SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-12385
A. Full title of the plan and address of the plan, if different from
that of the issuer named below:
LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
NORTHROP GRUMMAN CORPORATION
1840 Century Park East
Los Angeles, California 90067
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the trustees (or other persons who administer the employee benefit plan)
have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
Dated: June 30, 2003 /s/ J. Michael Hateley
_____________________________________
By J. Michael Hateley
Chairman, Administrative Committee
LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
TABLE OF CONTENTS
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Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for Plan Benefits
as of December 31, 2002 and 2001 2
Statement of Changes in Net Assets Available for Plan Benefits for the
Year Ended December 31, 2002 3
Notes to Financial Statements 4-13
SUPPLEMENTAL SCHEDULE--Form 5500, Schedule H, Part IV, Line 4i, Schedule of
Assets (Held at End of Year) at December 31, 2002 14
INDEPENDENT AUDITORS' REPORT
Administrative Committee
Litton Financial Security and Savings Program
We have audited the accompanying statements of net assets available for plan
benefits of the Litton Financial Security and Savings Program (the "Plan") as of
December 31, 2002 and 2001 and the related statement of changes in net assets
available for plan benefits for the year ended December 31, 2002. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements, referred to above, present fairly, in
all material respects, the net assets available for plan benefits as of December
31, 2002 and 2001 and the changes in net assets available for plan benefits for
the year ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
Table of Contents is presented for the purpose of additional analysis and is not
a required part of the basic financial statements but is supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. This schedule is the responsibility of the Plan's management. The
supplemental schedule has been subjected to the auditing procedures applied in
our audit of the basic 2002 financial statements and, in our opinion, is fairly
stated in all material respects when considered in relation to the basic
financial statements taken as a whole.
/s/ Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP
June 26, 2003
Los Angeles, California
LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
DECEMBER 31, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------- --------------------------------------
Retirement Savings Retirement Savings
Account Account Total Account Account Total
ASSETS:
Investments (Notes 2, 3, 4 and 5):
Investment in Northrop Grumman Employee
Benefit Plan Master Trust at fair value $369,013,143 $ - $ 369,013,143 $ - $ - $ -
Investment in Northrop Grumman Defined
Contribution Plans Master Trust at fair value 665,220,727 665,220,727
Short-term investments 75,870,873 18,833,847 94,704,720
U.S. government obligations 108,187,000 66,425,256 174,612,256
Corporate obligations 188,937,909 188,937,909
Common stock 144,208,421 413,550,487 557,758,908
Registered investment companies 82,236,617 1,424,107 83,660,724
Common/collective trusts 35,096,982 35,096,982
Loans receivable from participants 26,082,904 26,082,904 25,407,153 25,407,153
Other investments 51,000,000 51,000,000
------------ ------------ -------------- ------------ ------------ --------------
Total investments 369,013,143 691,303,631 1,060,316,774 410,502,911 800,675,741 1,211,178,652
------------ ------------ -------------- ------------ ------------ --------------
Receivables:
Dividends and interest 2,618,795 6,953,103 9,571,898
Employee deposits 219,509 281,249 500,758 318,188 451,977 770,165
Interfund transfers 981,392 (981,392)
Employer contributions 158,003 158,003 749,946 749,946
------------ ------------ -------------- ------------ ------------ -------------
Total receivables 219,509 439,252 658,761 3,918,375 7,173,634 11,092,009
------------ ------------ -------------- ------------ ------------ --------------
Total assets 369,232,652 691,742,883 1,060,975,535 414,421,286 807,849,375 1,222,270,661
------------ ------------ -------------- ------------ ------------ --------------
LIABILITIES:
Accrued expenses 408,174 532,362 940,536 214,814 640,980 855,794
Due brokers for securities purchased 12,262,294 12,262,294
------------ ------------ -------------- ------------ ------------ --------------
Total liabilities 408,174 532,362 940,536 214,814 12,903,274 13,118,088
------------ ------------ -------------- ------------ ------------ --------------
NET ASSETS AVAILABLE FOR PLAN BENEFITS $368,824,478 $691,210,521 $1,060,034,999 $414,206,472 $794,946,101 $1,209,152,573
============ ============ ============== ============ ============ ==============
See notes to financial statements.
-2-
LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------
Retirement Savings
Account Account Total
INVESTMENT INCOME (LOSS) (Notes 2, 3, 4 and 5):
Net depreciation in fair value
of investments $ (8,001,736) $ (99,896,266) $ (107,898,002)
Plan interest in the Northrop Grumman
Employee Benefit Plan Master Trust
investment loss (40,689,371) (40,689,371)
Plan interest in the Northrop Grumman
Defined Contribution Plans Master Trust
investment loss (5,086,597) (5,086,597)
Dividends 99,530 3,530,337 3,629,867
Interest 2,622,396 11,470,370 14,092,766
--------------- --------------- ---------------
Total investment loss (45,969,181) (89,982,156) (135,951,337)
--------------- --------------- ---------------
DEPOSITS AND CONTRIBUTIONS:
Employee deposits 18,789,025 41,586,426 60,375,451
Employer contributions 18,140,340 18,140,340
Employee rollovers into plan 663,472 663,472
Interfund transfers 1,103,926 (1,103,926)
Loan payments pending transfer (149,428) (149,428)
--------------- --------------- ---------------
Total deposits and contributions 19,892,951 59,136,884 79,029,835
--------------- --------------- ---------------
DEDUCTIONS:
Benefits paid to participants (Note 2) 18,552,282 71,080,564 89,632,846
Administrative expenses 835,779 2,010,323 2,846,102
--------------- --------------- ---------------
Total deductions 19,388,061 73,090,887 92,478,948
--------------- --------------- ---------------
TRANSFERS FROM OTHER PLANS (Note 1) 82,297 200,579 282,876
--------------- --------------- ---------------
NET DECREASE (45,381,994) (103,735,580) (149,117,574)
NET ASSETS AVAILABLE FOR
PLAN BENEFITS:
Beginning of year 414,206,472 794,946,101 1,209,152,573
--------------- --------------- ---------------
End of year $ 368,824,478 $ 691,210,521 $ 1,060,034,999
=============== =============== ===============
See notes to financial statements.
-3-
LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
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1. DESCRIPTION OF THE PLAN
The following description of the Litton Financial Security and Savings
Program (the "FSSP" or the "Plan") is provided for general information
purposes only. Participants should refer to the Plan document for a more
complete description of the Plan's provisions.
General--The FSSP is a tax-qualified defined contribution plan established
effective October 1, 1984, by Litton Industries, Inc. ("Litton") for the
benefit of employees of its U.S. subsidiaries and divisions as well as
employees of Premier America Credit Union, an unaffiliated entity. Effective
January 1, 1996, employees have been eligible to participate in the Plan
upon their date of hire on a voluntary basis. In addition, prior service
credit may be given to employees of certain businesses acquired by the
Company from time to time.
Effective June 2001, Litton was acquired by and became a wholly owned
subsidiary of Northrop Grumman Corporation ("NGC"), which assumed
sponsorship of the Plan.
Effective May 1, 2002, the Plan transferred all of its assets from Mellon
Bank (the "Former Trustee") to State Street Bank ("Trustee") and then
immediately transferred all assets for the FSSP Retirement Account to the
Northrop Grumman Employee Benefit Plan Master Trust (the "Pension Master
Trust").
Effective October 1, 2002, the Plan began utilizing the Northrop Grumman
Defined Contribution Plans Master Trust (the "Savings Master Trust") for
plan contributions and related investments. On November 18, 2002, the Plan
transferred the remaining assets of the FSSP Savings Account to the Savings
Master Trust. State Street Bank acts as Trustee for the Savings Master
Trust.
The FSSP is subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
Employee Deposits and Company Contributions--The Plan includes an FSSP
Retirement Account and an FSSP Savings Account. A participant may deposit
from 1% to 4% of his/her annual cash compensation into the FSSP Retirement
Account. A participant's FSSP Retirement Account deposits provide the basis
for determining the extent to which the participant is entitled to receive
pension benefits under the Litton heritage retirement plans (collectively,
the "Litton Retirement Plans"). As of June 1, 2002, a participant who
deposits 4% of his/her annual cash compensation into the FSSP Retirement
Account could deposit an additional 1% to 26% into the FSSP Savings Account
(prior to June 1, 2002, the FSSP Savings Account deposit limit was 16%).
Subject to certain collective bargaining agreements, the Company currently
matches 50% of the first 6% of a participant's deposits to the FSSP, with
such contributions remitted to the participant's FSSP Savings Account.
The investment of FSSP Retirement Account deposits is directed solely by the
Investment Committee, and FSSP Savings Account deposits are invested, as
designated by the participant, in one or more of the investment funds
currently available. However, the aggregate amount of deposits for any plan
year to all FSSP accounts may not exceed the maximum amounts for such year
allowable under Section 401(k) of the Internal Revenue Code (the "Code").
-4-
Each year, as required by the Plan document, the Plan re-allocates current
year deposits to ensure that each participant receives the maximum pension
and company matching contributions that he/she is eligible to receive,
subject to federal deferral and compensation limits. Maximization is
performed at the end of the calendar year or upon termination of employment,
whichever comes first. To the extent that deposits are re-allocated from a
participant's FSSP Savings Account to his/her FSSP Retirement Account, the
amount of Company matching contributions on any such re-allocated amounts
may be forfeited if the re-allocation reduces his/her deposits below the
maximum level eligible for Company matching contributions. Forfeitures of
Company matching contributions plus investment earnings thereon are used to
reduce subsequent Company matching contributions.
Vesting--A participant is always fully vested in his/her FSSP deposits
(including any investment earnings thereon). Participants currently vest at
50% in all Company matching contributions plus related investment earnings
after two full years of service and 100% after three full years of service.
Full vesting also occurs if a participant (while in the employ of the
Company) dies, becomes totally disabled or terminates employment on or after
his/her 65th birthday.
Upon termination of employment, a participant forfeits any nonvested amounts
of Company matching contributions plus investment earnings related thereto.
Forfeitures for a terminated participant may be restored depending on the
time elapsed from his/her termination date and the time that the terminated
participant was employed by the Company immediately prior to such
termination of employment.
Payment of Benefits--Upon termination of service (including termination due
to death, disability or retirement), a participant may receive a lump sum
payment of his/her FSSP Retirement and/or Savings Account balances. A
participant may also delay his/her lump sum payment until the age of 70 1/2,
if the total account balances exceed $5,000. In addition, a participant has
the option of choosing to take the total distribution as a life or, if
married, 50% joint and survivor annuity or, at retirement, to elect a
rollover of his/her FSSP Retirement Account to the Litton Retirement Plans.
A participant's benefit under the Litton Retirement Plans is determined by
the amount of deposits to his/her FSSP Retirement Account. To achieve the
maximum retirement benefit under such retirement plans, the FSSP provides
that employees must, on an annual basis, deposit the lesser of: (i) 4% of
their annual compensation, (ii) the 401(k) deferral limit as defined by the
Internal Revenue Code, (iii) 4% of the pay cap limit as defined by the
Internal Revenue Code or (iv) such lesser maximum amount as may result from
the application of the nondiscrimination tests. The FSSP and Litton
Retirement Plans together constitute a qualified offset arrangement as
defined in Section 1116(f) of the Tax Reform Act of 1986.
Withdrawals--Effective November 18, 2002, a participant may withdraw all or
a portion of his or her Company matching contributions (plus earnings) and
all or a portion of his or her FSSP Savings Account deposits for any reason
after reaching age 59 1/2, or prior to reaching age 59 1/2 in the case of
hardship (as described in the Plan document).
Participant Accounts--A separate account is maintained for each participant.
Each participant's account is credited with the participant's contribution
and allocations of (a) the Company's contribution, (b) Plan earnings, and
(c) administrative expenses. Allocations are based on participant earnings
on account balances, as defined in the Plan document. The benefit to which a
participant is entitled is the benefit that can be provided from the
participant's vested account.
-5-
Investments--Prior to November 18, 2002, FSSP assets were invested in five
funds held in trust. Participants could allocate their deposits and Company
matching contributions between one or more of the Savings Account investment
funds described below. Participants could change the allocation of future
deposits among funds and/or transfer existing account balances between such
funds once every month in 1% increments.
FSSP Retirement Account (Non-Participant Directed):
Retirement Fund--The Retirement Fund intended to provide increased value
through reasonable growth in principal and reasonable levels of current
income. Effective May 1, 2002, the Retirement Fund assets were invested in
the Northrop Grumman Employee Benefit Plan Master Trust.
FSSP Savings Account (Participant Directed):
Bond Fund--The Bond Fund intended to provide increased value through the
production of reasonable levels of current income with limited capital
risk. Permissible investments included high quality debt securities of
varying time maturities of more than one year, bonds, notes, debentures or
other debt obligations of the U.S. or foreign corporate issuers, the U.S.
government and agencies, or foreign governments and agencies denominated in
U.S. dollars, or group investment contracts (GICs) issued by an insurance
company or other financial institution.
Growth Fund--The Growth Fund intended to invest in stocks that generate
superior sales and earnings growth. This Fund invested in common stocks;
securities which were convertible into common stocks; warrants, options or
right to purchase common stocks; and other equity interests or
participations. This Fund also held fixed income securities or preferred
stocks, futures contracts with respect to financial instruments or
securities indices and all forms of options.
Money Market Fund--The Money Market Fund provided stability of principal
and produced current income consistent with minimal risk of principal by
investing in debt securities having an average maturity of less than two
years. The Money Market Fund invested in obligations of the U.S.
government, corporate debt obligations, certificates of deposit and other
short-term instruments.
The S&P 500 Index Fund--The S&P 500 Index Fund invested in stocks that
replicate the S&P 500 Index, whose value is calculated according to the
market value of 500 companies across four major industry sectors:
industrial, utility, financial and transportation. The S&P 500 Index Fund
was capitalization weighted, in that the stocks are represented according
to their market capitalizations (price times number of shares outstanding)
relative to the capitalization of the total index.
Effective October 15, 2002, an employee stock ownership fund option was
added to the Plan to permit participants to elect investment in a Company
stock fund (the "Northrop Grumman Fund"). On November 18, 2002, the Plan
transferred the FSSP Savings Account assets to the Savings Master Trust,
which has the investment options as described below. Each participant may
now direct his or her employee contributions and Company matching
contributions, in 1% increments, in any of the following 12 investment
funds.
U.S. Equity Fund--The U.S. Equity Fund consists predominantly of holdings
in large and medium sized U.S. company stocks. The fund's objectives are
capital appreciation over the long term, along with current income
(dividends). The fund's stock investments are selected by independent
professional investment managers appointed by the Plan's Investment
Committee.
-6-
U.S. Fixed Income Fund--The Fixed Income Fund consists of holdings in
marketable, fixed income securities rated within the three highest
investment grades (i.e., A or better) assigned by Moody's Investor
Services or Standard & Poor's Corporation, U.S. Treasury or federal agency
obligations, or cash equivalent instruments. The fund is broadly
diversified and maintains an average maturity of 10 years. The securities
are selected by independent professional investment managers appointed by
the Plan's Investment Committee.
Stable Value Fund--The Plan holds an interest in the Northrop Grumman
Stable Value Fund (the "Stable Value Fund"; see Note 4). Investments in
the Stable Value Fund are diversified among U.S. government securities and
obligations of government agencies, bonds, short-term investments, cash
and investment contracts issued by insurance companies and banks. The
Stable Value Fund is managed by an independent professional investment
manager appointed by the Plan's Investment Committee.
Northrop Grumman Fund--The Northrop Grumman Fund invests primarily in
Northrop Grumman Corporation common stock.
Balanced Fund--The Balanced Fund is a fully diversified portfolio
consisting of fixed portions of five of the savings plan funds (Stable
Value Fund, U.S. Equity Fund, Fixed Income Fund, International Equity Fund
and Small Cap Fund). The fund seeks to exceed the return of the bond
market and approach the return of the stock market, but with less risk
than an investment only in stocks.
International Equity Fund--The International Equity Fund consists of
stocks of a diversified group of companies in developed countries outside
the United States. The fund's objectives are capital appreciation over the
long term, along with current income (dividends).
Small Cap Fund--The Small Cap Fund consists of stocks of a diversified
group of small capitalization U.S. companies. The stocks purchased by the
fund typically have a market capitalization similar to companies in the
Russell 2000 Index, which are companies with an average market
capitalization of $500 million. The fund's objective is capital
appreciation over the long term, rather than current income (dividends).
Equity Index Fund--The Equity Index Fund consists of a diversified
portfolio of stocks, as defined by an established market index. These
stocks are selected by independent professional investment managers
appointed by the Plan's Investment Committee. This fund is designed to
provide results that closely match those of the Standard & Poor's 500
Stock Index.
High Yield Bond Fund--The High Yield Bond Fund consists of
below-investment-grade securities (i.e., BBB or lower) assigned by Moody's
Investor Services or Standard & Poor's Corporation. The fund seeks to
exceed the return of the high-quality (investment grade) bond market.
International Bond Fund--The International Bond Fund consists of non-U.S.
dollar denominated debt instruments rated within the three highest
investment grades (i.e., A or better) by Moody's Investor Services or
Standard & Poor's Corporation. The fund's objective is to provide a higher
level of income and capital appreciation than the domestic fixed income
market.
Emerging Markets Fund--The Emerging Markets Fund consists of a diversified
portfolio of stocks issued by companies based in developing countries. The
fund's objective is capital appreciation over the long term.
-7-
Schwab Personal Choice Retirement Account--The Schwab Personal Choice
Retirement Account consists of mutual funds from over 300 mutual fund
companies.
Contributions deposited into each investment fund buy a number of units in
each fund. The value of each participant's account within each fund
depends on two factors: (1) the number of units purchased to date, and (2)
the current value of each unit. Unit values are updated daily prior to any
Plan transactions, including contributions, withdrawals, distributions,
and transfers. Participants may change their investment options daily.
Participant Loans--FSSP loans may be made only from an active participant's
vested FSSP Savings Accounts to a maximum loan amount of the lesser of 50%
of such account balances or $50,000. The interest rate on such loans is the
trustee's prime rate plus 1% on the first day of the month in which the
participant applies for the loan. Interest is computed based upon the loan
recipient's pay period (e.g., monthly, bi-weekly).
Active participants' FSSP loan repayments are generally made by means of
payroll deductions. Loan repayments after termination may be made by check
if the participant's account balance remains in the FSSP. The maximum loan
repayment period is fifteen years if the loan proceeds are used to purchase
the participant's principal residence; otherwise, the maximum repayment
period for a loan is five years. Outstanding loan balances can be repaid in
full at any time.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting--The accompanying financial statements have been
prepared in accordance with principles generally accepted in the United
States of America.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Risks and Uncertainties--The Plan invests in various securities including
U.S. government securities, corporate debt instruments and corporate stocks.
Investment securities, in general, are normally exposed to various risks,
such as interest rate, credit and overall market volatility. Due to the
ongoing level of risk associated with investment securities, changes in the
values of those securities may occur in the near term which could materially
affect the amounts reported in the statements of net assets available for
plan benefits.
Investment Valuation and Income Recognition--The Plan's investments,
including the Plan's interest in the master trusts, are stated at fair value
as determined by State Street Bank and Trust Company ("State Street" or the
"Trustee"). The underlying investments in the master trusts are valued as
follows: Investments in securities traded on a national securities exchange
are valued at their quoted market price at the end of the Plan year.
Securities that have no quoted market price are presented at their estimated
fair value.
Securities are valued at their market values based on information and
financial publications of general circulation, statistical and valuation
services, records of security exchanges, appraisals by qualified persons,
transactions and bona fide offers in assets of the type in question and
other information customarily used in the valuation of assets or if market
values are not available, at their fair values as provided to the Trustee by
-8-
the party with authority to trade such securities (investment managers, the
Investment Committee, or, in the case of participant directed brokerage
accounts, the participant's broker, as applicable). The Trustee relies on
the prices provided by pricing sources or the investment managers,
Investment Committee or participant's broker as a certification as to value
in performing any valuations or calculations required of the Trustee under
this contract.
All securities and cash or cash equivalents are quoted in the local currency
and then converted into US dollars using the appropriate exchange rate
obtained by the Trustee.
The investment contracts with insurance companies included in the Stable
Value Fund are stated at contract value (see Notes 4 and 5). Participant
loans are valued at cost, which approximates fair value.
Purchases and sales of investments are recorded on a trade-date basis.
Interest income is recorded on the accrual basis and dividends are recorded
on the ex-dividend date.
Broker commissions, transfer taxes and other charges and expenses incurred
in connection with the purchase, sale or other disposition of securities or
other investments held by the Pension Master Trust and Savings Master Trust
are added to the cost of such securities or other investments or are
deducted from the proceeds of the sale or other disposition thereof, as
appropriate. Taxes (if any) on the assets of the funds, or on any gain
resulting from the sale or other disposition of such assets, or on the
earnings of the funds, are apportioned among the participants and former
participants (if any) whose interests in the Plan are affected, and the
share of such taxes apportioned to each such person is charged against his
or her account in the Plan.
The Pension Master Trust and Savings Master Trust allocate investment
income, realized gains and losses and unrealized appreciation and
depreciation on the underlying securities to the participating plans monthly
and daily, respectively, based on the market value of each plan's
investment. The unrealized appreciation or depreciation in the aggregate
current value of investments is the difference between current value and the
cost of investments. The realized gain or loss on investments is the
difference between the proceeds received and the average cost of the
investments sold.
Expenses--Administrative expenses of the Plan are paid by either the Plan or
the Plan's sponsor as provided in the Plan document.
Payment of Benefits--Benefits are recorded when paid.
3. INVESTMENTS
As of December 31, 2002, the Plan's investments included a proportionate
interest in certain investments held by the Pension Master Trust and Savings
Master Trust. These investments are stated at fair values determined and
reported by the Trustee in accordance with the master trust agreements
established by the Company (see Note 2). Proportionate interests of each
participating plan are ascertained on the basis of the Trustee's plan
accounting method for master trust arrangements. Plan assets represent 3.0%
and 14.6% of total net assets as reported by the Trustee of the Pension
Master Trust and Savings Master Trust, respectively, as of December 31,
2002. Only investments held in the FSSP Savings Account are participant
directed in nature.
As of December 31, 2002, Pension Master Trust and Savings Master Trust
assets of $1,209,014,315 million and $635,648,142 million, respectively,
were on loan to third party borrowers under security lending agreements.
Such assets could be subject to sale restrictions in the event security
lending agreements are terminated and the securities have not been returned
to the Plan.
-9-
The net assets of the Pension Master Trust and Savings Master Trust at fair
value are as follows as of December 31, 2002:
Pension Savings
Master Trust Master Trust
Assets:
Temporary investments (See Note 4) $ 1,048,047,128 $ 298,243,357
U.S. and foreign government securities 1,893,873,412 314,399,692
Corporate debt instruments 1,845,446,648 186,349,259
Common stocks 6,241,146,078 1,704,725,533
Common/collective trust funds 767,420,654 440,836,676
Real estate 85,671,225
Guaranteed and synthetic investment
contracts (See Notes 4 and 5) 1,690,110,231
Other investments 1,220,936,503 3,790,201
Dividends, interest and taxes receivable 55,685,261 6,938,752
Other receivables 766,961
Receivables for investments sold 630,337,569 55,685,018
Receivables for foreign exchange 248,255,892
--------------- ---------------
Total assets 14,037,587,331 4,701,078,719
--------------- ---------------
Liabilities:
Payables for foreign exchange 248,222,060
Due to broker for securities purchased 1,285,315,934 151,289,439
Other liabilities 1,011,540
--------------- ---------------
Total liabilities 1,534,549,534 151,289,439
--------------- ---------------
Net assets of the Master Trust $12,503,037,797 $ 4,549,789,280
=============== ===============
-10-
Investment income (loss) for the Pension Master Trust and Savings Master
Trust is as follows:
Pension Savings
Master Trust Master Trust
May 1, 2002 October 1, 2002
through through
December 31, 2002 December 31, 2002
Investment income (loss):
Net (depreciation) appreciation in fair value
of investments:
Temporary investments $ 78,961 $ 22,284
U.S. and foreign government securities 153,522,126 8,700,588
Corporate debt instruments 10,606,693 9,554,251
Common stocks (1,719,819,746) (30,332,026)
Common/collective trust funds (122,219,998) 26,222,283
Real estate (25,673,046)
Other investments (78,479,873) 1,252,568
--------------- ---------------
Net (depreciation) appreciation (1,781,984,883) 15,419,948
Interest 151,295,784 32,361,722
Dividends 77,841,638 7,234,555
Other income 31,987,218 214,021
Investment manager fees (33,211,408) (219,834)
Other expenses/fees (498,006)
--------------- ---------------
Total investment (loss) income $(1,554,071,651) $ 54,512,406
=============== ===============
The schedule below presents the fair value of the assets held for investment
and investments which represent 5% or more of the FSSP's net assets at
December 31, 2001.
Investments at Fair Value as Determined by Quoted Market Price
U.S. government securities-U.S. Treasury Notes dated 8/15/95 $108,187,000
Registered Investment Companies Long Leaf Partners $ 82,236,618
Investments at Estimated Fair Value
Tempororary investments:
Common/Collective Trust
Short Term Interest II
TBC Inc. Pooled Employee Funds $ 94,628,418
4. INTEREST IN NORTHROP GRUMMAN STABLE VALUE FUND
A portion of the Plan's investments is in the Northrop Grumman Stable Value
Fund, which was established for the investment of the assets of the Plan and
two other Northrop Grumman Corporation sponsored savings plans. Each
participating savings plan has an undivided interest in the Stable Value
Fund. At December 31, 2002, the Plan's interest in the net assets of the
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Stable Value Fund was approximately 12.5% of the total fund value.
Investment income and administrative expenses relating to the Stable Value
Fund are allocated among the participating plans on a daily basis.
The Plan has an arrangement with the investment manager of the Stable Value
Fund whereby the investment manager has the ability to borrow amounts from
third parties to satisfy liquidity needs of the Stable Value Fund, if
necessary. As of December 31, 2002, no borrowings under this arrangement
were outstanding.
Investments held in the Stable Value Fund were as follows as of December 31,
2002:
Guaranteed and Synthetic Investment Contracts (at contract value) $ 1,690,110,231
Northrop Retirement Savings Temporary Investment Fund 49,488,133
---------------
Total $ 1,739,598,364
===============
Investment income of the Stable Value Fund totaled $84,068,657 for the year
ended December 31, 2002.
5. INVESTMENT CONTRACTS WITH INSURANCE COMPANIES
All investment contracts held by the Stable Value Fund are considered to be
fully benefit responsive and therefore are recorded at contract value.
Contract value represents contributions made under the contract, plus
interest at the contract rate, less withdrawals and administrative expenses.
The Stable Value Fund holds wrapper contracts in order to manage the market
risk and return of certain securities held by the Stable Value Fund. The
wrapper contracts generally modify the investment characteristics of certain
underlying securities similar to those of guaranteed investment contracts.
Each wrapper contract and its related underlying assets are referred to as a
Synthetic Investment Contract ("SIC") and are recorded at contract value.
The SICs held by the Stable Value Fund had a contract value totaling
$1,646,981,826 at December 31, 2002. The fair value of the underlying assets
related to the wrapper contracts totaled $1,207,120,225 as of December 31,
2002.
The fair value of the non-synthetic guaranteed investment contracts totaled
$48,732,748 at December 31, 2002.
The following information is disclosed for the investment contracts within
the Stable Value Fund as of December 31, 2002:
Average yield of assets 5.53%
Average crediting interest rate of assets 5.53%
Average duration 2.58 years
6. PARTIES-IN-INTEREST TRANSACTIONS
During 2002 and 2001, the Plan incurred $121,419 and $97,493,
respectively, in fees related to services rendered by the Trustee and the
Former Trustee. The FSSP had transactions with both entities' short-term
investment funds, a liquidity pooled funds in which participation
commences and terminates on a daily basis. In Plan management's opinion,
fees paid during the year for services rendered by parties-in-interest
were based upon customary and reasonable rates for such services.
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7. PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate
the Plan subject to the provisions of ERISA. In the event the FSSP is
terminated, all participants will become 100% vested in their total FSSP
account balances.
8. FEDERAL INCOME TAXES STATUS
The IRS has determined and informed the Company by a letter dated May 14,
2003 that the Plan, as amended, and related trust are designed in accordance
with applicable sections of the Internal Revenue Code (the "Code"). The Plan
has been amended since receiving the determination letter. The Plan
administrator and the Plan's counsel believe that the Plan is currently
designed and being operated in compliance with the applicable requirements
of the Code and the related trust was tax exempt as of the financial
statement date. Therefore, no provision of income taxes has been included in
the Plan's financial statements.
9. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for Plan benefits
per the financial statements to the Form 5500 as of December 31:
2002 2001
Net assets available for Plan benefits per the
financial statements $ 1,060,034,999 $ 1,209,152,573
Less: Amounts allocated to withdrawing participants (10,098,576) (10,951,041)
--------------- ---------------
Net assets available for Plan benefits per the Form 5500 $ 1,049,936,423 $ 1,198,201,532
=============== ===============
The following is a reconciliation of benefits paid to participants per the
financial statements to the Form 5500 for the year ended December 31, 2002:
Benefits paid to participants per the financial statements $ 89,632,846
Add: Amounts allocated to withdrawing participants at December 31, 2002 10,098,576
Less: Amounts allocated to withdrawing participants at December 31, 2001 (10,951,041)
------------
Benefits paid to participants per the Form 5500 $ 88,780,381
============
Amounts allocated to withdrawing participants are recorded on the Form 5500
for benefit claims that have been processed and approved for payment prior
to December 31, but not yet paid as of that date.
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LITTON FINANCIAL SECURITY AND SAVINGS PROGRAM
FORM 5500, SCHEDULE H, PART IV, LINE 4i,
SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------
Identity of Issue,
Borrower, Lessor, or Description of Current
Similar Party Investment Value
*Northrop Grumman Employee Benefit Participation in Northrop Grumman
Plan Master Trust Employee Benefit Plan Master Trust $ 369,013,143
*Northrop Grumman Defined Contribution Participation in Northrop Grumman
Plans Master Trust Defined Contribution Plans Master Trust 665,220,727
*Northrop Grumman Corporation Participant loans (prime plus 1%) 26,082,904
---------------
TOTAL $ 1,060,316,774
===============
*Party-in-interest
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EXHIBIT INDEX
Exhibit No. Document
----------- --------
23 Independent Auditors' Consent
99.1 Certification pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002