-----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, Omn5gzOUVFYbL1uIOMNPhx84FvCK1V1NWQ0ngRxj6YABDY7mS0dQkmeQtX3bFE2J 8JmnxV7OAr3jkx0IcCpKYw== 0000950152-99-008933.txt : 19991115 0000950152-99-008933.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950152-99-008933 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747969 BUSINESS ADDRESS: STREET 1: 1900 RICHMOND RD CITY: CLEVELAND STATE: OH ZIP: 44124 BUSINESS PHONE: 2162917000 MAIL ADDRESS: STREET 1: 1900 RICHMOND ROAD CITY: CLEVELAND 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 September 30, 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 October 29, 1999, there were 121,605,093 shares of TRW Common Stock, $0.625 par value, outstanding. 2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
Statements of Operations (unaudited) TRW Inc. and subsidiaries - -------------------------------------------------------------------------------------------------------------------- Third quarter ended Nine months ended September 30 September 30 In millions except per share data 1999 1998 1999 1998 - ---------------------------------------------------------------------------------- ------------------------------ Sales $ 4,462 $ 2,836 $ 12,344 $8,959 Cost of sales 3,538 2,314 10,096 7,370 - ---------------------------------------------------------------------------------- ------------------------------ Gross profit 924 522 2,248 1,589 Administrative and selling expenses 309 201 824 592 Research and development expenses 187 126 502 370 Purchased in-process research and development - - 85 - Interest expense 149 24 334 100 Amortization of goodwill and intangible assets 40 10 81 29 Other (income)expense-net 28 (3) (13) (68) - ---------------------------------------------------------------------------------- ------------------------------ Earnings before income taxes 211 164 435 566 Income taxes 77 60 190 207 - ---------------------------------------------------------------------------------- ------------------------------ Net earnings $ 134 $ 104 $ 245 $ 359 - ---------------------------------------------------------------------------------- ------------------------------ Per share of common stock Diluted earnings per share $ 1.08 $ .85 $ 1.99 $ 2.88 Basic earnings per share $ 1.10 $ .86 $ 2.03 $ 2.95 Dividends declared $ .33 $ .31 $ .66 $ .62 - ---------------------------------------------------------------------------------- ------------------------------ - ---------------------------------------------------------------------------------- ------------------------------ Shares used in computing per share amounts Diluted 124.0 123.2 123.4 124.9 Basic 121.4 120.5 120.7 121.7 - ---------------------------------------------------------------------------------- ------------------------------
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Balance Sheets (unaudited) TRW Inc. and subsidiaries - -------------------------------------------------------------------------------------------------------------------------------- September 30 December 31 In millions 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 294 $ 83 Accounts receivable 2,487 1,721 Inventories 1,090 616 Prepaid expenses 288 104 Net assets of acquired businesses held for sale 822 - Deferred income taxes 218 179 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 5,199 2,703 Property, plant and equipment-on the basis of cost 8,014 6,604 Less accumulated depreciation and amortization 4,115 3,921 - -------------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment-net 3,899 2,683 Intangible assets Intangibles arising from acquisitions 3,698 850 Other 906 360 - -------------------------------------------------------------------------------------------------------------------------------- 4,604 1,210 Less accumulated amortization 222 143 - -------------------------------------------------------------------------------------------------------------------------------- Total intangible assets-net 4,382 1,067 Investments in affiliated companies 288 243 Long-term deferred income taxes - 33 Other notes and accounts receivable 283 227 Prepaid pension cost 2,729 - Other assets 490 213 - -------------------------------------------------------------------------------------------------------------------------------- $ 17,270 $ 7,169 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' investment Current liabilities Short-term debt $ 2,828 $ 839 Accounts payable 1,530 964 Current portion of long-term debt 733 30 Other current liabilities 2,361 1,185 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 7,452 3,018 Long-term liabilities 1,614 826 Long-term debt 5,530 1,353 Long-term deferred income taxes 581 - Minority interests in subsidiaries 110 94 Capital stock 76 75 Other capital 464 457 Retained earnings 2,174 2,021 Treasury shares-cost in excess of par value (567) (637) Accumulated other comprehensive income(loss) (164) (38) - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 1,983 1,878 - -------------------------------------------------------------------------------------------------------------------------------- $ 17,270 $ 7,169 - --------------------------------------------------------------------------------------------------------------------------------
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Statements of Cash Flows (unaudited) TRW Inc. and subsidiaries - -------------------------------------------------------------------------------------------------------------------------------- Nine months ended September 30 In millions 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Operating activities Net earnings $ 245 $ 359 Adjustments to reconcile net earnings to net cash provided by operating activities: Purchased in-process research and development 85 - ICO Global investment write-off 79 - LucasVarity pension income (128) - Depreciation and amortization 585 414 Deferred income taxes (76) (217) Other-net 49 4 Changes in assets and liabilities, net of effects of businesses acquired: Accounts receivable 95 20 Inventories and prepaid expenses 177 (151) Accounts payable and other accruals 136 (109) Other-net (97) (4) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,150 316 - -------------------------------------------------------------------------------------------------------------------------------- Investing activities Capital expenditures (540) (415) Acquisitions, net of cash acquired (6,083) (247) Proceeds from divestitures 157 - Other-net (169) (3) - -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (6,635) (665) - -------------------------------------------------------------------------------------------------------------------------------- Financing activities Increase in short-term debt 1,784 43 Proceeds from debt in excess of 90 days 5,923 912 Principal payments on debt in excess of 90 days (1,772) (314) Reacquisition of common stock - (179) Dividends paid (120) (114) Other-net (30) 19 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 5,785 367 - -------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (89) (9) - -------------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 211 9 Cash and cash equivalents at beginning of period 83 70 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 294 $ 79 - --------------------------------------------------------------------------------------------------------------------------------
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Results by Operating Segments (unaudited) TRW Inc. and subsidiaries - -------------------------------------------------------------------------------------------------------------------------------- Third quarter ended Nine months ended September 30 September 30 In millions 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------ --------------------------------- Sales Occupant Safety Systems $ 694 $ 710 $ 2,268 $ 2,245 Chassis Systems 1,436 515 3,588 1,675 Automotive Electronics 330 266 1,187 846 Other Automotive 477 194 1,152 618 Space & Electronics 498 474 1,412 1,495 Systems & Information Technology 745 677 2,155 2,080 Aeronautical Systems 282 - 582 - - ------------------------------------------------------------------------------------------ --------------------------------- Sales $ 4,462 $ 2,836 $ 12,344 $ 8,959 - ------------------------------------------------------------------------------------------ --------------------------------- Segment profit before income taxes Occupant Safety Systems $ 45 $ 45 $ 138 $ 172 Chassis Systems 91 26 195 108 Automotive Electronics 30 16 78 61 Other Automotive 35 20 85 68 Space & Electronics 17 60 239 215 Systems & Information Technology 54 52 112 134 Aeronautical Systems 33 - 65 - - ------------------------------------------------------------------------------------------ --------------------------------- Segment profit before income taxes 305 219 912 758 Purchased in-process research and development - - (85) - Corporate expense and other 6 (30) (141) (89) Pension income 61 - 119 - Financing costs (161) (25) (370) (103) - ------------------------------------------------------------------------------------------ --------------------------------- Earnings before income taxes $ 211 $ 164 $ 435 $ 566 - ------------------------------------------------------------------------------------------ ---------------------------------
4 6 NOTES TO FINANCIAL STATEMENTS (unaudited) Principles of Consolidation - --------------------------- The financial statements include the accounts of TRW and its subsidiaries. Investments in affiliated companies are accounted for by the equity or cost method as appropriate. The consolidated financial statements reflect the adjusted preliminary allocation of the purchase price for LucasVarity Limited (LucasVarity), formerly known as LucasVarity plc, 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 to the automotive industry and has a significant position in automotive 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 employs approximately 51,000 employees worldwide and the majority of its operating facilities are located 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 value of acquired in-process research and development was determined using the income approach under the proportional method. The fair value of identifiable intangible assets was determined primarily using the income approach. 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. During the third quarter 1999, certain pre-acquisition contingencies were adjusted. The value allocated to intangible assets increased $93 million from the preliminary valuation at March 31, 1999 to $506 million at September 30, 1999. The increase resulted from an updated independent appraisal which resulted in an increase in technology of $93 million. The preliminary allocation of the purchase price has been adjusted to incorporate these items and may be adjusted in subsequent periods through March 2000 based on 5 7 changes to pre-acquisition contingencies, completion of TRW management's assessment of the recognition of liabilities in connection with the acquisition of LucasVarity in accordance with EITF 95-3, and for the valuation of net assets of businesses held for sale based upon actual proceeds received from the sale of these businesses. Adjustments, if any, are not expected to have a material effect on TRW's results of operations or financial condition. The adjusted preliminary allocation of the purchase price and the estimated goodwill are summarized as follows: (In millions) Cash purchase price $6,778 Cash and cash equivalents 774 Accounts receivable 887 Inventory 524 Net assets of businesses held for sale 895 Prepaid expenses 170 Current deferred income taxes 77 Property, plant and equipment 1,302 Intangible assets 506 Prepaid pension costs 2,470 Other assets 389 ----- Total assets 7,994 Accounts payable (686) Other accruals (786) Debt (938) Long-term liabilities (823) Long-term deferred income taxes (753) ----- Total liabilities (3,986) Minority interest (39) Purchased in-process research and development 85 ----- Excess of purchase price over fair value of net assets acquired $2,724 ====== 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 5 to 30 years. Pro Forma Financial Information - ------------------------------- The following unaudited pro forma financial information for the third quarter and nine months ended September 30, 1999 and 1998, assumes the LucasVarity acquisition occurred as of the beginning of the respective periods, after giving effect to certain adjustments, including the amortization of intangible assets, interest expense on acquisition debt, depreciation based on the adjustments to the fair market value of the property, plant and equipment acquired, write-off of purchased in-process research and development and income tax effects. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the acquisition of LucasVarity been effected on the dates indicated, nor are they necessarily indicative of TRW's future results of operations. Third quarter ended Nine months ended (In millions except per share data) September 30 September 30 -------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Sales $4,462 $4,571 $13,970 $14,306 Net earnings 136 150 400 416 Diluted earnings per share 1.09 1.22 3.24 3.33 6 8 Foreign Exchange Contracts - -------------------------- TRW enters into forward exchange contracts which hedge firm foreign currency commitments, anticipated transactions and certain intercompany transactions. At September 30, 1999, TRW had contracts outstanding with a notional amount of $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 hedging of foreign currency exposures associated with the aerospace and automotive businesses acquired from LucasVarity and the hedging of certain intercompany transactions arising from the Company's reorganization of the ownership structure of certain of its subsidiaries following the acquisition of LucasVarity. The combined fair market value of the forward exchange contracts was an asset of approximately $60 million at September 30, 1999, primarily all of which related to LucasVarity, including the fair market value of contracts hedging the intercompany transactions. 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 the 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 TRW 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, TRW entered into a combination of forward starting interest rate swaps and treasury locks during the first six months 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 $1.8 billion of debt securities TRW issued during the second quarter 1999. These hedges were settled simultaneously with the issuance of the debt securities and a before-tax gain of $23 million is being recognized as an adjustment to interest expense over the life of the debt securities issued using the effective interest rate method. During the second quarter, TRW entered into an interest rate swap in order to convert the fixed rate to a floating rate on a notional principal amount of $425 million of notes issued during the quarter. The fair market value of the interest rate swap is a liability of approximately $850,000 at September 30, 1999. Net payments or receipts under the agreement will be recognized as an adjustment to interest expense. The agreement was entered into with a major financial institution, and TRW anticipates that the financial institution will satisfy its obligation under the agreement. No collateral is held in relation to the agreement. Issuance of a Subsidiary's Stock - -------------------------------- TRW includes gains or losses arising from the issuance of a subsidiary's or equity affiliate's stock in non-operating income. 7 9 Comprehensive Income - -------------------- The components of comprehensive income, net of related tax, for the third quarter and first nine months of 1999 and 1998 are as follows: Third quarter ended Nine months ended (In millions) September 30 September 30 ------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net earnings $ 134 $ 104 $ 245 $ 359 Foreign currency translation adjustments 215 77 (95) 68 Unrealized (losses)gains on securities (6) 45 (31) 41 ------ ----- ----- ----- Comprehensive income $ 343 $ 226 $ 119 $ 468 ------ ----- ----- ----- The components of accumulated other comprehensive income, net of related tax, at September 30, 1999 and December 31, 1998 are as follows: September 30 December 31 (In millions) 1999 1998 ------------ ----------- Foreign currency translation adjustments $ (150) $ (55) Unrealized (losses)gains on securities (1) 30 Minimum pension liability adjustments (13) (13) ------ ----- Accumulated other comprehensive income(loss) $ (164) $ (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, 2000. The Company is considering earlier adoption. Under this statement, changes in the market value of contracts which hedge anticipated transactions will be deferred and recognized in earnings when realized. The impact of the adoption will be determined by several factors, including the specific hedging instruments in place and their relationships to the hedged items, as well as market conditions as of the date of adoption. Management is in the process of analyzing and assessing the impact of the adoption of SFAS No. 133 on the Company's consolidated results of operations and financial position, but believes that such determination currently is not meaningful. Divestitures - ------------ On May 17, 1999, TRW announced it will divest its engine businesses, which consist of TRW Engine Components and Lucas Diesel Systems operations; TRW Nelson Stud Welding; and the LucasVarity Wiring companies. Sales included in TRW's third quarter and nine months ended September 30, 1999 Statements of Operations for the businesses to be sold were approximately $360 million and $975 million, respectively. Sales included in TRW's third quarter and nine months ended September 30, 1998 Statements of Operations for the businesses to be sold were $130 million and $430 million, respectively. TRW'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." TRW expects to complete the divestitures of these businesses beginning in the fourth quarter and continuing into early 2000. 8 10 Operating Segments - ------------------ The Company's automotive business is reported as the following operating segments: Occupant Safety Systems, Chassis Systems, Automotive Electronics and Other Automotive. The Company's aerospace and information systems business is reported as the following operating segments: Space & Electronics, Systems & Information Technology and Aeronautical Systems. The chief operating officer evaluates performance of and allocates resources to the total automotive and aerospace and information systems businesses and also reviews financial results of the seven operating segments. On August 16, 1999, TRW announced certain changes in management and organization of its automotive business to accelerate the integration of LucasVarity and strengthen its ability to serve its global customer base. As a result of these changes, LucasVarity light vehicle braking and aftermarket businesses were integrated with Chassis Systems, LucasVarity electronics businesses were integrated with Automotive Electronics and LucasVarity Diesel Systems and Wiring businesses were included in the Automotive Other segment. The LucasVarity aerospace business is reported separately as Aeronautical Systems. A description of each of the reported operating segments follows. Occupant Safety Systems - occupant restraint systems, including airbag and seat belt systems, and steering wheels. Chassis Systems - steering systems and components, including hydraulic and electrically assisted power and manual rack and pinion steering for light vehicles; light vehicle braking systems, including foundation, actuation, and anti-lock braking systems (ABS); vehicle stability controls (VSC); chassis modules and integrated vehicle control systems (IVCS); suspension components; and aftermarket operations, including parts, service, and technical and diagnostic support. Automotive Electronics - body control systems, safety and security systems, chassis and powertrain controls, sensors and components, and engineered fasteners. Other Automotive - engine valves and valve train parts; power steering systems and suspension components for commercial vehicles; diesel systems including fuel injection systems comprised of mechanical rotary pumps, fuel injectors and filters for fully-integrated electronically-controlled systems; stud welding systems; and wiring systems. Space & Electronics - spacecraft, including the design and manufacture of spacecraft equipment, propulsion subsystems, electro-optical and instrument systems, spacecraft payloads, high-energy lasers and laser technology and other high-reliability components; and electronic systems, equipment components and services, including the design and manufacture of space communications systems, avionics systems, commercial telecommunications, and other electronic technologies for tactical and strategic applications. Systems & Information Technology - systems engineering, systems integration, software development, modeling and simulation, test and evaluation, training and information technology for high technology systems, products and services in the fields of command and control, strategic missiles, missile and air defense, airborne reconnaissance, unmanned aerial vehicles, intelligence management and processing, earth observation, nuclear waste management, air traffic control, counterterrorism, security, criminal justice, health and human services, integrated supply chain, warehousing, logistics, tax and finance. Aeronautical Systems - engine controls, power generation, flight controls, cargo systems, hoists and winches, missile actuation, and repair and overhaul. 9 11 As a result of the acquisition of LucasVarity, segment assets increased significantly. The preliminary allocation of LucasVarity assets applicable to each segment follows: (In millions) Chassis Systems $3,301 Automotive Electronics 833 Other Automotive 1,189 Aeronautical Systems 2,075 Intersegment sales for each segment are as follows: Third quarter ended Nine months ended (In millions) September 30 September 30 ------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Occupant Safety Systems $ 1 $ 1 $ 2 $ 3 Chassis Systems 2 5 5 11 Automotive Electronics 22 10 49 28 Other Automotive 23 1 39 2 Space & Electronics 5 8 19 33 Systems & Information Technology 29 27 84 89 Aeronautical Systems - - - - 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. "Corporate expense and other" includes approximately a $22 million gain and $48 million loss on foreign exchange related to LucasVarity for the third quarter and first nine months of 1999, respectively. Inventories - ----------- Inventories consist of the following: September 30 December 31 (In millions) 1999 1998 ---------------------------- Finished products and work in process $ 633 $ 316 Raw materials and supplies 457 300 ------ ----- $1,090 $ 616 ------ ----- The increase in inventory is due to the acquisition of LucasVarity. Long-Term Liabilities - --------------------- Long-term liabilities at September 30, 1999 and December 31, 1998, include $1,154 million and $651 million, respectively, relating to postretirement benefits other than pensions. The increase is due to the acquisition of LucasVarity. Debt and Credit Agreements - -------------------------- TRW 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 of $3.7 billion expires January 26, 2000 with an option to extend the maturity of up to $2.0 billion of borrowings to January 26, 2001. The interest rates under the agreement are the prime rate 10 12 and a rate based on a London Interbank Offered Rate (LIBOR). Issuance of long-term debt securities in the public or private capital markets and the net proceeds from divestitures, among other items, 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. At September 30, 1999, there were no outstanding borrowings under this agreement. During the first quarter of 1999, TRW 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 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 TRW may extend the maturity of borrowings to January 26, 2001. 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 in the offer. During the second quarter, the Company settled the payable for LucasVarity shares by the issuance of commercial paper. During the second quarter 1999, TRW refinanced commercial paper by issuing $2.4 billion of notes and debentures on May 26, 1999 with $400 million 6.5% Notes Due 2002, $700 million 6.625% Notes Due 2004, $750 million 7.125% Notes Due 2009, and $550 million 7.75% Debentures Due 2029. An additional $1.0 billion of notes were issued on June 18, 1999 with $575 million Floating Rate Notes due 2000, based on a three-month LIBOR, and $425 million 6.45% Notes due 2001. The Company's effective obligation on the $425 million 6.45% Notes due 2001 was simultaneously changed to a floating rate based on a three-month LIBOR through the execution of a $425 million interest rate swap. Due to the issuance of long-term debt, tranche one of the $7.4 billion credit agreement was reduced by $3.4 billion during the second quarter. During the third quarter 1999, TRW refinanced commercial paper by entering into an $100 million debt agreement due September 2000. The interest rate under the agreement is a floating rate based on a three-month LIBOR. Due to the debt issuance, tranche one of the $7.4 billion credit agreement was reduced by an additional $100 million during the third quarter. At September 30, 1999, the Company's tranche one facility had been reduced to approximately $200 million in available commitments. The Company's available commitments under tranche two remain at $3.7 billion. At September 30, 1999, $1.1 billion of short-term obligations were reclassified to long-term obligations as TRW intends to refinance the obligations on a long-term basis and has the ability to do so under its existing credit agreements. Other (Income)Expense-Net - ------------------------- Other (income)expense-net included the following: (In millions) Third quarter ended Nine months ended September 30 September 30 ------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Other income $ (42) $ (14) $ (93) $ (95) Other expense 34 9 98 23 ICO Global investment write-off 79 - 79 - Gain from issuance of equity affiliate's stock - - (29) - Gain from sale of equity affiliates' stock (17) - (112) - Foreign currency exchange (26) 2 44 4 ----- ------ ------ ------ $ 28 $ (3) $ (13) $ (68) ----- ------ ------ ------ 11 13 Other income for the nine months ended September 30, 1998 included a $49 million benefit from the settlement of certain patent litigation. Other expense for third quarter of 1999 and nine months ended September 30, 1999 included charges for underwriting and participation fees incurred to secure committed credit facilities related to the acquisition of LucasVarity of $11 million and $33 million, respectively. During the first quarter of 1999, RF Micro Devices, Inc. (RFMD), an equity affiliate which designs, develops, manufactures and markets proprietary 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, resulting in a gain of $29 million. Deferred taxes have been provided on the gain. During the first quarter of 1999, TRW sold 287,500 shares of RFMD common stock in the registered public offering resulting in a gain of $15 million. TRW sold an additional 1.7 million shares of RFMD during the second quarter of 1999 resulting in a gain of $79 million. TRW sold an additional 400,000 shares of RFMD during the third quarter of 1999 resulting in a gain of $17 million. TRW owned approximately 22 percent of RFMD as of September 30, 1999. Foreign currency exchange for the nine months ended September 30, 1999 included a $50 million nonrecurring loss on foreign currency hedges related to the acquisition of LucasVarity. Foreign currency exchange for the third quarter and nine months ended September 30, 1999 included gains of $22 million and $3 million, respectively, on foreign currency hedges of anticipated transactions. Supplemental Cash Flow Information - ---------------------------------- Nine months ended (In millions) September 30 ------------------ 1999 1998 ---- ---- Interest paid (net of amount capitalized) $273 $ 96 Income taxes paid (net of refunds) $116 $396 For purposes of the Statements of Cash Flows, TRW considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. 12 14 Earnings Per Share - ------------------
Third quarter ended Nine months ended (In millions except per share data) September 30 September 30 ----------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Numerator Net earnings $133.5 $104.2 $244.9 $359.4 Preferred stock dividends .1 .2 .4 .5 ------ ------ ------ ----- Numerator for basic earnings per share--earnings available to common shareholders 133.4 104.0 244.5 358.9 Effect of dilutive securities Preferred stock dividends .1 .2 .4 .5 ------ ------ ------ ----- Numerator for diluted earnings per share-- earnings available to common shareholders after assumed conversions $133.5 $104.2 $244.9 $359.4 ------ ------ ------ ----- Denominator Denominator for basic earnings per share--weighted-average common shares 121.4 120.5 120.7 121.7 Effect of dilutive securities Convertible preferred stock .8 .9 .8 .9 Employee stock options 1.8 1.8 1.9 2.3 ------ ------ ------ ----- Dilutive potential common shares 2.6 2.7 2.7 3.2 Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 124.0 123.2 123.4 124.9 ------ ------ ------ ----- Basic earnings per share $ 1.10 $ .86 $ 2.03 $ 2.95 ------ ------ ------ ----- Diluted earnings per share $ 1.08 $ .85 $ 1.99 $ 2.88 ------ ------ ------ -----
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. 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 13 15 concerning the Company's subcontracts. On August 6, 1999, the Government filed its Second Amended Complaint, which incorporated vouchers, progress payment requests, and invoices submitted by TRW to higher tier Government contractors among the class of allegedly false claims challenged by the Government. On September 29, 1999, the former employee filed his Second Amended Complaint, which incorporated subcontracts performed by TRW for higher tier Government contractors among the class of contracts under which allegedly false claims were presented, and added allegations relating to certain of the former employee's pre-existing claims. 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. 14 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
(In millions except per share data) Third quarter ended Nine months ended September 30 September 30 ----------------------------------------- ----------------------------------------- Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $ 4,462 $ 2,836 $1,626 57% $12,344 $ 8,959 $3,385 38% Segment profit before income taxes 305 219 86 39% 912 758 154 20% Net earnings 134 104 30 28% 245 359 (114) (32%) Diluted earnings per share 1.08 0.85 0.23 27% 1.99 2.88 (0.89) (31%) Effective tax rate 36.5% 36.5% 43.7% 36.5%
Third quarter 1999 sales increased due to the inclusion of LucasVarity sales of $1.5 billion. Segment profit before tax for the third quarter increased primarily due to the inclusion of LucasVarity segment profit before tax of $121 million and gains on the sale of RFMD stock and a divestiture of $22 million, which were partially offset by the write-off of the Company's investment in ICO Global Communications (Holdings) Limited (ICO) of $79 million. Segment profit before tax for the third quarter of 1998 was affected by a $13 million automotive restructuring charge. In addition to the factors contributing to the increase in segment profit before tax for the third quarter 1999, net earnings also increased due to pension income related to LucasVarity of $38 million, gains on foreign currency hedges of $14 million and discontinuing the depreciation of assets of businesses held for sale of $15 million, which were partially offset by higher financing costs. Financing costs for the third quarter 1999 were $161 million compared to $25 million for the third quarter 1998. The increase in financing costs was primarily due to the debt incurred for the purchase of LucasVarity as well as the amortization of fees incurred to secure committed credit facilities. Sales for the nine months ended September 30, 1999 increased primarily due to the inclusion of LucasVarity sales of $3.3 billion. Segment profit before tax for the nine months ended September 30, 1999 increased primarily due to the inclusion of LucasVarity segment profit before tax of $242 million and gains on the sale of RFMD stock and a divestiture of $146 million, which were partially offset by the write-off of the Company's investment in ICO of $79 million, an increase in automotive restructuring charges of $56 million, losses on a commercial fixed-price contract and a capped cost reimbursable contract for the U.S. Army of $43 million, and the one-time noncash effect of the LucasVarity inventory writeup of $20 million. Segment profit before tax for the nine months ended September 30, 1998 included a $49 million benefit from the settlement of certain patent litigation, offset by $41 million in charges for litigation, contract reserves and severance costs, and $13 million related to automotive restructuring charges. Net earnings for the nine months ended September 30, 1999, decreased as the increase in segment profit before tax, the benefit of pension income related to LucasVarity of $75 million and the benefit related to discontinuing the depreciation of assets of businesses held for sale of $23 million were offset by an $85 million charge for purchased in-process research and development, higher financing costs, and losses on foreign currency hedges of $31 million. Financing costs for the nine months ended September 30, 1999 were $370 million compared to $103 million for the nine months ended 1998. The increase in financing costs was primarily due to the debt incurred for the purchase of LucasVarity as well as the amortization of fees incurred to secure committed credit facilities. 15 17 The effective tax rate was 43.7 percent for the nine months ended September 30, 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 36.5 percent for the nine months ended September 30, 1999. Automotive Segments Occupant Safety Systems
Third quarter ended Nine months ended (In millions) September 30 September 30 -------------------------------------------- -------------------------------------------------- Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $694 $710 $(16) (2%) $2,268 $2,245 $23 1% Segment profit before income taxes 45 45 - (1%) 138 172 (34) (20%)
Third quarter 1999 sales decreased primarily due to lower pricing of approximately $45 million and the effects of a strong U.S. dollar of approximately $23 million, offset in part by increased volume of approximately $42 million. Third quarter 1998 sales were affected by lower volume due to the General Motors strike. Segment profit before tax remained constant in the third quarter of 1999 as lower pricing and production inefficiencies relating to the implementation of a new manufacturing system of $5 million were offset by cost reductions net of inflation of approximately $32 million and increased volume of approximately $7 million. Segment profit before tax for the third quarter 1998 was affected by automotive restructuring charges of $9 million. Sales for the nine months ended September 30, 1999 increased primarily due to increased volume of $210 million which was offset in part by lower pricing of approximately $150 million and the effects of a strong U.S. dollar of approximately $40 million. Segment profit before tax for the nine months ended September 30, 1999 decreased primarily due to lower pricing and production inefficiencies related to the implementation of a new manufacturing system and the startup and transfer of certain operations to lower-cost facilities in Mexico of approximately $25 million, which were offset in part by cost reductions net of inflation of approximately $110 million and increased volume of approximately $30 million. Chassis Systems
Third quarter ended Nine months ended (In millions) September 30 September 30 -------------------------------------------- -------------------------------------------------- Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $1,436 $515 $921 179% $3,588 $1,675 $1,913 114% Segment profit before income taxes 91 26 65 264% 195 108 87 81%
Third quarter 1999 sales increased due to the inclusion of LucasVarity sales of approximately $925 million, as higher volume of approximately $25 million was offset by the effects of a strong U.S. dollar of approximately $25 million. Segment profit before tax for the third quarter 1999 increased due to the 16 18 inclusion of LucasVarity segment profit before tax of approximately $72 million which was partially offset by losses on new product introductions. Sales for the nine months ended September 30, 1999 increased due to the inclusion of LucasVarity sales of approximately $2 billion, as higher volume of approximately $30 million was offset by the effects of a strong U.S. dollar of approximately $60 million. Segment profit before tax for the nine months ended September 30, 1999 increased primarily due to the inclusion of LucasVarity segment profit before tax of approximately $176 million and cost reductions net of inflation of approximately $40 million, which were offset partially by the net effect of restructuring charges of $51 million, losses on new product introductions of approximately $25 million, the one-time noncash effect of the LucasVarity inventory write-up and lower pricing of approximately $16 million and $10 million, respectively. Automotive Electronics
Third quarter ended Nine months ended (In millions) September 30 September 30 -------------------------------------------- -------------------------------------------------- Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $330 $266 $64 24% $1,187 $846 $341 40% Segment profit before income taxes 30 16 14 89% 78 61 17 29%
Third quarter 1999 sales increased due to the inclusion of LucasVarity sales of approximately $50 million and higher volume of approximately $30 million. Segment profit before tax in the third quarter 1999 increased primarily due to cost reductions net of inflation of approximately $20 million and the inclusion of LucasVarity segment profit before tax of approximately $5 million which were partially offset by losses on new product introductions and lower pricing of approximately $10 million and $6 million, respectively. Sales for the nine months ended September 30, 1999 increased primarily due to the inclusion of LucasVarity sales of approximately $290 million and higher volume of approximately $90 million. Segment profit before tax for the nine months ended September 30, 1999 increased primarily due to cost reductions net of inflation of approximately $60 million and the inclusion of LucasVarity segment profit before tax of approximately $9 million which were offset in part by lower pricing of $25 million, unfavorable product mix including losses on new product introductions of approximately $20 million, net restructuring charges of $5 million and the one-time noncash effect of the LucasVarity inventory write-up of $4 million. Other Automotive
Third quarter ended Nine months ended (In millions) September 30 September 30 -------------------------------------------- -------------------------------------------------- Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $477 $194 $283 146% $1,152 $618 $534 86% Segment profit before income taxes 35 20 15 70% 85 68 17 24%
Third quarter 1999 sales increased due to the inclusion of LucasVarity sales of approximately $270 million and increased volume of approximately $25 million. Segment profit before tax in the third quarter 1999 17 19 increased primarily due to the inclusion of LucasVarity segment profit before tax of approximately $12 million. Sales for the nine months ended September 30, 1999 increased primarily due to the inclusion of LucasVarity sales of approximately $500 million and higher volume of approximately $50 million. Segment profit before tax for the nine months ended September 30, 1999 increased due to the inclusion of LucasVarity segment profit before tax of approximately $14 million. Automotive Restructuring - ------------------------ The automotive restructuring program is progressing. The Company closed an additional two plants in the third quarter bringing the total of closed plants to eight. An additional six plants which were previously announced for closure or sale are currently in-process of closure or sale. TRW has reduced employee headcount by more than 4,000 against a goal of 7,500. As to the elimination of suppliers, TRW has reduced the total supplier count by approximately 45 percent of the planned 4,500. In addition, on an annual basis, $70 million of the planned $75 million in selling, general, and administrative expense reductions has been achieved. 18 20 Aerospace & Information Systems Segments Space & Electronics
Third quarter ended Nine months ended (In millions) September 30 September 30 ---------------------------------------------- ------------------------------------------------ Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $498 $474 $24 5% $1,412 $1,495 $(83) (6%) Segment profit before income taxes 17 60 (43) (73%) 239 215 24 11%
Third quarter 1999 sales increased due to higher volume on core programs of approximately $35 million, and the startup in the commercial satellite communication line of business of approximately $25 million, which were offset in part by approximately $30 million of lower volume on contracts nearing completion or completed during the third quarter 1999. Segment profit before tax decreased in the third quarter 1999 due to the write-off of the Company's investment in ICO of $79 million, offset in part by gains of $17 million from the sale of RFMD stock and improved program performance of approximately $15 million. Sales for the nine months ended September 30, 1999 decreased primarily due to lower volume on contracts nearing completion or completed during the nine months ended September 30, 1999 of approximately $120 million and termination of SBIRS-Low contract of approximately $65 million which were offset in part by higher volume on core programs and the startup in the commercial satellite communication line of business of approximately $65 million and $25 million, respectively. Segment profit before tax for the nine months ended September 30, 1999 increased primarily due to a gain of $140 million related to RFMD which was partially offset by $11 million of charges for a capped cost reimbursable contract for the U.S. Army and the write-off of the Company's investment in ICO of $79 million. In addition, segment profit before tax for the first nine months of 1998 included a $49 million benefit from the settlement of certain patent litigation, offset in part by a $15 million charge for litigation. Systems & Information Technology
Third quarter ended Nine months ended (In millions) September 30 September 30 ---------------------------------------------- ---------------------------------------------- Percent Percent 1999 1998 Change Inc (Dec) 1999 1998 Change Inc (Dec) ---- ---- ------ --------- ---- ---- ------ --------- Sales $745 $677 $68 10% $2,155 $2,080 $75 4% Segment profit before income taxes 54 52 2 4% 112 134 (22) (16%)
Third quarter 1999 sales increased primarily due to new business and higher volume on an existing space and missile systems contract of $30 million and $33 million, respectively. Segment profit before tax for the third quarter 1999 increased slightly as profits on new business, the higher volume on an existing space and missile systems contract and a gain on a divestiture of a business of approximately $5 million were partially offset by performance on commercial programs of approximately $6 million. Sales for the nine months ended September 30, 1999 increased primarily due to new business and higher volume on an existing space and missile systems contract of approximately $85 million and $120 million, 19 21 respectively, offset in part by a contract modification announced in 1998 and lower volume on contracts nearing completion or completed during the nine months ended September 30, 1999 of approximately $57 million and $100 million, respectively. Segment profit before tax for the nine months ended September 30, 1999 decreased due to the charge of $33 million for a commercial fixed-price contract and the effect of lower volume and performance on commercial programs of approximately $7 million and $10 million, respectively, offset in part by the effect of new business of approximately $4 million and higher volume on an existing space and missile systems contract. Segment profit before tax for the nine months ended September 30, 1998 included charges of $26 million for contract reserves and severance costs relating to the combination of TRW's systems integration business with BDM. Aeronautical Systems Third quarter ended Nine months ended (In millions) September 30 September 30 ----------------------- ------------------------ 1999 1999 ---- ---- Sales $282 $582 Segment profit before income taxes 33 65 Sales and segment profit before tax for the third quarter and nine months ended 1999 are attributable to the acquisition of LucasVarity. 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 adjusted 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, $506 million for identified intangible assets including intellectual property and workforce, and incremental fair value adjustments of approximately $1.5 billion for a prepaid pension asset, primarily from an overfunded pension plan, $140 million for fixed assets and $30 million for 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. 20 22 TRW 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 TRW. 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 invest $250 million in Astrolink LLC, a strategic venture initiated by Lockheed Martin of which $83 million was invested in July 1999. 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 satellite-based network that will enable it to provide on-demand, wireless broadband data communication services on a global basis. Astrolink will focus on the high growth area of broadband multimedia, offering high-speed, quality, flexible, global bandwidth-on-demand services to large corporate customers and other consumers. TRW will build Astrolink's satellite communication payloads, the heart of the Astrolink network. These payloads will be sophisticated, orbiting switches designed to receive data signals in individually addressed packets from multiple ground cells, route the data, and transmit the data to the appropriate ground cell based on the destination address. In addition, TRW's payloads will allow Astrolink to offer its customers "bandwidth-on-demand," the ability to use, and pay for, only the bandwidth they actually need, avoiding the higher cost of a dedicated connection with a fixed amount of bandwidth. TRW also has the opportunity to be an Astrolink service provider. BDM International, Inc. - ----------------------- In December of 1997, TRW acquired BDM International, Inc., resulting in a charge for in-process research and 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 delays of the projects are not expected to affect materially TRW's expected investment returns. TRW 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. Any delay or cancellation of the projects would not have a material adverse impact on the results of operations or the financial condition of TRW. LIQUIDITY AND FINANCIAL POSITION In the first nine months of 1999, a net increase in debt of $5,935 million, cash flow provided by operating activities of $1,150 million and proceeds from divestitures of $157 million were used to fund acquisitions of $6,083 million, capital expenditures of $540 million, dividend payments of $120 million and other items of $288 million. As a result, cash and cash equivalents increased by $211 million. Net debt (short-term debt, the current portion of long-term debt, long-term debt less cash and cash equivalents) was $8.8 billion at September 30, 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 81 percent at September 30, 1999, compared to 52 percent at December 31, 1998. During the second quarter 1999, TRW refinanced short-term debt by issuing $2.4 billion of notes and debentures on May 26, 1999 with $400 million 6.5% Notes Due 2002, $700 million 6.625% Notes Due 2004, $750 million 7.125% Notes Due 2009, and $550 million 7.75% Debentures Due 2029. An additional $1.0 billion of notes were issued on June 18, 1999 with $575 million Floating Rate Notes due 2000, based 21 23 on a three-month LIBOR, and $425 million 6.45% Notes due 2001. The Company's effective obligation on the $425 million 6.45% Notes due 2001 was simultaneously changed to a floating rate based on a three-month LIBOR through the execution of a $425 million interest rate swap. During the third quarter 1999, TRW refinanced commercial paper by entering into an $100 million debt agreement due September 2000. The interest rate under the agreement is a floating rate based on a three-month LIBOR. At September 30, 1999, $1.1 billion of short-term obligations were reclassified to long-term obligations as TRW intends to refinance the obligations on a long-term basis and has the ability to do so under its existing credit agreements. TRW 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 of $3.7 billion expires January 26, 2000 with an option to extend the maturity of up to $2.0 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. Issuance of long-term debt securities in the public or private capital markets and the net proceeds from divestitures, among other items, 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. At September 30, 1999, there were no outstanding borrowings under this agreement and tranche one had been reduced by $3.5 billion due to the issuance of long-term debt to approximately $200 million. The Company's available commitments under tranche two remain at $3.7 billion. During the first quarter of 1999, TRW 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 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 TRW may extend the maturity of borrowings to January 26, 2001. It is currently management's intention to renegotiate the Company's revolving credit agreements upon expiration to maintain facilities adequate to meet the Company's liquidity requirements. No securities were issued under the Company's existing Universal Shelf Registration Statement during the first nine months of 1999, with $841 million remaining available. The Company filed a new Universal Shelf Registration Statement on October 15, 1999, for an additional $1.7 billion. 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 TRW's commercial paper at P-2 and senior unsecured debt at Baa1. Standard & Poor's has rated TRW's commercial paper at A-2 and senior unsecured debt at BBB. These rating changes are not expected to have a material impact on TRW's financial position. On May 17, 1999, TRW announced that it will divest its engine businesses, which consist of TRW Engine Components and Lucas Diesel Systems operations; TRW Nelson Stud Welding; and the LucasVarity Wiring companies. The estimated net proceeds from these divestitures are expected to be $1.2 to $1.5 billion. TRW has established a goal of reducing its net debt by approximately $2.5 billion, including the effects of these divestitures, by year-end 2000. Additional debt reduction will be accomplished through operating cash flow, working capital improvements, disposal of non-revenue producing assets and management of expenditures. At September 30, 1999, the Company had a working capital deficiency of approximately $2.3 billion primarily due to the issuance of debt incurred to purchase LucasVarity. Management believes that sufficient resources, in the form of funds generated by operations and existing borrowing capacity, are available to maintain liquidity. Management believes TRW's current financial position and financing arrangements, including financing for the acquisition of LucasVarity, allow flexibility in worldwide financing activities and permit 22 24 TRW 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 debt service requirements. 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. Year 2000 A company-wide Year 2000 (Y2K) compliance program has been implemented to determine Y2K issues and assure Y2K compliance. TRW's Y2K compliance program now encompasses the Y2K program of LucasVarity. 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. All phases are essentially complete, except for certain Y2K upgrades for nonmaterial and low priority items. The phases of the Y2K Compliance Program for the critical systems, along with corresponding percentage-of-completion, are shown below: - -------------------------------------------------------------------------------- PHASE PERCENTAGE-OF-COMPLETION - -------------------------------------------------------------------------------- Project Startup 100 - -------------------------------------------------------------------------------- Inventory and Assessment 100 - -------------------------------------------------------------------------------- Conversion, Upgrade and Renovation 100 - -------------------------------------------------------------------------------- Validation 100 - -------------------------------------------------------------------------------- Implementation 100 - -------------------------------------------------------------------------------- Although all phases of the critical Y2K compliance program are essentially complete, TRW will continue to evaluate and prepare critical contingency plans throughout 1999 for new suppliers and/or service providers or if new information becomes available. Project Startup covers establishment of the Y2K Program Office and establishing the budget and resources required for the Program. During the Inventory and Assessment phase, inventory lists were created for each area, such as the factory floor, end user systems, technical infrastructure, suppliers and service providers, and assessed as to whether there was a potential Y2K issue or not. Conversion, upgrade and renovation is the remediation phase. During this phase, non-compliant systems were upgraded, converted to new systems or modified to bring them into compliance. Validation is the testing 23 25 phase where changes, upgrades or new systems were tested to validate their Y2K compliance. In addition, mission critical compliant systems were tested to validate that they are Y2K compliant. Implementation is the installation of the upgraded, renovated or new system into production. 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 100 percent of TRW's and LucasVarity's internal computer systems are Y2K compliant for mission critical systems. Any remaining activities are driven by customer changes or continuing updates to reflect vendor Y2K upgrades. The majority of critical contingency plans for these systems were developed during the second quarter 1999, with the remainder completed during the third quarter 1999. These contingency plans include, but are not limited to, performing backups of mission critical computer systems, printing hard copies of key databases or reports or running key processes in December, where feasible. The factory floor systems are comprised of manufacturing and warehousing equipment. The Company estimates that 100 percent of TRW's and LucasVarity's critical factory floor systems are Y2K compliant. The majority of critical contingency plans for these systems were developed during the second quarter 1999 with the remainder completed during the third quarter 1999. Any uncertainty was managed through extensive testing of factory floor systems and contingency planning. Mission critical factory floor systems with a clock function have been tested for Year 2000 compliance. For critical machines, contingency plans have been developed that identify workarounds for the specific production line so that production schedules can be maintained. These contingency plans include, but are not limited to, manually setting the clock, expertise on-call, or utilizing another line or machine to produce the products. 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. The Company continues to evaluate the criticality of suppliers and has reduced its estimated critical suppliers to TRW's automotive business from 3,900 to 3,000. The Company has validated the critical suppliers' state of Y2K readiness and evaluated the risk to the Company by reviewing the self-assessment surveys and by conducting telephone surveys or on-site visits for selected critical suppliers. The Company has developed 100 percent of contingency plans for critical suppliers and service providers. Although the planned effort has been completed, the Company will continue this activity throughout 1999, as new providers are added or if new information becomes available. Contingency plans consist of, but are not limited to, identifying and qualifying alternate sources or the provision of buffer stock. The contingency plan is tailored to the specific supplier or service provider situation, in response to the Company's review of their Y2K readiness. Y2K certification requests were sent to approximately 8,200 suppliers and service providers to TRW's aerospace and information systems businesses, of which about 1,200 are considered critical. All of these critical suppliers have certified Y2K compliance. Contingency plans were developed during the second quarter and will continue to be prepared throughout 1999 for new suppliers/service providers or if new information becomes available. Contingency plans for TRW's aerospace and information systems businesses are focused on critical suppliers and service providers completing their Y2K readiness activities in the fourth quarter 1999. For critical suppliers and/or service providers where orders or services are anticipated during the first quarter of 2000, contingency plans such as, but not limited to, ordering supplies for late 1999 delivery, stocking additional consumables, qualifying alternate sources and/or holding buffer stock are in process. LucasVarity continues to evaluate the criticality of its suppliers as new suppliers and/or service providers are added or if new information becomes available and has reduced its estimated critical suppliers list from 5,500 to 4,400 of its automotive and aerospace suppliers and service providers. Each critical supplier and service provider has been contacted and their state of Y2K readiness validated. As a result of these assessments, any suppliers and service providers categorized as a high-risk to the Company's flow of products and services have an appropriate and formal contingency plan established and agreed to between the two parties. These contingency plans include, but are not limited to, identifying and qualifying alternate sources and the provision of buffer stock. 24 26 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 aerospace 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. The Company continues to review and refine the contracts identified as having Y2K impacts. The Company has determined that approximately 400 contracts have Y2K impacts. The remediation and validation has been completed, except where work continues in accordance with customer mandated schedules on a small number of contracts. The Company expects renovations and critical contingency planning to be performed throughout 1999. Although the program is essentially complete, the Company is continuing to monitor and assess possible Y2K issues, using formal program reviews to assess progress and initiate required actions. As required to address these issues, contingency plans have been prepared, updated and implemented as necessary to address the risks identified. Contingency plans are being developed for each unit. The contingency plan is specific to the business scenarios, local situation and risks as seen by the specific unit. The contingency plans include, but are not limited to, ensuring that backups of mission critical computer systems are performed; printing hardcopies of key databases or reports; running key processes in December, where feasible; and identifying workarounds for producing products, if a factory floor system should fail, as well as other scenarios. 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 aerospace and information systems' contracts will have unanticipated Y2K-related issues. In addition, the Company relies on Year 2000 compliance information from other third party, governmental (federal, state, international and local) or domestic and overseas agencies, particularly concerning a country's infrastructure. There continues to be a risk associated with infrastructure Y2K readiness for some countries, in spite of the efforts on the Company's part. 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 the cost of LucasVarity from the date of acquisition, is estimated to be $171 million and includes $85 million for capitalizable costs and $86 million of costs that are being expensed as incurred. The Company has expensed approximately $72 million to date, including $3 million relating to LucasVarity. The Company expects to expense an additional $6 million throughout the remainder of 1999 and $8 million in 2000. 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 program 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 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. 25 27 TRW 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. TRW'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. TRW'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. TRW 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 may be forward-looking statements. In addition, from time to time, TRW and its representatives make statements that may be 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: unanticipated events and circumstances that may occur and render TRW's acquisition of LucasVarity 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 from the acquisition of LucasVarity; 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 ability to continue technical innovation and the development of and demand for new products and contract awards; pricing pressures from customers; the ability to reduce the level of outstanding debt from cash flow from operations and the proceeds from dispositions planned in our automotive business; the ability to effectively implement the company-wide Y2K compliance program in accordance with the estimated timetable and costs described herein and the preparedness of our critical suppliers; the introduction of competing products or technology by competitors; the availability of funding for research and development; the ability to meet performance and delivery requirements on systems for customers; the economic, regulatory and political instability of Brazil, Asia and certain emerging countries; and the ability to attract and retain skilled employees with high-level technical competencies. Our automotive business also could be affected by: the ability to effectively implement the Company's 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; work stoppages; customer recall and warranty claims; product liability issues; and changes to the regulatory environment regarding automotive safety. Our aerospace and information systems business also could be affected by: the level of defense funding by the government; 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. The above list of important factors is not exclusive. We caution 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. 26 28 Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- TRW is subject to inherent risks attributed to operating in a global economy. It is TRW's policy to utilize derivative financial instruments to manage its interest rate and foreign currency exchange rate risks. When appropriate, TRW uses derivatives to hedge its exposure to short-term interest rate changes as a lower cost substitute for the issuance of fixed-rate debt. TRW 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 TRW's cash flow from adverse movements in exchange rates. Also, at certain times, TRW may use interest rate agreements in the management of interest rate exposure on debt issuances. TRW is exposed to credit loss in the event of nonperformance by the other party to derivative financial instruments. TRW limits this exposure by entering into agreements with a number of major financial institutions that meet credit standards established by TRW and that are expected to satisfy fully their obligations under the contracts. Derivative financial instruments are viewed by TRW as a risk management tool and are not used for speculative or trading purposes. Based on TRW's interest rate exposure on variable rate borrowings at September 30, 1999, a one-percentage-point increase in the average interest rate on TRW's variable rate borrowings would increase future interest expense by approximately $4 million per month. Based on TRW's exposure to foreign currency exchange rate risk resulting from derivative foreign currency instruments outstanding at September 30, 1999, a 10 percent uniform weakening 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 $20 million loss in fair value. Based on TRW's interest rate exposure with regard to the interest rate swap outstanding at September 30, 1999, a 10 percent increase of the fixed interest rate component of the swap at September 30, 1999 would result in a $4 million loss in fair value. TRW's sensitivity analyses of the effects of changes in interest rates and foreign currency exchange rates do not reflect the effect of such changes on the related hedged transactions or on other operating transactions. TRW'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 September 30, 1999. 27 29 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. On August 6, 1999, the Government filed its Second Amended Complaint, which incorporated vouchers, progress payment requests, and invoices submitted by TRW to higher tier Government contractors among the class of allegedly false claims challenged by the Government. On September 29, 1999, Bagley filed his Second Amended Complaint, which incorporated subcontracts performed by TRW for higher tier Government contractors among the class of contracts under which allegedly false claims were presented, and added allegations relating to certain of Bagley's pre-existing claims. 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. On July 21, 1997, the United States Environmental Protection Agency, or EPA, issued a notice of violation to the Company under the Clean Air Act with respect to air emissions at the former Izumi Industries, Corporation, Inc. facility in Yaphank, New York. TRW acquired this facility in November 1996. The EPA informed TRW that the New York State Department of Environmental Conservation, or DEC, would be the lead agency in this action. On August 15, 1997, the DEC commenced an administrative enforcement action against the Company under the New York Environmental Conservation Law with respect to such emissions. On September 11, 1997, the Company agreed to an Order of Consent with the DEC, pursuant to which the Company has paid a $300,000 civil penalty to the DEC and has initiated certain specified actions to bring the facility into compliance with applicable regulatory standards relating to air emissions. These matters are not expected to have a material effect on TRW's financial position. On September 9, 1999, TRW settled its claims against Izumi Industries, Corporation, Inc. for, among other things, the costs arising from the Order of Consent. 28 30 Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits: 10(a) Form of Non-Qualified Stock Option Agreement 10(b) Form of Transferable Non-Qualified Stock Option Agreement 10(c) Form of Stock Option Agreement Qualified Under the Laws of France 10(d) Employment Agreement by and between TRW Inc. and David M. Cote, dated as of November 11, 1999 27 Financial Data Schedule 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: None. 29 31 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: November 12, 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 30 32 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10(a) Form of Non-Qualified Stock Option Agreement 10(b) Form of Transferable Non-Qualified Stock Option Agreement 10(c) Form of Stock Option Agreement Qualified Under the Laws of France 10(d) Employment Agreement by and between TRW Inc. and David M. Cote, dated as of November 11, 1999 27 Financial Data Schedule 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) 31 EX-10.A 2 EXHIBIT 10A 1 Exhibit 10(a) [LOGO TRW] NONQUALIFIED STOCK OPTION AGREEMENT TERMS AND CONDITIONS 1. PURCHASE RIGHTS This option cannot be exercised before the first anniversary of the date of grant. After that you will be entitled to purchase up to 33-1/3% of the shares covered by this option, rounded down to the nearest whole share for each of the first two years, for each full year of your continuous employment with TRW Inc. ("TRW") after the date of grant. The purchase rights accumulate as shown in the following table. Number of Full Years of Cumulative Maximum Percentage of Continuous Service After Optioned Shares That May Be Date of Grant Purchased - ------------------------------------------------------------------ 1 33-1/3% 2 66-2/3% 3 100% Notwithstanding the foregoing, this option will immediately become exercisable in respect of all of the shares covered by this grant in the event of the termination of your employment in the following circumstances: (a) your death; (b) your disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan); or (c) on or after the first anniversary of the date of grant of this option, (i) your retirement at age 60 or over or (ii) a divestiture of the business or product line in which you are employed provided you are then age 60 or over and eligible for retirement. This option will also become immediately exercisable in respect of all the shares covered by this grant upon a change of control of TRW Inc. For purposes of this agreement, a change in control is defined in resolutions adopted by the Compensation and Stock Option Committee of the Directors of TRW on July 26, 1989, which, in summary, provide that a change in control is a change occurring (a) by virtue of TRW's merger, consolidation or reorganization into or with, or transfer of assets to, another corporation or (b) by virtue of a change in the majority of the Directors of TRW during any two-year period unless the election of each new Director was approved by a two-thirds vote of the Directors in office at the beginning of such period or (c) through the acquisition of shares representing 20% or more of the voting power of TRW or (d) through any other change in control reported in any filing with the Securities and Exchange Commission; provided, however, that no change in control is deemed to have occurred by the acquisition of shares, or any report of such acquisition, by TRW, a subsidiary of TRW or a TRW-sponsored employee benefit plan. The language of the resolutions controls over this summary language. 2. EXERCISE IN WHOLE OR PART To the extent this option has become exercisable, you may purchase on any date or dates all or any part of the shares which you are then entitled to purchase. However, no fractional shares may be purchased. 3. TERM OF OPTION To the extent this option has become exercisable in accordance with Section 1 above, it may be exercised by you at any time during the 10-year period beginning on the date of grant. To the extent this option remains unexercised, your unexercised purchase rights will terminate upon the first to occur of (i) the end of such ten-year period or (ii) three months after the date on which your employment with TRW terminates. Notwithstanding the foregoing, in the following cases your unexercised purchase rights will terminate at the times set forth in the following clauses: (a) If the Directors of TRW find that you intentionally committed an act materially inimical to the interests of TRW or a subsidiary, your unexercised purchase rights will terminate as of the time you committed such act, as determined by the Directors. (b) In the event of a change in control of TRW (as defined in Section 1 hereof), your unexercised purchase rights will not under any circumstances be subject to termination before the end of the ten-year period beginning on the date of grant. (c) If your employment is terminated by your death or by your disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan), your unexercised purchase rights will continue for the remainder of the 10-year period. (d) If your employment is terminated by your retirement at age 55 or over, your unexercised purchase rights will continue for the remainder of the 10-year period. (e) If your employment with TRW terminates due to a divestiture of the business or product line in which you are employed, your unexercised purchase rights will terminate 12 months after the date your employment terminates. (f) If you are age 55 or over and your employment is involuntarily terminated, your unexercised purchase rights will continue for the remainder of the 10-year period, notwithstanding clause (e) above. Nothing contained in this agreement shall extend this option beyond a 10-year period or shall limit whatever right TRW or a subsidiary might otherwise have to terminate your employment at any time. 4. PAYMENT OF OPTION PRICE The option price shall be payable at the time of exercise. The option price shall be paid at the Office of Secretary at TRW's corporate headquarters or at any other place designated by the Secretary. The option price may be paid in cash, by delivery of full shares of TRW Common, by a cashless exercise, or in any combination of the foregoing, in accordance with such procedures and subject to such further conditions as the Secretary of TRW may establish from time to time. Notwithstanding the foregoing, the Compensation and Stock Option Committee of TRW at any time may suspend or terminate your right to pay any or all of the option price in shares of TRW Common. Cash payments shall be made in United States dollars. Shares delivered in payment of the option price shall be valued at their fair market value on the date of exercise. For purposes of this option, "fair market value" is the average of the high and low sales prices of a share of TRW Common on the date of exercise on the New York Stock Exchange Composite Transactions Listing as reported in the Midwest edition of The Wall Street Journal (or if there are no sales on such date, then the closing sale price on such Listing on the nearest date before the date of exercise) or such other method or procedure for determining fair market value as the Compensation and Stock Option Committee of TRW in its sole discretion may determine. For purposes of this option, the "date of exercise" is the date on which written notice, accompanied by the option price, is received by the Secretary of TRW or his designee that you have elected to exercise all or part of this option. 2 5. TAXES Upon any exercise of this option, TRW may withhold delivery of certificates for the purchased shares until you make arrangements satisfactory to TRW to pay any withholding, transfer or other taxes due as a result of such exercise. You may elect, in accordance with applicable regulations of the Compensation and Stock Option Committee of TRW, to pay a portion or all of the amount of required withholding taxes in cash, through a cashless exercise or in shares of TRW Common, either by delivering to TRW previously held shares of TRW Common or by having shares of TRW Common withheld from the shares purchased hereunder. 6. SECURITIES LAWS This option shall not be exercisable if such exercise would violate any federal or state securities law. TRW will use its best efforts to make such filings and initiate such proceedings as may be necessary to prevent such violations unless the Directors of TRW determine, in their sole discretion, that such filings or proceedings would result in undue expense or hardship for TRW. TRW may place appropriate legends on the certificates for the optioned shares, give stop-transfer instructions to its transfer agents or take any other action to achieve compliance with those laws in connection with any exercise of this option or your resale of the optioned shares. 7. TRANSFERABILITY This option is not transferable other than by will or the laws of descent and distribution and shall be exercisable during your lifetime only by you or your guardian or legal representative. 8. LEAVES OF ABSENCE If you take a leave of absence for illness, military or governmental service or other reasons, and such leave has been specifically approved by the Chairman of the Board or the President of TRW for purposes of this option, then such leave will not be treated as an interruption of your employment. 9. ADJUSTMENTS The Compensation and Stock Option Committee of TRW may make such adjustments in the option price and in the number or kind of shares of TRW Common or other securities covered by this option as it in its sole discretion may determine are equitably required to prevent dilution or enlargement of your rights that would otherwise result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of TRW, merger, consolidation, reorganization, partial or complete liquidation or other corporate transaction or event having an effect similar to any of the foregoing. 10. CERTAIN DEFINITIONS For purposes of this option, employment with a subsidiary will be treated as equivalent to employment with TRW itself, and your continuous employment will not be deemed to be interrupted by reason of your transfer among TRW and its subsidiaries. "Subsidiary" means a corporation or other entity in an unbroken chain of entities beginning with TRW if each of the entities other than the last entity in the unbroken chain owns stock or other ownership interests possessing 50% or more of the total outstanding combined voting power of all classes of stock or other interests in the next entity in the chain. "Subsidiary" also means, if not covered by the definition of subsidiary in the preceding sentence and if specifically approved by the Chairman of the Board of TRW with respect to this option, a corporation or other entity in which TRW has a direct or indirect ownership interest. 11. MISCELLANEOUS By participating in the TRW stock option program, you understand and agree to the following conditions: (a) This stock option is subject to all the terms and conditions of the TRW plan pursuant to which it is granted. The Compensation and Stock Option Committee of TRW has authority to interpret and construe any provision of this instrument and the TRW plan pursuant to which this stock option is granted, and any such interpretation and construction shall be binding and conclusive. Any reference in this option to the Directors of TRW includes the Executive Committee of the Directors. (b) The program is discretionary and TRW can cancel or terminate it at any time. As such, the program does not create any contractual or other right to receive options or benefits in lieu of options in the future. Any future option grants, including but not limited to the timing of any grant, number of options, vesting provisions, and the exercise price, will be in TRW's sole discretion. (c) Your participation in the TRW stock option program is completely voluntary and is not a condition or right of your employment. (d) The value of your TRW stock option is an extraordinary item of compensation outside the scope of your employment contract, if any. As such, your option is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, social insurance contributions (except where local law specifically provides otherwise), pension or retirement benefits, or similar payments. (e) Your vesting progress will end if your employment terminates before three years after the grant date for reasons other than those set forth in Section 1 hereof. (f) The future value of the TRW stock is unknown and cannot be predicted with any certainty. If the TRW stock does not increase in value, the option will have no value. (g) You authorize your manager to furnish TRW (and any agent of TRW administering the program or providing program recordkeeping services) with such information and data as it shall request in order to facilitate the grant of options and administration of the program. You also waive any data privacy rights you might have with respect to such information about you, which is needed to issue your TRW stock option grant. (h) Your TRW stock option may not be assigned, sold, encumbered, or in any way transferred or alienated, except as otherwise explicitly provided in the Stock Option Agreement. (i) The TRW stock option program is governed by and subject to U.S. law. Interpretation of the program and your rights thereunder will be governed by provisions of U. S. law. EX-10.B 3 EXHIBIT 10B 1 Exhibit 10(b) [LOGO TRW] TRANSFERABLE NONQUALIFIED STOCK OPTION AGREEMENT TERMS AND CONDITIONS 1. PURCHASE RIGHTS This option cannot be exercised before the first anniversary of the date of grant. After that you will be entitled to purchase up to 33-1/3% of the shares covered by this option, rounded down to the nearest whole share for each of the first two years, for each full year of your continuous employment with TRW Inc. ("TRW") after the date of grant. The purchase rights accumulate as shown in the following table. Number of Full Years of Cumulative Maximum Percentage of Continuous Service After Optioned Shares That May Be Date of Grant Purchased - ------------------------------------------------------------------ 1 33-1/3% 2 66-2/3% 3 100% Notwithstanding the foregoing, this option will immediately become exercisable in respect of all of the shares covered by this grant in the event of the termination of your employment in the following circumstances: (a) your death; (b) your disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan); or (c) on or after the first anniversary of the date of grant of this option, (i) your retirement at age 60 or over or (ii) a divestiture of the business or product line in which you are employed provided you are then age 60 or over and eligible for retirement. This option will also become immediately exercisable in respect of all the shares covered by this grant upon a change of control of TRW Inc. For purposes of this agreement, a change in control is defined in resolutions adopted by the Compensation and Stock Option Committee of the Directors of TRW on July 26, 1989, which, in summary, provide that a change in control is a change occurring (a) by virtue of TRW's merger, consolidation or reorganization into or with, or transfer of assets to, another corporation or (b) by virtue of a change in the majority of the Directors of TRW during any two-year period unless the election of each new Director was approved by a two-thirds vote of the Directors in office at the beginning of such period or (c) through the acquisition of shares representing 20% or more of the voting power of TRW or (d) through any other change in control reported in any filing with the Securities and Exchange Commission; provided, however, that no change in control is deemed to have occurred by the acquisition of shares, or any report of such acquisition, by TRW, a subsidiary of TRW or a TRW-sponsored employee benefit plan. The language of the resolutions controls over this summary language. 2. EXERCISE IN WHOLE OR PART To the extent this option has become exercisable, you may purchase on any date or dates all or any part of the shares which you are then entitled to purchase. However, no fractional shares may be purchased. 3. TERM OF OPTION To the extent this option has become exercisable in accordance with Section 1 above, it may be exercised by you at any time during the 10-year period beginning on the date of grant. To the extent this option remains unexercised, your unexercised purchase rights will terminate upon the first to occur of (i) the end of such ten-year period or (ii) three months after the date on which your employment with TRW terminates. Notwithstanding the foregoing, in the following cases your unexercised purchase rights will terminate at the times set forth in the following clauses: (a) If the Directors of TRW find that you intentionally committed an act materially inimical to the interests of TRW or a subsidiary, your unexercised purchase rights will terminate as of the time you committed such act, as determined by the Directors. (b) In the event of a change in control of TRW (as defined in Section 1 hereof), your unexercised purchase rights will not under any circumstances be subject to termination before the end of the ten-year period beginning on the date of grant. (c) If your employment is terminated by your death or by your disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan), your unexercised purchase rights will continue for the remainder of the 10-year period. (d) If your employment is terminated by your retirement at age 55 or over, your unexercised purchase rights will continue for the remainder of the 10-year period. (e) If your employment with TRW terminates due to a divestiture of the business or product line in which you are employed, your unexercised purchase rights will terminate 12 months after the date your employment terminates. (f) If you are age 55 or over and your employment is involuntarily terminated, your unexercised purchase rights will continue for the remainder of the 10-year period, notwithstanding clause (e) above. Nothing contained in this agreement shall extend this option beyond a 10-year period or shall limit whatever right TRW or a subsidiary might otherwise have to terminate your employment at any time. 4. PAYMENT OF OPTION PRICE The option price shall be payable at the time of exercise. The option price shall be paid at the Office of Secretary at TRW's corporate headquarters or at any other place designated by the Secretary. The option price may be paid in cash, by delivery of full shares of TRW Common, by a cashless exercise, or in any combination of the foregoing, in accordance with such procedures and subject to such further conditions as the Secretary of TRW may establish from time to time. Notwithstanding the foregoing, the Compensation and Stock Option Committee of TRW at any time may suspend or terminate your right to pay any or all of the option price in shares of TRW Common. Cash payments shall be made in United States dollars. Shares delivered in payment of the option price shall be valued at their fair market value on the date of exercise. For purposes of this option, "fair market value" is the average of the high and low sales prices of a share of TRW Common on the date of exercise on the New York Stock Exchange Composite Transactions Listing as reported in the Midwest edition of The Wall Street Journal (or if there are no sales on such date, then the closing sale price on such Listing on the nearest date before the date of exercise) or such other method or procedure for determining fair market value as the Compensation and Stock Option Committee of TRW in its sole discretion may determine. For purposes of this option, the "date of exercise" is the date on which written notice, accompanied by the option price, is received by the Secretary of TRW or his designee that you have elected to exercise all or part of this option. 2 5. TAXES Upon any exercise of this option, TRW may withhold delivery of certificates for the purchased shares until you make arrangements satisfactory to TRW to pay any withholding, transfer or other taxes due as a result of such exercise. You may elect, in accordance with applicable regulations of the Compensation and Stock Option Committee of TRW, to pay a portion or all of the amount of required withholding taxes in cash, through a cashless exercise or in shares of TRW Common, either by delivering to TRW previously held shares of TRW Common or by having shares of TRW Common withheld from the shares purchased hereunder. 6. SECURITIES LAWS This option shall not be exercisable if such exercise would violate any federal or state securities law. TRW will use its best efforts to make such filings and initiate such proceedings as may be necessary to prevent such violations unless the Directors of TRW determine, in their sole discretion, that such filings or proceedings would result in undue expense or hardship for TRW. TRW may place appropriate legends on the certificates for the optioned shares, give stop-transfer instructions to its transfer agents or take any other action to achieve compliance with those laws in connection with any exercise of this option or your resale of the optioned shares. 7. TRANSFERABILITY This option is not transferable except (a) by will or the laws of descent and distribution, or (b) by gift to any member of your immediate family, to a trust for the benefit of an immediate family member, or to a partnership whose beneficiaries are members of your immediate family; provided, however, that there may be no consideration for any such transfer. For purposes of this agreement, "immediate family member" shall mean your spouse, children and grandchildren. Notwithstanding any transfer of this option pursuant to clause (b) of this Section 7, you will continue to be solely responsible for the taxes described in Section 5 of this agreement. Any option transferred pursuant to the terms of this Section 7 shall continue to be subject to the same terms and conditions as were applicable immediately prior to the transfer. 8. LEAVES OF ABSENCE If you take a leave of absence for illness, military or governmental service or other reasons, and such leave has been specifically approved by the Chairman of the Board or the President of TRW for purposes of this option, then such leave will not be treated as an interruption of your employment. 9. ADJUSTMENTS The Compensation and Stock Option Committee of TRW may make such adjustments in the option price and in the number or kind of shares of TRW Common or other securities covered by this option as it in its sole discretion may determine are equitably required to prevent dilution or enlargement of your rights that would otherwise result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of TRW, merger, consolidation, reorganization, partial or complete liquidation or other corporate transaction or event having an effect similar to any of the foregoing. 10. CERTAIN DEFINITIONS For purposes of this option, employment with a subsidiary will be treated as equivalent to employment with TRW itself, and your continuous employment will not be deemed to be interrupted by reason of your transfer among TRW and its subsidiaries. "Subsidiary" means a corporation or other entity in an unbroken chain of entities beginning with TRW if each of the entities other than the last entity in the unbroken chain owns stock or other ownership interests possessing 50% or more of the total outstanding combined voting power of all classes of stock or other interests in the next entity in the chain. "Subsidiary" also means, if not covered by the definition of subsidiary in the preceding sentence and if specifically approved by the Chairman of the Board of TRW with respect to this option, a corporation or other entity in which TRW has a direct or indirect ownership interest. 11. MISCELLANEOUS By participating in the TRW stock option program, you understand and agree to the following conditions: (a) This stock option is subject to all the terms and conditions of the TRW plan pursuant to which it is granted. The Compensation and Stock Option Committee of TRW has authority to interpret and construe any provision of this instrument and the TRW plan pursuant to which this stock option is granted, and any such interpretation and construction shall be binding and conclusive. Any reference in this option to the Directors of TRW includes the Executive Committee of the Directors. (b) The program is discretionary and TRW can cancel or terminate it at any time. As such, the program does not create any contractual or other right to receive options or benefits in lieu of options in the future. Any future option grants, including but not limited to the timing of any grant, number of options, vesting provisions, and the exercise price, will be in TRW's sole discretion. (c) Your participation in the TRW stock option program is completely voluntary and is not a condition or right of your employment. (d) The value of your TRW stock option is an extraordinary item of compensation outside the scope of your employment contract, if any. As such, your option is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, social insurance contributions (except where local law specifically provides otherwise), pension or retirement benefits, or similar payments. (e) Your vesting progress will end if your employment terminates before three years after the grant date for reasons other than those set forth in Section 1 hereof. (f) The future value of the TRW stock is unknown and cannot be predicted with any certainty. If the TRW stock does not increase in value, the option will have no value. (g) You authorize your manager to furnish TRW (and any agent of TRW administering the program or providing program recordkeeping services) with such information and data as it shall request in order to facilitate the grant of options and administration of the program. You also waive any data privacy rights you might have with respect to such information about you, which is needed to issue your TRW stock option grant. (h) Your TRW stock option may not be assigned, sold, encumbered, or in any way transferred or alienated, except as otherwise explicitly provided in the Stock Option Agreement. (i) The TRW stock option program is governed by and subject to U.S. law. Interpretation of the program and your rights thereunder will be governed by provisions of U. S. law. EX-10.C 4 EXHIBIT 10C 1 Exhibit 10(c) [LOGO TRW] STOCK OPTION AGREEMENT QUALIFIED UNDER THE LAWS OF FRANCE TERMS AND CONDITIONS 1. PURCHASE RIGHTS This option cannot be exercised before the fifth anniversary of the date of grant. After that you will be entitled to purchase all of the shares covered by this option, provided that you have been continuously employed with TRW Inc. ("TRW") since the date of grant. If the laws in France requiring that options be held for five years from the date of grant in order to qualify for favorable tax and social treatment applicable to stock options granted under the Law 70-1322 of December 31, 1970, as subsequently amended, are amended to require a holding period of less than five years, this option shall become exercisable upon the expiration of such shorter holding period, provided that you have been continuously employed with TRW since the date of grant; provided, however, that if such holding period shall be less than three years, this option shall become exercisable in accordance with whichever of the following schedules shall be applicable: One-year holding period: - ------------------------ Number of Full Years of Cumulative Maximum Percentage of Continuous Service After Optioned Shares That May Be Date of Grant Purchased - ------------------------------------------------------------------ 1 33-1/3% 2 66-2/3% 3 100% Two-year holding period: - ------------------------ Number of Full Years of Cumulative Maximum Percentage of Continuous Service After Optioned Shares That May Be Date of Grant Purchased - ------------------------------------------------------------------ 2 66-2/3% 3 100% The number of shares that may be purchased in accordance with the foregoing schedules shall be rounded down to the nearest whole share for each of the first two years. Notwithstanding the foregoing, in the event of the termination of your employment due to your death or to your disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan), or in the event of a change in control of TRW, this option will immediately become exercisable in respect of all of the shares covered by this grant. For purposes of this agreement, a change in control is defined in resolutions adopted by the Compensation and Stock Option Committee of the Directors of TRW on July 26, 1989, which, in summary, provide that a change in control is a change occurring (a) by virtue of TRW's merger, consolidation or reorganization into or with, or transfer of assets to, another corporation or (b) by virtue of a change in the majority of the Directors of TRW during any two-year period unless the election of each new Director was approved by a two-thirds vote of the Directors in office at the beginning of such period or (c) through the acquisition of shares representing 20% or more of the voting power of TRW or (d) through any other change in control reported in any filing with the Securities and Exchange Commission; provided, however, that no change in control is deemed to have occurred by the acquisition of shares, or any report of such acquisition, by TRW, a subsidiary of TRW or a TRW-sponsored employee benefit plan. The language of the resolutions controls over this summary language. 2. EXERCISE IN WHOLE OR PART To the extent this option has become exercisable, you may purchase on any date or dates all or any part of the shares which you are then entitled to purchase. However, no fractional shares may be purchased. 3. TERM OF OPTION To the extent this option has become exercisable in accordance with Section 1 above, it may be exercised by you at any time during the 10-year period beginning on the date of grant. To the extent this option remains unexercised, your unexercised purchase rights will terminate upon the first to occur of (i) the end of such ten-year period or (ii) three months after the date on which your employment with TRW terminates. Notwithstanding the foregoing, in the following cases your unexercised purchase rights will terminate at the times set forth in the following clauses: (a) If the Directors of TRW find that you intentionally committed an act materially inimical to the interests of TRW or a subsidiary, your unexercised purchase rights will terminate as of the time you committed such act, as determined by the Directors. (b) In the event of a change in control of TRW (as defined in Section 1 hereof), your unexercised purchase rights will not under any circumstances be subject to termination before the end of the ten-year period beginning on the date of grant. (c) In the event of your death at any time during the term of this option, your unexercised purchase rights will terminate upon the earlier of (i) six months after the date of your death and (ii) ten years after the date of grant. (d) If your employment is terminated by your disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan), your unexercised purchase rights will continue for the remainder of the 10-year period. (e) If your employment is terminated by your retirement at age 55 or over, your unexercised purchase rights will continue for the remainder of the 10-year period. (f) If your employment with TRW terminates due to a divestiture of the business or product line in which you are employed, your unexercised purchase rights will terminate 12 months after the date your employment terminates. (g) If you are age 55 or over and your employment is involuntarily terminated, your unexercised purchase rights will continue for the remainder of the 10-year period, notwithstanding clause (e) above. Nothing contained in this agreement shall extend this option beyond a 10-year period or shall limit whatever right TRW or a subsidiary might otherwise have to terminate your employment at any time. 4. PAYMENT OF OPTION PRICE The option price shall be payable at the time of exercise. The option price shall be paid at the Office of Secretary at TRW's corporate headquarters or at any other place designated by the Secretary. The option price may be paid in cash, by delivery of full shares of TRW Common, by a cashless exercise, or in any combination of the foregoing, in accordance with such procedures and subject to such further conditions as the Secretary of TRW may establish from time to time. Notwithstanding the foregoing, the Compensation and Stock Option Committee of TRW at any time may suspend or terminate your right to pay any or all of the option price in shares of TRW Common. Cash payments shall be made in United States dollars. Shares delivered in payment of the option price shall be valued at their fair market value on the date of exercise. For purposes of this option, "fair market value" is the average of the high and low sales prices of a share of TRW Common on the date of exercise on the New York Stock Exchange Composite Transactions Listing as reported in the Midwest edition of The Wall Street Journal (or if there are no sales on such date, 2 then the closing sale price on such Listing on the nearest date before the date of exercise) or such other method or procedure for determining fair market value as the Compensation and Stock Option Committee of TRW in its sole discretion may determine. For purposes of this option, the "date of exercise" is the date on which written notice, accompanied by the option price, is received by the Secretary of TRW or his designee that you have elected to exercise all or part of this option. 5. TAXES Upon any exercise of this option, TRW may withhold delivery of certificates for the purchased shares until you make arrangements satisfactory to TRW to pay any withholding, transfer or other taxes due as a result of such exercise. You may elect, in accordance with applicable regulations of the Compensation and Stock Option Committee of TRW, to pay a portion or all of the amount of required withholding taxes in cash, through a cashless exercise or in shares of TRW Common, either by delivering to TRW previously held shares of TRW Common or by having shares of TRW Common withheld from the shares purchased hereunder. 6. SECURITIES LAWS This option shall not be exercisable if such exercise would violate any federal or state securities law. TRW will use its best efforts to make such filings and initiate such proceedings as may be necessary to prevent such violations unless the Directors of TRW determine, in their sole discretion, that such filings or proceedings would result in undue expense or hardship for TRW. TRW may place appropriate legends on the certificates for the optioned shares, give stop-transfer instructions to its transfer agents or take any other action to achieve compliance with those laws in connection with any exercise of this option or your resale of the optioned shares. 7. TRANSFERABILITY This option is not transferable other than by will or the laws of descent and distribution and shall be exercisable during your lifetime only by you or your guardian or legal representative. 8. LEAVES OF ABSENCE If you take a leave of absence for illness, military or governmental service or other reasons, and such leave has been specifically approved by the Chairman of the Board or the President of TRW for purposes of this option, then such leave will not be treated as an interruption of your employment. 9. ADJUSTMENTS The Compensation and Stock Option Committee of TRW shall make adjustments in the option price and the number or kind of shares of TRW Common or other securities covered by this option only in accordance with the terms of the TRW plan and the French sub-plan thereunder, pursuant to which this stock option is granted. 10. CERTAIN DEFINITIONS For purposes of this option, employment with a subsidiary will be treated as equivalent to employment with TRW itself, and your continuous employment will not be deemed to be interrupted by reason of your transfer among TRW and its subsidiaries. "Subsidiary" means a corporation or other entity in an unbroken chain of entities beginning with TRW if each of the entities other than the last entity in the unbroken chain owns stock or other ownership interests possessing 50% or more of the total outstanding combined voting power of all classes of stock or other interests in the next entity in the chain. "Subsidiary" also means, if not covered by the definition of subsidiary in the preceding sentence and if specifically approved by the Chairman of the Board of TRW with respect to this option, a corporation or other entity in which TRW has a direct or indirect ownership interest. 11. MISCELLANEOUS By participating in the TRW stock option program, you understand and agree to the following conditions: (a) This stock option is subject to all the terms and conditions of the TRW plan, including the French sub-plan thereunder, pursuant to which it is granted. The Compensation and Stock Option Committee of TRW has authority to interpret and construe any provision of this instrument and the TRW plan and the French sub-plan thereunder pursuant to which this stock option is granted, and any such interpretation and construction shall be binding and conclusive. Any reference in this option to the Directors of TRW includes the Executive Committee of the Directors. (b) The program is discretionary and TRW can cancel or terminate it at any time. As such, the program does not create any contractual or other right to receive options or benefits in lieu of options in the future. Any future option grants, including but not limited to the timing of any grant, number of options, vesting provisions, and the exercise price, will be within TRW's sole discretion. (c) Your participation in the TRW stock option program is completely voluntary and is not a condition or right of your employment. (d) The value of your TRW stock option is an extraordinary item of compensation outside the scope of your employment contract, if any. As such, your option is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, social insurance contributions (except where local law specifically provides otherwise), pension or retirement benefits, or similar payments. (e) Your vesting progress will end if your employment terminates before five years after the grant date, or such shorter period prescribed in Section 1 hereof, for reasons other than death, disability for a period of more than twelve months (as defined in the TRW U.S. Long-Term Disability Plan) or a change in control of TRW. (f) The future value of the TRW stock is unknown and cannot be predicted with any certainty. If the TRW stock does not increase in value, the option will have no value. (g) You authorize your manager to furnish TRW (and any agent of TRW administering the program or providing program recordkeeping services) with such information and data as it shall request in order to facilitate the grant of options and administration of the program. You also waive any data privacy rights you might have with respect to such information about you, which is needed to issue your TRW stock option grant. (h) Your TRW stock option may not be assigned, sold, encumbered, or in any way transferred or alienated, except as otherwise explicitly provided in the Stock Option Agreement. (i) The TRW stock option program is governed by and subject to U.S. law. Interpretation of the program and your rights thereunder will be governed by provisions of U. S. law. EX-10.D 5 EXHIBIT 10D 1 Exhibit 10(d) EMPLOYMENT AGREEMENT -------------------- AGREEMENT, made and entered into as of the Effective Date by and between TRW Inc., an Ohio corporation (together with its successors and assigns permitted under this Agreement, the "Company"), and David M. Cote (the "Executive"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment (this "Agreement") and the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. DEFINITIONS. (a) "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified. (b) "Base Salary" shall mean the salary provided for in Section 4 below or any increased salary granted to the Executive pursuant to Section 4. (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean: (i) the Executive commits a felony involving moral turpitude; or (ii) in carrying out his duties, the Executive engages in conduct that constitutes gross neglect or gross misconduct, resulting, in either case, in economic harm to the Company. (e) A "Change in Control" shall be defined in the Employment Continuation Agreement, which is attached hereto as Exhibit A. 2 2 (f) "Constructive Termination Without Cause" shall mean termination by the Executive of his employment at his initiative within 30 days following the occurrence of any of the following events without his consent: (i) a reduction in the Executive's then current Base Salary or target bonus opportunity as a percentage of Base Salary; (ii) a material diminution in the Executive's duties; or (iii) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Company within 15 days after a merger, consolidation, sale or similar transaction. Following written notice from the Executive of any of the events described above, the Company shall have 15 calendar days in which to cure. If the Company fails to cure, the Executive's termination shall become effective on the 16th calendar day following the written notice. (g) "Disability" shall have the meaning ascribed to it by the Company's Long-Term Disability Plan. (h) "Effective Date" shall be November 11, 1999. (i) "Pro Rata" shall mean a fraction, the numerator of which is the number of days that the Executive was employed in the applicable performance period (a calendar year in the case of an annual bonus and a performance cycle in the case of an award under the Long-Term Incentive Plan) and the denominator of which shall be the number of days in the applicable performance period. (j) "Stock" shall mean the Common Stock of the Company. (k) "Term of Employment" shall mean the period specified in Section 2 below (including any extension as provided therein). (l) "Period of Employment" shall mean the period of time between the Effective Date and the date on which the Executive's employment terminates. 2. TERM OF EMPLOYMENT. The Term of Employment shall begin on the Effective Date, and shall extend until the third anniversary of the Effective Date, with two automatic one-year renewals thereafter unless either Party notifies the other at least 3 months before the scheduled expiration date that the term is not to renew. Notwithstanding the foregoing, the Term of Employment may be earlier terminated by either Party in accordance with the provisions of Section 12. 3 3 3. POSITION, DUTIES AND RESPONSIBILITIES. (a) Commencing on the Effective Date and continuing for the remainder of the Term of Employment, the Executive shall be employed as the President and Chief Operating Officer of the Company and be primarily responsible for the general operations of the automotive businesses of the Company. The Executive shall also be elected by the Board as a member of the Board, effective as of the Effective Date. The Executive, in carrying out his duties under this Agreement, shall report to the Chief Executive Officer. During the term of this Agreement, the Executive shall devote substantially all of his business time and attention to the business and affairs of the Company and shall use his best efforts, skills and abilities to promote its interests. (b) Nothing herein shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations with the concurrence of the Board (which approval shall not be unreasonably withheld), (ii) serving on the boards of a reasonable number of trade associations and/or charitable organizations, (iii) engaging in charitable activities and community affairs, and (iv) managing his personal investments and affairs, provided that such activities set forth in this Section 3(b) do not conflict or materially interfere with the effective discharge of his duties and responsibilities under Section 3(a). 4. BASE SALARY. The Executive shall be paid an annualized Base Salary, payable in accordance with the regular payroll practices of the Company, of $750,000 through calendar year 2000. Thereafter, the Base Salary shall be reviewed annually for increase in the discretion of the Board. 5. ANNUAL INCENTIVE AWARD. During the Term of Employment, commencing in 2000 the Executive shall have a target bonus opportunity each year equal to 70% of Base Salary, payable in that amount if the performance goals established for the relevant year are met, but subject to adjustment in accordance with the Company's Operational Incentive Plan. If such performance goals are not met, the Executive shall receive a lesser amount (or nothing) as determined in accordance with the Company's Operational Incentive Plan. The Executive is guaranteed a minimum bonus of $525,000 for the year 2000. 6. SIGN-ON AWARDS. (a) In order to keep the Executive whole in respect of compensation he is forfeiting at his previous employer, the Company shall grant the Executive the equity-based awards described in this Section 6. (b) RESTRICTED STOCK AWARD. The Company shall grant the Executive 430,000 shares of restricted stock based on the terms set forth in Exhibit B attached hereto. 4 4 (c) STOCK OPTION AWARD. The Company shall grant the Executive a stock option to purchase 500,000 shares of Common Stock of the Company based on the terms set forth in Exhibit C attached hereto. 7. ADDITIONAL LONG-TERM INCENTIVE AWARDS. (a) LONG-TERM INCENTIVE PROGRAMS. The Executive shall be eligible to participate in the Company's on-going long-term incentive programs. (b) STOCK OPTIONS. The Executive shall be eligible for stock option awards commencing with awards in 2000, in accordance with Company practices applicable to its senior-level executives at the sole discretion of the Board. (c) STRATEGIC INCENTIVE PLAN ("SIP"). The Executive shall participate in the Company's 1998-2000 SIP with a target grant of 15,000 performance units for the year 2000. 8. EMPLOYEE BENEFIT PROGRAMS. During the Term of Employment, the Executive shall be entitled to participate in any employee pension and welfare benefit plans and programs made available to the Company's senior level executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, the Company's Salaried Pension Plan, Stock Savings Plan and other retirement and savings plans or programs, Executive Health Care Plan (which covers medical, dental and vision), short-term and long-term disability and life insurance plans, accidental death and dismemberment protection, travel accident insurance, and will also participate in the Company's vacation policy for senior executives. 9. SUPPLEMENTAL PENSION. The Executive shall be entitled to participate in the Company's Non-Qualified Retirement Plans. In addition, the Company shall provide him with a Supplemental Retirement Benefit ("SRB"), commencing at the later to occur of (i) his termination of employment from the Company and (ii) his attaining age 60. The SRB shall consist of annual payments of $450,000 as a 50% joint and survivor benefit and shall be payable from the general assets of the Company. In the event that the Executive voluntarily terminates employment with the Company prior to age 60, is terminated for Cause by the Company or receives the Special Termination Benefit provided in Section 12(f) below, he will forfeit all rights to the SRB. In the event of the Executive's death prior to age 60, his spouse shall be entitled to one-half of the SRB. She will receive this benefit annually commencing on the date the Executive would have attained age 60 and ending on her death. 5 5 10. REIMBURSEMENT OF BUSINESS AND OTHER EXPENSES; RELOCATION. (a) The Executive is authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement and the Company shall promptly reimburse him for all reasonable business expenses incurred in connection with carrying out the business of the Company, subject to documentation in accordance with the Company's policy. (b) The Executive shall be entitled to participate in the Company's Relocation Policy, including without limitation, all reasonable moving, closing, temporary housing and other associated expenses. 11. PERQUISITES. The Executive shall receive standard Company executive perquisites, including, without limitation, the following: (a) the Executive Life Insurance Plan, providing split dollar insurance with a $5 million single-life covered amount, subject to the provisions of the plan; (b) the Financial Counseling Program; and (c) the Executive Automobile Plan. 12. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH. In the event that the Executive's employment is terminated due to his death, his estate or his beneficiaries, as the case may be, shall be entitled to the following benefits: (i) Base Salary through the end of the month in which death occurs; (ii) Pro Rata annual incentive award for the year in which the Executive's death occurs, when bonuses are paid to other officers; (iii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable through the end of the originally scheduled term; (iv) the restrictions on restricted stock shall lapse; (v) payout of other long-term incentive plans in accordance with those plans; and (vi) SRB benefits in accordance with Section 9. 6 6 (b) TERMINATION DUE TO DISABILITY. In the event that the Executive's employment is terminated due to his Disability, he shall be entitled to the following benefits: (i) disability benefits in accordance with the long-term disability program in effect for senior executives of the Company; (ii) Base Salary through the end of the month in which disability benefits commence; (iii) Pro Rata annual incentive award for the year in which the Executive's termination occurs, payable when bonuses are paid to other officers; (iv) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable for the end of the originally scheduled term; (v) the restrictions on the restricted stock shall lapse; (vi) payout of other long-term incentive plans in accordance with those plans; and (vii) SRB benefits in accordance with Section 9. (c) TERMINATION BY THE COMPANY FOR CAUSE. (i) A termination for Cause shall not take effect unless the provisions of this paragraph (i) are complied with. The Executive shall be given written notice by the Board of the intention to terminate him for Cause and shall then be entitled to a hearing before the Board, provided he requests such hearing within five calendar days of receipt of the written notice from the Board of the intention to terminate him for Cause. Following such hearing, if the Executive is furnished written notice by the Board confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, he shall thereupon be terminated for Cause. (ii) In the event the Company terminates the Executive's employment for Cause: (A) he shall be entitled to Base Salary through the date of the termination; (B) all outstanding options which are not then exercisable shall be forfeited; 7 7 (C) all unvested restricted stock shall be forfeited; (D) any other long-term incentive grant shall be forfeited; and (E) SRB benefits in accordance with Section 9. (d) TERMINATION WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION WITHOUT CAUSE AFTER JULY 1, 2001. In the event the Executive's employment is terminated by the Company without Cause, other than due to Disability or death, or in the event there is a Constructive Termination without Cause, in either case after July 1, 2001, the Executive shall be entitled to the following benefits: (i) Base Salary through the date of termination; (ii) Base Salary, at the annualized rate in effect on the date of termination, for a period of 24 months following such termination; (iii) a Pro Rata annual incentive award for the year in which termination occurs; (iv) an annual incentive award at target for a period of 24 months following the date of termination; payable when such awards are made to other senior executives; (v) if the termination is prior to the Executive's 55th birthday, exercisable options shall remain exercisable for three months, if the termination is on or after the Executive's 55th birthday, exercisable options shall remain exercisable through the end of the originally scheduled term; (vi) unvested restricted stock is forfeited; (vii) any other long-term incentives shall be payable in accordance with the plans; (viii) SRB benefits in accordance with Section 9; and (ix) continued participation in the Executive Health Care Plan and in other employee benefit plans or programs in which he was participating on the date of the termination of his employment until the earlier of 24 months following termination of employment or the date, or dates, he obtains coverage under the plans of another employer. 8 8 (e) VOLUNTARY TERMINATION. A termination of employment by the Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause, shall have the same consequences as provided in Section 12(c)(ii) for a termination for Cause. A voluntary termination under this Section 12(e) shall be effective 30 calendar days after prior written notice is received by the Company, unless the Company elects to make it effective earlier. (f) SPECIAL TERMINATION. In the event (i) the Executive's employment is terminated without Cause or there is a Constructive Termination without Cause, in either case, on or before July 1, 2001, or (ii) the Executive terminates his employment within 30 days following July 1, 2001 by providing written notice of intent to terminate in consequence of his not becoming Chief Executive Officer of the Company on that date (or earlier), the Company shall pay him $10 million at the time of his termination and he shall otherwise have the same entitlements as provided in Section 12(c)(ii) in the case of a termination for Cause; provided, however, that clause (ii) of this Section 12(f) shall not apply in the event of a prior termination of the Executive's employment pursuant to any other subsection of this Section 12. If a payment is made pursuant to this Section 12(f), it shall be in lieu of the Executive's entitlements, if any, under the Employment Continuation Agreement which is attached hereto as Exhibit A and to the extent the Executive has received payments or other benefits pursuant to the Employment Continuation Agreement such payments and benefits shall offset the amount due pursuant to this Section 12(f). (g) CONSEQUENCES OF A CHANGE IN CONTROL. (i) In the event of a change in control after July 1, 2001, the Executive's entitlements relating to a Change in Control of the Company shall be determined in accordance with the Employment Continuation Agreement, Exhibits B and C of this Employment Agreement and any other post-Effective Date documents relating to Executive benefits upon a change in control of the Company. In no event shall any payments or benefits due the Executive pursuant to the Employment Continuation Agreement be duplicated pursuant to this agreement. (ii) Under this Agreement in the event of a change in control on or before July 1, 2001, the Executive will receive the Special Termination Payment described in Section 12(f), and a Gross-Up payment on the terms and conditions described in Section 6 of the Employment Continuation Agreement between the Executive and the Company, dated November 11, 1999, with respect solely to payments made, if any, on the Performance-Based Restricted Stock described in Exhibit B and the Stock Option Award described in Exhibit C of this Agreement. (h) OTHER TERMINATION BENEFITS. In the case of any of the foregoing terminations, the Executive or his estate shall also be entitled to: 9 9 (i) the balance of any incentive awards due for performance periods which have been completed, but which have not yet been paid; (ii) any expense reimbursements due the Executive; and (iii) other benefits, if any, in accordance with applicable plans and programs of the Company. 13. CONFIDENTIALITY. (a) The Executive agrees that he will not, at any time during the Term of Employment or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or Affiliate of the Company, obtained during the course of his employment, except as required in the course of such employment or with the written permission of the Company or, as applicable, any subsidiary or Affiliate of the Company or as may be required by law, provided that, if the Executive receives legal process with regard to disclosure of such information, he shall promptly notify the Company and cooperate with the Company in seeking a protective order. (b) The Executive agrees that at the time of the termination of his employment with the Company, whether at the instance of the Executive or the Company, and regardless of the reasons therefor, he will deliver to the Company, and not keep or deliver to anyone else, any and all notes, files, memoranda, papers and, in general, any and all physical matter containing information, including any and all documents significant to the conduct of the business of the Company or any subsidiary or Affiliate of the Company which are in his possession, except for any documents for which the Company or any subsidiary or Affiliate of the Company has given written consent to removal at the time of the termination of the Executive's employment. 14. NONCOMPETITION. The Executive agrees that during the Period of Employment and for a period of two years thereafter (the "Noncompetition Period") he shall not in any manner, directly or indirectly, through any person, firm, corporation or enterprise, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or advisor or consultant to any person, firm, corporation or enterprise or otherwise (a "Competitor"), engage or be engaged, or assist any Competitor in engaging or being engaged, in any Competitive Activity. A Competitive Activity shall mean a business that (i)is being conducted by the Company or any Affiliate at the time in question, (ii) was being conducted, or was under active consideration to be conducted, by the Company or any Affiliate, at the date of the termination of the Executive's employment, and (iii) represents fifteen (15) percent or more of the total revenues of the Competitor for its most recent quarterly reporting period. Nothing in this Section 14 shall prohibit the Executive from being a passive owner of not more than one percent of the outstanding common stock, capital stock and equity of any firm, corporation or enterprise so 10 10 long as the Executive has no active participation in the management of business of such firm, corporation or enterprise. 15. NON SOLICITATION. The Executive further agrees that during the Noncompetition Period he shall not in any manner, directly or indirectly, induce or attempt to induce any employee of or advisor or consultant to the Company or any of its Affiliates to terminate or abandon his or her or its employment or other relationship for any purpose whatsoever; provided, however, that this restriction shall not apply to, or interfere with, the proper performance by the Executive of his duties and responsibilities during the Period of Employment. If the restrictions stated in Sections 14 and 15 of this Agreement are found by a court to be unreasonable, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 16. REMEDIES. The Executive agrees that the Company's remedies at law would be inadequate in the event of a breach or threatened breach of this Agreement; accordingly, the Company shall be entitled, in addition to its rights at law, to seek an injunction and other equitable relief without the need to post a bond. 17. RESOLUTION OF DISPUTES. Any disputes arising under or in connection with this Agreement shall be resolved by third party mediation of the dispute and, failing that, at the election of the Executive by binding arbitration, to be held in Cleveland, Ohio, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each Party shall bear his or its own costs of the mediation, arbitration or litigation. 18. INDEMNIFICATION. (a) The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held 11 11 harmless by the Company to the fullest extent legally permitted or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board of Directors or, if greater, by the laws of the State of Ohio, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee or agent of the Company or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. (b) The failure of the Company (including its board of directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of any proceeding concerning payment of amounts claimed by the Executive under Section 18(a) above that indemnification of the Executive is proper because he has met the applicable standard of conduct, shall not create a presumption that the Executive has not met the applicable standard of conduct. (c) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering the Executive to the extent the Company provides such coverage for its other executive officers. 19. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. Rights or obligations of the Company under this Agreement may be assigned or transferred by the Company pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law. 20. ENTIRE AGREEMENT. This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, 12 12 discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 21. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. 22. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law so as to achieve the purposes of this Agreement. 23. SURVIVORSHIP. Except as otherwise expressly set forth in this Agreement, the respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment. This Agreement itself (as distinguished from the Executive's employment) may not be terminated by either Party without the written consent of the other Party. Except as otherwise expressly set forth in this Agreement, the respective rights and obligations of the Parties shall survive the Agreement expiration with respect to the rights (including but not limited to vested rights) and the obligations of the Parties. 24. REFERENCES. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 25. GOVERNING LAW. This Agreement shall be governed in accordance with the laws of Ohio without reference to principles of conflict of laws. 13 13 26. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally, (b) delivered by certified or registered mail, postage prepaid, return receipt requested or (c) delivered by overnight courier (provided that a written acknowledgment of receipt is obtained by the overnight courier) to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: TRW Inc. Office of the General Counsel 1900 Richmond Road Cleveland, Ohio 44124 If to the Executive: David M. Cote 11804 Springhill Garden Anchorage, Kentucky 40223 27. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 28. COUNTERPARTS. This Agreement may be executed in two or more counterparts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. TRW Inc. By: /s/ Joseph T. Gorman -------------------------------- Joseph T. Gorman Chairman of the Board and Chief Executive Officer /s/ David M. Cote -------------------------------- David M. Cote EX-27 6 EXHIBIT 27
5 0000100030 TRW, INC. 1,000,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 294 0 2,487 0 1,090 5,199 8,014 4,115 17,270 7,452 5,530 0 0 76 1,907 17,270 12,344 12,344 10,096 10,096 0 0 334 435 190 245 0 0 0 245 2.03 1.99
EX-99 7 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 Nine Months Ended -------------------------------------------------------------------------- September 30, 1999 1998 1997 1996 1995 1994 ------------------ --------- ---------- ---------- ---------- ---------- Earnings from continuing operations before income taxes $434.7(A) $746.1 $239.7(B) $302.2(C) $625.5 $435.5 Unconsolidated affiliates (32.5) 1.0 (8.0) 1.4 1.3 (0.6) Minority earnings 14.6 10.5 20.2 11.5 10.8 7.7 Fixed charges excluding capitalized interest 379.1 174.3 123.9 129.0 137.2 145.3 ----- ----- ----- ----- ----- ----- Earnings $795.9 $931.9 $375.8 $444.1 $774.8 $587.9 ------ ------ ------ ------ ------ ------ Fixed Charges: Interest expense $334.1 $114.4 $75.4 $84.2 $94.7 $104.7 Capitalized interest 3.0 4.7 4.5 3.5 5.1 6.6 Portion of rents representa- tive of interest factor 44.9 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 $382.0 $179.0 $128.4 $132.5 $142.3 $151.9 ------ ------ ----- ----- ------ ------ Ratio of earnings to fixed charges 2.1x 5.2x 2.9x 3.4x 5.4x 3.9x ---- ---- ---- ---- ---- ----
(A) Earnings from continuing operations before income taxes for the nine months ended September 30, 1999 of $434.7 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-----