-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G5HFIRiPPehflUZXkHplcP3EATns3j8mmaGJmBB5S/ZML6J8u6Pzc1aUQ7fPVjJB dhOFSuUjuIWIRDFbZgh9yg== 0000950152-99-004597.txt : 19990518 0000950152-99-004597.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950152-99-004597 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRW INC CENTRAL INDEX KEY: 0000100030 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340575430 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02384 FILM NUMBER: 99626434 BUSINESS ADDRESS: STREET 1: 1900 RICHMOND RD CITY: LYNDHURST STATE: OH ZIP: 44124 BUSINESS PHONE: 2162917000 MAIL ADDRESS: STREET 1: 1900 RICHMOND ROAD CITY: LYNDHURST STATE: OH ZIP: 44124 10-Q 1 TRW, INC. 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to______ Commission file number 1-2384 --------- TRW Inc. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0575430 - ---------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1900 Richmond Road, Cleveland, Ohio 44124 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 291-7000 ------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of May 7, 1999, there were 120,365,445 shares of TRW Common Stock, $0.625 par value, outstanding. 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements --------------------
Statements of Earnings (unaudited) TRW Inc. and subsidiaries - ---------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31 In millions except per share data 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Sales $3,097 $3,095 Cost of sales 2,618 2,575 - ---------------------------------------------------------------------------------------------------------------------------- Gross profit 479 520 Administrative and selling expenses 184 199 Research and development expenses 144 121 Purchased in-process research and development 85 - Interest expense 43 38 Other (income)expense-net 16 (42) - ---------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 7 204 Income taxes 35 75 - ---------------------------------------------------------------------------------------------------------------------------- Net earnings(loss) $ (28) $ 129 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OF COMMON STOCK Diluted earnings(loss) per share $ (.24) $ 1.03 Basic earnings(loss) per share $ (.24) $ 1.05 Dividends declared $ .00 $ .00 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Shares used in computing per share amounts Diluted 120.1 126.2 Basic 120.1 122.6 - ----------------------------------------------------------------------------------------------------------------------------
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Balance Sheets (unaudited) TRW Inc. and subsidiaries - ------------------------------------------------------------------------------------------------------------------------------- March 31 December 31 In millions 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 1,058 $ 83 Accounts receivable 2,826 1,721 Inventories 1,123 616 Prepaid expenses 275 104 Net assets of acquired businesses held for sale 739 - Deferred income taxes 326 179 - ------------------------------------------------------------------------------------------------------------------------------- Total current assets 6,347 2,703 Property, plant and equipment-on the basis of cost 7,986 6,604 Less accumulated depreciation and amortization 3,890 3,921 - ------------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment-net 4,096 2,683 Intangible assets Intangibles arising from acquisitions 3,759 850 Other 780 360 - ------------------------------------------------------------------------------------------------------------------------------- 4,539 1,210 Less accumulated amortization 150 143 - ------------------------------------------------------------------------------------------------------------------------------- Total intangible assets-net 4,389 1,067 Investments in affiliated companies 335 243 Long-term deferred income taxes - 33 Other notes and accounts receivable 349 227 Prepaid pension cost 2,198 - Other assets 437 213 - ------------------------------------------------------------------------------------------------------------------------------- $18,151 $ 7,169 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' investment Current liabilities Short-term debt $ 1,837 $ 839 Short-term payable for LucasVarity plc 2,899 - Accounts payable 1,614 964 Current portion of long-term debt 677 30 Other current liabilities 1,890 1,185 - ------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 8,917 3,018 Long-term liabilities 1,764 826 Long-term payable for LucasVarity plc 3,359 - Long-term debt 1,663 1,353 Long-term deferred income taxes 590 - Minority interests in subsidiaries 131 94 Capital stock 75 75 Other capital 459 457 Retained earnings 1,991 2,021 Treasury shares-cost in excess of par value (625) (637) Accumulated other comprehensive income(loss) (173) (38) - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 1,727 1,878 - ------------------------------------------------------------------------------------------------------------------------------- $18,151 $ 7,169 - -------------------------------------------------------------------------------------------------------------------------------
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Statements of Cash Flows (unaudited) TRW Inc. and subsidiaries - ---------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31 In millions 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Operating activities Net earnings(loss) $ (28) $ 129 Adjustments to reconcile net earnings(loss) to net cash provided by operating activities: Purchased in-process research and development 85 - Depreciation and amortization 142 135 Deferred income taxes 2 (68) Other-net (43) 5 Changes in assets and liabilities, net of effects of businesses acquired: Accounts receivable (255) (162) Inventories and prepaid expenses 32 (23) Accounts payable and other accruals (49) (29) Other-net (20) (33) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (134) (46) - ---------------------------------------------------------------------------------------------------------------------------- Investing activities Capital expenditures (111) (140) Purchase of LucasVarity plc shares (519) - Acquisitions, net of cash acquired (36) (228) Other-net - 13 - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (666) (355) - ---------------------------------------------------------------------------------------------------------------------------- Financing activities Increase (decrease) in short-term debt 705 (40) Proceeds from debt in excess of 90 days 524 620 Principal payments on debt in excess of 90 days (180) (110) Reacquisition of common stock - (24) Dividends paid (40) (38) Other-net 1 14 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,010 422 - ---------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (9) 1 - ---------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 201 22 Acquired cash and cash equivalents of LucasVarity 774 - Cash and cash equivalents at beginning of quarter 83 70 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of quarter $1,058 $ 92 - ----------------------------------------------------------------------------------------------------------------------------
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Results by Business Segments (unaudited) TRW Inc. and subsidiaries - ---------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31 In millions 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Sales Automotive $1,965 $1,886 Aerospace & Information Systems 1,132 1,209 - ---------------------------------------------------------------------------------------------------------------------------- Sales $3,097 $3,095 - ---------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes Automotive $ 136 $ 149 Aerospace & Information Systems 99 126 - ---------------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes 235 275 Purchased in-process research and development 85 - Corporate expense and other 89 31 Financing costs 54 40 - ---------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 7 $ 204 - ----------------------------------------------------------------------------------------------------------------------------
4 6 NOTES TO FINANCIAL STATEMENTS (unaudited) Principles of Consolidation - --------------------------- The financial statements include the accounts of the Company and its subsidiaries except for four wholly owned insurance subsidiaries. The insurance subsidiaries and the investments in affiliated companies are accounted for by the equity or cost method as appropriate. The consolidated financial statements reflect the preliminary allocation of the purchase price for LucasVarity plc (LucasVarity), which may be adjusted as further information becomes available, and the consolidated results of LucasVarity's operations and cash flows subsequent to the date of acquisition, March 25, 1999. Acquisition - ----------- On February 6, 1999, TRW commenced an offer for the entire issued share capital of LucasVarity. The offer was declared unconditional in all respects on March 25, 1999. On March 29, 1999, TRW issued notices to those LucasVarity shareholders who had not already accepted the offer, informing them that it intended to exercise its rights under section 429 of the Companies Act of 1985 to acquire compulsorily all LucasVarity shares that had not been acquired in the offer. At midnight on May 10, 1999, TRW compulsorily acquired all shares that had not been acquired in the offer, thereby closing the acquisition of LucasVarity. LucasVarity manufactures and supplies advanced technology systems, products and services in the automotive and aerospace industries. It is a major producer of braking systems, fuel injection systems, electrical and electronic systems and has a significant position in aftermarket operations and services. LucasVarity provides the aerospace industry with high integrity systems in engine controls, electrical power generation and management, flight controls and cargo handling, all backed by a worldwide customer support operation. LucasVarity is headquartered in the U.K. and employs approximately 51,000 employees worldwide. LucasVarity maintains the majority of its operating facilities in Europe and the United States. The aggregate cash purchase price for LucasVarity was approximately $6.8 billion and the transaction was accounted for as a purchase business combination. Assets and liabilities have been recorded based on their respective fair values. The preliminary purchase price allocation resulted in an $85 million charge to earnings, with no income tax benefit, for the fair value of acquired in-process research and development that had not reached technological feasibility and had no future alternative use. The fair values of acquired in-process research and development and identified intangible assets were determined using the income approach under the proportional method. A risk adjusted discount rate of 18 percent representing the cost of capital and a premium for the risk was used to discount the projects' cash flows. Operating margins were assumed to be similar to historical margins of similar products. The size of the applicable market was verified for reasonableness with outside research sources. The projects were in various stages of completion ranging from approximately 40 to 80 percent complete as of the valuation date. The stage of completion for each project was estimated by evaluating the cost to complete, complexity of the technology and time to market. The projects are anticipated to be completed from late 1999 through 2002. The estimated cost to complete the projects is $65 million. 5 7 The estimated goodwill and the preliminary allocation of the purchase price are summarized as follows:
(In millions) Cash purchase price $6,778 Cash and cash equivalents 774 Accounts receivable 888 Inventory 552 Net assets of businesses held for sale 739 Prepaid expenses 136 Current deferred income taxes 149 Property, plant and equipment 1,531 Intangible assets 413 Prepaid pension costs 2,198 Other assets 414 ----- Total assets 7,794 Accounts payable (686) Other accruals (798) Debt (938) Long-term liabilities (932) Long-term deferred income taxes (631) ------ Total liabilities (3,985) Minority interest (39) Purchased in-process research and development 85 ------ Excess of purchase price over fair value of net assets acquired $2,923 ======
Goodwill is being amortized on a straight-line basis over 40 years and identifiable intangible assets are being amortized on a straight-line basis over useful lives ranging from 16 to 30 years. Pro forma financial statements are not included in this filing as the first quarter 1999 and the first quarter 1998 are comparable, except that the first quarter 1999 reflects approximately $5 million of LucasVarity's net earnings subsequent to March 25, the date of acquisition, as well as the $85 million charge to earnings, with no income tax benefit, for in-process research and development. Pro forma financial information can be found in TRW's Current Report on Form 8-K, originally filed with the Securities and Exchange Commission on March 26, 1999, as amended on May 17, 1999. Foreign Exchange Contracts - -------------------------- The Company enters into forward exchange contracts which hedge firm foreign currency commitments, anticipated transactions and certain intercompany transactions. At March 31, 1999, the Company had contracts outstanding amounting to $1.2 billion denominated principally in the British pound, the U.S. dollar, the Spanish peseta, the French franc, the German deutsche mark, the Euro and the Canadian dollar, maturing at various dates through January 2007. Contracts outstanding increased from $162 million at December 31, 1998 primarily due to the acquisition of LucasVarity. A foreign currency option transaction for a notional amount of approximately $42 million was outstanding at March 31, 1999. The option was settled during 6 8 April 1999, and the Company will recognize a before tax gain of approximately $1 million in the second quarter. The combined fair market value of the forward exchange contracts and the foreign currency option was approximately $85 million at March 31, 1999, primarily all of which related to LucasVarity. The fair market value of forward contracts at December 31, 1998 was $1 million. Changes in market value of the contracts which hedge firm foreign currency commitments and intercompany transactions are generally included in the basis of the transactions. Changes in market value of the contracts which hedge anticipated transactions are generally recognized in earnings. Foreign exchange contracts are placed with a number of major financial institutions to minimize credit risk. No collateral is held in relation to the contracts, and the Company anticipates that these financial institutions will satisfy their obligations under the contracts. Interest Rate Swap Agreements - ----------------------------- In anticipation of offering debt securities to finance the acquisition of LucasVarity, the Company entered into forward starting interest rate swaps during the first quarter of 1999 with a mandatory cash settlement in the second quarter. These agreements effectively fixed the base rate of interest on an aggregate notional principal amount of $900 million of debt that the Company plans to issue. The fair market value of the forward starting interest rate swaps is approximately $5 million at March 31, 1999. Net payments or receipts under the agreements will be recognized as an adjustment to interest expense. The agreements were entered into with major financial institutions, and the Company anticipates that the financial institutions will satisfy their obligations under the agreements. No collateral is held in relation to the agreements. Issuance of a Subsidiary's Stock - -------------------------------- The Company includes gains or losses arising from the issuance of a subsidiary's or equity affiliate's stock in non-operating income. Comprehensive Income - -------------------- The components of comprehensive income, net of related tax, for the first quarter of 1999 and 1998 are as follows:
Quarter ended (In millions) March 31 ------------------------------------ 1999 1998 ---- ---- Net earnings(loss) $ (28) $ 129 Foreign currency translation adjustments (124) (23) Unrealized gain(loss) on securities (11) 2 ----- ----- Comprehensive income(loss) $(163) $ 108 ----- -----
7 9 The components of accumulated other comprehensive income, net of related tax, at March 31, 1999 and December 31, 1998 are as follows:
March 31 December 31 (In millions) 1999 1998 ------------------------------------------ Foreign currency translation adjustments $(179) $ (55) Unrealized gain on securities 19 30 Minimum pension liability adjustments (13) (13) ----- ---- Accumulated other comprehensive income(loss) $(173) $(38) ----- ----
New Accounting Pronouncement - ---------------------------- In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for years beginning after June 15, 1999. However, the Company is considering earlier adoption. The effect this statement will have on the Company's results of operations and financial condition has not yet been determined. Divestitures - ------------ On May 17, 1999, the Company announced it will divest its engine businesses, which consist of TRW Engine Components and Lucas Diesel System operations; TRW Nelson Stud Welding; and the LucasVarity Wiring companies. Sales included in the Company's first quarter of 1999 and 1998 statements of earnings for the businesses to be sold were $174 million and $153 million, respectively. The first quarter of 1999 included sales of $25 million for LucasVarity Wiring companies and Lucas Diesel Systems operations. The Company's investment in the LucasVarity Wiring companies and Lucas Diesel Systems operations is included in the balance sheet caption "Net assets of acquired businesses held for sale". The Company expects to complete the divestitures of these businesses by year end 1999. Operating Segments - ------------------ On April 28, 1999, TRW announced a reorganization of its business into two segments: Automotive and Aerospace & Information Systems. TRW's and LucasVarity's automotive businesses were combined into TRW's Automotive Segment and TRW's space, defense and information systems businesses were combined with LucasVarity's aerospace business to form the Aerospace & Information Systems Segment. As a result of the acquisition of LucasVarity, segment assets increased significantly. However, as the valuation to determine the value of the assets applicable to each segment has not been finalized, the Company cannot currently provide the value of the segment assets for the Automotive Segment and the Aerospace & Information Systems Segment. The caption "Financing costs" displayed in the reconciliation of segment profit before income taxes to consolidated earnings before income taxes includes interest expense as well as the underwriting and participation fees associated with the acquisition of LucasVarity. 8 10 Inventories - ----------- Inventories consist of the following:
March 31 December 31 (In millions) 1999 1998 ------------------------------------------ Finished products and work in process $ 642 $ 316 Raw materials and supplies 481 300 ----- ----- $1,123 $ 616 ----- -----
The increase in inventory is due to the acquisition of LucasVarity. Long-Term Liabilities - --------------------- Long-term liabilities at March 31, 1999 and December 31, 1998, include $1,169 million and $651 million, respectively, relating to postretirement benefits other than pensions. The increase is due to the acquisition of LucasVarity. Other (Income)Expense-Net - ------------------------- Other (income)expense-net included the following:
Quarter ended (In millions) March 31 ------------------------------------------ 1999 1998 ---- ---- Other income $(40) $(66) Other expense 36 22 Gain from issuance of equity affiliate's stock (29) - Foreign currency exchange 49 2 ---- ---- $ 16 $(42) ---- ----
During the first quarter 1999, RF Micro Devices, Inc. (RFMD), an equity affiliate which designs, develops, manufactures and markets priority radio frequency integrated circuits for wireless communications applications, issued 2,012,500 shares of stock at $61.44 per share in a registered public offering. First quarter 1999 "Other(income)expense-net" included a gain of $29 million from the issuance of stock by RFMD. The Company's ownership decreased from 32 percent to 27 percent primarily due to the issuance of these shares. Deferred taxes have been appropriately provided on the gain. In addition, first quarter 1999 other income included $15 million from the Company's sale of 287,500 shares of RFMD common stock in the registered public offering. First quarter 1999 other expense included a $10 million before tax charge for underwriting and participation fees incurred to secure committed credit facilities related to the acquisition of LucasVarity. First quarter 1999 foreign currency exchange included a $50 million nonrecurring before tax loss on foreign currency hedges related to the acquisition of LucasVarity. First quarter 1998 other income included a $49 million benefit from the settlement of certain patent litigation. Supplemental Cash Flow Information - ----------------------------------
Quarter ended (In millions) March 31 ------------------------------------------ 1999 1998 ---- ---- Interest paid (net of amount capitalized) $47 $30 Income taxes paid (net of refunds) $33 $41
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. 9 11 During the first quarter of 1999, the Company incurred short-term borrowings of approximately $519 million to finance the purchase of LucasVarity's Ordinary Shares on the open market. In addition, a $6.3 billion payable was incurred for LucasVarity shares tendered into the offer. During April 1999, the Company settled a significant portion of the payable for LucasVarity shares by issuance of commercial paper. Earnings Per Share - ------------------ The effects of convertible preferred stock and employee stock options were excluded from the calculation of 1999 diluted earnings per share as they would have been antidilutive.
Quarter ended (In millions except per share data) March 31 ---------------------------------------- 1999 1998 ---- ---- NUMERATOR Net earnings(loss) $(28.4) $129.4 Preferred stock dividends .3 .2 -- -- Numerator for basic earnings per share-- earnings(loss) available to common shareholders (28.7) 129.2 Effect of dilutive securities Preferred stock dividends - .2 ---- ----- Numerator for diluted earnings per share--earnings(loss) available to common shareholders after assumed conversions $ (28.7) $129.4 ---- ----- DENOMINATOR Denominator for basic earnings per share-- weighted-average common shares 120.1 122.6 Effect of dilutive securities Convertible preferred stock - .9 Employee stock options - 2.7 ----- ----- Dilutive potential common shares - 3.6 Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 120.1 126.2 ----- ----- Basic earnings(loss) per share $(0.24) $ 1.05 ---- ----- Diluted earnings(loss) per share $(0.24) $ 1.03 ---- -----
Contingencies - ------------- During 1997, TRW Vehicle Safety Systems Inc., a wholly owned subsidiary of the Company, reported to the Arizona Department of Environmental Quality (ADEQ) potential violations of the Arizona hazardous waste law at its Queen Creek, Arizona facility for the possible failure to properly label and dispose of wastewater that might be classified as hazardous waste. ADEQ is conducting an investigation into these potential violations and the Company is cooperating with the investigation. If ADEQ initiates proceedings against the Company with respect to such matters, the Company could be liable for penalties and fines and other relief. The Arizona State Attorney General also is investigating matters, and federal, civil and criminal governmental investigations with respect to these potential violations are ongoing. Management is currently evaluating this matter and is unable to make a meaningful estimate of the amount or range of possible liability, if any, at this time, although management believes that the Company would have meritorious defenses. 10 12 During 1996, the Company was advised by the United States Department of Justice (DOJ) that it had been named as a defendant in two lawsuits brought by a former employee of the Company's former Space & Technology Group and originally filed under seal in 1994 and 1995, respectively, in the United States District Court for the Central District of California under the qui tam provisions of the civil False Claims Act. The Act permits an individual to bring suit in the name of the United States and share in any recovery. The allegations in the lawsuits relate to the classification of costs incurred by the Company that were charged to certain of its federal contracts. Under the law, the government must investigate the allegations and determine whether it wishes to intervene and take responsibility for the lawsuits. On February 13, 1998, the DOJ intervened in the litigation. On February 19, 1998 and March 4, 1998, the former employee filed amended complaints in the Central District of California that realleged certain of the claims included in the 1994 and 1995 lawsuits and omitted the remainder. The amended complaints allege that the United States has incurred substantial damages and that the Company should be ordered to cease and desist from violations of the civil False Claims Act and is liable for treble damages, penalties, costs, including attorneys' fees, and such other relief as deemed proper by the court. On March 17, 1998, the DOJ filed its complaint against the Company upon intervention in the 1994 lawsuit, which set forth a limited number of the allegations in the 1994 lawsuit and other allegations not in the 1994 lawsuit. The DOJ elected not to pursue the other claims in the 1994 lawsuit or the claims in the 1995 lawsuit. The DOJ's complaint alleges that the Company is liable for treble damages, penalties, interest, costs and "other proper relief." On March 18, 1998, the former employee withdrew the first amended complaint in the 1994 lawsuit at the request of the DOJ. On May 18, 1998, the Company filed answers to the former employee's first amended complaint in the 1995 lawsuit and to the DOJ's complaint, denying all substantive allegations against the Company contained therein. At the same time, the Company filed counterclaims against both the former employee and the federal government. On July 20, 1998, both the former employee and the DOJ filed motions seeking to dismiss the Company's counterclaims. On November 23, 1998 (entered as an Order on January 21, 1999), the court dismissed certain counterclaims asserted against the former employee and the federal government and took under advisement the former employee's motion to dismiss certain other counterclaims. On March 15, 1999, the DOJ was granted leave to file a First Amended Complaint, which adds certain allegations concerning the Company's subcontracts. The Company cannot presently predict the outcome of these lawsuits, although management believes that their ultimate resolution will not have a material effect on the Company's financial condition or results of operations. Interim Statements - ------------------ The financial statements are based in part on approximations and are subject to adjustments that may develop, such as unsettled contract and renegotiation matters and matters that arise in connection with the annual audit of the financial statements; however, in the opinion of management, all adjustments (which consist of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented have been included. Results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. 11 13 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- RESULTS OF OPERATIONS (In millions except per share data)
First Quarter ---------------------------------------------------- Percent 1999 1998 Inc(Dec) --------------- ---------------- ------------- Sales $3,097 $3,095 - Segment profit before income taxes 235 275 (15)% Net earnings(loss) (28) 129 (122)% Diluted earnings(loss) per share (0.24) 1.03 (123)% Effective tax rate 504.6% 36.50%
Sales of $3.1 billion were essentially unchanged compared with the first quarter of 1998. An increase in sales as a result of the inclusion of $106 million from LucasVarity, subsequent to March 25, 1999, the date of acquisition, was offset by a decrease in the aerospace and information systems business. A net loss of $28 million, or a net loss of $.24 per share, was reported in the first quarter 1999 compared with net earnings of $129 million, or $1.03 per share, reported in the first quarter 1998. First quarter 1999 net loss included the following: an $85 million charge, with no income tax benefit, for the fair value of acquired in-process research and development that had not reached technological feasibility and had no future alternative use; a $28 million after tax charge for a commercial fixed-price contract and a capped cost reimbursable contract for the U.S. Army; a non-recurring after tax loss of $33 million relating to forward contracts and currency options to purchase British pounds in connection with the LucasVarity acquisition; and $52 million of up front underwriting and participation fees to secure committed credit facilities and fees for unutilized credit facilities of which $12 million, or $8 million after tax, was charged to expense in the first quarter of 1999. First quarter 1999 net loss also included after tax gains of $19 million from the public offering of stock by RFMD and $10 million from the Company's sale of 287,500 shares of RFMD stock in the public offering. The Company may, from time to time, sell a portion of the remaining RFMD stock it owns. In addition, approximately $5 million of LucasVarity's net earnings subsequent to March 25, the date of acquisition, were included in the first quarter of 1999. First quarter 1998 net earnings included a $32 million benefit from the settlement of certain patent litigation, offset in part by $22 million in charges for litigation, contract reserves, and severance costs relating to the combination of the Company's systems integration business with BDM International, Inc., acquired in 1997. Interest expense was $43 million for the first quarter of 1999, compared to $38 million for the first quarter 1998, primarily due to financing higher working capital requirements and the purchase of LucasVarity shares in the open market. The effective tax rate for continuing operations was 504.6 percent for the first quarter 1999 compared to 36.5 percent in 1998. Excluding the write-off of purchased in-process research and development, which has no tax benefit, the effective tax rate would have been 38.4 percent. The 12 14 higher effective tax rate for the first quarter 1999 was primarily attributable to the tax impact of nondeductible intangibles associated with the LucasVarity acquisition and the mix of non-U.S. earnings.
Automotive (In millions) First Quarter ---------------------------------------------------- Percent 1999 1998 Inc(Dec) --------------- ---------------- ------------- Sales $1,965 $1,886 4% Segment profit before income taxes 136 149 (9)%
In the automotive segment, first quarter 1999 sales increased to $2.0 billion from $1.9 billion in the first quarter of 1998 due to the inclusion of LucasVarity automotive operations. Higher volume, primarily in Europe in the occupant restraints and electronics businesses, was offset by lower pricing across all product lines. Automotive segment profit before tax decreased to $136 million, compared with $149 million in the first quarter of 1998. First quarter 1999 segment profit before tax included $9.7 million in charges relating to the previously announced restructuring program and the results of LucasVarity's automotive business subsequent to the date of acquisition. The decline in segment profits resulted primarily from delays in anticipated savings associated with the automotive restructuring program and start-up costs related to new facilities and products. Lower pricing and production inefficiencies, offset in part by higher volume and cost reductions, also contributed to the decline in segment profits. The automotive restructuring program is currently behind plan and delays in achieving cost savings have negatively impacted automotive margins. However, the Company remains committed to implementing the cost-reduction steps and improving segment margins to achieve its goals. In the first quarter of 1999, the Company eliminated approximately 500 of the 4,500 suppliers targeted for reduction, while achieving a 20 percent improvement in supplier quality parts per million.
Aerospace & Information Systems (In millions) First Quarter ---------------------------------------------------- Percent 1999 1998 Inc(Dec) --------------- ---------------- ------------- Sales $1,132 $1,209 (6)% Segment profit before income taxes 99 126 (21)%
In the Aerospace & Information Systems segment, first quarter 1999 sales decreased to $1.1 billion from $1.2 billion in 1998. The decline in sales in the quarter resulted from delays in the start-up of commercial space programs, reduced funding on current programs, including a contract modification announced in 1998, the termination of the SBIRS-Low contract, contracts nearing completion, and lower than expected growth in commercial information technology, offset in part by new contract awards. Segment profit before tax decreased to $99 million in 1999, compared with $126 million in the first quarter of 1998. The decline in segment profit before tax resulted from the lower sales volume and increased product development costs associated with commercial programs. 13 15 Included in the 1999 segment results was a before tax gain of approximately $44 million from the public offering of stock by RFMD and the Company's sale of 287,500 shares of RFMD stock in the public offering. This gain was offset by a $43 million before tax charge for a commercial fixed-price contract and a capped cost reimbursable contract for the U.S. Army. First quarter 1998 segment profit included a benefit from the settlement of certain patent litigation, offset in part by charges for litigation and contract reserves and severance costs relating to the combination of the Company's systems integration business with BDM. ACQUISITIONS LucasVarity On March 25, 1999, TRW acquired LucasVarity for approximately $6.8 billion in cash. The acquisition was accounted for as a purchase. The preliminary purchase price allocation resulted in an $85 million charge to earnings, with no income tax benefit, for the fair value of acquired in-process research and development (IPR&D) that had not reached technological feasibility and had no future alternative use, $412 million of identified intangible assets including intellectual property and workforce, $177 million of fixed assets and $30 million of inventory. The fair value of IPR&D was determined using the income approach under the proportional method. The following projects were included in the valuation: next generation caliper of $26 million, next generation ABS brakes of $23 million, electro hydraulic braking of $12 million, aerospace engine controls of $18 million, and electrical parking brake of $6 million. A risk adjusted discount rate of 18 percent representing the cost of capital and a premium for the risk was used to discount the projects' cash flows. Operating margins were assumed to be similar to historical margins of similar products. The size of the applicable market was verified for reasonableness with outside research sources. The projects were in various stages of completion ranging from approximately 40 to 80 percent complete as of the valuation date. The stage of completion for each project was estimated by evaluating the cost to complete, complexity of the technology, and time to market. The projects are anticipated to be completed from late 1999 through 2002. The estimated cost to complete the projects is $65 million. The Company currently anticipates that these projects will be successfully developed as budgeted for both the estimated cost and time of completion. Any delay or cancellation of the projects would not have a material adverse impact on the results of operations or the financial condition of the Company. See the "Acquisitions" footnote in the Notes to Financial Statements for further discussion of the LucasVarity acquisition. Astrolink LLC On May 6, 1999, TRW announced that it will make a $250 million investment in Astrolink LLC, a strategic venture initiated by Lockheed Martin. In addition to TRW's investment, Lockheed Martin Global Telecommunications will invest $400 million, and Telespazio, a Telecom Italia Group Company, will invest $250 million. With this funding, Astrolink will commence construction of a system that will make it the world's first global, on-demand, wireless broadband service provider, scheduled to offer service in 2003. Astrolink will focus on the high-growth area of broadband data services, carrying traffic for Internet, intranet, multimedia and corporate data networks. TRW will build the digital, packet-switched communications payloads for Astrolink's satellites, and will have the opportunity to be an Astrolink 14 16 service provider. TRW's $250 million investment will be made in five installments over the next eighteen months. BDM International, Inc. During 1997, the Company acquired BDM International, Inc., resulting in a charge for in-process research & development of $548 million. To date, several commercial projects, including the Web-enabled warehouse and distribution project, have been delayed about one year due to the following circumstances: competitive pressures in the information technology markets requiring different or added functionality; delay in industry standards to be enacted by third parties; change in internal project staffing; and increased focus on Year 2000 compliance by customers. The costs to complete the projects are substantially unchanged from the assumptions used in the valuation. The Company anticipates that these projects will be successfully developed; however, there can be no assurance that the products will be viable in the rapidly changing commercial marketplace. LIQUIDITY AND FINANCIAL POSITION In the first quarter of 1999, a net increase in debt of $1,049 million was used to fund open market purchases of LucasVarity's Ordinary Shares of $519 million, operating activities of $134 million, capital expenditures of $111 million, dividend payments of $40 million, acquisitions of $36 million and other items of $8 million. As a result, cash and cash equivalents increased by $201 million. In addition, the Company received $774 million of cash and cash equivalents as part of the LucasVarity acquisition. Net debt (short-term debt, the current portion of long-term debt, long-term debt and the payables for LucasVarity less cash and cash equivalents) was $9.4 billion at March 31, 1999, compared to $2.1 billion at December 31, 1998. The ratio of net debt to total capital (net debt, minority interests and shareholders' investment) was 83 percent at March 31, 1999, compared to 52 percent at December 31, 1998. During the first quarter of 1999, the Company incurred short-term borrowings of approximately $519 million to finance the purchase of LucasVarity's Ordinary Shares on the open market. In addition, a $6.3 billion payable was incurred for LucasVarity shares tendered into the offer. During April 1999, the Company settled a significant portion of the payable for LucasVarity shares by issuance of commercial paper. At March 31, 1999, $3.6 billion of short-term obligations, primarily payable for LucasVarity tendered shares, were reclassified to long-term obligations as the Company intends to refinance the obligations on a long-term basis and has the ability to do so under its existing credit agreements. The Company received fully underwritten financing for the acquisition of LucasVarity in the form of a $7.4 billion two-tranche credit agreement with 59 banks. Tranche one of $3.7 billion expires December 31, 1999 and the second tranche expires January 26, 2000 with an option to extend the maturity of up to $2 billion of borrowings to January 26, 2001. The interest rates under the agreement are the prime rate and a rate based on a London Interbank Offered Rate. At March 31, 1999, there were no outstanding borrowings under this agreement. Issuance of long-term debt securities in the public or private capital markets and the net proceeds from divestitures, among other things, reduce the amount of the commitments by 100 percent under tranche one until it is zero and then by 50 percent under tranche two, with a maximum reduction under tranche two of $1.7 billion. During the first quarter of 1999, the Company amended the terms of its $750 million and $745 million U.S. revolving credit agreements and its $250 million multicurrency revolving credit agreement to change commitment fees, borrowing margins and other key terms and conditions to conform to the terms of the $7.4 15 17 billion agreement. In addition, the expiration date of the $745 million agreement was extended from December 6, 1999 to January 26, 2000, with the provision that the Company may extend the date to January 26, 2001. No securities were issued under the Universal Shelf Registration Statement during the first quarter of 1999. As a result of the debt incurred for the LucasVarity acquisition, ratings on TRW's short and long-term debt were lowered. Moody's Investors Service has rated the Company's commercial paper at P-2 and senior unsecured debt at Baa1. Standard & Poor's has rated the Company's commercial paper at A-2 and senior unsecured debt at BBB. These rating changes are not expected to have a material impact on the Company's financial position. On May 17, 1999, the Company announced that it will divest its engine businesses, which consist of TRW Engine Components and Lucas Diesel System operations; TRW Nelson Stud Welding; and the LucasVarity Wiring companies. The estimated net proceeds from these divestitures of $1.2 to $1.5 billion will be applied to reduce debt incurred to finance the acquisition of LucasVarity. The Company has established a goal of reducing its net debt by approximately $2.5 billion, including the effects of these divestitures, during the next 18 months. Management believes the Company's current financial position and financing arrangements, including financing for the acquisition of LucasVarity, allow flexibility in worldwide financing activities and permit the Company to respond to changing conditions in credit markets. Management believes that funds generated from operations, the divestiture program and existing borrowing capacity are adequate to fund capital expenditures, working capital including tax requirements, company-sponsored research and development programs, dividend payments to shareholders and the acquisition of LucasVarity. OTHER MATTERS During 1997, TRW Vehicle Safety Systems Inc., a wholly owned subsidiary of the Company, reported to the Arizona Department of Environmental Quality (ADEQ) potential violations of the Arizona hazardous waste law at its Queen Creek, Arizona facility for the possible failure to properly label and dispose of wastewater that might be classified as hazardous waste. If ADEQ initiates proceedings against the Company with respect to such matters, the Company could be liable for penalties and fines and other relief. Management is currently evaluating this matter and is unable to make a meaningful estimate of the amount or range of possible liability, if any, at this time, although management believes that the Company would have meritorious defenses. During 1996, the Company was advised by the United States Department of Justice that it had been named as a defendant in two lawsuits brought by a former employee and filed under seal in 1994 and 1995, respectively, in the United States District Court for the Central District of California under the qui tam provisions of the civil False Claims Act. The Company cannot presently predict the outcome of these lawsuits, although management believes that their ultimate resolution will not have a material effect on the Company's financial condition or results of operations. Refer to the "Contingencies" footnote in the Notes to Financial Statements for further discussion of these matters. 16 18 Year 2000 A company-wide Year 2000 (Y2K) compliance program has been implemented to determine Y2K issues and assure Y2K compliance. The Company's Y2K compliance program now encompasses the Y2K program of LucasVarity, which was recently acquired by TRW. The compliance program has four major areas: internal computer systems, factory floor systems, supplier and service management and products and contracts. The general phases of the compliance program are Project Start-up; Inventory and Assessment; Conversion, Upgrade and Renovation; Validation, including testing; and Implementation. The Project Start-up and the Inventory and Assessment phases are complete. Conversion, Upgrade and Renovation are essentially complete with the remainder of the Y2K compliance program scheduled to be complete by year-end 1999, except for certain Y2K upgrades for nonmaterial and low priority items. The internal computer systems are comprised of engineering and research and development facilities, business computer systems, end user systems and technical infrastructure. The Company estimates that 80 percent of TRW's internal computer systems are Y2K compliant and expects the remaining systems to be Y2K compliant by the end of the second quarter 1999. The Company estimates that 95 percent of LucasVarity's internal computer systems are Y2K compliant and expects the remaining systems to be Y2K compliant by the end of July 1999. The Company expects to develop the majority of critical contingency plans for these systems during the second quarter 1999 and the remainder during the third quarter 1999. The factory floor systems are comprised of manufacturing and warehousing equipment. The Company estimates that 90 percent of TRW's factory floor systems are Y2K compliant and expects the remaining systems to be Y2K compliant by the end of the second quarter of 1999. The Company estimates that 95 percent of LucasVarity's factory floor systems are Y2K compliant and expects the remaining systems to be Y2K compliant by the end of July 1999. The Company expects to develop the majority of critical contingency plans for these systems during the second quarter 1999 and the remainder during the third quarter 1999. The Company is continuing to evaluate Y2K issues associated with suppliers to TRW's Automotive business by working with the Automotive Industries Action Group (AIAG), which consists of several of TRW's largest automotive customers and suppliers. The AIAG sent self-assessment surveys to approximately 15,000 TRW suppliers, of which about 3,900 are critical to TRW's automotive business. The Company is validating the critical suppliers' state of Y2K readiness and evaluating the risk to the Company by reviewing the self-assessment surveys and by conducting telephone surveys, workshops or on-site visits for selected critical suppliers. The Company estimates that 65 percent of the critical automotive suppliers' Y2K readiness has been validated and expects the validation of the remaining critical suppliers to be completed during the second quarter 1999. Service providers' Y2K readiness is also being validated. The Company is currently developing critical contingency plans for suppliers and service providers and will continue this activity throughout 1999. Such plans consider alternate sourcing, stockpiling of inventory and supplies and disaster recovery scenarios. Y2K certification requests were sent to approximately 8,200 suppliers and service providers to TRW's space, defense and information systems businesses, of which about 1,200 are considered critical. Approximately 85 percent of those critical suppliers have certified Y2K compliance and the Company expects the remaining critical suppliers to respond during the second quarter 1999. The Company also expects the majority of critical contingency plans to be developed by the end of the second quarter 1999. Approximately 5,500 of LucasVarity's 20,000 automotive and aerospace suppliers and service providers are critical to its business. Each critical supplier and 17 19 service provider is being contacted and their state of Y2K readiness is being validated. LucasVarity has received responses from approximately 98 percent of its critical suppliers and service providers, and these responses have been reviewed to determine what, if any, follow up actions may be necessary. Suppliers and service providers assessed as being high risk, or of particular significance to the business, have been reviewed further to evaluate the risks to LucasVarity. As a result, LucasVarity has provided support to certain suppliers and service providers for their compliance efforts and has re-sourced a number of critical material and component suppliers. The validation and contingency planning related to LucasVarity's suppliers and service providers will be essentially complete by the end of July 1999. The Company has assessed the products of the existing TRW automotive business and determined that there should be no Y2K issues. Also, LucasVarity has assessed its automotive and aerospace products and determined that there should be no Y2K issues. Contracts entered into by TRW's space, defense and information systems businesses after January 1, 1996 and contract modifications entered into after January 1, 1996 that add major scope to earlier contracts have been assessed. Approximately 440 contracts were identified to have a potential Y2K impact. The Company has determined that 410 of these contracts have Y2K impacts; however, the customer and TRW have agreed that renovation, if any, will be funded by the customer. For the remaining 30 contracts, communications continue with the customers to determine whether there is a Y2K impact and to develop mutually acceptable renovation plans, if necessary. The Company expects renovations and critical contingency planning to be performed throughout 1999. As part of a continuing process under the Y2K program, issues are being assessed as they are identified, using formal program reviews to assess progress and initiate required actions. As the Company's Y2K compliance program proceeds, contingency plans are being prepared, updated and implemented as necessary to address the risks identified. The Company has identified the most likely risks of Y2K noncompliance as the risk that key suppliers will not be Y2K compliant and the risk that space, defense and information systems' contracts will have unanticipated Y2K-related issues. Due to the general uncertainty inherent in the Y2K problem, the Company is unable to determine at this time whether the consequences of Y2K compliance failures will have a material effect on the Company's results of operations or financial condition. In addition, the Company does not have control over service providers and as a result cannot currently estimate to what extent future operating results may be adversely affected by the failure of these service providers to address their Y2K issues successfully. The total cost of the Company's Y2K compliance program including LucasVarity is estimated to be $202 million and includes $99 million for capitalizable costs and $103 million of costs that are being expensed as incurred. The increase in the total cost of the Y2K compliance program is due to the acquisition of LucasVarity. TRW and LucasVarity have expensed approximately $70 million to date, of which approximately $19 million was expensed by LucasVarity prior to the acquisition. The Company expects to expense an additional $26 million throughout the remainder of 1999. The Company does not anticipate that the overall costs of the Company's Y2K compliance program will have a material effect on the Company's financial results or financial condition. The dates of completion and the costs of the Company's Y2K project are based on management's estimates, which were derived utilizing assumptions of future events, including the availability of certain resources, third party modification plans and other factors. There can be no guarantee that these estimates will be achieved, and if the actual timing and costs for the Company's Y2K program differ materially from those anticipated, the Company's 18 20 financial results and financial condition could be materially adversely affected. Euro Conversion On December 31, 1998, certain member countries of the European Union irrevocably fixed the conversion rates between their national currencies and a common currency, the "Euro," which became their legal currency on January 1, 1999. The participating countries' former national currencies will continue to exist as denominations of the Euro between January 1, 1999 and January 1, 2002. The Company has evaluated the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions, including receipts and payments, the competitive implications of cross-border price transparency and other strategic implications. The Company's primary customers in the automotive industry in Europe are expected to require Euro invoicing during 1999. Invoicing and other business functions will be Euro-capable by the end of the transition period but may be converted earlier where operationally efficient or cost-effective or to meet customer requirements. The Company's exposure to foreign currency risk and the related use of derivative contracts to mitigate that risk is expected to be reduced as a result of conversion to the Euro. The Company does not expect the conversion to the Euro to have a material effect on its financial condition or results of operations. Forward-Looking Statements Statements in this filing that are not statements of historical fact are forward-looking statements. In addition, from time to time, TRW and its representatives may make statements that are forward-looking. All forward-looking statements involve risks and uncertainties. This section provides readers with cautionary statements identifying, for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, important factors that could cause TRW's actual results to differ materially from those contained in forward-looking statements made in this filing or otherwise made by, or on behalf of, TRW. The following are some of the factors that could cause actual results to differ materially from estimates contained in TRW's forward-looking statements: Our consolidated results could be affected by: the continued development of and demand for new products; the ability to continue technical innovation; availability of funding for research and development; the ability to successfully identify and integrate acquisitions; pricing pressures from customers; pricing pressures resulting from the European Economic Union's conversion to a single currency; the ability to reduce the level of outstanding debt; the ability to achieve targeted proceeds from the dispositions planned in our automotive business; the ability to generate targeted cash flow from operations; the ability to effectively implement the company-wide Y2K compliance program in accordance with the estimated timetable and costs described herein; the introduction of competing products or technology by competitors; the ability to meet performance and delivery requirements on systems for customers; the economic, regulatory and political instability of certain emerging countries; economic conditions in Brazil and Asia; the effects of changes in laws and regulations as they relate to the Company's businesses; foreign exchange rates; the cost and availability of funds; interest rate risk; the impact of legal proceedings; and the ability to attract and retain skilled employees with high-level technical competencies. 19 21 Our automotive business also could be affected by: the ability to effectively implement our automotive restructuring program and improve automotive margins; changes in consumer debt levels and interest rates; the cyclical nature of the automotive industry; moderation or decline in the automobile build rate; successful new product launches; the ability to achieve cost reductions; work stoppages; customer warranty claims; changes to the regulatory environment regarding automotive safety; and our ability to increase the vehicle content of our products per vehicle. Our aerospace and information systems business also could be affected by: the level of defense funding by the government; our ability to receive contract awards; the termination of existing government contracts; and the ability to develop and market products and services for customers outside of the traditional aerospace and information systems markets. Certain statements contained in this filing or otherwise made by or on behalf of TRW regarding the purchase of LucasVarity, particularly those regarding synergies, future performance and costs, depend on certain events, risks and uncertainties that may be outside of TRW's control. Factors that could cause actual operating results to differ materially from those described in such forward-looking statements include: unanticipated events and circumstances that may occur and render the transaction less beneficial to TRW than anticipated; intense competition in our markets that make it impossible to guarantee that we will achieve the expected financial and operating results and synergies; and the ability of TRW to integrate LucasVarity into its operations and thereby achieve the anticipated cost savings and be in a position to take advantage of potential growth opportunities. The foregoing list of important factors is not exclusive. We caution you that any forward-looking statement reflects only the beliefs of TRW or its management at the time the statement is made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made. 20 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- The Company is subject to inherent risks attributed to operating in a global economy. It is the Company's policy to utilize derivative financial instruments to manage its interest rate and foreign currency exchange rate risks. When appropriate, the Company uses derivatives to hedge its exposure to short-term interest rate changes as a lower cost substitute for the issuance of fixed-rate debt. The Company manages cash flow transactional foreign exchange risk pursuant to a written corporate policy. Forward contracts and, to a lesser extent, options are utilized to protect the Company's cash flow from adverse movements in exchange rates. Also, at certain times, the Company may use interest rate agreements in the management of interest rate exposure on debt issuances. The Company is exposed to credit loss in the event of nonperformance by the other party to the derivative financial instruments. The Company limits this exposure by entering into agreements with a number of major financial institutions that meet credit standards established by the Company and that are expected to satisfy fully their obligations under the contracts. Derivative financial instruments are viewed by the Company as a risk management tool and are not used for speculative or trading purposes. Based on the Company's interest rate exposure on variable rate borrowings at March 31, 1999, a one-percentage-point increase in the average interest rate on the Company's variable rate borrowings would increase future interest expense by approximately $2 million per month. Based on the Company's exposure to foreign currency exchange rate risk resulting from derivative foreign currency instruments outstanding at March 31, 1999, a 10 percent uniform strengthening in the value of the U.S. dollar relative to the currencies in which those derivative foreign currency instruments are denominated would result in a loss of $91 million. Based on the Company's interest rate exposure with regard to the issuance of debt at March 31, 1999, a 10 percent decrease in the market rate at March 31, 1999 on the Company's forward starting interest rate swaps would result in a loss of $37 million. The Company's sensitivity analyses of the effects of changes in foreign currency exchange rates do not reflect the effect of such changes on the related hedged transactions or on other operating transactions. The Company's sensitivity analyses of the effects of changes in interest rates and foreign currency exchange rates do not factor in a potential change in the level of variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevailed. Refer to the "Foreign Exchange Contracts" and the "Interest Rate Swap Agreements" footnotes in the Notes to Financial Statements for further discussion of derivative instruments as of March 31, 1999. 21 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings. ------------------ During 1996, the United States Department of Justice, or the DOJ, advised the Company that it had been named as a defendant in two lawsuits brought by Richard D. Bagley, a former employee of the Company's former Space & Technology Group, and originally filed under seal in 1994 and 1995, respectively, in the United States District Court for the Central District of California under the qui tam provisions of the civil False Claims Act. The Act permits an individual to bring suit in the name of the United States and share in any recovery. The allegations in the lawsuits relate to the classification of costs incurred by the Company that were charged to certain of its federal contracts. Under the law, the government must investigate the allegations and determine whether it wishes to intervene and take responsibility for the lawsuits. On February 13, 1998, the DOJ intervened in the litigation. On February 19, 1998 and March 4, 1998, Bagley filed amended complaints in the Central District of California that realleged certain of the claims included in the 1994 and 1995 lawsuits and omitted the remainder. The amended complaints allege that the United States has incurred substantial damages and that the Company should be ordered to cease and desist from violations of the civil False Claims Act and is liable for treble damages, penalties, costs, including attorneys' fees, and such other relief as deemed proper by the court. On March 17, 1998, the DOJ filed its complaint against the Company upon intervention in the 1994 lawsuit, which set forth a limited number of the allegations in the 1994 lawsuit and certain additional allegations. The DOJ elected not to pursue the other claims in the 1994 lawsuit or the claims in the 1995 lawsuit. The DOJ's complaint alleges that the Company is liable for treble damages, penalties, interest, costs and "other proper relief." On March 18, 1998, Bagley withdrew the first amended complaint in the 1994 lawsuit at the request of the DOJ. On May 18, 1998, the Company filed answers to Bagley's first amended complaint in the 1995 lawsuit and to the DOJ's complaint, denying all substantive allegations contained therein. At the same time, the Company filed counterclaims against both Bagley and the federal government. On July 20, 1998, both Bagley and the DOJ filed motions seeking to dismiss the Company's counterclaims. On November 23, 1998 (entered as an Order on January 21, 1999), the court dismissed certain counterclaims asserted against Bagley and the federal government and took under advisement Bagley's motion to dismiss certain other counterclaims. On March 15, 1999, the DOJ was granted leave to file a First Amended Complaint, which adds certain allegations concerning the Company's subcontracts. The Company cannot presently predict the outcome of these lawsuits, although management believes that their ultimate resolution will not have a material effect on the Company's financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits: 10.1 Amendment dated as of March 25, 1999 to the Revolving Credit Agreement dated as of December 10, 1997 and amended as of December 8, 1998 among TRW Inc. and various financial institutions 10.2 Amendment dated as of March 25, 1999 to the Multi-Year Revolving Credit Agreement dated as of July 1, 1992 and amended and restated as of May 8, 1996 and amended as of August 7, 1997 among TRW Inc. and various financial institutions 10.3 Letter Agreement between TRW Inc. and Peter S. Hellman 27 Financial Data Schedule 22 24 99 Computation of Ratio of Earnings to Fixed Charges -- Unaudited (Supplement to Exhibit 12 of the following Form S-3 Registration Statement of the Company: No. 333-48443, filed March 23, 1998) (b) Reports on Form 8-K: Current Report on Form 8-K, dated January 28, 1999, announcing that TRW Inc. and LucasVarity plc had reached agreement on the terms of a recommended cash offer to be made on behalf of TRW Inc. to acquire the entire issued share capital of LucasVarity plc. Current Report on Form 8-K, dated February 5, 1999, disclosing the audited financial statements of TRW Inc. for the fiscal year ended December 31, 1998. Current Report on Form 8-K, dated March 26, 1999, reporting that the offer to acquire the entire issued share capital of LucasVarity plc was declared unconditional in all respects on March 25, 1999. 23 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRW Inc. Date: May 17, 1999 By: /s/ William B. Lawrence ----------------------- William B. Lawrence Executive Vice President and Secretary By: /s/ Carl G. Miller ----------------------- Carl G. Miller Executive Vice President and Chief Financial Officer EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 EXECUTION COPY AMENDMENT TO CREDIT AGREEMENT AMENDMENT dated as of March 25, 1999 to the Revolving Credit Agreement dated as of December 10, 1997 and amended as of December 8, 1998 (as heretofore amended, the "EXISTING CREDIT AGREEMENT") among TRW Inc., an Ohio corporation (the "COMPANY"), and the BANKS party thereto (the "BANKS"). W I T N E S S E T H : WHEREAS, the parties hereto are parties to the Existing Credit Agreement; WHEREAS, the Company has entered into a $7,400,000,000 Amended and Restated Credit Agreement dated as of January 27, 1999 and amended and restated as of February 26, 1999 among the Company, the eligible subsidiaries referred to therein, the lenders party thereto, Bank of America National Trust and Savings Association, Citibank, N.A. and Barclays Bank PLC, as co-syndication Agents and Morgan Guaranty Trust Company of New York, as administrative agent (as in effect on the date hereof, the "ACQUISITION CREDIT AGREEMENT"); and WHEREAS, the parties hereto wish to amend the Existing Credit Agreement so that (i) the covenants and the events of default applicable thereunder shall be the same as the covenants and the events of default applicable under the Acquisition Credit Agreement, (ii) the interest rate margin applicable to any loans of any type outstanding under the Existing Credit Agreement shall be the same as the interest rate margin applicable to loans of such type under the Acquisition Credit Agreement, (iii) the commitment fee rate payable under the Existing Credit Agreement shall be the same as the commitment fee rate payable under the Acquisition Credit Agreement and (iv) the Revolving Period Termination Date is extended from December 6, 1999 to January 26, 2000; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Existing Credit Agreement has the meaning assigned to such term in the Existing Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Existing Credit Agreement shall, after this Amendment becomes effective in accordance with Section 9, refer to the Existing Credit Agreement as amended hereby. 2 SECTION 2. Addition of Definition of Acquisition Credit Agreement. (a) A new definition of "ACQUISITION CREDIT AGREEMENT" is added in alphabetical order to Section 13 of the Existing Credit Agreement, to read in its entirety as follows: "ACQUISITION CREDIT AGREEMENT" means the $7,400,000,000 Amended and Restated Credit Agreement dated as of January 27, 1999 and amended and restated as of February 26, 1999 among the Company, the eligible subsidiaries referred to therein, the lenders party thereto, Bank of America National Trust and Savings Association, Citibank, N.A. and Barclays Bank PLC, as co-syndication Agents and Morgan Guaranty Trust Company of New York, as administrative agent, as amended, waived or modified from time to time; provided that for purposes of the incorporation by reference into this Agreement of any provision of the Acquisition Credit Agreement, no amendment, waiver or modification of any provision of the Acquisition Credit Agreement shall be effective unless consented to in writing by the Majority Banks. (b) The following paragraph is added at the end of Section 13 of the Existing Credit Agreement: "Certain provisions herein are incorporated by reference from or defined with reference to the Acquisition Credit Agreement (the "INCORPORATED PROVISIONS") solely for the convenience of the parties hereto in documenting this Agreement and the transactions referred to herein. If this Agreement remains in effect after the date (the "ACQUISITION PAYOUT DATE") on which the commitments under the Acquisition Credit Agreement have been terminated and the loans thereunder have been paid in full, then subject to the provisos that follow the Incorporated Provisions shall continue to be incorporated herein by reference as such provisions were in effect on the Acquisition Payout Date; provided that (i) on and after the first date on which Minimum Short-Term Debt Ratings (as defined in the Pricing Schedule) are in effect, other than for purposes of the incorporation of Section 6.01(b) of the Acquisition Credit Agreement, the Reset Date shall be deemed to have occurred and (ii) for purposes of incorporation by reference of Section 6.01(b) of the Acquisition Credit Agreement, the Reset Date will be deemed to have occurred on the first date the Minimum Long-Term Debt Ratings are in effect (and subject to any further amendment, waiver or other modification thereof consented to in writing by the Majority Banks hereunder). For purposes hereof, "Minimum Long-Term Debt Ratings" are in effect on any day on which the Company's long-term unsecured debt is rated at least BBB+ by S&P (as defined in the Pricing Schedule) and Baa1 by Moody's (as defined in the Pricing Schedule)." 2 3 SECTION 3. Incorporation By Reference of Covenants Contained in the Acquisition Credit Agreement. (a) Section 9.1 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: "9.1 Incorporation By Reference of Covenants Contained in the Acquisition Credit Agreement. Sections 5.01, 5.02 and 5.04 through 5.08, inclusive, of the Acquisition Credit Agreement are hereby incorporated herein by reference. Defined terms used in Sections 5.01, 5.02 and 5.04 through 5.08, inclusive, of the Acquisition Credit Agreement have the meanings assigned to such terms in the Acquisition Credit Agreement, except that for purposes of this Section 9.1 (i) the terms "Lenders" and "Administrative Agent" means the Banks and (ii) the terms "Event of Default" and "Unmatured Event of Default" shall mean an Event of Default and Unmatured Event of Default, respectively, under this Agreement." (b) Sections 9.2 through 9.5, inclusive, of the Existing Credit Agreement are hereby deleted in their entirety. (c) The definitions of "Compliance Certificate", "Consolidated Funded Debt, "Consolidated Net Tangible Assets", "Consolidated Net Worth", "Debt", "Domestic Subsidiary", "Exempted Indebtedness", "Funded Debt", "lien or mortgage", "Principal Property", "Sale and Leaseback Transaction" and "Wholly Owned Domestic Subsidiary" set forth in Section 13 of the Existing Credit Agreement are hereby deleted in their entirety. SECTION 4. Incorporation By Reference of Events of Default Contained in the Acquisition Credit Agreement. (a) Sections 11.1.2 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: "11.1.2 Incorporation By Reference of Events of Default Contained in the Acquisition Credit Agreement. Sections 6.01(b) through 6.01(d), inclusive, and Sections 6.01(f) through 6.01(i), inclusive, of the Acquisition Credit Agreement are hereby incorporated herein by reference. Defined terms used in Sections 6.01(b) through 6.01(d), inclusive, and Sections 6.01(f) through 6.01(i), inclusive, of the Acquisition Credit Agreement have the meanings assigned to such terms in the Acquisition Credit Agreement, except that for purposes of this Section 11.1.2, the term (i) "Commitments" means the Commitments under this Agreement, (ii) "Loans" means the Loans under this Agreement, and (iii) "Other Debt" means Debt (as defined in the Acquisition Credit Agreement) of the Company (other than the Loans under this Agreement ) in an aggregate principal amount in excess of $100,000,000." (b) Sections 11.1.2 through 11.1.4, inclusive, and Section 11.1.6 of the Existing Credit Agreement are hereby deleted in their entirety. 3 4 (c) Section 11.1.5 of the Existing Credit Agreement is redesignated as Section 11.1.3, and the following new Section 11.1.4 is added to the Existing Credit Agreement immediately after Section 11.1.3 thereof: "11.1.4. Guaranty Unenforceable. The Guaranty of the Company set forth in Section 12 shall cease at any time to be in full force and effect, or any party hereto (other than a Bank) shall so assert in writing." (d) Sections 11.2 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: "11.2 Effect of Event of Default. If any Event of Default described in Section 11.1.2 and constituting an "Event of Default" under Section 6.01(c) of the Acquisition Credit Agreement (a "BANKRUPTCY DEFAULT") shall occur, the Commitments (if they have not theretofore terminated) shall immediately terminate and all Loans and Notes shall automatically become immediately due and payable, all without notice of any kind; and, in the case of any other Event of Default, the Majority Banks may declare the Commitments (if they have not theretofore terminated) to be terminated and the Outstanding Majority Banks may declare that all Loans and Notes shall become immediately due and payable. The Majority Banks and the Outstanding Majority Banks shall promptly advise the Company in writing of any such declaration. Following the declaration that all Loans and Notes are immediately due and payable, all payments made by the Company on account of the Loans and Notes shall be made to the Administrator, which shall distribute such payments on a pro rata basis (in relation to the amounts of outstanding Loans) to Banks with outstanding Loans. Following such declaration, if any Bank receives a payment that is not on a pro rata basis, such Bank will remit to the Administrator any amount in excess of its pro rata portion. Upon receipt of any such remittance, the Administrator will distribute such amount to the Banks with outstanding Loans in order that all distributions will be pro rata. The effect as an Event of Default of any event described in Section 11.1.1 or a Bankruptcy Default may be waived only by the written concurrence of the holders of 100% of the aggregate unpaid principal amount of the Notes and the Majority Banks, and the effect as an Event of Default of any other event described in this Section 11 may be waived by the written concurrence of the Majority Banks and the Outstanding Majority Banks." SECTION 5. Changes in Pricing. (a) Clause (a) of Section 3.1 is hereby amended to read in its entirety as follows: "(a) At all times while such Loan is a Base Rate Loan, at a rate per annum equal to the Base Rate from time to time in effect, plus for any day the Applicable Margin on such day;" 4 5 (b) The definitions of "Applicable Commitment Fee" and "Applicable Margin" set forth in Section 13 of the Existing Credit Agreement are hereby amended to read in their entirety as follows: "APPLICABLE COMMITMENT FEE" has the meaning set forth in the Pricing Schedule. "APPLICABLE MARGIN" has the meaning set forth in the Pricing Schedule. (c) A new definition of "Pricing Schedule" is added in alphabetical order to Section 13 of the Existing Credit Agreement, to read in its entirety as follows: "PRICING SCHEDULE" means the Schedule attached hereto denominated as such. (d) A Pricing Schedule is hereby added to the Existing Credit Agreement, to read in its entirety as set forth on the Pricing Schedule attached hereto. SECTION 6. Extension of Revolving Period Termination Date. The definition of "Revolving Period Termination Date" set forth in Section 13 of the Existing Credit Agreement is amended by changing the date therein from "December 6, 1999" to "January 26, 2000". SECTION 7. Other Terms and Conditions. Unless amended hereby, all other terms and conditions of the Existing Agreement shall remain in full force and effect without change. SECTION 8. Governing Law. This Amendment and each Note issued pursuant hereto shall be a contract made under and governed by the internal laws of the State of Ohio. Wherever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. All obligations of the Company and rights of the Banks and any other holders of the Notes expressed herein or in the Notes shall be in addition to and not in limitation of those provided by applicable law. SECTION 9. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. When counterparts executed by all the parties hereto shall have been lodged with the Company (or, in the case of any party as to which an executed counterpart shall not have been so lodged, the Company shall have received telegraphic, telex, 5 6 or other written confirmation from such party of execution of a counterpart hereof by such party), this Amendment shall become effective as of January 27, 1999. SECTION 10. Captions. Section captions used in this Amendment are for convenience only, and shall not affect the construction of this Amendment. 7 Delivered at Cleveland, Ohio, as of the day and year first above written. TRW INC. By: /s/ Ronald P. Vargo -------------------------------------- Title: Vice President & Treasurer BANK OF AMERICA NT & SA By: /s/ Lynn W. Stetson -------------------------------------- Title: Managing Director BARCLAYS BANK PLC By: /s/ Keith Mackie -------------------------------------- Title: Director THE CHASE MANHATTAN BANK By: /s/ Andris G. Kalnins -------------------------------------- Title: Vice President 8 CITIBANK, N.A. By: /s/ Robert D. Wetrus -------------------------------------- Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Christopher C. Kunhardt -------------------------------------- Title: Vice President NATIONAL CITY BANK By: /s/ Davis R. Bonner -------------------------------------- Title: Senior Vice President NBD BANK By: /s/ Glenn A. Currin -------------------------------------- Title: Vice President 9 BANQUE NATIONALE DE PARIS By: /s/ Arnaud Collin du Bocage -------------------------------------- Title: Executive Vice President and General Manager DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Deborah Slusarczyk -------------------------------------- Title: Vice President By: /s/ Ken Hamilton -------------------------------------- Title: Senior Vice President KEYBANK NATIONAL ASSOCIATION By: /s/ Marianne T. Meil -------------------------------------- Title: Vice President ROYAL BANK OF CANADA By: /s/ Charles S. Romano, Jr. -------------------------------------- Title: Manager 10 MELLON BANK, N.A. By: /s/ Richard J. Schaich -------------------------------------- Title: Assistant Vice President ISTITUTO BANCARIO SAN PAOLO DI TORINO ISTITUTO MOBILARE ITALIANO S.P.A By: /s/ Carlo Persico -------------------------------------- Title: DGM By: /s/ Luca Sacchi -------------------------------------- Title: Vice President DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: /s/ Stephan A. Wiedemann -------------------------------------- Title: Director By: /s/ Alexander Karow -------------------------------------- Title: Associate 10 11 PRICING SCHEDULE "APPLICABLE COMMITMENT FEE" means, for any day, the rate per annum (expressed in basis points) set forth below in the column corresponding to the Pricing Level that applies on such day:
- ----------------------- ------- -------- --------- -------- ------- -------- PRICING LEVEL LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI Applicable 7.0 8.0 10.0 12.5 17.5 30.0 Commitment Fee
"APPLICABLE MARGIN" means, for any day, with respect to any Loan, the rate per annum (expressed in basis points) set forth below in the column corresponding to such type of Loan and the Pricing Level that applies on such day:
- ----------------------- ------- -------- --------- -------- ------- -------- PRICING LEVEL LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI Applicable Margin for Eurocurrency Loans Usage less than 1/4 40.0 50.0 62.5 75.0 100.0 125.0 Usage greater than or equal to 1/4 50.0 60.0 75.0 87.5 125.0 175.0 Applicable Margin for Domestic CD Loans Usage less than 1/4 52.5 62.5 75 87.5 112.5 137.5 Usage greater than or equal to 1/4 62.5 72.5 87.5 100 137.5 187.5 Applicable Margin for Base Rate Loans Usage less than 1/4 0 0 0 0 100 100 Usage greater than or equal to 1/4 0 0 0 0 100 100
For purposes of this Schedule, the following terms have the following meanings, subject to the last paragraph of this Pricing Schedule: "MOODY'S" means Moody's Investors Service, Inc. "LEVEL I PRICING" applies on any day on which (i) the Company's long-term debt is rated A or higher by S&P and no lower than A3 by Moody's or A2 or higher by Moody's and no lower than A- by S&P and (ii) Minimum Short-Term 11 12 Debt Ratings are in effect; provided that Level I Pricing shall not apply on any day prior to the Step Down Date. "LEVEL II PRICING" applies on any day on which (i)(x) the Company's long-term debt is rated A- or higher by S&P and no lower than Baa1 by Moody's or A3 or higher by Moody's and no lower than BBB+ by S&P and (y) Minimum Short-Term Debt Ratings are in effect and (ii) Level I Pricing does not apply; provided that Level II Pricing shall not apply on any day prior to the Step Down Date. "LEVEL III PRICING" applies on any day on which (i)(x) the Company's long-term debt is rated BBB+ or higher by S&P and Baa1 or higher by Moody's and (y) Minimum Short-Term Debt Ratings are in effect and (ii) neither Level I Pricing nor Level II Pricing applies; provided that Level III Pricing shall not apply on any day prior to the Step Down Date. "LEVEL IV PRICING" applies on any day on which (i)(x) the Company's long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's and (y) Minimum Short-Term Debt Ratings are in effect and (ii) none of Level I Pricing, Level II Pricing and Level III Pricing applies. "LEVEL V PRICING" applies on any day on which (i) the Company's long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) none of Level I Pricing, Level II Pricing, Level III Pricing and Level IV Pricing applies. "LEVEL VI PRICING" applies on any day if no other Pricing Level applies on such day. "MINIMUM SHORT-TERM DEBT RATINGS" are in effect on any day on which the Company's short-term debt is rated A-2 or higher by S&P and P-2 or higher by Moody's. "PRICING LEVEL" refers to the determination of which of Level I, Level II, Level III, Level IV, Level V or Level VI Pricing applies on any day. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "STEP DOWN DATE" means the first date on which the aggregate amount of the "Commitments" under the Acquisition Credit Agreement has been reduced by an amount equal to at least 25% of the aggregate amount of the "Commitments" on February 26, 1999 thereunder. 12 13 "USAGE" means at any day a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date, after giving effect to any borrowing or payment on such date, and (ii) the denominator of which is the aggregate amount of the Commitments at such date, after giving effect to any reduction of the Commitments on such date. For purposes of this Pricing Schedule, if for any reason any Loans remain outstanding after termination of the Commitments, the Usage for each day on or after the day of such termination shall be deemed to be greater than 1/4. The credit ratings with respect to long-term debt to be utilized for purposes of this Pricing Schedule are those assigned to the senior unsecured long-term debt securities of the Company without third-party credit enhancement, and any rating assigned to any other long-term debt security of the Company shall be disregarded for such purpose. The credit ratings with respect to short-term debt to be utilized for purposes of determining whether Minimum Short-Term Debt Ratings are in effect on any day are those assigned to the commercial paper issued by the Company, and any rating assigned to any other short-term debt security of the Company shall be disregarded for such purpose. The ratings in effect for any day are those in effect at the close of business on such day. 13 EX-10.2 3 EXHIBIT 10.2 1 Exhibit 10.2 EXECUTION COPY AMENDMENT TO CREDIT AGREEMENT AMENDMENT dated as of March 25, 1999 to the Multi-Year Revolving Credit Agreement dated as of July 1, 1992 and amended and restated as of May 8, 1996 (as heretofore amended, the "EXISTING CREDIT AGREEMENT") among TRW Inc., an Ohio corporation (the "COMPANY"), and the BANKS party thereto (the "BANKS"). W I T N E S S E T H : WHEREAS, the parties hereto are parties to the Existing Credit Agreement; WHEREAS, the Company has entered into a $7,400,000,000 Amended and Restated Credit Agreement dated as of January 27, 1999 and amended and restated as of February 26, 1999 among the Company, the eligible subsidiaries referred to therein, the lenders party thereto, Bank of America National Trust and Savings Association, Citibank, N.A. and Barclays Bank PLC, as co-syndication Agents and Morgan Guaranty Trust Company of New York, as administrative agent (as in effect on the date hereof, the "ACQUISITION CREDIT AGREEMENT"); and WHEREAS, the parties hereto wish to amend the Existing Credit Agreement so that (i) the covenants and the events of default applicable thereunder shall be the same as the covenants and the events of default applicable under the Acquisition Credit Agreement, (ii) the interest rate margin applicable to any loans of any type outstanding under the Existing Credit Agreement shall be the same as the interest rate margin applicable to loans of such type under the Acquisition Credit Agreement and (iii) the commitment fee rate payable under the Existing Credit Agreement shall be the same as the commitment fee rate payable under the Acquisition Credit Agreement; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Existing Credit Agreement has the meaning assigned to such term in the Existing Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Existing Credit Agreement shall, after this Amendment becomes effective in accordance with Section 8, refer to the Existing Credit Agreement as amended hereby. 2 SECTION 2. Addition of Definition of Acquisition Credit Agreement. (a) A new definition of "ACQUISITION CREDIT AGREEMENT" is added in alphabetical order to Section 13 of the Existing Credit Agreement, to read in its entirety as follows: "ACQUISITION CREDIT AGREEMENT" means the $7,400,000,000 Amended and Restated Credit Agreement dated as of January 27, 1999 and amended and restated as of February 26, 1999 among the Company, the eligible subsidiaries referred to therein, the lenders party thereto, Bank of America National Trust and Savings Association, Citibank, N.A. and Barclays Bank PLC, as co-syndication Agents and Morgan Guaranty Trust Company of New York, as administrative agent, as amended, waived or modified from time to time; provided that for purposes of the incorporation by reference into this Agreement of any provision of the Acquisition Credit Agreement, no amendment, waiver or modification of any provision of the Acquisition Credit Agreement shall be effective unless consented to in writing by the Majority Banks. (b) The following paragraph is added at the end of Section 13 of the Existing Credit Agreement: "Certain provisions herein are incorporated by reference from or defined with reference to the Acquisition Credit Agreement (the "INCORPORATED PROVISIONS") solely for the convenience of the parties hereto in documenting this Agreement and the transactions referred to herein. If this Agreement remains in effect after the date (the "ACQUISITION PAYOUT DATE") on which the commitments under the Acquisition Credit Agreement have been terminated and the loans thereunder have been paid in full, then subject to the provisos that follow the Incorporated Provisions shall continue to be incorporated herein by reference as such provisions were in effect on the Acquisition Payout Date; provided that (i) on and after the first date on which Minimum Short-Term Debt Ratings (as defined in the Pricing Schedule) are in effect, other than for purposes of the incorporation of Section 6.01(b) of the Acquisition Credit Agreement, the Reset Date shall be deemed to have occurred and (ii) for purposes of incorporation by reference of Section 6.01(b) of the Acquisition Credit Agreement, the Reset Date will be deemed to have occurred on the first date the Minimum Long-Term Debt Ratings are in effect (and subject to any further amendment, waiver or other modification thereof consented to in writing by the Majority Banks hereunder). For purposes hereof, "Minimum Long-Term Debt Ratings" are in effect on any day on which the Company's long-term unsecured debt is rated at least BBB+ by S&P (as defined in the Pricing Schedule) and Baa1 by Moody's (as defined in the Pricing Schedule)." 2 3 SECTION 3. Incorporation By Reference of Covenants Contained in the Acquisition Credit Agreement. (a) Section 9.1 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: "9.1 Incorporation By Reference of Covenants Contained in the Acquisition Credit Agreement. Sections 5.01, 5.02 and 5.04 through 5.08, inclusive, of the Acquisition Credit Agreement are hereby incorporated herein by reference. Defined terms used in Sections 5.01, 5.02 and 5.04 through 5.08, inclusive, of the Acquisition Credit Agreement have the meanings assigned to such terms in the Acquisition Credit Agreement, except that for purposes of this Section 9.1 (i) the terms "Lenders" and "Administrative Agent" means the Banks and (ii) the terms "Event of Default" and "Unmatured Event of Default" shall mean an Event of Default and Unmatured Event of Default, respectively, under this Agreement." (b) Sections 9.2 through 9.5, inclusive, of the Existing Credit Agreement are hereby deleted in their entirety. (c) The definitions of "Compliance Certificate", "Consolidated Funded Debt, "Consolidated Net Tangible Assets", "Consolidated Net Worth", "Debt", "Domestic Subsidiary", "Exempted Indebtedness", "Funded Debt", "lien or mortgage", "Principal Property", "Sale and Leaseback Transaction" and "Wholly Owned Domestic Subsidiary" set forth in Section 13 of the Existing Credit Agreement are hereby deleted in their entirety. SECTION 4. Incorporation By Reference of Events of Default Contained in the Acquisition Credit Agreement. (a) Sections 11.1.2 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: A11.1.2 Incorporation By Reference of Events of Default Contained in the Acquisition Credit Agreement. Sections 6.01(b) through 6.01(d), inclusive, and Sections 6.01(f) through 6.01(i), inclusive, of the Acquisition Credit Agreement are hereby incorporated herein by reference. Defined terms used in Sections 6.01(b) through 6.01(d), inclusive, and Sections 6.01(f) through 6.01(i), inclusive, of the Acquisition Credit Agreement have the meanings assigned to such terms in the Acquisition Credit Agreement, except that for purposes of this Section 11.1.2, the term (i) "Commitments" means the Commitments under this Agreement, (ii) "Loans" means the Loans under this Agreement, and (iii) "Other Debt" means Debt (as defined in the Acquisition Credit Agreement) of the Company (other than the Loans under this Agreement ) in an aggregate principal amount in excess of $100,000,000." 3 4 (b) Sections 11.1.2 through 11.1.4, inclusive, and Section 11.1.6 of the Existing Credit Agreement are hereby deleted in their entirety. (c) Section 11.1.5 of the Existing Credit Agreement is redesignated as Section 11.1.3, and the following new Section 11.1.4 is added to the Existing Credit Agreement immediately after Section 11.1.3 thereof: "11.1.4. Guaranty Unenforceable. The Guaranty of the Company set forth in Section 12 shall cease at any time to be in full force and effect, or any party hereto (other than a Bank) shall so assert in writing." (d) Sections 11.2 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: "11.2 Effect of Event of Default. If any Event of Default described in Section 11.1.2 and constituting an "Event of Default" under Section 6.01(c) of the Acquisition Credit Agreement (a "BANKRUPTCY DEFAULT") shall occur, the Commitments (if they have not theretofore terminated) shall immediately terminate and all Loans and Notes shall automatically become immediately due and payable, all without notice of any kind; and, in the case of any other Event of Default, the Majority Banks may declare the Commitments (if they have not theretofore terminated) to be terminated and the Outstanding Majority Banks may declare that all Loans and Notes shall become immediately due and payable. The Majority Banks and the Outstanding Majority Banks shall promptly advise the Company in writing of any such declaration. Following the declaration that all Loans and Notes are immediately due and payable, all payments made by the Company on account of the Loans and Notes shall be made to the Administrator, which shall distribute such payments on a pro rata basis (in relation to the amounts of outstanding Loans) to Banks with outstanding Loans. Following such declaration, if any Bank receives a payment that is not on a pro rata basis, such Bank will remit to the Administrator any amount in excess of its pro rata portion. Upon receipt of any such remittance, the Administrator will distribute such amount to the Banks with outstanding Loans in order that all distributions will be pro rata. The effect as an Event of Default of any event described in Section 11.1.1 or a Bankruptcy Default may be waived only by the written concurrence of the holders of 100% of the aggregate unpaid principal amount of the Notes and the Majority Banks, and the effect as an Event of Default of any other event described in this Section 11 may be waived by the written concurrence of the Majority Banks and the Outstanding Majority Banks." SECTION 5. Changes in Pricing. (a) Clause (a) of Section 3.1 is hereby amended to read in its entirety as follows: "(a) At all times while such Loan is a Base Rate Loan, at a rate per annum equal to the Base Rate from time to time in effect, plus for any day the Applicable Margin on such day;" 4 5 (b) The definitions of "Applicable Commitment Fee" and "Applicable Margin" set forth in Section 13 of the Existing Credit Agreement are hereby amended to read in their entirety as follows: "APPLICABLE COMMITMENT FEE" has the meaning set forth in the Pricing Schedule. "APPLICABLE MARGIN" has the meaning set forth in the Pricing Schedule. (c) A new definition of "Pricing Schedule" is added in alphabetical order to Section 13 of the Existing Credit Agreement, to read in its entirety as follows: "PRICING SCHEDULE" means the Schedule attached hereto denominated as such. (d) A Pricing Schedule is hereby added to the Existing Credit Agreement, to read in its entirety as set forth on the Pricing Schedule attached hereto. SECTION 6. Other Terms and Conditions. Unless amended hereby, all other terms and conditions of the Existing Agreement shall remain in full force and effect without change. SECTION 7. Governing Law. This Amendment and each Note issued pursuant hereto shall be a contract made under and governed by the internal laws of the State of Ohio. Wherever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. All obligations of the Company and rights of the Banks and any other holders of the Notes expressed herein or in the Notes shall be in addition to and not in limitation of those provided by applicable law. SECTION 8. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. When counterparts executed by the Company and the Majority Banks shall have been lodged with the Company (or, in the case of any party as to which an executed counterpart shall not have been so lodged, the Company shall have received telegraphic, telex, or other written confirmation from such party of execution of a counterpart hereof by such party), this Amendment shall become effective as of January 27, 1999. 5 6 SECTION 9. Captions. Section captions used in this Amendment are for convenience only, and shall not affect the construction of this Amendment. 6 7 Delivered at Cleveland, Ohio, as of the day and year first above written. TRW INC. By: /s/ Ronald P. Vargo -------------------------------------- Title: Vice President & Treasurer BANK OF AMERICA NT & SA By: /s/ Lynn W. Stetson -------------------------------------- Title: Managing Director BARCLAYS BANK PLC By: /s/ Keith Mackie -------------------------------------- Title: Director THE CHASE MANHATTAN BANK By: /s/ Andris G. Kalnins -------------------------------------- Title: Vice President 8 CITIBANK, N.A. By: /s/ Robert D. Wetrus -------------------------------------- Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Christopher C. Kunhardt -------------------------------------- Title: Vice President NATIONAL CITY BANK By: /s/ Davis R. Bonner -------------------------------------- Title: Senior Vice President THE SUMITOMO BANK, LIMITED By: /s/ John H. Kemper -------------------------------------- Title: Senior Vice President 9 BANQUE NATIONALE DE PARIS By: /s/ Arnaud Collin du Bocage -------------------------------------- Title: Executive Vice President and General Manager DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Deborah Slusarczyk -------------------------------------- Title: Vice President By: /s/ Ken Hamilton -------------------------------------- Title: Senior Vice President NBD BANK By: /s/ Glenn A. Currin -------------------------------------- Title: Vice President ROYAL BANK OF CANADA By: /s/ Charles S. Romano, Jr. -------------------------------------- Title: Manager 10 THE SAKURA BANK, LIMITED By: /s/ -------------------------------------- Title: THE TOKAI BANK, LIMITED By: /s/ -------------------------------------- Title: UBS AG, STAMFORD BRANCH (f/k/a/ UNION BANK OF SWITZERLAND) By: /s/ Philippe R. Sandmeier -------------------------------------- Title: Director By: /s/ Richard W. Fortney -------------------------------------- Title: Executive Director WELLS FARGO BANK, N.A. By: /s/ Judy A. Vodhanel -------------------------------------- Title: Vice President By: /s/ Steven A. Newell -------------------------------------- Title: Assistant Vice President 11 KEYBANK NATIONAL ASSOCIATION By: /s/ Marianne T. Meil -------------------------------------- Title: Vice President BANK OF CHINA By: /s/ Li Chuanjie -------------------------------------- Title: General Manager 11 12 PRICING SCHEDULE "APPLICABLE COMMITMENT FEE" means, for any day, the rate per annum (expressed in basis points) set forth below in the column corresponding to the Pricing Level that applies on such day:
- --------------- ------- -------- --------- -------- ------- -------- PRICING LEVEL LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI Applicable 9.0 10.0 12.5 15 22.5 37.5 Commitment Fee
"APPLICABLE MARGIN" means, for any day, with respect to any Loan, the rate per annum (expressed in basis points) set forth below in the column corresponding to such type of Loan and the Pricing Level that applies on such day:
- --------------- ------- -------- --------- -------- ------- -------- PRICING LEVEL LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI Applicable Margin for Eurocurrency Loans Usage less than 1/4 40.0 50.0 62.5 75.0 100.0 125.0 Usage greater than or equal to 1/4 50.0 60.0 75.0 87.5 125.0 175.0 Applicable Margin for Domestic CD Loans Usage less than 1/4 52.5 62.5 75 87.5 112.5 137.5 Usage greater than or equal to 1/4 62.5 72.5 87.5 100 137.5 187.5 Applicable Margin for Base Rate Loans Usage less than 1/4 0 0 0 0 100 100 Usage greater than or equal to 1/4 0 0 0 0 100 100
For purposes of this Schedule, the following terms have the following meanings, subject to the last paragraph of this Pricing Schedule: "MOODY'S" means Moody's Investors Service, Inc. "LEVEL I PRICING" applies on any day on which (i) the Company's long-term debt is rated A or higher by S&P and no lower than A3 by Moody's or A2 or higher by Moody's and no lower than A- by S&P and (ii) Minimum Short-Term 12 13 Debt Ratings are in effect; provided that Level I Pricing shall not apply on any day prior to the Step Down Date. "LEVEL II PRICING" applies on any day on which (i)(x) the Company's long-term debt is rated A- or higher by S&P and no lower than Baa1 by Moody's or A3 or higher by Moody's and no lower than BBB+ by S&P and (y) Minimum Short-Term Debt Ratings are in effect and (ii) Level I Pricing does not apply; provided that Level II Pricing shall not apply on any day prior to the Step Down Date. "LEVEL III PRICING" applies on any day on which (i)(x) the Company's long-term debt is rated BBB+ or higher by S&P and Baa1 or higher by Moody's and (y) Minimum Short-Term Debt Ratings are in effect and (ii) neither Level I Pricing nor Level II Pricing applies; provided that Level III Pricing shall not apply on any day prior to the Step Down Date. "LEVEL IV PRICING" applies on any day on which (i)(x) the Company's long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's and (y) Minimum Short-Term Debt Ratings are in effect and (ii) none of Level I Pricing, Level II Pricing and Level III Pricing applies. "LEVEL V PRICING" applies on any day on which (i) the Company's long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) none of Level I Pricing, Level II Pricing, Level III Pricing and Level IV Pricing applies. "LEVEL VI PRICING" applies on any day if no other Pricing Level applies on such day. "MINIMUM SHORT-TERM DEBT RATINGS" are in effect on any day on which the Company's short-term debt is rated A-2 or higher by S&P and P-2 or higher by Moody's. "PRICING LEVEL" refers to the determination of which of Level I, Level II, Level III, Level IV, Level V or Level VI Pricing applies on any day. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "STEP DOWN DATE" means the first date on which the aggregate amount of the "Commitments" under the Acquisition Credit Agreement has been reduced by an amount equal to at least 25% of the aggregate amount of the "Commitments" on February 26, 1999 thereunder. 13 14 "USAGE" means at any day a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date, after giving effect to any borrowing or payment on such date, and (ii) the denominator of which is the aggregate amount of the Commitments at such date, after giving effect to any reduction of the Commitments on such date. For purposes of this Pricing Schedule, if for any reason any Loans remain outstanding after termination of the Commitments, the Usage for each day on or after the day of such termination shall be deemed to be greater than 1/4. The credit ratings with respect to long-term debt to be utilized for purposes of this Pricing Schedule are those assigned to the senior unsecured long-term debt securities of the Company without third-party credit enhancement, and any rating assigned to any other long-term debt security of the Company shall be disregarded for such purpose. The credit ratings with respect to short-term debt to be utilized for purposes of determining whether Minimum Short-Term Debt Ratings are in effect on any day are those assigned to the commercial paper issued by the Company, and any rating assigned to any other short-term debt security of the Company shall be disregarded for such purpose. The ratings in effect for any day are those in effect at the close of business on such day. 14 EX-10.3 4 EXHIBIT 10.3 1 Exhibit 10.3 Executive Offices HOWARD V. KNICELY 1900 Richmond Road Executive Vice President Cleveland, OH 44124 Human Resources & Communications 216.291.7400 Personal and Confidential March 9, 1999 Peter S. Hellman 1614 Berkshire Road Gates Mills, OH 44040 Dear Peter: This letter agreement details the understanding we have reached regarding your employment with TRW Inc. ("TRW"), and the benefits TRW is willing to provide to you as consideration for the execution of this Agreement. Please review it carefully to make sure you are in complete agreement. EMPLOYMENT Your President and Chief Operating Officer status and full-time service with TRW will cease on February 28, 1999. Except as provided in subparagraph (d) of the paragraph captioned "Confidentiality; Cooperation" below, you will not be required to perform any services for or on behalf of TRW after February 28, 1999. As consideration for the execution of this Agreement, TRW will continue your employment relationship through the first to occur of February 28, 2001, the date you begin full-time employment with another company, or the date of your death (this first to occur date is hereinafter referred to as the "Termination Date"). If you begin full-time employment elsewhere earlier then February 28, 2001, you will immediately notify TRW and all remaining benefits described below as continuing through the Termination Date (other than cash compensation and those provided by law) will, except as otherwise provided below, terminate at that time, and your benefit service under the TRW Salaried Pension Plan (the "SPP") and the TRW Supplementary Retirement Income Plan ("SRIP") will be as provided under "Pensions" below. 2 Page 2 Peter S. Hellman March 9, 1999 OFFICER/DIRECTOR STATUS Effective February 28, 1999, you will resign as an officer and Director of TRW and of any of its direct or indirect subsidiaries. After February 28, 1999, you will not have, nor will you hold yourself out as having, authority to bind TRW in any manner and you will cease to be a member of the Management Committee and an executive officer of TRW Inc. within the definition of Rule 16a-1 (f) under the Securities Exchange Act of 1934. Our records indicate that your last transaction in TRW stock occurred in July 1998; accordingly, you will not have any further Section 16 reporting obligations after February 28, 1999. Please call Kathleen Weigand if you have any questions concerning Section 16. EMPLOYMENT CONTINUATION AGREEMENT Your February 7, 1996 employment continuation agreement will terminate effective February 28, 1999. SALARY AND INCENTIVE As consideration for the execution of this Agreement, TRW will continue to pay to you an amount equivalent to your salary at the current rate of $670,000 per year in bi-weekly payments through February 28, 2001. With respect to 1999 and 2000, you will receive a full OIP incentive at 60% target (i.e. $402,000 for 1999 and $402,000 for 2000), to be paid in each case in February of the following year. If you begin full-time employment elsewhere or you die before February 28, 2001, all salary and OIP incentives that would otherwise be paid over time through February 28, 2001 will be accelerated and paid in a single lump sum within 10 days of the date on which you begin that other full-time employment or the date of your death, as the case may be. STOCK OPTIONS Your outstanding stock options will continue to earn out until the Termination Date. You will not receive a stock option grant in 1999 and will no longer be eligible to receive future grants. Your rights to exercise your earned out stock options are controlled by the terms of the option agreements. Accordingly, in addition to being able to exercise earned stock options at any time before the Termination Date, you will have three months to exercise any earned stock options after the Termination Date. 3 Page 3 Peter S. Hellman March 9, 1999 STRATEGIC INCENTIVE PROGRAM You will continue to participate in the 1998-2000 Strategic Incentive Program through December 31, 2000 and will be eligible to receive payouts for the years 1999 and 2000, if any, based on TRW's SIP goal performance for each of those years and in accordance with your grant agreement, as amended from time to time, and as if you had continued in the employ of TRW as Chief Operating Officer through February 28, 2001; with payments to be made in February 2000 (for the year 1999) and February 2001 (for the year 2000). In the case that the 1998-2000 Strategic Incentive Program is terminated after 1999, your payout for the year 2000 will be the same payout amount that you receive for the year 1999. In the case that the 1998-2000 Strategic Incentive Program is terminated during 1999, your payout for each of the years 1999 and 2000 will be the same payout amount that you received for the year 1998. If you begin full-time employment elsewhere or you die before February 28, 2001, payments under this paragraph will not be accelerated but will be made at the times indicated above in this paragraph. BENEFITS Your benefits coverage will be as follows: A. VACATION Your vacation accrual will cease on February 28, 1999. Your accrued but unused vacation will be paid to you in a lump sum of $34,376.15 not later than March 15, 1999. B. GROUP HEALTH PLAN COVERAGE As further consideration, TRW will continue to provide medical coverage under the TRW Executive Health Care Plan through the Termination Date, provided you continue to make contributions in accordance with the Plan. You may elect within 60 days of the Termination Date to continue group health coverage under the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA) for a period of up to 18 months after termination (which may be extended for an additional 11 months, if, prior to the end of the initial 18-month period, you provide evidence that you or a dependent qualify for Social Security disability benefits under Title II or XVI of the Social Security Act) based on either the TRW Executive Health Care Plan or any TRW ChoicePlus medical plan option. You will be responsible for the COBRA costs of the plan, which will be 102% for the first 18 months and 150% for the additional 11 months. 4 Page 4 Peter S. Hellman March 9, 1999 C. LIFE INSURANCE As further consideration for the execution of this Agreement, you will continue to be covered by the company-paid life insurance program through the Termination Date. When your life insurance coverage ends, you will have 31 days from that date to convert your TRW-paid life insurance to an individual policy (currently through Prudential). Your participation in the employee-paid accidental death insurance plan will continue until the time you cease to make payments or through the end of the day on the Termination Date, whichever is earlier. If you are participating in the optional group universal life insurance program (currently administered by Aetna), at the time your employment terminates, you should automatically receive notification regarding the requirements for continuation of your policy once payroll deductions cease. D. KEY EXECUTIVE LIFE INSURANCE You will immediately vest in Policy #2722328 of the Key Executive Life Insurance Plan and TRW will pay all policy premiums necessary to maintain the policy death benefit at a level of at least $7,075,000 through the date of the death of the last to die of you and your wife subject to the terms of that plan. For purposes of that plan, your employment with TRW will be deemed to have terminated on February 28, 1999. TRW will continue Policy #659032272 with a face value of $5,700,000 in force through at least May 30, 1999 to provide you an opportunity to decide whether you want to continue that policy in effect after that date. Thereafter you may continue that policy in effect at your own cost. Let me know if you wish to pursue this and we will get the details from Ayco. E. LONG-TERM DISABILITY As further consideration for the execution of this Agreement, you will continue to be covered by TRW's long-term disability plan until the Termination Date. 5 Page 5 Peter S. Hellman March 9, 1999 F. PENSION Under the provisions of the TRW Salaried Pension Plan (SPP), you will be placed in deferred vested status, until you request the start of an annuity sometime between the ages of 55 and 65. You will receive a deferred vested right statement showing the amount of the annuity. For purposes of determining the benefit to be paid from the TRW SPP in accordance with the plan provisions, you will be credited with benefit service through the earlier of February 29, 2000 or your death, and your pensionable earnings (subject to Internal Revenue Code Sec. 401(a)(17) limits) through February 28, 1999 will be included. For purposes of determining the benefit to be paid from the TRW SRIP, you will be credited with benefit service through the Termination Date and amounts paid to you pursuant to this letter agreement that would have been treated as pensionable earnings if earned by you while a full-time employee of TRW will be treated as pensionable earnings. Please refer to your Salaried Pension Plan summary plan description for details of that plan. G. STOCK SAVINGS PLAN AND BENEFITS EQUALIZATION PLAN You may continue to make contributions to the Stock Savings Plan (SSP) and the nonqualified Benefits Equalization Plan (BEP) in accordance with the provisions of the plans, and to be credited under the SSP or BEP with TRW matching contributions, through the Termination Date. Thereafter, the following options are available to you regarding the distribution of your SSP/BEP accounts. (i) You may take a total distribution of your SSP. If you elect a total distribution, any funds in the TRW Stock Fund will be paid in shares of TRW Common Stock. (ii) You may defer the payout of the balance of your SSP account to a later date, which could be as late as age 70, in which case you will become an inactive participant in the Plan. Inactive participants continue to have the same options as active employees, except that they are no longer eligible to make contributions to or to apply for a loan from the SSP. 6 Page 6 Peter S. Hellman March 9, 1999 (iii) Unless you elect otherwise under the terms of the BEP, you will receive your BEP account balance in ten annual installments beginning with the January following the Termination Date. Alternatively, you may elect to receive your payment in a single sum or in annual installments for less than 10 years, provided you so elect at least 60 days before the Termination Date. We suggest that you seek the advice of your tax counsel regarding the advisability and effect of deferring the receipt of any payments under the SSP and BEP and the timing of any elections to defer. H. DEFERRED COMPENSATION PLAN Your participation in the TRW Inc. Nonqualified Deferred Compensation Plan will end on the Termination Date. Until that date, you will be invited to participate and eligible to defer your 1999 OIP and SIP payments and your 2000 OIP and SIP payments in accordance with the provisions of the plan. Your account balances will be paid out in accordance with the provisions of the Plan and your elections, but in no case will the balances be paid out later than January 2002. I. FINANCIAL COUNSELING You will continue to participate in the Financial Counseling Program administered by Ayco until April 15th of the year subsequent to your Termination Date. J. COMPANY CAR As further consideration for the execution of this Agreement, your current company car, including the insurance and maintenance thereof, will continue to be available to you until the Termination Date. At that time, you may purchase that car in accordance with our standard lease buyout practices. OUTPLACEMENT As further consideration for the execution of this Agreement, TRW will pay to one of the established outplacement firms selected from TRW's list of approved firms (Right Management Consultants, Career Partners/Patrick-Douglas, Interim Career Consulting, or any other such firm that may be approved in advance by TRW), reasonable and customary fees and expenses, for services rendered to you pursuant to a fee and expense agreement to be reached with the selected firm at the outset of the relationship, and approved at that time by TRW. 7 Page 7 Peter S. Hellman March 9, 1999 OFFICE/SECRETARIAL SUPPORT Through at least the first to occur of February 29, 2000 and the Termination Date, TRW will provide you with telephone answering service and secretarial support at TRW headquarters and office space at a different site to be selected by you with prior approval by TRW. CREDIT CARDS You agree to return your telephone credit card, American Express card, and other corporate credit cards to TRW on or about February 26, 1999. TRW EQUIPMENT AND PROPERTY You agree to return any and all company equipment and property that you may have in your possession (other than the portable computer you have heretofore used), including but not limited to any pager and/or cell phone to TRW no later than February 26, 1999. You may retain the portable computer through February 28, 2001. CONFIDENTIALITY; COOPERATION In consideration of TRW's agreement to provide the compensation, benefits, and payments, set forth in this letter agreement: (a) You acknowledge that as an employee of TRW you possess confidential and proprietary information owned by TRW and you agree not to use this information or reveal it to any other person or corporation. You will not remove from TRW facilities any materials which contain TRW confidential or proprietary information. (b) You agree you will not disparage, attempt to discredit, or otherwise call into disrepute TRW, its affiliates, successors, assigns, officers, directors, employees, agents, or any of their products or services in any manner that would damage the business or reputation of TRW or its affiliates, successors, assigns, officers, directors, employees, or agents. (c) You agree not to assist any party other than TRW in any litigation or investigation against TRW or its affiliates, successors, assigns, officers, directors, employees or agents with respect to any facts or circumstances existing at any time before the Termination Date or using information (whether or not confidential) obtained by you during or before your active employment by TRW, except as required by law. You further agree that if you believe any such action is required by law, you 8 Page 8 Peter S. Hellman March 9, 1999 will first afford TRW the opportunity to raise and obtain a ruling on any claim of attorney-client, work product, or other privilege or any other contractual or other defense that may be applicable. (d) You agree to provide your reasonable cooperation to TRW in any future lawsuit, administrative proceeding or other judicial, administrative or legislative matter in which your assistance may be desired by TRW. (e) Until February 28, 2001, you agree that you (i) shall refrain from accepting work, engagements, or appointments from any third party which would conflict with the protection of TRW confidential or proprietary information and (ii) shall not, directly or indirectly, as owner, manager, officer, director, employee, consultant or in any other capacity, become financially interested in or otherwise connected with a third party which engages in business activity which is competitive with the then current business activities of TRW; provided, however, this limitation shall not preclude you from being otherwise employed or making an equity investment in a firm whose stock is listed on a national securities exchange or NASDAQ. NONDISPARAGEMENT In consideration of your execution of this letter agreement, TRW agrees that neither TRW nor any of its affiliates, successors, assigns, officers, directors, employees, or agents will disparage you, attempt to discredit you, or otherwise call you into disrepute in any manner that would damage your reputation. RELEASE In consideration for TRW's agreement to provide the compensation, benefits and payments set forth in this letter agreement: (a) You agree for yourself, your heirs, executors, administrators, successors and assigns to release and discharge forever TRW, its affiliates and insurers, their successors and assigns, officers, directors, employees and agents from any and all claims, demands, causes of action, losses and expenses of every nature whatsoever, whether known or unknown, arising out of or in connection with your employment by TRW or, including, but not limited to, breach of contract (express or implied), wrongful discharge, intentional infliction of emotional 9 Page 9 Peter S. Hellman March 9, 1999 harm, defamation, libel, slander, or other tort, or violation of any federal, state, or municipal statute or ordinance relating to discrimination in employment, including but not limited to Title VII of the Civil Rights Act of 1964 (42 U.S.C. Sec. 2000(e) ET SEQ.), Ohio Revised Code Section 412 ET SEQ., Americans with Disabilities Act of 1990, 42 U.S.C. Sec. 12101, and all applicable state laws. (b) YOU AGREE THAT BY SIGNING THIS LETTER, YOU ARE ALSO KNOWINGLY AND VOLUNTARILY WAIVING ANY AND ALL CLAIMS OR CAUSES OF ACTION YOU MAY HAVE UNDER THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967 (29 U.S.C. SEC. 621 ET SEQ.) ("ADEA") AND APPLICABLE STATE LAWS. (c) In signing this Agreement, you agree to waive any rights you would have to pursue any of the claims described herein against TRW through the company's Alternative Dispute Resolution (ADR) process, or through any court or administrative agency; and further agree not to bring any suit or action in any court or administrative agency against any of the beneficiaries of this release arising out of or relating to the subject matter of this release. TRW agrees to release you, your successors and assigns from any and all claims, demands, causes of action, losses and expenses of every nature whatsoever, whether known or unknown, arising out of or in connection with your employment by TRW, or the termination thereof. MISCELLANEOUS (a) It is important that you understand that the continued availability, after the date of this letter, of the benefits specified above that are to be provided pursuant to any particular TRW benefit plan is subject to (i) the continued existence of the applicable TRW benefit plans, (ii) the retention of IRS-qualified status for those plans which are currently so qualified, (iii) the terms of all applicable TRW benefit plans as such terms and conditions are in effect from time to time in the future, and (iv) changes in governing laws and regulations applicable to the benefit plans. However, if any of the factors listed in (i) through (iv) above changes the benefits under any particular TRW benefit plan from those available under that plan as in effect on February 26, 1999, TRW will cause you to receive benefits 10 Page 10 Peter S. Hellman March 9, 1999 under that plan that are at least as favorable to you as the benefits provided under that plan are to the members of TRW's Management Committee. (b) You and TRW acknowledge and agree that: (i) material breach by you of your obligations under this letter agreement, including but not limited to those specified under "Confidentiality; Cooperation" above, following receipt by you of reasonably detailed written notice from TRW of the actions considered by TRW to be a breach and a reasonable opportunity for you to effect a cure, will relieve TRW from its obligation to make any further payments to you of salary, OIP incentive amounts or SIP incentive amounts or to continue to provide any benefit provided by reason of this letter agreement. (ii) TRW's obligations to pay money pursuant to this letter agreement are merely those of an unfunded and unsecured promise to pay money in the future, and any and all of TRW's assets will be and remain the general, unpledged and unrestricted assets of TRW; and (iii) you may not borrow against TRW's obligations to pay money to you pursuant to this Agreement, nor may you assign or otherwise transfer TRW's obligations hereunder, or any interest in them, and any attempt to do so will be ineffective. (c) It is understood that the terms of this letter agreement will be governed by the laws of the State of Ohio regardless of where either party may be domiciled. (d) Any payments made by TRW hereunder are subject to applicable federal, state, and local tax withholding. (e) In the event that any provision of this letter agreement are held to be void, voidable, or unenforceable, the remaining portions hereof will remain in full force and effect. 11 Page 11 Peter S. Hellman March 9, 1999 (f) You may wish to consult with your financial or tax advisor with regard to the tax implication of any benefits, including nonqualified benefit payments and deferrals, described in this Agreement. You acknowledge and agree that no representations or warranties have been made to you with regard to the tax consequences of any payment provided for under this letter agreement. (g) The release set forth under "Release" above does not constitute a release as to any liability for a breach or default of any of the obligations referred to in this letter agreement. (h) This Agreement has been approved by the Compensation and Stock Option Committee of the Directors of TRW Inc. ENTIRE AGREEMENT You and TRW agree that this letter agreement constitutes the entire agreement and supersedes all prior agreements and understandings, whether oral or written, between you and TRW with respect to the subject matter of this Agreement. You agree that the obligations of the paragraphs relating to Confidentiality; Cooperation and Release shall survive the expiration or termination of this letter agreement. ATTORNEY You understand and acknowledge that you have the right to consult an attorney (at your personal expense) regarding the terms of this Agreement prior to your signing this letter, that you have been given ample time to do so, and that whether or not you have done so is totally your choice. In the event either you or TRW breaches this Agreement and the other party brings an action to enforce the Agreement in a court of competent jurisdiction, the party who is finally adjudged to be prevailing shall be entitled to reasonable attorneys' fees. OPPORTUNITY TO REVOKE You acknowledge that you were given this letter on March 9, 1999 that you reviewed it, and, that if you so choose, you have 21 days to consider it prior to executing it. If, after thoughtful consideration, you are in full agreement with and understand the terms and conditions contained in this letter (including the release of all claims contained in this section of the letter entitled "Release"), if you agree that you 12 Page 12 Peter S. Hellman March 9, 1999 will be bound by it, and if you agree that it represents your free will and choice, please indicate such agreement by signing this letter, dating it, and returning it to me. Please keep a copy of the signed letter for your files. The Company will hold the executed Agreement for seven (7) calendar days following your execution thereof during which time you may revoke it by notifying the undersigned in writing by the seventh (7th) day. In the absence of receipt of your written revocation within the 7 day period, this Agreement will become effective on the eighth (8th) day after your execution of this Agreement (referred to herein as the "Effective Date"). IMPLEMENTATION Unless I direct otherwise, you should address any question about the implementation of this Agreement to me. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of you and your legal representatives, heirs, and beneficiaries and the Company and its successors and assigns. Sincerely, /s/ Howard V. Knicely Howard V. Knicely ACCEPTED AND AGREED TO this 25th day of March, 1999 /s/ Peter S. Hellman - ----------------------------- Peter S. Hellman EX-27 5 EXHIBIT 27
5 0000100030 TRW INC. 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,058 0 2,826 0 1,123 6,347 7,986 3,890 18,151 8,917 5,022 0 0 75 1,652 18,151 3,097 3,097 2,618 2,618 0 0 43 7 35 (28) 0 0 0 (28) (.24) (.24)
EX-99 6 EXHIBIT 99 1 Exhibit 99 TRW Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges - Unaudited (In millions except ratio data)
Years Ended December 31 Three Months Ended ------------------------------------------------------------------------------- March 31, 1999 1998 1997 1996 1995 1994 ------------------ ------------ -------------- ------------- ------------- ----------- Earnings from continuing operations before income taxes $7.0(A) $746.1 $239.7(B) $302.2(C) $625.5 $435.5 Unconsolidated affiliates (29.8) 1.0 (8.0) 1.4 1.3 (0.6) Minority earnings 3.7 10.5 20.2 11.5 10.8 7.7 Fixed charges excluding capitalized interest 57.6 174.3 123.9 129.0 137.2 145.3 ---- ----- ----- ----- ----- ----- Earnings $38.5 $931.9 $375.8 $444.1 $774.8 $587.9 ----- ------ ------ ------ ------ ------ Fixed Charges: Interest expense $42.6 $114.4 $75.4 $84.2 $94.7 $104.7 Capitalized interest 0.8 4.7 4.5 3.5 5.1 6.6 Portion of rents representa- tive of interest factor 15.0 59.9 48.5 43.2 41.4 39.2 Interest expense of uncon- solidated affiliates 0.0 0.0 0.0 1.6 1.1 1.4 --- --- --- --- --- --- Total fixed charges $58.4 $179.0 $128.4 $132.5 $142.3 $151.9 ----- ------ ----- ----- ------ ------ Ratio of earnings to fixed charges 0.7x 5.2x 2.9x 3.4x 5.4x 3.9x ---- ---- ---- ---- ---- ----
(A) Earnings from continuing operations before income taxes for the three months ended March 31, 1999 of $7.0 million includes an $85.3 million earnings charge for purchased in-process research and development. See "Acquisitions" footnote in the Notes to Financial Statements. (B) The 1997 earnings from continuing operations before income taxes of $239.7 million includes a $548 million earnings charge for purchased in-process research and development. See "Acquisitions" footnote in the Notes to Financial Statements of the Company's 1997 Annual Report to Shareholders. (C) The 1996 earnings from continuing operations before income taxes of $302.2 million includes a charge of $384.8 million as a result of actions taken in the automotive and space and defense businesses. See "Special Charges and Divestiture" footnote in the Notes to Financial Statements of the Company's 1996 Annual Report to Shareholders. -----END PRIVACY-ENHANCED MESSAGE-----