SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] 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 1-12001 ALLEGHENY TELEDYNE INCORPORATED (Exact name of registrant as specified in its charter) Delaware 25-1792394 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (412) 394-2800 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: ------------------------------------------------------------------------------- Title of each class Name of each exchange on which registered ------------------------------------------------------------------------------- Common Stock, $0.10 Par Value New York Stock Exchange =============================================================================== SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 20, 1998, the Registrant had outstanding 174,934,668 shares of its Common Stock. The aggregate market value of the Registrant's voting stock held by non-affiliates at this date was approximately $4.2 billion, based on the closing price of $28.25 as reported on the New York Stock Exchange. Shares of common stock known by the Registrant to be beneficially owned by directors of the Registrant and officers of the Registrant subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are not included in the computation. The Registrant, however, has made no determination that such persons are "affiliates" within the meaning of Rule 12b-2 under the Exchange Act. Documents Incorporated By Reference Selected portions of the 1997 Annual Report to Stockholders - Part I, Part II and Part IV of this Report. Selected portions of the 1998 Proxy Statement - Part III of this Report. ================================================================================ ALLEGHENY TELEDYNE INCORPORATED SEC FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 1997 INDEX PART I PAGE NO. Item 1. Business 3 Item 2. Properties 20 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 24 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 24 Item 6. Selected Financial Data 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 PART III Item 10. Directors and Executive Officers of the Registrant 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25 SIGNATURES 27 EXHIBIT INDEX 29 PART I ITEM 1. BUSINESS THE COMPANY Allegheny Teledyne Incorporated (the "Company" or "Allegheny Teledyne") is a group of technology-based manufacturing businesses with significant concentration in specialty metals, complemented by aerospace and electronics, industrial, and consumer products. The Company operates in four business segments - specialty metals, aerospace and electronics, industrial, and consumer - which accounted for 53.0%, 25.4%, 14.6%, and 7.0%, respectively, of the Company's total revenues from continuing operations of $3.647 billion for the year ended December 31, 1997. Allegheny Teledyne is a Delaware corporation with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone (412) 394-2800. Allegheny Teledyne was formed on August 15, 1996 by the combination of Allegheny Ludlum Corporation ("Allegheny Ludlum") and Teledyne, Inc. ("Teledyne"), which became wholly owned subsidiaries of Allegheny Teledyne. References to "Allegheny Teledyne," the "Company" or the "Registrant" mean Allegheny Teledyne Incorporated and its subsidiaries, unless the context otherwise requires. Additional financial information with respect to the Company's business segments, including their contributions to operating earnings and their identifiable assets, for the three years ended December 31, 1997 is presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" on pages 23 to 25 of the 1997 Annual Report to Stockholders (the "1997 Annual Report") and in Note 11 of Notes to Consolidated Financial Statements on pages 44 to 45 of the 1997 Annual Report and is incorporated herein by reference. The business segment information presented herein reflects adjustments made during the 1997 fiscal year. SPECIALTY METALS SEGMENT The products of this business segment are representative of the practical application of metallurgical science and technology as it is known and practiced throughout the world. Their unique characteristics are derived from the nature of the metals produced, the particular properties of the alloys melted, and the various processes, methods, forms, shapes and end products manufactured. Companies in the specialty metals segment include Allegheny Ludlum, Allvac, Rodney Metals, Wah Chang, and acquired in 1998, Special Melted Products Limited and Jessop Saville Limited (United Kingdom companies). These companies offer a number of products including the following: Specialty Steels, Super Alloys and Other Alloys. The term "specialty steel" refers to stainless steels, high speed and tool steels, high temperature alloys (super alloys), electronic and thermostatic alloys, and electrical steels. As compared with carbon steel, stainless steel alloys contain elements such as chromium, nickel, and molybdenum to make them corrosion- and heat-resistant; tool steel alloys, which contain more carbon than stainless steel, include tungsten, molybdenum and other metals to make them both hard and malleable; and electrical steel contains silicon to minimize energy loss. Most high temperature alloys, electronic alloys and 3 thermostatic alloys are not steel by definition and are more properly referred to as specialty metals. Unlike high-volume carbon steel producers, specialty steelmakers produce smaller quantities with special equipment. Because of the need to meet more exacting technical and metallurgical requirements, stainless and other specialty steels are made with special processing techniques and generally utilize different alloying elements such as nickel, ferrochromium, molybdenum, niobium, titanium and cobalt. Specialty steel is produced in a variety of forms (sheet, strip, foil, plate, wire, ingot, billet, rod, bar, tubing, and shapes) and is selected for use in environments that demand materials having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion or a combination of these characteristics. Common end uses of specialty steel include automobiles, appliances, communications and electronics equipment, marine equipment, electric power generating and distribution equipment, environmental equipment, home utensils and cutlery, construction products, tools and dies, food and chemical processing equipment, medical and health equipment, and aircraft and defense equipment. High-purity and high-performance superalloys, other alloys, and specialty steels are refined, partially finished, then sold to a wide variety of customers worldwide for many different applications in diverse industries, including aerospace, biomedical, marine, oil and gas, chemical processing, nuclear, and transportation industries. The Company is able to produce a wide range of premium grade, nickel-based, cobalt-based, and titanium alloys that are designed to meet the high performance requirements of the aircraft, aerospace, gas turbine, nuclear energy, and chemical processing industries. These products, in various forms, are engineered to retain exceptional strength and corrosion resistance at temperatures through 2,000 degrees Fahrenheit and are used in critical, high-stress applications. The Company's high-speed steels provide the high temperature hardness required for lathe bits, drills, milling cutters, taps and dies, and other cutting tools. Related alloy steels, including a cobalt-free maraging grade, are produced for bearings, gears, special aerospace hardware, and high-strength applications. Thin-rolled metals are fabricated in a broad range of gauges, widths, and coatings to meet the specialized needs of a diverse international customer base. These customers then use the metal to fabricate a variety of different products ranging from automobile components to photographic, personal computer, and consumer products. A significant portion of these metals are distributed through a network of Company service centers, some located in foreign countries. In February 1998, Allegheny Teledyne acquired manufacturing capability in the United Kingdom for high integrity vacuum melted and remelted steel and nickel alloys, forging capacity, and high technology testing services for the steel and related metals manufacturing industry by purchasing Special Melted Products Limited and other assets of the aerospace division of Sheffield Forgemasters. This acquisition also is expected to benefit sales and distribution of nickel-based alloys and titanium in Europe. As part of this acquisition, the Company also acquired Jessop Saville Limited, a United Kingdom operation, which produces 4 non-magnetic drill collars and downhole components for the oil and gas industry and two sales companies in the United States. Refractory and Reactive Metals. High-purity metals that exhibit unique properties (primarily zirconium, but including hafnium, vanadium, niobium, and titanium) are melted, refined, partially finished, then sold to domestic and foreign customers primarily in the nuclear energy, chemical processing, medical, and aerospace industries. The Company is a leading U.S. producer of zirconium, a highly corrosion-resistant metal that is transparent to neutrons. It is used for fuel tubes and structural parts in nuclear power reactors and for corrosion-resistant chemical industry applications. Other users of zirconium include the jewelry and personal hygiene industries. Hafnium, derived as a by-product of zirconium, is used for control rods in nuclear reactors due to its ability to absorb neutrons. Niobium, also known as columbium, is a high-technology metal produced by the Company in various forms and alloys. It is used as an alloying element in the manufacture of many steels. The higher quality grades produced by the Company are used in superalloys for jet engines and special alloys for aerospace applications such as rocket nozzles. When alloyed with titanium, niobium is used in applications requiring superconducting characteristics for high-strength magnets. This area includes medical devices for body-scanning, accelerators for high-energy physics, and fusion energy projects for future generation of electricity. Tantalum, one of the most corrosion-resistant metals, is produced by the Company for medical implants, chemical process equipment, and aerospace engine components. Pending Acquisitions. Allegheny Teledyne expects the acquisition of Oregon Metallurgical Corporation ("OREMET(R) Titanium" or "OREMET"), which is scheduled to be completed in March 1998, to enhance the competitiveness of the specialty metals segment, particularly the higher value-added high performance specialty metals markets. OREMET is one of two United States integrated producers of titanium metal and related products. OREMET produces and distributes titanium sponge, ingot, mill products and castings for use in the aerospace, industrial, recreational and military markets. Titanium sponge is used by Allegheny Teledyne's Allvac and Wah Chang units and Wah Chang's principal operations are located near those of OREMET. Allegheny Teledyne expects the combined companies to achieve significant efficiencies by consolidating administrative, sales and marketing and research and development functions and to benefit from lower raw materials costs. Allegheny Teledyne also believes that the combined companies can benefit from the ability to offer a wider array of titanium-based and other specialty metals and alloys to customers and from the coordinated utilization of service center and other distribution and sales attributes of the companies both in the United States and abroad. OREMET operates manufacturing and finishing facilities in Oregon and Pennsylvania, nine United States service centers, additional service centers in the United Kingdom, Germany, Singapore, and Canada, and other United States and foreign distribution and sales operations. OREMET employs approximately 850 employees. 5 The Company has announced that that it has entered into three agreements with Bethlehem Steel Corporation ("Bethlehem") which will become effective upon completion of Bethlehem's pending acquisition of Lukens Inc. ("Lukens"), subject to customary closing conditions. These agreements would enable the Company to produce wide stainless steel products and provide additional melt capacity. Under a 20-year conversion agreement, Bethlehem is to provide the Company with up to 15% of the available time on Lukens' Coatesville, Pennsylvania electric furnace melt shop and caster and Lukens' Conshohocken, Pennsylvania Steckel mill for the melting, casting and rolling of the Company's wide stainless steel products. Under an asset sales agreement, the Company would acquire certain assets of Lukens including the Houston, Pennsylvania plant for melting, casting and rolling stainless steel, the wide anneal and pickle line recently installed at Lukens' Massillon, Ohio plant and the vacuum-oxygen decarburization unit used in the refining of stainless steel at Lukens' Coatesville, Pennsylvania plant. The Company has also agreed to supply Bethlehem with up to 150,000 tons of stainless bands for processing at the Lukens' stainless cold finishing facilities in southwestern Pennsylvania and eastern Ohio until Bethlehem sells these facilities. Additional information about recent and pending acquisitions is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisitions and Divestitures" on page 21 to 22 of the 1997 Annual Report and in Notes 15 and 16 to the Notes to Consolidated Financial Statements on pages 49 to 52 of the 1997 Annual Report. Also see "Forward Looking and Other Statements" herein. AEROSPACE AND ELECTRONICS SEGMENT Companies in the aerospace and electronics segment include Teledyne Ryan Aeronautical, Teledyne Brown Engineering, Teledyne Electronic Technologies and Teledyne Continental Motors. In 1997, Teledyne Controls was merged into and now functions as a business unit of Teledyne Electronic Technologies. The companies in this segment offer a variety of products and services including the following: Unmanned Aerial Vehicles and Targets. Unmanned aerial vehicles and targets are designed, manufactured, and sold for defense-related purposes to the U. S. Government and to the international market. Allegheny Teledyne's background in airframe manufacture goes back to Charles Lindbergh's Spirit of St. Louis, which was built by Ryan Airlines, Inc., the predecessor to today's Teledyne Ryan Aeronautical. More than 25 types of remotely piloted aircraft, usually called Unmanned Aerial Vehicles ("UAVs"), have been built by Ryan, in both supersonic and subsonic versions. These recoverable and reusable vehicles are used for sophisticated military missions, such as reconnaissance, with the pilots safely flying them from remote control centers. Ryan heads the team developing the Global Hawk UAV for the U.S. Government. Through the production of sophisticated UAVs, Allegheny Teledyne has also developed broad experience in the use of advanced materials, such as graphite composites, and has facilities for the numerically controlled machining of airfoils from honey-comb materials. The Company has built the airframe for the U. S. Army's Apache attack helicopter since the inception of the program in the mid-1970's. In 1997, The Boeing Co. notified Ryan that it 6 has decided to terminate the long-standing agreement with Ryan to fabricate the Apache helicopter fuselage. Future business for this product from Boeing appears unlikely. Casting Services. The Company casts lightweight aluminum and magnesium aircraft parts. Aviation Propulsion Systems. Aviation propulsion systems, including small gas turbine engines and piston engines, are designed, manufactured and sold domestically and internationally for general aviation and defense-related purposes. Small gas turbine engines are used primarily in aerial targets and missiles. The piston engine products, sold under the Teledyne Continental Motors name, are used by several general aviation aircraft original equipment manufacturers ("OEMs") and after-market suppliers. Aerotronics Controls, Inc., a majority owned start-up company acquired in 1997, is engaged in the design and development for production of advanced electronic engine controls and engine management systems for piston aircraft engines, including Continental Motors' piston engines. Engineering Services. A wide range of engineering services is offered to government defense and aerospace customers as well as commercial customers. These services include payload integration for the space shuttle and systems engineering for ballistic missile defense. In addition, computer software has been developed for simulations and hardware performance evaluations. Sensing, Analysis and Instrumentation Systems and Instruments. A diverse range of sensing, analysis, and instrumentation systems and instruments is designed, manufactured and sold to a number of customers, including the U.S. Federal Aviation Administration, domestic and foreign airlines, commercial aircraft OEMs, and a broad base of companies in different industrial sectors. The Company currently produces equipment for telemetering data from remote sources, which is used by major airlines and helicopter fleets to record in-flight performance and maintenance data on their aircraft. Voice, data and facsimile transmission equipment is also provided for business and commuter aircraft. Sensors, analyzers (on-line and portable), and custom-engineered systems incorporate a broad range of principles of measurement, including electrochemical, electrolytic diffusion, chemiluminescence, absorption photometry, thermal conductivity, flame ionization, and catalytic oxidation. Oxygen sensors are designed to be accurate, sensitive, reliable, and versatile in their applications. Photometric detectors for specific chemicals cover the complete spectrum of absorption analysis, from ultraviolet to visible to infrared wave-lengths. Polarographic sensors for carbon monoxide and hydrogen sulfide gas analysis also monitor chlorine, fluorine, and reducing gases. The Company produces equipment for geophysical exploration and analysis for oil and gas exploration surveys and the measurement of seismic earth motion. It is a leader in the 7 production of a family of hydrophones based on piezoelectric ceramics. For over a half century, precise seismometers developed and manufactured by the Company have been used for detecting natural and man-made earth motion. Today, smaller, more sensitive instruments and microprocessor-based, portable systems are designed to quickly extract and analyze seismic information. Controlled Explosive Devices. Controlled explosive devices are designed, manufactured, and sold for defense-related, aerospace and commercial purposes. These devices are used in a wide range of pilot ejection systems, aircraft separation, and other similar aerospace-related systems. Commercially, the devices are used in vehicle airbags and petroleum industry drilling systems, among other uses. Electronic Components and Subsystems. A wide range of electronic chips, components and subsystems is designed, manufactured, and sold worldwide for a variety of communications, aerospace, defense-related, medical, industrial, and consumer applications. The Company's hybrid microcircuits are used in a variety of military, space, industrial, and medical applications. These compact and complex electronic building blocks combine multiple transistors and integrated circuits in multi-chip modules where small packaging sizes, reliability, and light weight are of paramount importance. Allegheny Teledyne's high power traveling wave tubes are used to transmit thousands of telephone conversations or a dozen television channels around the world simultaneously via satellite networks. Similar types of traveling wave tubes are used in airborne and ground-based electronic countermeasure equipment. In the microwave industry, Allegheny Teledyne is a leading supplier of filters, switching devices, oscillators and integrated subsystems for wireless equipment. Monolithic microwave provide power amplification for satellite communication systems and wireless local area networks. Other components include operational amplifiers, digital-analog converters, miniature relays, hybrid switching devices, connectors, flexible printed-circuit interconnections, switches, terminals, and a line of aircraft, tank and truck batteries. INDUSTRIAL SEGMENT Companies in Allegheny Teledyne's industrial segment include Teledyne Metalworking Products, Teledyne Fluid Systems, Teledyne Specialty Equipment, Casting Service, Portland Forge and Green River Steel Corporation. These companies offer a variety of products including the following: Cutting Tools and Tungsten Products. For the metalworking, mining and other industries requiring tools with extra hardness, Allegheny Teledyne produces a line of sintered tungsten carbide products, made under heat, to produce a material that approaches diamond hardness. Cemented carbide products, which may be coated or uncoated, are used as super-hard cutters in the high-speed machining and cutting of steel and other applications where hardness and wear resistance are important. Technical developments related to ceramics, coatings, and other disciplines are incorporated in these products. In December 1995, the Company acquired the 8 Stellram Group, manufacturers of high precision threading, milling, boring, and drilling systems for the European market. Allegheny Teledyne is a producer of tungsten for the worldwide market, starting with numerous and varied tungsten-bearing raw materials and resulting in tungsten and tungsten carbide powders and mill products. Previously used cemented carbide parts are also recycled into tungsten carbide powder. Wrought or ductile tungsten products are used in diverse applications including light bulb filaments, inert gas welding electrodes, electrical contacts, x-ray shielding, and aircraft counterweights. Molybdenum, a sister metal to tungsten, which also has a very high melting point, is produced by Allegheny Teledyne in powder form and then shaped into solid forms through powder metallurgy techniques. It is an important alloying element for steels and is used for plasma arc spraying of piston rings, for electrodes in glass melting, and for structural parts in high temperature furnaces. Nitrogen Gas Systems. Nitrogen gas springs are designed, manufactured and sold worldwide to industries that, as part of their manufacturing processes, must form metal. Major industries served include automobile, appliance, and can-making. Nitrogen gas systems overcome manufacturing difficulties encountered in high speed metal forming operations. Valves, Pumps and Boosters. Many different types of pressure relief valves, pumps, and boosters are designed, manufactured and sold domestically and internationally to a variety of industries, including transportation, hydrocarbon and petrochemical processing, pharmaceutical, and industrial components. Transportable Material Handlers. Allegheny Teledyne designs and manufactures, through domestic and foreign operations, a series of specialty forklifts that can ride as outriggers on delivery trucks. They are designed to save valuable cargo space, and their design and stability make them an asset at rough construction sites where positioning of the delivered product is extremely important. Mining and Construction Equipment. Rugged, high-performance mining and construction equipment such as hydraulic breakers, boom systems and underground mobile equipment, are designed and manufactured for the construction, quarry, and mining industries. Forgings and Castings. Allegheny Teledyne also processes metals by casting and forging the metals into finished forms that are used in a diverse number of industries. With the latest screw-type forging presses, the Company is a major U.S. producer of carbon and alloy steel forgings in sizes ranging from one pound to more than 200 pounds. In addition to supplying the transportation, construction, and other basic industries, the Company has the ability to forge the more difficult alloys, which are used in aerospace, medical implants, and other critical applications. Allegheny Teledyne also casts a variety of metals into forms ranging from diesel locomotive engine blocks to housings and parts for power generation equipment, tools, and automobiles. 9 CONSUMER SEGMENT Companies in Allegheny Teledyne's consumer segment include Teledyne Water Pik and Teledyne Laars. These companies manufacture a number of specialty products including the following: Oral Health Products. A wide range of consumer and professional oral health products and devices are designed, manufactured, and sold primarily through retail and professional dental networks. These products include a high-speed sonic plaque control toothbrush, a mechanical toothbrush model, and oral irrigation devices that are sold under the brand name of Teledyne Water Pik. The Company also produces apparatus and products used in professional dental practices. Shower Heads. Also marketed under the Teledyne Water Pik brand name are pulsating shower heads in a wide range of models including the new Flexible Shower Massage product. The Company designs, manufactures and sells these products through domestic and foreign mass merchandise and specialty retail outlets. Residential Water Filtration. A wide range of residential water filtration devices is designed, manufactured, and sold to domestic and foreign consumers primarily through mass merchandise and specialty retail outlets. The Instapure(R) line includes faucet-mounted, under-the-counter, and whole house water filters for improving the quality of water used in the home. The Waterfresh(R) pour through water filter for home water filtration is designed to remove up to 99% of the chlorine, sediment, bad taste, and odor from residential water, employing a filter which is made up of 100% natural ingredients and is biodegradable. The Company's water filtration product line can be adapted for many water delivery systems throughout the world. Pool Equipment and Heating Systems. The Company manufactures under the Teledyne Laars brand name a variety of heating systems for residential and commercial swimming pools and spas. The Hi-E(R) line of swimming pool heaters is designed to be up to 97% efficient and to produce low emissions. The Company also produces a broad line of water heating equipment that provides hot water and heating for commercial, residential, and industrial applications. In 1996, the Company acquired Jandy Industries, Inc., a United States producer of water flow control valves and electronic control systems for the swimming pool and spa industry. In 1998, the Company has begun offering fiber optic lighting to the pool and spa industry under an agreement with Lumenyte International Corporation. COMPETITION Markets for the Company's products and services in each of its principal business segments are highly competitive. The Company competes with many manufacturers which, depending on the product involved, range from large diversified enterprises to smaller companies specializing in particular products. Factors that effect the Company's competitive posture are the quality of its products, services and delivery capabilities, its research and development efforts, its marketing strategies, and price. Through its specialty metals segment, the Company is a leading producer of specialty steel. Companies in this segment face active competition from domestic competitors and from 10 foreign competitors, a number of which are government subsidized. Sales for Allegheny Ludlum and Rodney Metals, which consisted primarily of flat rolled products, declined 6% in 1997, even though tons shipped increased 1% in 1997. Sales declined due to continued European and Asian pricing pressure and increased imports in the U.S. markets for commodity stainless steel products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Specialty Metals - 1997 Compared to 1996" on page 23 of the Annual Report. Companies in Allegheny Teledyne's aerospace and electronics segment obtain many U.S. Government contracts through the process of competitive bidding. There can be no assurance that the Company will continue to be successful in having its bids accepted. RAW MATERIALS AND SUPPLIES Substantially all parts and materials required in the manufacture of the Company's products are available from more than one supplier and the sources and availability of raw materials essential to its businesses are adequate. The principal materials used by the Company in the production of its specialty steel are scrap (including nickel-, chromium-, and molybdenum-bearing scrap), nickel and nickel alloys, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, manganese and manganese alloys, and other alloying materials. Certain of these raw materials, such as ferrochromium and nickel, can be acquired by the Company and its specialty steel industry competitors, in large part, only from foreign sources. The Company purchases its nickel requirements principally from producers in Australia, Canada, Norway, the Commonwealth of Independent States, the Dominican Republic, and the U.S. Ferrochromium is purchased primarily from producers in South Africa, Zimbabwe, Turkey, and the Commonwealth of Independent States. Some of these foreign sources are located in countries that may be subject to unstable political and economic conditions, which might disrupt supplies or affect the price of these materials. More than 80% of the world's reserves of ferrochromium are located in South Africa, Zimbabwe, Albania, and Kazakhstan. The Company's specialty metals businesses also use large amounts of electricity and natural gas in the manufacture of their products. See "Forward Looking and Other Statements--Raw Materials for Specialty Metals." GOVERNMENT CONTRACTS For the year ended December 31, 1997, approximately 14% of the Company's revenues were attributable to sales under contracts with the U.S. Government. Sales to the Department of Defense accounted for approximately 9% of total sales in 1997. Sales by the Company to the U.S. Government included sales by the specialty metals segment of $47.0 million in 1997, $66.9 million in 1996, and $37.3 million in 1995, sales by the aerospace and electronics segment of $428.1 million in 1997, $543.1 million in 1996, and $485.5 million in 1995, and sales by the industrial and consumer segments of $2.1 million in 1997, $2.3 million in 1996, and $3.5 million in 1995. Many of the Company's contracts with the U.S. Government include price redetermination clauses, and most are terminable at the convenience of the government. See the discussion of related matters herein under the caption "Forward Looking and Other Statements--Government Contracts" and in Item 3. Legal Proceedings. Additional related 11 information is presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Other Matters--Government Contracts" on pages 27 to 28 of the 1997 Annual Report and in Notes 11 and 14 of Notes to Consolidated Financial Statements on pages 44 to 45 and 48 to 49 of the 1997 Annual Report. EXPORT SALES AND FOREIGN OPERATIONS Foreign sales represented approximately 17% of the Company's total sales in 1997 and 1996 and 15% of total sales in 1995. These figures include export sales by U.S. operations to customers in foreign countries, which accounted for approximately 13%, 12% and 13% of the Company's total sales in 1997, 1996 and 1995, respectively. See "Forward Looking and Other Statements--Export Sales." The Company's overseas sales, marketing and distribution efforts are aided by 12 international marketing offices in Europe, Asia, South America, and the Middle East. During the fiscal years 1997, 1996, and 1995, the Company and its subsidiaries did not engage in material manufacturing operations in foreign countries. However, recent initiatives by the Company, including those discussed below, will continue to expand the Company's presence internationally. In February 1998, Allegheny Teledyne acquired United Kingdom manufacturing capability for high integrity vacuum melted and remelted steel and nickel alloys, forging capacity, and high technology testing services for the steel and related metals manufacturing industry by purchasing Special Melted Products Limited and other assets of the aerospace division of Sheffield Forgemasters Limited. This acquisition also is expected to benefit sales and distribution of nickel-based alloys and titanium in Europe. In February 1996, Allegheny Ludlum established a joint venture company in the People's Republic of China with Shanghai No. 10 Steel Limited Company for the production and sale of precision rolled stainless steel strip. Allegheny Ludlum, which owns 60% of the joint venture company, will provide technology and engineering, technical, and management services. The joint venture is known as Shanghai STAL Precision Stainless Steel Limited Company. The new plant, currently under construction in Shanghai, will produce and sell up to 15,000 metric tonnes of the Company's Precision Rolled Strip(R) products. Completion of the plant is anticipated in 1998. This venture should enable both Allegheny Ludlum and Rodney Metals to participate more effectively in the Asian market. In December 1995, the Company completed the acquisition of the Stellram Group, based in Europe. With facilities in the United Kingdom, Germany, France and Switzerland, the Stellram Group is a leader in highly engineered tooling for milling, boring, threading, and drilling, and has enhanced the position of Teledyne Metalworking Products in the global cutting tools market. 12 BACKLOG, SEASONALITY AND CYCLICALITY The Company's backlog of confirmed orders was approximately $1.3 billion at December 31, 1997 and $1.2 billion at December 31, 1996. During the year ending December 31, 1998, it is anticipated that approximately 97% of confirmed orders on hand at December 31, 1997 will be filled. Backlog of confirmed orders of the specialty metals segment was $631.9 million at December 31, 1997 and $578.0 million at December 31, 1996. During the year ending December 31, 1998, it is anticipated that approximately 99 % of the confirmed orders on hand at December 31, 1997 for this segment will be filled. Backlog of confirmed orders of the aerospace and electronics segment was $523.8 million at December 31, 1997 and $453.4 million at December 31, 1996. During the year ending December 31, 1998, it is anticipated that approximately 92% of the confirmed orders on hand at December 31, 1997 for this segment will be filled. Generally, sales and operations of the Company's business segments are not seasonal. However, demand for products of the Company's specialty metals businesses is cyclical over longer periods because specialty metals customers operate in cyclical industries and are subject to changes in general economic conditions. See "Forward Looking and Other Statements--Demand for Specialty Metals." RESEARCH, DEVELOPMENT AND TECHNICAL SERVICES Management of the Company believes that the Company's research and development capabilities give it an edge in developing new products with profitable growth potential on a long-term basis. Research and development is conducted by the Company at its various operating locations both for its own account and for customers on a contract basis. Estimates of the components of research and development, including bid and proposal costs, for the years ended December 31, 1997, 1996, and 1995 included the following: (In millions) 1997 1996 1995 ---- ---- ---- Customer-Sponsored: Specialty metals segment $ 2.5 $ 3.8 $ 3.7 Aerospace and electronics segment 183.9 295.4 204.2 Other -- 3.9 26.0 ------ ------ ------ 186.4 303.1 233.9 ------ ------ ------ Company-Sponsored: Specialty metals segment 14.7 16.8 20.4 Aerospace and electronics segment 31.0 35.4 30.0 Other 14.6 14.0 16.1 ------ ------ ------ 60.3 66.2 66.5 ------ ------ ------ Total Research and Development $246.7 $369.3 $300.4 ====== ====== ====== Ongoing research and development efforts in the aerospace and electronics segment include the following: Teledyne Ryan Aeronautical's development of the Global Hawk for the U.S. Department of Defense; Ryan's development of a new low-cost miniature air launched 13 decoy UAV for the Department of Defense; and Teledyne Brown Engineering's work, in a joint venture, to determine the commercial feasibility of a new technology for safely destroying chemical weapons without incineration. In addition, Teledyne Continental Motors is leading an industry team to develop a new piston-driven engine for small aircraft. With respect to the specialty metals segment, the Company's research, development and technical service activities are closely interrelated and are directed toward cost reduction, process improvement, process control, quality assurance and control, system development, the development of new manufacturing methods, the improvement of existing manufacturing methods, the improvement of existing products, and the development of new products. The Company owns over 500 United States patents, many of which are also filed under the patent laws of other nations. Although these patents, as well as the Company's numerous trademarks, technical information license agreements, and other intellectual property, have been and are expected to be of value, management believes that the loss of any single such item or technically related group of such items would not materially affect the conduct of its business. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS The Company is (and the industries in which it competes are) subject to environmental laws and regulations concerning emissions to the air, discharges to waterways, and the generation, handling, storage, transportation, treatment and disposal of waste materials, and is also subject to other federal and state laws and regulations regarding health and safety matters. Each of the Company's production facilities has permits and licenses allowing and regulating air emissions and water discharges. The Company believes its businesses are being operated in compliance in all material respects with applicable environmental laws and regulations. The Company is currently involved in the investigation and remediation of a number of sites under the environmental laws, including approximately 35 sites at which the Company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, or similar state statutes. The Company's involvement is very limited or de minimis at approximately 10 of these sites, and the potential loss exposure with respect to any of the 35 individual sites is not considered to be material. During 1998, the Company expects to spend approximately $8.4 million for additional or upgraded environmental control equipment and facilities. The Company, like many manufacturers, would be required to expend significant additional funds to meet stringent air emission limits if the U.S. Environmental Protection Agency's proposed revisions to the National Ambient Air Quality Standards for Ozone and Particulate Matter are adopted. The proposed standards could increase the cost and the difficulty of obtaining operating permits for new operations or major modifications to existing operations. See the discussion of related matters herein under the caption "Forward Looking and Other Statements--Environmental Matters" and in Item 3. Legal Proceedings. Additional related information is presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Other Matters--Environmental" on page 27 of the 1997 Annual Report and in Notes 1 and 14 of Notes to Consolidated Financial Statements on pages 35 to 36 and 48 of the 1997 Annual Report. 14 EMPLOYEES The Company and its subsidiaries employ approximately 22,000 persons, 9,000 of whom are employed at companies in the specialty metals segment. Approximately 24% of the Company's workforce is covered by various union contracts, certain of which are described below. In February 1998, the United Steelworkers of America ("USWA") ratified a three-year collective bargaining agreement covering substantially all of Allegheny Ludlum's 3,300 production and maintenance employees. The new agreement extends through June 30, 2001. Approximately 400 employees at Allegheny Ludlum's Washington Plant are covered by a separate labor contract with the USWA which is effective through September 30, 1999. In addition, approximately 700 Wah Chang employees are covered by a labor contract with the USWA which is effective through October 10, 2000. CORPORATE OFFICERS OF THE REGISTRANT Corporate officers of the Company as of March 16, 1998 are as follows: NAME AGE TITLE Richard P. Simmons 66 Chairman, President and Chief Executive Officer* Robert P. Bozzone 64 Vice Chairman* Arthur H. Aronson 62 Executive Vice President* James L. Murdy 59 Executive Vice President, Finance and Administration and Chief Financial Officer* Judd R. Cool 62 Senior Vice President, Human Relations Robert Mehrabian 56 Senior Vice President* Jon D. Walton 55 Senior Vice President, General Counsel & Secretary* David F. Lewis 49 Vice President and Executive Assistant to the Chief Executive Officer Dale G. Reid 42 Vice President-Controller and Chief Accounting Officer* Robert S. Park 53 Vice President-Treasurer Gary R. Stechmesser 54 Vice President, Corporate Communications and Investor Relations Set forth below are descriptions of the business background for the past five years of the corporate officers of the Company. Richard P. Simmons has been Chairman of the Board of the Company since August 1996 and President and Chief Executive Officer since February 1997. Previously, he was Chairman of the Board of Allegheny Ludlum, having begun his service on that Board in 1980. He also served as Chief Executive Officer of Allegheny Ludlum until 1990. ----------- *Such officers are subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended. 15 Robert P. Bozzone has been Vice Chairman of the Board of the Company since August 1996. He has served as Vice Chairman of Allegheny Ludlum beginning in August 1994, and previously was President and Chief Executive Officer of Allegheny Ludlum. Arthur H. Aronson has been Executive Vice President of the Company since August 1996 and is responsible for the Company's specialty metals businesses. He also serves as a director of the Company. He was President of Allegheny Ludlum from August 1994 to January 1998 and has served as a director of Allegheny Ludlum since 1990. Mr. Aronson was the Chief Executive Officer of Allegheny Ludlum from August 1994 to August 1996. Previously, he served as Executive Vice President and Chief Operating Officer of Allegheny Ludlum. James L. Murdy has been Chief Financial Officer and a Vice President of the Company since August 1996 and Executive Vice President, Finance and Administration since December 1996. Mr. Murdy previously served as the Senior Vice President-Finance and Chief Financial Officer of Allegheny Ludlum. Judd R. Cool has been Senior Vice President, Human Resources since September 1997. Prior to joining the Company, Mr. Cool served as Vice President for Human Resources for Inland Steel Industries. Robert Mehrabian has been Senior Vice President of the Company since August 1997 and is responsible for the Company's aerospace and electronics businesses. He also serves as a director of the Company. Prior to joining the Company, Dr. Mehrabian served as the President of Carnegie Mellon University from 1990 to July 1997. Jon D. Walton has been Senior Vice President, General Counsel and Secretary of the Company since August 1997 and served as Vice President, General Counsel and Secretary of the Company from August 1996 to August 1997, having previously served in the same capacity as an officer of Allegheny Ludlum. David F. Lewis has been Vice President and Executive Assistant to the Chairman since August 1997. He previously had served as President of Teledyne Specialty Equipment since August 1996. Prior to joining Teledyne Specialty Equipment, Mr. Lewis was general manager of television and digital manufacturing in the Americas for Thomson Consumer Electronics. Dale G. Reid has served as a Vice President of the Company since May 1997 and Controller since August 1996. Mr. Reid previously served as Chief Accounting Officer and Controller of Teledyne. Robert S. Park has served as Vice President-Treasurer of the Company since August 1996. From May 1994 to August 1996, Mr. Park served as Vice President-Treasurer of Allegheny Ludlum. Previously, he served as Treasurer of Allegheny Ludlum. Gary R. Stechmesser has served as Vice President, Corporate Communications and Investor Relations since December 1996. Previously, he served as Vice President, Corporate Relations for Thomas & Betts Corporation. Prior to joining Thomas & Betts, he was Assistant Vice President, Industry and Government Affairs for AT&T Global Information Solutions. 16 FORWARD LOOKING AND OTHER STATEMENTS This Report on Form 10-K and the 1997 Annual Report contain various "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent the Company's expectations or beliefs concerning various future events, include the following: statements concerning anticipated effects of the potential acquisition of Oregon Metallurgical Corporation, the acquisition of the aerospace division of Sheffield Forgemasters, the agreements with Bethlehem Steel Corporation and the acquisition of Aerotronics Controls, Inc. on earnings, cost savings and operations of the Company; net cash flow; aviation and aerospace industry trends; certain expected capital expenditures; computer software modification and replacement; the outcome of any government inquiries, litigation or other proceedings related to government contracts or other matters; and future environmental costs. These statements are based on current expectations that involve a number of risks and uncertainties, including the following: Demand for Specialty Metals. Demand for products of the Company's specialty metals businesses, which accounted for a significant portion of the Company's 1997 total sales and its 1997 total income, is cyclical because the industries in which customers of such businesses operate are cyclical and are subject to changes in general economic conditions, including decreases in the rate of consumption or use of their products due to economic recessions or due to increases in use or decreases in price of other materials which may be used in lieu of the materials they produce, national and international overcapacity, fluctuations in the value of the U.S. dollar against other currencies, and levels of lower priced imports, which affect market demand for specialty materials. From time to time, these industries have experienced significant downturns. Significant downturns in the domestic economy are believed to have adversely affected the results of operations of Allegheny Ludlum, Teledyne and OREMET from time to time during their respective histories. As a result, the Company's operating results could be subject to significant fluctuation. Raw Materials for Specialty Metals. Certain of the principal raw materials used to produce specialty metals can be acquired in large part only from foreign sources, some of which are located in countries that may be subject to unstable political and economic conditions which might disrupt supplies or affect the prices of these materials. Purchase prices of certain critical raw materials are volatile. As a result, the Company's operating results could be subject to significant fluctuation. The Company enters into raw material futures contracts from time to time to hedge its exposure to price fluctuations. The Company believes that adequate controls are in place to monitor these activities, which are not financially material. Environmental Matters. The Company is subject to various federal, state, local and foreign environmental laws and regulations. Environmental laws and regulations have changed rapidly in recent years, and it is likely that the Company will be subject to increasingly stringent environmental standards in the future. The Company believes that its businesses are being operated in compliance in all material respects with applicable environmental laws and regulations. The Company is a party to lawsuits and other proceedings involving alleged violations of environmental laws. The Company records environmental liabilities when the 17 Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceeds, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but are not reasonably estimable. Based on currently available information, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. Government Contracts. A number of the Company's subsidiaries perform work on contracts with the U.S. Government. Many of these contracts include price redetermination clauses, and most are terminable at the convenience of the government. Certain of these contracts are fixed-priced or fixed-price incentive development contracts which involve a risk that costs may exceed those expected when the contracts were negotiated. Absent modification of these contracts, any costs incurred in excess of the fixed or ceiling prices must be borne by the Company. In addition, virtually all defense programs are subject to curtailment or cancellation due to the year-to-year nature of the government appropriations and allocations process. A material reduction in U.S. Government appropriations may have an adverse effect on the Company's business, depending upon the specific programs affected by any such reduction. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the effect of adjusting the current period earnings on a cumulative catch-up basis. When the current contract estimate indicates a loss, provision is made for the total anticipated loss. The Company obtains many U.S. Government contracts through the process of competitive bidding. There can be no assurance that the Company will continue to be successful in having its bids accepted. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. The False Claims Act permits a person to assert the rights of the U.S. Government by initiating a suit under seal against a contractor if such person purports to have information that the contractor falsely submitted a claim to the U.S. Government for payment. If it chooses, the U.S. Government may intervene and assume control of the case. 18 Although government contracting claims are generally resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. Given the extent of the Company's business with the U.S. Government, a suspension or debarment of the Company could have a material adverse effect on future operating results and the consolidated financial condition of the Company. However, although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. Export Sales. It is anticipated that export sales will continue to account for a significant percentage of the Company's sales. Among the risks associated with export sales are export controls, changes in legal and regulatory requirements, policy changes affecting the markets for the Company's products, changes in tax laws and tariffs, exchange rate fluctuations (which may affect sales to foreign customers and the value of, and profits earned on, such sales when translated into U.S. dollars), political and economic instability, accounts receivable collection, and the seasonality of foreign sales. Any of these factors could have a material adverse effect on the Company's results of operations. Acquisition and Disposition Strategy. The Company intends to continue to strategically position its businesses in order to improve its competitive posture by seeking specialty niches, expanding its global presence, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of existing businesses. Accordingly, the Company regularly considers acquisition and business combination opportunities as well as possible business dispositions, and its management from time to time holds discussions with management of other companies to explore such opportunities and possible dispositions. As a result, the businesses comprising the Company are subject to change. Uncertainties Relating to Synergies. There can be no assurance that the Company will be able to realize, or do so within any particular time frame, the cost reductions, cash-flow increases or other synergies expected to result from acquisitions and other transactions in which the Company has made or may make or generate additional revenue to offset any unanticipated inability to realize such expected synergies. Realization of the anticipated benefits of acquisitions and other transactions could take longer than expected and implementation difficulties and market factors could alter the anticipated benefits. 19 ITEM 2. PROPERTIES The Company's principal domestic facilities as of December 31, 1997 are listed below by segment. Of those facilities listed below which are owned, three are subject to mortgages or similar encumbrances securing borrowings under certain industrial development authority financings. See Note 4 of the Notes to Consolidated Financial Statements beginning on page 37 of the 1997 Annual Report. Although the facilities vary in terms of age and condition, management believes that these facilities have generally been well maintained. SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) ----------------- ------------- -------------- SPECIALTY METALS Allegheny Ludlum Brackenridge Works Manufacturing of stainless steel and specialty 2,443,000 (owned) Brackenridge and Natrona, PA metals strip, sheet, and plate, silicon electrical steel strip and sheet, and other specialty steel strip and sheet. West Leechburg Works Manufacturing of stainless steel and specialty 1,415,000 (owned) West Leechburg and metals strip and sheet, silicon electrical steel Bagdad, PA strip and sheet, and other specialty steel strip and sheet. Vandergrift Plant Manufacturing of stainless steel strip and sheet. 966,000 (owned) Vandergrift, PA Washington Plant Manufacturing of stainless steel and tool steel 615,000 (owned) Washington, PA plate products. Wallingford Plant Manufacturing of stainless steel and specialty 591,000 (owned) Wallingford and metals strip and sheet and other specialty strip Waterbury, CT and sheet. Lockport Plant Manufacturing of stainless steel and other 282,000 (owned) Lockport, NY specialty metals products. New Castle Plant Manufacturing of stainless steel sheet. 178,000 (owned) New Castle, IN Allvac Monroe, NC Production of nickel and titanium products, tool 640,000 (owned) and high speed steel, and other specialty steel long products. Latrobe, PA Production of nickel and titanium products, tool 468,000 (owned) and high speed steel, and other specialty steel long products. Richburg, SC Production of nickel and titanium products, tool 221,000 (leased) and high speed steel, and other specialty steel long products. 20 SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) ----------------- ------------- -------------- South Boston, VA Production of nickel and titanium products, tool 116,000 (leased) and high speed steel, and other specialty steel long products. Rodney Metals New Bedford, MA Manufacturing of stainless steel precision rolled 250,000 (leased) and coated thin sheet strip and foil, custom roll-formed and stretch-formed shapes. Dynamic Metals Koppel, PA Manufacturing of specialty welded, seamless, and 151,000 (owned) fabricated tubing. Wah Chang Albany, OR Production of zirconium, halfnium, niobium, 1,215,000 (owned) titanium, and tantalum. AEROSPACE & ELECTRONICS Teledyne Brown Engineering Huntsville, AL Provision of engineered services and products, 475,000 (owned) including systems engineering, optical 123,000 (leased) engineering, software and hardware engineering, 31,000 (leased) and instrumentation technology. 25,000 (leased) Grove Hill, AL Provision of engineered services and products, 208,000 (owned) including systems engineering, optical engineering, software and hardware engineering, and instrumentation technology. Teledyne Continental Motors Mobile, AL Design, development, and production of new and 993,000 (leased) rebuilt piston engines, ignition systems, and 536,000 (leased) spare parts for general aviation market. Redlands, CA Manufacturing of batteries for the general 91,000 (owned) aviation market. Teledyne Electronic Technologies Los Angeles, CA Development and production of electronic 141,000 (leased) components and subsystems. 83,000 (owned) Los Angeles, CA Production of digital data acquisition systems 154,000 (leased) for monitoring commercial aircraft and engines. Lewisburg, TN Development and production of electronic 153,000 (owned) components and subsystems. Mt. View, CA Production of ferrite components, switching 100,000 (owned) devices, filters, and monolithic microwave integrated circuits. Teledyne Ryan Aeronautical San Diego, CA Production of unmanned aerial vehicles, 1,100,000 (leased) airframes, and high-performance aerial target systems. 21 SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) ----------------- ------------- -------------- Toledo, OH Design, development, and production of small 351,000 (leased) turbine engines for aerospace and automotive markets. Hollister, CA Manufacturing of controlled explosive devices. 221,000 (owned) Cast Products and Picco Pomona, CA Manufacturing of aluminum and magnesium castings 231,000 (owned) for air frames, turbine engines and missiles. INDUSTRIAL Teledyne Metalworking Products Waynesboro, PA Production of thread-cutting and roll forming 386,000 (owned) equipment and perishable tools. Huntsville, AL Production of molybdenum, tungsten, and tungsten 293,000 (owned) carbide powders and milled products. Nashville, TN Production of tungsten carbide and cutting tools. 134,000 (owned) Teledyne Fluid Systems Brecksville, OH Manufacturing of nitrogen cylinder systems and 138,000 (owned) industrial and pressure release valves. Teledyne Specialty Equipment Canal Winchester, OH Manufacturing of transportable material handlers. 41,000 (owned) Casting Service La Porte, IN Manufacturing of large ductile and grey iron 453,000 (owned) castings for diesel engines, automotive dies, machine tools and power generation. Portland Forge Portland, IN Manufacturing of carbon and alloy steel forgings 215,000 (owned) as transmissions, pistons, and other power train components. Lebanon, KY Manufacturing of carbon and alloy steel forgings. 100,000 (owned) CONSUMER Teledyne Laars Moorpark, CA Manufacturing of pool heaters, pool filtration, 200,000 (owned) and spa control equipment. Rochester, NH Manufacturing of heating elements. 80,000 (owned) Teledyne Water Pik Fort Collins, CO Manufacturing of shower heads, water filtration 243,000 (owned) products, and oral health products. Loveland, CO Manufacturing of shower heads, water filtration 134,000 (owned) products, and oral health products. 22 The Company also owns or leases facilities in a number of foreign countries, including Canada, the United Kingdom, Germany, France, The Netherlands, Switzerland, Sweden, Mexico and Taiwan. In connection with the Company's February 1998 acquisition of Special Melted Products Limited, the Company acquired facilities aggregating 625,000 square feet for melt and remelt, machining and bar mill operations, laboratories and offices located on a 25 acre site in Sheffield, England. The related acquisition of Jessop Saville Limited includes a 40,000 square foot leased facility for computer numerically controlled milling and machine operations. Many of the Company's manufacturing facilities operated at or near their productive capacities during 1997. With respect to the specialty metals segment, Allegheny Ludlum's Brackenridge primary melting and continuous slab casting facilities have operated at high levels for the past five years. Allegheny Ludlum's stainless steel finishing plants have operated at approximately 85% to 95% of capacity for the past five years. The Company's plants that primarily produce silicon electrical steels have operated at approximately 50% to 90% of capacity since 1980 and are currently operating at a rate of approximately 70%. The Company's executive offices, located at PPG Place in Pittsburgh, Pennsylvania, and its West Coast Regional offices, located at Century Park in Los Angeles, California, are leased from third parties. These facilities are modern and sufficient for the Company to carry on its activities. ITEM 3. LEGAL PROCEEDINGS The Company becomes involved from time to time in various lawsuits, claims and proceedings relating to the conduct of its business, including those pertaining to environmental, government contracting, product liability, patent infringement, commercial, employment, taxes, employee benefits, and stockholder matters. In June 1995, the U.S. Department of Justice commenced an action against Allegheny Ludlum in the United States District Court for the Western District of Pennsylvania, alleging multiple violations of the federal Clean Water Act . The complaint seeks injunctive relief and assessment of penalties of up to $25,000 per day of violation. Also, in January 1997, the U.S. EPA filed suit in the United States District Court for the Western District of Pennsylvania against Allegheny Ludlum alleging failure to comply with a unilateral administrative order ("UAO") issued in May 1996. The complaint asks for injunctive relief and assessment of penalties of up to $25,000 per day of violation. The UAO seeks physical control of a portion of Allegheny Ludlum's Natrona plant for at least 30 years for a treatment facility to be built by another company in conjunction with that company's remediation of a nearby Superfund site. The Company is challenging the UAO and has filed a declaratory judgment action to protect its rights. While the outcome of litigation, including the matters specified above, cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or 23 liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. See the discussion of related matters in Item 1 of Part I of this Form 10-K under the captions "Environmental, Health and Safety Matters" and "Government Contracts." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference from Note 17 of the Notes to Consolidated Financial Statements on page 53 of the 1997 Annual Report and from "Common Stock Price" on page 54 of the 1997 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is incorporated by reference from "Selected Financial Data" on pages 56 and 57 of the 1997 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information required by this item is incorporated by reference from "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 21 to 29 of the 1997 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements listed in Item 14(a)(1) are incorporated by reference from pages 30 to 53 of the 1997 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In addition to the information set forth under the caption "Corporate Officers of the Registrant" in Part I of this report, the information concerning the directors of the Company required by this item is incorporated by reference from "Election of Directors" as set forth in the 1998 Proxy Statement filed by the Registrant pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from "Information About the Board of Directors - Compensation of Directors," "Executive Compensation," and "Cumulative Total Stockholder Return," as set forth in the 1998 Proxy Statement filed by the Registrant pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference from "Security Ownership" as set forth in the 1998 Proxy Statement filed by the Registrant pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from "Certain Transactions" as set forth in the 1998 Proxy Statement filed by the Registrant pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: (1) FINANCIAL STATEMENTS The following consolidated financial statements included on pages 30 to 53 of the 1997 Annual Report are incorporated by reference: Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Report of Ernst & Young LLP, Independent Auditors Notes to Consolidated Financial Statements The report of Arthur Andersen LLP relating to the consolidated statements of operations, shareholders' equity, and cash flows of Teledyne, Inc. for the year ended December 31, 1995 is filed herewith as Exhibit 99.1. 25 (2) FINANCIAL STATEMENT SCHEDULES All schedules set forth in the applicable accounting regulations of the Commission either are not required under the related instructions or are not applicable and, therefore, have been omitted. (3) EXHIBITS A list of exhibits included in this Report or incorporated by reference is found in the Exhibit Index beginning on page 29 of this Report and incorporated by reference. (B) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1997: Current Reports on Form 8-K were filed by the Company on November 3, 1997 (with respect to a press release concerning Registrant's agreement to acquire Oregon Metallurgical Corporation) and December 23, 1997 (with respect to a press release concerning Registrant's proposal to acquire Lukens Inc.). 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ALLEGHENY TELEDYNE INCORPORATED Date: March 23, 1998 By /s/ RICHARD P. SIMMONS ------------------------------------ Richard P. Simmons Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as of the 23rd day of March 1998. /s/ RICHARD P. SIMMONS /s/ JAMES L. MURDY ------------------------------------------------- ------------------------------------------------------ Richard P. Simmons James L. Murdy Chairman of the Board, President and Chief Executive Vice President, Finance and Administration Executive Officer and Director (Principal and Chief Financial Officer (Principal Financial Executive Officer) Officer) /s/ ARTHUR H. ARONSON /s/ DALE G. REID ------------------------------------------------- ------------------------------------------------------ Arthur H. Aronson Dale G. Reid Executive Vice President and Director Vice President-Controller and Chief Accounting Officer (Principal Accounting Officer) /s/ ROBERT P. BOZZONE /s/ PAUL S. BRENTLINGER ------------------------------------------------- ------------------------------------------------------ Robert P. Bozzone Paul S. Brentlinger Vice Chairman of the Board and Director Director /s/ FRANK V. CAHOUET /s/ DIANE C. CREEL ------------------------------------------------- ------------------------------------------------------ Frank V. Cahouet Diane C. Creel Director Director /s/ C. FRED FETTEROLF /s/ W. CRAIG McCLELLAND ------------------------------------------------- ------------------------------------------------------ C. Fred Fetterolf W. Craig McClelland Director Director /s/ ROBERT MEHRABIAN /s/ WILLIAM G. OUCHI ------------------------------------------------- ------------------------------------------------------ Robert Mehrabian William G. Ouchi Director Director /s/ CHARLES J. QUEENAN, JR. /s/ GEORGE A. ROBERTS ------------------------------------------------- ------------------------------------------------------ Charles J. Queenan, Jr. George A. Roberts Director Director /s/ JAMES E. ROHR /s/ FAYEZ SAROFIM ------------------------------------------------- ------------------------------------------------------ James E. Rohr Fayez Sarofim Director Director 27 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION --------- ----------- 3.1 Restated Certificate of Incorporation of Allegheny Teledyne Incorporated (incorporated by reference from Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (No. 333-8235), appears as Annex A to Appendix A of the Joint Proxy Statement/Prospectus forming part of the Registration Statement filed July 17, 1996). 3.2 Amended and Restated Bylaws of Allegheny Teledyne Incorporated (incorporated by reference from Exhibit 3.1 to the Registration Statement on Form S-4 (No. 333-8235), appears as Annex B to Appendix A of the Joint Proxy Statement/Prospectus forming part of the Registration Statement filed July 17, 1996). 4.1 Credit Agreement dated as of August 30, 1996 (incorporated by reference from Exhibit 10 to Form 10-Q for the quarter ended September 30, 1996 (File No. 1-12001)) and Assignment and Assumption Agreements dated as of August 22, 1997 and First Amendment to Credit Agreement dated as of August 31, 1997 relating to Credit Agreement dated as of August 30, 1996 (incorporated by reference from Exhibit 4 to Registrant's Form 10-Q for the quarter ended September 30, 1997 (File No. 1-12001)). 4.2 Indenture dated as of December 15, 1995 between Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as trustee (relating to Allegheny Ludlum Corporation's 6.95% Debentures due 2025) (incorporated by reference from Exhibit 4(a) to Allegheny Ludlum Corporation's Form 10-K for the year ended December 31, 1995 (File No. 1-9498)), and First Supplemental Indenture by and among Allegheny Teledyne Incorporated, Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as Trustee, dated as of August 15, 1996 (incorporated by reference from Exhibit 4.1 to Registrant's Current Report on From 8-K dated August 15, 1996 (File No. 1-12001)). 4.3 Rights Agreement dated March 12, 1998, including Certificate of Designation for Series A Junior Participating Preferred Stock as filed with the State of Delaware on March 13, 1998 (incorporated by reference from Exhibit 1 to the Registrant's Current Report on Form 8-K dated March 12, 1998 (File No. 1-12001)). 10.1 Allegheny Teledyne Incorporated 1996 Incentive Plan, as amended as of December 31, 1997. (1),(2) 10.2 Allegheny Teledyne Incorporated Stock Acquisition and Retention Program effective January 1, 1997 (incorporated by reference from Exhibit 10.2 to the Registrant's Form 10-K for the year ended December 31, 1996 (File No. 1-12001)). (1) 28 10.3 Allegheny Teledyne Incorporated Stock Acquisition and Retention Program effective January 1, 1998. (1),(2) 10.4 Allegheny Teledyne Incorporated 1996 Non-Employee Director Stock Compensation Plan, as amended and restated effective as of December 31, 1997. (1),(2) 10.5 Allegheny Teledyne Incorporated Fee Continuation Plan for Non-Employee Directors (incorporated by reference from Exhibit 10.4 to Registrant's Form 10-K for the year ended December 31, 1996 (File No. 1-12001)). (1) 10.7 Supplemental Pension Plan for Certain Key Employees of Allegheny Teledyne and its subsidiaries (formerly known as the Allegheny Ludlum Corporation Key Man Salary Continuation Plan). (1),2 10.8 Allegheny Teledyne Incorporated Benefit Restoration Plan formerly known as the Allegheny Ludlum Corporation Benefit Restoration Plan (incorporated by reference from Exhibit 10(e) to Allegheny Ludlum Corporation's Form 10-K for the year ended December 30, 1990 (File No. 1-9498)). (1) 10.9 Allegheny Ludlum Corporation 1987 Stock Option Incentive Plan (as amended and restated) (incorporated by reference from Exhibit 10(f) to Allegheny Ludlum Corporation's Form 10-K for the year ended December 31, 1995 (File No. 1-9498)). (1) 10.10 Allegheny Ludlum Corporation Performance Share Plan (as amended and restated) (incorporated by reference from the Registration Statement on Form S-4 (No. 333-8235) of Allegheny Teledyne Incorporated, appears as Appendix F to the Joint Proxy Statement/Prospectus forming part of the Registration Statement). (1) 10.11 Allegheny Ludlum Corporation Stock Acquisition and Retention Plan, as restated effective as of August 15, 1996 (incorporated by reference from Exhibit 10.10 to Registrant's Form 10-K for the year ended December 31, 1996 (File No. 1-12001)).(1) 10.12 Teledyne, Inc. 1990 Stock Option Plan (incorporated by reference from Exhibit 10 to Teledyne, Inc.'s Form 10-K for the year ended December 31, 1990 (File No. 1-5212)).(1) 10.13 Teledyne, Inc. 1994 Long-Term Incentive Plan (incorporated by reference from Exhibit A to Teledyne, Inc.'s 1994 proxy statement (File No. 1-5212)). (1) 10.14 Teledyne, Inc. 1995 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit A to Teledyne, Inc.'s 1995 proxy statement (File No. 1-5212)). (1) 10.15 Teledyne, Inc. Senior Executive Performance Plan (incorporated by reference form the Registration Statement on Form S-4 (No. 333-8235) of Allegheny Teledyne Incorporated, appears as Appendix G to the Joint Proxy Statement/Prospectus forming part of the Registration Statement). (1) 29 10.16 Summary of Teledyne, Inc. Executive Deferred Compensation Plan, as restated effective September 1, 1994 (incorporated by reference from Exhibit 10.2 to Teledyne, Inc.'s Form 10-K for the year ended December 31, 1994 (File No. 1-5212)). (1) 10.17 First Amendment dated as of August 14, 1995 and Second Amendment dated as of December 4, 1995 to the Summary of Teledyne, Inc. Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.2 to Teledyne, Inc.'s Form 10-K for the year ended December 31, 1995 (File No. 1-5212)). (1) 10.18 Employment Agreement dated July 15, 1996 between Allegheny Teledyne Incorporated and Arthur H. Aronson (incorporated by reference from Exhibit 10.3 to the Company's Registration Statement on Form S-4 (No. 333-8235)). (1) 10.19 Employment Agreement dated July 15, 1996 between Allegheny Teledyne Incorporated and James L. Murdy (incorporated by reference from Exhibit 10.4 to the Company's Registration Statement on Form S-4 (No. 333-8235)). (1) 10.20 Employment Agreement dated July 15, 1996 between Allegheny Teledyne Incorporated and Jon D. Walton (incorporated by reference from Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 333-8235)). (1) 10.21 Separation Agreement dated March 6, 1997 between Allegheny Teledyne Incorporated and William P. Rutledge (incorporated by reference from Exhibit 10.10 to Registrant's Form 10-K for the year ended December 31, 1996 (File No. 1-12001)). (1) 10.22 Agreement and Plan of Merger dated as of October 31, 1997 among Allegheny Teledyne Incorporated, Sea Merger Inc. and Oregon Metallurgical Corporation (incorporated by reference from Exhibit 2.1 to the Company's Registration Statement on Form S-4 (No. 333-46695)). (1) 13.1 Pages 21 through 57 inclusive of the Annual Report of Allegheny Teledyne Incorporated for the year ended December 31, 1997.(2) 21.1 Subsidiaries of the Registrant.(2) 23.1 Consent of Ernst & Young LLP.(2) 23.2 Consent of Arthur Andersen LLP.(2) 27.1 Financial Data Schedule for Year Ended December 31, 1997.(2) 27.2 Restated Financial Data Schedule for Year Ended December 31, 1996.(2) 27.3 Restated Financial Data Schedule for Nine Months ended September 30, 1997 and 1996.(2) 27.4 Restated Financial Data Schedule for Six Months ended June 30, 1997.(2) 27.5 Restated Financial Data Schedule for Three Months Ended June 30, 1997.(2) 99.1 Report of Arthur Andersen LLP.(2) --------------- (1) Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Report. (2) Filed herewith. Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have been omitted from the Exhibits in accordance with Item 601(b)(4)(iii) of Regulation S-K. A copy of any omitted document will be furnished to the Commission upon request. 30 EXHIBIT 10.1 ALLEGHENY TELEDYNE INCORPORATED 1996 INCENTIVE PLAN (AS AMENDED AND RESTATED AS OF DECEMBER 31, 1997) ARTICLE I PURPOSE AND ADOPTION OF THE PLAN 1.01. PURPOSE. The purpose of the Allegheny Teledyne Incorporated 1996 Incentive Plan (hereinafter referred to as the "Plan") is to assist in attracting and retaining highly competent employees, to act as an incentive in motivating selected officers and other key employees of Allegheny Teledyne Incorporated and its Subsidiaries to achieve long-term corporate objectives and to enable cash incentive awards to qualify as performance-based for purposes of the tax deduction limitations under Section 162(m) of the Code. 1.02. ADOPTION AND TERM. The Plan has been approved by the Board of Directors of Allegheny Teledyne Incorporated, to be effective as of the effective date of the transactions described in the Amended and Restated Agreement and Plan of Merger and Combination, dated as of April 1, 1996, by and among Allegheny Teledyne Incorporated, Allegheny Ludlum Corporation, ALS Merger Corporation and Teledyne, Inc. and TDY Merger, Inc. (the "Effective Date"), but is subject to the approval of the stockholders of the Company and the stockholders of Allegheny Ludlum Corporation and Teledyne, Inc. The Plan shall remain in effect until terminated by action of the Board; provided, however, that no Incentive Stock Option may be granted hereunder after the tenth anniversary of the Effective Date and the provisions of Articles VII, VIII, IX and X with respect to performance-based awards to "covered employees" under Section 162(m) of the Code shall expire as of the fifth anniversary of the Effective Date. ARTICLE II DEFINITIONS For the purpose of this Plan, capitalized terms shall have the following meanings: 2.01. AWARD means any one or a combination of Non-Qualified Stock Options or Incentive Stock Options described in Article VI, Stock Appreciation Rights described in Article VI, Restricted Shares described in Article VII, Performance Awards described in Article VIII, Awards of cash or any other Award made under the terms of the Plan. 2.02. AWARD AGREEMENT means a written agreement between the Company and a Participant or a written acknowledgment from the Company to a Participant specifically setting forth the terms and conditions of an Award granted under the Plan. 2.03. AWARD PERIOD means, with respect to an Award, the period of time set forth in the Award Agreement during which specified target performance goals must be achieved or other conditions set forth in the Award Agreement must be satisfied. 2.04. BENEFICIARY means an individual, trust or estate who or which, by a written designation of the Participant filed with the Company or by operation of law, succeeds to the rights and obligations of the Participant under the Plan and the Award Agreement upon the Participant's death. 2.05. BOARD means the Board of Directors of the Company. 2.06. CHANGE IN CONTROL means, and shall be deemed to have occurred upon the occurrence of, any one of the following events: (a) The acquisition in one or more transactions, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Company Voting Securities in excess of 25% of the Company Voting Securities unless such acquisition has been approved by the Board; (b) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on the Effective Date and (ii) persons who were nominated for elections as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on the Effective Date; provided, however, that any person nominated for election by a Board at least two-thirds of whom constituted persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i); (c) Approval by the stockholders of the Company of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Company Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than seventy five (75%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Common Stock and Company Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be; or 2 (d) Approval by the stockholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) a sale or other disposition of all or substantially all the assets of the Company. 2.07. CODE means the Internal Revenue Code of 1986, as amended. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section. 2.08. COMMITTEE means the Committee defined in Section 3.01. 2.09. COMPANY means Allegheny Teledyne Incorporated, a Delaware corporation, and its successors. 2.10. COMMON STOCK means Common Stock of the Company, par value $.10 per share. 2.11. COMPANY VOTING SECURITIES means the combined voting power of all outstanding voting securities of the Company entitled to vote generally in the election of directors to the Board. 2.12. DATE OF GRANT means the date designated by the Committee as the date as of which it grants an Award, which shall not be earlier than the date on which the Committee approves the granting of such Award. 2.13. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.14. EXERCISE PRICE means, with respect to a Stock Appreciation Right, the amount established by the Committee in the Award Agreement which is to be subtracted from the Fair Market Value on the date of exercise in order to determine the amount of the payment to be made to the Participant, as further described in Section 6.02(b). 2.15. FAIR MARKET VALUE means, on any date, the average of the high and low quoted sales prices of a share of Common Stock, as reported on the Composite Tape for New York Stock Exchange Listed Companies on such date or, if there were no sales on such date, on the last date preceding such date on which a sale was reported. 2.16. INCENTIVE STOCK OPTION means a stock option within the meaning of Section 422 of the Code. 2.17. MERGER means any merger, reorganization, consolidation, exchange, transfer of assets or other transaction having similar effect involving the Company. 2.18. NON-QUALIFIED STOCK OPTION means a stock option which is not an Incentive Stock Option. 2.19. OPTIONS means all Non-Qualified Stock Options and Incentive Stock Options granted at any time under the Plan. 3 2.20. OUTSTANDING COMMON STOCK means, at any time, the issued and outstanding shares of Common Stock. 2.21. PARTICIPANT means a person designated to receive an Award under the Plan in accordance with Section 5.01. 2.22. PERFORMANCE AWARDS means Awards granted in accordance with Article VIII. 2.23. PERFORMANCE GOALS means operating income, operating profit (earnings from continuing operations before interest and taxes), earnings per share, return on investment or working capital, return on stockholders' equity, economic value added (the amount, if any, by which net operating profit after tax exceeds a reference cost of capital), reductions in inventory, inventory turns and on-time delivery performance, any one of which may be measured with respect to the Company or any one or more of its Subsidiaries and divisions and either in absolute terms or as compared to another company or companies, and quantifiable, objective measures of individual performance relevant to the particular individual's job responsibilities. 2.24. PLAN means the Allegheny Teledyne Incorporated 1996 Incentive Plan as described herein, as the same may be amended from time to time. 2.25. PURCHASE PRICE, with respect to Options, shall have the meaning set forth in Section 6.01(b). 2.26. RESTORATION OPTION means a Non-Qualified Stock Option granted pursuant to Section 6.01(f). 2.27. RESTRICTED SHARES means Common Stock subject to restrictions imposed in connection with Awards granted under Article VII. 2.28. RETIREMENT means early or normal retirement under a pension plan or arrangement of the Company or one of its Subsidiaries in which the Participant participates. 2.29. RULE 16B-3 means Rule 16b-3 promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as the same may be amended from time to time, and any successor rule. 2.30. STOCK APPRECIATION RIGHTS means Awards granted in accordance with Article VI. 2.31. SUBSIDIARY means a subsidiary of the Company within the meaning of Section 424(f) of the Code. 2.32. TERMINATION OF EMPLOYMENT means the voluntary or involuntary termination of a Participant's employment with the Company or a Subsidiary for any reason, including death, disability, retirement or as the result of the divestiture of the Participant's employer or any similar transaction in which the Participant's employer ceases to be the Company or one of its Subsidiaries. Whether entering military or other government service shall constitute Termination of Employment, or whether a Termination of Employment shall occur as a result of disability, shall be determined in each case by the Committee in its sole discretion. 4 ARTICLE III ADMINISTRATION 3.01. COMMITTEE. The Plan shall be administered by a committee of the Board ("Committee") comprised of at least two persons. The Committee shall have exclusive and final authority in each determination, interpretation or other action affecting the Plan and its Participants. The Committee shall have the sole discretionary authority to interpret the Plan, to establish and modify administrative rules for the Plan, to impose such conditions and restrictions on Awards as it determines appropriate, to cancel Awards (including those made pursuant to other plans of the Company) and to substitute new Options for previously awarded Options which, at the time of such substitution, have an exercise price in excess of the Fair Market Value of the underlying Common Stock (including options granted under other incentive compensation programs of the Company) with the consent of the recipient, and to take such steps in connection with the Plan and Awards granted hereunder as it may deem necessary or advisable. The Committee shall not, however, have or exercise any discretion that would disqualify amounts payable under Article X as performance-based compensation for purposes of Section 162(m) of the Code. The Committee may delegate such of its powers and authority under the Plan as it deems appropriate to a subcommittee of the Committee and/or designated officers or employees of the Company. In addition, the full Board may exercise any of the powers and authority of the Committee under the Plan. In the event of such delegation of authority or exercise of authority by the Board, references in the Plan to the Committee shall be deemed to refer, as appropriate, to the delegate of the Committee or the Board. The selection of members of the Committee or any subcommittee thereof, and any delegation by the Committee to designated officers or employees, under this Section 3.01 shall comply with Section 16(b) of the Exchange Act, the performance-based provisions of Section 162(m) of the Code, and the regulations promulgated under each of such statutory provisions, or the respective successors to such statutory provisions or regulations, as in effect from time to time. ARTICLE IV SHARES 4.01. NUMBER OF SHARES ISSUABLE. The total number of shares initially authorized to be issued under the Plan shall be 9,000,000 shares of Common Stock. The number of shares available for issuance under the Plan shall be further subject to adjustment in accordance with Section 11.07. The shares to be offered under the Plan shall be authorized and unissued Common Stock, or issued Common Stock which shall have been reacquired by the Company. 4.02. SHARES SUBJECT TO TERMINATED AWARDS. Common Stock covered by any unexercised portions of terminated Options (including canceled Options) granted under Article VI, Common Stock forfeited as provided in Section 7.02(a) and Common Stock subject to any Awards which are otherwise surrendered by the Participant may again be subject to new Awards under the Plan. Common Stock subject to Options, or portions thereof, which have been surrendered in connection with the exercise of Stock Appreciation Rights shall not be available for subsequent Awards under the Plan, but Common Stock issued in payment of such Stock Appreciation Rights shall not be charged against the number of shares of Common Stock available for the grant of Awards hereunder. 5 ARTICLE V PARTICIPATION 5.01. ELIGIBLE PARTICIPANTS. Participants in the Plan shall be such officers and other key employees of the Company and its Subsidiaries, whether or not members of the Board, as the Committee, in its sole discretion, may designate from time to time. The Committee's designation of a Participant in any year shall not require the Committee to designate such person to receive Awards or grants in any other year. The designation of a Participant to receive awards or grants under one portion of the Plan does not require the Committee to include such Participant under other portions of the Plan. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. Notwithstanding any provision herein to the contrary, the Committee may grant Awards under the Plan, other than Incentive Stock Options, to non-employees who, in the judgment of the Committee, render significant services to the Company or any of its Subsidiaries, on such terms and conditions as the Committee deems appropriate and consistent with the intent of the Plan. Subject to adjustment in accordance with Section 11.07, in any calendar year, no Participant shall be granted Awards in respect of more than 750,000 shares of Common Stock (whether through grants of Options or Stock Appreciation Rights or other grants of Common Stock or rights with respect thereto) and $3,000,000 in cash. ARTICLE VI STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 6.01. OPTION AWARDS. (a) GRANT OF OPTIONS. The Committee may grant, to such Participants as the Committee may select, Options entitling the Participant to purchase shares of Common Stock from the Company in such number, at such price, and on such terms and subject to such conditions, not inconsistent with the terms of this Plan, as may be established by the Committee. The terms of any Option granted under this Plan shall be set forth in an Award Agreement. (b) PURCHASE PRICE OF OPTIONS. The Purchase Price of each share of Common Stock which may be purchased upon exercise of any Option granted under the Plan shall be determined by the Committee; provided, however, that the Purchase Price of the Common Stock purchased pursuant to Options designated by the Committee as Incentive Stock Options shall be equal to or greater than the Fair Market Value on the Date of Grant as required under Section 422 of the Code. 6 (c) DESIGNATION OF OPTIONS. Except as otherwise expressly provided in the Plan, the Committee may designate, at the time of the grant of each Option, the Option as an Incentive Stock Option or a Non-Qualified Stock Option. (d) INCENTIVE STOCK OPTION SHARE LIMITATION. No Participant may be granted Incentive Stock Options under the Plan (or any other plans of the Company and its Subsidiaries) which would result in shares with an aggregate Fair Market Value (measured on the Date of Grant) of more than $100,000 first becoming exercisable in any one calendar year. (e) RIGHTS AS A SHAREHOLDER. A Participant or a transferee of an Option pursuant to Section 11.04 shall have no rights as a shareholder with respect to Common Stock covered by an Option until the Participant or transferee shall have become the holder of record of any such shares, and no adjustment shall be made for dividends in cash or other property or distributions or other rights with respect to any such Common Stock for which the record date is prior to the date on which the Participant or a transferee of the Option shall have become the holder of record of any such shares covered by the Option; provided, however, that Participants are entitled to share adjustments to reflect capital changes under Section 11.07. (f) RESTORATION OPTIONS UPON THE EXERCISE OF A NON-QUALIFIED STOCK OPTION. In the event that any Participant delivers to the Company, or has withheld from the shares otherwise issuable upon the exercise of a Non-Qualified Stock Option, shares of Common Stock in payment of the Purchase Price of any Non-Qualified Stock Option granted hereunder in accordance with Section 6.04, the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of shares of Common Stock equal to the number of such shares so delivered or withheld upon exercise of the original Option and, in the discretion of the Committee, the number of shares, if any, delivered or withheld to the Corporation to satisfy any withholding tax liability arising in connection with the exercise of the original Option. A Restoration Option shall have a per share Purchase Price of not less than 100% of the per share Fair Market Value of the Common Stock on the date of grant of such Restoration Option, a term not longer than the remaining term of the original Option at the time of exercise thereof, and such other terms and conditions as the Committee in its sole discretion shall determine. 6.02. STOCK APPRECIATION RIGHTS. (a) STOCK APPRECIATION RIGHT AWARDS. The Committee is authorized to grant to any Participant one or more Stock Appreciation Rights. Such Stock Appreciation Rights may be granted either independent of or in tandem with Options granted to the same Participant. Stock Appreciation Rights granted in tandem with Options may be 7 granted simultaneously with, or, in the case of Non-Qualified Stock Options, subsequent to, the grant to such Participant of the related Option; provided however, that: (i) any Option covering any share of Common Stock shall expire and not be exercisable upon the exercise of any Stock Appreciation Right with respect to the same share, (ii) any Stock Appreciation Right covering any share of Common Stock shall expire and not be exercisable upon the exercise of any related Option with respect to the same share, and (iii) an Option and Stock Appreciation Right covering the same share of Common Stock may not be exercised simultaneously. Upon exercise of a Stock Appreciation Right with respect to a share of Common Stock, the Participant shall be entitled to receive an amount equal to the excess, if any, of (A) the Fair Market Value of a share of Common Stock on the date of exercise over (B) the Exercise Price of such Stock Appreciation Right established in the Award Agreement, which amount shall be payable as provided in Section 6.02(c). (b) EXERCISE PRICE. The Exercise Price established under any Stock Appreciation Right granted under this Plan shall be determined by the Committee, but in the case of Stock Appreciation Rights granted in tandem with Options shall not be less than the Purchase Price of the related Option. Upon exercise of Stock Appreciation Rights granted in tandem with options, the number of shares subject to exercise under any related Option shall automatically be reduced by the number of shares of Common Stock represented by the Option or portion thereof which are surrendered as a result of the exercise of such Stock Appreciation Rights. (c) PAYMENT OF INCREMENTAL VALUE. Any payment which may become due from the Company by reason of a Participant's exercise of a Stock Appreciation Right may be paid to the Participant as determined by the Committee (i) all in cash, (ii) all in Common Stock, or (iii) in any combination of cash and Common Stock. In the event that all or a portion of the payment is made in Common Stock, the number of shares of Common Stock delivered in satisfaction of such payment shall be determined by dividing the amount of such payment or portion thereof by the Fair Market Value on the Exercise Date. No fractional share of Common Stock shall be issued to make any payment in respect of Stock Appreciation Rights; if any fractional share would be issuable, the combination of cash and Common Stock payable to the Participant shall be adjusted as directed by the Committee to avoid the issuance of any fractional share. 6.03.TERMS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. (a) CONDITIONS ON EXERCISE. An Award Agreement with respect to Options and/or Stock Appreciation Rights may contain such waiting periods, exercise dates and restrictions on exercise (including, but not limited to, periodic installments) as may be determined by the Committee at the time of grant. (b) DURATION OF OPTIONS AND STOCK APPRECIATION RIGHTS. Options and Stock Appreciation Rights shall terminate upon the first to occur of the following events: 8 (i) Expiration of the Option or Stock Appreciation Right as provided in the Award Agreement; or (ii) Termination of the Award in the event of a Participant's disability, Retirement, Death or other Termination of Employment as provided in the Award Agreement; or (iii) In the case of an Incentive Stock Option, ten years from the Date of Grant; or (iv) Solely in the case of a Stock Appreciation Right granted in tandem with an Option, upon the expiration of the related Option. (c) ACCELERATION OR EXTENSION OF EXERCISE TIME. The Committee, in its sole discretion, shall have the right (but shall not be obligated to), exercisable on or at any time after the Date of Grant, to permit the exercise of an Option or Stock Appreciation Right (i) prior to the time such Option or Stock Appreciation Right would become exercisable under the terms of the Award Agreement, (ii) after the termination of the Option or Stock Appreciation Right under the terms of the Award Agreement, or (iii) after the expiration of the Option or Stock Appreciation Right. 6.04. EXERCISE PROCEDURES. Each Option and Stock Appreciation Right granted under the Plan shall be exercised by written notice to the Company which must be received by the officer or employee of the Company designated in the Award Agreement on or before the close of business on the expiration date of the Award. The Purchase Price of shares purchased upon exercise of an Option granted under the Plan shall be paid in full in cash by the Participant pursuant to the Award Agreement; provided however, that the Committee may (but shall not be required to) permit payment to be made by delivery to the Company of either (a) Common Stock (which may include Restricted Shares or shares otherwise issuable in connection with the exercise of the Option, subject to such rules as the Committee deems appropriate) or (b) any combination of cash and Common Stock, or (c) such other consideration as the Committee deems appropriate and in compliance with applicable law (including payment in accordance with a cashless exercise program under which, if so instructed by the Participant, Common Stock may be issued directly to the Participant's broker or dealer upon receipt of an irrevocable written notice of exercise from the Participant). In the event that any Common Stock shall be transferred to the Company to satisfy all or any part of the Purchase Price, the part of the Purchase Price deemed to have been satisfied by such transfer of Common Stock shall be equal to the product derived by multiplying the Fair Market Value as of the date of exercise times the number of shares of Common Stock transferred to the Company. The Participant may not transfer to the Company in satisfaction of the Purchase Price any fractional share of Common Stock. Any part of the Purchase Price paid in cash upon the exercise of any Option shall be added to the general funds of the Company and may be used for any proper corporate purpose. Unless the Committee shall otherwise determine, any Common Stock transferred to the Company as payment of all or part of the Purchase Price upon the exercise of any Option shall be held as treasury shares. 6.05. CHANGE IN CONTROL. Unless otherwise provided by the Committee in the 9 applicable Award Agreement, in the event of a Change in Control, all Options outstanding on the date of such Change in Control, and all Stock Appreciation Rights shall become immediately and fully exercisable. The provisions of this Section 6.05 shall not be applicable to any Options or Stock Appreciation Rights granted to a Participant if any Change in Control results from such Participant's beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of Common Stock or Company Voting Securities. ARTICLE VII RESTRICTED SHARES 7.01. RESTRICTED SHARE AWARDS. The Committee may grant to any Participant an Award of Common Stock in such number of shares, and on such terms, conditions and restrictions, whether based on performance standards, periods of service, retention by the Participant of ownership of purchased or designated shares of Common Stock or other criteria, as the Committee shall establish. With respect to performance-based Awards of Restricted Shares to "covered employees" (as defined in Section 162(m) of the Code), performance targets will be limited to specified levels of one or more of the Performance Goals. The terms of any Restricted Share Award granted under this Plan shall be set forth in an Award Agreement which shall contain provisions determined by the Committee and not inconsistent with this Plan. (a) ISSUANCE OF RESTRICTED SHARES. As soon as practicable after the Date of Grant of a Restricted Share Award by the Committee, the Company shall cause to be transferred on the books of the Company, or its agent, Common Stock, registered on behalf of the Participant, evidencing the Restricted Shares covered by the Award, but subject to forfeiture to the Company as of the Date of Grant if an Award Agreement with respect to the Restricted Shares covered by the Award is not duly executed by the Participant and timely returned to the Company. All Common Stock covered by Awards under this Article VII shall be subject to the restrictions, terms and conditions contained in the Plan and the Award Agreement entered into by the Participant. Until the lapse or release of all restrictions applicable to an Award of Restricted Shares the share certificates representing such Restricted Shares may be held in custody by the Company, its designee, or, if the certificates bear a restrictive legend, by the Participant. Upon the lapse or release of all restrictions with respect to an Award as described in Section 7.01(d), one or more share certificates, registered in the name of the Participant, for an appropriate number of shares as provided in Section 7.01(d), free of any restrictions set forth in the Plan and the Award Agreement shall be delivered to the Participant. (b) SHAREHOLDER RIGHTS. Beginning on the Date of Grant of the Restricted Share Award and subject to execution of the Award Agreement as provided in Section 7.01(a), the Participant shall become a shareholder of the Company with respect to all shares subject to the Award Agreement and shall have all of the rights of a shareholder, including, but not limited to, the right to vote such shares and the right to 10 receive dividends; provided, however, that any Common Stock distributed as a dividend or otherwise with respect to any Restricted Shares as to which the restrictions have not yet lapsed, shall be subject to the same restrictions as such Restricted Shares and held or restricted as provided in Section 7.01(a). (c) RESTRICTION ON TRANSFERABILITY. None of the Restricted Shares may be assigned or transferred (other than by will or the laws of descent and distribution, or to an inter vivos trust with respect to which the Participant is treated as the owner under Sections 671 through 677 of the Code except to the extent that Section 16 of the Exchange Act limits a participant's right to make such transfers), pledged or sold prior to lapse of the restrictions applicable thereto. (d) DELIVERY OF SHARES UPON VESTING. Upon expiration or earlier termination of the forfeiture period without a forfeiture and the satisfaction of or release from any other conditions prescribed by the Committee, or at such earlier time as provided under the provisions of Section 7.03, the restrictions applicable to the Restricted Shares shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 11.05, the Company shall deliver to the Participant or, in case of the Participant's death, to the Participant's Beneficiary, one or more share certificates for the appropriate number of shares of Common Stock, free of all such restrictions, except for any restrictions that may be imposed by law. 7.02. TERMS OF RESTRICTED SHARES. (a) FORFEITURE OF RESTRICTED SHARES. Subject to Sections 7.02(b) and 7.03, all Restricted Shares shall be forfeited and returned to the Company and all rights of the Participant with respect to such Restricted Shares shall terminate unless the Participant continues in the service of the Company or a Subsidiary as an employee until the expiration of the forfeiture period for such Restricted Shares and satisfies any and all other conditions set forth in the Award Agreement. The Committee shall determine the forfeiture period (which may, but need not, lapse in installments) and any other terms and conditions applicable with respect to any Restricted Share Award. (b) WAIVER OF FORFEITURE PERIOD. Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole discretion, waive the forfeiture period and any other conditions set forth in any Award Agreement under appropriate circumstances (including the death, disability or Retirement of the Participant or a material change in circumstances arising after the date of an Award) and subject to such terms and conditions (including forfeiture of a proportionate number of the Restricted Shares) as the Committee shall deem appropriate. 7.03. CHANGE IN CONTROL. Unless otherwise provided by the Committee in the applicable Award Agreement, in the event of a Change in Control, all restrictions applicable to the Restricted Share Award shall terminate fully and the Participant shall immediately have the right to the delivery of share certificate or certificates for such shares in accordance with Section 7.01(d). 11 ARTICLE VIII PERFORMANCE AWARDS 8.01. PERFORMANCE AWARDS. (a) AWARD PERIODS AND CALCULATIONS OF POTENTIAL INCENTIVE AMOUNTS. The Committee may grant Performance Awards to Participants. A Performance Award shall consist of the right to receive a payment (measured by the Fair Market Value of a specified number of shares of Common Stock, increases in such Fair Market Value during the Award Period and/or a fixed cash amount) contingent upon the extent to which certain predetermined performance targets have been met during an Award Period. Performance Awards may be made in conjunction with, or in addition to, Restricted Share Awards made under Article VII. The Award Period shall be two or more fiscal or calendar years as determined by the Committee. The Committee, in its discretion and under such terms as it deems appropriate, may permit newly eligible employees, such as those who are promoted or newly hired, to receive Performance Awards after an Award Period has commenced. (b) PERFORMANCE TARGETS. The performance targets may include such goals related to the performance of the Company or, where relevant, any one or more of its Subsidiaries or divisions and/or the performance of a Participant as may be established by the Committee in its discretion. In the case of Performance Awards to "covered employees" (as defined in Section 162(m) of the Code), the targets will be limited to specified levels of one or more of the Performance Goals. The performance targets established by the Committee may vary for different Award Periods and need not be the same for each Participant receiving a Performance Award in an Award Period. Except to the extent inconsistent with the performance-based compensation exception under Section 162(m) of the Code, in the case of Performance Awards granted to employees to whom such section is applicable, the Committee, in its discretion, but only under extraordinary circumstances as determined by the Committee, may change any prior determination of performance targets for any Award Period at any time prior to the final determination of the Award when events or transactions occur to cause the performance targets to be an inappropriate measure of achievement. (c) EARNING PERFORMANCE AWARDS. The Committee, at or as soon as practicable after the Date of Grant, shall prescribe a formula to determine the percentage of the Performance Award to be earned based upon the degree of attainment of performance targets. (d) PAYMENT OF EARNED PERFORMANCE AWARDS. Subject to the requirements of Section 11.05, payments of earned Performance Awards shall be made in cash or Common Stock, or a combination of cash and Common Stock, in the discretion of the Committee. The Committee, in its sole discretion, may define such terms and conditions with respect to the payment of earned Performance Awards as it may deem desirable. 8.02. TERMS OF PERFORMANCE AWARDS. 12 (a) TERMINATION OF EMPLOYMENT. Unless otherwise provided below or in Section 8.03, in the case of a Participant's Termination of Employment prior to the end of an Award Period, the Participant will not have earned any Performance Awards. (b) RETIREMENT. If a Participant's Termination of Employment is because of Retirement prior to the end of an Award Period, the Participant will not be paid any Performance Awards, unless the Committee, in its sole and exclusive discretion, determines that an Award should be paid. In such a case, the Participant shall be entitled to receive a pro-rata portion of his or her Award as determined under Subsection (d). (c) DEATH OR DISABILITY. If a Participant's Termination of Employment is due to death or disability (as determined in the sole and exclusive discretion of the Committee) prior to the end of an Award Period, the Participant or the Participant's personal representative shall be entitled to receive a pro-rata share of his or her Award as determined under Subsection (d). (d) PRO-RATA PAYMENT. The amount of any payment made to a Participant whose employment is terminated by Retirement, death or disability (under circumstances described in Subsections (b) and (c)) will be the amount determined by multiplying the amount of the Performance Award which would have been earned, determined at the end of the Award Period, had such employment not been terminated, by a fraction, the numerator of which is the number of whole months such Participant was employed during the Award Period, and the denominator of which is the total number of months of the Award Period. Any such payment made to a Participant whose employment is terminated prior to the end of an Award Period under this Section 8.02 shall be made at the end of the respective Award Period, unless otherwise determined by the Committee in its sole discretion. Any partial payment previously made or credited to a deferred account for the benefit of a Participant as provided under Section 8.01(d) of the Plan shall be subtracted from the amount otherwise determined as payable as provided in this Section. (e) OTHER EVENTS. Notwithstanding anything to the contrary in this Article VIII, the Committee may, in its sole and exclusive discretion, determine to pay all or any portion of a Performance Award to a Participant who has terminated employment prior to the end of an Award Period under certain circumstances (including the death, disability or retirement of the Participant or a material change in circumstances arising after the Date of Grant) and subject to such terms and conditions as the Committee shall deem appropriate. 8.03. CHANGE IN CONTROL. Unless otherwise provided by the Committee in the applicable Award Agreement, in the event of a Change in Control, all Performance Awards for all Award Periods shall immediately become fully payable to all Participants and shall be paid to Participants in accordance with Section 8.02(d), within 30 days after such Change in Control. 13 ARTICLE IX OTHER STOCK-BASED AWARDS 9.01. GRANT OF OTHER STOCK-BASED AWARDS. Other stock-based awards, consisting of stock purchase rights (with or without loans to Participants by the Company containing such terms as the Committee shall determine), Awards of cash, Awards of Common Stock, or Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, may be granted either alone or in addition to or in conjunction with other Awards under the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Common Stock to be granted pursuant to such Awards, and all other conditions of the Awards. Any such Award shall be confirmed by an Award Agreement executed by the Committee and the Participant, which Award Agreement shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of this Plan with respect to such Award. 9.02. TERMS OF OTHER STOCK-BASED AWARDS. In addition to the terms and conditions specified in the Award Agreement, Awards made pursuant to this Article IX shall be subject to the following: (a) Any Common Stock subject to Awards made under this Article IX may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses; and (b) If specified by the Committee in the Award Agreement, the recipient of an Award under this Article IX shall be entitled to receive, currently or on a deferred basis, interest or dividends or dividend equivalents with respect to the Common Stock or other securities covered by the Award; and (c) The Award Agreement with respect to any Award shall contain provisions dealing with the disposition of such Award in the event of a Termination of Employment prior to the exercise, realization or payment of such Award, whether such termination occurs because of Retirement, disability, death or other reason, with such provisions to take account of the specific nature and purpose of the Award. 9.03. FOREIGN QUALIFIED AWARDS. Awards under the Plan may be granted to such employees of the Company and its Subsidiaries who are residing in foreign jurisdictions as the Committee in its sole discretion may determine from time to time. The Committee may adopt such supplements to the Plan as may be necessary or appropriate to comply with the applicable laws of such foreign jurisdictions and to afford Participants favorable treatment under such laws; provided, however, that no Award shall be granted under any such supplement with terms or conditions inconsistent with the provision set forth in the Plan. 14 ARTICLE X SHORT-TERM CASH INCENTIVE AWARDS 10.01. ELIGIBILITY. Executive officers of the Company who are from time to time determined by the Committee to be "covered employees" for purposes of Section 162(m) of the Code will be eligible to receive short-term cash incentive awards under this Article X. 10.02. AWARDS. (a) PERFORMANCE TARGETS. For each fiscal year of the Company after fiscal year 1996, the Committee shall establish objective performance targets based on specified levels of one or more of the Performance Goals. Such performance targets shall be established by the Committee on a timely basis to ensure that the targets are considered "preestablished" for purposes of Section 162(m) of the Code. (b) AMOUNTS OF AWARDS. In conjunction with the establishment of performance targets for a fiscal year, the Committee shall adopt an objective formula (on the basis of percentages of Participants' salaries, shares in a bonus pool or otherwise) for computing the respective amounts payable under the Plan to Participants if and to the extent that the performance targets are attained. Such formula shall comply with the requirements applicable to performance-based compensation plans under Section 162(m) of the Code and, to the extent based on percentages of a bonus pool, such percentages shall not exceed 100% in the aggregate. (c) PAYMENT OF AWARDS. Awards will be payable to Participants in cash each year upon prior written certification by the Committee of attainment of the specified performance targets for the preceding fiscal year. (d) NEGATIVE DISCRETION. Notwithstanding the attainment by the Company of the specified performance targets, the Committee shall have the discretion, which need not be exercised uniformly among the Participants, to reduce or eliminate the award that would be otherwise paid. (e) GUIDELINES. The Committee shall adopt from time to time written policies for its implementation of this Article X. Such guidelines shall reflect the intention of the Company that all payments hereunder qualify as performance-based compensation under Section 162(m) of the Code. (f) NON-EXCLUSIVE ARRANGEMENT. The adoption and operation of this Article X shall not preclude the Board or the Committee from approving other short-term incentive compensation arrangements for the benefit of individuals who are Participants hereunder as the Board or Committee, as the case may be, deems appropriate and in the best of the Company. 15 ARTICLE XI TERMS APPLICABLE GENERALLY TO AWARDS GRANTED UNDER THE PLAN 11.01. PLAN PROVISIONS CONTROL AWARD TERMS. Except as provided in Section 11.16, the terms of the Plan shall govern all Awards granted under the Plan, and in no event shall the Committee have the power to grant any Award under the Plan which is contrary to any of the provisions of the Plan. In the event any provision of any Award granted under the Plan shall conflict with any term in the Plan as constituted on the Date of Grant of such Award, the term in the Plan as constituted on the Date of Grant of such Award shall control. Except as provided in Section 11.03 and Section 11.07, the terms of any Award granted under the Plan may not be changed after the Date of Grant of such Award so as to materially decrease the value of the Award without the express written approval of the holder. 11.02. AWARD AGREEMENT. No person shall have any rights under any Award granted under the Plan unless and until the Company and the Participant to whom such Award shall have been granted shall have executed and delivered an Award Agreement or received any other Award acknowledgment authorized by the Committee expressly granting the Award to such person and containing provisions setting forth the terms of the Award. 11.03. MODIFICATION OF AWARD AFTER GRANT. No Award granted under the Plan to a Participant may be modified (unless such modification does not materially decrease the value of the Award) after the Date of Grant except by express written agreement between the Company and the Participant, provided that any such change (a) shall not be inconsistent with the terms of the Plan, and (b) shall be approved by the Committee. 11.04. LIMITATION ON TRANSFER. Except as provided in Section 7.01(c) in the case of Restricted Shares, a Participant's rights and interest under the Plan may not be assigned or transferred other than by will or the laws of descent and distribution, and during the lifetime of a Participant, only the Participant personally (or the Participant's personal representative) may exercise rights under the Plan. The Participant's Beneficiary may exercise the Participant's rights to the extent they are exercisable under the Plan following the death of the Participant. Notwithstanding the foregoing to the extent permitted under Section 16(b) of the Exchange Act with respect to Participants subject to such Section, the Committee may grant Non-Qualified Stock Options that are transferable, without payment of consideration, to immediate family members of the Participant or to trusts or partnerships for such family members, and the Committee may also amend outstanding Non-Qualified Stock Options to provide for such transferability. 11.05. TAXES. The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or shares issuable under such Participant's Award, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the 16 exercise of an Incentive Stock Option, and the Company may defer payment or issuance of the cash or shares upon exercise or vesting of an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee and shall be payable by the Participant at such time as the Committee determines in accordance with the following rules: (a) The Participant shall have the right to elect to meet his or her withholding requirement (i) by having withheld from such Award at the appropriate time that number of shares of Common Stock, rounded up to the next whole share, whose Fair Market Value is equal to the amount of withholding taxes due, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash. (b) The Committee shall have the discretion as to any Award, to cause the Company to pay to tax authorities for the benefit of any Participant, or to reimburse such Participant for the individual taxes which are due on the grant, exercise or vesting of any share Award, or the lapse of any restriction on any share Award (whether by reason of a Participant's filing of an election under Section 83(b) of the Code or otherwise), including, but not limited to, Federal income tax, state income tax, local income tax and excise tax under Section 4999 of the Code, as well as for any such taxes as may be imposed upon such tax payment or reimbursement. (c) In the case of Participants who are subject to Section 16 of the Exchange Act, the Committee may impose such limitations and restrictions as it deems necessary or appropriate with respect to the delivery or withholding of shares of Common Stock to meet tax withholding obligations. 11.06. SURRENDER OF AWARDS. Any Award granted under the Plan may be surrendered to the Company for cancellation on such terms as the Committee and the holder approve. 11.07. ADJUSTMENTS TO REFLECT CAPITAL CHANGES. (a) RECAPITALIZATION. The number and kind of shares subject to outstanding Awards, the Purchase Price or Exercise Price for such shares, the number and kind of shares available for Awards subsequently granted under the Plan and the maximum number of shares in respect of which Awards can be made to any Participant in any calendar year shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan. The Committee shall have the power and sole discretion to determine the amount of the adjustment to be made in each case. (b) MERGER. After any Merger in which the Company is the surviving corporation, each Participant shall, at no additional cost, be entitled upon any exercise of 17 all Options or receipt of other Award to receive (subject to any required action by shareholders), in lieu of the number of shares of Common Stock receivable or exercisable pursuant to such Award, the number and class of shares or other securities to which such Participant would have been entitled pursuant to the terms of the Merger if, at the time of the Merger, such Participant had been the holder of record of a number of shares equal to the number of shares receivable or exercisable pursuant to such Award. Comparable rights shall accrue to each Participant in the event of successive Mergers of the character described above. In the event of a Merger in which the Company is not the surviving corporation, the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), shall either assume the Company's rights and obligations under outstanding Award Agreements or substitute awards in respect of the Acquiring Corporation's stock for such outstanding Awards. In the event the Acquiring Corporation fails to assume or substitute for such outstanding Awards, the Board shall provide that any unexercisable and/or unvested portion of the outstanding Awards shall be immediately exercisable and vested as of a date prior to such Merger, as the Board so determines. The exercise and/or vesting of any Award that was permissible solely by reason of this Section 11.07(b) shall be conditioned upon the consummation of the Merger. Any Options which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Merger shall terminate effective as of the effective date of the Merger. (c) OPTIONS TO PURCHASE SHARES OR STOCK OF ACQUIRED COMPANIES. After any Merger in which the Company or a Subsidiary shall be a surviving corporation, the Committee may grant substituted options under the provisions of the Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the Merger whose shares or stock subject to the old options may no longer be issued following the Merger. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares which might otherwise become subject to any Options. 11.08. NO RIGHT TO EMPLOYMENT. No employee or other person shall have any claim of right to be granted an Award under this Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any of its Subsidiaries. 11.09. AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES. Payments received by a Participant pursuant to the provisions of the Plan shall not be included in the determination of benefits under any pension, group insurance or other benefit plan applicable to the Participant which is maintained by the Company or any of its Subsidiaries, except as may be provided under the terms of such plans or determined by the Board. 11.10. GOVERNING LAW. All determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Delaware and construed in accordance therewith. 18 11.11. NO STRICT CONSTRUCTION. No rule of strict construction shall be implied against the Company, the Committee, or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Committee. 11.12. COMPLIANCE WITH RULE 16B-3. It is intended that, unless the Committee determines otherwise, Awards under the Plan be eligible for exemption under Rule 16B-3. The Board is authorized to amend the Plan and to make any such modifications to Award Agreements to comply with Rule 16b-3, as it may be amended from time to time, and to make any other such amendments or modifications as it deems necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3. 11.13. CAPTIONS. The captions (i.e., all Section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan. 11.14. SEVERABILITY. Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. 11.15. AMENDMENT AND TERMINATION. (a) AMENDMENT. The Board shall have complete power and authority to amend the Plan at any time; provided, however, that the Board shall not, without the requisite affirmative approval of shareholders of the Company, make any amendment which requires shareholder approval under Rule 16b-3 or the Code, unless such compliance is no longer desired under Rule 16b-3, the Code or under any other applicable law or rule of any stock exchange which lists Common Stock or Company Voting Securities. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Award. (b) TERMINATION. The Board shall have the right and the power to terminate the Plan at any time. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be exercised after termination of the Plan at any time prior to the expiration date of such Award to the same extent such Award would have been exercisable had the Plan not terminated. 11.16. SPECIAL PROVISION RELATING TO CERTAIN STOCK ISSUANCES. Notwithstanding anything to the contrary contained in this Plan, shares of Common Stock authorized to be issued under this Plan may be issued to pay awards made under the Performance Share Plan for Key Employees of Allegheny Ludlum Corporation and Subsidiaries (As Amended and Restated) (the "Allegheny Ludlum Performance Plan") and the Teledyne, Inc. Senior Executive Performance Plan (the "Teledyne SEP Plan"). All decisions with respect to the making of awards, and the payment of such awards in shares of Common Stock, under the Allegheny Ludlum Performance Plan or the Teledyne SEP Plan (each a "Subsidiary Plan") shall be made by the body in whom the power to administer the applicable Subsidiary Plan is vested from time to time and shall be complied with by the Committee and the Company. All shares of Common Stock issued in payment of an award under either Subsidiary Plan shall be governed exclusively by the terms of such award, and any terms of this Plan inconsistent therewith shall be inapplicable to such shares. 19 EXHIBIT 10.3 ALLEGHENY TELEDYNE INCORPORATED 1996 INCENTIVE PLAN ADMINISTRATIVE RULES FOR THE ALLEGHENY TELEDYNE INCORPORATED STOCK ACQUISITION AND RETENTION PROGRAM EFFECTIVE AS OF JANUARY 1, 1998 ARTICLE I. ADOPTION AND PURPOSE OF THE PROGRAM 1.01 ADOPTION. These rules are adopted by the Personnel and Compensation Committee and the Stock Incentive Award Subcommittee of the Board of Directors pursuant to the authority reserved in Section 3.01 of the Allegheny Teledyne Incorporated 1996 Incentive Plan (the "Plan"). Capitalized terms used but not defined in these rules shall have the same meanings as in the Plan. 1.02 PURPOSE. The purpose of the Allegheny Teledyne Incorporated Stock Acquisition and Retention Program (the "SARP") is to assist the Corporation and its subsidiaries in retaining and motivating selected key management employees who will contribute to the success of the Corporation and its subsidiaries. The SARP encourages eligible employees to hold a proprietary interest in the Corporation by offering them an opportunity to receive grants of restricted shares of Stock which, in accordance with the terms and conditions set forth below, will vest only if the employees retain, for a specified period of time, ownership of (i) shares of Stock purchased pursuant to the SARP or (ii) already-owned shares of Stock which such employees identify as being subject to the SARP. Awards under the SARP will act as an incentive to participating employees to achieve long-term objectives which will inure to the benefit of all stockholders of the Corporation. ARTICLE II. DEFINITIONS For purposes of these rules, the capitalized terms set forth below shall have the following meanings: 2.01 AWARD AGREEMENT means a written agreement between the Corporation and a Participant or a written acknowledgment from the Corporation specifically setting forth the terms and conditions of an award of Restricted Stock granted to a Participant pursuant to Article VII of these rules. 2.02 BOARD means the Board of Directors of the Corporation. 2.03 BUSINESS DAY means any day on which the New York Stock Exchange shall be open for trading. 2.04 CAUSE means a determination by the Committee that a Participant has engaged in conduct that is dishonest or illegal, involves moral turpitude or jeopardizes the Corporation's right to operate its business in the manner in which it is now operated. 2.05 CHANGE IN CONTROL means any of the events set forth below: (a) The acquisition in one or more transactions, other than from the Corporation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Corporation Voting Securities in excess of 30% of the Corporation Voting Securities unless such acquisition has been approved by the Board; or (b) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on January 1, 1998 and (ii) persons who were nominated for election as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on January 1, 1998; provided, however, that any person nominated for election by the Board at a time when at least two-thirds of the members of the Board were persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i); or (c) Approval by the stockholders of the Corporation of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be; or (d) Approval by the stockholders of the Corporation of (i) a complete liquidation or dissolution of the Corporation or (ii) a sale or other disposition of all or substantially all the assets of the Corporation. 2.06 COMMITTEE means the Stock Incentive Award Subcommittee of the Board, in the case of individuals who are "officers" of the Corporation as defined in Rule 16a-1(f) as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such Rule may be amended from time to time, and the Personnel and Compensation Committee of the Board, in the case of individuals who are not such officers of the Corporation. 2.07 CORPORATION means Allegheny Teledyne Incorporated, a Delaware corporation, and its successors. 2.08 CORPORATION VOTING SECURITIES means the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of the Board. 2.09 DATE OF GRANT means the date as of which an award of Restricted Stock is granted in accordance with Article VII of these rules. 2 2.10 DESIGNATED STOCK means shares of Stock already owned by a Participant that the Participant identifies as being subject to the SARP, thereby triggering the grant of Restricted Stock to such Participant pursuant to Article VII of these rules. 2.11 DESIGNATION NOTICE means a written notice, in a form acceptable to the Committee, by which a Participant designates previously-acquired shares of Stock as Designated Stock. 2.12 DISABILITY means any physical or mental injury or disease of a permanent nature which renders a Participant incapable of meeting the requirements of the employment performed by such Participant immediately prior to the commencement of such disability. The determination of whether a Participant is disabled shall be made by the Committee in its sole and absolute discretion. Notwithstanding the foregoing, if a Participant's employment by the Corporation or an applicable subsidiary terminates by reason of a disability, as defined in an Employment Agreement between such Participant and the Corporation or an applicable subsidiary, such Participant shall be deemed to be disabled for purposes of the SARP. 2.13 EFFECTIVE DATE means January 1, 1998. 2.14 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.15 FAIR MARKET VALUE means, as of any given date, the average of the high and low trading prices of the Stock on such date as reported on the New York Stock Exchange or, if the Stock is not then traded on the New York Stock Exchange, on such other national securities exchange on which the Stock is admitted to trade, or, if none, on the National Association of Securities Dealers Automated Quotation System if the Stock is admitted for quotation thereon; provided, however, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. 2.16 OUTSTANDING STOCK means, at any time, the issued and outstanding Stock. 2.17 PARTICIPANT means any person selected by the Committee, pursuant to Section 5.01 of these rules, as eligible to participate under the SARP. 2.18 PERMITTED TRANSFEREE means a Participant's spouse, or (by blood, adoption or marriage) parent, child, stepchild, descendant or sibling, or the estate, any guardian, custodian, conservator or committee of, or any trust for the benefit of, the Participant or any of the foregoing persons. 2.19 PLAN means the Allegheny Teledyne Incorporated 1996 Incentive Plan, as the same may be amended from time to time. 2.20 PURCHASE AMOUNT means the dollar amount that a Participant specifies in a Purchase Notice with respect to a particular Purchase Date. 2.21 PURCHASE DATE means, with respect to any Window Period, the Business Day immediately following the last day of the Window Period. 3 2.22 PURCHASED STOCK means Stock purchased by a Participant pursuant to Article VI of these rules, which triggers the grant of Restricted Stock to such Participant pursuant to Article VII of these rules. 2.23 PURCHASE LOAN means a loan provided to a Participant by the Corporation to facilitate the Participant's purchase of Stock pursuant hereto. 2.24 PURCHASE NOTICE means a written notice, in a form acceptable to the Committee, by which a Participant may elect to purchase Stock as of a Purchase Date in accordance with Section 6.01 of these rules. 2.25 RELATED STOCK means, with respect to any share of Restricted Stock, the two shares of Purchased Stock or Designated Stock, as the case may be, which entitle such Participant to receive such share of Restricted Stock pursuant to Article VII of these rules. 2.26 RESTRICTED STOCK means shares of Stock awarded to a Participant subject to restrictions as described in Article VII of these rules. 2.27 SARP means the Stock Acquisition and Retention Program, as the same may be amended from time to time. 2.28 SARP YEAR means each of the calendar years during the term the SARP remains in effect. 2.29 STOCK means the common stock, par value $0.10 per share, of the Corporation. 2.30 WINDOW PERIOD means each of the four (4) periods in each year consisting of the ten (10) consecutive Business Days beginning on the third (3rd) Business Day following the release by the Corporation of its quarterly or annual summary statements of sales and earnings and ending on the twelfth (12th) Business Day following such date. ARTICLE III. ADMINISTRATION The SARP shall be administered by the Committee, which shall have exclusive and final authority and discretion in each determination, interpretation or other action affecting the SARP and its Participants. The Committee shall have the sole and absolute authority and discretion to interpret the SARP, to modify these administrative rules for the SARP, to select, in accordance with Section 5.01 of these rules, the persons who will be Participants hereunder, to impose such conditions and restrictions as it determines appropriate and to take such other actions and make such other determinations in connection with the SARP as it may deem necessary or advisable. 4 ARTICLE IV. STOCK ISSUABLE UNDER THE SARP 4.01 SHARES OF STOCK ISSUABLE. The Stock to be offered under the SARP shall be authorized and unissued Stock, or Stock which shall have been reacquired by the Corporation and held in its treasury. 4.02 SHARES SUBJECT TO TERMINATED AWARDS. Shares of Stock forfeited as provided in Section 7.02 of these rules may again be issued under the SARP. ARTICLE V. PARTICIPATION 5.01 DESIGNATION OF PARTICIPANTS. Participants in the SARP shall be such officers and senior executives of the Corporation and its subsidiaries whose actions most directly affect the long-term success of the Corporation as the Committee, in its sole discretion, after consultation with the Chief Executive Officer, may designate as eligible to participate in the SARP. Prior to the commencement of each SARP Year during the term of the SARP, the Committee shall designate the Participants who are eligible to participate in the SARP during such SARP Year; provided, however, that with respect to the initial SARP Year of the SARP, such designations shall be made no later than thirty (30) days following the Effective Date. The Committee's designation of a Participant with respect to any SARP Year shall not require the Committee to designate such person as a Participant with respect to any other SARP Year. The Committee shall consider such factors as it deems pertinent in selecting Participants. The Committee shall promptly provide to each person selected as a Participant written notice of such selection. The designation of a person as a Participant with respect to a SARP Year shall permit such person to elect to submit one or more Purchase Notices and/or Designation Notices during such SARP Year irrespective of whether, in the case of Purchase Notices, the applicable Purchase Date(s) fall within such SARP Year. 5.02 PARTICIPANT ELECTIONS. A person who is designated as a Participant in accordance with Section 5.01 of these rules shall be entitled to purchase Stock by delivering one or more Purchase Notices in accordance with Article VI of these rules, and such Stock purchases shall result in the award of Restricted Stock to such Participant in accordance with Article VII of these rules. In addition, a Participant shall be entitled to designate as Designated Stock, in one or more Designation Notices delivered to the Corporation at any time during a SARP Year, any even number of shares of Stock then owned by the Participant, other than shares of Purchased Stock, shares of Stock credited to the Participant's account under a company-sponsored defined contribution plan and shares of Stock subject to outstanding and as yet unexercised stock options. Such designation of shares as Designated Stock shall result in the award of Restricted Stock to the Participant in accordance with Article VII of these rules. The sum of (i) the aggregate Purchase Amounts elected by a Participant pursuant to one or more Purchase Notices submitted within any one SARP Year and (ii) the Fair Market Value of the Designated Stock designated by the Participant pursuant to one or more Designation Notices submitted within such SARP Year (such Fair Market Value being determined as of the date the applicable Designation Notice is delivered), shall not exceed such Participant's gross annual salary as in effect on the first day of such SARP Year. 5 ARTICLE VI. STOCK PURCHASES 6.01 STOCK PURCHASE ELECTIONS. A Participant shall have the right to purchase Stock in accordance with the terms of this Article VI of these rules. A Participant may elect to purchase Stock under this SARP by delivering to the Corporation a Purchase Notice and cash and/or a promissory note executed by the Participant in an amount equal to the purchase price designated in such Participant's Purchase Notice. Such Purchase Notice shall set forth, among other things, the Purchase Amount elected by the Participant. Such promissory note which shall evidence such Participant's Purchase Loan in accordance with Section 6.03 of these rules, shall be in a principal amount equal to the Purchase Amount designated in such Participant's Purchase Notice and shall by its terms become effective as of the applicable Purchase Date. All elections under this Section 6.01 shall be irrevocable. Each election shall take effect as of the Purchase Date immediately following the close of the Window Period that follows the date the Purchase Notice is received by the Corporation. If an election is not submitted during a Window Period, such election shall take effect as of the first Purchase Date which occurs at least six (6) months after the date the election is submitted. 6.02 ISSUANCE OF AND PAYMENT FOR STOCK. As of each Purchase Date, the Corporation shall credit to each Participant the number of shares of Purchased Stock purchased pursuant to the Purchase Notice submitted by such Participant. The number of shares of Purchased Stock to be so credited shall be determined by dividing the Purchase Amount designated by such Participant in his or her Purchase Notice by a purchase price per share equal to the average Fair Market Value during the Window Period. As of any Purchase Date, only an even number of shares of Purchased Stock can be purchased by a Participant and in no event shall the Corporation be required to issue fractional shares. The Purchase Amount elected by a Participant, and the principal amount of the related promissory note, shall be automatically reduced (and if the entire Purchase Amount is paid in cash, cash shall be returned to the Participant) to the minimum extent necessary in order that an even number of whole shares of Purchased Stock is credited to such Participant as of the Purchase Date. The purchase price for shares of Purchased Stock credited to a Participant as of a Purchase Date shall be paid in cash and/or by means of a Purchase Loan made by the Corporation to the Participant in accordance with Section 6.03 of these rules. The Participant shall have all of the rights of a stockholder with respect to the shares of Purchased Stock credited to him under this Section 6.02 including, but not limited to, the right to vote such shares and the right to receive dividends (or dividend equivalents) paid with respect to such shares. 6.03 TERMS OF PURCHASE LOAN. (a) Purchase Loan. The promissory note delivered to the Corporation by a Participant in accordance with Section 6.01 of these rules shall evidence a Purchase Loan in principal amount equal to such Participant's Purchase Amount reduced by the amount of cash paid, if any. Unless the Committee shall otherwise determine prior to the applicable Purchase Date, each Purchase Loan shall have a term not to exceed ten years, and be secured by the shares of Purchased Stock acquired with such Purchase Loan. (b) Interest on Purchase Loan. Until the Participant's Purchase Loan is paid in full, or otherwise satisfied or discharged in full, interest on the outstanding balance of the Purchase Loan shall accrue at a fixed rate per annum equal to the minimum rate required to avoid imputed interest under the applicable provisions of the Internal Revenue Code of 1986. 6 (c) Repayment of Purchase Loan. No principal or interest payments with respect to a Purchase Loan shall be required prior to the fifth anniversary of the date such Purchase Loan is made; provided, however, that prior to such fifth anniversary, cash dividends on shares of Purchased Stock held as security for such Purchase Loan, and on the related shares of Restricted Stock, shall be applied to pay accrued interest on the Purchase Loan (any non-cash dividends shall remain as part of the collateral securing such Purchase Loan). After such fifth anniversary, level monthly payments of principal and accrued interest with respect to a Purchase Loan shall be required for the remaining term thereof. Unless otherwise determined by the committee, all outstanding principal and interest on a Participant's Purchase Loan shall be immediately due and payable in full upon termination of the Participant's employment with the Corporation and its affiliates. All or any portion of the principal and/or interest with respect to a Purchase Loan may, at the election of the Participant, be paid by the delivery to the Corporation of whole shares of Stock, other than (i) shares of Stock credited to the Participant's account under a company-sponsored defined contribution plan or (ii) shares of Stock subject to outstanding and as yet unexercised stock options. For purposes of the immediately preceding sentence, shares of Stock shall be valued at the Fair Market Value of such shares on the Business Day immediately preceding the date such shares are delivered to the Corporation. (d) Other Terms. The promissory notes evidencing the Purchase Loans shall contain such other terms and conditions as the Committee may determine, including, without limitation, any special terms relating to the retirement of a Participant prior to the expiration of the term of one or more Purchase Loans. 6.04 STOCK CERTIFICATES. As promptly as administratively feasible after each Purchase Date, the Corporation shall deliver to each Participant one or more stock certificates for the number of shares of Stock purchased by such Participant as of such Purchase Date in accordance with this Article VI. The Participant shall then deliver certificates representing a number of shares with a value equal to the principal amount of the Purchase Loan to the Corporation in pledge for the related Purchase Loan along with an executed security agreement in such form as the Committee shall specify. Upon satisfaction in full of the Purchase Loan, the certificates shall be delivered to the Participant free and clear of any restrictions except for any restrictions that may be imposed by law. ARTICLE VII. RESTRICTED STOCK 7.01 RESTRICTED STOCK AWARDS. As of each Purchase Date, there shall automatically be granted to any Participant who purchases Purchased Stock as of such Purchase Date pursuant to Article VI of these rules an award of one share of Restricted Stock for each two shares of Purchased Stock. The Purchase Date shall be the Date of Grant of such Restricted Stock. As of any date that a Participant delivers a Designation Notice to the Corporation, in accordance with Section 5.02 of these rules, designating shares of Stock as Designated Stock, there shall automatically be granted to such Participant an award of one share of Restricted Stock for each two shares of Designated Stock. The date of delivery of such Designation Notice shall be the Date of Grant of such Restricted Stock. The terms of all such Restricted Stock awards shall be set forth in an Award Agreement between the Corporation and the Participant which shall contain such forfeiture periods and conditions, restrictions and other provisions, not inconsistent with these rules, as shall be determined by the Committee. (a) Issuance of Restricted Stock. As soon as practicable after the Date of 7 Grant of Restricted Stock, the Corporation shall cause to be transferred on the books of the Corporation shares of Stock, registered on behalf of the Participant, evidencing such Restricted Stock, but subject to forfeiture to the Corporation retroactive to the Date of Grant if an Award Agreement delivered to the Participant by the Corporation with respect to the Restricted Stock is not duly executed by the Participant and timely returned to the Corporation. Until the lapse or release of all restrictions applicable to an award of Restricted Stock, the stock certificates representing such Restricted Stock shall be held in custody by the Corporation or its designee. (b) Stockholder Rights. Beginning on the Date of Grant of the Restricted Stock and subject to execution of the Award Agreement as provided in Section 7.01(a) of these rules, the Participant shall become a stockholder of the Corporation with respect to all Stock subject to the Award Agreement and shall have all of the rights of a stockholder, including, but not limited to, the right to vote such Stock and the right to receive dividends (or dividend equivalents) paid with respect to such Stock; provided, however, that any Stock distributed as a dividend or otherwise with respect to any Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock and shall be held as prescribed in Section 7.01(a) of these rules. (c) Restriction on Transferability. None of the Restricted Stock may be assigned, transferred (other than by will or the laws of descent and distribution), pledged, sold or otherwise disposed of prior to lapse or release of the restrictions applicable thereto. (d) Delivery of Stock Upon Release of Restrictions. Upon expiration or earlier termination of the forfeiture period without a forfeiture, the satisfaction of the Purchase Loan, if any, for the Related Stock and the satisfaction of or release from any other conditions prescribed by the Committee, the restrictions applicable to the Restricted Stock shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 8.02 of these rules, the Corporation shall deliver to the Participant, or, in case of the Participant's death, to the Participant's legal representatives, one or more stock certificates for the appropriate number of shares of Stock, free of all such restrictions, except for any restrictions that may be imposed by law. 7.02 TERMS OF RESTRICTED STOCK. (a) Forfeiture of Restricted Stock. Subject to Section 7.02(b) of these rules, all Restricted Stock shall be forfeited and returned to the Corporation and all rights of the Participant with respect to such Restricted Stock shall cease and terminate in their entirety if during the forfeiture period (i) the Participant transfers, sells or otherwise disposes of the Related Stock other than to a Permitted Transferee or in a transaction constituting a Change in Control or (ii) the employment of the Participant with the Corporation and its affiliates terminates for any reason or (iii) the Participant defaults on the Purchase Loan, if any, for the Related Stock. Unless the Committee, in its sole discretion, provides otherwise in the applicable Award Agreement, the forfeiture period for any shares of Restricted Stock shall be five years from the Date of Grant of such Restricted Stock. Notwithstanding the foregoing, in the event of the discharge by the Corporation and its subsidiaries of a Participant without Cause or termination of a Participant's employment by reason of death, Disability or retirement pursuant to the retirement policy of the Corporation or its applicable subsidiaries, all forfeiture restrictions imposed on Restricted Stock shall 8 immediately and fully lapse. In addition, upon the occurrence of a Change in Control, all forfeiture restrictions imposed on Restricted Stock shall immediately and fully lapse. (b) Waiver of Forfeiture Period. Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole discretion, waive the forfeiture conditions set forth in any Award Agreement under appropriate circumstances and subject to such terms and conditions (including forfeiture of a proportionate number of the shares of Restricted Stock) as the Committee may deem appropriate, provided that the Participant shall at that time have completed at least one year of employment after the Date of Grant. ARTICLE VIII. MISCELLANEOUS 8.01 LIMITATIONS ON TRANSFER. The rights and interest of a Participant under the SARP may not be assigned or transferred other than by will or the laws of descent and distribution. During the lifetime of a Participant, only the Participant personally may exercise rights under the SARP. 8.02 TAXES. The Corporation shall be entitled to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Corporation with respect to any Stock issuable under the SARP, or with respect to any income recognized upon the lapse of restrictions applicable to Restricted Stock, and the Corporation may defer issuance of Stock hereunder until and unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee or its delegate and shall be payable by the Participant at such time as the Committee determines. The Committee shall prescribe in each Award Agreement one or more methods by which the Participant will be permitted to satisfy his or her tax withholding obligation, which methods may include, without limitation, the payment of cash by the Participant to the Corporation and the withholding, at the appropriate time, of shares of Stock otherwise issuable to the Participant in a number sufficient, based upon the Fair Market Value of such Stock, to satisfy such tax withholding requirements. 8.03 LEGENDS. All certificates for Stock delivered under the SARP shall be subject to such transfer restrictions set forth in these rules and such other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities law, and the Committee may cause a legend or legends to be endorsed on any such certificates making appropriate references to such restrictions. 8.04 AMENDMENT AND TERMINATION. The Committee shall have complete power and authority to amend or terminate these rules at any time it is deemed necessary or appropriate. No termination or amendment of the SARP may, without the consent of the Participant to whom any award shall theretofore have been granted under the SARP, adversely affect the right of such individual under such award; provided, however, that the Committee may, in its sole discretion, make such provision in the Award Agreement for amendments which, in its sole discretion, it deems appropriate. 9 EXHIBIT 10.4 ALLEGHENY TELEDYNE INCORPORATED 1996 NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 31, 1997) ARTICLE I. GENERAL 1.1. Purpose. It is the purpose of the Plan to promote the interests of the Company and its stockholders by attracting, retaining and providing an incentive to Non-Employee Directors through the acquisition of a proprietary interest in the Company and an increased personal interest in its performance. This purpose will be served by providing an opportunity for Non-Employee Directors to elect to receive Stock Options and/or Common Stock in lieu of Director's Fees, the automatic payment of a portion of the Director's Retainer Fee Payment in the form of Common Stock to those Non-Employee Directors not electing to receive such portion in the form of Stock Options and/or Common Stock and granting each Non-Employee Director annually an option covering 1,000 shares of Common Stock. 1.2. Adoption and Term. The Plan has been approved by the Board and shall become effective as of the Effective Date (as hereinafter defined). The Plan shall terminate without further action upon the earlier of (a) the tenth anniversary of the effective date, and (b) the first date upon which no shares of Common Stock remain available for issuance under the Plan. 1.3. Definitions. As used herein the following terms have the following meanings: (a) "Annual Options" means the Stock Options issuable under Section 4.4(a) of the Plan. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section. (d) "Common Stock" means the common stock par value $0.10 per share, of the Company. (e) "Company" means Allegheny Teledyne Incorporated, a Delaware corporation, and any successor thereto. (f) "Compensation Year" means each calendar year or portion thereof during which the Plan is in effect. (g) "Director" means a member of the Board. (h) "Director's Fees" means the Director's Retainer Fee Payments and the Director's Meeting Fee Payments. (i) "Director's Meeting Fee Payment" means the dollar value of the fees which the Non-Employee Director would be entitled to receive for attending meetings of the Board or any committee of the Board. (j) "Director's Retainer Fee Payment" means the dollar value of that portion of the annual retainer fee payable by the Company to a Non-Employee Director for serving as a Director and for serving as the chair of the Board or any committee of the Board as of a particular Payment Date, as established by the Board and in effect from time to time. (k) "Effective Date" means the date on which the "Effective Time" occurs. The term "Effective Time" shall have the meaning set forth in the Agreement and Plan of Merger and Combination, dated as of April 1, 1996, as amended and restated, by and among the Company, Allegheny Ludlum Corporation and Teledyne, Inc. (l) "Employee" means any employee of the Company or an affiliate. (m) "Fair Market Value" means, as of any given date, the average of the high and low trading prices of the Common Stock on such date as reported on the New York Stock Exchange, or, if the Common Stock is not then traded on the New York Stock Exchange, on such other national securities exchange on which the Common Stock is admitted to trade, or, if none, on the National Association of Securities Dealers Automated Quotation System if the Common Stock is admitted for quotation thereon; provided, however, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. (n) "Meeting Fee Options" means the Stock Options issuable under Section 4.4(b) of the Plan. (o) "Non-Employee Director" means a Director who is not an Employee. (p) "Non-Employee Director Notice" means a written notice delivered in accordance with Section 4.2. (q) "Plan" means this Allegheny Teledyne Incorporated 1996 Non-Employee Director Stock Compensation Plan, as it may hereafter be amended from time to time. 2 (r) "Payment Date" means the first business day of January and July of each Compensation Year on which the Director's Retainer Fee Payment for serving as a Director is paid by the Company and the first business day of January of each Compensation Year on which the Director's Retainer Fee Payment for serving as the chair of the Board or any committee of the Board is paid by the Company. (s) "Retainer Fee Options" means the Stock Options issuable under Section 4.3 of the Plan. (t) "Stock Options" means options to purchase shares of Common Stock of the Company issuable hereunder. 1.4. Shares Subject to the Plan. The shares to be offered under the Plan shall consist of the Company's authorized but unissued Common Stock or treasury shares and, subject to adjustment as provided in Section 5.1 hereof, the aggregate amount of such stock which may be issued or subject to Stock Options issued hereunder shall not exceed 700,000. If any Stock Option granted under the Plan shall expire or terminate for any reason, without having been exercised or vested in full, as the case may be, the unpurchased shares subject thereto shall again be available for issuance under the Plan. Stock Options granted under the Plan will not be qualified as "incentive stock options" under Section 422 of the Code. ARTICLE II. ADMINISTRATION 2.1. The Board. The Plan shall be administered by the Board. Subject to the provisions of the Plan, the Board shall interpret the Plan, promulgate, amend, and rescind rules and regulations relating to the Plan and make all other determinations necessary or advisable for its administration. Interpretation and construction of any provision of the Plan by the Board shall be final and conclusive. Notwithstanding the foregoing, the Board shall have or exercise no discretion with respect to the selection of persons eligible to participate hereunder, the determination of the number of shares of Common Stock or number of Stock Options issuable to any person or any other aspect of Plan administration with respect to which such discretion is not permitted in order for grants of shares of Common Stock and Stock Options to be exempt under Rule 16b-3 under the Securities Exchange Act of 1934, as amended. ARTICLE III. PARTICIPATION 3.1. Participants. Each Non-Employee Director shall participate in the Plan on the terms and conditions hereinafter set forth. ARTICLE IV. PAYMENT OF DIRECTOR'S FEES 4.1. General. The Director's Retainer Fee Payment shall be paid to each Non-Employee Director, as of each Payment Date, as set forth in the Plan and subject to such other payment policies and procedures as the Board may establish from time to time. Director's Meeting Fee payments shall be paid reasonably promptly following the date of the meeting to 3 which such payments relate. If for the applicable Compensation Year such Non-Employee Director has not made an election to receive Stock Options or Common Stock in lieu of at least twenty-five percent (25%) of the Director's Retainer Fee Payment pursuant to Section 4.2, seventy-five percent (75%) of the director's Retainer Fee Payment shall be paid in cash and twenty-five percent (25%) of the Director's Retainer Fee Payment shall be paid in the form of Common Stock. 4.2 Non-Employee Director Notice. A Non-Employee Director may file with the Secretary of the Company or other designee of the Board of Directors, at any time prior to December first of the calendar year prior to any Compensation Year, and at such other times as the Board may approve, a Non-Employee Director Notice making an election to receive (i) either twenty-five percent (25%), fifty percent (50%), seventy-five percent (75%) or one hundred (100%) of his or her Director's Retainer Fee Payment in the form of Stock Options and/or Common Stock with the balance to be paid in cash, and/or (ii) either one hundred percent (100%) in cash or twenty-five percent (25%), fifty percent (50%), seventy-five percent (75%) or one hundred percent (100%) of his or her Director's Meeting Fee Payment in the form of Stock Options and/or Common Stock with the balance, if any, to be paid in cash. If a Director does not timely file an election, he or she shall receive twenty-five percent (25%) of the Director's Retainer Fee Payment in Common Stock and seventy-five percent (75%) in cash and one hundred percent (100%) of the Director's Meeting Fee Payment in cash. Notwithstanding the foregoing, elections with respect to the 1996 and 1997 Compensation Years and elections by newly elected or appointed Non-Employee Directors may be made during the Compensation Years to which such elections relate. Once filed, a Non-Employee Director Notice is irrevocable with respect to the initial Compensation Year to which it relates and will be effective and irrevocable for all subsequent compensation Years until another Non-Employee Director Notice is filed by such director in accordance with the procedure described in the first sentence of this Section 4.2. 4.3 Conversion to Shares. (a) Director's Retainer Fee Payment. Each Non-Employee Director who pursuant to Section 4.1 or 4.2 is to receive Common Stock as all or part of his or her Director's Retainer Fee Payment with respect to a Compensation Year and who is elected or reelected or is a continuing Non-Employee Director as of the date of commencement of such Compensation Year as of the applicable Payment Date, shall receive as of each Payment Date during such Compensation Year a number of shares of Common Stock equal to the quotient obtained by dividing (i) the amount of the Director's Retainer Fee Payment to be paid in the form of Common Stock by (ii) the Fair Market Value of the Common Stock per share on such Payment Date. Cash shall be paid in lieu of any fractional shares. (b) Director's Meeting Fee Payment. Each Non-Employee Director who has duly filed a Non-Employee Director Notice in accordance with Section 4.2 with respect to a Compensation Year and elected to receive all or any portion of the Director's Meeting Fee Payment in the form of Common Stock shall receive as of the first business day in January of the next following Compensation Year a number of shares of Common Stock equal to the quotient 4 obtained by dividing (i) the amount of the Director's Meeting Fee Payment for the Compensation Year to be paid in the form of Common Stock by (ii) the Fair Market Value of the Common Stock per share on such day. Cash shall be paid in lieu of any fractional shares. 4.4 Stock Options. (a) Annual Option Grants. An Annual Option covering 1,000 shares of Common Stock shall be granted to each Non-Employee Director on the date of adoption of the Director Stock Plan by the Board, subject to approval by the stockholders of Allegheny Ludlum Corporation and Teledyne, Inc. at their respective special meetings of shareholders presently scheduled to be held in 1996 and to the effectiveness of the Plan. Thereafter, an Annual Option covering 1,000 shares of Common Stock will be granted to each Non-Employee Director automatically at the conclusion of each Company Annual Meeting. If, after the date of adoption of this Plan, a director first becomes a Non-Employee Director on a date other than an Annual Meeting date, an Annual Option covering 1,000 shares of Common Stock will be granted to such director on his or her first date of Board service. The purchase price of the Common Stock covered by each Annual Option will be the Fair Market Value of a share of Common Stock as of the date of grant of the Annual Option. (b) Retainer Fees Options. Retainer Fee Options will be granted on the Payment Dates of each Compensation Year. The number of shares of Common Stock to be subject to a Retainer Fee Option shall be equal to the nearest number of whole shares determined by multiplying the Fair Market Value of a share of Company Common Stock on the date of grant by 0.3333 and dividing the result into the applicable portion of the Director's Retainer Fee Payment elected to be received as Stock Options by the Non-Employee Director for the Compensation Year. The purchase price of each share covered by each Retainer Fee Option shall be equal to the Fair Market Value of a share of Common Stock on the date of grant of the Retainer Fee Option multiplied by 0.6666. (c) Meeting Fee Options. Meeting Fee Options for a Compensation Year will be granted on the first business day of the next following Compensation Year after the conclusion of the Compensation Year. The number of shares of Common Stock to be subject to a Meeting Fee Option shall be equal to the nearest number of whole shares determined by multiplying the Fair Market Value of a share of Company Common Stock on the date of grant by 0.3333 and dividing the result into the portion of the Director's Meeting Fee Payment elected to be received as Stock Options by the Non-Employee Director. The purchase price of each share covered by each Meeting Fee Option shall be equal the Fair Market Value of a share of Common Stock on the date of grant of the Meeting Fee Option multiplied by 0.6666. (d) Duration and Exercise of Stock Options. Subject to Section 4.4(g) below, Annual Options and Retainer Fee Options become exercisable on the first anniversary of the date on which they were granted and Meeting Fee Options become exercisable immediately upon grant. Stock Options shall terminate upon the expiration of ten years from the date of grant. No Stock Option may be exercised for a fraction of a share and no partial exercise of any Stock Option may be for less than one hundred (100) shares. 5 (e) Purchase Price. The purchase price for the shares shall be paid in full at the time of exercise (i) in cash or by check payable to the order of the Company, (ii) by delivery of shares of Common Stock of the Company already owned by, and in the possession of Stock Option holder, or (iii) by delivering a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the Stock Option price (in which case the exercise will be effective upon receipt of such proceeds by the Company). Shares of Common Stock used to satisfy the exercise price of a Stock Option shall be valued at their Fair Market Value on the date of exercise. (f) Transferability. Stock Options granted hereunder shall not be transferable, other than by will or the laws of descent and distribution and shall be exercisable during a Stock Option holder's lifetime only by the Stock Option holder or by his or her guardian or legal representative, except to the extent (i) transfer is permitted by Rule 16b-3 promulgated under the Exchange Act, and (ii) approved by the Committee. Subject to the foregoing, Stock Options shall not be assigned, pledged or otherwise encumbered by the holder thereof, either voluntarily or by operation of law. (g) Termination of Directorship. All rights of a director in a Stock Option, to the extent that the Stock Option has not been exercised, shall terminate three months after the date of the termination of his or her services as a director for any reason other than (i) the death of the director, (ii) cessation of services as a director because the individual, although nominated by the Board, is not elected by the stockholders to the Board, or (iii) retirement because of total and permanent disability as defined in Section 22(e)(3) of the Code (collectively "Termination Events"). If a director ceases to be a director of the Company because of a Termination Event, (i) the nearest whole number of unexercisable Stock Options shall immediately become exercisable which equals the number of full months actually served by the director as a Non-Employee Director during the Compensation Year at issue divided by 12, multiplied by the number of unexercisable Stock Options on the date of the Termination Event. The remaining unexercisable portion of all such Stock Options shall terminate. All then exercisable Stock Options shall expire twelve months after the date of a Termination Event. ARTICLE V. MISCELLANEOUS 5.1. Adjustments Upon Changes in Common Stock. The number and kind of shares available for issuance under the Plan, and the number and kind of shares subject to, and the exercise price of, outstanding Stock Options, shall be appropriately adjusted to prevent dilution or enlargement of rights by reason of any stock dividend, stock split, combination or exchange of shares, recapitalization, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the shares issuable under the Plan. 5.2. Amendment and Termination. The Board shall have complete power and authority to amend the Plan at any time; provided, however, that the Board shall not, without the affirmative approval of the shareholders of the Company, increase the number of shares of Common Stock available for issuance hereunder or make any other amendment which requires shareholder approval under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, 6 as amended, unless the Board determines that such compliance is no longer desired, or under any applicable law. The Board shall have the right and the power to terminate the Plan at any time. No amendment or termination of the Plan may, without the consent of the Non-Employee Director, adversely affect the right of such Non-Employee Director with respect to any Stock Options then outstanding. 5.3. Requirements of Law. The issuance of Common Stock under the Plan shall be subject to all applicable laws, rules and regulations and to such approval by governmental agencies as may be required. 5.4. No Guarantee of Membership. Nothing in the Plan shall confer upon a Non-Employee Director any right to continue to serve as a Director. 5.5. Construction. Words of any gender used in the Plan shall be construed to include any other gender, unless the context requires otherwise. 7 EXHIBIT 10.7 RESTATED ALLEGHENY TELEDYNE INCORPORATED SUPPLEMENTAL PENSION PLAN 1. ESTABLISHMENT. The Board of Directors of Allegheny Teledyne Incorporated ("Corporation") hereby adopts the Supplemental Pension Plan previously maintained by Allegheny Ludlum Corporation as the Supplemental Pension Plan ("Plan") pursuant to which officers and key salaried employees of the Corporation and its subsidiaries who are mainly responsible for its continued growth and development and future financial success may be awarded supplemental pension income subsequent to retirement in addition to their regular pensions from the Corporation and its subsidiaries and continuing income to them in the event of their disability and to their survivors in the event of their death, all as hereinafter provided. 2. OBJECTIVE. The objective of this Plan is to provide for an officer or key employee who may be designated to participate in the Plan the payment in the event of his retirement, disability or death of 50% of his monthly base salary in effect on the date of his retirement, disability or death, as the case may be. These payments shall be made as supplemental pension income for a period of 118 months following the end of the two-month period immediately succeeding the later of (i) the retirement of the participant and (ii) the participant attaining age 62. If a designated participant suffers a total disability while employed by the Corporation or a subsidiary, he may, by notice to the Corporation during the initial 6 months' waiting period before his disability payments begin under the Corporation's or employing subsidiary's disability plan, elect to receive supplementary pension income payments monthly in the amount described in the first sentence of this paragraph while he is receiving his total disability payments for up to 120 months. Any payments made to a participant under the previous sentence while disabled shall reduce dollar for dollar the payments that may otherwise be payable under the Plan for him following retirement or to another as hereafter provided following his death. If a designated participant dies following retirement and prior to the completion of his 118 month payment period the balance of the payments will be made or continued to his surviving spouse and/or his estate or designated beneficiary for the remainder of such period, or, if he dies after becoming totally disabled and during the period of such disability but before expiration of the 120 month payment period, the balance of the payments will be made or continued to his surviving spouse and/or his estate or designated beneficiary for the remainder of such 120 month period. If a designated participant dies before his retirement and while an active employee of the Corporation, or a subsidiary, monthly payments in an amount aforesaid will be paid to his surviving spouse and/or his estate or designated beneficiary for a period of 10 years following his death. A participant (or in the event of his death, his spouse, estate or beneficiary) shall be entitled to receive supplemental or continuing pension income under the Plan only if he (i) retires on or after his Normal Retirement Age within the meaning of the Corporation's Pension Plan for Salaried Employees or on or after age 58 with approval of the Corporation's Board of Directors under conditions whereby he is entitled to receive an immediate pension under the Corporation's Pension Plan for Salaried Employees or if he would be entitled to receive such a pension but for the fact that he has not had the necessary years of continuous service with the Corporation, (ii) becomes totally disabled within the meaning of the Corporation's long-term disability insurance plan (and the term "total disability" as used herein refers to such a disability) or (iii) dies while actively employed by the Corporation or a subsidiary or after becoming totally disabled as described in clause (ii) immediately above and while still receiving disability payments for such disability or during the initial waiting period before the disability payments commence. If a participant retires prior to his 62nd birthday, but after attaining age 58, or he recovers from total disability status before completion of his 120 month payment period, such supplemental or continuing pension income may be paid commencing at his age 62 or may continue to be paid after the termination of disability status, but only at the option and in the sole discretion of the Corporation's Board of Directors (but without intending in a disability situation to affect the rights of a participant or others as otherwise provided herein or his retirement or death to receive payments under the Plan). 3. TERMINATION OF PARTICIPATION. Except as provided in the last sentence of section 2 hereof if a designated participant is discharged, voluntarily quits, retires on a deferred vested retirement pension, or if his employment is terminated for any reason other than total disability, normal retirement or early retirement on or after his 58th birthday or death, his participation in the Plan will immediately terminate. 4. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Corporation. The Board of Directors shall, in its sole discretion, select from the officers and key employees of the Corporation and its subsidiaries (including officers and employees who are directors of the Corporation) those persons who shall be designated to participate in the Plan. No officer or employee shall have any right to be designated as a participant except as the Board of Directors in its sole discretion shall determine. The Board of Directors may, in its sole discretion, increase benefits payable pursuant to the Plan to any designated participants after they become members of the Plan. The Board of Directors shall determine the manner in which payments are to be reduced following retirement or death of a participant as a result of prior payments made during the participant's total disability, although generally the reduction would be applied ratably over the entire payment period so as to provide an even payment stream to the payment recipient. Each officer and key employee designated as a participant in this Plan shall enter into a written agreement with the Corporation, or employing subsidiary, containing appropriate terms and conditions consistent with the provisions of this Plan, including a provision that the participant will not compete with the Corporation or its subsidiaries for a ten year period following his retirement, or onset of total disability, without the written consent of the Corporation. 5. INSURANCE. In order to insure that funds will be available to make or repay the Corporation for the supplemental pension payments, the Corporation and its subsidiaries may purchase insurance on the lives of the designated participants. Any such insurance policies will be owned by, and will name as beneficiary, the Corporation or the employing subsidiary, as the case may be. 6. AMENDMENT; TERMINATION. This Plan shall continue in effect until amended or terminated by the Corporation's Board of Directors. Any such amendment or termination shall not adversely affect any agreement theretofore entered into with a designated participant. Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results could differ materially from those encompassed within such forward-looking statements as a result of various factors, certain of which are described below. FINANCIAL OVERVIEW During 1997, Allegheny Teledyne Incorporated and subsidiaries (the "Company") continued to build upon the operating and financial strengths created when Allegheny Ludlum Corporation ("Allegheny Ludlum") and Teledyne, Inc. ("Teledyne") combined in August of 1996. * Sales from continuing operations increased to $3,647 million despite a severe decline in commodity stainless steel prices. * Operating profit improved 5 percent to $453 million or 12 percent of sales. * Corporate expenses declined 23 percent to $31 million as a result of consolidating headquarter operations in Pittsburgh, Pennsylvania. * Cash from operating activities continued strong at $257 million, up from $233 million in 1996. Capital spending totaled $112 million, which included $96 million in purchases of property, plant and equipment and the investment of $13 million in a joint venture in China to produce stainless steel. * The Company repurchased 3.8 million shares of its common stock at a cost of $108 million. The Company expects free cash flow to be consistently strong. This should provide sufficient financial resources for the Company to capitalize on new profitable growth opportunities while keeping its strong credit rating and access to low cost capital markets. During 1997, the Company repaid $110 million of debt. With net debt at 22% of total capitalization, the Company is well-positioned financially to carry through on its strategic plans. The Company's debt structure has several important attributes. First, 46% of long-term debt has a maturity of 28 years and a fixed rate of 6.95%. Second, the Company's revolving credit agreement has a five-year maturity, which gives significant stability to nearer term debt arrangements. Finally, low cost interest rate pricing alternatives currently give the Company an after-tax blended cost to borrow of approximately 3.3%. This low cost incremental liquidity of $408 million on available bank lines at December 31, 1997, is an important strategic advantage for the Company. ACQUISITIONS AND DIVESTITURES OREGON METALLURGICAL CORPORATION In October 1997, the Company announced that it had entered into a definitive merger agreement to acquire Oregon Metallurgical Corporation ("OREMET") in a transaction valued at $553 million using December 31, 1997 values. Under the terms of the merger agreement, each outstanding share of OREMET common stock will be converted into 1.296 shares of Allegheny Teledyne common stock. OREMET is an integrated producer and distributor of titanium sponge, ingot, mill products and castings for use in the aerospace, industrial, recreational, and military markets with 850 employees. It operates manufacturing and finishing facilities in Oregon and Pennsylvania and has nine service centers in the United States, with additional centers in the United Kingdom, Germany, Singapore, and Canada. The merger is expected to be tax-free to OREMET shareholders and will be accounted for under the pooling of interest method. The following table shows unaudited pro forma sales for the year ended December 31, 1997, after giving effect to the proposed acquisition: (In millions) Business Segment: Sales % of Total --------------------------------------------------- Specialty Metals - Commodity stainless steel $ 573.5 14.6% - Premium stainless steel 402.0 10.2 - Titanium 449.6 11.4 - Nickel-based superalloys 278.6 7.1 - Other specialty metals 515.6 13.1 --------------------------------------------------- Subtotal 2,219.3 56.4 Aerospace and Electronics 927.0 23.6 Industrial 532.0 13.5 Consumer 253.8 6.5 --------------------------------------------------- Total Continuing Operations 3,932.1 100.0% --------------------------------------------------- Operations sold or held for sale 98.0 --------------------------------------------------- Total Sales $4,030.1 --------------------------------------------------- ---------- 21 Combined net income and basic and diluted earnings per share of the two companies, based on unaudited pro forma financial results for the year ending December 31, 1997, were $328.8 million, $1.67 and $1.64 per share, respectively. Combined assets totaled $2.9 billion. Unaudited pro forma combined net equity was nearly $1.2 billion; net debt to total capitalization improved to 18 percent. The effect of conforming accounting policies is not expected to be material. The transaction is subject to the approval of the shareholders of OREMET, as well as other customary closing conditions. The meeting of OREMET's shareholders to vote on the merger is scheduled to be held on March 24, 1998. AEROSPACE DIVISION OF SHEFFIELD FORGEMASTERS In February 1998, the Company acquired the assets of the aerospace division of Sheffield Forgemasters Limited, a private company in the United Kingdom, for approximately $110 million in an all-cash transaction. Sheffield Forgemasters' aerospace division consists of three companies in the United Kingdom as well as two sales companies in the United States: * Special Melted Products Limited, which produces high integrity vacuum melted and remelted steel and nickel alloys in various forms; * Jessop Saville Limited, which produces non-magnetic drill collars and downhole components for the oil and gas industry; and * Commercial Testing Services Limited, which offers high technology testing services to the steel and related metals manufacturing industries. The acquisition of these companies is expected to provide significant support to the Company's high performance metals businesses, primarily Allvac, as well as enhance service to customers by improving sales and distribution of nickel-based alloys and titanium in Europe. The acquisition provides additional vacuum melting, vacuum consumable remelting, electroslag remelting, and forging capacity, which will complement Allvac's facilities. The division's GFM forging machine is one of the largest in the world. AGREEMENTS WITH BETHLEHEM STEEL CORPORATION In January 1998, Bethlehem Steel Corporation ("Bethlehem") and the Company jointly announced that they had entered into three agreements that would become effective after Bethlehem closes its previously announced acquisition of Lukens Inc. ("Lukens"). Under these agreements, Bethlehem would provide the Company with conversion services for stainless steel hot bands and coiled plate wider than the Company can currently produce; the Company would purchase certain assets that Lukens uses in the manufacture of stainless steel products; and the Company would supply hot roll bands to Bethlehem for further processing on the stainless steel coil finishing facilities that Lukens currently owns. Under the conversion agreement, Bethlehem has agreed, for a 20-year period, to provide the Company with up to 15 percent of the available time on Lukens' Coatesville, Pennsylvania electric furnace melt shop and caster and Lukens' Conshohocken, Pennsylvania Steckel mill for the melting, casting and rolling of the Company's wide stainless steel products. Under the asset sales agreement, the Company would acquire certain assets of Lukens for $175 million. These assets include the Houston, Pennsylvania plant of Lukens' Washington Steel Division, which is used for the melting, casting and rolling of stainless steel hot bands; the wide anneal and pickle line recently installed at Lukens' Massillon, Ohio plant; and the vacuum-oxygen decarburization unit used in the refining of stainless steel at Lukens' Coatesville, Pennsylvania plant. Under the hot band supply agreement, the Company would supply Bethlehem with up to 150,000 tons of stainless bands for further processing at Lukens' stainless cold finishing facilities at its Washington, Pennsylvania and Massillon plants until Bethlehem sells these facilities, as previously announced. The agreements are subject to the completion of Bethlehem's acquisition of Lukens as well as customary closing conditions. It is anticipated that the agreements will be effective and that the asset purchases will be closed soon after Bethlehem's acquisition of Lukens is consummated. AEROTRONICS CONTROLS In November 1997, the Company acquired a controlling interest in Aerotronics Controls, Inc. ("ACI"), a Connecticut-based startup company specializing in the design and development of electronic engine controls and management systems for piston aircraft engines. The microprocessor-based products under development by ACI are designed to modernize the engine management systems of both new and existing piston-powered light aircraft, including those powered by engines produced by Teledyne Continental Motors, an Allegheny Teledyne company. Piston aircraft engines for light aircraft currently operate with mechanical ignition systems and pilot-controlled fuel scheduling. The incorporation of microprocessor-based products being developed by ACI on piston-powered light aircraft is designed to yield improved fuel efficiencies, emissions reduction, reduced pilot workload, and to reduce engine maintenance cost induced by variations in pilot operating patterns. ACI expects to certify and begin production of initial product offerings within approximately two years. ---------- 22 DIVESTITURES In 1997, the Company announced a program of divesting businesses which did not meet long-term criteria for critical mass, strategic fit and opportunities for growth. During the year the Company sold six businesses which manufactured collapsible metal and laminate packaging tubes, thread cutting and rolling machines, electric heating elements, metal dies and plastic compression molds, welded stainless tubular products, and operated job training centers for the U.S. government. Net after-tax proceeds from sales of these non-strategic businesses together with proceeds from sales of investments, surplus real estate and Company aircraft totaled $82.4 million in 1997. The Company continues to work on the divestiture of other non-strategic businesses and the sale of surplus real estate holdings. RESULTS OF OPERATIONS The Company's sales from continuing businesses were $3.6 billion in 1997 and 1996 and $3.7 billion in 1995. Foreign sales represented approximately 17% of sales in 1997 and 1996 and 15% of total sales in 1995. Sales under contracts with the U.S. Government, which included contracts with the Department of Defense, represented approximately 14%, 18%, and 19% of total sales in 1997, 1996, and 1995, respectively. Defense sales represented approximately 9%, 12%, and 15% of total sales in 1997, 1996, and 1995, respectively. Sales and operating profit for the Company's four business segments are presented separately below and in Note 11 of the Notes to Consolidated Financial Statements. Certain amounts for 1996 and 1995 have been reclassified to conform with the 1997 presentation. SPECIALTY METALS (In millions) 1997 % Change 1996 % Change 1995 ---------------------------------------------------------------------------------------------------------- Sales from Continuing Operations $1,934.3 1% $1,915.7 (7)% $2,070.3 ---------------------------------------------------------------------------------------------------------- Operating Profit 267.4 -- 268.0 (9)% 294.1 ---------------------------------------------------------------------------------------------------------- Operating Profit as a Percentage of Sales 13.8% 14.0% 14.2% ---------------------------------------------------------------------------------------------------------- Foreign Sales as a Percentage of Sales 11.7% 10.4% 10.7% ---------------------------------------------------------------------------------------------------------- 1997 COMPARED TO 1996 Sales for the specialty metals segment increased 1% and operating profit remained virtually unchanged in 1997 compared to 1996, despite an increasingly difficult pricing environment for stainless steel commodity grades and a $4.9 million charge for environmental expenses. Tight operating cost controls remained in effect throughout the specialty metals segment. Sales of Allegheny Ludlum and Rodney Metals, which consist primarily of flat-rolled products, declined 6% in 1997. Tons shipped increased 1% in 1997, but sales declined due to the significant pricing pressure in commodity stainless steel products. Tons shipped in 1997 were 542,000 compared to 535,000 in 1996. Operating profit declined 22% reflecting the impact of European and Asian pricing pressure and increased imports in the U.S. markets. Average selling prices of flat-rolled specialty materials declined to $2,380 per ton in 1997 from $2,568 in 1996. Operating profit, excluding the environmental charge, and sales from businesses other than flat-rolled products increased 51% and 19%, respectively, compared to 1996. These results reflected strong demand from commercial aerospace and chemical processing industries for specialized metals such as nickel-based superalloys, titanium, niobium and zirconium. The Company invested $12.7 million in 1997 and has invested $19.2 million to-date in a Chinese joint venture, Shanghai STAL Precision Stainless Steel Limited Company, and plans to invest approximately $6 million in 1998. Allegheny Ludlum own 60% of the venture. It is expected that the plant being constructed by the joint venture will become operational in December 1998. In February 1998, an early settlement was reached on a new three-year labor agreement covering United Steelworkers of America union members working at Allegheny Ludlum plants in Pennsylvania, New York, Indiana, and Connecticut which is effective through June 30, 2001. 1996 COMPARED TO 1995 Sales and operating profit for the specialty metals segment declined 7% and 9%, respectively, in 1996 compared to 1995. Strong demand by commercial aerospace and industrial markets for highly specialized metals, such as nickel-based superalloys and titanium, and improved profitability of zirconium products were offset by weak selling prices for commodity flat-rolled stainless steel. Sales of Allegheny Ludlum and Rodney Metals, which consisted primarily of flat-rolled products, declined 14% in 1996. Lower shipments, primarily at Allegheny Ludlum, coupled with significant pricing pressure in commodity stainless steel products caused this sales decline. Tons shipped in 1996 were 535,000 compared to a record 589,000 in 1995. ---------- 23 Operating profit declined 31% reflecting the impact of European and Asian pricing pressure and increased imports in the U.S. markets. Average selling prices of flat-rolled specialty materials declined to $2,568 per ton in 1996 from a high of $2,725 in 1995. In addition, raw material surcharges declined throughout 1996 and were virtually eliminated by year-end. Raw material costs decreased in 1996 but only partially offset lower selling prices of commodity products. Allegheny Ludlum's two unplanned equipment outages in the first quarter of 1996 also contributed to the decline in operating profit. Sales and operating profit at Allvac increased substantially in 1996 primarily due to increased shipments and higher average sales prices for nickel-based and titanium-based alloys. The sales price increase reflected strong demand from commercial aerospace, biomedical and recreation markets, and was supplemented with continuing cost containment efforts. Operating results at Wah Chang also increased substantially in 1996 primarily due to increased sales, especially of titanium products, and cost reduction efforts begun in the fourth quarter of 1995. Titanium products benefited from significant sales increases primarily due to the improved commercial aerospace industry and the increasing use of titanium in recreational products. The profitability of zirconium products benefited from favorable sales mix shifts, lower raw material costs and price increases. Earnings from niobium products increased primarily due to lower processing costs and lower cost foreign-sourced raw materials. AEROSPACE AND ELECTRONICS (In millions) 1997 % Change 1996 % Change 1995 ---------------------------------------------------------------------------------------------------------- Sales from Continuing Operations $927.0 (4)% $970.0 8% $897.1 ---------------------------------------------------------------------------------------------------------- Operating Profit 90.3 (10)% 100.4 18% 85.1 ---------------------------------------------------------------------------------------------------------- Operating Profit as a Percentage of Sales 9.7% 10.4% 9.5% ---------------------------------------------------------------------------------------------------------- U.S. Government Sales as a Percentage of Sales 46.2% 56.0% 54.1% ---------------------------------------------------------------------------------------------------------- Foreign Sales as a Percentage of Sales 18.7% 21.0% 22.7% ---------------------------------------------------------------------------------------------------------- 1997 COMPARED TO 1996 Sales for the aerospace and electronics segment decreased 4% and operating profit decreased 10% in 1997 compared to 1996. Teledyne Ryan Aeronautical experienced declines in sales and operating profit primarily due to the scheduled wind-down of the current phase of the Global Hawk High Altitude Endurance Unmanned Aerial Surveillance/ Reconnaissance Vehicle program and the completion in 1996 of a contract to supply mid-range unmanned aerial vehicles. In September 1997, Ryan received authorization from the Pentagon to build two additional Global Hawk vehicles and to begin procuring certain items for a fifth vehicle. In 1997, The Boeing Company notified Ryan that it has decided to terminate the long-standing agreement with Ryan to fabricate the Apache helicopter fuselage. Future business for this product from Boeing appears unlikely. Operating results declined at Teledyne Brown Engineering due to lower shipments and funding levels on defense and NASA contracts and costs associated with restructuring its operations. Nonrecurring expenses, primarily research and development-related expenses for avionics, resulted in declines in operating profit at Teledyne Controls, a business unit of Teledyne Electronic Technologies. Teledyne Electronic Technologies continued to be the largest contributor to the segment's sales and profit for 1997. Demand for electromechanical relays, circuit board contract manufacturing, and microelectronic hybrid products paced these results. 1996 COMPARED TO 1995 Sales for the aerospace and electronics segment increased 8% and operating profit increased 18% in 1996 compared to 1995. Sales increased in development work on the Global Hawk unmanned aerial vehicle and in electronic devices, electromechanical relays and avionics for commercial customers. Sales also improved in engineering services related to the environmental cleanup of chemical munitions and engines for the general aviation market. These sales improvements were partially offset by the scheduled wind-down of a phase of the U.S. Apache helicopter program and by the completion of contracts to supply electronic countermeasure equipment for the international market and fabricated products to the U.S. Government. Operating profit for the segment benefited from the increase in sales and improved profitability on a contract to supply mid-range unmanned aerial vehicles. ---------- 24 INDUSTRIAL (In millions) 1997 % Change 1996 % Change 1995 ---------------------------------------------------------------------------------------------------------- Sales from Continuing Operations $532.0 3% $515.7 11% $465.8 ---------------------------------------------------------------------------------------------------------- Operating Profit 60.7 25% 48.5 23% 39.3 ---------------------------------------------------------------------------------------------------------- Operating Profit as a Percentage of Sales 11.4% 9.4% 8.4% ---------------------------------------------------------------------------------------------------------- Foreign Sales as a Percentage of Sales 35.4% 36.6% 25.1% ---------------------------------------------------------------------------------------------------------- 1997 COMPARED TO 1996 Sales for the industrial segment increased 3% and operating profit increased 25% in 1997 compared to 1996. Operating profit improved for Teledyne Metalworking Products, formerly Teledyne Advanced Materials. This business unit is the largest revenue and profit producer in this segment. It manufactures tungsten and tungsten carbide products, including cutting tools and inserts, for the global metal forming market. In addition, sales and operating profit improved at Portland Forge and at Teledyne Specialty Equipment's mining and construction equipment and material handling businesses. These improvements in results were offset by a decline in operating profit and sales at Casting Service due primarily to discontinuing certain product lines and costs associated with other restructuring activities. 1996 COMPARED TO 1995 Sales for the industrial segment increased 11% and operating profit increased 23% in 1996 compared to 1995. Improvements were primarily the result of the acquisition of the European-based Stellram Group, a manufacturer of high precision milling, boring and drilling systems, in December 1995. Increased sales of nitrogen cylinder systems for the metal stamping industry, improved operating efficiencies in the pressure relief valve business and cost reductions in the material handling business also contributed to the growth in the segment's operating profit. A decline in operating results at Portland Forge due to weakness in the heavy truck market partially offset these improvements. CONSUMER (In millions) 1997 % Change 1996 % Change 1995 ---------------------------------------------------------------------------------------------------------- Sales from Continuing Operations $253.8 11% $228.3 5% $218.2 ---------------------------------------------------------------------------------------------------------- Operating Profit 34.5 141% 14.3 42% 10.1 ---------------------------------------------------------------------------------------------------------- Operating Profit as a Percentage of Sales 13.6% 6.3% 4.6% ---------------------------------------------------------------------------------------------------------- Foreign Sales as a Percentage of Sales 18.0% 18.7% 19.2% ---------------------------------------------------------------------------------------------------------- 1997 COMPARED TO 1996 Sales for the consumer segment increased 11% and operating profit increased 141% in 1997 compared to 1996. The improvement in operating results at Teledyne Water Pik was particularly strong due to the favorable performance of new products and cost reductions. Sales and operating profit improved at Teledyne Laars primarily due to the successful integration of the pool products of Laars and Jandy Industries, a major United States producer of water flow control valves and electronic control systems for the swimming pool industry which was acquired in 1996, and the introduction of a new pool heater product. 1996 COMPARED TO 1995 Sales for the consumer segment increased 5% and operating profit increased 42% in 1996 compared to 1995. Sales improved primarily due to the acquisition of Jandy Industries. Residential and commercial heating systems and home water treatment products also contributed to the improvement in sales. Operating profit for the segment increased as a result of the acquisition of Jandy and reduced product introduction expenses in 1996, which were partially offset by costs associated with discontinuing products and restructuring manufacturing facilities and by a settlement of patent litigation. ---------- 25 MERGER AND RESTRUCTURING COSTS The Company recorded charges of $11.2 million in 1997 and $57.5 million in 1996 for severance, financial advisory, legal, accounting, and other costs associated with the combination of Allegheny Ludlum and Teledyne. CORPORATE EXPENSES Corporate expenses declined to $31.0 million in 1997 from $40.1 million in 1996 and $47.7 million in 1995, excluding a one-time gain discussed below. The decline in 1997 resulted primarily from the consolidation and restructuring of the Allegheny Ludlum and Teledyne corporate operations and the continued focus on cost controls. The decline in 1996 resulted from a reduction in legal and compliance expenses. In 1995, the New Piper Aircraft, Inc. emerged from bankruptcy with the Company having exchanged its major creditor position for 24.2% equity ownership and an option to purchase an additional 24.2%. As a result, the Company recognized a gain of $5.9 million in 1995. OPERATIONS SOLD OR HELD FOR SALE Income from operations sold or held for sale in 1997 included pretax gains of $18.1 million on the divestitures of six businesses which operated job training centers for the U.S. Government and which manufactured collapsible metal and laminate packaging tubes, thread cutting and rolling machines, electric heating elements, metal dies and plastic compression molds, and welded stainless tubular products, $27.6 million on the sale of the Company's investment in Semtech Corporation common stock, and $17.3 million on the sale of the Company's investment in Nitinol Development Corporation. In addition, operating results for operations sold or held for sale included a charge of $5.3 million to write off the Company's investment in a research and development venture in 1997 and charges of $6.8 million in 1997 and $7.7 million in 1996 to settle certain U.S. Government contracting matters relating to former Teledyne businesses. Income from operations sold or held for sale in 1996 included pretax gains of $41.0 million on the sale of the Company's defense vehicle business and $20.3 million on the sale of surplus California real estate. For 1995, income from operations sold or held for sale included a pretax gain of $50.7 million on the sale of the Company's defense electronics systems business. These amounts are included in other income on the income statement. INCOME TAXES The Company's effective income tax rate was 37.4%, 41.1% and 37.2% in 1997, 1996 and 1995, respectively. The 1997 rate includes the effect of favorable adjustments to prior years' tax liabilities. The 1996 rate resulted from non-deductible business combination costs in 1996. The Company has determined, based on its history of operating earnings, expectations of future operating earnings and potential tax planning strategies, that it is more likely than not that the deferred income tax assets at December 31, 1997 will be realized. FINANCIAL CONDITION AND LIQUIDITY In 1997, cash generated from operations of $256.7 million, proceeds from the sales of businesses and investments of $142.8 million and proceeds from the exercise of stock options of $35.4 million were used to purchase treasury stock of $107.7 million, pay dividends of $112.2 million, invest $111.5 million in capital equipment and business expansion and reduce long-term debt by $109.8 million. Cash transactions plus cash on hand at the beginning of the year resulted in a cash position of $50.3 million at December 31, 1997. Working capital increased to $667.2 million at December 31, 1997 compared to $614.0 million at the end of 1996. The current ratio increased to 2.2 in 1997 from 2.0 in 1996. The increase in working capital was primarily due to higher inventory levels related to increased demand for high performance superalloys and lower accrued liabilities. The Company redeemed the Teledyne, Inc. 7% subordinated debentures on September 23, 1997. Payment was made in an amount equal to 100% of the principal amount of the debentures, in the aggregate amount of $19.5 million, plus accrued interest to the redemption date. The Company's debt to capitalization ratio declined to 25% in 1997 from 34% in 1996. The Company's net debt to total capitalization ratio declined to 22% in 1997 from 31% in 1996. Total capital expenditures for 1998 are expected to approximate $150 million with the largest item being $30 million (of the total cost of approximately $40 million) for a Sendzimir mill which is expected to go on stream at Allegheny Ludlum's Vandergrift, Pennsylvania plant in late 1999 and approximately $10 million (of the total cost of approximately $19 million) for the 60-inch wide upgrade of the anneal and pickle line at Allegheny Ludlum's West Leechburg, Pennsylvania plant which is expected to be completed by mid-1999. In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum were merged with overfunded defined benefit pension plans of Teledyne. The resulting pension plan is fully funded with assets significantly in excess of the projected benefit obligations. As a result, for the indefinite future, the Company does not anticipate that it will have to contribute to its defined benefit pension plan. Under current Internal Revenue Code regulations, certain amounts paid for retiree medical expenses may be reimbursed annually from the excess pension plan assets. In 1997, the Company recovered the pretax amount of $31.9 million under these regulations. While not affecting reported operating profit, cash flow increased by the after-tax effect of the recovered amount. ---------- 26 The Company believes that internally generated funds, current cash on hand and borrowings from existing credit lines will be adequate to meet foreseeable needs. In 1997, the Company repurchased 3.8 million shares of common stock at a cost of $107.7 million at per share prices ranging from $25-1/8 to $32-3/4. However, average common shares outstanding for 1997 are slightly higher than 1996 because share issuances upon stock option exercises exceeded share repurchases. The 12 million share repurchase program initiated earlier in 1997 was terminated October 31, 1997 in connection with the announced proposed acquisition of OREMET, which will be accounted for as a pooling of interests. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements will be adopted by the Company in 1998, and are not expected to have a material effect on the consolidated financial statements. OTHER MATTERS COSTS AND PRICING Although inflationary trends in recent years have been moderate, during the same period certain critical raw material costs have been volatile. The Company primarily uses the last-in, first-out method of inventory accounting which reflects current costs in the cost of products sold. The Company considers these costs, the increasing costs of equipment and other costs in establishing its sales pricing policies and has instituted raw material surcharges on certain of its products to the extent permitted by competitive factors in the marketplace. The Company continues to emphasize cost containment in all aspects of its business. HEDGING The Company uses derivative financial instruments from time to time to hedge ordinary business risks regarding foreign currencies on product sales and to partially hedge against volatile raw material cost fluctuations in the specialty metals segment. The Company believes that adequate controls are in place to monitor these activities, which are not financially material. ENVIRONMENTAL The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. The Company's reserves for environmental remediation totaled approximately $40 million at December 31, 1997. Based on currently available information, management does not believe future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. With respect to proceedings brought under the federal Superfund laws, or similar state statutes, the Company has been identified as a potentially responsible party at approximately 35 of such sites, excluding those at which it believes it has no future liability. The Company's involvement is very limited or de minimis at approximately 10 of these sites, and the potential loss exposure with respect to any of these 35 individual sites is not considered to be material. In 1996, AICPA Statement of Position 96-1, Environmental Remediation Liabilities, was issued which established accounting standards for recognition of environmental costs. This statement, which was adopted in 1997, did not have a material effect on the consolidated financial statements. For additional discussion of environmental matters, see Notes 1 and 14 of the Notes to Consolidated Financial Statements. GOVERNMENT CONTRACTS A number of the Company's subsidiaries perform work on contracts with the U.S. Government. Many of these contracts include price redetermination clauses, and most are terminable at the convenience of the government. Certain of these contracts are fixed-price or fixed-price incentive development contracts which involve a risk that costs may exceed those expected when the contracts were negotiated. Absent modification of these contracts, any costs incurred in excess of the fixed or ceiling prices must be borne by the Company. In addition, virtually all defense programs are subject to curtailment or cancellation due to the year-to-year nature of the government appropriations and allocations process. A material reduction in U.S. Government appropriations may have an adverse effect on the Company's business, depending upon the specific programs affected by any such reduction. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the effect of adjusting the current period earnings on a cumulative catch-up basis. When the current contract estimate indicates a loss, provision is made for the total anticipated loss. The Company obtains many U.S. Government contracts through the process of competitive bidding. There can be no assurance that the Company will continue to be successful in having its bids accepted. ---------- 27 Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. The False Claims Act permits a person to assert the rights of the U.S. Government by initiating a suit under seal against a contractor if such person purports to have information that the contractor falsely submitted a claim to the U.S. Government for payment. If it chooses, the U.S. Government may intervene and assume control of the case. Although government contracting claims may be resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. Given the extent of the Company's business with the U.S. Government, a suspension or debarment of the Company could have a material adverse effect on the future operating results and consolidated financial condition of the Company. However, although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. For additional discussion of government contract matters, see Note 14 of the Notes to Consolidated Financial Statements. IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS For the past several years, the Company has been working on modifying or replacing portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The year 2000 date is an issue that affects most businesses including suppliers and customers of the Company. The Company anticipates spending approximately $9 million in 1998 and may spend additional amounts in subsequent years to address the issue. Based upon internal assessments, formal communications with suppliers and customers with which the Company exchanges electronic data, and work completed to date, the Company expects that all necessary modifications will be complete prior to any significant impact on the Company's operating systems. FORWARD LOOKING AND OTHER STATEMENTS This annual report contains various "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent the Company's expectations or beliefs concerning various future events, include the following: statements concerning anticipated effects of the potential acquisition of OREMET, the acquisition of the aerospace division of Sheffield Forgemasters, the agreements with Bethlehem Steel Corporation and the acquisition of Aerotronics on earnings, cost savings and operations of the Company; net cash flow; aviation and aerospace industry trends; certain expected capital expenditures; computer software modification or replacement; the outcome of any government inquiries, litigation or other proceedings related to government contracts or other matters; and future environmental costs. These statements are based on current expectations that involve a number of risks and uncertainties, including those described under the captions "Other Matters -- Environmental" and "Other Matters -- Government Contracts." Other important factors that could cause actual results to differ from those in such forward-looking statements include the following: Demand for Specialty Metals. Demand for products of the Company's specialty metals businesses, which accounted for a significant portion of the Company's 1997 total sales and its 1997 total income, is cyclical because the industries in which customers of such businesses operate are cyclical and are subject to changes in general economic conditions, including decreases in the rate of consumption or use of their products due to economic recessions or due to increases in use or decreases in price of other materials which may be used in lieu of the materials they produce, national and international overcapacity, fluctuations in the value of the U.S. dollar against other currencies, and levels of lower priced imports, which affect market demand for specialty materials. From time to time, these industries have experienced significant downturns. Significant downturns in the domestic economy are believed to have adversely affected the results of operations of Allegheny Ludlum, Teledyne and OREMET from time to time during their respective histories. As a result, the Company's operating results could be subject to significant fluctuation. ---------- 28 Raw Materials for Specialty Metals. Certain of the principal raw materials used to produce specialty metals can be acquired only from foreign sources, some of which are located in countries that may be subject to unstable political and economic conditions which might disrupt supplies or affect the prices of these materials. Purchase prices of certain critical raw materials are volatile. As a result, the Company's operating results could be subject to significant fluctuation. Export Sales. Among the risks associated with export sales are export controls, changes in legal and regulatory requirements, policy changes affecting the markets for the Company's products, changes in tax laws and tariffs, exchange rate fluctuations, political and economic instability, accounts receivable collection and the seasonality of foreign sales. Any of these factors could have an adverse effect on the Company's results of operations. Acquisition and Disposition Strategy. The Company intends to continue to strategically position its businesses in order to improve its competitive posture by seeking specialty niches, expanding its global presence, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of existing businesses. Accordingly, the Company regularly considers acquisition and business combination opportunities as well as possible business dispositions, and its management from time to time holds discussions with management of other companies to explore such opportunities and possible dispositions. As a result, the businesses comprising the Company are subject to change. Uncertainties Relating to Synergies. There can be no assurance that the Company will be able to realize, or do so within any particular time frame, the cost reductions, cash-flow increases or other synergies expected to result from acquisitions and other transactions the Company has made or may make or generate additional revenue to offset any unanticipated inability to realize such expected synergies. Realization of the anticipated benefits of acquisitions and other transactions could take longer than expected and implementation difficulties and market factors could alter the anticipated benefits. Employees. The Company employs approximately 22,000 persons, 9,000 of whom are employed at companies in the specialty metals segment. Approximately 24% of the Company's workforce is covered by various union contracts, certain of which are described below. Approximately 400 employees at Allegheny Ludlum's Washington Plant are covered by a labor contract with the United Steelworkers of America ("USWA") which is effective through September 30, 1999. Substantially all of Allegheny Ludlum's 3,300 other production and maintenance employees are covered by a recently approved three-year labor contract between the Company and the USWA, which is effective through June 30, 2001. In addition, approximately 700 Wah Chang employees are covered by a labor contract with the USWA which is effective through October 10, 2000. Additional risk factors are described from time to time in the Company's filings with the Securities and Exchange Commission. ---------- 29 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions except per share amounts) DECEMBER 31, December 31, December 31, For the Years Ended 1997 1996 1995 ---------------------------------------------------------------------------------------------------------- SALES $ 3,745.1 $ 3,815.6 $ 4,048.1 ---------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 2,828.8 2,901.7 3,158.9 Selling and administrative expenses 484.1 515.5 479.0 Merger and restructuring costs 11.2 57.5 6.4 Interest expense, net 19.6 34.7 37.6 ---------------------------------------------------------------------------------------------------------- 3,343.7 3,509.4 3,681.9 ---------------------------------------------------------------------------------------------------------- Earnings before Other Income 401.4 306.2 366.2 Other Income 73.8 78.5 74.7 ---------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 475.2 384.7 440.9 Provision for Income Taxes 177.6 158.2 164.1 ---------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY LOSS 297.6 226.5 276.8 Extraordinary Loss on Redemption of Debt, Net of Income Tax Benefit -- (13.5) (2.9) ---------------------------------------------------------------------------------------------------------- NET INCOME 297.6 213.0 273.9 Dividends on Preferred Stock -- 2.0 1.6 ---------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 297.6 $ 211.0 $ 272.3 ---------------------------------------------------------------------------------------------------------- Basic Net Income per Common Share: Income before Extraordinary Loss $ 1.70 $ 1.28 $ 1.56 Extraordinary Loss -- (0.08) (0.02) ---------------------------------------------------------------------------------------------------------- BASIC NET INCOME PER COMMON SHARE $ 1.70 $ 1.20 $ 1.54 ---------------------------------------------------------------------------------------------------------- Diluted Net Income per Common Share: Income before Extraordinary Loss $ 1.67 $ 1.27 $ 1.53 Extraordinary Loss -- (0.08) (0.02) ---------------------------------------------------------------------------------------------------------- DILUTED NET INCOME PER COMMON SHARE $ 1.67 $ 1.19 $ 1.51 ---------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. --------- 30 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions except share and per share amounts) DECEMBER 31, December 31, 1997 1996 --------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 50.3 $ 62.5 Accounts receivable 518.0 522.5 Inventories 582.4 518.4 Deferred income taxes 37.0 70.1 Tax refund 9.4 -- Prepaid expenses and other current assets 31.6 26.3 --------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,228.7 1,199.8 Property, plant and equipment 687.7 731.4 Prepaid pension cost 379.7 352.5 Cost in excess of net assets acquired 169.9 177.1 Other assets 138.5 145.6 --------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,604.5 $ 2,606.4 --------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 247.5 $ 241.7 Accrued liabilities 314.0 344.1 --------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 561.5 585.8 Long-term debt 326.1 443.4 Accrued postretirement benefits 572.8 567.5 Other 144.4 138.2 --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,604.8 1,734.9 --------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, par value $0.10: authorized - 50,000,000 shares; issued - none -- -- Common stock, par value $0.10: authorized - 600,000,000 shares; issued - 176,346,720 in 1997 and 174,389,377 in 1996; outstanding - 174,329,604 shares in 1997 and 174,389,377 shares in 1996 17.6 17.4 Additional paid-in capital 290.7 246.6 Retained earnings 752.7 596.7 Treasury stock: 2,017,116 shares in 1997 (60.2) -- Other (1.1) 10.8 --------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 999.7 871.5 --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,604.5 $ 2,606.4 --------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. ---------- 31 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) DECEMBER 31, December 31, December 31, For the Years Ended 1997 1996 1995 --------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 297.6 $ 213.0 $ 273.9 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 98.5 105.3 110.9 Gains on sales of businesses (69.2) (64.5) (51.1) Deferred income taxes (5.7) 18.6 42.4 Extraordinary loss on redemption of debt -- 13.5 2.9 Change in operating assets and liabilities: Inventories (68.8) (67.1) (12.9) Accrued liabilities (43.5) (13.8) (30.8) Tax refund 37.7 -- -- Accrued income taxes 36.4 17.9 12.5 Prepaid pension costs (24.7) (41.8) (83.6) Accounts payable 10.6 21.3 (46.3) Long-term postretirement liability 5.3 11.6 (0.6) Accounts receivable (4.7) 13.0 (7.5) Other (12.8) 6.4 3.3 --------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 256.7 233.4 213.1 --------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from the sales of businesses and investments 112.1 124.8 69.0 Purchases of property, plant and equipment (96.3) (88.6) (93.8) Disposals of property, plant and equipment 30.7 16.0 14.8 Investment in ventures and purchases of businesses (15.2) (23.6) (43.2) Other (5.9) (9.3) (15.1) --------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 25.4 19.3 (68.3) --------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Payments on long-term debt and capital leases (114.2) (436.5) (114.9) Increase in long-term debt 4.4 290.5 167.3 --------------------------------------------------------------------------------------------------------- Net increase (decrease) in long-term debt (109.8) (146.0) 52.4 Dividends paid - common and preferred stock (112.2) (106.1) (57.1) Purchases of common stock (107.7) (23.7) (75.6) Exercises of stock options 35.4 13.9 6.4 Redemption of preferred stock -- (41.4) -- Other -- 0.5 0.8 --------------------------------------------------------------------------------------------------------- CASH USED IN FINANCING ACTIVITIES (294.3) (302.8) (73.1) --------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12.2) (50.1) 71.7 Cash and cash equivalents at beginning of year 62.5 112.6 40.9 --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 50.3 $ 62.5 $ 112.6 --------------------------------------------------------------------------------------------------------- NON-CASH TRANSACTIONS: Preferred stock dividends on common stock $ -- $ 8.3 $ 33.1 --------------------------------------------------------------------------------------------------------- Amounts presented on the Statements of Cash Flows may not agree to the corresponding changes in balance sheet items due to the accounting for purchases and sales of businesses, and the effects of foreign currency translation. The accompanying notes are an integral part of these statements. ---------- 32 ALLEGHENY TELEDYNE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions except per share amounts) Additional Common Paid-In Retained Treasury Stockholders' Stock Capital Earnings Stock Other Equity ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 $ 17.8 $ 319.4 $ 314.3 $ -- $ 3.9 $ 655.4 Net income -- -- 273.9 -- -- 273.9 Preferred stock dividends on common stock (Teledyne $0.31 per share) -- -- (33.1) -- -- (33.1) Cash dividends on common and preferred stock (Allegheny Ludlum $0.49 per common share, Teledyne $0.21 per common share and $0.60 per preferred share) -- -- (57.1) -- -- (57.1) Employee stock plans -- 11.6 0.1 -- -- 11.7 Purchase and cancellation of common stock (0.4) (75.2) -- -- -- (75.6) Increase in net unrealized appreciation -- -- -- -- 9.9 9.9 Currency translation adjustment -- -- -- -- 0.7 0.7 ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 17.4 255.8 498.1 -- 14.5 785.8 ------------------------------------------------------------------------------------------------------------- Net income -- -- 213.0 -- -- 213.0 Preferred stock dividends on common stock (Teledyne $0.08 per share) -- -- (8.3) -- -- (8.3) Cash dividends on common and preferred stock (Allegheny Teledyne $0.16 per common share, Allegheny Ludlum $0.42 per common share, Teledyne $0.44 per common share and $1.20 per preferred share) -- -- (106.1) -- -- (106.1) Employee stock plans -- 14.5 -- -- -- 14.5 Purchase and cancellation of common stock -- (23.7) -- -- -- (23.7) Decrease in net unrealized appreciation -- -- -- -- (1.6) (1.6) Currency translation adjustment -- -- -- -- (2.1) (2.1) ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 17.4 246.6 596.7 -- 10.8 871.5 ------------------------------------------------------------------------------------------------------------- Net income -- -- 297.6 -- -- 297.6 Cash dividends on common stock ($0.64 per common share) -- -- (112.2) -- -- (112.2) Employee stock plans 0.2 44.1 (29.4) 47.5 -- 62.4 Purchase of common stock -- -- -- (107.7) -- (107.7) Decrease in net unrealized appreciation -- -- -- -- (7.3) (7.3) Currency translation adjustment -- -- -- -- (4.6) (4.6) ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 $ 17.6 $290.7 $752.7 $(60.2) $ (1.1) $999.7 ------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. ---------- 33 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS ALLEGHENY TELEDYNE INCORPORATED We have audited the accompanying consolidated balance sheets of Allegheny Teledyne Incorporated and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1995 financial statements of Teledyne, Inc., a wholly owned subsidiary, which statements reflect total revenues constituting 63.1% of the related consolidated total for the year ended December 31, 1995. Those statements were audited by other auditors whose report thereon dated January 13, 1996 has been furnished to us, and our opinion, insofar as it relates to data included for Teledyne, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allegheny Teledyne Incorporated at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1996 the Company changed its method of accounting for depreciation. /s/ ERNST & YOUNG LLP --------------------- Ernst & Young LLP Pittsburgh, Pennsylvania January 19, 1998 ---------- 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Allegheny Teledyne Incorporated ("Allegheny Teledyne") and its subsidiaries. As described in Note 2, on August 15, 1996, Allegheny Ludlum Corporation ("Allegheny Ludlum") and Teledyne, Inc. ("Teledyne") combined to form Allegheny Teledyne. The combination was accounted for under the pooling of interests method of accounting and these consolidated financial statements reflect the combined financial position, operating results and cash flows of Allegheny Ludlum and Teledyne as if they had been combined for all periods presented. Significant intercompany accounts and transactions have been eliminated. Unless the context requires otherwise, the "Company" refers to Allegheny Teledyne and its subsidiaries. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Management believes that the estimates are reasonable. CASH EQUIVALENTS Marketable securities with original maturities of three months or less are included in cash equivalents. The carrying amounts approximate market. ACCOUNTS RECEIVABLE Receivables are presented net of a reserve for doubtful accounts of $17.9 million at December 31, 1997 and $13.0 million at December 31, 1996. The Company markets its products to a diverse customer base, principally throughout the United States. Trade credit is extended based upon evaluations of each customer's ability to perform its obligations, which are updated periodically. INVENTORIES Inventories are stated at the lower of cost (last-in, first-out; first-in, first-out and average cost methods) or market, less progress payments. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. PROPERTY AND EQUIPMENT Property, plant and equipment are carried at cost. The straight-line method of depreciation was adopted for all property placed into service after July 1, 1996. For buildings and equipment acquired prior to July 1, 1996, depreciation is computed using a combination of accelerated and straight-line methods. The Company believes the method adopted on July 1, 1996 more appropriately reflects its financial results by better allocating costs of new property over the useful lives of these assets. In addition, the method more closely conforms with that prevalent in the industries in which the Company operates and with that used by Allegheny Ludlum. The effect of this change on net income for 1996 was not material. COST IN EXCESS OF NET ASSETS ACQUIRED Cost in excess of net assets acquired related to businesses purchased after November 1970 is being amortized on a straight-line basis over periods not exceeding 40 years. FINANCIAL INSTRUMENTS The fair values of financial instruments approximated their carrying values at December 31, 1997. Fair values have been determined through information obtained from quoted market sources and management estimates. The Company's investments in debt and equity securities are classified as available-for-sale and are reported at fair values, with net unrealized appreciation and depreciation on investments reported as a separate component of stockholders' equity. ENVIRONMENTAL Costs that mitigate or prevent future environmental contamination or extend the life, increase the capacity or improve the safety or efficiency of property utilized in current operations are capitalized. Other costs that relate to current operations or an existing condition caused by past operations are expensed. Environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable, but generally not later than the completion of the feasibility study or the Company's recommendation of a remedy or commitment to an appropriate plan of action. The accruals are reviewed periodically and, as investigations and remediations proceed, adjustments are made as necessary. Accruals for losses from environmental remediation obligations do not consider the effects of inflation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal Superfund sites or similar state-managed sites and an assessment of the likelihood that such parties will fulfill their obligations at such sites. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current ---------- 35 technology. Such estimates take into consideration the Company's prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of the Company's environmental experts in consultation with outside environmental specialists, when necessary. REVENUE RECOGNITION Commercial sales and revenue from U.S. Government fixed-price type contracts are generally recorded as deliveries are made or as services are rendered. For certain fixed-price type contracts that require substantial performance over a long time period before deliveries begin, sales are recorded based upon attainment of scheduled performance milestones. Sales under cost-reimbursement contracts are recorded as costs are incurred and fees are earned. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the effect of adjusting the current period earnings on a cumulative catch-up basis. When the current contract estimate indicates a loss, provision is made for the total anticipated loss. RESEARCH AND DEVELOPMENT Company-funded research and development costs ($60.3 million in 1997, $66.2 million in 1996, and $66.5 million in 1995), which include bid and proposal costs, are expensed as incurred. Costs related to customer-funded research and development contracts are charged to costs and expenses as the related sales are recorded. A portion of the costs incurred for Company-funded research and development is recoverable through overhead cost allowances on government contracts. INCOME TAXES Provision for income taxes included deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. NET INCOME PER COMMON SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is computed in a manner similar to fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements will be adopted by the Company in 1998, and are not expected to have a material effect on the consolidated financial statements. RECLASSIFICATIONS Certain amounts from prior years have been reclassified to conform with the 1997 presentation. NOTE 2. COMBINATION OF ALLEGHENY LUDLUM AND TELEDYNE -- On August 15, 1996, Allegheny Ludlum and Teledyne became wholly owned subsidiaries of Allegheny Teledyne. Allegheny Ludlum shareholders received one share of Allegheny Teledyne common stock for each one of their Allegheny Ludlum common shares. Teledyne stockholders received 1.925 shares of Allegheny Teledyne common stock for each of their Teledyne common shares. There were 174.2 million shares of Allegheny Teledyne issued in the combination of the two companies. Revenues and net income for the six months ended June 30, 1996 (the most recent interim period prior to the pooling) were $691.7 million and $39.6 million, respectively, for Allegheny Ludlum and $1.3 billion and $102.4 million, respectively, for Teledyne. Intercompany transactions prior to the combination were not material. The Company recorded merger and restructuring costs of $11.2 million ($6.8 million net of tax) and $57.5 million ($42.9 million net of tax) in 1997 and 1996, respectively, for financial advisory, legal, accounting, severance and other costs associated with the combination of the companies. ---------- 36 NOTE 3. INVENTORIES -- DECEMBER 31, December 31, (In millions) 1997 1996 --------------------------------------------------------------------------------------------------------- Raw materials and supplies $ 166.9 $ 153.8 Work-in-process 524.2 515.1 Finished goods 112.9 104.8 --------------------------------------------------------------------------------------------------------- Total inventories at current cost 804.0 773.7 Less allowances to reduce current cost values to LIFO basis (206.4) (229.6) Progress payments (15.2) (25.7) --------------------------------------------------------------------------------------------------------- TOTAL INVENTORIES $ 582.4 $ 518.4 --------------------------------------------------------------------------------------------------------- Inventories, before progress payments, determined on the last-in, first-out method were $531.4 million at December 31, 1997 and $423.3 million at December 31, 1996. The remainder of the inventory was determined using the first-in, first-out and average cost methods. These inventory values do not differ materially from current cost. During 1997, 1996, and 1995, inventory usage resulted in liquidations of last-in, first-out inventory quantities. These inventories were carried at the lower costs prevailing in prior years as compared with the cost of current purchases. The effect of these last-in, first-out liquidations was to increase net income by $7.3 million in 1997, $4.9 million in 1996, and $8.0 million in 1995. The Company enters into raw material (principally nickel) future contracts from time to time to hedge its exposure to price fluctuations. Gains and losses on hedged contracts are deferred and recognized in cost of sales upon expiration of the contract period. These contracts are not significant to the Company's total raw material purchases and are not material from a financial point of view. Inventories, before progress payments, related to long-term contracts were $16.2 million and $8.1 million at December 31, 1997 and 1996, respectively. Progress payments related to long-term contracts were $5.7 million and $8.5 million at December 31, 1997 and 1996, respectively. NOTE 4. LONG-TERM DEBT -- CREDIT AGREEMENTS In August 1996, Allegheny Teledyne entered into a credit agreement with a group of banks that provides for borrowings of up to $500 million on a revolving credit basis. The agreement, as extended, has a five-year term. Interest is payable at prime or other alternative interest rate bases, at the Company's option. The agreement provides for an annual facility fee of 0.075%. The agreement has various covenants that limit the Company's ability to dispose of properties and merge with another corporation. The Company is also required to maintain certain financial ratios as defined in the agreement that can also limit the amount of dividend payments and share repurchases. Under the most restrictive requirement, approximately 60% of the Company's retained earnings is currently free of restrictions pertaining to cash dividend distributions and share repurchases. The Company's subsidiaries also maintain credit agreements with various foreign banks which provide for additional borrowings of up to $58.5 million. These agreements provide for annual facility fees of 0.15%. Borrowings outstanding under the credit agreements are unsecured. Commitments under separate standby letters of credit outstanding were $42.1 million at December 31, 1997 and $38.3 million at December 31, 1996. DEBENTURES In 1997, Allegheny Teledyne redeemed the Teledyne 7% subordinated debentures. Payment was made in an amount equal to 100% of the principal amount of the debentures, in the aggregate amount of $19.5 million, plus accrued interest to the redemption date. In 1996, Allegheny Teledyne guaranteed the outstanding Allegheny Ludlum 6.95% debentures. In addition, utilizing $250 million from the credit agreement discussed above and $107 million from cash on hand, the Company redeemed the Teledyne 10% subordinated debentures. As a result, an extraordinary loss of $13.5 million, net of a tax benefit of $8.8 million, was recognized to write off the unamortized original issue discount. In 1995, $150 million of Allegheny Ludlum 6.95% debentures were issued. A portion of the proceeds from this issue was used to extinguish, at a premium to book value, $100 million of Allegheny Ludlum 5-7/8% convertible subordinated debentures, resulting in an extraordinary loss of $2.9 million, net of a tax benefit of $2.0 million. ---------- 37 Long-term debt at December 31, 1997 and 1996 was as follows: DECEMBER 31, December 31, (In millions) 1997 1996 --------------------------------------------------------------------------------------------------------- Credit agreements $ 150.1 $ 241.3 Allegheny Ludlum 6.95% debentures, due 2025 150.0 150.0 Industrial revenue bonds due 1998 through 2007 15.2 16.6 Capitalized leases and other 13.6 19.3 Teledyne 7% subordinated debentures -- 20.7 --------------------------------------------------------------------------------------------------------- 328.9 447.9 Current portion (2.8) (4.5) --------------------------------------------------------------------------------------------------------- Total long-term debt $ 326.1 $ 443.4 --------------------------------------------------------------------------------------------------------- The weighted average interest rate of borrowings outstanding under the credit agreements was 5.5% at December 31, 1997 and 5.2% at December 31, 1996. Scheduled maturities of long-term borrowings during the next five years are $2.8 million in 1998, $2.1 million in 1999, $1.5 million in 2000, $1.2 million in 2001, and $11.5 million in 2002. Scheduled repayments under revolving credit agreements are $45.1 million in 1999 and $105.0 million in 2002. Interest expense was $28.5 million in 1997, $48.5 million in 1996, and $50.6 million in 1995. Interest and commitment fees paid were $29.6 million in 1997, $48.5 million in 1996, and $48.1 million in 1995. NOTE 5. SUPPLEMENTAL BALANCE SHEET INFORMATION -- Cash and cash equivalents were as follows: DECEMBER 31, December 31, (In millions) 1997 1996 ---------------------------------------------------------------------------------------------------------- Cash (Gross of outstanding checks: 1997 - $22.5 million; 1996 - $30.6 million) $ 11.1 $ 24.3 Other short-term investments, at cost which approximates market 39.2 38.2 ---------------------------------------------------------------------------------------------------------- Total cash and cash equivalents $ 50.3 $ 62.5 ---------------------------------------------------------------------------------------------------------- Property, plant and equipment were as follows: DECEMBER 31, December 31, (In millions) 1997 1996 ---------------------------------------------------------------------------------------------------------- Land $ 37.3 $ 41.1 Buildings 266.0 281.4 Equipment and leasehold improvements 1,264.4 1,256.9 ---------------------------------------------------------------------------------------------------------- 1,567.7 1,579.4 Accumulated depreciation and amortization (880.0) (848.0) ---------------------------------------------------------------------------------------------------------- Total property, plant and equipment $ 687.7 $ 731.4 ---------------------------------------------------------------------------------------------------------- Accrued liabilities included salaries and wages of $79.1 million and $80.7 million in 1997 and 1996, respectively, and accrued severance costs of $5.6 million and $11.9 million in 1997 and 1996, respectively. ---------- 38 NOTE 6. REDEMPTION OF PREFERRED STOCK -- On August 14, 1996, all of the outstanding shares of the Teledyne Series E Cumulative Preferred Stock were redeemed at $15.60 per share. NOTE 7. STOCKHOLDERS' EQUITY -- PREFERRED STOCK Authorized preferred stock may be issued in one or more series, with designations, powers and preferences as shall be designated by the Board of Directors. At December 31, 1997, there were no shares of preferred stock issued. COMMON STOCK In connection with the combination of Allegheny Ludlum and Teledyne, Allegheny Teledyne assumed stock options and awards, as well as purchase and designation rights and related awards outstanding under stock-based compensation plans maintained by Allegheny Ludlum and Teledyne prior to the combination. In addition, Allegheny Teledyne's Board of Directors adopted the Allegheny Teledyne Incorporated 1996 Incentive Plan and the 1996 Non-Employee Director Stock Compensation Plan, which were approved by the stockholders on August 15, 1996. The 1996 Incentive Plan provides for awards of up to 9,000,000 shares of Allegheny Teledyne common stock to officers and key employees of the Company. A maximum of 700,000 shares or options to acquire shares may be issued under the 1996 Non-Employee Director Stock Compensation Plan to directors who are not employees of the Company. The Company accounts for its stock option plans in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB Opinion 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock at the date of the grant. If compensation cost for these plans had been determined using the fair-value method prescribed by FASB Statement No. 123, "Accounting for Stock-based Compensation," net income would have been reduced by $2.7 million, or $0.02 per share, $2.0 million, or $0.01 per share, and $0.3 million, with no impact on per share amounts, for the years ended December 31, 1997, 1996 and 1995, respectively. The impact on earnings per share is the same under both the basic and diluted methods for each of these years. Under FASB Statement No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1997 1996 1995 ---------------------------------------------------------------------------------------------------------- Expected Dividend Yield 2.5% 3.6% 3.9% Expected Volatility 31% 31% 31% Risk-Free Interest Rate 6.4% 6.4% 6.2% Expected Lives 8.0 8.0 8.0 Weighted-average fair value of options granted during year $ 8.74 $5.15 $3.82 ---------------------------------------------------------------------------------------------------------- Stock option transactions under the Company's employee plans are summarized as follows: 1997 1996 1995 ----------------------------------------------------------------------------------------------------------- WEIGHTED- Weighted- Weighted- NUMBER OF AVERAGE Number of Average Number of Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price ----------------------------------------------------------------------------------------------------------- Outstanding beginning of year 8,552,958 $12.42 7,937,884 $10.90 7,626,897 $10.51 Granted 110,000 $24.36 2,058,200 $16.57 1,207,301 $12.54 Exercised (3,626,713) $10.21 (1,074,512) $ 9.35 (723,339) $ 9.28 Cancelled (675,504) $12.67 (368,614) $11.75 (172,975) $11.31 ----------------------------------------------------------------------------------------------------------- Outstanding end of year 4,360,741 $14.52 8,552,958 $12.42 7,937,884 $10.90 ----------------------------------------------------------------------------------------------------------- Exercisable at end of year 1,987,947 $12.47 4,003,054 $10.49 3,500,875 $9.71 ----------------------------------------------------------------------------------------------------------- ---------- 39 Exercise prices for options outstanding as of December 31, 1997 ranged from $8.51 to $28.25. The weighted-average remaining contractual life of those options is 7.6 years. In addition to the Company's stock option plans, at December 31, 1997, a maximum of 231,200 shares were issuable to 42 employees under the Allegheny Ludlum Performance Share Plan based on units awarded to such participants for the 1995-1996 award period, which are payable in three annual installments beginning in 1997. Compensation expense related to the various stock-based plans was $4.3 million in 1997, $5.5 million in 1996 and $10.0 million in 1995. NOTE 8. INCOME TAXES -- Provision for income taxes was as follows: (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Current - Federal $136.4 $114.6 $100.4 - State 24.8 19.0 17.3 - Foreign 8.5 6.0 4.0 --------------------------------------------------------------------------------------------------------- - Total 169.7 139.6 121.7 --------------------------------------------------------------------------------------------------------- Deferred - Federal 1.3 11.2 29.8 - State 6.2 7.2 12.6 - Foreign 0.4 0.2 -- --------------------------------------------------------------------------------------------------------- - Total 7.9 18.6 42.4 --------------------------------------------------------------------------------------------------------- Provision for income taxes $177.6 $158.2 $164.1 --------------------------------------------------------------------------------------------------------- Income taxes paid $110.2 $115.4 $ 55.0 --------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary loss included income from domestic operations of $452.4 million in 1997, $366.6 million in 1996 and $437.1 million in 1995. The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate: 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Federal tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefit 4.3 4.3 4.4 Capitalization of merger and restructuring costs -- 1.8 -- Amortization of cost in excess of net assets acquired 0.3 0.3 0.3 Foreign sales corporation exemption (0.6) (0.6) (0.4) Other (1.6) 0.3 (2.1) --------------------------------------------------------------------------------------------------------- Effective income tax rate 37.4% 41.1% 37.2% --------------------------------------------------------------------------------------------------------- Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. The categories of assets and liabilities which have resulted in differences in the timing of the recognition of income and expense were as follows: ---------- 40 1997 1996 --------------------------------------------------------------------------------------------------------- Deferred Income Tax Assets --------------------------------------------------------------------------------------------------------- Postretirement benefits other than pensions $225.8 $223.2 Deferred compensation and other benefit plans 32.3 37.4 Self-insurance reserves 21.9 16.5 Long-term contracts 3.3 6.9 Other items 81.0 85.1 --------------------------------------------------------------------------------------------------------- Total deferred income tax assets 364.3 369.1 --------------------------------------------------------------------------------------------------------- Deferred Income Tax Liabilities --------------------------------------------------------------------------------------------------------- Pension asset 154.7 143.1 Bases of property, plant and equipment 112.2 110.8 Inventory valuation 15.8 15.2 Other items 10.1 26.3 --------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 292.8 295.4 --------------------------------------------------------------------------------------------------------- Net deferred income tax asset $ 71.5 $ 73.7 --------------------------------------------------------------------------------------------------------- NOTE 9. PENSION PLANS AND OTHER POSTEMPLOYMENT BENEFITS -- In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum were merged with over-funded defined benefit pension plans of Teledyne, and Allegheny Teledyne became the plan sponsor. The Company has defined benefit pension plans and defined contribution plans covering substantially all of its employees. Benefits under the defined benefit pension plans are generally based on years of service and/or final average pay. The Company funds the pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. Components of pension expense (income) for the Company's defined benefit plans included the following: Expense (Income) (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 36.3 $ 33.9 $ 28.4 Interest cost on benefits earned in prior years 130.9 124.1 121.8 Expected return on plan assets (206.7) (202.7) (164.1) Net amortization of unrecognized amounts (19.8) (22.3) (42.8) --------------------------------------------------------------------------------------------------------- Pension income $ (59.3) $ (67.0) $ (56.7) --------------------------------------------------------------------------------------------------------- Actual return on plan assets was income of $426.0 million, $28.8 million and $375.6 million in 1997, 1996 and 1995, respectively. Pension costs for defined contribution plans were $15.4 million in 1997, $16.2 million in 1996 and $14.9 million in 1995. Actuarial assumptions used to develop the components of pension expense (income) were as follows: 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Discount rate 7.25% 7.5% 7.9% Rate of increase in future compensation levels 3%-4.5% 3%-4.5% 3%-4.5% Expected long-term rate of return on assets 9.0% 8.6% 7.8% ---------- 41 Plan assets in excess of projected benefit obligation were as follows: DECEMBER 31, December 31, (In millions) 1997 1996 --------------------------------------------------------------------------------------------------------- Plan assets at fair value, primarily listed stocks, government securities and pooled investment funds $2,615.7 $2,359.2 --------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefit obligation 1,781.7 1,573.4 Non-vested benefit obligation -- 91.1 --------------------------------------------------------------------------------------------------------- Accumulated benefit obligation 1,781.7 1,664.5 Additional benefits related to future compensation levels 142.4 172.8 --------------------------------------------------------------------------------------------------------- Projected benefit obligation 1,924.1 1,837.3 --------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $ 691.6 $ 521.9 --------------------------------------------------------------------------------------------------------- DECEMBER 31, December 31, (In millions) 1997 1996 --------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation: Included in balance sheet: Prepaid pension cost $ 379.7 $ 352.5 Other long-term liabilities (10.4) (4.0) Not included in balance sheet: Unrecognized net gain due to experience different from that assumed and changes in the discount rate 276.9 90.5 Unrecognized net asset at adoption of SFAS No. 87, net of amortization 131.4 161.9 Unrecognized prior service cost (86.0) (79.0) --------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $ 691.6 $ 521.9 --------------------------------------------------------------------------------------------------------- Any reversion of pension plan assets to the Company would be subject to federal and state income taxes, substantial excise tax and other possible claims. Discount rates of 7.0% at December 31, 1997 and 7.25% at December 31, 1996 were used for the valuation of pension obligations. OTHER POSTRETIREMENT BENEFIT PLANS The Company sponsors several defined benefit postretirement plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. In certain plans, Company contributions towards premiums are capped based on the cost as of a certain date thereby creating a defined contribution. Cash from excess pension assets of $31.9 million in 1997 and $30.5 million in 1996 was transferred pre-tax under Section 420 of the Internal Revenue Code from the Company's defined benefit pension plans to the Company. The Internal Revenue Code permits transfers annually of an amount not to exceed the Company's actual expenditures on retiree health care benefits. While not affecting reported operating profit, cash flow increased by the after-tax effect of the transferred amount. Components of postretirement benefit expense included the following: Expense (Income) (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 7.8 $ 7.9 $ 6.9 Interest cost on benefits earned in prior years 43.4 46.1 46.7 Expected return on plan assets (8.4) (6.5) (4.7) Net amortization of unrecognized amounts (0.7) 2.3 0.5 --------------------------------------------------------------------------------------------------------- Postretirement benefit expense $42.1 $49.8 $49.4 --------------------------------------------------------------------------------------------------------- ---------- 42 Actual return on plan assets was $21.7 million in 1997, $5.4 million in 1996 and $4.8 million in 1995. Discount rates of 7.25% in 1997, 7.5% in 1996 and 7.7% in 1995 were used in determining the postretirement benefit expense. The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans was 8.21% in 1997 and was assumed to decrease to 5.00% in the year 2002 and remain at that level thereafter. The health care cost trend rate assumption had a significant effect on the amounts reported. If the assumed health care cost trend rates were increased by one percentage point in each year, this would increase the accumulated postretirement benefit obligation ("APBO") for health care plans at December 31, 1997 by $82.3 million and the postretirement benefit expense for 1997 by $6.7 million. The following table sets forth the postretirement benefit plans' combined funded status reconciled with the amounts recognized in the balance sheet: (In millions) 1997 1996 --------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $452.9 $441.7 Other fully eligible plan participants 82.2 72.5 Other active plan participants 133.4 121.9 --------------------------------------------------- Total accumulated postretirement benefit obligation 668.5 636.1 Less plan assets at fair value 79.6 52.5 --------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 588.9 583.6 Unrecognized net loss (32.8) (35.1) Unrecognized prior service cost 16.7 19.0 --------------------------------------------------- Accrued postretirement benefit cost $572.8 $567.5 --------------------------------------------------- The Company intends to make transfers of excess pension assets to the extent and for each year permitted under Section 420 of the Internal Revenue Code. Under the assumptions set forth above and assuming that the expiration date of Section 420 of the Internal Revenue Code is deferred, the present value of excess pension assets available for transfer under Section 420 is sufficient to fund more than 50% of the present value of the accumulated postretirement benefit cost of the Company as a whole including those attributable to each of its subsidiaries. At the end of 1997, approximately one-half of the plan assets for the postretirement benefit plans were invested in marketable securities and one-half in limited partnership funds. The Company's Chairman, President and Chief Executive Officer serves on the advisory boards of the limited partnership funds. The discount rates used in determining the APBO were 7.0% at December 31, 1997 and 7.25% at December 31, 1996. The expected long-term rate of return on plan assets ranged from 9% to 15% in 1997 and 1996. NOTE 10. DIVESTITURES AND ACQUISITIONS -- In 1997, the Company announced a program of divesting businesses which did not meet long-term criteria for critical mass, strategic fit and opportunities for growth. During the year, the Company sold six businesses which manufactured collapsible metal and laminate packaging tubes, (including Envases Comerciales S.A., which was acquired in December 1995), thread cutting and rolling machines, electric heating elements, metal dies and plastic compression molds, welded stainless tubular products, and operated job training centers for the U.S. government. In addition, the Company sold its equity interest in Nitinol Development Corporation. The pretax gain recognized on the sales of these non-strategic businesses was $35.4 million. The pretax proceeds from these sales totaled $77.2 million in 1997. The Company continues to work on the divestiture of other non-strategic businesses. In 1996, the Company sold its defense vehicle business. The pretax gain and proceeds on the sale of this business were $41.0 million and $59.2 million, respectively. In May 1996, the Company acquired Jandy Industries, a United States producer of water flow control valves and electronic control systems for the swimming pool industry. The business was purchased for $13.5 million in cash. In connection with the purchase, the Company acquired operating assets with a fair value of $20.9 million and assumed operating liabilities of $7.4 million. In 1995, the Company sold its defense electronic systems business, recognizing a pretax gain of $50.7 million. The pretax proceeds on this sale were $60.1 million. In January 1995, the Company acquired the material handling business of Kooi B.V., a Netherlands company that is a European supplier of material handlers. In December 1995, the Company acquired two businesses: Stellram Group, based in ---------- 43 Europe, manufacturers of high precision milling, boring and drilling systems primarily for the European market; and Envases Comerciales, S.A., a Costa Rican manufacturer of specialty packaging for pharmaceutical and food companies throughout Central America and Mexico. These three businesses were purchased for $59.5 million, consisting of $43.2 million in cash and the assumption of $16.3 million in debt. In connection with these purchases, the Company acquired operating assets with a fair value of $87.9 million and assumed operating liabilities of $28.4 million. NOTE 11. BUSINESS SEGMENTS -- Allegheny Teledyne is a group of technology-based manufacturing businesses serving worldwide customers with specialty metals for consumer, industrial and aerospace applications; commercial and government-related aerospace and electronics products; and industrial and consumer products. Information on the Company's business segments was as follows: (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Sales: Specialty metals $1,934.3 $1,915.7 $2,070.3 Aerospace and electronics 927.0 970.0 897.1 Industrial 532.0 515.7 465.8 Consumer 253.8 228.3 218.2 --------------------------------------------------------------------------------------------------------- Total continuing operations 3,647.1 3,629.7 3,651.4 Operations sold or held for sale 98.0 185.9 396.7 --------------------------------------------------------------------------------------------------------- Total sales $3,745.1 $3,815.6 $4,048.1 --------------------------------------------------------------------------------------------------------- The Company's backlog of confirmed orders was approximately $1.3 billion at December 31, 1997 and $1.2 billion at December 31, 1996. Backlog of the specialty metals segment was $631.9 million at December 31, 1997 and $578.0 million at December 31, 1996. (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Sales to the U.S. Government including direct sales as prime contractor and indirect sales as subcontractor: Specialty metals $ 47.0 $ 66.9 $ 37.3 Aerospace and electronics 428.1 543.1 485.5 Industrial and consumer 2.1 2.3 3.5 Operations sold or held for sale 31.9 70.4 234.1 --------------------------------------------------------------------------------------------------------- Total sales to U.S. Government $ 509.1 $ 682.7 $ 760.4 --------------------------------------------------------------------------------------------------------- Sales to the U.S. Government included sales to the Department of Defense of $342.6 million in 1997, $450.5 million in 1996 and $613.4 million in 1995. Total foreign sales were $647.6 million in 1997, $652.6 million in 1996 and $626.2 million in 1995. Of these amounts, sales by operations in the United States to customers in other countries were $471.5 million in 1997, $440.5 million in 1996 and $517.1 million in 1995. Sales between business segments, which were not material, generally were priced at prevailing market prices. ---------- 44 (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Operating profit: Specialty metals $267.4 $268.0 $294.1 Aerospace and electronics 90.3 100.4 85.1 Industrial 60.7 48.5 39.3 Consumer 34.5 14.3 10.1 --------------------------------------------------------------------------------------------------------- Total operating profit 452.9 431.2 428.6 Merger and restructuring costs (11.2) (57.5) (6.4) Corporate expenses (31.0) (40.1) (41.8) Interest expense, net (19.6) (34.7) (37.6) Operations sold or held for sale 66.9 68.6 90.8 Excess pension income 17.2 17.2 7.3 --------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary loss $475.2 $384.7 $440.9 --------------------------------------------------------------------------------------------------------- Operating results for operations sold or held for sale included pretax gains on the divestiture of certain non-strategic businesses and the related operating profit of those businesses. Also included was a gain in 1997 of $27.6 million on the sale of the Company's investment in Semtech Corporation common stock and a gain of $20.3 million in 1996 on the sale of surplus real estate in California. These amounts are included with other income in the statements of income for the respective periods. In addition, operating results for operations sold or held for sale included a charge of $5.3 million to write off the Company's investment in a research and development venture in 1997 and charges of $6.8 million in 1997 and $7.7 million in 1996 to settle certain U.S. Government contracting matters relating to former Teledyne businesses. Merger and restructuring expenses included proxy expenses in 1995. Excess pension income represents the amount of pension income in excess of amounts allocated to business segments to offset pension and other postretirement benefit expenses. (In millions) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Depreciation and amortization: Specialty metals $ 60.8 $ 65.4 $ 64.8 Aerospace and electronics 12.2 13.5 15.7 Industrial 12.6 14.0 12.2 Consumer 5.9 4.5 5.5 Corporate and operations sold or held for sale 7.0 7.9 12.7 --------------------------------------------------------------------------------------------------------- $ 98.5 $ 105.3 $ 110.9 --------------------------------------------------------------------------------------------------------- Capital expenditures: Specialty metals $ 48.4 $ 42.7 $ 54.6 Aerospace and electronics 15.2 16.1 13.3 Industrial 20.9 16.9 15.6 Consumer 7.4 7.0 5.2 Corporate and operations sold or held for sale 4.4 5.9 5.1 --------------------------------------------------------------------------------------------------------- $ 96.3 $ 88.6 $ 93.8 --------------------------------------------------------------------------------------------------------- Identifiable assets: Specialty metals $1,285.5 $1,244.6 $1,289.1 Aerospace and electronics 274.5 276.6 254.8 Industrial 249.8 250.6 192.9 Consumer 116.8 120.5 99.0 Corporate: Pension asset 379.7 352.5 314.9 Other 272.3 301.2 323.5 Operations sold or held for sale 25.9 60.4 154.7 --------------------------------------------------------------------------------------------------------- $2,604.5 $2,606.4 $2,628.9 --------------------------------------------------------------------------------------------------------- ---------- 45 NOTE 12. SUMMARIZED FINANCIAL INFORMATION OF ALLEGHENY LUDLUM AND TELEDYNE -- Summarized financial information for Allegheny Ludlum and Teledyne is presented below: BALANCE SHEETS: Allegheny Ludlum Teledyne December 31 December 31 (In millions) 1997 1996 1997 1996 ---------------------------------------------------------------------------------------------------------- Current assets $450.8 $450.8 $796.5 $748.0 Non-current assets 945.0 862.3 371.2 449.1 Current liabilities 171.1 196.7 383.5 394.4 Non-current liabilities 491.1 489.0 572.8 578.7 ---------------------------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS: Allegheny Ludlum Teledyne (In millions) 1997 1996 1995 1997 1996 1995 ---------------------------------------------------------------------------------------------------------- Sales $1,194.9 $1,277.8 $1,494.3 $2,554.5 $2,551.5 $2,553.8 Gross profit 168.9 223.5 234.2 730.8 676.6 655.0 Net income before extraordinary loss on redemption of debt 62.0 73.2 114.8 222.9 144.1 162.0 Net income 62.0 73.2 111.9 222.9 130.6 162.0 ---------------------------------------------------------------------------------------------------------- In 1996, the underfunded defined benefit pension plans of Allegheny Ludlum were merged with overfunded defined benefit pension plans of Teledyne, and Allegheny Teledyne became the plan sponsor. As a result, the summarized balance sheet information presented for Allegheny Ludlum and Teledyne does not include the Allegheny Teledyne net prepaid pension asset or the related deferred taxes. Solely for purposes of this presentation, pension income has been allocated to Allegheny Ludlum and Teledyne to offset pension and postretirement expenses which may be funded with pension assets. This allocated pension income has not been recorded in the financial statements of Allegheny Ludlum or of Teledyne. --------- 46 NOTE 13. EARNINGS PER SHARE -- The following table sets forth the computation of basic and diluted net income per common share: (In millions except per share amounts) Years ended December 31, 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Numerator: Income before Extraordinary Loss $297.6 $226.5 $276.8 Extraordinary Loss on Redemption of Debt -- (13.5) (2.9) Dividends on Preferred Stock -- (2.0) (1.6) --------------------------------------------------------------------------------------------------------- Numerator for Basic Net Income per Common Share -- Net Income Available to Common Stockholders 297.6 211.0 272.3 Effect of Dilutive Securities: 5.875% Allegheny Ludlum Convertible Debentures -- -- 3.2 --------------------------------------------------------------------------------------------------------- Numerator for Diluted Net Income per Common Share -- Net Income Available to Common Stockholders after Assumed Conversions $297.6 $211.0 $275.5 --------------------------------------------------------------------------------------------------------- Denominator: Weighted Average Shares 175.2 174.1 176.4 Contingent Issuable Stock 0.2 0.4 0.1 --------------------------------------------------------------------------------------------------------- Denominator for Basic Net Income per Common Share 175.4 174.5 176.5 Effect of Dilutive Securities: Employee Stock Options 3.0 3.4 1.9 5.875% Allegheny Ludlum Convertible Debentures -- -- 4.5 --------------------------------------------------------------------------------------------------------- Dilutive Potential Common Shares 3.0 3.4 6.4 Denominator for Diluted Net Income per Common Share - Adjusted Weighted Average Shares and Assumed Conversions 178.4 177.9 182.9 --------------------------------------------------------------------------------------------------------- Basic Net Income per Common Share: Income before Extraordinary Loss $ 1.70 $ 1.28 $ 1.56 Extraordinary Loss -- (0.08) (0.02) --------------------------------------------------------------------------------------------------------- Basic Net Income per Common Share $ 1.70 $ 1.20 $ 1.54 --------------------------------------------------------------------------------------------------------- Diluted Net Income per Common Share: Income before Extraordinary Loss $ 1.67 $ 1.27 $ 1.53 Extraordinary Loss -- (0.08) (0.02) --------------------------------------------------------------------------------------------------------- Diluted Net Income per Common Share $ 1.67 $ 1.19 $ 1.51 --------------------------------------------------------------------------------------------------------- For additional disclosures regarding the employee stock options and contingent stock-acquisition arrangements, see Note 7. ---------- 47 NOTE 14. COMMITMENTS AND CONTINGENCIES -- Rental expense under operating leases was $29.3 million in 1997, $31.1 million in 1996 and $30.2 million in 1995. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year as of December 31, 1997, were as follows: $16.4 million in 1998, $16.8 million in 1999, $14.8 million in 2000, $13.4 million in 2001, $11.7 million in 2002 and $45.4 million thereafter. The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. In accordance with the Company's accounting policy disclosed in Note 1, environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceeds, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but the amounts, and the possible range of loss in excess of the amounts accrued, are not reasonably estimable. Based on currently available information, however, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. At December 31, 1997, the Company's reserves for environmental remediation obligations totaled approximately $40 million, of which approximately $11 million was included in other current liabilities. The reserve includes estimated probable future costs of $11 million for federal Superfund and comparable state-managed sites; $5 million for formerly owned or operated sites for which the Company has remediation or indemnification obligations; $6 million for owned or controlled sites at which Company operations have been discontinued; and $18 million for sites utilized by the Company in its ongoing operations. The Company is evaluating whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties other than participating potentially responsible parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites with which it has been identified in up to thirty years. In 1996, AICPA Statement of Position 96-1, Environmental Remediation Liabilities, was issued which established accounting standards for recognition of environmental costs. This statement, which was adopted in 1997, did not have a material effect on the consolidated financial statements. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. Although such claims are generally resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. However, although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. In October 1996, the Company reached an agreement in principle with the U.S. Government for a joint ---------- 48 settlement of two cases (one involving the Company's former Teledyne Neosho unit, divested in 1992 and the other involving the Company's former Thermatics unit, divested in 1996) for an aggregate of $11.5 million. The settlement was finalized and the Company made payment in December 1996. The matter involving the former Neosho unit involved an action brought in 1991 under the False Claims Act in the U.S. District Court for the Western District of Missouri and related to alleged misappropriations of government-owned aircraft parts and falsification of inventory control documents. The matter involving the former Thermatics unit commenced in 1993 when Thermatics sought admission into the Department of Defense Voluntary Disclosure Program with respect to testing practices at variance from military specifications. Established reserves for these matters in 1994 amounted to $3.8 million. The Company learns from time to time that it has been named as a defendant in civil actions filed under seal pursuant to the False Claims Act. Generally, since such cases are under seal, the Company does not in all cases possess sufficient information to determine whether the Company could sustain a material loss in connection with such cases, or to reasonably estimate the amount of any loss attributable to such cases. A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. NOTE 15. ACQUISITION OF OREGON METALLURGICAL CORPORATION -- In October 1997, the Company announced that it had entered into a definitive merger agreement to acquire Oregon Metallurgical Corporation ("OREMET") in a transaction valued at $553 million using December 31, 1997 values. Under the terms of the merger agreement, each outstanding share of OREMET common stock will be converted into 1.296 shares of Allegheny Teledyne common stock. OREMET is an integrated producer and distributor of titanium sponge, ingot, mill products and castings for use in the aerospace, industrial, recreational, and military markets with 850 employees. It operates manufacturing and finishing facilities in Oregon and Pennsylvania and has nine service centers in the United States, with additional centers in the United Kingdom, Germany, Singapore, and Canada. The merger is expected to be tax-free to OREMET shareholders and will be accounted for under the pooling of interest method. The following table shows unaudited pro forma sales for the year ended December 31, 1997, after giving effect to the proposed acquisition: (In millions) Business Segment: Sales % of Total ---------------------------------------------------- Specialty Metals - Commodity stainless steel $ 573.5 14.6% - Premium stainless steel 402.0 10.2 - Titanium 449.6 11.4 - Nickel-based superalloys 278.6 7.1 - Other specialty metals 515.6 13.1 ---------------------------------------------------- Subtotal 2,219.3 56.4 Aerospace and Electronics 927.0 23.6 Industrial 532.0 13.5 Consumer 253.8 6.5 ---------------------------------------------------- Total Continuing Operations 3,932.1 100.0% ---------------------------------------------------- Operations sold or held for sale 98.0 ---------------------------------------------------- Total Sales $4,030.1 ---------------------------------------------------- Combined net income and basic and diluted earnings per share of the two companies, based on unaudited pro forma financial results for the year ending December 31, 1997, were $328.8 million, $1.67 and $1.64 per share, respectively. Combined assets totaled $2.9 billion. Unaudited pro forma combined net equity was nearly $1.2 billion; net debt to total capitalization improved to 18 percent. The effect of conforming accounting policies is not expected to be material. The transaction is subject to the approval of the shareholders of OREMET, as well as other customary closing conditions. The meeting of OREMET shareholders to vote on the merger is scheduled to be held on March 24, 1998. The following unaudited pro forma consolidated balance sheet gives effect to the merger by combining the respective balance sheets of the Company and OREMET as of December 31, 1997 on a pooling of interests basis. The following unaudited pro forma consolidated statements of income give effect to the merger by combining the respective statements of income for the Company and OREMET for the years ended December 31, 1997, 1996 and 1995. The unaudited pro forma consolidated statements of income do not give effect to anticipated expenses and nonrecurring charges related to the merger and the estimated revenue enhancements and expense savings associated with the combination of the operations of the Company and OREMET. With respect to the unaudited pro forma earnings per share computations, shares have been adjusted to the equivalent shares of the Company for each year. ---------- 49 ALLEGHENY TELEDYNE INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS December 31, 1997 ------------------------------------------------------ Allegheny Pro Forma (In millions) Teledyne OREMET Adjustments Pro Forma ----------------------------------------------------------------------------------------------------------- ASSETS: Cash and cash equivalents $ 50.3 $ 3.4 $ $ 53.7 Short-term investments available-for-sale -- 34.4 34.4 Accounts receivable 518.0 58.0 576.0 Inventories 582.4 115.5 697.9 Deferred income taxes 37.0 3.3 40.3 Tax refund 9.4 -- 9.4 Prepaid expenses and other current assets 31.6 0.7 32.3 ----------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,228.7 215.3 1,444.0 Property, plant and equipment 687.7 66.1 753.8 Prepaid pension cost 379.7 -- 379.7 Cost in excess of net assets acquired 169.9 16.6 186.5 Other assets 138.5 0.8 (5.1) 134.2 ----------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,604.5 $298.8 $(5.1) $2,898.2 ----------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Accounts payable $ 247.5 $ 20.4 $ $ 267.9 Accrued liabilities 311.2 17.6 13.0 341.8 Current portion of long-term debt 2.8 1.9 4.7 ----------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 561.5 39.9 13.0 614.4 Long-term debt 326.1 4.3 330.4 Accrued postretirement benefits 572.8 1.7 574.5 Other 144.4 8.0 (5.1) 147.3 ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,604.8 53.9 7.9 1,666.6 ----------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock 17.6 16.6 (14.4) 19.8 Additional paid-in-capital 290.7 158.4 14.4 463.5 Retained earnings 752.7 69.9 (13.0) 809.6 Treasury stock (60.2) -- (60.2) Other (1.1) -- (1.1) ----------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 999.7 244.9 (13.0) 1,231.6 ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,604.5 $298.8 $(5.1) $2,898.2 ----------------------------------------------------------------------------------------------------------- Pro forma adjustments include the reclassification of $5.1 million of deferred income tax liabilities and the recording of a $13.0 million reserve to reflect management's estimate of anticipated expenses related to the merger. The capital accounts have been adjusted to reflect the issuance of 21.4 million shares of Allegheny Teledyne common stock in exchange for all the outstanding shares of OREMET common stock. ---------- 50 ALLEGHENY TELEDYNE INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share and share data) Years ended December 31 1997 1996 1995 ---------------------------------------------------------------------------------------------------------- SALES $4,030.1 $4,052.6 $4,194.9 ---------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 3,039.6 3,081.0 3,289.9 Selling and administrative expenses 511.1 538.2 495.1 Merger and restructuring costs 11.2 57.5 6.4 Interest expense, net 16.9 35.1 39.7 ---------------------------------------------------------------------------------------------------------- 3,578.8 3,711.8 3,831.1 ---------------------------------------------------------------------------------------------------------- Earnings before Other Income 451.3 340.8 363.8 Other Income 72.9 77.6 74.2 ---------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 524.2 418.4 438.0 Provision for Income Taxes 195.4 169.6 163.7 ---------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY LOSS 328.8 248.8 274.3 Extraordinary Loss on Redemption of Debt, Net of Income Tax Benefit -- (13.5) (2.9) ---------------------------------------------------------------------------------------------------------- NET INCOME 328.8 235.3 271.4 Dividends on Preferred Stock -- 2.0 1.6 ---------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 328.8 $ 233.3 $ 269.8 ---------------------------------------------------------------------------------------------------------- Basic Net Income Per Common Share: Income before Extraordinary Loss $ 1.67 $ 1.29 $ 1.44 Extraordinary Loss -- (0.07) (0.02) ---------------------------------------------------------------------------------------------------------- BASIC NET INCOME PER COMMON SHARE $ 1.67 $ 1.22 $ 1.42 ---------------------------------------------------------------------------------------------------------- Diluted Net Income per Common Share: Income before Extraordinary Loss $ 1.64 $ 1.27 $ 1.39 Extraordinary Loss -- (0.07) (0.01) ---------------------------------------------------------------------------------------------------------- DILUTED NET INCOME PER COMMON SHARE $ 1.64 $ 1.20 $ 1.38 ---------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 196,369,564 190,856,426 190,539,957 ---------------------------------------------------------------------------------------------------------- ---------- 51 NOTE 16. SUBSEQUENT EVENTS -- AGREEMENTS WITH BETHLEHEM STEEL CORPORATION In January 1998, Bethlehem Steel Corporation ("Bethlehem") and the Company jointly announced that they had entered into three agreements that would become effective after Bethlehem closes its previously announced acquisition of Lukens Inc. ("Lukens"). Under these agreements, Bethlehem would provide the Company with conversion services for stainless steel hot bands and coiled plate wider than the Company can currently produce; the Company would purchase certain assets that Lukens uses in the manufacture of stainless steel products; and the Company would supply hot roll bands to Bethlehem for further processing on the stainless steel coil finishing facilities that Lukens currently owns. Under the conversion agreement, Bethlehem has agreed, for a 20-year period, to provide the Company with up to 15 percent of the available time on Lukens' Coatesville, Pennsylvania electric furnace melt shop and caster and Lukens' Conshohocken, Pennsylvania Steckel mill for the melting, casting and rolling of the Company's wide stainless steel products. Under the asset sales agreement, the Company would acquire certain assets of Lukens for $175 million. These assets include the Houston, Pennsylvania plant of Lukens' Washington Steel Division, which is used for the melting, casting and rolling of stainless steel hot bands; the wide anneal and pickle line recently installed at Lukens' Massillon, Ohio plant; and the vacuum-oxygen decarburization unit used in the refining of stainless steel at Lukens' Coatesville, Pennsylvania plant. Under the hot band supply agreement, the Company would supply Bethlehem with up to 150,000 tons of stainless bands for further processing at Lukens' stainless cold finishing facilities at its Washington, Pennsylvania and Massillon plants until Bethlehem sells these facilities, as previously announced. The agreements are subject to the completion of Bethlehem's acquisition of Lukens as well as customary closing conditions. It is anticipated that the agreements will be effective and that the asset purchases will be closed soon after Bethlehem's acquisition of Lukens is consummated. AEROSPACE DIVISION OF SHEFFIELD FORGEMASTERS In February 1998, the Company acquired the assets of the aerospace division of Sheffield Forgemasters Limited, a private company in the United Kingdom, for approximately $110 million in an all-cash transaction. Sheffield Forgemasters' aerospace division consists of three companies in the United Kingdom as well as two sales companies in the United States: * Special Melted Products Limited, which produces high integrity vacuum melted and remelted steel and nickel alloys in various forms; * Jessop Saville Limited, which produces non-magnetic drill collars and downhole components for the oil and gas industry; and * Commercial Testing Services Limited, which offers high technology testing services to the steel and related metals manufacturing industries. The acquisition of these companies is expected to provide significant support to the Company's high performance metals businesses, primarily Allvac, as well as enhance service to customers by improving sales and distribution of nickel-based alloys and titanium in Europe. The acquisition provides additional vacuum melting, vacuum consumable remelting, electroslag remelting, and forging capacity, which will complement Allvac's facilities. The division's GFM forging machine is one of the largest in the world. ---------- 52 NOTE 17. QUARTERLY DATA (UNAUDITED) -- Quarter Ended ------------------------------------------------------- (In millions except share and per share amounts) March 31 June 30 September 30 December 31 --------------------------------------------------------------------------------------------------------- 1997 -- Sales $957.9 $957.1 $909.2 $920.9 Gross profit 226.1 240.3 210.6 239.3 Net income 63.4 87.0 64.3 82.9 --------------------------------------------------------------------------------------------------------- Basic net income per common share $ 0.36 $ 0.50 0.37 $ 0.48 --------------------------------------------------------------------------------------------------------- Diluted net income per common share $ 0.35 $ 0.49 $ 0.36 $ 0.47 --------------------------------------------------------------------------------------------------------- Average shares outstanding 175,163,476 175,766,313 175,508,743 174,374,636 --------------------------------------------------------------------------------------------------------- 1996 -- Sales $1,017.9 $997.7 $879.7 $920.3 Gross profit 222.3 237.5 215.7 238.4 Income before extraordinary loss 81.6 60.4 19.6 64.9 Extraordinary loss on redemption of debt -- -- -- (13.5) Net income 81.6 60.4 19.6 51.4 --------------------------------------------------------------------------------------------------------- Basic net income per common share: Income before extraordinary loss $ 0.46 $ 0.34 $ 0.11 $ 0.38 Extraordinary loss -- -- -- (0.08) --------------------------------------------------------------------------------------------------------- Basic net income per common share $ 0.46 $ 0.34 $ 0.11 $ 0.30 --------------------------------------------------------------------------------------------------------- Diluted net income per common share: Income before extraordinary loss $ 0.46 $ 0.33 $ 0.11 $ 0.37 Extraordinary loss -- -- -- (0.08) --------------------------------------------------------------------------------------------------------- Diluted net income per common share $ 0.46 $ 0.33 $ 0.11 $ 0.29 --------------------------------------------------------------------------------------------------------- Average shares outstanding 174,122,080 173,841,171 174,068,161 174,297,782 --------------------------------------------------------------------------------------------------------- The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Net income for the 1997 first quarter included an after-tax gain of $9.2 million on the sale of the Company's investment in Nitinol Development Corporation partially offset by after-tax charges of $7.9 million from merger and restructuring costs and the write-off of a research and development venture. The 1997 second quarter net income included after-tax gains of $18.9 million on the sale of the Company's investment in Semtech Corporation common stock and other investments. These gains were partially offset by after-tax charges of $6.7 million for a legal settlement of a U.S. Government contract dispute related to a unit divested in 1995 and merger and restructuring costs. Net income for the 1997 third quarter included a net after-tax gain of $3.9 million on the sale of a business which operated job training centers for the U.S. Government partially offset by a charge relating to legal matters. The 1997 fourth quarter net income included a net after-tax gain of $6.3 million on divestitures of businesses which manufactured collapsible metal and laminate packaging tubes, electric heating elements and metal dies and plastic compression molds. Net income for 1996 included after-tax gains of $24.8 million on sale of the Teledyne defense vehicle business in the first quarter, and $12.8 million on the sale of surplus California real estate in the fourth quarter. Net income for 1996 was adversely affected by after-tax merger and restructuring charges of $5.2 million in the second quarter, $26.3 million in the third quarter and $11.4 million in the fourth quarter. In addition, the 1996 fourth quarter included an after-tax charge of $4.7 million for settlement of legal cases involving U.S. Government contracting issues related to divested operations of Teledyne. The Company paid a cash dividend of $0.16 per share on its common stock in each of the 1997 quarters and in the fourth quarter of 1996. Allegheny Ludlum paid cash dividends in 1996 of $0.13 per share in each of the first and second quarters, and $0.16 per share in the third quarter. Teledyne paid cash dividends in 1996 of $0.12 per equivalent common share in the first quarter and $0.16 per equivalent common share in each of the second and third quarters. In addition, a dividend of $0.08 per equivalent share in face amount of Teledyne's Series E Cumulative Preferred Stock was paid in the 1996 first quarter. ---------- 53 COMMON STOCK PRICE (Per quarter) 1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. ---------------------------------------------------------------------------------------------------------- Allegheny Teledyne Incorporated High $29-1/2 $28-7/8 $32-13/16 $29-7/8 Low $21 $25-1/8 $25-7/8 $23-1/8 ---------------------------------------------------------------------------------------------------------- 1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. ---------------------------------------------------------------------------------------------------------- Allegheny Teledyne Incorporated (from August 16) High -- -- $23-1/2 $23-3/4 Low -- -- $19-7/8 $20-1/8 Allegheny Ludlum Corporation (through August 15) High $21-1/16 $21-3/8 $21-1/8 -- Low $18 $17-3/8 $18-1/4 -- Teledyne, Inc. (through August 15) High $29-3/4 $40-1/8 $40-5/8 -- Low $24-1/8 $27-3/4 $34-3/4 -- ---------------------------------------------------------------------------------------------------------- Note: All stock prices are as historically presented. On August 15, 1996, Allegheny Ludlum Corporation ("Allegheny Ludlum") and Teledyne, Inc. ("Teledyne") became wholly owned subsidiaries of Allegheny Teledyne Incorporated ("Allegheny Teledyne"). Allegheny Ludlum shareholders received one share of Allegheny Teledyne common stock for each one of their Allegheny Ludlum common shares. Teledyne stockholders received 1.925 shares of Allegheny Teledyne common stock for each of their Teledyne common shares. Allegheny Teledyne common stock is listed on the New York Exchange, under the symbol "ALT." As of December 31, 1997, there were approximately 9,213 record holders of Allegheny Teledyne common stock. ---------- 54 MANAGEMENT'S REPORT The accompanying consolidated financial statements of Allegheny Teledyne Incorporated and subsidiaries have been prepared in accordance with generally accepted accounting principles and include some amounts that are based upon Management's best estimates and judgments. Management has the primary responsibility for the information contained in the financial statements and in other sections of this Annual Report and for their integrity and objectivity. The Company has a system of internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded for the preparation of financial information. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the cost of such systems should not exceed the benefits to be derived. The Company maintains a staff of professional internal auditors, who assist in audit coverage with the independent accountants and conduct operational and special audits. The independent accountants express their opinion on the Company's financial statements based on procedures, including an evaluation of internal controls, which they consider to be sufficient to form their opinion. The Audit and Finance Committee of the Board of Directors is composed of five non-employee members. Among its principal duties, the Committee is responsible for recommending the independent accountants to conduct the annual audit of the Company's financial statements and for reviewing the financial reporting and accounting practices. /s/ R. P. SIMMONS ------------------------------------------------------- R. P. Simmons Chairman, President and Chief Executive Officer /s/ J. L. MURDY ------------------------------------------------------- J. L. Murdy Executive Vice President, Finance and Administration and Chief Financial Officer /s/ D. G. REID ------------------------------------------------------- D. G. Reid Vice President, Controller and Chief Accounting Officer ---------- 55 SELECTED FINANCIAL DATA (In millions except per share amounts) For the Years Ended December 31 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------------------------- Sales: Continuing $3,647.1 $3,629.7 $3,651.4 $2,986.4 $2,974.3 Operations sold or held for sale 98.0 185.9 396.7 470.9 587.7 --------------------------------------------------------------------------------------------------------- $3,745.1 $3,815.6 $4,048.1 $3,457.3 $3,562.0 --------------------------------------------------------------------------------------------------------- Income, after tax, before extraordinary loss and cumulative effect of accounting change $ 297.6 $ 226.5 $ 276.8 $ 9.8 $ 143.6 Extraordinary loss on redemption of debt -- (13.5) (2.9) -- (3.7) Cumulative effect of accounting change -- -- -- -- (185.6) --------------------------------------------------------------------------------------------------------- Net income (loss) $ 297.6 $ 213.0 $ 273.9 $ 9.8 $ (45.7) --------------------------------------------------------------------------------------------------------- Basic income (loss) per common share: Income after tax, before extraordinary loss and cumulative effect of accounting change $ 1.70 $ 1.28 $ 1.56 $ 0.06 $ 0.83 Extraordinary loss on redemption of debt -- (0.08) (0.02) -- (0.02) Cumulative effect of accounting change -- -- -- -- (1.07) --------------------------------------------------------------------------------------------------------- Basic net income (loss) per common share $ 1.70 $ 1.20 $ 1.54 $ 0.06 $ (0.26) --------------------------------------------------------------------------------------------------------- Diluted income (loss) per common share: Income after tax, before extraordinary loss and cumulative effect of accounting change $ 1.67 $ 1.27 $ 1.53 $ 0.06 $ 0.82 Extraordinary loss on redemption of debt -- (0.08) (0.02) -- (0.02) Cumulative effect of accounting change -- -- -- -- (1.04) --------------------------------------------------------------------------------------------------------- Diluted net income (loss) per common share $ 1.67 $ 1.19 $ 1.51 $ 0.06 $ (0.24) --------------------------------------------------------------------------------------------------------- Dividends declared: Allegheny Teledyne $ 0.64 $ 0.16 $ -- $ -- $ -- Allegheny Ludlum $ -- $ 0.42 $ 0.49 $ 0.48 $ 0.47 Teledyne $ -- $ 0.52 $ 0.52 $ -- $ 0.42 --------------------------------------------------------------------------------------------------------- Working capital $ 667.2 $ 614.0 $ 679.8 $ 540.1 $ 635.8 --------------------------------------------------------------------------------------------------------- Total assets $2,604.5 $2,606.4 $2,628.9 $2,479.4 $2,535.1 --------------------------------------------------------------------------------------------------------- Long-term debt $ 326.1 $ 443.4 $ 561.1 $ 489.7 $ 495.5 --------------------------------------------------------------------------------------------------------- Redeemable preferred stock $ -- $ -- $ 33.1 $ -- $ -- --------------------------------------------------------------------------------------------------------- Stockholders' equity $ 999.7 $ 871.5 $ 785.8 $ 655.4 $ 686.3 --------------------------------------------------------------------------------------------------------- ---------- 56 The historical selected financial data reflects the results of Allegheny Ludlum and of Teledyne as if they had been combined for all periods presented. The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Net income included after-tax gains of $34.1 million on the divestitures of certain non-strategic businesses and the sale of investments in Semtech Corporation common stock and Nitinol Development Corporation in 1997, $37.6 million on the sale of the Teledyne defense vehicle business and surplus California real estate in 1996, $30.3 million on the sale of the Teledyne defense electronic systems business in 1995 and $24.2 million on the sale of an investment in Litton Industries common stock in 1993. Net income was adversely affected by after-tax merger, restructuring and proxy contest charges of $6.8 million in 1997, $42.9 million in 1996 and $3.9 million in 1995. Results of operations included after-tax charges of $4.1 million in 1997, $4.7 million in 1996, $88.0 million in 1994 and $10.7 million in 1993 related to Teledyne's settlement of certain legal matters with the U.S. Government. Results for 1994 were adversely affected by a ten-week strike at Allegheny Ludlum called by the United Steelworkers of America. Net losses for 1993 included charges of $185.6 million for the cumulative effect of changing the accounting for postretirement health care and life insurance benefits for Teledyne in 1993. Teledyne dividends declared included $0.08 per equivalent share in 1996 and $0.31 per equivalent share in 1995 paid in face amount of Teledyne's Series E Cumulative Preferred Stock. The Teledyne Series E Cumulative Preferred Stock was redeemed for cash in 1996. ---------- 57 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Name of Subsidiary State of Incorporation The following lists the subsidiaries of Allegheny Teledyne Incorporated, excluding those subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute significant subsidiary. The subsidiaries listed are all wholly owned, either directly or indirectly. Allegheny Ludlum Corporation Pennsylvania Teledyne, Inc. Delaware Teledyne Industries, Inc. California Jessop Steel Company Pennsylvania AII Acquisition Corp. Delaware ALC Funding Corporation Delaware EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Form 10-K of Allegheny Teledyne Incorporated of our report dated January 19, 1998, included in the 1997 Annual Report to Stockholders of Allegheny Teledyne Incorporated. We also consent to the incorporation by reference in Registration Statements 333-8235, 333-10225, 333-10227, 333-10229 and 333-10245 of Allegheny Teledyne Incorporated of our report dated January 19, 1998, with respect to the consolidated financial statements incorporated herein by reference. /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania March 23, 1998 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 13, 1996, included in this Form 10-K, on the consolidated financial statements of Teledyne, Inc. as of December 31, 1995 and for the year ended December 31, 1995, into the Registration Statements 333-8235, 333-10225, 333-10227, 333-10229 and 333-10245 previously filed by Allegheny Teledyne Incorporated. /s/ Arthur Andersen LLP Los Angeles, California March 23, 1998 The schedule contains summary financial information extracted from the registrant's consolidated statement of income for the fiscal year ended December 31, 1997 and consolidated balance sheet as of December 31, 1997 and is qualified in its entirety by reference to such financial statements. The schedule contains summary financial information extracted from the registrant's consolidated statement of income for the fiscal year ended December 31, 1996 and consolidated balance sheet as of December 31, 1996 and is qualified in its entirety by reference to such financial statements. The schedule contains summary financial information extracted from the registrant's consolidated statements of income for the nine months ended September 30, 1997 and 1996 and consolidated balance sheets as of September 30, 1997 and 1996 and is qualified in its entirety by reference to such financial statements. The schedule contains summary financial information extracted from the registrant's consolidated statement of income for the six months ended June 30, 1997 and consolidated balance sheet as of June 30, 1997 and is qualified in its entirety by reference to such financial statements. The schedule contains summary financial information extracted from the registrant's consolidated statement of income for the three months ended March 31, 1997 and consolidated balance sheet as of March 31, 1997 and is qualified in its entirety by reference to such financial statements. EXHIBIT 99.1 To the Board of Directors of Allegheny Teledyne Incorporated: We have audited the consolidated statements of operations, shareholders' equity and cash flows of Teledyne, Inc. (a Delaware corporation) and subsidiaries (Company) for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Teledyne, Inc. and subsidiaries for the year ended December 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California January 13, 1996