may differ from the
amounts included herein.
S-7
(b)Total debt does not include borrowings of approximately $315 million
incurred subsequent to September 30, 2001 in connection with our acquisition
of the Electronics and Information Systems Group of AeroJet-General
Corporation.
(c)We calculated EBITDA by adding back net interest expense and depreciation
and amortization expense to income from continuing operations before taxes
and accounting change. Since all companies do not calculate EBITDA or
similarly titled financial measures in the same manner, disclosures by other
companies may not be comparable with EBITDA as defined herein. EBITDA is a
financial measure used by analysts to value companies. Therefore, our
management believes that the presentation of EBITDA provides relevant
information to investors. EBITDA should not be construed as an alternative
to operating income or cash flows from operating activities as determined in
accordance with United States generally accepted accounting principles or as
a measure of liquidity. Amounts reflected as EBITDA are not necessarily
available for discretionary use as a result of restrictions imposed by
applicable law or agreements upon the payment of dividends or distributions,
among other things.
(d)For purposes of computing the ratios of earnings to fixed charges, earnings
represent earnings from continuing operations before income taxes and fixed
charges, and fixed charges consist of interest expense, the portion of
rental expense calculated to be representative of the interest factor,
amortization of discounts and capitalized expenses related to indebtedness,
and preferred stock dividends. The ratios should be read in conjunction with
the financial statements and other financial data included or incorporated
by reference in this prospectus supplement or the accompanying prospectus.
See "Where You Can Find More Information."
S-8
Unaudited Pro Forma Condensed Combined Financial Statements
The unaudited pro forma condensed combined financial statements presented
below are derived from the historical consolidated financial statements of each
of Northrop Grumman, Northrop Grumman Systems Corporation, which we refer to as
Northrop Systems Litton and Newport News. The unaudited pro forma condensed
combined financial statements are prepared using the purchase method of
accounting, with Northrop Grumman treated as the acquiror and as if the Newport
News and Litton acquisitions had been completed as of the beginning of the
periods presented for statement of income purposes and as if the Newport News
acquisition had been completed on September 30, 2001 for statement of financial
position purposes. As of the date of this prospectus supplement, the Newport
News acquisition had not yet been completed. Please refer to "--Recent
Developments" above.
The unaudited pro forma condensed combined financial statements are based
upon the historical financial statements of Northrop Systems, Northrop Grumman,
Litton and Newport News adjusted to give effect to, in the case of the pro
forma statements of income, the Litton acquisition and the Newport News
acquisition and, in the case of the pro forma statement of financial position,
the Newport News acquisition. The pro forma adjustments are described in the
accompanying notes presented on the following pages. The pro forma financial
statements have been developed from (a) the audited consolidated financial
statements of Northrop Systems contained in its Annual Report on Form 10-K/A
for the year ended December 31, 2000 and the unaudited consolidated financial
statements of Northrop Grumman contained in its Quarterly Report on Form 10-Q
for the nine months ended September 30, 2001, which are incorporated by
reference in this prospectus supplement, (b) the audited consolidated financial
statements of Litton contained in its Annual Report on Form 10-K for the fiscal
year ended July 31, 2000 and the unaudited consolidated financial statements of
Litton contained in its Quarterly Report on Form 10-Q for the six months ended
January 31, 2001, which are incorporated by reference in this prospectus
supplement, and (c) the audited consolidated financial statements of Newport
News contained in its Annual Report on Form 10-K for the year ended December
31, 2000 and the unaudited consolidated financial statements of Newport News
contained in its Quarterly Report on Form 10-Q for the quarter ended September
16, 2001, which are incorporated by reference in this prospectus supplement. In
addition, the audited consolidated financial statements of Litton contained in
its Annual Report on Form 10-K for the fiscal year ended July 31, 2000 and the
unaudited consolidated financial statements of Litton contained in its
Quarterly Report on Form 10-Q for the six months ended January 31, 2001 have
been used to bring the financial reporting periods of Litton to within 90 days
of those of Northrop Systems and Northrop Grumman. The pro forma financial
statements should be read in conjunction with these separate historical
consolidated financial statements and related notes.
The acquisition of Litton, which is valued at approximately $5.2 billion,
including the assumption of Litton's net debt of $1.3 billion, is accounted for
using the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the underlying tangible and
intangible assets acquired and liabilities assumed based on their respective
fair market values, with the excess recorded as goodwill. The pro forma
financial statements reflect preliminary estimates of the fair market value of
the Litton assets acquired and liabilities assumed and the related allocations
of purchase price, and preliminary estimates of adjustments necessary to
conform Litton data to Northrop Grumman's accounting policies. The pro forma
financial statements do not include the recognition of liabilities associated
with certain potential restructuring activities. Northrop Grumman is currently
reviewing the preliminary estimates of the fair market value of the Litton
assets acquired and liabilities assumed, including valuations associated with
certain contracts and preliminary valuation study results for intangible
assets, property, plant and equipment, and retiree benefits assets and
liabilities. Northrop Grumman is also evaluating several possible restructuring
activities of Litton operations. The final determination of the fair market
value of assets acquired and liabilities assumed and final allocation of the
purchase price may differ from the amounts assumed in these pro forma financial
statements. Adjustments to the purchase price allocations are expected to be
finalized by December 31, 2001, and will be reflected in future Northrop
Grumman filings. These adjustments may be material.
S-9
As of the date of this prospectus supplement, Northrop Grumman has not
completed the valuation studies necessary to arrive at the required estimates
of the fair market value of the Newport News assets to be acquired and the
Newport News liabilities to be assumed and the related allocations of purchase
price, nor has it identified the adjustments necessary, if any, to conform
Newport News data to Northrop Grumman's accounting policies. Accordingly,
Northrop Grumman has used the historical book values of the assets and
liabilities of Newport News and has used the historical revenue recognition
policies of Newport News to prepare the pro forma financial statements, with
the excess of the purchase price over the historical net assets of Newport News
recorded as goodwill and other purchased intangibles. Once Northrop Grumman has
completed the valuation studies necessary to finalize the required purchase
price allocations and identified any necessary conforming changes, the pro
forma financial statements will be subject to adjustment. These adjustments may
be material.
The pro forma financial statements are provided for illustrative purposes
only and do not purport to represent what the actual consolidated results of
operations or the consolidated financial position of Northrop Grumman would
have been had the Litton and Newport News acquisitions occurred on the dates
assumed, nor are they necessarily indicative of future consolidated results of
operations or financial position.
The pro forma financial statements do not include the realization of cost
savings from operating efficiencies, synergies or other restructurings
resulting from the Litton and Newport News acquisitions, except for preliminary
estimates of costs to consolidate the Litton and Northrop Grumman corporate
offices.
S-10
Unaudited Pro Forma Condensed Combined
Statement of Financial Position
September 30, 2001
($ in millions)
Pro Forma
Northrop Newport ---------------------
Grumman News Adjustment Combined
-------- ------- ---------- --------
Assets:
Current assets
Cash and cash equivalents.................................. $ 310 $ 66 $ -- $ 376
Accounts receivable........................................ 2,297 131 -- 2,428
Inventoried costs.......................................... 1,222 409 -- 1,631
Deferred income taxes...................................... 35 110 -- 145
Prepaid expenses and other current assets.................. 140 19 -- 159
------- ------ ------ -------
Total current assets....................................... 4,004 735 -- 4,739
------- ------ ------ -------
Property, plant and equipment................................. 3,297 1,616 -- 4,913
Accumulated depreciation...................................... (1,211) (950) -- (2,161)
------- ------ ------ -------
Property, plant and equipment, net............................ 2,086 666 -- 2,752
------- ------ ------ -------
Other assets
Goodwill and other purchased intangibles, net.............. 7,956 -- 2,110 (a) 10,066
Prepaid retiree benefits cost and intangible pension asset. 2,773 -- -- 2,773
Other assets............................................... 395 237 -- 632
------- ------ ------ -------
11,124 237 2,110 13,471
------- ------ ------ -------
$17,214 $1,638 $2,110 $20,962
======= ====== ====== =======
Liabilities and Shareholders' Equity:
Current liabilities
Notes payable and current portion of long-term debt........ $ 134 $ 46 $ -- $ 180
Accounts payable........................................... 757 87 -- 844
Accrued employees' compensation............................ 629 -- -- 629
Advances on contracts...................................... 837 -- -- 837
Income taxes............................................... 373 -- -- 373
Other current liabilities.................................. 1,223 484 -- 1,707
------- ------ ------ -------
Total current liabilities.................................. 3,953 617 -- 4,570
------- ------ ------ -------
Long-term debt................................................ 5,185 432 917 (a) 6,534
Accrued retiree benefits...................................... 1,478 -- -- 1,478
Deferred tax and other long-term liabilities.................. 973 285 -- 1,258
Mandatorily redeemable preferred stock........................ 350 -- -- 350
Shareholders' equity
Paid-in capital and unearned compensation.................. 2,366 452 1,045 (a) 3,863
Retained earnings.......................................... 2,928 236 (236) (a) 2,928
Accumulated other comprehensive loss....................... (19) -- -- (19)
Stock employee compensation trust.......................... -- (384) 384 (a) --
------- ------ ------ -------
5,275 304 1,193 6,772
------- ------ ------ -------
$17,214 $1,638 $2,110 $20,962
======= ====== ====== =======
S-11
Unaudited Pro Forma Condensed Combined
Statement of Income
Nine Months Ended September 30, 2001
($ in millions, except per share)
Pro Forma Pro Forma
Northrop -------------------------- Newport -----------------------
Grumman Litton Adjustment Combined News Adjustment Combined
-------- ------ ---------- -------- ------- ---------- --------
Product sales and service
revenue.................. $9,254 $1,345 $ (18) (b) $10,581 $1,639 $ -- $12,220
Cost of product sales and
service revenue
Operating costs......... 7,656 1,120 19 (b)(c)(d) 8,795 1,481 (140) (h)(j) 10,136
Administrative and
general expenses...... 908 121 -- 1,029 -- 153 (j) 1,182
------ ------ ----- ------- ------ ----- -------
Operating margin........... 690 104 (37) 757 158 (13) 902
Interest expense........... (269) (27) (64) (e) (360) (37) (23) (i) (420)
Other, net................. 64 3 -- 67 (1) -- 66
------ ------ ----- ------- ------ ----- -------
Income from continuing
operations before income
taxes.................... 485 80 (101) 464 120 (36) 548
Federal and foreign income
taxes.................... 189 30 (35) (f) 184 48 (18) (f)(j) 214
------ ------ ----- ------- ------ ----- -------
Income from continuing
operations............... $ 296 $ 50 $ (66) $ 280 $ 72 $ (18) $ 334
====== ====== ===== ======= ====== ===== =======
Less, dividends paid to
preferred shareholders... (12) -- (6) (g) (18) -- -- (18)
------ ------ ----- ------- ------ ----- -------
Income available to common
shareholders............. $ 284 $ 50 $ (72) $ 262 $ 72 $ (18) $ 316
====== ====== ===== ======= ====== ===== =======
Weighted average shares
outstanding, basic....... 80.3 85.3 102.0
Weighted average shares
outstanding, diluted..... 81.0 86.1 102.8
Basic earnings per share:
Continuing operations... $ 3.53 $ 3.07 $ 3.10
Diluted earnings per share:
Continuing operations... $ 3.50 * $ 3.04 * $ 3.08 *
--------
* Calculated by dividing income available to common shareholders by average
shares diluted, which is calculated assuming preferred shares are not
converted to common shares, resulting in the most dilutive effect.
S-12
Unaudited Pro Forma Condensed Combined
Statement of Income
Year Ended December 31, 2000
($ in millions, except per share)
Pro Forma Pro Forma
Northrop -------------------------- Newport -----------------------
Grumman Litton Adjustment Combined News Adjustment Combined
-------- ------ ---------- -------- ------- ---------- --------
Product sales and service
revenue.................. $7,618 $5,626 $ (61) (b) $13,183 $2,072 $ -- $15,255
Cost of product sales and
service revenue
Operating costs......... 5,446 4,669 88 (b)(c)(d) 10,203 1,870 (251) (h)(j) 11,822
Administrative and
general expenses...... 1,074 491 -- 1,565 -- 271 (j) 1,836
------ ------ ----- ------- ------ ----- -------
Operating margin........... 1,098 466 (149) 1,415 202 (20) 1,597
Interest expense........... (175) (105) (191) (e) (471) (53) (31) (i) (555)
Other, net................. 52 16 -- 68 4 -- 72
------ ------ ----- ------- ------ ----- -------
Income from continuing
operations before income
taxes.................... 975 377 (340) 1,012 153 (51) 1,114
Federal and foreign income
taxes.................... 350 151 (119) (f) 382 63 (26) (f)(j) 419
------ ------ ----- ------- ------ ----- -------
Income from continuing
operations............... $ 625 $ 226 $(221) $ 630 $ 90 $ (25) $ 695
====== ====== ===== ======= ====== ===== =======
Less, dividends paid to
preferred shareholders... -- -- (25) (g) (25) -- -- (25)
------ ------ ----- ------- ------ ----- -------
Income available to
common shareholders...... $ 625 $ 226 $(246) $ 605 $ 90 $ (25) $ 670
====== ====== ===== ======= ====== ===== =======
Weighted average shares
outstanding, basic....... 70.6 83.6 100.2
Weighted average shares
outstanding, diluted..... 70.9 84.0 100.6
Basic earnings per share:
Continuing operations... $ 8.86 $ 7.24 $ 6.69
Diluted earnings per share:
Continuing operations... $ 8.82 $ 7.20 * $ 6.66 *
--------
* Calculated by dividing income available to common shareholders by average
shares diluted, which is calculated assuming preferred shares are not
converted to common shares, resulting in the most dilutive effect.
S-13
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
(a)Adjustments to (i) eliminate the equity of Newport News, (ii) record
issuance of common stock, (iii) record debt financing for the Newport News
acquisition along with additional acquisition related costs, and (iv) record
goodwill and other purchased intangibles. The amount of the purchase price
allocated to goodwill was calculated based on the following assumptions: (i)
the price per share of our common stock is $90.00 at the completion of our
offer and merger with Newport News, which is the midpoint of the common
stock range described below; (ii) the exchange ratio is 0.75; and (iii) we
issue the maximum number of shares of our common stock available for
issuance (16,636,885) in our offer and merger with Newport News. Any
fluctuation in our common stock price within the range from $80.00 to
$100.00 will not have a material impact on our pro forma calculation of
goodwill. In the event that our common stock price is greater than $100.00
at the completion of our offer and merger, the goodwill balance will
increase by $15.0 million for each $1.00 incremental increase in our common
stock price in excess of $100.00.
(b)Adjustment to eliminate intercompany sales and cost of sales transactions
between Northrop Grumman and Litton.
(c)Adjustment to amortize the preliminary estimate of goodwill and other
purchased intangible assets arising out of the acquisition of Litton over an
estimated weighted average life of 26 years on a straight line basis.
(d)Adjustment to record preliminary depreciation of property, plant and
equipment and amortization of capitalized software arising out of the
acquisition of Litton.
(e)Adjustment to record interest expense on, and the amortization of debt
issuance costs of, financing for the acquisition of Litton at a weighted
average rate of 6.8% and 7.5% for the nine months ended September 30, 2001
and the year ended December 31, 2000, respectively.
(f)Adjustment to record income tax effects on pre-tax pro forma adjustments,
using a statutory tax rate of 35%.
(g)Adjusted, pro rata, for dividends to preferred shareholders using $7 per
share dividend rate for redeemable preferred stock issued in the acquisition
of Litton.
(h)Adjustment to amortize purchased intangible assets arising out of the
Newport News acquisition over an estimated life of 30 years on a straight
line basis.
(i)Adjustment to record interest on debt financing for the Newport News
acquisition at the current rate of 3.4% as of October 26, 2001.
(j)Adjustment to conform Newport News data to classifications utilized by
Northrop Grumman.
S-14
The Offering
What are the equity security units?
Each equity security unit, which we refer to as the "units," will be issued
at the stated amount of $100 and will initially consist of:
(1)a purchase contract under which:
. you will agree to purchase, and we will agree to sell, for $100,
shares of our common stock on November 16, 2004 (the "stock purchase
date"), the number of which we will determine based on an average
trading price of our common stock for a period preceding that date,
calculated in the manner described below; and
. we will pay you contract adjustment payments at the rate of 2.0% of
the stated amount of $100 per year as specified below; and
(2)a senior note due November 16, 2006, with a principal amount of $100, on
which we will pay interest quarterly at the initial annual rate of 5.25%
until a successful remarketing of the senior notes and at the reset rate
(as described below) thereafter (assuming the senior notes are
successfully remarketed).
The senior notes that are a component of the units will be owned by you, but
will initially be pledged to us to secure your obligations under the purchase
contract. We refer in this prospectus supplement to the purchase contracts,
together with the pledged senior notes or, after the remarketing, together with
the specified pledged treasury securities, as "normal units."
Each holder of normal units may elect at any time to withdraw the pledged
senior notes or, after the remarketing described below, treasury securities
underlying the normal units, creating "stripped units." A holder might consider
it beneficial to either hold the senior notes directly or to realize income
from their sale. To create stripped units, the holder must substitute, as
pledged securities, specifically identified treasury securities that will pay
$100 on the stock purchase date, the amount due on such date under the purchase
contract, and the pledged senior notes or treasury securities will be released
from the pledge agreement and delivered to the holder. Holders of stripped
units may recreate normal units by re-substituting the senior notes or, after
the remarketing, applicable treasury securities for the treasury securities
underlying the stripped units.
We will not initially list either the stripped units or the senior notes on
any national securities exchange. In the event that either of these securities
are separately traded to a sufficient extent that applicable exchange listing
requirements are met, we will attempt to list these securities on the exchange
on which the normal units are then listed.
If the senior notes are successfully remarketed as described in this
prospectus supplement, the applicable ownership interest in the treasury
securities will replace the senior note as a component of each unit and will be
pledged to us to secure your obligations under the purchase contract.
What are the purchase contracts?
The purchase contract underlying a unit obligates you to purchase, and us to
sell, for $100, on the stock purchase date, a number of newly issued shares of
our common stock equal to the settlement rate described below. We will base the
settlement rate on an average trading price of our common stock for a period
preceding that date, calculated in the manner described below.
S-15
What payments will be made to holders of the units and the senior notes?
If you hold normal units, we will pay you quarterly contract adjustment
payments on the purchase contracts at the annual rate of 2.0% of the $100
stated amount through and including the stock purchase date and quarterly
interest payments on the senior notes at the initial annual rate of 5.25% of
the principal amount of $100 per senior note through and including November 16,
2004, and at the reset rate thereafter. The contract adjustment payments are
subject to deferral as described below. We are not entitled to defer interest
payments on the senior notes. On the stock purchase date, if your senior notes
are successfully remarketed as described below, you will still receive a
quarterly payment at the same annual rate as was paid on the senior notes prior
to remarketing.
If you hold stripped units, you will receive only the quarterly contract
adjustment payments payable by us at the annual rate of 2.0% of the $100 stated
amount. The contract adjustment payments are subject to deferral as described
below. In the event that we elect to defer the payment of contract adjustment
payments on the purchase contracts until the stock purchase date, each holder
of normal units and stripped units will receive on the stock purchase date in
respect of the deferred contract adjustment payments a number of shares of our
common stock in lieu of a cash payment, as described below.
If you hold senior notes separately from the units, you will receive only
the cash interest payable on the senior notes. The senior notes, whether held
separately from or as part of the units, will initially pay interest at the
annual rate of 5.25% of the principal amount of $100 per senior note for the
quarterly payments payable on and before August 16, 2004. If the senior notes
are successfully remarketed, they will pay interest at the reset rate from the
date on which they are successfully remarketed until their maturity on November
16, 2006. If the remarketing agent cannot establish a reset rate meeting the
requirements described in this prospectus supplement, the remarketing agent
will not reset the interest rate on the senior notes and the interest rate will
continue to be the initial annual rate of 5.25%, until the remarketing agent
can on a later remarketing date prior to the stock purchase date establish a
reset rate meeting the requirements described in this prospectus supplement. If
no remarketing occurs prior to the stock purchase date, the initial rate will
be the interest rate through maturity of the senior notes. We are not entitled
to defer payments on the senior notes.
What are the payment dates?
Subject to our deferral right in respect of the purchase contract payments
described below, distributions will be paid quarterly in arrears on each
February 16, May 16, August 16 and November 16, commencing February 16, 2002.
When can Northrop Grumman defer payments and distributions?
We can defer payment of all or part of the contract adjustment payments on
the purchase contracts until no later than the stock purchase date. We will pay
additional contract adjustment payments on any deferred installments of
contract adjustment payments at a rate of 5.25% per year until paid, compounded
quarterly, to but excluding November 16, 2004, unless your purchase contract
has been earlier settled or terminated. All contract adjustment payments
deferred until the stock purchase date will be paid in shares of our common
stock.
We are not entitled to defer payments on the senior notes.
What is the reset rate?
In order to facilitate the remarketing of the senior notes at the
remarketing price described below, the remarketing agent will reset the rate of
interest on the senior notes for the quarterly payments payable on and after
November 16, 2004 until their maturity on November 16, 2006. The reset rate
will be the rate sufficient to cause the then current aggregate market value of
all the outstanding senior notes to be equal to at least 100.50% of the
remarketing value described below. The remarketing agent will assume for this
purpose, even if not true,
S-16
that all of the senior notes continue to be components of normal units and will
be remarketed. Resetting the interest rate on the senior notes at this rate
should enable the remarketing agent to sell the senior notes in the remarketing
and purchase the necessary treasury securities, the proceeds of which will be
applied in settlement of the purchase contracts and to payment of the quarterly
payment on the normal units due on November 16, 2004.
The reset rate will be determined by the remarketing agent on the third
business day (as defined below) prior to August 16, 2004, the last quarterly
payment date before the stock purchase date. If the remarketing agent cannot
establish a reset rate meeting these requirements on the remarketing date and,
as a result, the senior notes cannot be sold as described below, the interest
rate will not be reset and will continue to be the initial rate of the senior
notes. However, the remarketing agent may thereafter attempt to establish a
reset rate meeting these requirements, and the remarketing agent may attempt to
remarket the senior notes, on the subsequent dates described below. If a reset
rate cannot be established on a given date, the remarketing will not occur on
that date.
The reset of the interest rate on the senior notes will not change the
quarterly payment due to holders of the normal units on November 16, 2004,
which, as described above, will be paid in an amount equal to interest on the
senior notes at the initial rate of 5.25% of $100 for that quarterly payment
plus the contract adjustment payments that are accrued and unpaid at that time.
A "business day" means any day other than Saturday, Sunday or any other day
on which banking institutions and trust companies in The State of New York or
at a place of payment are authorized or required by law, regulation or
executive order to be closed.
What is remarketing?
In order to provide holders of normal units with the necessary collateral to
be applied in the settlement of their purchase contracts, the remarketing agent
will sell the senior notes of holders of normal units, other than those
electing not to participate in the remarketing, and the remarketing agent will
use the proceeds to purchase treasury securities, which the participating
holders of normal units will pledge to secure their obligations under the
related purchase contracts. The cash paid on the pledged treasury securities
underlying the normal units of such holders will be used to satisfy such
holders' obligations to purchase our common stock on the stock purchase date.
This will be one way for holders of normal units to satisfy their obligations
to purchase shares of our common stock under the related purchase contracts.
Unless a holder elects not to participate in the remarketing as described
below, the remarketing agent will remarket the senior notes that are included
in the normal units on one or more occasions starting on the remarketing date,
which initially will be the third business day immediately preceding August 16,
2004, unless the remarketing agent delays the remarketing to a later date as
described below.
We will enter into a remarketing agreement with a nationally recognized
investment banking firm, pursuant to which it will agree to use its
commercially reasonable best efforts to sell the senior notes that are included
in normal units and that are participating in the remarketing, at a price equal
to at least 100.50% of the remarketing value.
The "remarketing value" will be equal to the sum of:
(1)the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the quarterly payment date falling on the
stock purchase date, an amount of cash equal to the aggregate interest
payments that are scheduled to be payable on that quarterly payment date
on each senior note which is included in a normal unit and which is
participating in the remarketing, assuming for this purpose, even if not
true, that the interest rate on the senior notes remains at the initial
rate; and
(2)the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the stock purchase date, an amount of cash
equal to $100 for each senior note which is included in a normal unit
and which is participating in the remarketing.
S-17
The remarketing agent will use the proceeds from the sale of the senior
notes included in normal units in a successful remarketing described in this
section to purchase, in the discretion of the remarketing agent, in open market
transactions or at treasury auction, the amount and the types of treasury
securities described in (1) and (2) above, which it will deliver through the
purchase contract agent to the collateral agent to secure the obligations under
the related purchase contracts of the holders of the normal units whose senior
notes participated in the remarketing. The remarketing agent will deduct as a
remarketing fee an amount not exceeding 25 basis points (0.25%) of the total
proceeds from such remarketing. The remarketing agent will remit the remaining
portion of the proceeds, if any, to the holders of the normal units
participating in the remarketing.
Alternatively, a holder of normal units may elect not to participate in the
remarketing and retain the senior notes underlying those units by delivering
the treasury securities described in (1) and (2) above, in the amount and types
specified by the remarketing agent, applicable to the holder's senior notes, to
the purchase contract agent on the fourth business day prior to the remarketing
date to satisfy its obligation under the related purchase contracts. The
interest rate on a senior note will be reset to the reset rate regardless of
whether the holder of the senior note elects to participate in the remarketing.
What happens if the remarketing agent does not sell the senior notes?
If, as described above, the remarketing agent cannot establish a reset rate
on the remarketing date that will be sufficient to cause the then current
aggregate market value of all the outstanding senior notes to be equal to at
least 100.50% of the remarketing value, assuming, even if not true, that all of
the senior notes are held as components of normal units and will be remarketed,
and the remarketing agent cannot sell the senior notes offered for remarketing
on the remarketing date at a price equal to at least 100.50% of the remarketing
value, determined on the basis of the senior notes being remarketed, the
remarketing agent will attempt to establish a reset rate meeting these
requirements on each of the two immediately following business days. If the
remarketing agent cannot establish a reset rate meeting these requirements on
either of those days, it will attempt to establish such a reset rate on each of
the three business days immediately preceding October 1, 2004. If the
remarketing agent cannot establish such a reset rate during that period, it
will further attempt to establish such a reset rate on each of the three
business days immediately preceding the stock purchase date. We refer to each
of these three business day periods as "remarketing periods" in this prospectus
supplement. Any such remarketing will be at a price equal to at least 100.50%
of the remarketing value.
If the remarketing agent fails to remarket the senior notes offered for
remarketing at the price specified in the preceding paragraph by the business
day immediately preceding the stock purchase date, holders of senior notes will
have the right to put their senior notes to us on the stock purchase date upon
at least three business days prior notice at a price per senior note equal to
$100. If a holder of normal units has exercised its put right but has not
otherwise settled its purchase contract in cash by the close of business on the
business day immediately preceding the stock purchase date (but without regard
to the notice requirements otherwise applicable to cash settlement), the put
price will be applied by us in satisfaction of its obligations under the
purchase contract on the stock purchase date. If a holder of stripped units has
exercised its put right, the put price will be paid to such holder on the stock
purchase date.
If the remarketing agent fails to remarket the senior notes by the business
day immediately preceding the stock purchase date, any holder of normal units
that has not exercised its put right and has not otherwise settled its purchase
contract in cash by the close of business on the business day immediately
preceding the stock purchase date (but without regard to the notice
requirements otherwise applicable to cash settlement) will be deemed to have
directed, at our election, either (1) the collateral agent to dispose of such
holder's senior notes in accordance with applicable law and at our direction,
or (2) us to retain and cancel such holder's senior notes pledged as
collateral, in either case in satisfaction of such holder's obligations under
the purchase contract.
S-18
If I am not a party to a purchase contract, may I still participate in a
remarketing of my senior notes?
Holders of senior notes that are not included as part of normal units may
elect to have their senior notes included in the remarketing in the manner
described in "Description of the Equity Security Units--Optional Remarketing of
Senior Notes Which Are Not Included in Normal Units." The remarketing agent
will use its commercially reasonable best efforts to remarket the separately
held senior notes included in the remarketing at a price equal to at least
100.50% of the remarketing value, determined on the basis of the separately
held senior notes being remarketed. After deducting its remarketing fee in an
amount not exceeding 25 basis points (0.25%) of the total proceeds from the
remarketing, the remaining portion of the proceeds, if any, will be remitted to
the holders whose separate senior notes were sold in the remarketing. If a
holder of senior notes elects to have its senior notes remarketed but the
remarketing agent fails to sell the senior notes during any remarketing period,
the senior notes will be promptly returned to the holder following the
conclusion of that period.
What is the settlement rate?
The settlement rate is the number of newly issued shares of our common stock
that we are obligated to sell and you are obligated to buy upon settlement of a
purchase contract on the stock purchase date.
The settlement rate for each purchase contract will be as follows, subject
to adjustment under specified circumstances:
. if the applicable market value, determined as described below, of our
common stock is equal to or greater than $107.97, the settlement rate will
be 0.9262 shares of our common stock per purchase contract;
. if the applicable market value of our common stock is less than $107.97
but greater than $88.50, the settlement rate will be equal to $100 divided
by the applicable market value of our common stock per purchase contract;
and
. if the applicable market value of our common stock is less than or equal
to $88.50, the settlement rate will be 1.1299 shares of our common stock
per purchase contract.
"Applicable market value" means the average of the closing price per share
of our common stock on each of the 20 consecutive trading days ending on the
third trading day immediately preceding the stock purchase date.
At the option of each holder, a purchase contract may be settled early by
the early delivery of cash to the purchase contract agent, as described below,
in which case 0.9262 shares of our common stock will be issued per purchase
contract.
Besides participating in a remarketing, how else can my obligations under the
purchase contract be satisfied?
Besides participating in the remarketing, your obligations under the
purchase contract may also be satisfied:
. if you have created stripped units or elected not to participate in the
remarketing, by delivering and pledging specified treasury securities in
substitution for your senior notes, and applying the cash payments
received on the pledged treasury securities;
. if you hold normal units, by exercising your put right;
. through the early delivery of cash to the purchase contract agent in the
manner described in "Description of the Equity Security Units--Early
Settlement;" or
. if we are involved in a merger, acquisition or consolidation prior to the
stock purchase date in which at least 30% of the consideration for our
common stock consists of cash or cash equivalents, through an early
settlement of the purchase contract as described in "Description of the
Equity Security Units--Early Settlement upon Cash Merger."
S-19
In addition, the purchase contracts, our related rights and obligations and
those of the holders of the units, including their obligations to purchase our
common stock, will automatically terminate upon the occurrence of particular
events of our bankruptcy, insolvency or reorganization. Upon such a termination
of the purchase contracts, the pledged senior notes and securities will be
released and distributed to you. If we become the subject of a case under the
federal bankruptcy code, a delay may occur as a result of the automatic stay
under the bankruptcy code and continue until the automatic stay has been
lifted. The automatic stay will not be lifted until such time as the bankruptcy
judge agrees to lift it and return your collateral to you.
If the purchase contract is settled early through cash or as the result of a
bankruptcy event as described above, such holder will have no further right to
receive any accrued contract or deferred contract adjustment payments.
Under what circumstances may Northrop Grumman redeem the senior notes before
they mature?
If the tax laws change or are interpreted in a way that adversely affects
the tax treatment of the senior notes, then we, as issuer of the senior notes,
may elect to redeem the senior notes for the price of a portfolio of treasury
securities described below. If the senior notes are redeemed before a
successful remarketing, the money received from the redemption will be used by
the collateral agent to purchase a portfolio of zero-coupon U.S. treasury
securities that mature on or prior to each payment date of the senior notes
through the stock purchase date, in an aggregate amount equal to the principal
on the senior note included in normal units and the interest that would have
been due on such payment date on the senior notes included in normal units.
These treasury securities will replace the senior notes as the collateral
securing your obligations to purchase our common stock under the purchase
contracts. If the senior notes are redeemed, then each unit will consist of a
purchase contract for our common stock and an ownership interest in the
portfolio of treasury securities.
What is the maturity of the senior notes?
The senior notes will mature on November 16, 2006.
What are the U.S. federal income tax consequences related to the units and
senior notes?
If you purchase units in the offering, you will be treated for U.S. federal
income tax purposes as having acquired the senior notes and purchase contracts
constituting those units, and by purchasing the units you agree to treat the
senior notes in that manner for all tax purposes. In addition, you agree to
treat the senior notes as our indebtedness for all tax purposes. You must
allocate the purchase price of the units between those senior notes and
purchase contracts in proportion to their respective fair market values, which
will establish your initial tax basis. We expect to report the fair market
value of each senior note as $100.00 and the fair market value of each purchase
contract as $0.00.
For U.S. federal income tax purposes, the senior notes will be treated as
contingent payment debt instruments subject to the "noncontingent bond method"
of accruing original issue discount. As discussed more fully under "U.S.
Federal Income Tax Consequences--Senior Notes--Original Issue Discount," the
effects of this method will be (1) to require you, regardless of your usual
method of tax accounting, to use the accrual method with respect to the senior
notes, (2) for all accrual periods through August 16, 2004, and possibly
thereafter, the accrual of interest income by you in excess of distributions
actually received by you and (3) generally to result in ordinary rather than
capital treatment of any gain or loss on the sale, exchange or disposition of
the units to the extent attributable to the senior notes. In addition, we
intend to report the contract adjustment payments as ordinary income to you,
but you should consult your tax advisor concerning alternative
characterizations.
Because there is no statutory, judicial or administrative authority directly
addressing the tax treatment of units or instruments similar to units, you are
urged to consult your own tax advisor concerning the tax consequences of an
investment in units. For additional information, see "U.S. Federal Income Tax
Consequences."
S-20
Will the units be listed on a stock exchange?
The normal units have been approved for listing on the New York Stock
Exchange (NYSE) under the symbol "NOC PrE." Neither the stripped units nor the
senior notes will initially be listed; however, in the event that either of
these securities are separately traded to a sufficient extent that applicable
exchange listing requirements are met, we will attempt to cause those
securities to be listed on the exchange on which the normal units are then
listed.
What are your expected uses of proceeds from the offering?
We estimate that our net proceeds from the sale of units in this offering,
before expenses and after deducting underwriting discounts and commissions,
will be $582.0 million, or $669.3 million if the underwriters exercise their
over-allotment option to purchase additional units in full.
We anticipate using the aggregate net proceeds from this offering, together
with an estimated $681.5 million of net proceeds, before expenses and after
deducting underwriting discounts and commissions, from the concurrent offering
of our common stock, or $783.7 million if the underwriters exercise their
over-allotment option to purchase additional shares of common stock in full,
primarily to repay indebtedness incurred under our five-year revolving credit
facility. We may also use the proceeds for general corporate purposes,
including working capital needs, capital expenditures and acquisitions.
The Offering--Explanatory Diagrams
The following diagrams demonstrate some of the key features of the purchase
contracts, normal units, stripped units and the senior notes, and the
transformation of normal units into stripped units and senior notes.
Purchase Contracts
. Normal units and stripped units both include a purchase contract under
which you agree to purchase shares of our common stock on the stock
purchase date.
. The number of shares to be purchased under each purchase contract will
depend on the "applicable market value." The "applicable market value"
means the average of the closing price per share of our common stock on
each of the 20 consecutive trading days ending on the third trading day
immediately preceding the stock purchase date.
[CHART APPEARS HERE]
Common Stock Flow chart
(1)The "reference price" is $88.50.
(2)The "threshold appreciation price" is equal to $107.97, which is 122% of
the reference price.
S-21
(3)For each of the percentage categories shown, the percentage (expressed
as a decimal) of the shares to be delivered on the stock purchase date
to a holder of normal units or stripped units is determined by dividing
. the related number of shares to be delivered, as indicated in the
footnote for each such category, by
. an amount equal to $100, the stated amount of the unit, divided by
the reference price.
(4)If the applicable market value of our common stock is less than or equal
to the reference price, the number of shares to be delivered will be
calculated by dividing the stated amount of $100 by the reference price.
(5)If the applicable market value of our common stock is between the
reference price and the threshold appreciation price, the number of
shares to be delivered will be calculated by dividing the stated amount
of $100 by the applicable market value.
(6)If the applicable market value of our common stock is greater than or
equal to the threshold appreciation price, the number of shares to be
delivered will be calculated by dividing the stated amount of $100 by
the threshold appreciation price.
Normal Units
. A normal unit will consist of two components as illustrated below:
[CHART APPEARS HERE]
three boxes chart
. After remarketing, the normal units will include specified treasury
securities in lieu of the senior notes if the remarketing is successful.
. If you hold a normal unit, you own the senior notes and, after
remarketing, the treasury securities, but will pledge them to us to
secure your obligations under the purchase contract.
. If you hold a normal unit, you may also substitute a specified amount of
treasury securities for the senior notes if you decide not to
participate in the remarketing.
S-22
Stripped Units
. A stripped unit consists of two components as described below:
[FLOW CHART]
purchase contract chart
. If you hold a stripped unit, you own the treasury security but will
pledge it to us to secure your obligations under the purchase contract.
The treasury security is a zero-coupon U.S. treasury security (CUSIP No.
912833FV7) that matures on November 15, 2004.
Senior Notes
. Senior notes will have the terms illustrated below:
[FLOW CHART]
two boxes chart
. If you hold a senior note that is a component of a normal unit, you have
the option to either:
-- allow the senior note to be included in the remarketing process, the
proceeds of which will be used to purchase treasury securities, if
the remarketing is successful, which will be applied to settle the
purchase contract; or
-- elect not to participate in the remarketing by delivering treasury
securities in substitution for the senior note, the proceeds of which
will be applied to settle the purchase contract.
S-23
. If you hold a senior note that is separate and not a component of a
normal unit, you have the option to either:
-- continue to hold the senior note whose rate has been reset for the
quarterly payments payable on and after November 16, 2004; or
-- deliver the senior note to the remarketing agent to be included in
the remarketing.
Transforming Normal Units into Stripped Units and Senior Notes
. To create a stripped unit, you may combine the purchase contract with
the specified zero-coupon U.S. treasury security that matures on
November 15, 2004.
. You will then own the zero-coupon U.S. treasury security but will pledge
it to us to secure your obligations under the purchase contract.
. The zero-coupon U.S. treasury security together with the purchase
contract would then constitute a stripped unit. The senior note (or,
after remarketing, treasury securities), which was previously a
component of the normal unit, is tradeable as a separate security.
[FLOW CHART]
zero coupon chart
. After remarketing, the normal units will include specified U.S. treasury
securities in lieu of senior notes.
. You can also transform stripped units and senior notes (or, after
remarketing, treasury securities, if the remarketing is successful) into
normal units. Following that transformation, the specified zero-coupon
U.S. treasury security, which was previously a component of the stripped
units, is tradeable as a separate security.
. The transformation of normal units into stripped units and senior notes
(or, after remarketing, treasury securities) and the transformation of
stripped units and senior notes (or, after remarketing, treasury
securities) into normal units may generally only be effected in integral
multiples of 10 units, as more fully described in this prospectus
supplement.
Concurrent Offering
We are also offering, in a concurrent offering, 8,000,000 shares of our
common stock. This offering of the units and the concurrent offering of our
common stock are not conditioned on each other.
S-24
RISK FACTORS RELATING TO THE UNITS
In considering whether to purchase the units, you should carefully consider
all the information we have included or incorporated by reference in this
prospectus supplement and the accompanying prospectus. In particular, you
should carefully consider the risk factors described below. Because a unit
consists of a purchase contract to acquire shares of our common stock and a
senior note issued by us, you are making an investment decision with regard to
our common stock and senior notes, as well as the units. You should carefully
review the information in this prospectus supplement and the accompanying
prospectus about all of these securities.
You will bear the entire risk of a decline in the price of our common stock.
The market value of the shares of our common stock you will receive on the
stock purchase date may be materially different from the effective price per
share paid by you on the stock purchase date. If the average trading price of
our common stock on the stock purchase date is less than $88.50 per share, you
will, on the stock purchase date, be required to purchase shares of common
stock at a loss. Accordingly, a holder of units assumes the entire risk that
the market value of our common stock may decline. Any such decline could be
substantial.
You will receive only a portion of any appreciation in our common stock price.
The aggregate market value of the shares of our common stock you will
receive upon settlement of a purchase contract generally will exceed the stated
amount of $100 only if the average closing price per share of our common stock
over the 20-trading day period preceding settlement equals or exceeds $107.97,
which we refer to as the "threshold appreciation price." The threshold
appreciation price represents an appreciation of 22% over $88.50. Therefore,
during the period prior to the stock purchase date, an investment in the units
affords less opportunity for equity appreciation than a direct investment in
our common stock. If the average closing price exceeds $88.50, which we refer
to as the "reference price," but falls below the threshold appreciation price,
you will realize no equity appreciation on the common stock for the period
during which you own the purchase contract. Furthermore, if the applicable
average closing price exceeds the threshold appreciation price, the value of
the shares you will receive under the purchase contract will be approximately
82% of the value of the shares you could have purchased with $100 at the time
of this offering.
The trading price for our common stock and the general level of interest rates
and our credit quality will directly affect the trading price for the units.
It is impossible to predict whether the price of our common stock or
interest rates will rise or fall. Our credit quality, operating results and
prospects and economic, financial and other factors will affect trading prices
of our common stock. In addition, market conditions can affect the capital
markets generally, therefore affecting the price of our common stock. These
conditions may include the level of, and fluctuations in, the trading prices of
stocks generally and sales of substantial amounts of our common stock in the
market after the offering of the units or the perception that those sales could
occur. Fluctuations in interest rates may affect the relative value of our
common stock underlying the purchase contracts and of the other components of
the units, which could, in turn, affect the trading prices of the units and our
common stock.
You may suffer dilution of our common stock issuable upon settlement of your
purchase contract.
The number of shares of our common stock issuable upon settlement of your
purchase contract is subject to adjustment only for stock splits and
combinations, stock dividends and specified other transactions. The number of
shares of our common stock issuable upon settlement of each purchase contract
is not subject to adjustment for other events, such as employee stock option
grants, offerings of common stock for cash, or in connection with acquisitions
or other transactions which may adversely affect the price of our common stock.
The terms of the units do not restrict our ability to offer common stock in the
future or to engage in other transactions that could
S-25
dilute our common stock. We have no obligation to consider the interests of the
holders of the units in engaging in any such offering or transaction.
You will have no rights as common stockholders.
Until you acquire shares of our common stock upon settlement of your
purchase contract, you will have no rights with respect to our common stock,
including voting rights, rights to respond to tender offers and rights to
receive any dividends or other distributions on our common stock. Upon
settlement of your purchase contract, you will be entitled to exercise the
rights of a holder of common stock only as to actions for which the record date
occurs after the stock purchase date.
Your pledged securities will be encumbered.
Although holders of units will be beneficial owners of the underlying
pledged senior notes or treasury securities, the holders will pledge those
securities with the collateral agent to secure their obligations under the
related purchase contracts. Therefore, for so long as the purchase contracts
remain in effect, holders will not be allowed to withdraw their pledged senior
notes or treasury securities from this pledge arrangement, except upon
substitution of other securities as described in this prospectus supplement.
The purchase contract agreement will not be qualified under the Trust Indenture
Act of 1939; the obligations of the purchase contract agent will be limited.
The purchase contract agreement relating to the units will not be qualified
under the Trust Indenture Act of 1939. The purchase contract agent under the
purchase contract agreement, who will act as the agent and the attorney-in-fact
for the holders of the units, will not be qualified as a trustee under the
Trust Indenture Act of 1939. Accordingly, holders of the units will not have
the benefits of the protections of the Trust Indenture Act of 1939 other than
to the extent applicable to a senior note included in a unit. Under the terms
of the purchase contract agreement, the purchase contract agent will have only
limited obligations to the holders of the units.
The secondary market for the units may be illiquid.
We are unable to predict how the units will trade in the secondary market or
whether that market will be liquid or illiquid. There is currently no secondary
market for the units. We will apply to list the normal units on the NYSE. We
will not initially list either the stripped units or the senior notes; however,
in the event that either of these securities are separately traded to a
sufficient extent that applicable exchange listing requirements are met, we
will attempt to list those securities on the exchange on which the normal units
are then listed. We have been advised by the underwriters that they presently
intend to make a market for the normal units; however, they are not obligated
to do so and any market making may be discontinued at any time. There can be no
assurance as to the liquidity of any market that may develop for the normal
units, the stripped units or the senior notes, your ability to sell such
securities or whether a trading market, if it develops, will continue. In
addition, in the event that sufficient numbers of normal units are converted to
stripped units, the liquidity of normal units could be adversely affected. We
cannot provide assurance that a listing application for normal units, stripped
units or senior notes will be accepted or, if accepted, that the normal units,
stripped units or senior notes will not be delisted from NYSE or that trading
in the normal units, stripped units or senior notes will not be suspended as a
result of elections to create stripped units or recreate normal units through
the substitution of collateral that causes the number of these securities to
fall below the applicable requirements for listing securities on the NYSE.
We may redeem the senior notes upon the occurrence of a tax event.
We have the option to redeem the senior notes, on not less than 30 days nor
more than 60 days prior written notice, in whole but not in part, at any time
if a tax event occurs and continues under the circumstances described in this
prospectus supplement. If we exercise this option, we will redeem the senior
notes at the redemption price
S-26
plus accrued and unpaid interest, if any. If we redeem the senior notes, we
will pay the redemption price (described later in this prospectus supplement)
in cash to the holders of the notes. In the case of senior notes held as part
of a normal unit at the time the tax event redemption occurs prior to the
successful remarketing of the notes, the redemption price payable to you as a
holder of the normal units will be distributed to the collateral agent, who in
turn will apply an amount equal to the redemption price to purchase a portfolio
of zero-coupon U.S. treasury securities on your behalf, and will remit the
remainder of the redemption price, if any, to you, and the treasury securities
will be substituted for the senior notes as collateral to secure your
obligations under the purchase contracts related to the normal units. If your
senior notes are not components of normal units, you, rather than the
collateral agent, will receive redemption payments. There can be no assurance
as to the effect on the market prices for the normal units if we substitute the
treasury securities as collateral in place of any senior notes so redeemed. A
tax event redemption will be a taxable event to the holders of the senior notes.
The U.S. federal income tax consequences of the purchase, ownership and
disposition of the units are unclear.
No statutory, judicial or administrative authority directly addresses the
treatment of the units or instruments similar to the units for U.S. federal
income tax purposes. As a result, the U.S. federal income tax consequences of
the purchase, ownership and disposition of the units are not entirely clear. In
addition, because the senior notes will be treated as contingent payment debt
instruments, any gain on the disposition of a senior note prior to the date on
which the interest rate on the senior note is reset generally will be treated
as ordinary interest income; thus, the ability to offset such interest income
with a loss, if any, on a purchase contract may be limited.
Because the senior notes will be issued with original issue discount, you will
have to include interest in your taxable income before you receive cash.
Because the senior notes will be treated as contingent payment debt
instruments, original issue discount will accrue from the issue date of the
senior notes and will be included in your gross income for U.S. federal income
tax purposes before you receive a cash payment to which the income is
attributable and in an amount greater than the interest payable on the senior
notes prior to the date on which the interest rate on the notes is reset.
The trading price of the senior notes may not fully reflect the value of their
accrued but unpaid interest.
The senior notes may trade at a price that does not fully reflect the value
of their accrued but unpaid interest. If you dispose of your notes between
record dates for interest payments, you will be required to include in gross
income the daily portions of original issue discount through the date of
disposition in income as ordinary income, and to add this amount to your
adjusted tax basis in the notes disposed of. To the extent the selling price is
less than your adjusted tax basis, you will recognize a loss.
The senior notes are obligations of Northrop Grumman and not of its
subsidiaries and will be effectively subordinated to the claims of the
subsidiaries' creditors.
The units are obligations exclusively of Northrop Grumman and not of its
subsidiaries. Northrop Grumman is a holding company and, accordingly,
substantially all of our operations are conducted through our subsidiaries. As
a result, our cash flow and our ability to service our debt, including the
units, depends upon the earnings of our subsidiaries. In addition, we depend on
the distribution of earnings, loans or other payments by our subsidiaries to us.
Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to pay any amounts due on the units or to provide us with
funds for our payment obligations, whether by dividends, distributions, loans
or other payments. In addition, any payment of dividends, distributions, loans
or advances by our subsidiaries to us could be subject to statutory or
contractual restrictions. Payments to us by our subsidiaries will also be
contingent upon our subsidiaries' earnings and business considerations.
S-27
Our right to receive any assets of any of our subsidiaries upon their
liquidation or reorganization, and therefore the right of the holders of the
units to participate in those assets, will be effectively subordinated to the
claims of that subsidiary's creditors, including senior debenture and note
holders, and bank trade creditors. In addition, even if we were a creditor of
any of our subsidiaries, our rights as a creditor would be subordinate to any
security interest in the assets of our subsidiaries and any indebtedness of our
subsidiaries senior to that held by us.
Delivery of the securities under the pledge agreement is subject to potential
delay if we become subject to a bankruptcy proceeding.
Notwithstanding the automatic termination of the purchase contracts, if we
become the subject of a case under the U.S. bankruptcy code, imposition of an
automatic stay under Section 362 of the U.S. bankruptcy code may delay the
delivery to you of your securities being held as collateral under the pledge
arrangement and such delay may continue until the automatic stay has been
lifted. The automatic stay will not be lifted until such time as the bankruptcy
judge agrees to lift it and return your collateral to you.
S-28
FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS
This prospectus supplement and the information incorporated by reference in
it contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements concern our plans,
expectations and objectives for future operations. These include statements and
assumptions with respect to expected future revenues, margins, program
performance, earnings and cash flows, acquisitions of new contracts, the
outcome of competitions for new programs, the outcome of contingencies
including litigation and environmental remediation, the effect of completed and
planned acquisitions and divestitures of businesses or business assets, the
anticipated costs of capital investments, and anticipated industry trends. We
base these statements on assumptions and analyses we have made in light of our
experience and our historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the
circumstances. Our actual results and trends may differ materially from the
information, statements and assumptions as described, and actual results could
be materially less than our planned results.
Important factors that should be considered in connection with an investment
in our units and that could cause our actual results to differ materially from
those suggested by the forward-looking statements include:
. We depend on a limited number of customers. We are heavily dependent on
government contracts many of which are only partially funded; the
termination or failure to fund one or more significant contracts could
have a negative impact on our operations. We are a supplier, either
directly or as a subcontractor or team member, to the U.S. Government
and its agencies as well as foreign governments and agencies. These
contracts are subject to each customer's political and budgetary
constraints, changes in short-range and long-range plans, the timing of
contract awards, the congressional budget authorization and
appropriation processes, the relevant government's ability to terminate
contracts for convenience or for default, as well as other risks such as
contractor debarment in the event of certain violations of legal and
regulatory requirements.
. Many of our contracts are fixed price contracts. While firm, fixed price
contracts allow us to benefit from cost savings, they also expose us to
potential cost overruns. If our initial estimates used for calculating
the contract price are incorrect, we can incur losses on those
contracts. In addition, some of our contracts have provisions relating
to cost controls and audit rights and if we fail to meet the terms
specified in those contracts then we may not realize their full
benefits. Our ability to manage costs on these contracts may affect our
financial condition. Lower earnings caused by cost overruns and cost
controls would have an adverse effect on our financial results.
. We are subject to significant competition. Our markets include defense
and commercial markets in which we compete with companies of substantial
size and resources. Our success or failure in winning new contracts or
follow-on orders for our existing or future products may cause material
fluctuations in our future revenues and operating results.
. Our operations may be subject to events that cause adverse effects on
our ability to meet contract obligations within anticipated cost and
time parameters. We may encounter internal problems and delays in
delivery as a result of issues with respect to design, technology,
licensing and patent rights, labor or materials and components that
prevent us from achieving contract requirements. We may be affected by
delivery or performance issues with key suppliers and subcontractors, as
well as other factors inherent in our businesses that may adversely
affect operating results. Changes in inventory requirements or other
production cost increases may also have a negative impact on our
operating results.
. We must integrate our acquisitions successfully. Acquiring businesses is
a significant challenge. If we do not execute our acquisition and
integration plans for these businesses in accordance with our strategic
timetable, our operating results may be adversely affected. We acquired
several businesses in 2000 and we acquired Litton earlier this year. We
have also agreed to acquire Newport News. We believe our integration
processes are well-suited to achieve the anticipated strategic and
operating
S-29
benefits of these acquisitions, but if we do not perform our plans as
intended, or if we encounter unforeseen problems in the acquired
businesses problems in those businesses develop subsequent to
acquisition, our operating results may be adversely affected. Among the
factors that may be involved would be unforeseen costs and expenses,
previously undisclosed liabilities, diversion of management focus, and
any effects of complying with government-imposed organizational
conflicts of interest rules as a result of the acquisitions.
. We rely on continuous innovation. We are dependent upon our ability to
anticipate changing needs for defense products, military and civilian
electronic systems and support, and information technology. Our success
is dependent on designing new products which will respond to such
requirements within customers' price limitations.
. We have significant foreign operations and sales, and are therefore
subject to the additional risks associated with international
activities. These risks include currency fluctuations, devaluation,
regional political instability, acts of international terrorists,
compliance with foreign laws and U.S. laws affecting the activities of
U.S. companies overseas, expropriations, antitrust and export/import
controls, taxation, extended span of managerial control, economic
conditions, governmental policies requiring inward investment as a
prerequisite to transacting business on the governmental level,
practical requirements and restrictions in retaining representatives and
consultants in connection with sales efforts, uprisings, acts of war,
embargoes and cultural and ethical differences. One or more of these or
other international risks could result in an adverse effect on our sales
and operations.
. We assume that any divestiture of non-core businesses and assets will be
completed successfully. Our performance may be affected by our inability
to successfully dispose of assets and businesses that do not fit with or
are no longer appropriate to our strategic plan. If any sales of such
businesses or assets can only be made at a loss, our earnings will be
negatively impacted.
. We are subject to environmental and other liabilities. Our performance
may be affected by known environmental risks, pending litigation and
other loss contingencies, if not resolved within the parameters of our
internal plans, and by unanticipated environmental or other liabilities.
. Our pension income may fluctuate. Pension income, a non-cash item which
is included in our earnings, is based on assumptions of market
performance and actual performance may differ. If an event causes us to
revalue our pension income during the calendar year, the portion of our
earnings attributed to pension income could vary significantly.
. Our indebtedness, primarily incurred in connection with the Litton
acquisition, is approximately $3.7 billion higher at September 30, 2001
than our indebtedness at December 31, 2000. The increase in debt
increases demands on our cash resources.
. A substantial portion of our employees in the Ship Systems sector are
represented by labor unions, and unions represent some of our employees
in other sectors as well. If we are unable to maintain satisfactory
relations with the unions, our productivity and profitability may
suffer. Union representation can involve various activities and tactics,
including work stoppages, to achieve negotiated terms in collective
bargaining agreements. A negative impact on timely deliveries occasioned
by a work stoppage could result in problems with our governmental and
other customers and consequently affect operating results in an adverse
manner.
Additional information with respect to important factors and uncertainties
in our business is contained in our SEC filings, including, without limitation,
Northrop Systems' Annual Report on Form 10-K/A for the year ended December 31,
2000 and our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2001, June 30, 2001 and September 30, 2001. We intend all forward-looking
statements that we make to be subject to safe harbor protection of the federal
securities laws as found in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
S-30
Accordingly, you should not rely on the accuracy of predictions contained in
forward-looking statements. These statements speak only as of the date of this
prospectus supplement and, in the case of the accompanying prospectus, the date
of such prospectus, or, in the case of documents incorporated by reference, the
date of those documents. We do not assume any obligation to update our
forward-looking statements to reflect events, circumstances, changes in
expectations or the occurrence of unanticipated events occurring after the date
of those statements.
ACCOUNTING TREATMENT
The net proceeds from the sale of the equity security units will be
allocated between the purchase contracts and the senior notes in our financial
statements based on the underlying fair value of each instrument. The present
value of the purchase contract adjustment payments will be initially charged to
equity, with an offsetting credit to liabilities. Subsequent contract
adjustment payments will be allocated between this liability account and
interest expense based on a constant rate calculation over the life of the
transaction. We expect to report the fair market value of each senior note as
$100.00 and the fair market value of each purchase contract as $0.00.
The purchase contracts are forward transactions in our common stock.
Assuming a successful remarketing of the senior notes, upon settlement of a
purchase contract, we will receive approximately $100 on that purchase contract
and will issue the requisite number of shares of our common stock. The
consideration we receive at that time will be credited to stockholders' equity
allocated between our common stock and additional paid-in-capital accounts.
Before the issuance of shares of our common stock upon settlement of the
purchase contracts, the purchase contracts will be reflected in our diluted
earnings per share calculations using the treasury stock method. Under this
method, the number of shares of our common stock used in calculating diluted
earnings per share is deemed to be increased by the excess, if any, of the
number of shares that would be issued upon settlement of the forward purchase
contracts less the number of shares that could be purchased by us in the
market, at the average market price during the period, using the proceeds
receivable upon settlement. Consequently, we anticipate that there will be no
dilutive effect on our earnings per share except during periods when the
average market price of our common stock is above $107.97.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of units in this offering,
before expenses and after deducting underwriting discounts and commissions,
will be approximately $582.0 million, or $669.3 million if the underwriters
exercise their over-allotment option to purchase additional units in full.
We intend to use our net proceeds from the sale of units, together with an
estimated $681.5 million of net proceeds, before expenses and after deducting
underwriting discounts and commissions, from the concurrent offering of our
common stock, or $783.7 million if the underwriters exercise their
over-allotment option to purchase additional shares of common stock in full,
primarily to repay indebtedness incurred under our five-year revolving credit
facility. We may also use the proceeds for general corporate purposes,
including working capital needs, capital expenditures and acquisitions. We
entered into, and incurred indebtedness under, our five-year revolving credit
facility and a separate 364-day revolving credit facility in connection with
our acquisition of Litton in April 2001. As a result of the offering of units,
we will reduce the amount of credit available under our 364-day facility to
zero. Indebtedness incurred under our five-year credit facility bears interest
at a rate equal to adjusted LIBOR, or an adjusted base rate, at our election,
in each case plus an incremental margin based on our credit rating. As of
September 30, 2001, the weighted average interest rate of borrowings under the
five-year credit facility was approximately 4.35%.
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CAPITALIZATION
The following table sets forth:
. our capitalization as of September 30, 2001,
. our capitalization as adjusted to reflect this offering,
. our capitalization as further adjusted to reflect the concurrent
offering of our common stock, and
. our capitalization as further adjusted to reflect, on a pro forma basis,
our proposed acquisition of Newport News.
From time to time, we may issue additional debt or equity securities. The
following information should be read in conjunction with our consolidated
financial statements, including the notes thereto, which are incorporated
herein by reference. See "Where You Can Find More Information."
September 30, 2001
--------------------------------------
Pro
As forma, as
(Unaudited) As further further
Actual adjusted adjusted adjusted
- ----------- -------- -------- ---------
(in millions)
Cash and cash equivalents(1)...................................... $ 310 $ 310 $ 723 $ 376
======= ======= ======= =======
Short-term debt:
Notes payable.................................................. 130 130 130 130
Current portion of long-term debt.............................. 4 4 4 50
------- ------- ------- -------
Total short-term debt...................................... 134 134 134 180
------- ------- ------- -------
Long-term debt:
Notes and Debentures exclusive of equity security units senior
notes........................................................ 4,212 4,212 4,212 4,644
Equity security units senior notes. . . . . . . ............... -- 600 600 600
Long-term revolving credit facility(2)......................... 850 268 -- 504
Other.......................................................... 123 123 123 123
------- ------- ------- -------
Total long-term debt, less current maturities.............. 5,185 5,203 4,935 5,871
------- ------- ------- -------
Mandatorily redeemable preferred stock............................ 350 350 350 350
Shareholders' equity :
Preferred Stock, par value $1 per share, 10,000,000 shares
authorized; 3,500,000 shares issued and outstanding
reported above............................................... -- -- -- --
Common Stock, par value $1 per share, 400,000,000 shares
authorized; issued and outstanding: 85,671,983, actual;
93,671,983 as adjusted and as further adjusted; 110,308,868,
pro forma, as further adjusted(3) ........................... 2,386 2,386 3,067 4,564
Retained earnings.............................................. 2,928 2,928 2,928 2,928
Unearned compensation.......................................... (20) (20) (20) (20)
Accumulated other comprehensive loss........................... (19) (19) (19) (19)
------- ------- ------- -------
Total shareholders' equity................................. 5,275 5,275 5,956 7,453
------- ------- ------- -------
Total capitalization . ................................. $10,944 $10,962 $11,375 $13,854
======= ======= ======= =======
--------
(1)Cash proceeds may be used for general corporate purposes, including working
capital needs, capital expenditures and acquisitions.
(2)Borrowings of approximately $315 million incurred subsequent to September
30, 2001 in connection with our acquisition of the Electronics and
Information Systems Group of AeroJet-General Corporation are not reflected.
(3)Assumes that we will issue the maximum number of shares of our common stock
available for issuance in the Newport News acquisition, and assumes a common
stock price of $90.00 per share, the midpoint of the collar utilized in the
acquisition agreement with Newport News.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed and principally traded on the New York Stock
Exchange under the symbol "NOC." The following table sets forth, for the
calendar quarters indicated, the high and low last reported sale prices per
share of our common stock as reported on the New York Stock Exchange Composite
Transaction Tape. The following tables also set forth the cash dividends
declared per share of our common stock for the corresponding periods.
Period High Low Dividend
------ ------- ------ --------
1999:
First Quarter.............................. $ 75.63 $56.63 $0.40
Second Quarter............................. 73.88 57.31 0.40
Third Quarter.............................. 75.94 59.56 0.40
Fourth Quarter............................. 63.31 47.00 0.40
2000:
First Quarter.............................. $ 55.63 $42.63 $0.40
Second Quarter............................. 81.38 51.19 0.40
Third Quarter.............................. 93.25 64.38 0.40
Fourth Quarter............................. 93.88 74.00 0.40
2001:
First Quarter.............................. $ 99.09 $79.13 $0.40
Second Quarter............................. 95.37 77.60 0.40
Third Quarter.............................. 102.97 77.00 0.40
Fourth Quarter (through November 15, 2001). 108.97 89.02 --
The last reported sale price for our common stock on November 15, 2001 was
$89.02. The approximate number of holders of record of our common stock on
November 7, 2001 was 13,536. Our credit facilities restrict our ability to pay
dividends to our stockholders under provisions that we do not currently believe
will limit our ability to pay dividends at the current rate.
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DESCRIPTION OF THE EQUITY SECURITY UNITS
We summarize below the principal terms of the equity security units, which
we refer to as the "units," and the purchase contracts and senior notes which
comprise the units. The following description is not complete, and we refer you
to the agreements which will govern your rights as a holder of units. See
"Where You Can Find More Information." In addition, to the extent that the
following description is not consistent with those contained in the
accompanying prospectus under "Description of Debt Securities" and "Description
of Common Stock" you should rely on this description.
Overview
Each unit will have a stated amount of $100. Each unit will initially
consist of and represent:
(1)a purchase contract under which:
. you will agree to purchase, and we will agree to sell, for $100,
shares of our common stock on the stock purchase date, the number of
which will be determined by the settlement rate described below,
based on an average trading price of our common stock for a period
preceding that date; and
. we will pay you contract adjustment payments at the annual rate of
2.0% payable on a quarterly basis as specified below; and
(2)a senior note with a principal amount of $100, on which we will pay
interest quarterly at the initial annual rate of 5.25%.
The senior notes will initially be pledged to secure your obligations under
the purchase contract. The purchase contracts, together with the pledged senior
notes or, after a successful remarketing, the specified pledged treasury
securities, are referred to in this prospectus supplement as "normal units."
Each holder of normal units may elect to withdraw the pledged senior notes or
treasury securities underlying the normal units by substituting, as pledged
securities, specifically identified treasury securities that will pay $100 on
the stock purchase date, the amount due on such date under each purchase
contract. If a holder of normal units elects to substitute treasury securities
as pledged securities, the pledged senior notes or treasury securities will be
released from the pledge agreement and delivered to the holder. The normal
units would then become "stripped units." Holders of stripped units may
recreate normal units by resubstituting the senior notes (or, after a
successful remarketing, the applicable specified treasury securities) for the
treasury securities underlying the stripped units.
As a beneficial owner of the units, you will be deemed to have:
. irrevocably agreed to be bound by the terms of the purchase contract
agreement, pledge agreement and purchase contract for so long as you
remain a beneficial owner of such units; and
. appointed the purchase contract agent under the purchase contract
agreement as your agent and attorney-in-fact to enter into and perform
the purchase contract on your behalf.
In addition, as a beneficial owner of the units, you will be deemed by your
acceptance of the units to have agreed, for all tax purposes, to treat yourself
as the owner of the related senior notes, or the treasury securities, as the
case may be, and to treat the senior notes as our indebtedness.
At the closing of the offering of the units, the underwriters will purchase
the units. The purchase price of each unit will be allocated by us between the
related purchase contract and the related senior note. The senior notes will
then be pledged to the collateral agent to secure the obligations owed to us
under the purchase contracts.
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We will enter into:
. a purchase contract agreement with JPMorgan Chase Bank (formerly known
as The Chase Manhattan Bank), as purchase contract agent, governing the
appointment of the purchase contract agent as the agent and
attorney-in-fact for the holders of the units, the purchase contracts,
the transfer, exchange or replacement of certificates representing the
units and certain other matters relating to the units; and
. a pledge agreement with The Bank of New York, as collateral agent,
custodial agent and securities intermediary creating a pledge and
security interest for our benefit to secure the obligations of holders
of units under the purchase contracts.
Creating Stripped Units and Recreating Normal Units
Holders of normal units will have the ability to "strip" those units and
take delivery of the pledged senior notes (or after a successful remarketing,
the pledged treasury securities), creating "stripped units," and holders of
stripped units will have the ability to recreate normal units from their
stripped units by depositing senior notes (or after a successful remarketing,
the applicable treasury securities) as described in more detail below. Holders
who elect to create stripped units or recreate normal units will be responsible
for any related fees or expenses.
Creating Stripped Units
Each holder of normal units may create stripped units and withdraw the
pledged senior notes or treasury securities underlying the normal units by
substituting, as pledged securities, the treasury securities described below
that will pay $100 on the stock purchase date, the amount due on that date
under the purchase contract. Holders of normal units may create stripped units
at any time on or before the second business day prior to the stock purchase
date, except that they may not create stripped units during the period from
four business days prior to any remarketing period until the expiration of
three business days after the end of that period.
In order to create stripped units, a normal unitholder must substitute, as
pledged securities, zero-coupon U.S. treasury securities (CUSIP No. 912833FV7)
which mature on the stock purchase date. Upon creation of the stripped units,
the treasury securities will be pledged with the collateral agent to secure the
unitholder's obligation to purchase our common stock under the purchase
contract, and the pledged senior notes or treasury securities underlying the
normal units will be released. Because treasury securities are issued in
integral multiples of $1,000, holders of normal units may make the substitution
only in integral multiples of 10 normal units. However, after a successful
remarketing of the senior notes or the occurrence of a tax event redemption,
the holders may make the substitution only in integral multiples of normal
units such that both the treasury securities to be deposited and the treasury
securities to be released are in integral multiples of $1,000.
To create stripped units, you must:
. deposit with the collateral agent the treasury securities described
above, which will be substituted for the pledged senior notes or
treasury securities underlying your normal units and pledged with the
collateral agent to secure your obligation to purchase our common stock
under the purchase contract;
. transfer the normal units to the purchase contract agent; and
. deliver a notice to the purchase contract agent stating that you have
deposited the specified treasury securities with the collateral agent
and are requesting that the purchase contract agent instruct the
collateral agent to release to you the pledged senior notes or treasury
securities underlying the normal units.
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Upon that deposit and the receipt of an instruction from the purchase
contract agent, the collateral agent will effect the release to the purchase
contract agent of the underlying pledged senior notes or treasury securities
from the pledge under the pledge agreement free and clear of our security
interest. The purchase contract agent will:
. cancel the normal units;
. transfer to you the underlying pledged senior notes or treasury
securities; and
. deliver to you the stripped units.
Any senior notes released to you will be tradeable separately from the
resulting stripped units. Interest on the senior notes will continue to be
payable in accordance with their terms.
Recreating Normal Units
Each holder of stripped units may recreate normal units by substituting, as
pledged securities, senior notes or the applicable treasury securities then
constituting a part of the normal units for the treasury securities underlying
the stripped units. Holders may recreate normal units at any time on or before
the second business day prior to the stock purchase date, except that they may
not recreate normal units during the period from four business days prior to
any remarketing period until the expiration of three business days after that
period.
Upon recreation of the normal units, the senior notes or treasury securities
will be pledged with the collateral agent to secure the holder's obligation to
purchase our common stock under the purchase contract, and the treasury
securities underlying the stripped units will be released. Because treasury
securities are issued in integral multiples of $1,000, holders of stripped
units may make the substitution only in integral multiples of 10 stripped
units. However, after a successful remarketing of the senior notes or the
occurrence of a tax event redemption, the holder may make the substitution only
in integral multiples of stripped units such that both the treasury securities
to be deposited and the treasury securities to be released are in integral
multiples of $1,000.
To recreate normal units from stripped units, you must:
. deposit with the collateral agent:
-- if the substitution occurs prior to the remarketing of the senior
notes, senior notes having an aggregate principal amount equal to the
aggregate stated amount of your stripped units; and
-- if the substitution occurs after the remarketing of the senior notes
or the occurrence of a tax event redemption, the applicable treasury
securities then constituting a part of the normal units;
. transfer the stripped units to the purchase contract agent; and
. deliver a notice to the purchase contract agent stating that you have
deposited the senior notes or treasury securities with the collateral
agent and are requesting that the purchase contract agent instruct the
collateral agent to release to you the pledged treasury securities
underlying those stripped units.
The senior notes or treasury securities will be substituted for the treasury
securities underlying your stripped units and will be pledged with the
collateral agent to secure your obligation to purchase our common stock under
your purchase contract.
Upon that deposit and the receipt of an instruction from the purchase
contract agent, the collateral agent will effect the release to the purchase
contract agent of the underlying pledged treasury securities from the pledge
under the pledge agreement free and clear of our security interest. The
purchase contract agent will:
. cancel the stripped units;
. transfer to you the underlying treasury securities; and
. deliver to you the normal units.
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Current Payments
If you hold normal units, you will receive payments consisting of quarterly
contract adjustment payments on the purchase contracts payable by us at the
annual rate of 2.0% of the $100 stated amount through and including the stock
purchase date, quarterly interest payments on the senior notes at the annual
rate of 5.25% of the principal amount of $100 per senior note until a
successful remarketing of the senior notes, and a quarterly payment on the
stock purchase date from specified pledged treasury securities, at the same
annual rate as was initially paid on the senior notes.
If you hold stripped units, you will only be entitled to receive quarterly
contract adjustment payments payable by us at the annual rate of 2.0% of the
$100 stated amount until November 16, 2004. However, you will be required for
U.S. federal income tax purposes to recognize original issue discount on the
treasury securities on a constant yield basis, regardless of your method of tax
accounting, or acquisition discount on the treasury securities when it is paid
or accrues generally in accordance with your regular method of tax accounting.
The contract adjustment payments are subject to deferral by us until the
stock purchase date as described below. If we defer any of these payments, we
will pay or accrue additional payments on the deferred amounts at the annual
rate of 5.25% until paid.
If you hold senior notes separately from the units, you will only receive
the interest payment on the senior notes. The senior notes, whether held
separately or as part of the units, will initially pay interest at the annual
rate of 5.25% of the principal amount of $100 per senior note for the quarterly
payments payable on and before November 16, 2004. After that date, if the
senior notes are successfully remarketed, interest payments on the senior notes
will be made at the reset rate from the date the senior notes are successfully
remarketed until their maturity on November 16, 2006. However, if a reset rate
meeting the requirements described in this prospectus supplement cannot be
established, the interest rate will not be reset and will continue to be the
initial annual rate of 5.25%, until a reset rate meeting the requirements
described in this prospectus supplement can be established on a later
remarketing date prior to the stock purchase date. If no remarketing occurs
prior to that date, the initial rate will be the interest rate through maturity
of the notes.
Contract adjustment payments and interest payments on the senior notes
payable for any period will be computed (1) for any full quarterly period on
the basis of a 360-day year of twelve 30-day months and (2) for any period
shorter than a full quarterly period, on the basis of a 30-day month and, for
periods of less than a month, on the basis of the actual number of days elapsed
per 30-day month. Contract adjustment payments and interest on the senior notes
will accrue from November 21, 2001 and will be payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year, commencing
February 16, 2002. If the purchase contracts are settled early, at your option,
or terminated, you will have no right to receive any accrued and deferred
contract adjustment payments.
Our obligations with respect to the senior notes will be unsecured and will
rank equally with all our other unsecured and unsubordinated indebtedness. See
"Description of the Senior Notes" below and "Description of Debt Securities" in
the accompanying prospectus.
Contract adjustment payments and interest payments on the senior notes will
be payable to the holders of normal units as they are registered on the books
and records of the purchase contract agent on the relevant record dates. So
long as the normal units remain in book-entry only form, the record date will
be the business day prior to the relevant payment dates. Contract adjustment
payments will be paid through the purchase contract agent, which will hold
amounts received in respect of the contract adjustment payments for the benefit
of the holders of the purchase contracts that are a part of such normal units.
Subject to any applicable laws and regulations, each payment will be made as
described under "Description of the Senior Notes--Book-Entry and Settlement"
below. If the normal units do not remain in book-entry only form, the relevant
record dates will be the 15th day prior to the relevant payment dates. If any
date on which these payments and distributions are to be made is not a business
day, then amounts payable on that date will be made on the next day that is a
business day without any
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interest or other payment in respect of the delay, except that, if the business
day is in the next calendar year, payment will be made on the immediately
preceding business day, in each case with the same force and effect as if made
on the scheduled payment date.
Option to Defer Contract Adjustment Payments
We may, at our option and upon prior written notice to the holders of the
units and the forward purchase contract agent, defer the payment of contract
adjustment payments on the related forward purchase contracts forming a part of
normal units and stripped units until no later than the stock purchase date.
However, deferred contract adjustment payments will bear additional contract
adjustment payments at the rate of 5.25% per year (compounding on each
succeeding payment date) until paid. If the purchase contracts are terminated
(upon the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to us), the right to receive contract adjustment
payments and deferred contract adjustment payments will also terminate.
In the event that we elect to defer the payment of contract adjustment
payments on the purchase contracts until the stock purchase date, each holder
of normal units and stripped units will receive on the stock purchase date in
respect of the deferred contract adjustment payments, in lieu of a cash
payment, a number of shares of our common stock equal to (a) the aggregate
amount of deferred contract adjustment payments payable to the holder divided
by (b) the applicable market value.
We will not issue any fractional shares of our common stock with respect to
the payment of deferred contract adjustment payments on the stock purchase
date. In lieu of fractional shares otherwise issuable with respect to such
payment of deferred contract adjustment payments, the holder will be entitled
to receive an amount in cash equal to the fraction of a share times the
applicable market value.
In the event we exercise our option to defer the payment of contract
adjustment payments, then until the deferred contract adjustment payments have
been paid, we will not, and we will not permit any subsidiary of ours to,
declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, our common
stock other than:
. purchases, redemptions or acquisitions of shares of our common stock in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of employees, officers or directors
or a stock purchase or dividend reinvestment plan, or the satisfaction
by us of our obligations pursuant to any contract or security
outstanding on the date of such event,
. as a result of a reclassification of our capital stock or the exchange
or conversion of one class or series of our capital stock for another
class or series of the capital stock,
. the purchase of fractional interests in shares of our common stock
pursuant to the conversion or exchange provisions of the security being
converted or exchanged,
. dividends or distributions in our common stock (or rights to acquire
common stock), or repurchases, redemptions or acquisitions of common
stock in connection with the issuance or exchange of common stock (or
securities convertible into or exchangeable for shares of our common
stock), or
. redemptions, exchanges or repurchases of any rights outstanding under a
shareholder rights plan or the declaration or payment thereunder of a
dividend or distribution of or with respect to rights in the future.
Description of the Purchase Contracts
Each purchase contract underlying a unit, unless earlier terminated, or
earlier settled at your option or upon specified mergers and other transactions
described below, will obligate you to purchase, and us to sell, for $100, on
the stock purchase date a number of newly issued shares of our common stock
equal to the settlement rate.
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The settlement rate, which is the number of newly issued shares of our
common stock issuable upon settlement of a purchase contract on the stock
purchase date, will, subject to adjustment under certain circumstances as
described under "--Anti-dilution Adjustments" below, be as follows:
. If the "applicable market value" of our common stock is equal to or
greater than the threshold appreciation price of $107.97, which is 22%
above, the settlement rate, which is equal to $100 divided by $107.97,
will be 0.9262 shares of our common stock per purchase contract.
Accordingly, if the market price for our common stock increases to an
amount that is greater than $107.97 on the settlement date, the
aggregate market value of the shares of common stock issued upon
settlement of each purchase contract, assuming that this market value is
the same as the applicable market value of our common stock, will be
greater than $100, and if the market price equals $107.97, the aggregate
market value of those shares, assuming that this market value is the
same as the applicable market value of our common stock, will equal $100.
. If the applicable market value of our common stock is less than $107.97
but greater than $88.50, the settlement rate will be equal to $100
divided by the applicable market value of our common stock per purchase
contract. Accordingly, if the market price for our common stock
increases but that market price is less than $107.97 on the settlement
date, the aggregate market value of the shares of common stock issued
upon settlement of each purchase contract, assuming that this market
value is the same as the applicable market value of our common stock,
will equal $100.
. If the applicable market value of our common stock is less than or equal
to $88.50, the settlement rate, which is equal to $100 divided by
$88.50, will be 1.1299 shares of our common stock per purchase contract.
Accordingly, if the market price for our common stock decreases to an
amount that is less than $88.50 on the settlement date, the aggregate
market value of the shares of common stock issued upon settlement of
each purchase contract, assuming that the market value is the same as
the applicable market value of our common stock, will be less than $100,
and if the market price equals $88.50, the aggregate market value of
those shares, assuming that this market value is the same as the
applicable market value of our common stock, will equal $100.
The "applicable market value" of our common stock is the average of the
closing prices per share of our common stock on each of the 20 consecutive
trading days ending on the third trading day immediately preceding the stock
purchase date.
For purposes of determining the applicable market value for our common
stock, the closing price of our common stock on any date of determination means
the closing sale price or, if no closing price is reported, the last reported
sale price of our common stock on the NYSE on that date. If our common stock is
not listed for trading on the NYSE on any date, the closing price of our common
stock on any date of determination means the closing sales price as reported in
the composite transactions for the principal U.S. securities exchange on which
our common stock is so listed, or if our common stock is not so listed on a
U.S. national or regional securities exchange, as reported by the Nasdaq stock
market, or, if our common stock is not so reported, the last quoted bid price
for our common stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization or, if that bid price is not
available, the market value of our common stock on that date as determined by a
nationally recognized independent investment banking firm retained by us for
this purpose.
A trading day is a day on which our common stock (1) is not suspended from
trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (2) has traded at least
once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of our
common stock.
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Settlement
Settlement of the purchase contracts will occur on the stock purchase date,
unless:
. you have settled the related purchase contract prior to the stock
purchase date through the early delivery of cash to the purchase
contract agent, in the manner described in "--Early Settlement;"
. we are involved in a merger prior to the stock purchase date in which at
least 30% of the consideration for our common stock consists of cash or
cash equivalents, and you have settled the related purchase contract
through an early settlement as described in "--Early Settlement upon
Cash Merger;" or
. an event described under "--Termination of Purchase Contracts" below has
occurred.
The settlement of the purchase contracts on the stock purchase date will
occur as follows:
. for the stripped units or normal units that include pledged treasury
securities, the cash payments on the treasury securities will
automatically be applied to satisfy in full your obligation to purchase
our common stock under the purchase contracts;
. for the normal units in which the related senior notes remain a part of
the normal units because of a failed remarketing, you may exercise your
put right described under ''--Remarketing" below and we will apply the
put price in satisfaction of your obligation to purchase our common
stock under the purchase contracts; and
. for the normal units in which the related senior notes remain a part of
the normal units because of a failed remarketing, unless you exercise
your put right, we will exercise our rights as a secured party to retain
or dispose of the senior notes in accordance with applicable law in
satisfaction of your obligation to purchase our common stock under the
purchase contracts.
In either event, our common stock will then be issued and delivered to you
or your designee, upon payment of the applicable consideration, presentation
and surrender of the certificate evidencing the units, if the units are held in
certificated form, and payment by you of any transfer or similar taxes payable
in connection with the issuance of our common stock to any person other than
you.
Prior to the date on which shares of common stock are issued in settlement
of purchase contracts, our common stock underlying the related purchase
contracts will not be deemed to be outstanding for any purpose and you will
have no rights with respect to the common stock, including voting rights,
rights to respond to tender offers and rights to receive any dividends or other
distributions on the common stock, by virtue of holding the purchase contracts.
No fractional shares of common stock will be issued by us pursuant to the
purchase contracts. In place of fractional shares otherwise issuable, you will
be entitled to receive an amount of cash equal to the fractional share,
calculated on an aggregate basis in respect of the purchase contracts you are
settling, times the applicable market value.
Remarketing
The senior notes held by each holder of a normal unit will be subject to a
remarketing on the third business day immediately preceding August 16, 2004,
unless the holder elects not to participate in the remarketing. The proceeds of
such remarketing will be used to purchase treasury securities, which will be
pledged to secure the obligations of such participating holder of normal units
under the related purchase contract. The redemption proceeds received on the
pledged treasury securities underlying the normal unit of such holder will be
used to satisfy such participating holder's obligation to purchase our common
stock on the stock purchase date.
Unless a holder of normal units delivers treasury securities in a kind and
amount designated by the remarketing agent, as described below, the senior
notes that are included in the normal units will be remarketed on the
remarketing date, unless the remarketing agent delays the remarketing to a
later date as described below. The remarketing date will be the third business
day immediately preceding August 16, 2004, the last quarterly payment date
before the stock purchase date.
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We will enter into a remarketing agreement with a nationally recognized
investment banking firm, pursuant to which that firm will agree, as remarketing
agent, to use its commercially reasonable best efforts to sell the senior notes
which are included in normal units and which are participating in the
remarketing at a price equal to at least 100.50% of the remarketing value.
The "remarketing value" will be equal to the sum of:
(1)the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the quarterly payment date falling on the
stock purchase date, an amount of cash equal to the aggregate interest
payments that are scheduled to be payable on that quarterly payment
date, on each senior note which is included in a normal unit and which
is participating in the remarketing, assuming for this purpose, even if
not true, that the interest rate on the senior notes remains at the
initial rate; and
(2)the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the stock purchase date, an amount of cash
equal to $100 for each senior note which is included in a normal unit
and which is participating in the remarketing.
For purposes of (1) and (2) above, the value on the remarketing date of the
treasury securities will assume that (a) the treasury securities are highly
liquid treasury securities maturing on or within 35 days prior to the stock
purchase date (as determined in good faith by the remarketing agent in a manner
intended to minimize the cash value of the treasury securities) and (b) those
treasury securities are valued based on the ask-side price of the treasury
securities at a time between 9:00 a.m. and 11:00 a.m., New York City time,
selected by the remarketing agent, on the remarketing date (as determined on a
third-day settlement basis by a reasonable and customary means selected in good
faith by the remarketing agent) plus accrued interest to that date.
The remarketing agent will use the proceeds from the sale of these senior
notes in a successful remarketing described in this section to purchase, in the
discretion of the remarketing agent, in open market transactions or at treasury
auction, the amount and the types of treasury securities described in (a) and
(b) above, which it will deliver through the purchase contract agent to the
collateral agent to secure the obligations under the related purchase contracts
of holders of the normal units whose senior notes participated in the
remarketing. The remarketing agent will deduct as a remarketing fee an amount
not exceeding 25 basis points (0.25%) of the total proceeds from such
remarketing. The remarketing agent will remit the remaining portion of the
proceeds, if any, to the holders of the normal units participating in the
remarketing.
Alternatively, a holder of normal units may elect not to participate in the
remarketing and retain the senior notes underlying those units by delivering
the treasury securities described in (1) and (2) above, in the amount and types
specified by the remarketing agent to the purchase contract agent on the fourth
business day prior to the remarketing date. In such case, the interest rate on
such holder's note would be reset to the reset rate, even though the holder did
not participate in the remarketing.
The purchase contract agent will give holders notice of remarketing,
including the specific treasury securities (including the CUSIP numbers and/or
the principal terms thereof) that must be delivered by holders that elect not
to participate in the remarketing, on the seventh business day prior to the
remarketing date. A holder electing not to participate in the remarketing must
notify the purchase contract agent of such election and deliver such specified
treasury securities to the purchase contract agent not later than 10:00 a.m. on
the fourth business day prior to the remarketing date. A holder that notifies
the purchase contract agent of such election but does not so deliver the
treasury securities and a holder that does not notify the purchase contract
agent will be deemed to have elected to participate in the remarketing. On the
stock purchase date, the purchase contract agent will apply the cash payments
received on the pledged treasury securities to pay the purchase price under the
purchase contracts.
If the remarketing agent cannot establish a reset rate on the remarketing
date that will be sufficient to cause the then current aggregate market value
of the senior notes to be equal to at least 100.50% of the remarketing value,
assuming, even if not true, that all of the senior notes are held as components
of normal units and will be
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remarketed, and the remarketing agent cannot remarket the senior notes offered
for remarketing on the remarketing date at a price equal to at least 100.50% of
the remarketing value, determined on the basis of the senior notes being
remarketed, the remarketing agent will attempt to establish a reset rate
meeting these requirements on each of the two immediately following business
days. If the remarketing agent cannot establish a reset rate meeting these
requirements on either of those days, it will attempt to establish such a reset
rate on each of the three business days immediately preceding October 1, 2004.
If the remarketing agent cannot establish such a reset rate during that period,
it will further attempt to establish such a reset rate on each of the three
business days immediately preceding the stock purchase date. We refer to each
of these three business day periods as "remarketing periods" in this prospectus
supplement. Any such remarketing will be at a price equal to at least 100.50%
of the remarketing value (determined on the basis of the senior notes being
remarketed) on the subsequent remarketing date.
If the remarketing agent fails to remarket the senior notes offered for
remarketing at the price specified in the preceding paragraph by the business
day immediately preceding the stock purchase date, holders of senior notes will
have the right to put their senior notes to us on the stock purchase date upon
at least three business days prior notice at a price per senior note equal to
$100. If a holder of normal units has exercised its put right but has not
otherwise settled its purchase contract in cash by the close of business on the
business day immediately preceding the stock purchase date (but without regard
to the notice requirements described below under "--Notice to Settle with
Cash"), the put price will be applied by us in satisfaction of its obligations
under the purchase contract on the stock purchase date. If a holder of stripped
units has exercised its put right, the put price will be paid to such holder on
the stock purchase date.
If the remarketing agent fails to remarket the senior notes by the business
day immediately preceding the stock purchase date, any holder of normal units
that has not exercised its put right and has not otherwise settled its purchase
contract in cash by the close of business on the business day immediately
preceding the stock purchase date (but without regard to the notice
requirements described below under "--Notice to Settle with Cash") will be
deemed to have directed, at our election, either (1) the collateral agent to
dispose of such holder's senior notes in accordance with applicable law and at
our direction, or (2) us to retain and cancel such holder's senior notes
pledged as collateral, in either case in satisfaction of such holder's
obligations under the purchase contract.
We will cause a notice of any failed remarketing period to be published on
the fourth business day immediately following such period, by publication in a
daily newspaper in the English language of general circulation in New York
City, which is expected to be The Wall Street Journal. We will also release
this information by means of Bloomberg and Reuters newswire. In addition, we
will request, not later than seven nor more than 15 calendar days prior to any
remarketing period, that The Depository Trust Company (''DTC") notify its
participants holding senior notes, normal units and stripped units of the
remarketing. The notice of the failure of the second remarketing period and the
DTC notification of the third remarketing period will provide the procedures
that must be followed if a holder of units wishes to exercise its put right.
Optional Remarketing of Senior Notes Which Are Not Included in Normal Units
Under the remarketing agreement, on or prior to the fourth business day
immediately preceding the beginning of a remarketing period, holders of senior
notes that are not included in normal units may elect to have their senior
notes included in the remarketing by delivering their senior notes along with a
notice of such election to the custodial agent prior to the beginning of a
remarketing period, but no earlier than the payment date immediately preceding
August 16, 2004. The custodial agent will hold these senior notes in an account
separate from the collateral account in which the securities pledged to secure
the holders' obligations under the purchase contracts will be held. Holders of
senior notes electing to have their senior notes remarketed will also have the
right to withdraw that election on or prior to the fifth business day
immediately preceding the first day of the relevant remarketing period.
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On the third business day immediately prior to the relevant remarketing
period, the custodial agent will deliver these separate senior notes to the
remarketing agent for remarketing. The remarketing agent will use its
commercially reasonable best efforts to remarket the separately held senior
notes included in the remarketing at a price equal to at least 100.50% of the
remarketing value, determined on the basis of the separately held senior notes
being remarketed. After deducting as the remarketing fee an amount not
exceeding 25 basis points (0.25%) of the total proceeds from such remarketing,
the remarketing agent will remit to the collateral agent the remaining portion
of the proceeds for payment to such participating holders.
If, as described above, the remarketing agent cannot remarket the senior
notes during any remarketing period, the remarketing agent will promptly return
the senior notes to the custodial agent to release to the holders. Holders of
senior notes that are not components of normal units may elect to have their
senior notes remarketed during any subsequent remarketing period pursuant to
the procedures described above. In addition, if the remarketing agent fails to
remarket the senior notes by the business day immediately preceding the stock
purchase date, holders of senior notes that are not components of normal units
may exercise their put rights.
Early Settlement
At any time not later than 10:00 a.m. on the seventh business day prior to
November 16, 2004, a holder of units may settle the related purchase contracts
by delivering to the purchase contract agent immediately available funds in an
amount equal to $100 multiplied by the number of purchase contracts being
settled. Holders may settle early only in units of 10 and integral multiples of
10.
No later than the third business day after an early settlement, we will
issue, and the holder will be entitled to receive, 0.9262 shares of our common
stock for each unit, regardless of the market price of our common stock on the
date of early settlement, subject to adjustment under the circumstances
described under "--Anti-dilution Adjustments" below. At that time, the holder's
right to receive future contract adjustment payments will terminate. The holder
will also receive the senior notes or other securities underlying those units.
Notice to Settle with Cash
Unless the treasury securities have replaced the senior notes as a component
of normal units as a result of a successful remarketing of the notes or a tax
event redemption, a holder of normal units may settle the related purchase
contract with separate cash prior to 11:00 a.m., New York City time, on the
fourth business day immediately preceding the stock purchase date. A holder of
a normal unit wishing to settle the related purchase contract with separate
cash must notify the purchase contract agent by presenting and surrendering the
normal unit certificate evidencing the normal unit at the offices of the
purchase contract agent with the form of "Notice
to Settle by Separate Cash" on the reverse side of the certificate completed
and executed as indicated on or prior to 5:00 p.m., New York City time, on the
seventh business day immediately preceding the stock purchase date. If a holder
of normal units who has given notice of its intention to settle the related
purchase contract with separate cash fails to deliver the cash to the
collateral agent on the business day immediately preceding the stock purchase
date, such holder, if it has not exercised its put right, will be deemed to
have directed us to retain the related senior note in full satisfaction of the
holder's obligation to purchase shares of our common stock under the related
purchase contracts.
Early Settlement upon Cash Merger
Prior to the stock purchase date, if we are involved in a merger in which at
least 30% of the consideration for our common stock consists of cash or cash
equivalents ("cash merger"), then on or after the date of the cash merger each
holder of the units will have the right to accelerate and settle the related
purchase contract at the settlement rate in effect immediately before the cash
merger. We refer to this right as the "merger early settlement right." We will
provide each of the holders with a notice of the completion of a cash merger
within five business days thereof. The notice will specify a date, which shall
not be less than 20 nor more than 30 days after the date of the notice, on
which the optional early settlement will occur and a date by which each holder's
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merger early settlement right must be exercised. The notice will set forth,
among other things, the applicable settlement rate and the amount of the cash,
securities and other consideration receivable by the holder upon settlement. To
exercise the merger early settlement right, you must deliver to the purchase
contract agent, on or one business day before the merger early settlement date,
the certificate evidencing your units, if the units are held in certificated
form, and payment of the applicable purchase price in the form of a certified
or cashier's check. If you exercise the merger early settlement right, we will
deliver to you on the merger early settlement date the kind and amount of
securities, cash or other property that you would have been entitled to receive
if you had settled the purchase contract immediately before the cash merger at
the settlement rate in effect at such time. You will also receive the senior
notes or treasury securities underlying those units. If you do not elect to
exercise your merger early settlement right, your units will remain outstanding
and subject to normal settlement on the stock purchase date.
Anti-dilution Adjustments
The formula for determining the settlement rate and the number of shares of
our common stock to be delivered upon an early settlement may be adjusted if
certain events occur, including:
(1)the payment of a stock dividend or other distributions on our common
stock;
(2)the issuance to all holders of our common stock of rights or warrants,
other than any dividend reinvestment or share purchase or similar plans,
entitling them to subscribe for or purchase our common stock at less
than the current market price (as defined below);
(3)subdivisions, splits and combinations of our common stock;
(4)distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, securities, cash or other assets
(excluding any dividend or distribution covered by clause (1) or (2)
above and any dividend or distribution paid exclusively in cash);
(5)distributions consisting exclusively of cash to all holders of our
common stock in an aggregate amount that, when combined with (a) other
all-cash distributions made within the preceding 12 months and (b) the
cash and the fair market value, as of the date of expiration of the
tender or exchange offer referred to below, of the consideration paid in
respect of any tender or exchange offer by us or a subsidiary of ours
for our common stock concluded within the preceding 12 months, exceeds
15% of our aggregate market capitalization (such aggregate market
capitalization being the product of the current market price of our
common stock multiplied by the number of shares of common stock then
outstanding) on the date fixed for the determination of stockholders
entitled to receive such distribution; and
(6)the successful completion of a tender or exchange offer made by us or
any subsidiary of ours for our common stock that involves an aggregate
consideration that, when combined with (a) any cash and the fair market
value of other consideration payable in respect of any other tender or
exchange offer by us or a subsidiary of ours for our common stock
concluded within the preceding 12 months and (b) the aggregate amount of
any all-cash distributions to all holders of our common stock made
within the preceding 12 months, exceeds 15% of our aggregate market
capitalization on the date of expiration of such tender or exchange
offer.
The "current market price" per share of our common stock on any day means
the average of the daily closing prices for the five consecutive trading days
preceding the earlier of the day preceding the day in question and the day
before the "ex date" with respect to the issuance or distribution requiring
such computation. For purposes of this paragraph, the term "ex date," when used
with respect to any issuance or distribution, means the first date on which our
common stock trades without the right to receive the issuance or distribution.
In the case of reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions that cause our common stock to be
converted into the right to receive other securities, cash or property, each
purchase
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contract then outstanding would, without the consent of the holders of units,
become a contract to purchase such other securities, cash or property instead
of our common stock. In such event, on the stock purchase date the settlement
rate then in effect will be applied to the value on the stock purchase date of
the securities, cash or property a holder would have received if it had held
the shares covered by the purchase contract when the applicable transaction
occurred. Holders have the right to settle their obligations under the purchase
contracts early in the event of certain cash mergers as described under
"--Early Settlement upon Cash Merger."
If at any time we make a distribution of property to our common stockholders
that would be taxable to the stockholders as a dividend for United States
federal income tax purposes (that is, distributions, evidences of indebtedness
or assets, but generally not stock dividends or rights to subscribe for capital
stock), and, pursuant to the settlement rate adjustment provisions of the
purchase contract agreement, the settlement rate is increased, that increase
may be deemed to be the receipt of taxable income to holders of units. See
"U.S. Federal Income Tax Consequences--Purchase Contracts--Adjustment to
Settlement Rate."
In the case of the payment of a dividend or other distribution on our common
stock of shares of capital stock of any class or series, or similar equity
interests, of or relating to a subsidiary or other business unit, which we
refer to as a "spin-off," the settlement rate in effect immediately before the
close of business on the record date fixed for determination of stockholders
entitled to receive that distribution will be increased by multiplying:
. the settlement rate by
. a fraction, the numerator of which is the current market price of our
common stock plus the fair market value, determined as described below,
of the portion of those shares of capital stock or similar equity
interests so distributed applicable to one share of common stock and the
denominator of which is the current market price of our common stock.
The adjustment to the settlement rate under the preceding paragraph will
occur at the earlier of:
. the tenth trading day from, and including, the effective date of the
spin-off and
. the date of the securities being offered in the initial public offering
of the spin-off, if that initial public offering is effected
simultaneously with the spin-off.
For purposes of this section, "initial public offering" means the first time
securities of the same class or type as the securities being distributed in the
spin-off are bona fide offered to the public for cash.
In the event of a spin-off that is not effected simultaneously with an
initial public offering of the securities being distributed in the spin-off,
the fair market value of the securities to be distributed to holders of our
common stock means the average of the sale prices of those securities over the
first 10 trading days after the effective date of the spin-off. Also, for
purposes of such a spin-off, the current market price of our common stock means
the average of the sales prices of our common stock over the first 10 trading
days after the effective date of the spin-off.
If, however, an initial public offering of the securities being distributed
in the spin-off is to be effected simultaneously with the spin-off, the fair
market value of the securities being distributed in the spin-off means the
initial public offering price, while the current market price of our common
stock means the sale price of our common stock on the trading day on which the
initial public offering price of the securities being distributed in the
spin-off is determined.
In addition, we may increase the settlement rate if our board of directors
deems it advisable to avoid or diminish any income tax to holders of our common
stock resulting from any dividend or distribution of shares (or rights to
acquire shares) or from any event treated as a dividend or distribution for
income tax purposes or for any other reasons.
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Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless the adjustment would require an increase or decrease of at least one
percent in the settlement rate. If any adjustment is not required to be made
because it would not change the settlement rate by at least one percent, then
the adjustment will be carried forward and taken into account in any subsequent
adjustment.
We will be required, as soon as practicable following the occurrence of an
event that requires or permits an adjustment in the settlement rate, to provide
written notice to the holders of units of the occurrence of that event. We will
also be required to deliver a statement setting forth in reasonable detail the
method by which the adjustment to the settlement rate was determined and
setting forth the revised settlement rate.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of our common stock issuable upon early
settlement of a purchase contract.
Pledged Securities and Pledge Agreement
The senior notes or treasury securities underlying the units will be pledged
to the collateral agent for our benefit. Under the pledge agreement, the
pledged securities will secure the obligations of holders of units to purchase
our common stock under the purchase contract. A holder of a unit cannot
separate or separately transfer the purchase contract from the pledged
securities underlying the unit. Your rights to the pledged securities will be
subject to our security interest created by the pledge agreement. You will not
be permitted to withdraw the pledged securities related to the units from the
pledge arrangement except:
. to substitute specified treasury securities for the related pledged
senior notes or other pledged treasury securities upon creation of a
stripped unit;
. to substitute senior notes or specified treasury securities for the
related pledged treasury securities upon the recreation of a normal unit;
. upon delivering specified treasury securities when electing not to
participate in a remarketing; or
. upon the termination or early settlement of the purchase contracts.
Subject to our security interest and the terms of the purchase contract
agreement and the pledge agreement:
. each holder of units that include senior notes will retain ownership of
the senior notes and will be entitled through the purchase contract
agent and the collateral agent to all of the rights of a holder of the
senior notes, including interest payments, voting, redemption and
repayment rights; and
. each holder of units that include treasury securities will retain
ownership of the treasury securities.
We will have no interest in the pledged securities other than our security
interest.
Quarterly Payments on Pledged Securities
Except as described in "--Description of the Purchase Contracts," the
collateral agent, upon receipt of quarterly interest payments on the pledged
securities underlying the normal units, will distribute those payments to the
purchase contract agent, which will, in turn, distribute that amount to persons
who were the holders of normal units on the record date for the payment. As
long as the units remain in book-entry only form, the record date for any
payment will be one business day before the payment date.
Termination of Purchase Contracts
The purchase contracts, our related rights and obligations and those of the
holders of the units, including their rights to receive contract adjustment
payments and obligations to purchase our common stock, will automatically
terminate upon the occurrence of particular events of our bankruptcy,
insolvency or reorganization.
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Upon such a termination of the purchase contracts, the collateral agent will
release the securities held by it to the purchase contract agent for
distribution to the holders. If a holder would otherwise have been entitled to
receive less than $1,000 principal amount at maturity of any treasury security
upon termination of the purchase contract, the purchase contract agent will
dispose of the security for cash and pay the cash to the holder. Upon
termination, however, the release and distribution may be subject to a delay.
If we become the subject of a case under the federal bankruptcy code, a delay
in the release of the pledged senior notes or treasury securities may occur as
a result of the automatic stay under the bankruptcy code and continue until the
automatic stay has been lifted. The automatic stay will not be lifted until
such time as the bankruptcy judge agrees to lift it and return your collateral
to you.
The Purchase Contract Agreement
Distributions on the units will be payable, purchase contracts will be
settled and transfers of the units will be registrable at the office of the
purchase contract agent in the Borough of Manhattan, The City of New York. In
addition, if the units do not remain in book-entry form, payment of
distributions on the units may be made, at our option, by check mailed to the
address of the persons shown on the unit register.
If any quarterly payment date or the stock purchase date is not a business
day, then any payment required to be made on that date must be made on the next
business day (and so long as the payment is made on the next business day,
without any interest or other payment on account of any such delay), except
that if the next business day is in the next calendar year, the payment or
settlement will be made on the prior business day with the same force and
effect as if made on the payment date. A "business day" means any day other
than Saturday, Sunday or any other day on which banking institutions and trust
companies in The State of New York or at a place of payment are authorized or
required by law, regulation or executive order to be closed.
If your units are held in certificated form and you fail to surrender the
certificate evidencing your units to the purchase contract agent on the stock
purchase date, the shares of our common stock issuable in settlement of the
related purchase contracts will be registered in the name of the purchase
contract agent. These shares, together with any distributions on them, will be
held by the purchase contract agent as agent for your benefit, until the
certificate is presented and surrendered or you provide satisfactory evidence
that the certificate has been destroyed, lost or stolen, together with any
indemnity that may be required by the purchase contract agent and us.
If your units are held in certificated form and (1) the purchase contracts
have terminated prior to the stock purchase date, (2) the related pledged
securities have been transferred to the purchase contract agent for
distribution to the holders and (3) you fail to surrender the certificate
evidencing your units to the purchase contract agent, the pledged securities
that would otherwise be delivered to you and any related payments will be held
by the purchase contract agent as agent for your benefit, until you present and
surrender the certificate or provide the evidence and indemnity described above.
The purchase agent will not be required to invest or to pay interest on any
amounts held by it before distribution.
No service charge will be made for any registration of transfer or exchange
of the units, except for any applicable tax or other governmental charge.
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Modification
The purchase contract agreement, the pledge agreement and the purchase
contracts may be amended with the consent of the holders of a majority of the
units at the time outstanding. However, no modification may, without the
consent of the holder of each outstanding unit affected by the modification:
. change any payment date;
. change the amount or type of pledged securities required to be pledged
to secure obligations under the units, impair the right of the holder of
any units to receive distributions on the pledged securities underlying
the units or otherwise adversely affect the holder's rights in or to the
pledged securities;
. change the place or currency of payment for any amounts payable in
respect of the units, increase any amounts payable by holders in respect
of the units or decrease any other amounts receivable by holders in
respect of the units;
. reduce any contract adjustment payment or change the place or currency
of that payment;
. impair the right to institute suit for the enforcement of any purchase
contract;
. reduce the number of shares of common stock purchasable under any
purchase contract, increase the price to purchase shares of common stock
on settlement of any purchase contract, change the stock purchase date
or otherwise adversely affect the holder's rights under any purchase
contract; or
. reduce the above stated percentage of outstanding units the consent of
whose holders is required for the modifications or amendment of the
provisions of the purchase contract agreement, the pledge agreement or
the purchase contracts.
Consolidation, Merger, Sale or Conveyance
We will agree in the purchase contract agreement that we will not (1) merge
with or into or consolidate with any other entity or (2) sell, assign,
transfer, lease or convey all or substantially all of our properties and assets
to any person, firm or corporation other than, with respect to clause (2), a
direct or indirect wholly-owned subsidiary of Northrop Grumman, unless:
. we are the continuing corporation or the successor corporation is a
corporation organized under the laws of the United States of America or
any state or the District of Columbia;
. the successor entity expressly assumes its obligations under the
purchase agreement, the pledge agreement, the purchase contracts and the
remarketing agreement; and
. we or such corporation is not, immediately after such merger,
consolidation, sale, assignment, transfer, lease or conveyance, in
default in the performance of any of our or its obligations under the
purchase contract agreement, the pledge agreement, the purchase
contracts or the remarketing agreement.
Title
We, the purchase contract agent and the collateral agent may treat the
registered holder of any units as the absolute owner of those units for the
purpose of making payment and settling the related purchase contracts and for
all other purposes.
Governing Law
The purchase contract agreement, the pledge agreement and the purchase
contracts will be governed by, and construed in accordance with, the laws of
the State of New York.
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Book-Entry System
DTC will act as securities depositary for the units. The units will be
issued only as fully-registered securities registered in the name of Cede &
Co., DTC's nominee. One or more fully-registered global security certificates,
representing the total aggregate number of units, will be issued and deposited
with DTC and will bear a legend regarding the restrictions on exchanges and
registration of transfer referred to below.
The laws of some jurisdictions require that some purchasers of securities
take physical delivery of securities in definitive form. Those laws may impair
the ability to transfer beneficial interests in the units so long as the units
are represented by global security certificates.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934.
DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions,
including transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thus eliminating the
need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc., collectively referred to as
participants. Access to the DTC system is also available to others, including
securities brokers and dealers, bank and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a direct participant either directly or indirectly, collectively referred
to as indirect participants. The rules applicable to DTC and its participants
are on file with the SEC.
No units represented by global security certificates may be exchanged in
whole or in part for certificated units registered, and no transfer of global
security certificates will be made in whole or in part for certificated units
registered, and no transfer of global security certificates in whole or part
may be registered, in the name of any person other than DTC or any nominee of
DTC, unless, however, DTC has notified us that it is unwilling or unable to
continue as depositary for the global security certificates and no successor
depositary has been appointed within 90 days after this notice, has ceased to
be qualified to act as required by the purchase contract agreement and no
successor depositary has been appointed within 90 days after we learn that DTC
is no longer qualified or we determine that we will no longer have debt
securities represented by global securities or permit any of the global
securities certificates to be exchangeable or there is a continuing default by
us in respect of our obligations under one or more purchase contracts, the
indenture, the purchase contract agreement, the senior notes, the units, the
pledge agreement or any other principal agreements or instruments executed in
connection with this offering. All units represented by one or more global
security certificates or any portion of them will be registered in those names
as DTC may direct.
As long as DTC or its nominee is the registered owner of the global security
certificates, DTC or that nominee will be considered the sole owner and holder
of the global security certificates and all units represented by those
certificates for all purposes under the units and the purchase contract
agreement. Except in the limited circumstances referred to above, owners of
beneficial interests in global security certificates will not be entitled to
have the global security certificates or the units represented by those
certificates registered in their names, will not receive or be entitled to
receive physical delivery of units certificates in exchange and will not be
considered to be owners or holders of the global security certificates or any
units represented by those certificates for any purpose under the units or the
purchase contract agreement. All payments on the units represented by the
global security certificates and all related transfers and deliveries of senior
notes, treasury securities and common stock will be made to DTC or its nominee
as their holder.
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Ownership of beneficial interests in the global security certificates will
be limited to participants or persons that may hold beneficial interests
through institutions that have accounts with DTC or its nominee. Ownership of
beneficial interests in global security certificates will be shown only on, and
the transfer of those ownership interests will be effected only through,
records maintained by DTC or its nominee with respect to participants'
interests or by the participant with respect to interests of persons held by
the participants on their behalf.
Procedures for settlement of purchase contracts on the stock purchase date
or upon early settlement will be governed by arrangements among DTC,
participants and persons that may hold beneficial interests through
participants designed to permit the settlement without the physical movement of
certificates. Payments, transfers, deliveries, exchange and other matters
relating to beneficial interests in global security certificates may be subject
to various policies and procedures adopted by DTC from time to time.
Neither we or any of our agents, nor the purchase contract agent or any of
its agents, will have any responsibility or liability for any aspect of DTC's
or any participant's records relating to, or for payments made on account of,
beneficial interests in global security certificates, or for maintaining,
supervising or reviewing any of DTC's records or any participant's records
relating to those beneficial ownership interests.
The information in this section concerning DTC and its book-entry system has
been obtained from sources that we believe to be reliable, but we do not take
responsibility for its accuracy.
Replacement of Units Certificates
If physical certificates are issued, we will replace any mutilated
certificate at your expense upon surrender of that certificate to the unit
agent. We will replace certificates that become destroyed, lost or stolen at
your expense upon delivery to us and the purchase contract agent of
satisfactory evidence that the certificate has been destroyed, lost or stolen,
together with any indemnity that may be required by the purchase contract agent
and us.
We, however, are not required to issue any certificates representing units
on or after the stock purchase date or after the purchase contracts have
terminated. In place of the delivery of a replacement certificate following the
stock purchase date, the purchase contract agent, upon delivery of the evidence
and indemnity described above, will deliver the shares of our common stock
issuable pursuant to the purchase contracts included in the units evidenced by
the certificate, or, if the purchase contracts have terminated prior to the
stock purchase date, transfer the pledged securities related to the units
evidenced by the certificate.
Information Concerning the Purchase Contract Agent
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) will
initially act as purchase contract agent. The purchase contract agent will act
as the agent and attorney-in-fact for the holders of units from time to time.
The purchase contract agreement will not obligate the purchase contract agent
to exercise any discretionary authority in connection with a default under the
terms of the purchase contract agreement, the pledge agreement and the purchase
contracts, or the pledged securities.
The purchase contract agreement will contain provisions limiting the
liability of the purchase contract agent. The purchase contract agreement will
contain provisions under which the purchase contract agent may resign or be
replaced. Resignation or replacement of the purchase contract agent would be
effective upon the appointment of a successor.
The purchase contract agent is one of a number of banks with which we and
our subsidiaries maintain ordinary banking and trust relationships.
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Information Concerning the Collateral Agent
The Bank of New York will initially act as collateral agent. The collateral
agent will act solely as our agent and will not assume any obligation or
relationship of agency or trust for or with any of the holders of the units
except for the obligations owed by a pledgee of property to the owner thereof
under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement will contain provisions under which the
collateral agent may resign or be replaced. Resignation or replacement of the
collateral agent would be effective upon the appointment of a successor.
The collateral agent is one of a number of banks with which we and our
subsidiaries maintain ordinary banking and trust relationships.
Miscellaneous
The purchase contract agreement will provide that we will pay all fees and
expenses related to:
. the offering of the units;
. the retention of the collateral agent;
. the enforcement by the purchase contract agent of the rights of the
holders of the units; and
. with certain exceptions, stock transfer and similar taxes attributable
to the initial issuance and delivery of our common stock upon settlement
of the purchase contracts.
Should you elect to create stripped units or recreate normal units, you will
be responsible for any fees or expenses payable in connection with the
substitution of the applicable pledged securities, as well as any commissions,
fees or other expenses incurred in acquiring the pledged securities to be
substituted, and we will not be responsible for any of those fees or expenses.
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DESCRIPTION OF THE SENIOR NOTES
The senior notes are to be issued under our indenture dated as of November
21, 2001 between Northrop Grumman and JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank), as trustee. A copy of the form of the indenture is
on file with the SEC and may be obtained by accessing the Internet address
provided or contacting us as described under "Where You Can Find More
Information." The following description is qualified in its entirety by
reference to the provisions of the indenture. You should read the indenture
carefully to fully understand the terms of the senior notes.
Unless otherwise indicated, capitalized terms used in the following summary
that are defined in the indenture have the meanings used in the indenture.
General
The senior notes will mature on November 16, 2006 . The senior notes will
initially pay interest at the annual rate of 5.25% on each February 16, May 16,
August 16, and November 16, commencing on February 16, 2002, for quarterly
payments due on or before August 16, 2004 . After that date, if the senior
notes are successfully remarketed, they will pay interest at the reset rate
from that date until they mature on November 16, 2006 . If the remarketing
agent cannot establish a reset rate meeting the requirements described under
"Description of the Equity Security Units--Remarketing," the remarketing agent
will not reset the interest rate on the senior notes and the reset rate will
continue to be the initial annual rate of 5.25%, until the remarketing agent
can establish such a reset rate on a later remarketing date prior to the stock
purchase date. If no remarketing occurs prior to that date, the initial rate
will be the interest rate through maturity of the notes. The senior notes are
not redeemable prior to their stated maturity except as described below.
The amount of interest payable for any period will be computed (1) for any
full quarterly period on the basis of a 360-day year of twelve 30-day months
and (2) for any period shorter than a full quarterly period, on the basis of a
30-day month and, for periods of less than a month, on the basis of the actual
number of days elapsed per 30-day month. If any date on which interest is
payable on the senior notes is not a business day, the payment of the interest
payable on that date will be made on the next day that is a business day,
without any interest or other payment in respect of the delay, except that, if
the business day is in the next calendar year, then the payment will be made on
the immediately preceding business day, in each case with the same force and
effect as if made on the scheduled payment date.
The senior notes will be issued in denominations of $100 and integral
multiples of $100.
The senior notes will not have the benefit of a sinking fund.
Payment of the principal and interest on the senior notes will rank equally
with all of our other unsecured and unsubordinated debt. As of September 30,
2001, there existed approximately $5.3 billion of indebtedness incurred by
subsidiaries, substantially all of which was guaranteed by Northrop Grumman,
which guaranty obligation would have ranked equally with the senior notes and
approximately $350 million of mandatorily redeemable preferred stock that would
have ranked junior to the senior notes.
The indenture does not limit the amount of additional indebtedness that we
or any of our subsidiaries may incur. The senior notes will be the exclusive
obligations of Northrop Grumman. Since our operations are conducted through
subsidiaries, the cash flow and the consequent ability to service debt,
including our senior notes, are partially dependent upon the earnings of our
subsidiaries and the distribution of those earnings to, or upon other payments
of funds by those subsidiaries to, us. The subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due on the senior notes or to make funds available for such
payments, whether by dividends, loans or other payments. In addition, the
payment of dividends and the making of loans and advances to us by our
subsidiaries may be subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries, and are subject to various
business considerations.
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Any right of Northrop Grumman to receive assets of any of its subsidiaries
upon their liquidation or reorganization (and the resulting right of the
holders of the senior notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that Northrop Grumman is itself recognized as
creditor of such subsidiary, in which case our claims would be subordinated to
any security interests in the assets of such subsidiary and any indebtedness of
such subsidiary senior to that held by us.
We may, without the consent of the holders of the senior notes, create and
issue additional notes ranking equally with the senior notes and otherwise
similar in all respects so that such further notes would be consolidated and
form a single series of notes.
Remarketing
The senior notes will be remarketed as described under "Description of the
Equity Security Units--Remarketing."
Optional Remarketing of Senior Notes Which Are Not Included in Normal Units
On or prior to the fourth business day immediately preceding the first day
of a remarketing period, holders of senior notes that are not components of
normal units may elect to have their senior notes remarketed in the same manner
as senior notes that are components of normal units by delivering their senior
notes along with a notice of this election to the collateral agent. The
collateral agent will hold the senior notes in an account separate from the
collateral account in which the pledged securities will be held. Holders of
senior notes electing to have their notes remarketed will also have the right
to withdraw the election on or prior to the fourth business day immediately
preceding the first day of the relevant remarketing period.
Tax Event Redemption
If a tax event occurs and is continuing, we may, at our option, redeem the
senior notes in whole, but not in part, at any time at a price, which we refer
to as the redemption price, equal to, for each senior note, the redemption
amount referred to below plus accrued and unpaid interest, if any, to the date
of redemption. Installments of interest on senior notes which are due and
payable on or prior to a redemption date will be payable to holders of the
senior notes registered as such at the close of business on the relevant record
dates. If, following the settlement of the purchase contracts and following the
occurrence of a tax event, we exercise our option to redeem the senior notes,
the proceeds of the redemption will be payable in cash to the holders of the
senior notes. If the tax event redemption occurs prior to a successful
remarketing of the senior notes, the redemption price for the senior notes
forming part of normal units at the time of the tax event redemption will be
distributed to the collateral agent, who in turn will purchase the applicable
treasury portfolio described below on behalf of the holders of normal units and
remit the remainder of the redemption price, if any, to the purchase contract
agent for payment to the holders. The treasury portfolio will be substituted
for corresponding senior notes and will be pledged to the collateral agent to
secure the obligations of the holders of the normal units to purchase shares of
our common stock under the purchase contracts.
"Tax event" means the receipt by Northrop Grumman of an opinion of
nationally recognized tax counsel experienced in such matters (which may be
Sheppard, Mullin, Richter & Hampton LLP) to the effect that there is more than
an insubstantial risk that interest payable by us on the senior notes on the
next interest payment date would not be deductible, in whole or in part, by us
for United States federal income tax purposes as a result of any amendment to,
change in, or announced proposed change in, the laws, or any regulations
thereunder, of the United States or any political subdivision or taxing
authority thereof or therein affecting taxation, any amendment to or change in
an official interpretation or application of any such law or regulations by any
legislative body, court, governmental agency or regulatory authority or any
official interpretation or pronouncement that provides for a position with
respect to any such laws or regulations that differs from the
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generally accepted position on the date of this prospectus supplement, which
amendment, change, or proposed change is effective or which interpretation or
pronouncement is announced on or after the date of this prospectus supplement.
"Redemption amount" means in the case of a tax event redemption occurring
prior to a successful remarketing of the senior notes, for each senior note the
product of the principal amount of the note and a fraction whose numerator is
the treasury portfolio purchase price and whose denominator is the aggregate
principal amount of senior notes outstanding on the tax event redemption date,
and in the case of a tax event redemption date occurring after a successful
remarketing of the senior notes, the par value of the senior notes.
"Treasury portfolio" shall mean a portfolio of zero-coupon U.S. treasury
securities consisting of principal or interest strips of U.S. treasury
securities that mature on or prior to the stock purchase date in an aggregate
amount equal to the aggregate principal amount of the senior notes outstanding
on the tax event redemption date, and with respect to each scheduled interest
payment date on the senior notes that occurs after the tax event redemption
date and no later than the stock purchase date, interest or principal strips of
U.S. treasury securities that mature on or prior to that interest payment date
in an aggregate amount equal to the aggregate interest payment that would be
due on the aggregate principal amount of the senior notes outstanding on the
tax event redemption date. These treasury securities are non-callable by us.
"Treasury portfolio purchase price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City to the
quotation agent on the third business day immediately preceding the tax event
redemption date for the purchase of the treasury portfolio for settlement on
the tax event redemption date.
"Quotation agent" means J.P. Morgan Securities Inc. or Salomon Smith Barney
Inc., or a successor of either or any other primary U.S. government securities
dealer in New York City selected by us.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of senior notes to
be redeemed at its registered address. Unless we default in payment of the
redemption price, on and after the redemption date interest shall cease to
accrue on the senior notes. In the event any notes are called for redemption,
neither we nor the trustee will be required to register the transfer of or
exchange the notes to be redeemed.
Book-Entry and Settlement
Senior notes that are released from the pledge following substitution or
early settlement will be issued in the form of one or more global certificates,
which we refer to as global securities, registered in the name of DTC or its
nominee. Except as provided below and except upon recreation of normal units,
owners of beneficial interests in such a global security will not be entitled
to receive physical delivery of notes in certificated form and will not be
considered the holders (as defined in the indenture) thereof for any purpose
under the indenture, and no global security representing notes shall be
exchangeable, except for another global security of like denomination and tenor
to be registered in the name of DTC or its nominee or a successor depositary or
its nominee. Accordingly, each beneficial owner must rely on the procedures of
DTC or if such person is not a participant, on the procedures of the
participant through which such person owns its interest to exercise any rights
of a holder under the indenture.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of the securities in certificated form. These
laws may impair the ability to transfer beneficial interests in such a global
security.
In the event that
. DTC notifies us that it is unwilling or unable to continue as a
depositary for the global security certificates and no successor
depositary has been appointed within 90 days after this notice, or
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. DTC at any time ceases to be a clearing agency registered under the
Securities Exchange Act at which time DTC is required to be so
registered to act as depositary and no successor depositary has been
appointed within 90 days after we learn that DTC has ceased to be so
registered, or
. we determine in our sole discretion that we will no longer have debt
securities represented by global securities or permit any of the global
security certificates to be exchangeable or an event of default under
the indenture has occurred and is continuing,
certificates for the notes will be printed and delivered in exchange for
beneficial interests in the global security certificates. Any global note that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
note certificates registered in the names directed by DTC. We expect that these
instructions will be based upon directions received by DTC from its
participants with respect to ownership of beneficial interests in the global
security certificates.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the principal U.S. federal income tax
consequences of the purchase, ownership and disposition of the units, the
senior notes, treasury securities and purchase contracts that are or may be the
components of a unit, and shares of our common stock acquired under a purchase
contract to U.S. holders of units who purchase units in the initial offering at
their original offering price and hold the units, senior notes, treasury
securities, purchase contracts and shares of our common stock as capital
assets. This discussion is based upon the Internal Revenue Code of 1986 as
amended (the "Code"), treasury regulations (including proposed treasury
regulations) issued thereunder, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject
to change, possibly with retroactive effect.
This discussion does not address all aspects of U.S. federal income taxation
that may be relevant to U.S. holders in light of their particular
circumstances, such as holders who are subject to special tax treatment (for
example, (1) banks, regulated investment companies, insurance companies,
dealers in securities or currencies or tax-exempt organizations, (2) persons
holding units, senior notes or shares of common stock as part of a straddle,
hedge, conversion transaction or other integrated investment, or (3) persons
whose functional currency is not the U.S. dollar), some of which may be subject
to special rules, nor does it address alternative minimum taxes or state, local
or foreign taxes.
No statutory, administrative or judicial authority directly addresses the
treatment of units or instruments similar to units for U.S. federal income tax
purposes. As a result, no assurance can be given that the IRS or a court will
agree with the tax consequences described herein. Prospective investors are
urged to consult their own tax advisors with respect to the U.S. federal income
tax consequences of the purchase, ownership and disposition of units, senior
notes and shares of common stock acquired under a purchase contract in light of
their own particular circumstances, as well as the effect of any state, local
or foreign tax laws.
Consequences to U.S. Holders
The following is a discussion of U.S. federal income tax considerations
relevant to a "U.S. holder" of units. For purposes of this discussion, the term
U.S. holder means an individual who is a citizen or resident of the United
States, a U.S. domestic corporation or any other entity or person generally
subject to U.S. federal income tax on a net income basis.
Normal Units
Allocation of Purchase Price. A U.S. holder's acquisition of a normal unit
will be treated as an acquisition of the senior note and the purchase contract
constituting the unit for U.S. federal income tax purposes. The purchase price
of each unit will be allocated among the senior note and the purchase contract
constituting the
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unit, in proportion to their respective fair market values at the time of
purchase. Such allocation will establish the U.S. holder's initial tax basis in
the senior note and the purchase contract. We expect to report the fair market
value of each senior note as $100.00 and the fair market value of each purchase
contract as $0.00. This position will be binding on each U.S. holder (but not
on the IRS) unless such U.S. holder explicitly discloses a contrary position on
a statement attached to such U.S. holder's timely filed U.S. federal income tax
returns for the taxable year in which a unit is acquired. Thus, absent such
disclosure, a U.S. holder should allocate the purchase price for a unit in
accordance with the values reported by us. The remainder of this discussion
assumes that this allocation of the purchase price of a unit will be respected
for U.S. federal income tax purposes.
Ownership of Senior Notes or Treasury Securities. For U.S. federal income
tax purposes, a U.S. holder will be treated as owning the senior notes or
treasury securities constituting a part of the units owned. We (under the terms
of the units) and each U.S. holder (by acquiring units) agree to treat the
senior notes or treasury securities constituting a part of the units as owned
by such U.S. holder for all tax purposes, and the remainder of this summary
assumes such treatment. The U.S. federal income tax consequences of owning the
senior notes or treasury securities are discussed below (see "--Senior Notes,"
"--Stripped Units" and "--Treasury Securities Purchased on Remarketing").
Sales, Exchanges or Other Taxable Dispositions of Units. If a U.S. holder
sells, exchanges or otherwise disposes of units in a taxable disposition, such
U.S. holder will be treated as having sold, exchanged or disposed of each of
the purchase contract and the senior note (or treasury securities) that
constitute such unit. The proceeds realized on such disposition will be
allocated among the purchase contract and the senior note (or treasury
securities) in proportion to their respective fair market values. As a result,
as to each of the purchase contract and the senior note (or treasury
securities), a U.S. holder generally will recognize gain or loss equal to the
difference between the portion of the proceeds received by such U.S. holder
that is allocable to the purchase contract and the senior note (or treasury
securities) and such U.S. holder's adjusted tax basis in the purchase contract
and the senior note (or treasury securities), except that amounts received by a
taxpayer who uses a cash method of tax accounting with respect to accrued but
unpaid interest on treasury securities will be treated as ordinary interest
income to the extent not previously taken into income. For treatment of amounts
received with respect to contract adjustment payments or deferred contract
adjustment payments, see "--Purchase Contracts--Contract Adjustment Payments
and Deferred Contract Adjustment Payments" below.
In the case of the purchase contract and the treasury securities, such gain
or loss generally will be capital gain or loss. Such gain or loss generally
will be long-term capital gain or loss if the U.S. holder held the units (or,
in the case of the treasury securities, the treasury security) for more than
one year immediately prior to such disposition. Long-term capital gains of
individuals are eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations. The rules governing the determination
of the character of gain or loss on the disposition of a senior note are
summarized under "--Senior Notes--Sales, Exchanges, Remarketing or Other
Taxable Dispositions of Senior Notes." Because gain or loss on disposition of a
senior note may be treated as ordinary income or loss, disposition of a unit
consisting of a purchase contract and a senior note may give rise to capital
gain or loss on the purchase contract and ordinary income or loss on the senior
note, which must be reported separately for U.S. federal income tax purposes.
If the sale, exchange or other disposition of a unit occurs when the
purchase contract has a negative value, a U.S. holder should be considered to
have received additional consideration for the senior note (or treasury
securities) in an amount equal to such negative value and to have paid such
amount to be released from such U.S. holder's obligations under the related
purchase contract. Because, as discussed below, any gain on the disposition of
a senior note prior to the purchase contract settlement date generally will be
treated as ordinary interest income for U.S. federal income tax purposes, the
ability to offset such interest income with a loss on the purchase contract may
be limited. U.S. holders should consult their tax advisors regarding a
disposition of a unit at a time when the purchase contract has a negative value.
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Senior Notes
Classification of the Senior Notes. In connection with the issuance of the
senior notes, our counsel, Sheppard, Mullin, Richter & Hampton LLP, is of the
opinion that, under current law, and based on certain representations, facts
and assumptions set forth in the opinion, the senior notes will be classified
as indebtedness for U.S. federal income tax purposes. We (under the terms of
the senior notes) and each U.S. holder (by acquiring senior notes) agree to
treat the senior notes as our indebtedness for all tax purposes.
Original Issue Discount. Because of the manner in which the interest rates
on the senior notes are reset, the senior notes will be classified as
contingent payment debt instruments subject to the "noncontingent bond method"
for accruing original issue discount, as set forth in the applicable Treasury
Regulations.
As discussed more fully below, the effects of applying such method will be
(1) to require each U.S. holder, regardless of such holder's usual method of
tax accounting, to use an accrual method with respect to the interest income on
senior notes, (2) to require each U.S. holder to accrue interest income in
excess of interest payments actually received for all accrual periods through
August 16, 2004, and possibly for accrual periods thereafter, and (3) generally
to result in ordinary, rather than capital, treatment of any gain or loss on
the sale, exchange or other disposition of senior notes. (See "--Sales,
Exchanges, Remarketing or Other Taxable Dispositions of Senior Notes" below.)
A U.S. holder will be required to accrue original issue discount on a
constant yield to maturity basis based on the "comparable yield" of the senior
notes. The comparable yield of the senior notes generally will be the rate at
which we would issue a fixed rate noncontingent debt instrument with terms and
conditions similar to the senior notes. We have determined that the comparable
yield is 6.0% and the projected payments are $1.24 on February 16, 2002, $1.31
for each subsequent quarter ending on or prior to August 16, 2004 and $1.76 for
each quarter ending after August 16, 2004. We have also determined that the
projected payment for the senior notes, per $100 of principal amount, at the
maturity date is $101.76 (which includes the stated principal amount of the
senior notes as well as the final projected interest payment).
The amount of original issue discount on a senior note for each accrual
period is determined by multiplying the comparable yield of the senior note
(adjusted for the length of the accrual period) by the senior note's adjusted
issue price at the beginning of the accrual period. Based on the allocation of
the purchase price of each unit described above (see "--Normal
Units--Allocation of Purchase Price"), the adjusted issue price of each senior
note, per $100 of principal amount, at the beginning of the first accrual
period will be $100, and the adjusted issue price of each senior note at the
beginning of each subsequent accrual period will be equal to $100, increased by
any original issue discount previously accrued by such U.S. holder on such
senior note and decreased by the amount of projected payments on such senior
note through such date. The amount of original issue discount so determined
will then be allocated on a ratable basis to each day in the accrual period
that such U.S. holder holds the senior note.
If after the date on which the interest rate on the senior notes is reset,
the remaining amounts of principal and interest payable differ from the
payments set forth on the applicable projected payment schedule, negative or
positive adjustments reflecting such difference should generally be taken into
account by such U.S. holder as adjustments to interest income in a reasonable
manner over the period to which they relate. We expect to account for any such
difference with respect to a period as an adjustment for that period.
A U.S. holder is generally bound by the comparable yield and projected
payment schedule provided by us under the terms of the units. The comparable
yield and projected payment schedules are supplied by us solely for computing
income under the noncontingent bond method for U.S. federal income tax purposes
and do not constitute projections or representations as to the amounts that
such U.S. holder will actually receive as a result of owning senior notes or
units.
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Tax Basis in Senior Notes. A U.S. holder's tax basis in a senior note will
be equal to the portion of the purchase price for the units allocated to the
senior notes as described above (see "--Normal Units--Allocation of Purchase
Price"), increased by the amount of original issue discount included in income
with respect to the senior note and decreased by the amount of projected
payments with respect to the senior note through the computation date.
Sales, Exchanges, Remarketing or Other Taxable Dispositions of Senior Notes.
A U.S. holder will recognize gain or loss on a disposition of senior notes
(including a redemption for cash or upon the remarketing thereof) in an amount
equal to the difference between the amount realized by such U.S. holder on the
disposition of the senior notes and such U.S. holder's adjusted tax basis in
such senior notes. Selling expenses incurred by such U.S. holder, including the
remarketing fee, will reduce the amount of gain or increase the amount of loss
recognized by such U.S. holder upon a disposition of senior notes. Gain
recognized on the disposition of a senior note prior to the date on which the
interest rate on the senior notes is reset will be treated as ordinary interest
income. Loss recognized on the disposition of a senior note prior to the
interest rate reset date will be treated as ordinary loss to the extent of such
U.S. holder's prior inclusions of original issue discount on the senior note
reduced by coupon payments received. Any loss in excess of such amount will be
treated as a capital loss. In general, gain recognized on the disposition of a
senior note on or after the interest rate reset date will be ordinary interest
income to the extent attributable to the excess, if any, of the total remaining
principal and interest payments due on the senior note over the total remaining
payments set forth on the projected payment schedule for the senior note. Any
gain recognized in excess of such amount and any loss recognized on such a
disposition will generally be treated as a capital gain or loss. Long-term
capital gains of individuals are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations.
Purchase Contracts
Acquisition of our Common Stock Under a Purchase Contract. A U.S. holder
generally will not recognize gain or loss on the purchase of our common stock
under a purchase contract, except with respect to any cash paid to a U.S.
holder in lieu of a fractional share of our common stock, which should be
treated as paid in exchange for such fractional share. A U.S. holder's
aggregate initial tax basis in the common stock received under a purchase
contract should generally equal the purchase price paid for such common stock,
plus the properly allocable portion of such U.S. holder's adjusted tax basis
(if any) in the purchase contract (see "--Normal Units --Allocation of Purchase
Price"), less the portion of such purchase price and adjusted tax basis
allocable to the fractional share. The holding period for our common stock
received under a purchase contract will commence on the day following the
acquisition of such common stock.
Early Settlement of Purchase Contract. The purchase of our common stock on
early settlement of a purchase contract will be taxed as described above. A
U.S. holder of units will not recognize gain or loss on the return of such U.S.
holder's proportionate share of senior notes or treasury securities upon early
settlement of a purchase contract and will have the same adjusted tax basis and
holding period in such senior notes or treasury securities as before such early
settlement.
Termination of Purchase Contract. If a purchase contract terminates, a U.S.
holder of units will recognize a loss equal to such U.S. holder's adjusted tax
basis (if any) in the purchase contract at the time of such termination. Any
such loss will be capital. The deductibility of capital losses is subject to
limitations. A U.S. holder will not recognize gain or loss on the return of
such U.S. holder's proportionate share of senior notes or treasury securities
upon termination of the purchase contract and such U.S. holder will have the
same adjusted tax basis and holding period in such senior notes or treasury
securities as before such termination.
Adjustment to Settlement Rate. A U.S. holder of units might be treated as
receiving a constructive dividend distribution from us if (1) the settlement
rate is adjusted and as a result of such adjustment such U.S. holder's
proportionate interest in our assets or earnings and profits is increased and
(2) the adjustment is not made pursuant to a bona fide, reasonable
anti-dilution formula. An adjustment in the settlement rate would not be
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considered made pursuant to such a formula if the adjustment were made to
compensate a U.S. holder for certain taxable distributions with respect to the
common stock. Thus, under certain circumstances, an increase in the settlement
rate might give rise to a taxable dividend to a U.S. holder of units even
though such U.S. holder would not receive any cash related thereto.
Contract Adjustment Payments and Deferred Contract Adjustment Payments.
There is no direct authority addressing the treatment, under current law, of
the contract adjustment payments or deferred contract adjustment payments, and
such treatment is, therefore, unclear. Contract adjustment payments and
deferred contract adjustment payments may constitute taxable ordinary income to
a U.S. holder when received or accrued, in accordance with such U.S. holder's
regular method of tax accounting. We intend to file information returns that
report contract adjustment payments and deferred contract adjustment payments
as taxable ordinary income to U.S. holders. U.S. holders should consult their
tax advisors concerning the treatment of contract adjustment payments and
deferred contract adjustment payments, including the possibility that any
contract adjustment payment or deferred contract adjustment payment may be
treated as a loan, purchase price adjustment, rebate or payment analogous to an
option premium, rather than being includible in income on a current basis.
The treatment of contract adjustment payments and deferred contract
adjustment payments could affect a U.S. holder's adjusted tax basis in a
purchase contract or shares of our common stock received under a purchase
contract or the amount realized by a U.S. holder upon the sale or disposition
of a unit or the termination of a purchase contract. In particular,
. amounts received on sale or disposition of a unit or on termination of a
purchase contract with respect to any accrued but unpaid contract
adjustment payments or deferred contract adjustment payments that have
not been included in a U.S. holder's income may be treated as ordinary
income
. any contract adjustment payments or deferred contract adjustment
payments that have been included in a U.S. holder's income, but that
have not been paid to such U.S. holder, should increase such U.S.
holder's adjusted tax basis in the purchase contract
. any contract adjustment payments or deferred contract adjustment
payments that have been paid to a U.S. holder, but that have not been
included in such U.S. holder's income, should either reduce such U.S.
holder's adjusted tax basis in the purchase contract or result in an
increase in the amount realized on termination or disposition of the
purchase contract.
Common Stock
Any distribution on our common stock paid by us out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes) will constitute a dividend and will be includible in income by a U.S.
holder when received. Any such dividend will be eligible for the dividends
received deduction if the U.S. holder is an otherwise qualifying corporate
holder that meets the holding period and other requirements for the dividends
received deduction.
Upon a disposition of our common stock, a U.S. holder will recognize capital
gain or loss in an amount equal to the difference between the amount realized
and such U.S. holder's adjusted tax basis in our common stock (see "--Purchase
Contracts--Acquisition of our Common Stock Under a Purchase Contract"). Capital
gains of individuals derived in respect of capital assets held for more than
one year are eligible for reduced rates of taxation.
Stripped Units
Substitution of Treasury Securities to Create Stripped Units. A U.S. holder
of normal units who delivers treasury securities to the collateral agent in
substitution for senior notes or other pledged securities generally will not
recognize gain or loss upon the delivery of such treasury securities or the
release of the senior notes or other pledged securities to such U.S. holder.
Such U.S. holder will continue to take into account items of income or
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deduction otherwise includible or deductible, respectively, by such U.S. holder
with respect to such treasury securities and senior notes or other pledged
securities, and the purchase contract will not be affected by such delivery and
release. In general, a U.S. holder will be required for U.S. federal income tax
purposes to recognize original issue discount on the treasury securities, on a
constant yield basis, regardless of your method of accounting, or acquisition
discount on the treasury securities, when it is paid or accrues generally in
accordance with such U.S. holder's normal method of accounting. U.S. holders
should consult their own tax advisors concerning the tax consequences of
purchasing, owning and disposing of the treasury securities so delivered to the
collateral agent.
Substitution of Senior Notes to Recreate Normal Units. A U.S. holder of
stripped units who delivers senior notes to the collateral agent in
substitution for pledged treasury securities generally will not recognize gain
or loss upon the delivery of such senior notes or the release of the pledged
treasury securities to such U.S. holder. Such U.S. holder will continue to take
into account items of income or deduction otherwise includible or deductible,
respectively, by such holder with respect to such pledged treasury securities
and such senior notes. Such U.S. holder's tax basis in the senior notes, the
pledged treasury securities and the purchase contract will not be affected by
such delivery and release. U.S. holders should consult their own advisors
concerning the tax consequences of purchasing, owning and disposing of the
treasury securities so released to them.
Treasury Securities Purchased on Remarketing
A U.S. holder's initial basis in the treasury securities purchased by the
collateral agent in connection with a remarketing will be equal to the amount
paid for the treasury securities.
If a U.S. holder is on the cash method of accounting, it will generally not
include income on these treasury securities until payment is received on them.
If a U.S. holder is on the accrual method of accounting, it will be required to
include acquisition discount in income over the remaining term of the treasury
securities and will increase its basis in the treasury securities by the amount
of acquisition discount included in income.
Backup Withholding Tax and Information Reporting
Unless a U.S. holder is an exempt recipient, such as a corporation, payments
under units, senior notes, purchase contracts, treasury securities or common
stock, the proceeds received with respect to a fractional share of common stock
upon the settlement of a purchase contract, and the proceeds received from the
sale of units, senior notes, purchase contracts, treasury securities or common
stock, may be subject to information reporting and may also be subject to U.S.
federal backup withholding tax if such U.S. holder fails to supply accurate
taxpayer identification numbers or otherwise fails to comply with applicable
U.S. information reporting or certification requirements. The U.S. federal
backup withholding tax rate for 2001 is 30.5% and is scheduled to be reduced
gradually to 28% by the year 2006 for payments made prior to taxable years
beginning after December 31, 2010. Any amounts so withheld will be allowed as a
credit against the U.S. holder's U.S. federal income tax liability. Any amounts
withheld under the backup withholding rules will be allowed as a credit against
your United States federal income tax liability provided the required
information is furnished to the Internal Revenue Service.
Consequences to Non-U.S. Holders
The following discussion is a summary of the principal United States federal
income tax consequences resulting from the purchase, acquisition and ownership
of units by "Non-U.S. holders." For purposes of the discussion under this
heading "Non-U.S. Holders," a "Non-U.S. holder" is a holder of a unit that is
not a U.S. person. A "U.S. person" is a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, an
estate the income of which is subject to U.S. federal income taxation
regardless of its source or a trust if (i) a U.S. court is able to exercise
primary supervision over the trust's administration and (ii) one or more U.S.
persons have the authority to control all of the trust's substantial decisions.
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Current payments and dividends. The payment of interest and amounts
attributable to original issue discount on the senior notes or treasury
securities to a Non-U.S. holder will not be subject to U.S. federal withholding
tax if: (1) in the case of senior notes, the Non-U.S. holder does not actually
or constructively own 10% or more of the total voting power of all of our
voting stock and is not a controlled foreign corporation that is related to us
within the meaning of the Code, and (2) the beneficial owner of the senior note
or treasury securities provides a statement signed under penalties of perjury
that includes its name and address and certifies that it is a Non-U.S. holder
in compliance with applicable requirements (or satisfies certain documentary
evidence requirements for establishing that it is a Non-U.S. holder). If the
foregoing exceptions do not apply, payments on the senior notes (or treasury
securities with an original term longer that 183 days) may be subject to gross
withholding at the rate of 30% (or such lower rate as may be available to a
Non-U.S. holder under an applicable treaty).
Although the treatment of the contract adjustment payments for U.S. federal
income tax purposes is unclear, we will take the view that such payments to
Non-U.S. holders are subject to the 30% U.S. withholding tax and will withhold
accordingly. Non-U.S. holders should consult with their tax advisors regarding
whether such withholdings may be refundable under an applicable treaty or
otherwise.
Dividend payments to Non-U.S. holders in respect of our common stock will be
subject to U.S. withholding tax at a rate of 30% (or such lower rate as may be
available to a Non-U.S. holder under an applicable treaty).
Gain or loss on disposition. A Non-U.S. holder will not be subject to U.S.
federal income tax on gain realized on the sale, exchange, maturity or
redemption of either a normal unit, a stripped unit, a senior note, a purchase
contract, any treasury securities, or any shares of our common stock unless (1)
such gain is effectively connected with the conduct by the holder of a trade or
business in the United States or (2) in the case of gain realized by an
individual holder, the holder is present in the United States for 183 days or
more in the taxable year of the sale and either (A) such gain or income is
attributable to an office or other fixed place of business maintained in the
United States by such holder or (B) such holder has a tax home in the United
States.
Information reporting and backup withholding. In general, backup withholding
and information reporting will not apply to payments made by us or our paying
agents, in their capacities as such, to a Non-U.S. holder if the holder has
provided the required certification that it is a Non-U.S. holder, provided that
neither we nor our paying agent has actual knowledge that the holder is a U.S.
person.
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ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
acquisition, holding and disposition of units (and the securities underlying
such units) by employee benefit plans that are subject to Title I of the U.S.
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), plans,
individual retirement accounts and other arrangements that are subject to
Section 4975 of the Code or provisions under any federal, state, local,
non-U.S. or other laws or regulations that are similar to such provisions of
the Code or ERISA (collectively, "similar laws"), and entities whose underlying
assets are considered to include "plan assets" of such plans, accounts and
arrangements (each, a "plan").
General Fiduciary Matter
ERISA and the Code impose certain duties on persons who are fiduciaries of a
plan subject to Title I of ERISA or Section 4975 of the Code and prohibit
certain transactions involving the assets of a plan and its fiduciaries or
other interested parties. Under ERISA and the Code, any person who exercises
any discretionary authority or control over the administration of such a plan
or the management or disposition of the assets of such plan, or who renders
investment advice for a fee or other compensation to such a plan, is generally
considered to be a fiduciary of the plan.
In considering an investment in the securities of a portion of the assets of
any plan, a fiduciary should determine whether the investment is in accordance
with the documents and instruments governing the plan and the applicable
provisions of ERISA, the Code or any similar law relating to a fiduciary's
duties to the plan including, without limitation, the prudence,
diversification, delegation of control and prohibited transaction provisions of
ERISA, the Code and any other applicable similar laws.
Any insurance company proposing to invest assets of its general account in
the securities should consider the extent that such investment would be subject
to the requirements of ERISA in light of the U.S. Supreme Court's decision in
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank and
under any subsequent legislation or other guidance that has or may become
available relating to that decision, including the enactment of Section 401(c)
of ERISA by the Small Business Job Protection Act of 1996 and the regulations
promulgated thereunder.
Prohibited Transaction Issues
Section 406 of ERISA and Section 4975 of the Code prohibit plans subject to
Title I of ERISA or Section 4975 of the Code from engaging in specified
transactions involving plan assets with persons or entities who are "parties in
interest," within the meaning of ERISA, or "disqualified persons," within the
meaning of Section 4975 of the Code, unless an exemption is available. A party
in interest or disqualified person who engaged in a non-exempt prohibited
transaction may be subject to excise taxes and other penalties and liabilities
under ERISA and the Code. In addition, the fiduciary of the plan that engaged
in such a non-exempt prohibited transaction may be subject to penalties and
liabilities under ERISA and the Code.
If the units are purchased by a plan, the units (and the securities
underlying such units) will be deemed to constitute "plan assets," and the
acquisition, holding and disposition of the units (or the securities underlying
such units) may constitute or result in a direct or indirect prohibited
transaction under Section 406 of ERISA and/or Section 4975 of the Code if (i)
Northrop Grumman is a party in interest or disqualified person with respect to
such plan or (ii) the plan sells or disposes of such units (or the securities
underlying such units) to a counterparty that is a party in interest or
disqualified person with respect to such plan, in each case, unless an
exemption is available. In addition, the disposition of the units (or the
securities underlying such units) to a plan may constitute or result in a
direct or indirect prohibited transaction under Section 406 of ERISA and/or
Section 4975 of the Code if the counterparty to the disposition is a party in
interest or disqualified person with respect to such plan, unless an exemption
is available. In the regard, the U.S. Department of Labor (the "DOL") has
issued prohibited transaction class exemptions, or "PTCEs," that may apply to
these transactions. These class exemptions include,
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without limitation, PTCE 84-14 respecting transactions determined by
independent qualified professional asset managers, PTCE 90-1 respecting
insurance company pooled separate accounts, PTCE 91-38 respecting bank
collective investment trust partnerships, PTCE 95-60 respecting life insurance
company general accounts, PTCE 96-23 respecting transactions determined by
in-house asset managers, and PTCE 75-1 respecting principal transactions by a
broker-dealer, although there can be no assurance that all of the conditions of
any such exemptions will be satisfied.
Accordingly, by its purchase of the units (and the securities underlying
such units), each holder, and the fiduciary of any plan that is a holder, will
be deemed to have represented and warranted on each day from and including the
date of its purchase of the units (and the securities underlying such units)
through and including the date of disposition of the satisfaction of its
obligation under the purchase contract and the disposition of any such unit
(and any security underlying such unit) either (i) that it is not a plan or
(ii) that the acquisition, holding and the disposition of any unit (and any
security underlying such unit) by such holder does not and will not constitute
a prohibited transaction under ERISA or Section 4975 of the Code or other
similar laws unless an exemption is available with respect to such transactions
and the conditions of such exemption have been satisfied.
In addition, no plan will be permitted to participate in the remarketing
program unless and until such plan provides the remarketing agent with
assurances, reasonably satisfactory to the remarketing agent, that such
participation in the remarketing program will not constitute a prohibited
transaction under ERISA or Section 4975 of the Code or other similar laws for
which an exemption is not available.
Any plan or other entity whose assets include plan assets subject to ERISA,
Section 4975 of the Code or substantially similar federal, state or local law
should consult their advisors and/or counsel.
UNDERWRITING
Northrop Grumman and the underwriters named below have entered into an
underwriting agreement with respect to the units. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
units set forth in the following table.
Number of Units
Underwriters ---------------
J.P. Morgan Securities Inc........... 2,400,000
Salomon Smith Barney Inc............. 2,400,000
Goldman, Sachs & Co.................. 300,000
Lehman Brothers Inc.................. 300,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................... 300,000
SG Cowen Securities Corporation...... 300,000
---------
Total............................. 6,000,000
=========
If the underwriters sell more units than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 900,000
units from us to cover such sales. They may exercise that option for 13 days.
If any units are purchased pursuant to this option, the underwriters will
severally purchase units in approximately the same proportion as set forth
above.
The following table summarizes the underwriting discounts and commissions we
will pay.
No Exercise Full Exercise
Paid by Northrop Grumman ----------- -------------
Per Unit........ $ 3.00 $ 3.00
Total........... $18,000,000 $20,700,000
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Units sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus supplement.
Any units sold by the underwriters to securities dealers may be sold at a
discount from the public offering price of up to $1.80 per unit. Any such
securities dealers may resell any units purchased from the underwriters to
certain other brokers or dealers at a discount from the public offering price
of up to $0.10 per unit. If all the units are not sold at the initial offering
price, the underwriters may change the offering price and the other selling
terms.
The underwriters of the concurrent offering of our common stock, which
include the underwriters of this offering, will donate 25,000 of the 8,000,000
shares of common stock they are purchasing from us in the concurrent offering
to the Twin Towers Fund. Each such underwriter's donation will be based on its
proportionate participation in the concurrent offerings.
The units are a new issue of securities with no established trading market.
We have been advised by the underwriters that the underwriters intend to made a
market in the units but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the units.
In connection with this offering, the underwriters may purchase and sell the
units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
units than they are required to purchase in this offering. "Covered" short
sales are sales made in an amount not greater than the underwriters' option to
purchase additional units from us in the offering. The underwriters may close
out any covered short position by either exercising their option to purchase
additional units or purchasing units in the open market. In determining the
source of units to close out the covered short position, the underwriters will
consider, among other things, the price of units available for purchase in the
open market as compared to the price at which they may purchase units through
the overallotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
units in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the units in the open market after pricing that will adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the units while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased the units
sold by or for the account of such underwriter in stabilizing or short-covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the units. As a result, the price of the units may
be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the New York Stock Exchange, in
the over-the-counter market or otherwise.
We and our executive officers and directors have agreed for a period of 90
days from the date of this prospectus supplement, subject to certain
exceptions, not to offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, or file with the SEC a registration statement under the
Securities Act of 1933 relating to, shares of our common stock, securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction that would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of any such securities
or cash, without the prior written consent of J.P. Morgan Securities Inc. and
Salomon Smith Barney Inc. We may take such actions with respect to currently
contemplated issuances of our common stock, issuances of our common stock as
consideration in future acquisitions and transfers of our common stock to
affiliates. Our executive officers and directors may each sell up to 50,000
shares of our common stock during the period beginning on the 30th day after
the date of this prospectus supplement and ending on the 90th day following the
date of this prospectus supplement.
S-64
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
From time to time, the underwriters and certain of their affiliates have
engaged, and may in the future engage, in transactions with, and perform
services for, us and our affiliates in the ordinary course of business.
Concurrently with this offering, we are also offering 8,000,000 shares of our
common stock, with an over-allotment option of 1,200,000 shares, for which the
underwriters of this offering are also acting as underwriters under a separate
underwriting agreement. The two offerings are not conditioned on each other. In
addition, the underwriters, or their affiliates, except for Goldman, Sachs &
Co., Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are lenders under the five-year and the 364-day revolving credit
agreements dated as of March 30, 2001, among us and the lenders listed therein,
borrowings under which will be repaid from the net proceeds of this offering
and the concurrent common stock offering. We estimate, based on information
currently available, that the underwriters and their affiliates will be repaid
approximately $600 million from the application of the net proceeds of the
offerings.
LEGAL MATTERS
Certain legal matters with respect to the offering of the units will be
passed on for us by Sheppard, Mullin, Richter & Hampton LLP, Los Angeles,
California. Certain legal matters with respect to the offering of the units
will be passed upon for the underwriters by Cleary, Gottlieb, Steen & Hamilton,
New York, New York.
EXPERTS
The audited financial statements of Newport News incorporated in this
prospectus supplement by reference from Newport News' Annual Report on Form
10-K for the year ended December 31, 2000 have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are incorporated herein in reliance upon the authority of said
firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
Northrop Grumman and its subsidiaries have filed, and Newport News has
filed, annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any such report, statement or
other information at the SEC's public reference rooms at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may obtain additional
information about the public reference rooms by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a site on the Internet at
http://www.sec.gov that contains reports, proxy statements and other
information regarding issuers that file electronically with the SEC. You may
also read such reports, proxy statements and other documents at the offices of
the New York Stock Exchange at 20 Broad Street, New York, New York 10005.
We are "incorporating by reference" information into this prospectus
supplement. This means that we are disclosing important information to you by
referring you to another document that has been filed separately with the SEC.
The information incorporated by reference is considered to be part of this
prospectus supplement. Information that is filed with the SEC after the date of
this prospectus supplement will automatically modify and supersede the
information included or incorporated by reference in this prospectus supplement
to the extent that the subsequently filed information modifies or supersedes
the existing information. We incorporate by reference our future filings with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934 until we complete this offering.
S-65
The following documents filed with the SEC by Northrop Grumman are hereby
incorporated by reference:
. Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
2001, June 30, 2001 and September 30, 2001;
. Current Reports on Form 8-K and Form 8-K/A filed April 17, 2001 and June
14, 2001, respectively, and Current Report on Form 8-K filed November
14, 2001;
. Form 8-A registering our common stock under the Securities Exchange Act
of 1934, filed on March 28, 2001; and
. Form 8-A registering our Series B preferred stock under the Securities
Exchange Act of 1934, filed on March 7, 2001.
The following document filed with the SEC by Northrop Grumman Systems
Corporation (SEC File Number 2-26850) is hereby incorporated by reference:
. Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000.
The following documents filed with the SEC by Litton Industries, Inc. (SEC
File Number 1-3998) are hereby incorporated by reference:
. Annual Report on Form 10-K for the fiscal year ended July 31, 2000; and
. Quarterly Reports on Form 10-Q for the fiscal quarters ended October 31,
2000 and January 31, 2001.
The following documents filed with the SEC by Newport News (SEC File Number
1-12385) are hereby incorporated by reference:
. Annual Report on Form 10-K for the fiscal year ended December 31, 2000;
. Quarterly Reports on Form 10-Q for the fiscal quarters ended March 18,
2001, June 17, 2001 and September 16, 2001; and
. Current Reports on Form 8-K filed April 25, 2001 and November 8, 2001.
You may request a copy of any of these filings at no cost by writing to or
telephoning us at the following address and telephone number: John H. Mullan,
Corporate Vice President and Secretary, 1840 Century Park East, Los Angeles,
California 90067, telephone (310) 201-3081.
We maintain an Internet site at http://www.northgrum.com. The information
contained at our Internet site is not incorporated by reference in this
prospectus supplement, and you should not consider it a part of this prospectus
supplement.
Any statement made in this prospectus supplement concerning the contents of
any contract, agreement or other document is only a summary of the actual
document. You may obtain a copy of any document summarized in this prospectus
supplement at no cost by writing to or telephoning us at the address and
telephone number given above. Each statement regarding a contract, agreement or
other document is qualified in its entirety by reference to the actual document.
S-66
PROSPECTUS
$2,000,000,000
Northrop Grumman Corporation
Debt Securities
Preferred Stock
Common Stock
Warrants to Purchase Debt Securities
Warrants to Purchase Equity Securities
Stock Purchase Contracts
Stock Purchase Units
You should read this prospectus and any supplement carefully before you
invest.
This prospectus describes debt and equity securities that we may issue and
sell at various times:
. Our prospectus supplements will contain the specific terms of each
issuance of debt or equity securities.
. We can issue debt and equity securities with a total offering price of
up to $2,000,000,000 under this prospectus.
. We may sell the debt and equity securities to or through underwriters,
dealers or agents. We also may sell debt and equity securities directly
to investors.
Our common shares are listed on the New York Stock Exchange and the Pacific
Stock Exchange under the trading symbol "NOC." Our Series B preferred shares
are listed on the New York Stock Exchange under the trading symbol "NOC pb." We
will not sell any of the securities being offered without delivery of the
applicable prospectus supplement describing the method and terms of the
offering of such series of securities being offered. Any common stock sold
pursuant to a prospectus supplement will be listed on the New York Stock
Exchange and the Pacific Stock Exchange, subject to official notice of issuance.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
This prospectus is dated October 26, 2001.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS............................................... 2
WHERE YOU CAN FIND MORE INFORMATION................................. 3
FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS.................... 4
NORTHROP GRUMMAN CORPORATION........................................ 6
USE OF PROCEEDS..................................................... 7
RATIO OF EARNINGS TO FIXED CHARGES.................................. 7
DESCRIPTION OF DEBT SECURITIES...................................... 8
DESCRIPTION OF PREFERRED STOCK...................................... 14
DESCRIPTION OF COMMON STOCK......................................... 19
DESCRIPTION OF WARRANTS............................................. 20
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS 21
PLAN OF DISTRIBUTION................................................ 22
VALIDITY OF THE DEBT AND EQUITY SECURITIES.......................... 23
EXPERTS............................................................. 23
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. Under this shelf registration
process, we may sell any combination of the debt and equity securities
described in this prospectus in one or more offerings for total proceeds of up
to $2,000,000,000. This prospectus provides you with a general description of
the securities we may offer. Each time we sell securities, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. This prospectus supplement may add, update or change information
contained in this prospectus. It is important for you to consider the
information contained in this prospectus and any prospectus supplement together
with additional information described under the heading, "Where You Can Find
More Information."
References to "Northrop Grumman" refer to Northrop Grumman Corporation,
formerly NNG, Inc.; references in this prospectus to "Northrop Systems" refer
to Northrop Grumman Systems Corporation, formerly Northrop Grumman Corporation;
references to "Litton" refer to Litton Industries, Inc. Unless the context
requires otherwise, references to "we," "us" or "our" refer collectively to
Northrop Grumman and its subsidiaries.
You should rely only on the information incorporated by reference or
provided in the prospectus or a prospectus supplement. We have not authorized
anyone else to provide you with different information. Neither we, nor any
other person on behalf of us, are making an offer to sell or soliciting an
offer to buy any of the securities described in this prospectus or in a
prospectus supplement in any state where the offer is not permitted by law. You
should not assume that the information in this prospectus or a prospectus
supplement is accurate as of any date other than the date on the front of the
documents. There may have been changes in our affairs since the date of the
prospectus or a prospectus supplement.
2
WHERE YOU CAN FIND MORE INFORMATION
Northrop Grumman and its subsidiaries Northrop Systems and Litton have filed
annual, quarterly and current reports, proxy statements and other information
with the SEC. Northrop Grumman has succeeded to the filing obligations of
Northrop Systems and all future filings by Northrop Grumman will be on a
consolidated basis with Northrop Systems and Litton. Litton is no longer
obligated to file reports with the SEC. You may read and copy any such report,
statement or other information at the SEC's public reference rooms at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain additional
information about the public reference rooms by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a site on the Internet at
http://www.sec.gov that contains reports, proxy statements and other
information regarding issuers that file electronically with the SEC. You may
also read such reports, proxy statements and other documents at the offices of
the New York Stock Exchange at 20 Broad Street, New York, New York 10005.
We are "incorporating by reference" information into this prospectus. This
means that we are disclosing important information to you by referring you to
another document that has been filed separately with the SEC. The information
incorporated by reference is considered to be part of this prospectus.
Information that is filed with the SEC after the date of this prospectus will
automatically modify and supersede the information included or incorporated by
reference in this prospectus to the extent that the subsequently filed
information modifies or supersedes the existing information. We incorporate by
reference our future filings with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 until we complete this offering.
The following documents filed with the SEC by Northrop Grumman are hereby
incorporated by reference:
. Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30,
2001 and March 31, 2001;
. Current Reports on Form 8-K and Form 8-K/A filed April 17, 2001 and June
14, 2001, respectively;
. Form 8-A registering our common stock under the Securities Exchange Act
of 1934, filed on March 28, 2001; and
. Form 8-A registering our Series B preferred stock under the Securities
Exchange Act of 1934, filed on March 27, 2001.
The following document filed with the SEC by Northrop Systems (SEC File
Number 2-26850) is hereby incorporated by reference:
. Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000.
The following documents filed with the SEC by Litton (SEC File Number
1-3998) are hereby incorporated by reference:
. Annual Report on Form 10-K for the fiscal year ended July 31, 2000; and
. Quarterly Reports on Form 10-Q for the fiscal quarters ended October 31,
2000 and January 31, 2001.
You may request a copy of any of these filings at no cost by writing to or
telephoning us at the following address and telephone number: John H. Mullan,
Corporate Vice President and Secretary, 1840 Century Park East, Los Angeles,
California 90067, telephone (310) 201-3081.
We maintain an Internet site at http://www.northgrum.com. The information
contained at our Internet site is not incorporated by reference in this
prospectus, and you should not consider it a part of this prospectus.
Any statement made in this prospectus concerning the contents of any
contract, agreement or other document is only a summary of the actual document.
You may obtain a copy of any document summarized in this prospectus at no cost
by writing to or telephoning us at the address and telephone number given
above. Each statement regarding a contract, agreement or other document is
qualified in its entirety by reference to the actual document.
3
FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS
Some of the information included in this prospectus and in the documents
incorporated by reference are forward-looking statements within the meaning of
the securities laws. These statements concern our plans, expectations and
objectives for future operations. These include statements and assumptions with
respect to expected future revenues, margins, program performance, earnings and
cash flows, acquisitions of new contracts, the outcome of competitions for new
programs, the outcome of contingencies including litigation and environmental
remediation, the effect of completed and planned acquisitions and divestitures
of businesses or business assets, the anticipated costs of capital investments,
and anticipated industry trends. Our actual results and trends may differ
materially from the information, statements and assumptions as described, and
actual results could be materially less than our planned results.
Important factors that could cause actual results to differ materially from
those suggested by the forward-looking statements include:
. We depend on a limited number of customers. We are heavily dependent on
government contracts many of which are only partially funded; the
termination or failure to fund one or more significant contracts could
have a negative impact on our operations. We are a supplier, either
directly or as a subcontractor or team member, to the U.S. Government
and its agencies as well as foreign governments and agencies. These
contracts are subject to each customers' political and budgetary
constraints, changes in short-range and long-range plans, the timing of
contract awards, the congressional budget authorization and
appropriation processes, the government's ability to terminate contracts
for convenience or for default, as well as other risks such as
contractor debarment in the event of certain violations of legal and
regulatory requirements.
. Many of our contracts are fixed price contracts. While firm, fixed price
contracts allow us to benefit from cost savings, they also expose us to
the risk of cost overruns. If our initial estimates used for calculating
the contract price are incorrect, we can incur losses on those
contracts. In addition, some of our contracts have provisions relating
to cost controls and audit rights and if we fail to meet the terms
specified in those contracts then we may not realize their full
benefits. Our ability to manage costs on these contracts may affect our
financial condition. Lower earnings caused by cost overruns and cost
controls would have an adverse effect on our financial results.
. We are subject to significant competition. Our markets include defense
and commercial areas where we compete with companies of substantial size
and resources. Our success or failure in winning new contracts or follow
on orders for our existing or future products may cause material
fluctuations in our future revenues and operating results.
. Our operations may be subject to events that cause adverse effects on
our ability to meet contract obligations within anticipated cost and
time parameters. We may encounter internal problems and delays in
delivery as a result of issues with respect to design, technology,
licensing and patent rights, labor or materials and components that
prevent us from achieving contract requirements. We may be affected by
delivery or performance issues with key suppliers and subcontractors, as
well as other factors inherent in our businesses which may cause
operating results to be adversely affected. Changes in inventory
requirements or other production cost increases may also have a negative
impact on our operating results.
. We must integrate our acquisitions successfully. Acquiring businesses is
a significant challenge. If we do not execute our acquisition and
integration plans for these businesses in accordance with our strategic
timetable, our operating results may be adversely affected. We acquired
several businesses in 2000 and 2001, including Litton. We believe our
integration processes are well-suited to achieve the anticipated
strategic and operating benefits of these acquisitions, but if we do not
perform our plans as intended, or if we encounter unforeseen problems in
the acquired businesses, or problems in those businesses develop
subsequent to acquisition, our operating results may be adversely
affected. Among the factors that may be involved would be unforeseen
costs and expenses, previously undisclosed
4
liabilities, diversion of management focus, and any effects of complying
with government-imposed organizational conflicts of interest rules as a
result of the acquisitions.
. We rely on continuous innovation. We are dependent upon our ability to
anticipate changing needs for defense products, military and civilian
electronic systems and support, and information technology. Our success
is dependent on designing new products which will respond to such
requirements within customers' price limitations.
. We face significant challenges in the international marketplace. Our
international business is subject to changes in import and export
policies, technology transfer restrictions, limitations imposed by
United States law that are not applicable to our foreign competitors,
and other legal, financial and governmental risks.
. We assume that any divestiture of non-core businesses and assets will be
completed successfully. Our performance may be affected by our inability
to successfully dispose of assets and businesses that do not fit with or
are no longer appropriate to our strategic plan. If any sales of such
businesses or assets can only be made at a loss, our earnings will be
negatively impacted.
. We are subject to environmental and other liabilities. Our performance
may be affected by known environmental risks, pending litigation and
other loss contingencies, if not resolved within the parameters of our
internal plans, and by unanticipated environmental or other liabilities.
. Our pension income may fluctuate. Pension income, a non-cash item which
is included in our earnings, is based on assumptions of market
performance and actual performance may differ. If an event causes us to
revalue our pension income during the calendar year, the portion of our
earnings attributed to pension income could vary significantly.
. Our indebtedness, incurred in connection with the Litton acquisition, is
higher than our indebtedness at December 31, 2000. The increase in debt
will increase demands on our cash resources.
Additional information with respect to risks and uncertainties in our
business is contained in our SEC filings, including, without limitation,
Northrop Systems' Annual Report on Form 10-K/A for the year ended December 31,
2000 and our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2001 and June 30, 2001.
Accordingly, you should not rely on the accuracy of predictions contained in
forward-looking statements. These statements speak only as of the date of this
prospectus, or, in the case of documents incorporated by reference, the date of
those documents. We cannot undertake any obligation to update our
forward-looking statements to reflect events, circumstances, changes in
expectations or the occurrence of unanticipated events occurring after the date
of those statements.
5
NORTHROP GRUMMAN CORPORATION
We are a leading global aerospace and defense company providing products and
services in defense and commercial electronics, systems integration,
information technology and non-nuclear shipbuilding and systems. As a prime
contractor, principal subcontractor, partner, or preferred supplier, we
participate in many high-priority defense and commercial technology programs in
the United States and abroad. We are a holding company formed in connection
with our acquisition of Litton in April 2001. Our principal executive offices
are located at 1840 Century Park East, Los Angeles, California 90067 and our
telephone number is (310) 553-6262.
We are aligned into five business sectors: Integrated Systems, Electronic
Systems, Information Technology, Ship Systems and Component Technologies.
Integrated Systems. This sector includes the design, development and
production of airborne early warning, electronic warfare and surveillance and
battlefield management systems. Integrated Systems is the prime contractor for
the Joint STARS advanced airborne targeting and battle management system, the
U.S. Air Force's B-2 Spirit stealth bomber, unmanned vehicles including The
Global Hawk, and the EA-6B Prowler electronic countermeasures aircraft, and is
upgrading the E-2C Hawkeye early warning aircraft. Integrated Systems also has
a principal role in producing the U.S. Navy's F/A 18 Hornet strike fighter.
Electronic Systems. This sector includes the design, development,
manufacture and integration of a wide variety of defense electronics and
systems, airspace management systems, precision weapons, marine systems,
logistics systems, space systems, and automation and information systems.
Significant programs include fire control radars for the F-16 and F-22 fighter
aircraft and the Longbow Apache helicopter, the AWACS airborne early warning
radar, the Joint STARS air-to-ground surveillance radar sensor, the Longbow
Hellfire missile and the BAT "brilliant" anti-armor submunition. This sector
also provides tactical military radars and country-wide air defense systems,
plus airborne electronic countermeasures systems intended to jam enemy aircraft
and weapons systems. The sector includes our advanced electronics businesses,
which design, develop and manufacture inertial navigation, guidance and
control, IFF (identification friend or foe), and marine electronic systems, and
provide electronic warfare systems and integrate avionics systems and shipboard
information and communication systems. The U.S. Government is a significant
customer.
Information Technology. This sector includes the design, development,
operation and support of computer systems for scientific and management
information. Information Technology has extensive expertise in command,
control, communications, computers, intelligence, surveillance and
reconnaissance (C4ISR). It is a key management support element for major
weapons systems, such as the U.S. Navy's AEGIS class destroyer and also
provides mission planning for the U.S. Navy, Air Force and Special Operations
Command. Information Technology provides base operations support for NASA's
Kennedy Space Center, Cape Canaveral Air Station and Patrick Air Force Base,
among others. In addition, Information Technology provides information
technology services to commercial customers and to our other sectors.
Information Technology includes our information systems businesses, which
design, develop, integrate and support computer-based information systems and
provide information technology and services primarily for government customers.
Ship Systems. This sector is engaged in the building of large multimission
non-nuclear surface ships for the U.S. Navy as well as for other government and
commercial customers worldwide and is a provider of overhaul, repair,
modernization, ship design and engineering services. The U.S. Government is a
significant customer.
Component Technologies. This sector includes international suppliers of
complex backplanes, connectors, laser crystals, solder materials, specialty
products and other electronic components used primarily in the
telecommunications, industrial and computer markets.
6
USE OF PROCEEDS
We will use the net proceeds from the sale of the debt and equity securities
for general corporate purposes. These purposes may include repayment of debt,
working capital needs, capital expenditures, acquisitions and any other general
corporate purpose. If we identify a specific purpose for the net proceeds of an
offering, we will describe that purpose in the applicable prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratios of earnings to fixed charges for
each of the fiscal years ended December 31, 1996 through December 31, 2000 and
for the six months ended June 30, 2000 and June 30, 2001.
Six Months
Ended June 30, Year Ended December 31,
-------------- ------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
2.61 5.34 5.26 3.78 2.11 2.68 2.50
For purposes of computing the ratios of earnings to fixed charges, earnings
represent earnings from continuing operations before income taxes and fixed
charges, and fixed charges consist of interest expense, the portion of rental
expense calculated to be representative of the interest factor, amortization of
discounts and capitalized expenses related to indebtedness, and preferred stock
dividends. The ratios should be read in conjunction with the financial
statements and other financial data included or incorporated by reference in
this prospectus. See "Where You Can Find More Information."
7
DESCRIPTION OF DEBT SECURITIES
As used in this prospectus, "debt securities" means the senior and
subordinated debentures, notes, bonds and other evidences of indebtedness that
we issue and a trustee authenticates and delivers under the applicable
indenture. We will describe the particular terms of any series of debt
securities, and the extent to which the general terms summarized below may
apply, in the prospectus supplement relating to that series.
We will issue senior debt securities and subordinated debt securities under
separate indentures between us and The Chase Manhattan Bank, as trustee. We
have summarized the material provisions of the indentures on the following
pages. We filed the forms of both the senior indenture and the subordinated
indenture as exhibits to this registration statement and you should read the
indentures for provisions that may be important to you. If you would like more
information on these provisions, see "Where You Can Find More Information" on
how to locate the indentures. We refer to the senior indenture and the
subordinated indenture as the "indenture."
If we use another trustee or another indenture for a series of debt
securities, we will provide the details in a prospectus supplement. We will
file the forms of any other indentures with the SEC at the time we use them.
Terms
The indenture provides for the issuance of debt securities in one or more
series. A prospectus supplement relating to a series of debt securities will
include specific terms relating to the offering. These terms will include some
or all of the following:
. the title and type of the debt securities;
. whether the debt securities will be senior or subordinated debt
securities and the terms of the subordination provisions;
. any limit on the total principal amount of the debt securities;
. the person who will receive interest payments on any debt securities if
other than the registered holder;
. the price or prices at which we will sell the debt securities;
. the maturity date or dates of the debt securities;
. the rate or rates, which may be fixed or variable, per annum at which
the debt securities will bear interest and the date from which such
interest will accrue;
. the dates on which interest will be payable and the related record dates;
. whether any index, formula or other method will determine payments of
principal or interest and the manner of determining the amount of such
payments;
. the place or places of payments on the debt securities;
. whether the debt securities are redeemable;
. any redemption dates, prices, obligations and restrictions on the debt
securities;
. any mandatory or optional sinking fund or purchase fund or analogous
provisions;
. the denominations of the debt securities if other than $1,000 or
multiples of $1,000;
. the currency of principal and interest payments if other than US Dollars;
. any provisions granting special rights if certain events happen;
. any deletions from, changes in or additions to the events of default or
the covenants specified in the indenture;
8
. any trustees, authenticating or paying agents, transfer agents,
registrars or other agents for the debt securities if other than The
Chase Manhattan Bank;
. any conversion or exchange features of the debt securities;
. whether we will issue the debt securities as original issue discount
securities for federal income tax purposes;
. any special tax implications of the debt securities;
. the terms of payment upon acceleration; and
. any other material terms of the debt securities.
We may issue debt securities that are convertible into or exchangeable for
our common stock or other securities, or the debt or equity of another company.
If we issue these types of debt securities, we will provide additional
information in a prospectus supplement.
We may sell debt securities at a discount below their stated principal
amount, bearing no interest or interest at a rate that, at the time of
issuance, is different than market rates. When we refer to the principal and
interest on debt securities, we also mean the payment of any additional amounts
that we must pay under the indenture or the debt securities, including amounts
for certain taxes, assessments or other governmental charges which holders of
debt securities must pay.
Denomination, Form, Payment and Transfer
Normally, we will denominate and make payments on debt securities in U.S.
dollars. If we issue debt securities denominated, or with payments, in a
foreign or composite currency, a prospectus supplement will specify the
currency or composite currency.
We may from time to time issue debt securities as registered securities.
This means that holders will be entitled to receive certificates representing
the debt securities registered in their name. You can transfer or exchange debt
securities in registered form without service charge, upon reimbursement of any
taxes or government charges. You can make this transfer or exchange at the
trustee's corporate trust office or at any other office we maintain for such
purposes. If the debt securities are in registered form, we can pay interest by
check mailed to the person in whose name the debt securities are registered on
the days specified in the indenture.
As a general rule, however, we will issue debt securities in book-entry
form. This means that one or more permanent global certificates registered in
the name of a depositary, or a nominee of the depositary, will represent the
debt securities. Only persons who have accounts with depositaries, which are
known as participants, or persons that may hold interests through participants,
can have beneficial ownership interests in global certificates representing a
series of debt securities. The depositary will maintain a computerized
book-entry and transfer system that keeps track of the principal amounts of
debt securities held in the accounts of participants. Participants keep records
of the interests of their clients who have purchased debt securities through
them. Beneficial ownership interests in debt securities issued in book-entry
form may be shown only on, and may be transferred only through, records
maintained by the depositary and its participants. Some states require that
certain purchasers receive securities only in certificate form. These state
laws may limit the ability of beneficial owners to transfer their interests.
The Depository Trust Company, or DTC, frequently acts as the depositary for
debt securities. DTC is owned by a number of its participants and by the NYSE,
AMEX and the NASD. The information below regarding DTC, which DTC provides, is
included informational purposes only. You should not treat it as a
representation, warranty or contract modification of any kind. If we issue the
debt securities of any series in book-entry form and the depositary is someone
other than DTC, we will provide you with additional information in a prospectus
supplement.
9
DTC holds securities that its participants deposit. Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations. DTC's book-entry system is also available to other
organizations such as securities brokers and dealers, banks and trust companies
that work through a participant. DTC electronically records the settlement
among participants of their securities transactions in deposited securities.
Issuers make interest and principal payments to DTC, which in turn credits
payments to participants' accounts according to their beneficial ownership
interests as reflected in DTC's records. In addition, DTC currently assigns any
voting rights to participants by using an omnibus proxy. These payments and
voting rights are governed by the customary practices between the participants
and holders of beneficial interests.
DTC will be the sole owner of the global certificates. We, the trustee and
the paying agent have no responsibility or liability for the records relating
to beneficial ownership interests in the global certificates or for the
payments of principal and interest due for the accounts of beneficial holders
of interests in the global certificates. The global certificates representing a
series of debt securities normally may not be transferred except by DTC to its
nominees or successors in accordance with the indenture. A series of debt
securities represented by global certificates will be exchangeable for debt
securities in registered form with the same terms in authorized denominations
if:
. DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and we do not appoint a successor depositary within 90 days; or
. we decide not to require all of the debt securities of a series to be
represented by global certificates and notify the trustee of that
decision.
Events of Default
Unless we indicate otherwise in a prospectus supplement, the following are
events of default under the indenture with respect to any issued debt
securities:
. failure to pay the principal or any premium on any debt security of that
series when due;
. failure for 30 days to pay interest on any debt security of that series
when due;
. failure to deposit any sinking fund payment on any debt security of that
series when due;
. failure to perform any other covenant in the indenture that continues
for 90 days after we have been given written notice of such failure; or
. the occurrence of certain events in bankruptcy, insolvency or
reorganization.
An event of default for one series of debt securities does not necessarily
constitute an event of default for any other series. The trustee may withhold
notice to the debt securities holders of any default, except a payment default,
if it considers such action to be in the holders' interests.
If an event of default occurs and continues, the trustee, or the holders of
at least 25% in aggregate principal amount of the debt securities of the
series, may declare the entire principal of all the debt securities of that
series to be due and payable immediately. If this happens, under a number of
circumstances, the holders of a majority of the aggregate principal amount of
the debt securities of that series can void the acceleration of payment.
The indenture provides that the trustee has no obligation to exercise any of
its rights at the direction of any holders, unless the holders offer the
trustee reasonable indemnity. If they provide this indemnification, the holders
of a majority in principal amount of any series of debt securities have the
right to direct any proceeding, remedy, or power available to the trustee with
respect to that series.
Subordination
The subordinated debt securities will be subordinated and junior in right of
payment to all our senior indebtedness to the extent set forth in the
applicable prospectus supplement.
10
Conversion Rights
We will describe the terms upon which debt securities may be convertible
into our common stock or other securities in a prospectus supplement. These
terms will include provisions as to whether conversion is mandatory or
optional. They may also include provisions adjusting the number of shares of
our common stock or other securities.
Our Obligations Under the Senior Indenture
Under the senior indenture, we will agree to the following:
Limitations on Liens. The senior indenture restricts our ability to encumber
our assets and the assets of our restricted subsidiaries. If we, or any
restricted subsidiary, pledge or mortgage any of our property to secure any
debt, then we will, unless an exception applies, pledge or mortgage the same
property to the trustee to secure the debt securities for as long as such debt
is secured by such property. Restricted subsidiary means one of our
subsidiaries that has substantially all of its assets located in, or carries on
substantially all of its business in, the United States.
This restriction will not apply in various situations. We may encumber
assets if the encumbrance is a permitted lien, as defined below, without regard
to the amount of debt secured by the encumbrance. We may also encumber assets
if the amount of all debt secured by encumbrances, other than some permitted
encumbrances, does not exceed the greater of $1,000,000,000 or 10% of our
consolidated net tangible assets. Consolidated net tangible assets means our
total assets, including the assets of our subsidiaries, as reflected in our
most recent balance sheet, less current liabilities, goodwill, patents and
trademarks. Permitted liens include:
. liens on a corporation's property, stock or debt at the time it becomes
a restricted subsidiary;
. liens on property at the time we or a restricted subsidiary acquire the
property;
. liens securing debt owing by a restricted subsidiary to us or another
restricted subsidiary;
. liens existing at the time the senior indenture becomes effective;
. liens on property of an entity at the time such entity is merged into or
consolidated with us or a restricted subsidiary or at the time we or a
restricted subsidiary acquire all or substantially all of the assets of
the entity;
. liens in favor of any governmental customer to secure payments or
performance pursuant to any contract or statute, or to secure
indebtedness we incur with respect to the acquisition or construction of
the property subject to the liens, any related indebtedness, or debt
guaranteed by a government or governmental authority; and
. any renewal, extension or replacement for any lien permitted by one of
the exceptions described above.
Limitations on Sale Leaseback Arrangements. Except under various
circumstances, the senior indenture also restricts our ability and the ability
of any restricted subsidiaries to enter into sale-leaseback transactions. Such
an arrangement is permissible if we or our restricted subsidiary would be
permitted to incur indebtedness secured by a principal property at least equal
in amount to the attributable debt with respect to such arrangement.
Sale-leaseback transaction means, subject to some exceptions, an arrangement
pursuant to which we, or a restricted subsidiary, transfer a principal property
to a person and contemporaneously lease it back from that person. Principal
property means, with some exceptions, any manufacturing plant or facility
located in the United States which we or one or more of our restricted
subsidiaries owns, except any plant or facility which our board of directors
determines is not of material importance to our total business. Attributable
debt for a sale and leaseback transaction means the lesser of the fair value of
such property as determined by our board of directors or the present value of
the obligation of the lessee for net rental payments during the remaining term
of the lease.
11
The applicable indenture will not otherwise limit our ability to incur
additional debt, unless we tell you this in a prospectus supplement.
Consolidation, Merger or Sale
We may neither consolidate with nor merge into another corporation nor
transfer all or substantially all of our assets to another corporation unless:
. the successor corporation assumes all of our obligations under the debt
securities and the indenture;
. immediately following the transaction, no event of default and no
circumstances which, after notice or lapse of time or both, would become
an event of default, shall have happened and be continuing; and
. we have delivered to the trustee an officers' certificate and a legal
opinion confirming that we have complied with the indenture.
Defeasance and Covenant Defeasance
Any series of our debt securities is subject to the defeasance and discharge
provisions of the applicable indenture. Under those provisions, we may elect
either:
. to defease and be discharged from any and all our obligations with
respect to those debt securities, except for the rights of holders of
those debt securities to receive payments on the securities solely from
the trust fund established pursuant to the indenture and the obligations
to exchange or register the transfer of the securities, to replace
temporary or mutilated, destroyed, lost or stolen securities, to
maintain an office or agency with respect to the securities and to hold
moneys for payment in trust ("defeasance"); or
. to be released from our obligations with respect to those debt
securities concerning restrictive covenants which are subject to
covenant defeasance, and the occurrence of certain events of default
with respect to those restrictive covenants shall no longer be an event
default ("covenant defeasance").
To invoke defeasance or covenant defeasance with respect to any series of
debt securities, we must irrevocably deposit with the trustee, in trust, money
or U.S. Government obligations, or both, which will provide money in an amount
sufficient to pay all sums due on that series.
As a condition to defeasance or covenant defeasance, we must deliver to the
indenture trustee an opinion of counsel stating that holders of the debt
securities will not recognize gain or loss for federal income tax purposes as a
result of the defeasance or covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if we did not elect the defeasance or covenant
defeasance. We may exercise our defeasance option with respect to the
securities notwithstanding our prior exercise of our covenant defeasance
option. If we exercise our defeasance option, payment of the securities may not
be accelerated by the reference to restrictive covenants which are subject to
covenant defeasance. If we do not comply with our remaining obligations after
exercising our covenant defeasance option and the securities are declared due
and payable because of the occurrence of any event of default, the amount of
money and U.S. Government obligations on deposit in the defeasance trust may be
insufficient to pay amounts due on the securities at the time of the
acceleration. However, we will remain liable for those payments.
Changes to the Indenture
Holders who own more than 50% in principal amount of the debt securities of
a series can agree with us to change the provisions of the indenture relating
to that series. However, no change can affect the payment
12
terms or the percentage required to change other terms without the consent of
all holders of debt securities of the affected series.
We may enter into supplemental indentures for other specified purposes and
to make changes that would not materially adversely affect the holders'
interests, including the creation of any new series of debt securities, without
the consent of any holder of debt securities.
Governing Law
New York law will govern the indentures and the debt securities.
Trustee
The Chase Manhattan Bank will serve as trustee under each indenture. It is
the trustee under the existing senior debt securities indenture of Northrop
Systems. If we use a different trustee for any debt securities, we will let you
know in a prospectus supplement.
13
DESCRIPTION OF PREFERRED STOCK
The following description discusses the general terms of the preferred stock
which we have issued and may issue in the future. Our certificate of
incorporation, the applicable certificate of designation to our certificate of
incorporation and the prospectus supplement will describe the terms of the
related series of preferred stock. We will provide you copies of these
documents upon request.
General. Our certificate of incorporation authorizes our board of directors,
from time to time and without further stockholder action, to provide for the
issuance of up to 10,000,000 shares of preferred stock, par value $1.00 per
share. Our board of directors may authorize the issuance of preferred stock in
one or more series and may fix the relative rights and preferences of the
shares, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges.
There are 3,500,000 shares of Series B preferred stock, par value $1.00 per
share, outstanding as of the date of this prospectus. As of the date of this
prospectus, there is no other series of preferred stock outstanding, and there
are no agreements or understandings for the issuance of any other preferred
stock, except for the issuance of Series A Junior Participating Preferred Stock
in connection with preferred share purchase rights attached to our common
stock. See "Description of Common Stock--Preferred Share Purchase Rights."
The shares of any series of preferred stock will be, when issued, fully paid
and non-assessable and holders of preferred stock will not have preemptive
rights.
Series B Preferred Stock
The following is a summary of the rights, preferences and privileges of our
existing Series B Preferred Stock, as set forth in a Certificate of
Designations, Preferences and Rights of Series B Preferred Stock filed with the
Secretary of State of Delaware. This summary is not a complete description of
such rights, preferences and privileges and the rights of holders of our Series
B preferred stock are governed by the precise language of the certificate of
designations, not this summary.
Conversion. Each share of our Series B preferred stock is convertible, at
any time, at the option of the holder, into the right to receive shares of our
common stock. Initially, each share of Series B preferred stock is convertible
into the right to receive the number of shares of common stock equal to the
liquidation value per share of Series B preferred stock of $100.00 divided by
$109.75.
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 or the sale of
substantially all of our assets; upon the liquidation of Northrop Grumman; upon
the occurrence of certain specified distributions with respect to the common
stock; and upon 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 Series B 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 Series B 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 Series B preferred stock is
then convertible.
Liquidation. In any liquidation of Northrop Grumman, each share of Series B
preferred stock is 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 our capital stock
which is junior to the Series B preferred stock. In any liquidation of Northrop
Grumman, no distribution may be made on any shares of our capital stock ranking
on a parity with the Series B preferred stock as to dividends, redemption
14
payments and rights upon liquidation, dissolution or winding up of Northrop
Grumman, unless the holders of Series B preferred stock participate ratably in
the distribution along with the holders of capital stock ranking on a parity
with the Series B preferred Stock as to such matters.
Reacquired Shares. Any shares of Series B preferred stock converted,
redeemed, purchased or otherwise acquired by us will be retired and canceled.
The reacquired shares will become authorized but unissued shares of Series B
preferred stock, which we may reissue at a later date.
Rank. The Series B 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 Series B
preferred stock which by its terms ranks junior to the Series B preferred
stock. The Series B preferred stock ranks on parity with each other class or
series of preferred stock unless such class or series by its terms ranks senior
to the Series B preferred stock.
Voting Rights. Holders of Series B 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 Series B preferred stock is
required for an amendment of our certificate of incorporation, for a merger or
any other action which would:
. authorize any class or series of stock ranking prior or senior to the
Series B preferred stock as to dividends, redemption payments or rights
upon liquidation, dissolution or winding up;
. adversely alter the preference, special rights or powers given to the
Series B preferred stock; or
. cause or permit the purchase or redemption of less than all of the
Series B preferred stock unless all dividends to which such shares are
entitled have been declared and paid or provided for.
If accrued dividends on the Series B preferred stock are not paid for six
quarterly dividend periods (whether or not consecutive), a majority of the
holders of the Series B 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 our board, the size of our 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 Series B preferred stock are entitled to cumulative
cash dividends, payable quarterly in April, July, October and January of each
year at a dividend rate per share $7.00 per year. 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
Series B preferred stock; and
. the redemption, repurchase or other acquisition for consideration of any
shares of our capital stock ranking junior to the Series B preferred
stock.
Mandatory Redemption for Cash After Twenty Years. We are required to redeem
all of the shares of Series B preferred stock for cash twenty years and one day
from the date of issuance of the Series B preferred stock. The redemption price
per share is equal to the liquidation value of $100.00 per share of Series B
preferred stock plus accrued but unpaid dividends, whether or not declared, to
the mandatory redemption date.
Optional Redemption for Common Stock After Seven Years. We have the option
to redeem shares of the Series B preferred stock in exchange for common stock
at any time after the seventh anniversary of the date of the initial issuance
of the Series B preferred stock. Upon redemption, holders of Series B preferred
stock will receive the number of shares of common stock equal to the
liquidation value of $100.00 per share of Series B preferred stock plus accrued
but unpaid dividends to the redemption date divided by the current market price
of the common stock on the redemption date.
15
Change in Control. Upon a fundamental change in control of Northrop Grumman,
as defined below, holders of Series B preferred stock have the right, which may
be exercised during the period of 20 business days following notice from us, to
exchange their shares of Series B preferred stock for common stock. Each share
of Series B 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 Series B preferred stock, plus accrued but unpaid
dividends to such date by the current market value of the common stock on the
exchange date.
A "fundamental change in control" is defined as any merger, consolidation,
sale of all or substantially all of our 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 our capital
stock or the capital stock of 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 Series B preferred stock
for each share of Series B 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.
Other Series of Preferred Stock
The following description discusses the general terms of preferred stock
which we may issue in the future. You should refer to the prospectus supplement
relating to the class or series of preferred stock being offered for the
specific terms of that class or series, including:
. the title and stated value of the preferred stock being offered;
. the number of shares of preferred stock being offered, their liquidation
preference per share and their purchase price;
. the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculating the payment date(s) applicable to the preferred stock being
offered;
. whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on the preferred stock being
offered shall accumulate;
. the procedures for any auction and remarketing, if any, for the
preferred stock being offered;
. the provisions for a sinking fund, if any, for the preferred stock being
offered;
. the provisions for redemption, if applicable, of the preferred stock
being offered;
. any listing of the preferred stock being offered on any securities
exchange or market;
. the terms and conditions, if applicable, upon which the preferred stock
being offered will be convertible into our common stock, including the
conversion price, or the manner of calculating the conversion price, and
the conversion period;
. the terms and conditions, if applicable, upon which the preferred stock
being offered will be exchangeable into debt or equity securities,
including the exchange price, or the manner of calculating the exchange
price, and the exchange period;
. voting rights, if any, of the preferred stock being offered;
. whether interests in the preferred stock being offered will be
represented by depositary shares;
16
. a discussion of any material and/or special United States federal income
tax considerations applicable to the preferred stock being offered;
. the relative ranking and preferences of the preferred stock being
offered as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of the company;
. any limitations on the issuance of any class or series of preferred
stock ranking senior to or on a parity with the series of preferred
stock being offered as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the company; and
. any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock being offered.
Rank. Unless otherwise specified in the applicable prospectus supplement,
the preferred stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of the company, rank:
(a)senior to all classes or series of our common stock and to all equity
securities the terms of which specifically provide that such equity
securities rank junior to the preferred stock being offered;
(b)junior to all equity securities issued by us the terms of which
specifically provide that such equity securities rank senior to the
preferred stock being offered; and
(c)on a parity with all equity securities issued by us other than those
referred to in clauses (a) and (b) of this subheading.
Distributions. A prospectus supplement will describe the circumstances
relating to distributions on our preferred stock. If our board of directors
approves distributions, holders of our preferred stock of each series will be
entitled to receive distributions out of our assets legally available for
payment to stockholders. These distributions may be cash distributions, or
distributions in kind or in other property. The prospectus supplement will
describe the rates of the distributions and the dates we will make
distributions. Each distribution shall be payable to holders of record on such
record date as shall be fixed by our board of directors. Distributions on any
series of preferred stock, if cumulative, will be cumulative from and after the
date set forth in the applicable prospectus supplement.
Redemption. A prospectus supplement may provide that the preferred stock
will be subject to mandatory redemption or redemption at our option, in whole
or in part. The prospectus supplement will describe the terms, the times and
the redemption prices of the preferred stock.
Liquidation Preference. If we liquidate, dissolve or wind up our affairs,
then, before we make distributions to holders of common stock or any other
class or series of shares of our capital stock ranking junior to the preferred
stock in the distribution of assets, the holders of each series of preferred
stock shall be entitled to receive liquidating distributions out of our assets
legally available for distribution to stockholders. We will make liquidating
distributions in the amount of the liquidation preference set forth in the
applicable prospectus supplement plus an amount equal to all accumulated and
unpaid distributions. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of shares of preferred
stock will have no right or claim to any of our remaining assets.
If we liquidate, dissolve or wind up and we do not have enough legally
available assets to pay the amount of the liquidating distributions on all
outstanding shares of preferred stock and other classes of capital stock
ranking equally with the preferred stock in the distribution of assets, then
the holders of the preferred stock and all other such classes or series of
shares of capital stock shall share ratably in any such distribution of assets
in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
Voting Rights. Holders of preferred stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law, or
as indicated in the applicable prospectus supplement.
17
Under the Delaware General Corporation Law, holders of outstanding shares of
a series of preferred stock would be entitled to vote as a separate class on a
proposed amendment to the terms of that series of preferred stock or our
certificate of incorporation if the amendment would increase or decrease the
par value of that series of preferred stock or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely, in which case the approval of the proposed amendment would require
the affirmative vote of at least a majority of the outstanding shares of that
series of preferred stock.
Conversion Rights. The terms and conditions, if any, upon which any series
of preferred stock is convertible into common stock will be set forth in the
applicable prospectus supplement. These terms will include the following:
. the number of shares of common stock into which the shares of preferred
stock are convertible;
. the conversion price or the manner of calculating the conversion price;
. the conversion date(s) or period(s);
. provisions as to whether conversion will be at the option of the holders
of the preferred stock or at our option; and
. the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of that
series of preferred stock.
Transfer Agent and Registrar. EquiServe Trust Company is the transfer agent
and registrar for our Series B preferred stock. We currently plan to retain
EquiServe Trust Company to serve as the transfer agent and registrar for any
other series of preferred stock that we issue.
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DESCRIPTION OF COMMON STOCK
We have authority to issue 400,000,000 shares of common stock, par value
$1.00 per share. As of September 25, 2001, 85,611,682 shares of common stock
were outstanding. Our common stock is listed on the New York Stock Exchange and
the Pacific Stock Exchange.
Dividends. Dividends may be paid on the common stock and on any class or
series of stock entitled to participate with the common stock as to dividends,
but only when and as declared by our board of directors.
Voting Rights. Each holder of our common stock is entitled to one vote per
share on all matters submitted to a vote of stockholders and does not have
cumulative voting rights for the election of directors.
Liquidation. If we liquidate, holders of common stock are entitled to
receive all remaining assets available for distribution to stockholders after
satisfaction of our liabilities and the preferential rights of any preferred
stock that may be outstanding at that time.
Other Rights. Our outstanding common shares are fully paid and
nonassessable. The holders of our common stock do not have any preemptive,
conversion or redemption rights.
Registrar and Transfer Agent. The registrar and transfer agent for our
common stock is EquiServe Trust Company.
Preferred Share Purchase Rights. We have adopted a rights plan pursuant to
which a preferred share purchase right is attached to each share of our common
stock that is or becomes outstanding prior to October 31, 2008. The rights
become exercisable 10 days after the public announcement that any person or
group has (i) acquired 15% or more of the outstanding shares of our common
stock, or (ii) initiated a tender offer for shares of our common stock, which,
if consummated, would result in any person or group acquiring 15% or more of
the outstanding shares of our common stock. Once exercisable, each right will
entitle the holder to purchase one one-thousandth of a share of our Series A
junior participating preferred stock, par value $1.00 per share, at a price of
$250.00 per one one-thousandth of a share, subject to adjustment.
Alternatively, under certain circumstances involving an acquisition of 15% or
more of our common stock outstanding, each right will entitle its holder to
purchase, at a fifty percent discount, a number of shares of our common stock
having a market value of two times the exercise price of the right. We may (i)
exchange the rights at an exchange ratio of one share of our common stock per
right, and (ii) redeem the rights, at a price of $0.01 per right, at any time
prior to an acquisition of 15% or more of the outstanding shares of our common
stock by any person or group.
Some Important Charter and Statutory Provisions. Our certificate of
incorporation provides for the division of our board of directors into three
classes of directors, each serving staggered, three year terms. Our certificate
of incorporation further provides generally that any alteration, amendment or
repeal of the sections of our certificate of incorporation dealing with the
following subjects requires the approval of the holders of at least 80% of our
outstanding voting power, unless such action is approved by a majority of our
board of directors:
. the election and classification of the board of directors;
. liability of directors; and
. the vote requirements for amendments to our certificate of incorporation,
If any of these changes to our certificate of incorporation are approved by our
board of directors, the approval of a majority of our outstanding voting power
is required to make these changes effective.
These provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of the company.
19
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a Delaware corporation which
has a class of stock which is listed on a national stock exchange or which has
2,000 or more stockholders of record from engaging in a business combination
with an interested stockholder (generally, the beneficial owner of 15% or more
of the corporation's outstanding voting stock) for three years following the
time the stockholder became an interested stockholder, unless, prior to that
time, the corporation's board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder, or if at least two-thirds of the outstanding shares not
owned by that interested stockholder approve the business combination, or if,
upon becoming an interested stockholder, that stockholder owned at least 85% of
the outstanding shares, excluding those held by officers, directors and some
employee stock plans. A "business combination" includes a merger, asset sale,
or other transaction resulting in a financial benefit, other than
proportionately as a stockholder, to the interested stockholder.
DESCRIPTION OF WARRANTS
General. We may issue warrants to purchase our debt or equity securities. We
may issue warrants independently or together with any offered securities and
the warrants may be attached to or separate from those offered securities. We
will issue the warrants under warrant agreements to be entered into between us
and a bank or trust company, as warrant agent, all as described in the
applicable prospectus supplement. The warrant agent will act solely as our
agent in connection with the warrants of the series being offered and will not
assume any obligation or relationship of agency or trust for or with any
holders or beneficial owners of warrants.
The applicable prospectus supplement will describe the following terms,
where applicable, of warrants in respect of which this prospectus is being
delivered:
. the title of the warrants;
. the designation, amount and terms of the securities for which the
warrants are exercisable;
. the designation and terms of the other securities, if any, with which
the warrants are to be issued and the number of warrants issued with
each such security;
. the price or prices at which the warrants will be issued;
. the aggregate number of warrants;
. any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants;
. the price or prices at which the securities purchasable upon exercise of
the warrants may be purchased;
. if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be separately
transferable;
. if applicable, a discussion of the material United States federal income
tax considerations applicable to the exercise of the warrants;
. any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants;
. the date on which the right to exercise the warrants shall commence, and
the date on which the right shall expire;
. the maximum or minimum number of warrants which may be exercised at any
time; and
. information with respect to book-entry procedures, if any.
20
Exercise of Warrants. Each warrant will entitle the holder of warrants to
purchase for cash the amount of debt or equity securities, at the exercise
price as shall be set forth in, or be determinable as set forth in, the
prospectus supplement relating to the warrants. Warrants may be exercised at
any time up to the close of business on the expiration date set forth in the
prospectus supplement relating to the warrants. After the close of business on
the expiration date, unexercised warrants will become void.
Warrants may be exercised as set forth in the prospectus supplement relating
to the warrants. When the warrant holder makes the payment and properly
completes and signs the warrant certificate at the corporate trust office of
the warrant agent or any other office indicated in the prospectus supplement,
we will, as soon as possible, forward the debt or equity securities which the
warrant holder has purchased. If the warrant holder exercises the warrant for
less than all of the warrants represented by the warrant certificates, we will
issue a new warrant certificate for the remaining warrants.
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS
AND STOCK PURCHASE UNITS
We may issue stock purchase contracts, including contracts obligating
holders to purchase from us, and us to sell to the holders, a specified number
of shares of common stock at a future date or dates, which we refer to herein
as "stock purchase contracts." The price per share of common stock and the
number of shares of common stock may be fixed at the time the stock purchase
contracts are issued or may be determined by reference to a specific formula
set forth in the stock purchase contracts. The stock purchase contracts may be
issued separately or as part of units consisting of a stock purchase contract
and debt securities, obligations of third parties, including U.S. treasury
securities, securing the holders' obligations to purchase the common stock
under the stock purchase contracts, which we refer to herein as "stock purchase
units." The stock purchase contracts may require holders to secure their
obligations thereunder in a specified manner. The stock purchase contracts also
may require us to make periodic payments to the holders of the stock purchase
units or vice versa, and such payments may be unsecured or refunded on some
basis.
The applicable prospectus supplement will describe the terms of the stock
purchase contracts or stock purchase units. The description in the prospectus
supplement will not necessarily be complete, and reference will be made to the
stock purchase contracts, and, if applicable, collateral or depositary
arrangements, relating to the stock purchase contracts or stock purchase units.
Material United States federal income tax considerations applicable to the
stock purchase units and the stock purchase contracts will also be discussed in
the applicable prospectus supplement.
21
PLAN OF DISTRIBUTION
We may sell any series of debt or equity securities:
. through underwriters or dealers;
. through agents;
. directly to one or more purchasers; or
. directly to stockholders.
We may effect the distribution of the debt or equity securities from time to
time in one or more transactions either:
. at a fixed price or prices which may be changed;
. at market prices prevailing at the time of sale;
. at prices relating to such prevailing market prices; or
. at negotiated prices.
For each offering of debt or equity securities, the prospectus supplement
will describe the plan of distribution.
If we use underwriters in the sale, they will buy the debt or equity
securities for their own account. The underwriters may then resell the debt or
equity securities in one or more transactions at a fixed public offering price
or at varying prices determined at the time of sale or after the sale. The
obligations of the underwriters to purchase the debt or equity securities will
be subject to various conditions. The underwriters will be obligated to
purchase all the debt or equity securities offered if they purchase any debt or
equity securities. Any initial public offering price and any discounts or
concessions allowed or re-allowed or paid to dealers may be changed from time
to time.
If we use dealers in the sale, we will sell debt or equity securities to
these dealers as principals. The dealers may then resell the debt or equity
securities to the public at varying prices to be determined by these dealers at
the time of resale. If we use agents in the sale, they will use their
reasonable best efforts to solicit purchasers for the period of their
appointment. If we sell directly, no underwriters or agents would be involved.
We are not making an offer of debt or equity securities in any state that does
not permit such an offer.
Underwriters, dealers and agents that participate in the debt or equity
securities distribution may be deemed to be underwriters as defined in the
Securities Act of 1933. Any discounts, commissions, or profit they receive when
they resell the debt or equity securities may be treated as underwriting
discounts and commissions under that Act. We may have agreements with
underwriters, dealers and agents to indemnify them against various civil
liabilities, including certain liabilities under the Securities Act of 1933, or
to contribute with respect to payments that they may be required to make.
We may authorize underwriters, dealers or agents to solicit offers from
institutions whereby the institution contractually agrees to purchase the debt
or equity securities from us on a future date at a specified price. This type
of contract may be made only with institutions that we specifically approve.
These institutions could include banks, insurance companies, pension funds,
investment companies and educational and charitable institutions. The
underwriters, dealers or agents will not be responsible for the validity or
performance of these contracts.
Underwriters, dealers and agents may engage in transactions with us or
perform services for us in the ordinary course of business.
22
VALIDITY OF THE DEBT AND EQUITY SECURITIES
Sheppard, Mullin, Richter & Hampton LLP, Los Angeles, California, will issue
an opinion about the legality of the debt and equity securities for us.
Underwriters, dealers or agents, who we will identify in a prospectus
supplement may have their counsel opine about certain legal matters relating to
the debt and equity securities.
EXPERTS
The consolidated financial statements and related financial statement
schedule incorporated in this prospectus by reference from Northrop Systems'
Annual Report on Form 10-K/A for the year ended December 31, 2000 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
With respect to the unaudited interim financial information of Northrop
Grumman for the periods ended March 31, 2001 and June 30, 2001 and Northrop
Systems for the periods ended March 31, 2000 and June 30, 2000 which is
incorporated herein by reference, Deloitte & Touche LLP have applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their reports included in Northrop Grumman's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June
30, 2001 and incorporated by reference herein, they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act of 1933 for their reports on the unaudited interim financial information
because those reports are not "reports" or a "part" of the registration
statement prepared or certified by an accountant within the meaning of Sections
7 and 11 of the Act.
The consolidated financial statements incorporated in this prospectus by
reference from Litton's Annual Report on Form 10-K for the year ended July 31,
2000 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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6,000,000 Equity Security Units
NORTHROP GRUMMAN CORPORATION
7.25% Equity Security Units
[LOGO] Northrop Grumman
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Joint Bookrunning Managers
JPMorgan
Salomon Smith Barney
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Goldman, Sachs & Co. Lehman Brothers Merrill Lynch & Co. SG Cowen
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