-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GxydWz3E3o+pU3luaf70wSalAavfPqQ2L4AZwGS2llreqilEzU252jVfTfJ8MmcO zAB4xX10eDpNK3IO63VoEw== 0000950132-96-000284.txt : 19960515 0000950132-96-000284.hdr.sgml : 19960515 ACCESSION NUMBER: 0000950132-96-000284 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHENY LUDLUM CORP ET AL CENTRAL INDEX KEY: 0000811929 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 251364894 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09498 FILM NUMBER: 96562699 BUSINESS ADDRESS: STREET 1: 1000 SIX PPG PL CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4123942800 10-K405 1 ALLEGHENY LUDLUM FORM 10-K 1995 ================================================================================ UNITED STATES 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 [fee required] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [no fee required] FOR THE TRANSITION PERIOD FROM _________________ TO _________________ COMMISSION FILE NUMBER 1-9498 ALLEGHENY LUDLUM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Pennsylvania 25-1364894 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 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, Par Value $0.10 Per share New York Stock Exchange, Inc. =============================================================================== 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 (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- 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] AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 6, 1996: $816,099,094. The amount shown is based on the closing price of the registrant's common stock on the New York Stock Exchange on that date. Shares of common stock known by the registrant to be beneficially owned by executive officers or directors of the registrant 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 Securities Exchange Act of 1934. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 6, 1996: 66,241,891 DOCUMENTS INCORPORATED BY REFERENCE: Selected portions of the 1995 Annual Report--Part I, Part II and Part IV of this Report. Selected portions of the 1996 Proxy Statement--Part III of this Report. ================================================================================ INDEX PART I THE COMPANY............................................................................................ 3 Item 1. BUSINESS.................................................................................... 3 Item 2. PROPERTIES.................................................................................. 8 Item 3. LEGAL PROCEEDINGS........................................................................... 10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 10 PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS........................ 11 Item 6. SELECTED FINANCIAL DATA..................................................................... 11 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................. 11 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 11 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................... 11 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 11 Item 11. EXECUTIVE COMPENSATION...................................................................... 11 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................................... 11 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 11 PART IV Item 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE................................................... 12 SIGNATURES.................................................................................................. 13
This is a refiling of the Form 10-K405 which was originally filed on March 20, 1996 at accession number 0000950132-96-000151. 2 PART I THE COMPANY The Company is a Pennsylvania corporation formed in 1979 with its principal executive offices located at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222-5479, telephone (412)394-2800. References to the "Company" mean Allegheny Ludlum Corporation and its subsidiaries and predecessors, unless the context otherwise requires. The Company is one of the world's leading manufacturers of specialty materials and one of the largest domestic producers of stainless steel. The Company manufactures stainless steel sheet, strip, plate, foil, welded tubing and stampings; silicon electrical steel sheet and strip; and other specialty steel and specialty metals alloys, including tool steels, magnetic, thermostatic and electronic sheet and strip, and high-temperature alloys. ITEM 1. BUSINESS INDUSTRY OVERVIEW The industry in which the Company operates is generally referred to as the specialty steel industry, which represents a small but distinct segment of the steel industry. 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; electrical steel contains silicon to minimize energy loss; and tool steel alloys, which contain more carbon than stainless steel, include tungsten, molybdenum and other metals to make them both hard and malleable. Most high temperature alloys, electronic alloys and 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, plate, wire, rod, bar and tubing) 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, dies, food and chemical processing equipment, medical and health equipment and aircraft and defense equipment. While other materials such as carbon steel, titanium, composites, ceramics, aluminum and plastic compete in various applications with stainless steel, the largest part of the specialty steel industry, the Company believes that the domestic market for stainless steel has been growing over the past twenty years as a result of the less rapid growth in the price of stainless steel relative to competitive products and the increasing demand for higher quality products with greater durability. The Company believes that when total life cycle costs are fully evaluated, stainless steel is often the least expensive quality alternative. ACQUISITION On November 10, 1993, the Company completed its acquisition of Athlone Industries, Inc., a Delaware corporation ("Athlone"), by means of the merger of a wholly owned subsidiary of the Company into Athlone. Athlone, through its Jessop Steel Company ("Jessop" or "Jessop Steel") operations, was primarily a manufacturer of specialty metals, primarily tool steel and stainless steel and nickel alloy plate mill plate. See Note 11 of the Notes to the Consolidated Financial Statements of the Company on page 34 of the 1995 Annual Report to Shareholders which is incorporated herein by reference. 3 JOINT VENTURE In February, 1996, the Company announced that it had established a joint venture company in the People's Republic of China with Shanghai No. 10 Iron and Steel Works, for the production and sale of precision rolled stainless steel strip. The Company, which owns 60% of the joint venture company, will provide technology, engineering, technical and management services. The joint venture will be known as Shanghai STAL Precision Stainless Steel Limited Company. The new plant will be located in Shanghai to produce and sell up to 15,000 metric tonnes of the Company's Precision Rolled Strip/TM/ products. It is expected to be operational in late 1997. GENERAL The Company operates in a single business segment, specialty steel. The Company has three principal product lines, consisting of stainless steel, silicon electrical steel and other specialty steel alloys (including tool steels and other specialty metals), which are produced at eleven facilities located in five states. Stainless steel products are marketed principally in the form of sheet, strip and plate as well as stampings and welded tubing. Silicon electrical steel is marketed in the form of sheet and strip. Other specialty steel alloys are marketed principally as sheet, strip and plate. The following table sets forth certain information concerning sales of the Company's principal product lines for the past five fiscal years.
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (IN MILLIONS) Stainless Steel......................................... $1,223.6 $ 834.0 $ 892.3 $ 831.4 $ 771.2 Silicon Electrical Steel................................ 147.2 141.5 156.0 161.1 172.2 Other Specialty Alloys.................................. 123.5 101.4 51.9 43.5 61.2 -------- -------- -------- -------- -------- Total Sales........................................ $1,494.3 $1,076.9 $1,100.2 $1,036.0 $1,004.6 ======== ======== ======== ======== ========
The table reflects the inclusion of the Company's Washington Plant (Jessop) since the date of its acquisition in November 1993. In April 1994, the United Steelworkers of America called a strike which lasted ten weeks. Additional information concerning the Company's sales and operating profit is set forth under the heading "Selected Financial Data" on page 37 of the Company's 1995 Annual Report to Shareholders which is incorporated herein by reference. The Company's products are sold primarily to distributors and to other customers within the United States who further process such materials into end products for resale to others. The Company's backlog of firm orders at the end of 1995 was $234.0 million (nearly all of which are expected to be filled within the year), as compared to $301.0 million at the end of 1994. STAINLESS STEEL Stainless steel products have represented the largest share of the Company's total sales. In 1995 stainless steel represented approximately 82% of total sales. Stainless steel sheet (24" and wider) accounts for the largest portion of the Company's sales. It is used in a wide variety of consumer and industrial applications that require easy cleaning and fabricability and corrosion resistance. Approximately 75% of the Company's stainless steel sheet is sold to service centers which have slitting, cutting and other processing facilities. Stainless steel strip (less than 24" wide) is used in a variety of consumer products and a wide range of automotive components. The Company's products include its very thin Precision Rolled Strip/TM/ products which range in thickness from 0.0015" up to 0.015". Approximately 75% of the Company's stainless steel strip is sold directly to end-use customers, with the remainder sold to service centers, including the Company's own distributor outlet for stainless steel strip, ALstrip, Inc. ALstrip, Inc. is a 90% owned subsidiary with locations in Skokie, Illinois; Exton, Pennsylvania; and Springfield, Tennessee. Stainless steel plate (at least .1875" thick and 10" wide) has a variety of applications, primarily in industrial equipment that requires cleanliness or corrosion-resistant capabilities such as pollution control scrubbers and - --------- /TM/Trademark of the Company. 4 other equipment, food processing equipment, pulp and paper equipment, chemical equipment and power generation equipment. The Company's plate products are sold in both coil and cut-to-length ("plate mill plate") form. Coil plate is sold to service center customers who further process the material by roller leveling and cutting to length before final use or sale. The Company's Washington, Pennsylvania Plant produces nearly all of the Company's plate mill plate. However, a small amount of extra-wide plate product is processed by outside converters. Approximately 95% of the Company's stainless steel plate is sold to service centers. SILICON ELECTRICAL STEEL The Company's silicon electrical steel products, primarily grain oriented, are used generally in applications in which electrical conductivity and magnetic properties are important and are sold directly to end-use customers. Users of the Company's silicon electrical steel products include manufacturers of transformers and communications equipment. OTHER SPECIALTY ALLOYS The Company also produces tool steel, high temperature alloys, electronic and thermostatic alloys, and other specialty alloys. These specialty alloys are used primarily in applications that require high strength, hardness, heat resistance and special magnetic, electronic or expansion characteristics. During 1994, other specialty alloy sales increased significantly due to the acquisition of the Washington Plant. RAW MATERIALS 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, the Dominican Republic, Canada, Norway, the Commonwealth of Independent States, Columbia, New Caledonia and South Africa. 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 also uses large amounts of electricity, particularly in the melt shop in the Company's Brackenridge Works, and natural gas in the manufacture of its products; energy costs currently represent approximately 5% of the Company's revenue dollars. RESEARCH, DEVELOPMENT AND TECHNICAL SERVICES 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 where a proprietary position is possible. The Company conducts its primary research activities at its Technical Center in Natrona Heights, Pennsylvania. Expenditures for research, development and technology totaled $46.2 million in 1995, $36.5 million in 1994, and $41.9 million in 1993. Research and development expenses related to activities conducted at the Technical Center were $9.2 million, $8.2 million, and $9.2 million in 1995, 1994, and 1993, respectively. The Company believes that its investment in technology, research and development and technical services, as a percent of annual revenue, exceeds the level of investment by other companies in the steel industry. The Company owns approximately 170 United States patents, many of which are also filed under the patent laws of other nations, but does not consider its business to be materially dependent on any patent or patent rights. COMPETITION AND IMPORTS OF SPECIALTY STEEL The Company is a leading producer of specialty steel. There are at least six domestic producers of stainless steel sheet, strip and plate. The Company's principal domestic competitors are J&L Specialty Steel, Inc. 5 ("J&L"), whose principal stockholder is France's Ugine, S.A. ("Ugine"), a subsidiary of Usinor Sacilor SA, which is Europe's largest steelmaker and 80% of whose stock was owned by the French government prior to the reported privatization of that company in 1995; Armco Inc. ("Armco"); Lukens Inc. ("Lukens"), which owns Washington Steel Company; and North American Stainless, which is owned primarily by Acerinox, S.A. (a Spanish stainless steel producer), and which in 1993 began shipments from a new finishing facility in Kentucky. In 1995, Swedish-based Avesta Sheffield AB, one of Europe's largest producers of stainless steel, acquired the Eastern Stainless plate company from Armco, which has given Avesta Sheffield a stainless melting source for its plate operations in the United States. With respect to grain-oriented silicon electrical steel (used in electrical transformers), the Company believes that it and Armco Inc. are the only two U.S. producers. The Company believes that there are several other domestic producers of other specialty alloys in flat-rolled form. In the fourth quarter of 1993, Lukens' Washington Steel Group began to manufacture and sell stainless steel plate mill products; previously, Washington Steel produced stainless sheet, strip and coil plate products and Lukens produced stainless plate mill plate only on a conversion basis. In the past two years, J&L, Armco, Lukens, and North American Stainless have announced that they are increasing their capacity to produce stainless steel products. In 1995, Nucor Corp., a carbon steel minimill, entered the stainless steel market and produced stainless steel products used primarily in automotive exhaust systems. The Company faces active competition in the sale of all of its products from both domestic and foreign competitors. A number of foreign competitors are government owned and/or subsidized. The principal methods of competition in specialty steel are price, service, product quality and delivery. The level of stainless steel imports decreased in the 1995 fiscal year. Import penetration in 1995 for stainless steel sheet and strip decreased 14% and was 20% of the domestic market. Import penetration of stainless steel plate decreased 3% to 15% of the domestic market in 1995. Imports of silicon electrical steel increased to 23% in 1993, decreased to 20% in 1994 and increased to 21% of the domestic market in 1995. In August 1993, the Company and others filed trade cases charging that dumping and unfairly priced and subsidized silicon electrical steel imports are undermining the U.S. market. In October 1993, the International Trade Commission ruled that imports of grain-oriented silicon steel from Italy and Japan injure or threaten injury to domestic producers. Beginning in 1994, importers from these nations were required to post either cash or bonds of 85% and 31%, respectively, on the value of imported silicon electrical steel products. Silicon electrical steel also faces competition from amorphous metals, currently produced in the United States only by AlliedSignal Inc. In 1994, the Company filed a patent infringement suit against AlliedSignal in the United States District Court for the Western District of Pennsylvania. The suit asks for an injunction prohibiting AlliedSignal from making and selling amorphous electrical alloys in violation of a patent granted to the Company which covers certain alloy compositions which provide improved magnetic properties. Multilateral steel consensus agreements which are aimed at eliminating foreign subsidies and foreign market access barriers have not yet been reached. The Company believes the U.S. government must take action to protect domestic markets from unfair trade practices by any company or nation which does not have to meet a profit or capital formation discipline. Therefore, the Company is urging the U.S. government to reach agreements with foreign governments to accomplish these objectives. In addition to competition from other stainless steel producers, other materials such as carbon steel, titanium, composites, ceramics, aluminum and plastic compete in various applications with stainless steel. EXPORTS Revenues from export sales were $87 million, $73 million, and $79 million, in fiscal years 1995, 1994, and 1993, respectively. Political unrest and the economic environment in some important export markets and the volatility of foreign exchange rates make it difficult to predict whether export sales will continue at the levels reached in the last three years. 6 EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of the Company as of March 6, 1996:
NAME AGE TITLE AND YEAR ELECTED TO PRESENT POSITION - --- --- ------------------------------------------ Richard P. Simmons............................... 64 Chairman of the Board ........................... 1986 Robert P. Bozzone................................ 62 Vice Chairman of the Board ...................... 1994 Arthur H. Aronson................................ 60 President and Chief Executive Officer ........... 1994 James L. Murdy................................... 57 Senior Vice President-Finance and Chief Financial Officer ....................... 1988 Robert W. Rutherford............................. 56 Senior Vice President-Commercial ................ 1994 Jack W. Shilling................................. 52 Senior Vice President-Technical ................. 1994 Harry R. Wagner.................................. 51 Senior Vice President-Operations ................ 1994 Douglas A. Kittenbrink........................... 40 Vice President-Engineering and Information Technology .................................... 1992 Bruce A. McGillivray............................. 62 Vice President-Human Resources .................. 1986 Carl R. Moulton.................................. 48 Group Vice President ............................ 1993 Robert S. Park................................... 51 Vice President-Treasurer ........................ 1994 Richard R. Roeser................................ 49 Vice President-Controller ....................... 1994 David G. Vietmeier............................... 51 Vice President-Purchasing ....................... 1988 Jon D. Walton.................................... 53 Vice President-General Counsel and Secretary ................................. 1990
Prior to 1990, Mr. Simmons also served as Chief Executive Officer of the Company. Prior to 1994, Mr. Bozzone served as President and Chief Executive Officer and Mr. Aronson served as Executive Vice President and Chief Operating Officer of the Company. Messrs. Rutherford, Shilling and Wagner had been Vice President-Commercial, Vice President-Technical and Vice President-Production, respectively, prior to 1994. Mr. Kittenbrink was employed in various high level engineering management and professional positions for over 5 years with Inland Steel Industries, Inc. before joining the Company in 1992. Mr. Moulton was President of Jessop Steel Company until he joined the Company upon the Company's acquisition of Jessop in 1993. Messrs. Park and Roeser had been Treasurer and Controller, respectively, prior to 1994. Each of the other executive officers of the Company has held high level managerial or professional positions with the Company for more than the past five years. EMPLOYEES As of January 1, 1996, the Company had approximately 6,000 employees of whom approximately 2,000 were salaried employees. The Company also has approximately 5,700 retirees. Approximately 400 employees at the Company'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 the Company's other production and maintenance employees are covered by a four-year labor contract between the Company and the USWA which is effective through July 1, 1998. 7 ENVIRONMENTAL, HEALTH AND SAFETY MATTERS The Company (and the industry in which it competes) is 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 that it is in substantial compliance with environmental laws and regulations. The Company estimates that its capital expenditures for fiscal year 1996 will include $9.3 million for additional or upgraded environmental control equipment and facilities. The Company, like most corporations in the steel and metals-producing industries, expects to spend additional funds to meet the lower levels of emissions mandated by the Clean Air Act Amendments of 1990 (the "CAA Amendments"). The Company continues to believe that it will be able to meet the new requirements while continuing its commitment to attractive new capital investments. LIMITED PARTNERSHIP INVESTMENTS The Company, through wholly owned subsidiaries, made commitments to invest as a limited partner in two Code, Hennessy & Simmons limited partnership leveraged buyout funds and in the entities that serve as the general partners of the funds. Investors made commitments to invest approximately $82.5 million when the first fund was formed in 1989, including $25 million invested or to be invested by the Company's subsidiary. Investors made commitments to invest $155 million in the second fund, which was formed in December 1993, including $30 million to be invested by the Company. Both funds were formed to originate and lead investments in middle market companies that are undergoing an ownership transition. The funds' portfolios include companies that design, manufacture and distribute consumer and industrial products for a variety of end use applications. At the end of the first quarter of 1994, the Company voluntarily contributed its limited partnership interest in the first limited partnership fund to an irrevocable trust established for the purpose of partially funding the retiree medical benefit and insurance obligations the Company has to its employees represented by the United Steelworkers of America. Subsequently in 1994 and in 1995, the Company voluntarily contributed investments it had made as a limited partner in the second limited partnership fund, in the amount of $13.1 million, to the irrevocable trust. Returns from investments in this trust are being recorded in accordance with Statement of Financial Accounting Standards No. 106. The Company cannot predict the magnitude or timing of any future gains or losses related to the investments. ITEM 2. PROPERTIES The name, location and area of each of the Company's principal manufacturing plants together with the principal products which they are equipped to produce as of December 31, 1995, are as follows:
AREA IN PLANT AND LOCATION SQUARE FEET PRINCIPAL PRODUCTS - ------------------ ----------- ------------------ Brackenridge Works Brackenridge and Natrona, 2,443,000 Stainless steel and specialty metals strip, sheet and plate, Pennsylvania silicon electrical steel strip and sheet, and other specialty steel strip and sheet. West Leechburg Works 1,415,000 Stainless steel and specialty metals strip and sheet, silicon West Leechburg and Bagdad, electrical steel strip and sheet, and other specialty steel Pennsylvania strip and sheet. Vandergrift Plant 966,000 Stainless steel strip and sheet. Vandergrift, Pennsylvania Washington Plant 615,000 Stainless steel and tool steel plate products. Washington, Pennsylvania Wallingford Plant 591,000 Stainless steel and specialty metals strip and sheet and other Wallingford and specialty steel strip and sheet. Waterbury, Connecticut
8
AREA IN PLANT AND LOCATION SQUARE FEET PRINCIPAL PRODUCTS - ------------------ ----------- ------------------ Lockport Plant 282,000 Stainless steel and other specialty metals products. Lockport, New York New Castle Plant 178,000 Stainless steel sheet. New Castle, Indiana Claremore Plant 135,000 Stainless steel welded tubular products. Claremore, Oklahoma
The Brackenridge Plant utilizes four electric furnaces, an argon-oxygen decarburization (A.O.D.) unit, a continuous caster, annealing lines and rolling mills in its production. The Natrona Plant has three coreless induction furnaces, two basic oxygen furnace vessels and ingot casting facilities. The Lockport Plant has three electric arc furnaces, an AOD vessel, a vacuum induction melting furnace and electroslag as well as vacuum arc remelting facilities. The Vandergrift, Wallingford, West Leechburg, Bagdad and New Castle Plants have annealing, rolling and slitting facilities. The Claremore Plant utilizes electric welding facilities in producing tubular products. The Washington Plant has rolling, annealing and finishing facilities utilized in the production of plate products. The Company owns all of the foregoing plants, each of which, with the exception of the Wallingford and Washington Plants, is subject to mortgages or similar encumbrances securing borrowings under certain industrial development authority financings. See Note 4 of the Notes to the Consolidated Financial Statements on page 27 of the 1995 Annual Report. While the plants have been constructed at various times over a long period, many of the buildings have been replaced, remodeled or expanded and additional buildings have been constructed from time to time. Much of the equipment at the various plants has likewise been replaced or remodeled and new equipment has been added at various times. The Company believes that the plants have been well-maintained and are technologically advanced. The Brackenridge primary melting and continuous slab casting facilities have operated at high levels for the past five years. The stainless steel finishing plants have operated at approximately 85% to 95% of capacity for the past five years. The Company has increased stainless steel finishing capacity through process and equipment improvements, computer-assisted scheduling plans, the installation of new equipment at the Vandergrift Plant and the upgrade and expansion of the Waterbury Plant in 1993 and 1994. 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 conducts its primary research activities at its Technical Center in Natrona Heights, Pennsylvania. The facility contains state-of-the-art equipment for a variety of testing and analytical activities relating to the Company's products and processes. The Company owns this 139,000 sq. ft. facility. The Coatesville and Santa Fe Processing Centers, located near Philadelphia, Pennsylvania and Los Angeles, California, respectively, are warehouses used in additional processing and distribution of the Company's Jessop plate products. The Coatesville facility is owned while the Santa Fe facility is leased from a third party. The Company's subsidiary, ALstrip, Inc., operates stainless steel strip processing and distribution centers in Skokie, Illinois, Exton, Pennsylvania, and Springfield, Tennessee. ALstrip owns all its slitting and cutting equipment and the Skokie and Springfield facilities outright and leases its Exton facility from a third party. The Company's executive offices, located in Pittsburgh, Pennsylvania, and Western Regional Sales Office, located in Schaumburg, Illinois, are leased from third parties. The Eastern Regional Sales Office is located at the Wallingford Plant. These facilities are modern and sufficient for the Company to carry on its activities. 9 ITEM 3. LEGAL PROCEEDINGS As previously announced, in June 1995, the U.S. Department of Justice commenced an action against the Company in the United States District Court for the Western District of Pennsylvania, asserting, in 64 claims, multiple violations of the federal Clean Water Act occurring at various times since 1987. The complaint seeks injunctive relief and assessment of penalties of up to $25,000 per day of violation. While it is too early to predict the outcome of the case, the Company believes that any costs or penalties should not be material to the financial condition of the Company or its results of operation. The Company is involved in various other lawsuits from time to time arising in the ordinary course of business and otherwise. In management's opinion, the outcome of these matters will not have a material adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 1995. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference from "Common Stock Data" on page 38 of the 1995 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is incorporated by reference from "Selected Financial Data" on page 37 of the 1995 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is incorporated by reference from "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 to 22 of the 1995 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In addition to the information set forth under the caption "Executive 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 "Nominees for Director" and "Continuing Directors" as set forth in the 1996 Proxy Statement filed by the registrant pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from "Compensation of Directors," "Executive Compensation," and "Cumulative Total Shareholder Return," as set forth in the 1996 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 1996 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 1996 Proxy Statement filed by the registrant pursuant to Regulation 14A. 11 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 23 through 36 of the 1995 Annual Report are incorporated by reference: Consolidated Statement of Income--Years Ended December 31, 1995, January 1, 1995 and January 2, 1994 Consolidated Balance Sheets at December 31, 1995 and January 1, 1995 Consolidated Statement of Cash Flows--Years Ended December 31, 1995, January 1, 1995 and January 2, 1994 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Accountants The consent to incorporate the Auditors' Report is included herein on page 14. (2) FINANCIAL STATEMENT SCHEDULES The following Consolidated Statement Schedule for years ended December 31, 1995, January 1, 1995 and January 2, 1994 is included herein:
PAGE NO. -------- II. Valuation and Qualifying Accounts....................................................... 15
All other schedules set forth in the applicable accounting regulations of the Securities and Exchange 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 16 of this Report and incorporated by reference. (B) REPORTS ON FORM 8-K FILED IN THE FOURTH FISCAL QUARTER OF 1995: None. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLEGHENY LUDLUM CORPORATION March 20, 1996 /s/ A. H. ARONSON By.................................... A. H. Aronson 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 Company and in the capacities and as of the 20th day of March, 1996. /s/ ARTHUR H. ARONSON /s/ C. FRED FETTEROLF By.............................. By.............................. Arthur H. Aronson C. Fred Fetterolf President and Chief Executive Director Officer and Director /s/ THOMAS MARSHALL /s/ JAMES L. MURDY By.............................. By.............................. Thomas Marshall James L. Murdy Director Senior Vice President-Finance and Chief Financial Officer /s/ W. CRAIG MCCLELLAND and Director By.............................. W. Craig McClelland /s/ RICHARD R. ROESER Director By.............................. Richard R. Roeser /s/ RICHARD K. PITLER Vice President-Controller By.............................. Richard K. Pitler /s/ ROBERT S. PARK Director By.............................. Robert S. Park /s/ ANNE POL Vice President-Treasurer By.............................. Anne Pol RICHARD P. SIMMONS Director By.............................. Richard P. Simmons /s/ CHARLES J. QUEENAN, JR. Chairman of the Board By.............................. and Director Charles J. Queenan, Jr. Director /s/ ROBERT P. BOZZONE By.............................. /s/ JAMES E. ROHR Robert P. Bozzone By.............................. Vice Chairman of the Board James E. Rohr and Director Director /s/ PAUL S. BRENTLINGER /s/ GEORGE W. TIPPINS By.............................. By.............................. Paul S. Brentlinger George W. Tippins Director Director /s/ STEVEN C. WHEELWRIGHT By.............................. Steven C. Wheelwright Director 13 CONSENT TO INCORPORATE AUDITORS' REPORT ON FINANCIAL STATEMENTS We consent to the incorporation by reference in this Form 10-K of Allegheny Ludlum Corporation of our report dated January 30, 1996, included in the 1995 Annual Report to Shareholders of Allegheny Ludlum Corporation. Our audits also included the financial statement schedule of Allegheny Ludlum Corporation listed in item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Pittsburgh, Pennsylvania January 30, 1996 14 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES (in thousands of dollars)
ADDITIONS BALANCE AT -------------------------------------- BALANCE BEGINNING CHARGED TO COSTS CHARGED TO OTHER AT END DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS--DESCRIBE DEDUCTIONS--DESCRIBE OF PERIOD ----------- --------- ------------ ------------------ -------------------- --------- YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts........................ $ 3,715 $ 95 -- $ 63(2) $ 3,873 ========== ========= ========= ========= YEAR ENDED JANUARY 1, 1995: Allowance for doubtful accounts........................ $ 3,791 $ 145 -- $ (221)(2) $ 3,715 ========== ========= ========= ========= YEAR ENDED JANUARY 2, 1994: Allowance for doubtful accounts........................ $ 3,235 $ 696 $ 300(1) $ (440)(2) $ 3,791 ========== ========= ========= =========
- --------- (1) Balance acquired with the purchase of the Jessop Steel operations. (2) Uncollectible accounts written off, net of recoveries. 15 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 3(a) Restated and Amended Articles of Incorporation of the Company........................... (a) 3(b) By-Laws, as amended..................................................................... (b) 4(a) Indenture dated as of December 15, 1995, between Allegheny Ludlum Corporation and The Chase Manhattan Bank (National Association), as Trustee (relating to $150,000,000 6.95% Debentures due December 15, 2025)............................................... (c) 4(b) Industrial Revenue Bonds/Capitalized Leases: (i) Allegheny County Industrial Development Authority, 1977 Series A, 6-1/4% Pollution Control Revenue Bonds, $13,000,000, due 2/1/07 (relating to plants in West Leechburg, Brackenridge and Natrona, Pennsylvania);................... (d) (ii) Allegheny County Industrial Development Authority, 1978 Series A, 7.20% Pollution Control Revenue Bonds, $1,700,000, due 12/1/03 (relating to plants in West Leechburg, Brackenridge and Natrona, Pennsylvania);................... (d) (iii) Niagara County Industrial Development Agency, 1984, Variable Rate Industrial Development Revenue Bonds, $10,000,000, due 10/1/02 (relating to plant in Lockport, New York);.......................................................... (d) (iv) Allegheny County Industrial Development Authority, 1973 Series A, 6% Industrial Revenue Bonds, $2,700,000, due 2/1/98 (relating to plants in Brackenridge, Natrona, West Leechburg and Bagdad, Pennsylvania);.............. (d) (v) Allegheny County Industrial Development Authority, 1974 Series B, 6.5% Industrial Revenue Bonds, $1,000,000, due 2/1/98 (relating to plants in Brackenridge, Natrona and Bagdad, Pennsylvania);.............................. (d) (vi) Allegheny Valley Development Corporation, 1976 Series A, 4% Industrial Revenue Bonds, $2,024,000, due 5/1/97 (relating to plant in Brackenridge, Pennsylvania);................................................................ (d) (vii) Claremore Industrial Development Authority, 1977 Series A, 6.3% Industrial Development Revenue Bonds, $4,150,000, due 11/1/07 (relating to plant in Claremore, Oklahoma);................................................ (d) (viii) Westmoreland County Industrial Development Authority, 1986, Variable Rate Urban Development Action Grant, $775,000, due 1991 through 1996 (relating to plant in West Leechburg, Pennsylvania);....................................... (d) (ix) Pennsylvania Industrial Development Authority, 1988, 3% Loan, $2,000,000, due 1989 through 2004 (relating to plant in Vandergrift, Pennsylvania);........... (d) (x) Pennsylvania Sunny Day Fund, 1989, 3% Loan, $3,750,000, due 1989 through 2004 (relating to plant in Vandergrift, Pennsylvania);............................. (d) (xi) Westmoreland County Industrial Development Authority, 1989, 3% Loan, $3,000,000, due 1989 through 1999 (relating to plant in Vandergrift, Pennsylvania);................................................................ (d) (xii) Financing Agreement dated as of December 20, 1988 between Green River Steel Corporation and the Commonwealth of Kentucky, acting through the State Property and Buildings Commission and the Economic Development Cabinet (relating to Green River Steel Corporation Plant)............................. (d) 10(a) Credit Agreement dated June 30, 1995......................................................... (e) 10(b) Additional Compensation Plan (1)*............................................................ (f) 10(c) Key Man Salary Continuation Program (2)*..................................................... (f) 10(d) Benefit Restoration Plan*.................................................................... (g)
16
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 10(f) 1987 Stock Option Incentive Plan (as amended and restated)*............................. (c) 10(g) Performance Share Plan (as amended and restated)*....................................... (h) 10(h) Employment Agreement between the Company and A. H. Aronson*............................. (i) 10(i) Fee Continuation Plan for Non-Employee Directors*....................................... (j) 10(j) Director Share Incentive Plan*.......................................................... (k) 10(k) Stock Acquisition and Retention Plan*................................................... (l) 13 Pages 19 through 38 inclusive of the Annual Report for the year ended December 31, 1995 (3)................................................................. (c) 21 Subsidiaries of the Registrant.......................................................... (c) 23 Consent of Ernst & Young LLP............................................................ (c) 27 Financial Data Schedule................................................................. (c)
- --------- (a) A copy of this document, filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1994, is hereby incorporated herein by reference. (b) A copy of this document, filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended January 1, 1995, is hereby incorporated herein by reference. (c) Filed herewith. (d) Copies of these documents are not filed as an Exhibit to this Report pursuant to Item 601(b)(4)(iii). The Company will furnish such copies to the Commission upon request. (e) A copy of this document, filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1995, is hereby incorporated herein by reference. (f) Copies of these documents, filed as Exhibits to the Company's Registration Statement on Form S-1 Number 33-12940 as heretofore filed with the Securities and Exchange Commission, are incorporated herein by reference, the Additional Compensation Plan being filed as Exhibit 10(c) to such Registration Statement, and the Key Man Salary Continuation Plan being filed as Exhibit 10(e) to such Registration Statement. (g) A copy of this document, filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 30, 1990, is hereby incorporated herein by reference. (h) A copy of this document, filed as Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1994, is hereby incorporated herein by reference. (i) A copy of this document, filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended January 2, 1994, is hereby incorporated herein by reference. (j) A copy of this document, filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, is hereby incorporated herein by reference. (k) A copy of this document, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993, is hereby incorporated herein by reference. (l) A copy of this document, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1994, is hereby incorporated herein by reference. (1) Presently known as the Performance Management System Plan. (2) Presently known as the Supplemental Pension Plan for certain key employees of the Company. (3) Except for those provisions specifically incorporated by reference in this report, the 1995 Annual Report shall not be deemed to be "filed" with the Securities and Exchange Commission. *Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. 17 EX-4.A 2 INDENTURE DATED 12/15/95 Exhibit 4(a) Execution Version ---------------------------------------------------- ALLEGHENY LUDLUM CORPORATION To THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Trustee ---------------- INDENTURE Dated as of December 15, 1995 ---------------- $150,000,000 6.95% Debentures Due December 15, 2025 ---------------------------------------------------- TABLE OF CONTENTS/1/ ---------- PAGE Parties..................................................................... 1 Recitals of the Company..................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions.............................................. 1 Act...................................................... 2 Affiliate; control....................................... 2 Attributable Debt........................................ 2 Authenticating Agent..................................... 2 Board of Directors....................................... 2 Board Resolution......................................... 3 Business Day............................................. 3 Commission............................................... 3 Company.................................................. 3 Company Request or Company Order......................... 3 Consolidated Net Tangible Assets......................... 3 Corporate Trust Office................................... 4 corporation.............................................. 4 Debt..................................................... 4 Defaulted Interest....................................... 4 Depositary............................................... 4 Event of Default......................................... 4 Global Security.......................................... 4 Holder................................................... 4 Indenture................................................ 4 Interest Payment Date.................................... 4 Lien..................................................... 4 Maturity................................................. 4 Officers' Certificate.................................... 5 Opinion of Counsel....................................... 5 Outstanding.............................................. 5 Paying Agent............................................. 6 Person................................................... 6 Predecessor Security..................................... 6 Principal Property....................................... 6 Regular Record Date...................................... 6 Responsible Officer...................................... 6 Restricted Subsidiary.................................... 7 Sale and Leaseback Transaction........................... 7 - ------------------ /1/ This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. PAGE Securities............................................... 7 Security Register and Security Registrar................. 7 Special Record Date...................................... 7 Stated Maturity.......................................... 7 Subsidiary............................................... 7 Trust Indenture Act...................................... 7 Trustee.................................................. 7 Vice President........................................... 8 SECTION 102. Compliance Certificates and Opinions..................... 8 SECTION 103. Form of Documents Delivered to Trustee................... 8 SECTION 104. Acts of Holders; Record Dates............................ 9 SECTION 105. Notices, Etc., to Trustee and Company.................... 10 SECTION 106. Notice to Holders; Waiver................................ 11 SECTION 107. Conflict With Trust Indenture Act........................ 11 SECTION 108. Effect of Headings and Table of Contents................. 12 SECTION 109. Successors and Assigns................................... 12 SECTION 110. Separability Clause...................................... 12 SECTION 111. Benefits of Indenture.................................... 12 SECTION 112. Governing Law............................................ 12 SECTION 113. Legal Holidays........................................... 12 SECTION 114. No Security Interest Created............................. 13 SECTION 115. Limitation on Individual Liability....................... 13 ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally.......................................... 13 SECTION 202. Form of Face of Security................................. 14 SECTION 203. Form of Reverse of Security.............................. 15 SECTION 204. Form of Trustee's Certificate of Authentication......................................... 17 ARTICLE THREE THE SECURITIES SECTION 301. Title and Terms.......................................... 17 SECTION 302. Denominations............................................ 18 SECTION 303. Execution, Authentication, Delivery and Dating............................................. 18 SECTION 304. Temporary Securities..................................... 19 SECTION 305. Registration; Registration of Transfer and Exchange........................................... 20 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities............................................. 23 - ii - PAGE SECTION 307. Payment of Interest; Interest Rights Preserved.............................................. 23 SECTION 308. Persons Deemed Owners.................................... 25 SECTION 309. Cancellation............................................. 25 SECTION 310. Computation of Interest.................................. 25 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture.............................................. 26 SECTION 402. Application of Trust Money............................... 27 SECTION 403. Defeasance Upon Deposit of Moneys or Government Obligations................................. 27 SECTION 404. Repayment To Company..................................... 29 ARTICLE FIVE REMEDIES SECTION 501. Events of Default........................................ 29 SECTION 502. Acceleration of Maturity; Rescission and Annulment.......................................... 32 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee............................. 33 SECTION 504. Trustee May File Proofs of Claim......................... 34 SECTION 505. Trustee May Enforce Claims Without Possession of Securities............................... 34 SECTION 506. Application of Money Collected........................... 34 SECTION 507. Limitation on Suits...................................... 35 SECTION 508. Unconditional Right of Holders to Receive Principal and Interest......................... 36 SECTION 509. Restoration of Rights and Remedies....................... 36 SECTION 510. Rights and Remedies Cumulative........................... 36 SECTION 511. Delay or Omission Not Waiver............................. 36 SECTION 512. Control by Holders....................................... 37 SECTION 513. Waiver of Defaults....................................... 37 SECTION 514. Undertaking for Costs.................................... 38 SECTION 515. Waiver of Stay or Extension Laws......................... 38 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities...................... 38 - iii - PAGE SECTION 602. Notice of Defaults....................................... 39 SECTION 603. Certain Rights of Trustee................................ 39 SECTION 604. Not Responsible for Recitals or Issuance of Securities................................. 41 SECTION 605. May Hold Securities...................................... 41 SECTION 606. Money Held in Trust...................................... 41 SECTION 607. Compensation and Reimbursement........................... 41 SECTION 608. Disqualification; Conflicting Interests.................. 42 SECTION 609. Corporate Trustee Required; Eligibility.................. 42 SECTION 610. Resignation and Removal; Appointment of Successor........................................... 43 SECTION 611. Acceptance of Appointment by Successor................... 44 SECTION 612. Merger, Conversion, Consolidation or Succession to Business................................. 45 SECTION 613. Preferential Collection of Claims Against Company........................................ 45 SECTION 614. Authenticating Agents.................................... 45 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders............................... 47 SECTION 702. Preservation of Information; Communications to Holders.............................. 48 SECTION 703. Reports by Trustee....................................... 48 SECTION 704. Reports by Company....................................... 49 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms........................................ 49 SECTION 802. Successor Substituted..................................... 50 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders..................................... 50 SECTION 902. Supplemental Indentures With Consent of Holders............................................. 51 SECTION 903. Execution of Supplemental Indentures..................... 52 - iv - PAGE SECTION 904. Effect of Supplemental Indentures........................ 52 SECTION 905. Conformity With Trust Indenture Act...................... 53 SECTION 906. Reference in Securities to Supplemental Indentures............................................. 53 SECTION 907. Notice of Supplemental Indenture......................... 53 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal and Interest........................ 53 SECTION 1002. Maintenance of Office or Agency.......................... 53 SECTION 1003. Money for Payments to be Held in Trust.......................................... 54 SECTION 1004. Limitation on Liens...................................... 55 SECTION 1005. Limitation on Sale and Leaseback Transactions........................................... 58 SECTION 1006. Existence................................................ 59 SECTION 1007. Statement as to Compliance............................... 59 SECTION 1008. Waiver of Certain Covenants.............................. 60 TESTIMONIUM................................................................. 61 SIGNATURES AND SEALS........................................................ 61 ACKNOWLEDGMENTS............................................................. 62 - v - INDENTURE, dated as of December 15, 1995, between ALLEGHENY LUDLUM CORPORATION, a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania (herein called the "Company"), having its principal executive offices at 1000 Six PPG Place, Pittsburgh, Pennsylvania 15222, and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), a national banking association, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its 6.95% Debentures Due December 15, 2025 (herein called the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. ----------- For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of this Indenture; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms used principally in Article Four or Article Six are defined in those Articles. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Attributable Debt" in respect of a Sale and Leaseback Transaction means, as of any particular time, the present value (discounted at the rate of interest implicit in the terms of the lease involved in such Sale and Leaseback Transaction, as determined in good faith by the Company) of the obligation of the lessee thereunder for net rental payments (excluding, however, any amounts required to be paid by such lessee, whether or not designated as rent or additional rent, on account of maintenance and repairs, services, insurance, taxes, assessments, water rates or similar charges and any amounts required to be paid by such lessee thereunder contingent upon monetary inflation or the amount of sales, maintenance and repairs, insurance, taxes, assessments, water rates or similar charges) during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities. "Board of Directors" means the board of directors of the Company or the executive committee thereof or any other committee appointed by that board to act in respect hereof. - 2 - "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day", means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York or the city in which the Corporate Trust Office is located are authorized or obligated to close by law or executive order. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, if any, its President or any Vice President, and by its Treasurer, any Assistant Treasurer, its Secretary or any Assistant Secretary, and delivered to the Trustee. "Consolidated Net Tangible Assets" means the aggregate amount of assets of the Company and its consolidated subsidiaries (less applicable reserves) after deducting therefrom (a) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles and (b) all current liabilities except for current maturities of long-term debt, current maturities of capitalized lease obligations, indebtedness for borrowed money having a maturity of less than 12 months from the date of the most recent audited consolidated balance sheet of the Company, but which by its terms is renewable or extendable beyond 12 months from such date at the option of the borrower, and deferred income taxes which are classified as current liabilities, all as reflected in the audited consolidated balance sheet contained in the Company's most recent annual report to its shareholders under Rule 14a-3 of the Securities Exchange Act of 1934, as amended, prior to the time as of which "Consolidated Net Tangible Assets" is being determined. - 3 - "Corporate Trust Office" means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at 4 Chase MetroTech Center, 3rd floor, Brooklyn, New York 11245. "corporation" means a corporation, association, company, joint stock company, limited liability company or business trust. "Debt" means indebtedness for borrowed money. "Defaulted Interest" has the meaning specified in Section 307. "Depositary" means, with respect to Securities issuable in whole or in part in the form of one or more Global Securities, the Person designated as Depositary by the Company in Section 301 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean or include each Person who is then a Depositary hereunder. "Event of Default" has the meaning specified in Section 501. "Global Security" means a Security evidencing all or part of the Securities and issued to the Depositary in accordance with Section 303 and bearing the legend prescribed in the sixth paragraph of Section 303. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Lien" means any mortgage, pledge, security interest or lien. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the - 4 - Stated Maturity thereof or by declaration of acceleration or otherwise. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, if any, the President or any Vice President, and by the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 1007 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for or an employee of the Company, and who shall be reasonably acceptable to the Trustee. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for the payment of which moneys in the necessary amount have been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities or from its obligations with respect to which the Company shall have been discharged; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so - 5 - owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of or any interest on any Securities on behalf of the Company. "Person" means, except as provided in Article Six, any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Principal Property" means any manufacturing plant or other similar facility located within the United States of America (other than its territories and possessions) and owned by, or leased to, the Company or any Restricted Subsidiary, the book value of the real property, plant and equipment of which (as shown, without deduction of any depreciation reserves, on the books of the owner or owners) is not less than 2% of Consolidated Net Tangible Assets as of the date on which such plant or other facility is acquired or a leasehold interest therein is acquired except (a) any such plant or facility which the Board of Directors determines by Board Resolution in good faith is not of material importance to the total business conducted, or assets owned, by the Company and its Restricted Subsidiaries as an entirety, or (b) any portion of any such plant or facility which the Board of Directors determines by Board Resolution in good faith not to be of material importance to the use or operation thereof. "Regular Record Date" for the interest payable on any Interest Payment Date means the June 1st or the December 1st (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Trustee, means any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or assistant trust officer, or any other officer of the - 6 - Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Subsidiary" means any Subsidiary substantially all the property of which is located, or substantially all the business of which is carried on, within the United States of America (other than its territories and possessions) which shall at the time, directly or indirectly, through one or more Subsidiaries or in combination with one or more other Subsidiaries or the Company, own or be a lessee of a Principal Property. "Sale and Leaseback Transaction" has the meaning specified in Section 1005. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such interest is due and payable. "Subsidiary" means, with respect to the Company, a corporation of which more than 50% of the total voting power of the capital stock entitled (without regard to the occurrence of any contingency) to vote in the election of its directors is owned, directly or indirectly, by the Company or by one or more other Subsidiaries or by the Company and one or more other Subsidiaries. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended and in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of - 7 - this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 102. Compliance Certificates and Opinions. ------------------------------------ Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. -------------------------------------- In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such - 8 - Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders; Record Dates. ----------------------------- (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the - 9 - authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 3Oth day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date for action to be taken by the Holders, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. Notwithstanding the foregoing, the Company shall not set a record date for, and the provisions of this paragraph shall not apply with respect to, any Act by the Holders pursuant to Section 501, 502 or 512. (d) The ownership of Securities shall be proved by the Security Register. (e) Any Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon any such Security. (f) Without limiting the foregoing, a Holder entitled hereunder to give or take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any different part of such principal amount. SECTION 105. Notices, Etc., to Trustee and Company. ------------------------------------- Any Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Institutional Trust - 10 - Group, including via facsimile transmission to (718) 242-5886, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it, Attention: Corporate Secretary, at the address of its principal executive offices specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company or via facsimile transmission to (412) 394-3010. SECTION 106. Notice to Holders; Waiver. ------------------------- Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail any notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict With Trust Indenture Act. --------------------------------- If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture only as so modified or excluded, as the case may be. - 11 - SECTION 108. Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Company shall bind or inure to the benefit of its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. ------------------- In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. --------------------- Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Security Registrar, any Paying Agent, any Authenticating Agent and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. ------------- This Indenture and the Securities shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the conflicts of law rules of said Commonwealth; provided, however, that the rights, duties and obligations of, and the standard of care for, the Trustee shall be governed by the laws of the State of New York, without regard to the conflicts of law rules of said State. SECTION 113. Legal Holidays. -------------- In any case where any Interest Payment Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or at the Stated Maturity; provided, that no interest shall accrue for the period from and after such Interest Payment Date or Stated Maturity, as the case may be, to such Business Day if such payment is made or duly provided for on such Business Day. - 12 - SECTION 114. No Security Interest Created. ---------------------------- Nothing in this Indenture or in the Securities, express or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect in any jurisdiction where property of the Company or its Subsidiaries is or may be located. SECTION 115. Limitation on Individual Liability. ---------------------------------- No recourse under or upon any obligation, covenant or agreement contained in this Indenture or in any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any successor Person, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, shareholders, officers or directors, as such, of the Company or any successor Person, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, shareholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Security. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. --------------- The Securities and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any law or with the rules of any securities exchange on which the Securities are - 13 - listed or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 202. Form of Face of Security. ------------------------ ALLEGHENY LUDLUM CORPORATION 6.95% Debentures Due December 15, 2025 No. ....... $.............. Allegheny Ludlum Corporation, a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to .................................., or registered assigns, the principal sum of ....................... Dollars on December 15, 2025, and to pay interest thereon from December 15, 1995 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on June 15 and December 15 in each year, commencing June 15, 1996, at the rate of 6.95% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice thereof having been given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. - 14 - Payment of the principal of and interest on this Security will be made at the office or agency of the Company maintained for that purpose pursuant to Section 1002 of the Indenture in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register if this Security is not a Global Security. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: Attest: ALLEGHENY LUDLUM CORPORATION .............................. By........................... SECTION 203. Form of Reverse of Security. --------------------------- This Security is one of a duly authorized issue of securities of the Company designated as its 6.95% Debentures Due December 15, 2025, (herein called the "Securities"), limited in aggregate principal amount to $150,000,000, issued and to be issued under an Indenture, dated as of December 15, 1995 (herein called the "Indenture"), between the Company and The Chase Manhattan Bank (National Association), as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. - 15 - If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. - 16 - No service charge shall be made for any such registration of transfer or exchange except as provided in the Indenture, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 204. Form of Trustee's Certificate of Authentication. ----------------------------------------------- The Trustee's certificates of authentication shall be in substantially the following form: This is one of the Securities referred to in the within-mentioned Indenture. The Chase Manhattan Bank (National Association), as Trustee By........................... Authorized Officer ARTICLE THREE THE SECURITIES SECTION 301. Title and Terms. --------------- The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $150,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306 or 906. The Securities shall be known and designated as the "6.95% Debentures Due December 15, 2025" of the Company. Their Stated Maturity shall be December 15, 2025, and they shall bear interest at the rate of 6.95% per annum, from December 15, 1995, - 17 - or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semi-annually on June 15 and December 15, commencing June 15, 1996, until the principal thereof is paid or made available for payment. The principal of and interest on the Securities shall be payable at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register so long as the Securities are not represented by one or more Global Securities. The Depositary for the Securities is The Depository Trust Company. SECTION 302. Denominations. ------------- The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. Securities shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plan as the officers of the Company executing the same may determine with the approval of the Trustee. SECTION 303. Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, if any, its President or one of its Vice Presidents, under its corporate seal or a facsimile thereof reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall either at one time or from time to time pursuant to such instructions as may be described therein authenticate and deliver such Securities as is in this Indenture provided and not otherwise. - 18 - Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. If the Securities are to be issued in whole or in part in the form of one or more Global Securities, then the Company shall execute and the Trustee shall authenticate and deliver one or more Global Securities that (i) shall represent an aggregate amount equal to the aggregate principal amount of the Outstanding Securities to be represented by one or more Global Securities, (ii) shall be registered in the name of the Depositary for such Global Security or Securities or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instruction and (iv) shall bear a legend substantially to the following effect (or in the form required by such Depositary): "Unless and until it is exchanged in whole or in part for the individual Securities represented hereby, this Global Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary." Each Depositary for a Global Security must, at all times while it serves as such Depositary, be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and any other applicable statute or regulation. SECTION 304. Temporary Securities. -------------------- Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other - 19 - variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. Any such temporary Security may be in global form, representing all or a portion of the Outstanding Securities. Every such temporary Security shall be executed by the Company and shall be authenticated and delivered by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Security or Securities in lieu of which it is issued. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of a like aggregate principal amount in authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Upon any exchange of a portion of a temporary Global Security for a definitive Global Security or for the individual Securities represented thereby pursuant to this Section 304 or Section 305, the temporary Global Security shall be endorsed by the Trustee to reflect the reduction of the principal amount evidenced thereby, whereupon the principal amount of such temporary Global Security shall be reduced for all purposes by the amount so exchanged and endorsed. SECTION 305. Registration; Registration of Transfer and Exchange. ------------------------ (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers and exchanges of Securities as herein provided. At all reasonable times, upon reasonable notice, the Security Register shall be open for inspection by the Company. Upon surrender for registration of transfer of any Security at the office or agency designated pursuant to Section - 20 - 1002 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. Notwithstanding any other provision of this Section, unless and until it is exchanged in whole or in part for the individual Securities represented thereby, a Global Security representing all or a portion of the Securities may not be transferred except as a whole by the Depositary to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at the office or agency maintained for that purpose. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. (b) If at any time the Depositary for the Securities notifies the Company that it is unwilling or unable to continue as Depositary for the Securities or if at any time the Depositary for the Securities shall no longer be eligible under Section 303, the Company shall appoint a successor Depositary. If a successor Depositary for the Securities is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of individual Securities, will authenticate and deliver, individual Securities in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing the Securities in exchange for such Global Security or Securities. The Company may at any time and in its sole discretion determine that individual Securities issued in the form of one or more Global Securities shall no longer be represented by such Global Security or Securities. In such event, or if an Event of Default has occurred and is continuing, the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of individual Securities, will authenticate and deliver, individual Securities in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing the Securities in exchange for such Global Security or Securities. - 21 - The Depositary for the Securities may surrender a Global Security in exchange in whole or in part for individual Securities on such terms as are acceptable to the Company and such Depositary. Thereupon, the Company shall execute, and the Trustee shall authenticate and deliver, without service charge, (i) to each Person specified by the Depositary a new individual Security or Securities of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Security; and (ii) to the Depositary a new Global Security in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of individual Securities delivered to Holders thereof. Upon the exchange of a Global Security for individual Securities, such Global Security shall be canceled by the Trustee. Individual Securities issued in exchange for a Global Security pursuant to this Section shall be registered in such names and in such authorized denominations as the Depositary for such Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Securities to the Persons in whose names such Securities are so registered. (c) All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities except as provided in Section 306. The Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304 or 906 not involving any transfer. - 22 - SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. ------------------------------------------------ If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including, without limitation, the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest, Interest Rights Preserved. ---------------------------------------------- Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. At the - 23 - option of the Company, interest on the Securities may be paid by mailing checks to the addresses of the Holders thereof as such addresses shall appear in the Securities Register if such Securities are not represented by a Global Security and interest on any Global Security may be paid by wire transfer of immediately available funds to an account designated by the Depositary. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing as to the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). - 24 - (2) The Company may make payment of any Defaulted Interest on the Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. --------------------- Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. ------------ All Securities surrendered for payment or registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of as directed by a Company Order. SECTION 310. Computation of Interest. ----------------------- Interest on the Securities shall be computed on the basis of a 360 day year of twelve 30-day months. - 25 - ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. --------------------------------------- This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, and the Company, in the case of (i) or (ii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation for principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. - 26 - Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. -------------------------- Subject to the provisions of the last paragraph of Section 1003, all moneys and U.S. Government Obligations (as defined below) deposited with the Trustee pursuant to Section 401 or 403 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee. SECTION 403. Defeasance Upon Deposit of Moneys or Government Obligations. -------------------------------- At the Company's option, either (a) the Company shall be deemed to have been Discharged (as defined below) from its obligations in respect of the Securities on the 123rd day after the applicable conditions set forth below have been satisfied or (b) the Company shall cease to be under any obligation to comply with any provision or condition set forth in Sections 801, 802, 1004 and 1005 and noncompliance with any such Section shall not result in a default in the performance, or breach, of any covenant of the Company under this Indenture at any time after the applicable conditions set forth below have been satisfied: (1) the Company shall have deposited or caused to be deposited with the Trustee or its agent as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders: (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge each installment of principal of, and interest on, the Outstanding Securities on the dates such installments of interest or principal are due; - 27 - (2) if the Securities are then listed on the New York Stock Exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Company's exercise of the option under this Section 403 would not cause the Securities to be delisted; (3) no Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit; (4) the Company shall have delivered to the Trustee an Opinion of Counsel, which opinion and counsel are reasonably satisfactory to the Trustee and its counsel, to the effect that Holders will not recognize income, gain or loss for Federal income tax purposes as a result of the Company's exercise of the option under this Section 403 and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such option had not been exercised, and, in the case of Securities being Discharged, either a private letter ruling to that effect received from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service or evidence of a change in applicable Federal income tax law occurring after the date of this Indenture; and (5) if the Company is to be Discharged, no Event of Default or event which with notice or lapse of time or both would become an Event of Default under Section 501(5) or (6) with respect to the Securities shall have occurred and be continuing at any time during the period ending on the 123rd day after the date of such deposit. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture relating to the Securities (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of Holders of Securities to receive, from the trust fund described in subparagraph (1) above, payment of the principal of and interest on the Securities when such payments are due; (B) the Company's obligations with respect to the Securities under Sections 305, 306, 1002 and 1003; and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of - 28 - America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which in either case under clause (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. Section 404. Repayment to Company. -------------------- The Trustee and any Paying Agent shall promptly pay or return to the Company upon Company Request any moneys or U.S. Government Obligations held by them at any time that are not required for the payment of the principal of and interest on the Securities for which money or U.S. Government Obligations have been deposited pursuant to Section 403. The provisions of the last paragraph of Section 1003 shall apply to any money held by the Trustee or any Paying Agent under this Article that remains unclaimed for two years after the Maturity of the Securities for which money or U.S. Government Obligations have been deposited pursuant to Section 403. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. ----------------- "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of any Security at its Maturity; or - 29 - (3) default in the performance, or breach, of any covenant of the Company in this Indenture (other than a default in performance or breach of a covenant which is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (4) default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or any Restricted Subsidiary in an aggregate principal amount of at least $10,000,000 or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any Restricted Subsidiary in an aggregate principal amount of at least $10,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; provided, however, that, subject to the provisions of Sections 601 and 602, the Trustee shall not be deemed to have knowledge of such default unless either (A) a Responsible Officer of the Trustee shall have actual knowledge of such default or (B) the Trustee shall have received written notice thereof from the Company, from any Holder, from the holder of any such indebtedness or from the trustee under any such mortgage, indenture or other instrument; or (5) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, - 30 - reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (6) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. To the extent applicable, upon receipt by the Trustee of any Notice of Default executed by a Holder pursuant to this Section 501, a record date shall automatically and without any other action by any Person be set for the purpose of determining the Holders of Outstanding Securities entitled to join in such Notice of Default, which record date shall be the close of business on the day the Trustee receives such Notice of Default. The Holders of Outstanding Securities on such record date (or their duly appointed agents), and only such Persons, shall be entitled to join in such Notice of Default, whether or not such Holders remain Holders after such record date; provided, that unless such Notice of Default shall have become effective by virtue of Holders of the requisite principal amount of Outstanding Securities on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such Notice of Default shall - 31 - automatically and without any action by any Person be canceled and of no further force or effect. SECTION 502. Acceleration of Maturity; Rescission and Annulment. ------------------------ If an Event of Default occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of (and all accrued and unpaid interest on) all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount and interest shall become immediately due and payable. Upon payment of all such amounts (including interest accruing through the date of payment), all obligations of the Company in respect of the Securities shall terminate. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities, (B) the principal of any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate prescribed therefor in the Securities, and (C) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the nonpayment of the principal of and interest on the Securities which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission and waiver shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Trustee of any declaration of acceleration, or any rescission and annulment of any such acceleration, pursuant to this Section 502, a record date shall - 32 - automatically and without any other action by any Person be set for the purpose of determining the Holders of Outstanding Securities entitled to join in such declaration, or rescission and annulment, as the case may be, which record date shall be the close of business on the day the Trustee receives such declaration, or rescission and annulment, as the case may be. The Holders of Outstanding Securities on such record date (or their duly appointed agents), and only such Persons, shall be entitled to join in such declaration, or rescission and annulment, as the case may be, whether or not such Holders remain Holders after such record date; provided, that unless such declaration, or rescission and annulment, as the case may be, shall have become effective by virtue of Holders of the requisite principal amount of Outstanding Securities on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such declaration. or rescission and annulment, as the case may be, shall automatically and without any action by any Person be canceled and of no further force or effect. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. -------------------------------- The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal at the rate prescribed therefor in the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. - 33 - SECTION 504. Trustee May File Proofs of Claim. -------------------------------- In case of any judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have the claims of the Trustee and the Holders allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. -------------------------------- All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name, as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. ------------------------------ Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: - 34 - FIRST: To the payment of all amounts due the Trustee under Section 607; and SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively. SECTION 507. Limitation on Suits. ------------------- No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatsoever by virtue of, or by availing of, any provision of this Indenture (including without limitation the provisions of Section 512) to affect, disturb or prejudice the rights of any other Holders or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of the Holders. - 35 - SECTION 508. Unconditional Right of Holders to Receive Principal and Interest. --------------------------------- Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and (subject to Section 307) interest on such Security on the Stated Maturity or Maturities expressed in such Security and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. ------------------------------ Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. ---------------------------- No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. - 36 - SECTION 512. Control by Holders. ------------------ The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, that (1) such direction shall not be in conflict with any rule of law or with this Indenture; (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and (3) subject to the provisions of Section 601, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by Responsible Officer or Officers of the Trustee, determine that the action so directed would involve the Trustee in personal liability for which it has not been adequately indemnified or would be unduly prejudicial to Holders not joining in such direction. Upon receipt by the Trustee of any such direction, pursuant to this Section 512, a record date shall automatically and without any other action by any Person be set for the purpose of determining the Holders of Outstanding Securities entitled to join in such direction, which record date shall be the close of business on the day the Trustee receives such direction. The Holders of Outstanding Securities on such record date (or their duly appointed agents), and only such Persons, shall be entitled to join in such direction, whether or not such Holders remain Holders after such record date; provided, that unless such direction shall have become effective by virtue of Holders of the requisite principal amount of Outstanding Securities on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such direction shall automatically and without any action by any Person be canceled and of no further force or effect. SECTION 513. Waiver of Defaults. ------------------ The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any default hereunder and its consequences, except a default (1) in the payment of the principal of or interest on any Security, or - 37 - (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. --------------------- In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided, that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company, the Trustee or the Holders of 10% or more in principal amount of the Outstanding Securities. SECTION 515. Waiver of Stay or Extension Laws. -------------------------------- The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. ----------------------------------- The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of - 38 - such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. Notice of Defaults. ------------------ The Trustee shall give the Holders notice of any default hereunder as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 501(3), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 603. Certain Rights of Trustee. ------------------------- Subject to the provisions of Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders - 39 - pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be liable for any losses on investments; (i) the Trustee shall not be liable for any error or judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (j) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities; and (k) in the event that the Trustee is also acting as Paying Agent, Authenticating Agent or Security Registrar hereunder, the rights and protections afforded to the Trustee pursuant to this Article Six shall also be afforded to it as such Paying Agent, Authenticating Agent or Security Registrar. - 40 - SECTION 604. Not Responsible for Recitals or Issuance of Securities. ------------------------- The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee or any Authenticating Agent assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. ------------------- The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. ------------------- Money held by the Trustee or any Paying Agent (except the Company) in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee or any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 607. Compensation and Reimbursement. ------------------------------ The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder as may be mutually agreed upon in writing by the Company and the Trustee (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except to the extent any such expense, disbursement or advance may be attributable to its negligence or bad faith; and - 41 - (3) to indemnify the Trustee and its directors, officers and employees for, and to hold each of them harmless against, any loss, liability or expense incurred without negligence or bad faith on its, his or her part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself, himself or herself against any claim or liability in connection with the exercise or performance of any of the Trustee's powers or duties hereunder. As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of or interest on particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501, the expenses (including the reasonable fees and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable bankruptcy, insolvency or other similar law. The obligations of the Company set forth in this Section 607 and any lien arising hereunder shall survive the resignation or removal of any Trustee, the discharge of the Company's obligations pursuant to Article Four, the termination of this Indenture and the repayment of the Securities whether at Stated Maturity or otherwise. SECTION 608. Disqualification; Conflicting Interests. --------------------------------------- If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 609. Corporate Trustee Required; Eligibility. --------------------------------------- There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such, having a combined capital and surplus of at least $100,000,000 and an office or agency in New York, New York at which its corporate trust business is administered. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of a Federal or state supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so - 42 - published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. ------------------------------------------------- (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee shall not have been delivered to the resigning Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. - 43 - (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee and such successor Trustee shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders of Securities in the manner provided in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. -------------------------------------- Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. All moneys due and owing to a retiring Trustee shall be paid by the Company upon resignation or removal of the retiring Trustee. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. - 44 - SECTION 612. Merger, Conversion, Consolidation or Succession to Business. ------------------------- Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder; provided, that such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 613. Preferential Collection of Claims Against Company. ------------------------------------------------- If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 614. Authenticating Agents. --------------------- The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon exchange, registration of transfer or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Any such Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by Federal, state or District of Columbia authority. If such Authenticating Agent publishes reports of its condition at least annually, pursuant to law or the requirements of said supervising - 45 - or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible to act as such in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of any Authenticating Agent, shall continue to be Authenticating Agent hereunder; provided, that such successor corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible to act as such in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment under this Section shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if initially named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible to act as such in accordance with the provisions of this Section. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have represented to the Trustee that it is eligible for appointment as Authenticating Agent under this Section and to have agreed with the Trustee that: it will perform and carry out the duties of an Authenticating Agent as herein set forth, including among other things the duties to authenticate Securities when presented to it in connection with exchanges, registrations of transfer thereof or pursuant to Section 306; it will keep and maintain, and furnish to the Trustee from time to time as requested by the Trustee, appropriate records of all transactions carried out by it as - 46 - Authenticating Agent and will furnish the Trustee such other information and reports as the Trustee may reasonably require; and it will notify the Trustee promptly if it shall cease to be eligible to act as Authenticating Agent in accordance with the provisions of this Section. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have agreed with the Trustee to indemnify the Trustee against any loss, liability or expense incurred by the Trustee and to defend any claim asserted against the Trustee by reason of any acts or failures to act of such Authenticating Agent, but such Authenticating Agent shall have no liability for any action taken by it in accordance with the specific written direction of the Trustee. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation and expenses for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certification of authentication, an alternative certificate of authentication in the following form: This is one of the Securities designated in the within-mentioned Indenture. The Chase Manhattan Bank (National Association), As Trustee By.......................... As Authenticating Agent By.......................... Authorized Officer ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. ------------------------------ The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not later than June 15 and December 15 in each year, a list, in such form as the Trustee may - 47 - reasonably require, of the names and addresses of the Holders as of the immediately preceding June 1 or December 1, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content, such list to be dated as of a date not more than 15 days prior to the time such list is furnished; notwithstanding the foregoing, so long as the Trustee is the Security Registrar, no such list shall be required to be furnished. SECTION 702. Preservation of Information; Communications to Holders. ------------------------- (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 703. Reports by Trustee. ------------------ (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. - 48 - SECTION 704. Reports by Company. ------------------ The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided, that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. --------------------- The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person and the Company shall not permit any Person to consolidate with or merge into the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any indebtedness which is an obligation of the successor Person or becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time - 49 - or both, would become an Event of Default, shall have happened and be continuing; (3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets of the Company would become subject to a Lien which would not be permitted by this Indenture, the Company or such successor Person, as the case may be, shall take such steps as shall be necessary effectively to secure the Securities equally and ratably with (or prior to) all indebtedness secured thereby; and (4) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with the transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Substituted. --------------------- Upon any consolidation of the Company with, or merger by the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person (if still in existence) shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. -------------------------- Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: - 50 - (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Event of Default; or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or (5) to secure the Securities pursuant to the requirements of Section 1004 or 1005 or otherwise; or (6) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities; or (7) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided, that such action pursuant to this clause (7) shall not adversely affect the interests of the Holders of Outstanding Securities in any material respect. SECTION 902. Supplemental Indentures With Consent of Holders. ----------------------------------------------- With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon, or change the place of payment where, or the coin or currency in which, any Security or interest thereon is payable, or - 51 - impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof; or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; or (3) modify any of the provisions of this Section or Section 513 or Section 1008, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 1008, or the deletion of this proviso, in accordance with the requirements of Section 901(6). It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. ------------------------------------ In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Officer's Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which adversely affects the Trustee's own rights, duties, immunities or liabilities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. --------------------------------- Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. - 52 - SECTION 905. Conformity With Trust Indenture Act. ----------------------------------- Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 906. Reference in Securities to Supplemental Indentures. -------------------------- Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 907. Notice of Supplemental Indenture. -------------------------------- Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to Section 902, the Company shall transmit to the Holders a notice setting forth the substance of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal and Interest. --------------------------------- The Company will duly and punctually pay the principal of and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. ------------------------------- The Company will maintain in New York, New York an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and of any change in the location, of such office or agency. If at any time the Company shall fail to maintain such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby - 53 - appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in New York, New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Section 1003. Money for Payments to be Held in Trust. -------------------------------------- If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of or interest on any Securities, deposit with any such Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and hold all sums held by it for the payment of principal of or interest on the Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; and (2) at any time during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent for payment in respect of the Securities. - 54 - The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Security and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper of general circulation in The City of New York, Borough of Manhattan, printed in the English language and customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Limitation on Liens. ------------------- (a) Except as otherwise provided in clauses (1) through (8) below or in subsection (b) of this Section, the Company shall not, and shall not permit any Restricted Subsidiary to, issue, assume or guarantee any Debt secured by a Lien upon any Principal Property of the Company or of any Restricted Subsidiary or upon any shares of stock or Debt issued by any Restricted Subsidiary (whether such Principal Property, shares of stock or Debt are now owned or hereafter acquired) without in any such case effectively providing concurrently with the issuance, assumption or guaranty of any such Debt that the Securities (together with, if the Company shall so determine, any other indebtedness of or guaranty by the Company or such Restricted Subsidiary then existing or thereafter created which is not subordinated to the Securities) shall be secured equally and ratably with (or, at the option of the Company, prior to) such Debt, so long as such Debt shall be so secured; provided, however, that nothing in this Section 1004 shall prevent, - 55 - restrict or apply to (and there shall be excluded from secured Debt in any computation under this Section 1004) Debt secured by: (1) Liens on property of, or shares of stock or Debt issued by, any Subsidiary existing at the time it becomes a Restricted Subsidiary; provided, that such Lien shall not have been incurred in connection with the transfer by the Company or a Restricted Subsidiary of a Principal Property to such Subsidiary unless the Company, within 180 days of the effective date of such transfer, applies or causes a Restricted Subsidiary to apply an amount equal to the fair value, as determined by the Board of Directors, of such Principal Property at the time of such transfer, to the retirement of Securities or other Debt of the Company (other than Debt subordinated to the Securities), or Debt of any Restricted Subsidiary (other than Debt owed to the Company or any Restricted Subsidiary), having a stated maturity (i) more than 12 months from the date of such application or (ii) which is extendable at the option of the obligor thereon to a date more than 12 months from the date of such application; (2) Liens on any property, shares of stock or Debt existing at the time of acquisition thereof (including acquisition through merger or consolidation) or securing the payment of all or any part of the purchase price or construction cost thereof or securing any Debt incurred prior to, at the time of, or within 180 days after, the acquisition of such property, shares of stock or Debt or the completion of any such construction, whichever is later, for the purpose of financing all or any part of the purchase price or construction cost thereof; (3) Liens on any property to secure all or any part of the cost of development, construction, alteration, repair or improvement of all or any part of such property, or to secure Debt incurred prior to, at the time of, or within 180 days after, the completion of such development, construction, alteration, repair or improvement, whichever is later, for the purpose of financing all or any part of such cost; (4) Liens which secure Debt owing by a Restricted Subsidiary to the Company or to another Restricted Subsidiary or by the Company to a Restricted Subsidiary so long as the Debt is held by the Company or a Restricted Subsidiary; (5) Liens securing indebtedness of a corporation or other Person which becomes a successor of the Company in accordance with the provisions of Article Eight other than Debt incurred by such corporation or other Person in - 56 - connection with a consolidation, merger or sale of assets in accordance with such Article; (6) Liens on property of the Company or a Restricted Subsidiary in favor of the United States of America or any state thereof, or any department, agency or instrumentality or political subdivision of the United States of America or any state thereof, or in favor of any other country or any political subdivision thereof, to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred or guaranteed for the purpose of financing all or any part of the purchase price or the cost of construction, alteration, repair or improvement of the property subject to such Liens (including but not limited to Liens incurred in connection with pollution control, industrial revenue or similar financing), or in favor of any trustee or mortgagee for the benefit of holders of indebtedness of any such entity incurred for any such purpose; (7) Liens existing at December 15, 1995 including Liens to the extent such Liens attach to property acquired after such date pursuant to the terms of the instrument creating such Liens as in effect on such date; and (8) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Lien referred to in the foregoing clauses (1) to (7), inclusive, or of any Debt secured thereby; provided, that such extension, renewal or replacement Lien shall be limited to all or any part of the same property that secured the Lien extended, renewed or replaced (plus any improvements and construction on such property) and shall secure no larger amount of Debt than that which had been so secured at the time of such extension, renewal or replacement and, in the case of clause (iv), that the Debt being secured thereby is being secured for the same type of Person as the Debt being replaced. (b) Notwithstanding the foregoing provisions of this Section 1004, the Company and any one or more Restricted Subsidiaries may issue, assume or guarantee Debt secured by a Lien which would otherwise be subject to the foregoing restrictions if at the time it does so (the "Incurrence Time") the aggregate amount of such Debt plus all other Debt of the Company and its Restricted Subsidiaries secured by Liens which would otherwise be subject to the foregoing restrictions after giving effect to the retirement of any Debt which is currently being retired (not including Debt permitted to be secured under clauses (1) through (8) above), plus the aggregate Attributable Debt (determined as of the Incurrence Time) of Sale and Leaseback Transactions (other than Sale and Leaseback Transactions - 57 - permitted by Subsections (a) and (b) of Section 1005) entered into after December 15, 1995 and in existence at the Incurrence Time (less the aggregate amount of proceeds of such Sale and Leaseback Transactions which shall have been applied in accordance with Subsection (c) of Section 1005), does not exceed 10% of Consolidated Net Tangible Assets. SECTION 1005. Limitation on Sale and Leaseback Transactions. --------------------------------------------- The Company shall not itself, and shall not permit any Restricted Subsidiary to, enter into any arrangements after December 15, 1995 with any bank, insurance company or other lender or investor (other than the Company or another Restricted Subsidiary) providing for the leasing as lessee by the Company or by any such Restricted Subsidiary of any Principal Property (except a lease for a temporary period not to exceed three years by the end of which it is intended the use of such Principal Property by the lessee will be discontinued and a lease which secures or relates to industrial revenue or pollution control bonds or similar financing), which was or is owned by the Company or a Restricted Subsidiary and which has been or is to be sold or transferred by the Company or a Restricted Subsidiary, more than 180 days after the completion of construction and commencement of full operation thereof by the Company or such Restricted Subsidiary, to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such Principal Property (herein called a "Sale and Leaseback Transaction") unless: (a) the Company or such Restricted Subsidiary would (at the time of entering into such arrangement) be entitled pursuant to clauses (1) through (8) of Subsection (a) of Section 1004, without equally and ratably securing the Securities, to issue, assume or guarantee Debt secured by a Lien on such Principal Property in the amount of Attributable Debt arising from such Sale and Leaseback Transaction; or (b) the Attributable Debt of the Company and its Restricted Subsidiaries in respect of such Sale and Leaseback Transaction and all other Sale and Leaseback Transactions entered into after December 15, 1995 (other than such Sale and Leaseback Transactions as are permitted by subsection (a) or (c) of this Section 1005), plus the aggregate principal amount of Debt secured by Liens on Principal Properties then outstanding (not including any such Debt secured by Liens described in clauses (1) through (8) of subsection (a) of Section 1004) which do not equally and ratably secure the Securities, would not exceed 10% of Consolidated Net Tangible Assets; or - 58 - (c) the Company, within 180 days after the sale or transfer, applies or causes a Restricted Subsidiary to apply an amount equal to the greater of the net proceeds of such sale or transfer or the fair value, as determined by the Board of Directors, of the Principal Property so sold and leased back at the time of entering into such Sale and Leaseback Transaction to the retirement of Securities or other Debt of the Company (other than Debt subordinated to the Securities), or Debt of any Restricted Subsidiary (other than Debt owed to the Company or any Restricted Subsidiary), having a stated maturity (i) more than 12 months from the date of such application or (ii) which is extendable at the option of the obligor thereon to a date more than 12 months from the date of such application; provided, that the amount to be so applied shall be reduced by (x) the principal amount of Securities delivered to the Trustee for retirement and cancellation within 180 days after such sale or transfer, and (y) the principal amount of any such Debt of the Company or a Restricted Subsidiary other than Securities voluntarily retired by the Company or a Restricted Subsidiary within 180 days after such sale or transfer. Notwithstanding the foregoing, no retirement referred to in this subdivision (c) may be effected by payment at Maturity. Notwithstanding the foregoing, where the Company or any Restricted Subsidiary is the lessee in any Sale and Leaseback Transaction, Attributable Debt shall not include any Debt resulting from the guarantee by the Company or any other Restricted Subsidiary of the lessee's obligation thereunder. SECTION 1006. Existence. --------- Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board or Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1007. Statement as to Compliance. -------------------------- The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officer's Certificate stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the provisions and conditions of this Indenture and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. - 59 - SECTION 1008. Waiver of Certain Covenants. --------------------------- The Company may omit in any particular instance to comply with any provision or condition set forth in Sections 1004 and 1005, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such provision or condition, but no such waiver shall extend to or affect such provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such provision or condition shall remain in full force and effect. - 60 - * * * This instrument may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. ATTEST: ALLEGHENY LUDLUM CORPORATION /s/ J. D. Walton By: /s/ James L. Murdy - ---------------------------- -------------------------- Name: Jon D. Walton Name: James L. Murdy Title: Vice President--General Title: Senior Vice Presient--Finance Counsel and Secretary and Chief Financial Officer (Corporate Seal) ATTEST: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), AS TRUSTEE /s/ Gemmel Richards By: /s/ J. D. Heaney - ---------------------------- -------------------------- Name: Gemmel Richards Name: J. D. Heaney Title: Assistant Secretary Title: Vice President (Corporate Seal) - 61 - ACKNOWLEDGMENTS THE COMMONWEALTH OF PENNSYLVANIA) ) COUNTY OF ALLEGHENY ) BEFORE ME, the undersigned authority, on this day personally appeared, James L. Murdy, the Senior Vice President--Finance and Chief Financial Officer - -------------- ---------------------------------------------------------- of ALLEGHENY LUDLUM CORPORATION, known to me to be the person whose name is subscribed to the above and foregoing instrument of writing, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as the act and deed of said corporation; and, being by me duly sworn, did depose and say that he resides at Upper St. Clair, Pennsylvania, that he is the Senior Vice President--Finance - ----------------------------- ------------------------------ and Chief Financial Officer of said corporation, that he knows the seal of - --------------------------- said corporation, that the seal affixed to said instrument is such corporate seal, that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 18th day of ---- December 1995. - -------- /s/ Mary Beth Luksik ---------------------------- My commission expires on: Notarial Seal Mary Beth Luksik, Notary Public Pittsburgh, Allegheny County My Commission Expires June 8, 1998 - 62 - THE STATE OF NEW YORK) ) COUNTY OF KINGS ) BEFORE ME, the undersigned authority, on this day personally appeared J. D. HEANEY, the Vice President of THE CHASE MANHATTAN BANK (NATIONAL - ------------ -------------- ASSOCIATION), known to me to be the person whose name is subscribed to the above and foregoing instrument of writing, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated, and as the act and deed of said corporation; and, being by me duly sworn, did depose and say that he resides at Langhorne, PA 19047, that he ------------------- is a Vice President of said corporation, that he knows the seal of said -------------- corporation, that the seal affixed to said instrument is such corporate seal, that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. GIVEN UNDER MY HAND AND SEAL OF OFFICE this 19th day of December ---- -------- 1995. /s/ Margaret M. Price ---------------------------- Notary Public in and for My commission expires on: Margaret M. Price Notary Public, State of New York No. 24-4980599 Qualified in Kings County Commission Expires April 22, 1997 - 63 - EX-10.F 3 1987 STOCK OPTION INCENTIVE PLAN Exhibit 10(f) ALLEGHENY LUDLUM CORPORATION 1987 STOCK OPTION INCENTIVE PLAN -------------------------------- (Amended and Restated) Article I. Purposes of the Plan The purposes of the Allegheny Ludlum Corporation 1987 Stock Option Incentive Plan are to promote the growth and profitability of Allegheny Ludlum Corporation, to provide key employees of Allegheny Ludlum Corporation and of any corporation the majority of the voting stock of which is owned by Allegheny Ludlum Corporation with an incentive to achieve long-term corporate objectives, to attract and retain key employees of outstanding competence and to provide key employees with an opportunity to acquire an equity interest in Allegheny Ludlum Corporation. Article II. Definitions As used herein, the following terms shall have the meanings set forth: 2.01 "Award" shall mean the grant of a Stock Option and/or a Stock Appreciation Right under the Plan. 2.02 "Award Agreement" shall mean the agreement between the Optionee and the Company evidencing the grant of Stock Options and/or Stock Appreciation Rights under the Plan, which Award Agreement shall contain such terms, conditions and restrictions as the Committee may deem advisable; provided, however, Award Agreements entered into at different times or with different Optionees need not contain similar provisions. 2.03 "Board" shall mean the Board of Directors of the Company. 2.04 "CEO" shall mean the Chief Executive Officer of the Company. 2.05 "Committee" shall mean the Personnel and Compensation Committee of the Board, subject to the provisions of Section 3.4(a) hereof. 2.06 "Common Stock" shall mean common stock, $0.10 par value per share, of the Company. 2.07 "Company" shall mean Allegheny Ludlum Corporation. 2.08 "Eligible Participants" shall mean (i) those officers and key employees of the Company, or of any corporation the majority of the voting stock of which is owned by the Company, designated by the Board in accordance with the procedures set forth in Article III hereof as eligible to receive an Award under the Plan, and (ii) subject to the following sentence, all Executive Officers of the Company. Directors of the Company who are not otherwise officers or employees of the Company and Directors who are members of the Committee may not be designated as Eligible Participants. 2.09 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 2.10 "Executive Officer" shall mean an "officer" of the Company as defined in Rule 16a-1(f) as promulgated by the Securities and Exchange Commission under the Exchange Act, as such Rule may be amended from time to time. 2.11 "Fair Market Value" shall mean the fair market value of shares of Common Stock, as determined by the Committee in its discretion. The Committee may change from time to time any method or formula by which it determines Fair Market Value. 2.12 "Optionee" shall mean an Eligible Participant who has received a grant of Stock Options and/or Stock Appreciation Rights under the Plan. Whenever the word "Optionee" is used in any provision of the Plan in circumstances where the provision should logically be construed to apply to executors, administrators or the person or persons to whom the Stock Options and/or Stock Appreciation Rights may be transferred by will or the laws of descent or distribution, the word "Optionee" shall be deemed to include such executors, administrators or person or persons. 2.13 "Option Period" shall mean the period or periods beginning on the date on which a Stock Option or Stock Appreciation Right is granted and ending on the last day on which such Stock Option or Stock Appreciation Right may be exercised by an Optionee, as determined by the Committee upon recommendation of the CEO and as set forth in the Award Agreement; provided, however, no Option Period may extend beyond the tenth anniversary of the date of granting the related Stock Option or Stock Appreciation Right. 2.14 "Option Price" shall mean (i) with respect to Stock Options, the price at which a share of Common Stock may be purchased pursuant to Stock Options granted under the Plan upon exercise thereof, and (ii) with respect to Stock Appreciation Rights, the price at which a Stock Appreciation Right may be exercised, as such Option Price may be adjusted from time to time in accordance with the provisions of Article V and Section 9.8 hereof and the terms of the Award Agreement. - 2 - 2.15 "Plan" shall mean the Allegheny Ludlum Corporation 1987 Stock Option Incentive Plan, as amended from time to time pursuant to Section 9.10 hereof. 2.16 "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Securities and Exchange Commission under the Exchange Act, as in effect prior to May 1, 1991 until the Committee elects otherwise and thereafter as such Rule may be amended from time to time. 2.17 "Stock Appreciation Right" shall mean a right which upon exercise shall entitle the Optionee to receive for each share of Common Stock subject to such Stock Appreciation Right the excess, if any, of the Fair Market Value of a share of Common Stock as of the date of such exercise over the Option Price. 2.18 "Stock Option" shall mean the right and option of an Optionee to purchase the aggregate number of shares of Common Stock as is set forth in the Award Agreement. 2.19 "Termination Date" shall mean the date upon which this Plan terminates, which shall be January 1, 1997. Article III. Operation of the Plan 3.1 Designation of Eligible Participants ------------------------------------ (a) Designation by Board The Board, upon recommendation made in accordance with Section 3.1(b) hereof, shall determine and designate those officers and key employees of the Company or of any corporation the majority of the voting stock of which is owned by the Company, in addition to the Executive Officers, who shall be eligible to participate in the Plan. The Board shall make such determination and designation only from those individuals, job classifications or other descriptions of officers and key employees recommended to the Board in accordance with Section 3.1(b) hereof. (b) Procedure for Recommendation to the Board (i) Recommendation by CEO Any and all recommendations concerning eligibility to participate in the Plan shall be initiated by the CEO. The CEO may, at such times and from time to time as he may determine in his discretion, recommend to the Committee those officers and key employees, by naming such individuals, by describing job classifications or otherwise describing the persons or classes of - 3 - employees, whom the CEO in his discretion considers to be officers or key employees eligible to participate in the Plan. The CEO may, from time to time, as he may determine in his discretion, recommend the addition of such individuals, job classifications or other descriptions of employees to those previously designated as Eligible Participants or the deletion of Eligible Participants from those previously designated as eligible to participate. (ii) Review by Committee The Committee shall review each recommendation of the CEO as soon as practicable after presentation of such recommendation by the CEO. Upon such review, the Committee shall recommend to the Board those individuals, job classifications or other descriptions of employees from among those recommended by the CEO which the Committee, in its discretion, considers to be officers or key employees eligible to participate in the Plan. (c) Designation of Eligibility Does Not Require Grant of Options Designation of an officer or key employee as an Eligible Participant shall not require the CEO to recommend the grant of an Award or the Committee to grant an Award to such Eligible Participant, either upon initial designation or from time to time thereafter. 3.2 Grant of Stock Options and/or Stock Appreciation ------------------------------------------------ Rights ------ (a) Grant by Committee The Committee, upon recommendation made in accordance with Section 3.2(b) hereof, may grant Stock Options and/or Stock Appreciation Rights under the Plan to any Eligible Participant recommended to receive an Award whether or not such Eligible Participant has previously received an Award under the Plan, in respect to an amount of shares and subject to such restrictions as the Committee may deem appropriate, in its discretion but only upon the recommendation of the CEO in accordance with Section 3.2(b) hereof. (b) Procedure for Recommendation Any and all recommendations concerning the grant of an Award under the Plan, including but not limited to the identity of the Eligible Participant, the form of the Award and the number of shares subject to Stock Options or Stock Appreciation Rights in an Award granted to an Eligible Participant, shall be initiated by the CEO. The CEO may, at such times and from time to time as he may determine, recommend to the - 4 - Committee the identity of the Eligible Participant(s) to whom an Award should be granted together with (i) the number of shares subject to Stock Options and/or Stock Appreciation Rights to be granted to each Eligible Participant so recommended, (ii) the respective Option Periods applicable thereto and (iii) any restrictions or other terms and conditions applicable to Stock Options and/or Stock Appreciation Rights. The Committee shall review each recommendation of the CEO as soon as practicable after presentation of such recommendation by the CEO. (c) General The CEO, in recommending, and the Committee, in granting, such Awards and determining their form and amount, shall give consideration to the functions and responsibilities of the Eligible Participant, his or her contributions to profitability and sound growth of the Company and such other factors as the CEO and the Committee, as the case may be, may deem appropriate. An Optionee, upon receipt of a grant of an Award, shall state his or her good faith intention to continue as an employee of the Company for such period (but not less than six months) from the date of the grant of the Award as shall be provided in the Award Agreement, subject to the right of the Company to terminate the employment of the Optionee at any time. No Award may be granted to an Eligible Participant within six months of the Eligible Participant's expected retirement date. No Stock Option or Stock Appreciation Right may be granted under the Plan after December 31, 1996, or such earlier date as may be determined by the Board. 3.3 Vesting of Stock Options and/or Stock Appreciation -------------------------------------------------- Rights ------ Stock Options and Stock Appreciation Rights granted under the Plan shall not be immediately exercisable but shall become exercisable in accordance with a vesting schedule set forth in the Award Agreement evidencing such grant. Except as permitted by the Committee upon recommendation of the CEO, no Award Agreement may set forth a vesting schedule which provides for vesting more rapid than the rate of one third of the number of shares subject to such Award Agreement on each of the third, fourth and fifth anniversaries of the grant of such Award. Stock Options and Stock Appreciation Rights, to the extent vested under the schedule set forth in the Award Agreement, shall be separately exercisable in whole or in part. 3.4 General Administration ---------------------- (a) The Plan shall be administered by the Committee. A person who is not a disinterested person for the purposes of Rule 16b-3 or, effective as of the 1995 annual meeting of shareholders, who is not an "outside director" for the - 5 - purposes of Section 162(m) of the Internal Revenue Code of 1986 and the regulations promulgated thereunder, shall not be a member of the Committee, and shall not participate in the administration of the Plan, for any purpose relating to any Executive Officer participant or participants in the Plan. Such disqualification shall be effective immediately prior to the occurrence of any event or circumstance that causes the person to lose the status of disinterested person or outside director, as the case may be. (b) The Committee shall have the authority in its sole discretion from time to time: (i) upon recommendation of the CEO, to grant Awards provided for in the Plan; (ii) to prescribe such limitations, restrictions and conditions upon any such Stock Options and/or Stock Appreciation Rights as the Committee, upon recommendation of the CEO, shall deem appropriate; and (iii) to interpret the Plan, to adopt, amend and rescind rules and regulations relating to the Plan, and to make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. A majority of the Committee shall constitute a quorum, and the action of a majority of members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted in writing without the holding of a meeting, shall be the acts of the Committee. (c) All such actions of the Committee shall be final, conclusive and binding upon Eligible Participants and Optionees. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any grant hereunder. Article IV. Aggregate Limitation on Shares Subject to Plan Shares of Common Stock which may be issued pursuant to Stock Options or Stock Appreciation Rights granted under the Plan may be either authorized and unissued shares or authorized and issued shares of Common Stock held by the Company as treasury shares. The number of shares of Common Stock reserved for issuance under the Plan shall not exceed 2,700,000 shares, as adjusted to reflect the 3-for-2 stock split effective July 2, 1990 and the 2-for-1 stock split effective July 1, 1993, subject to further adjustment pursuant to Section 9.8 hereof; provided, however, if any Stock Option or Stock Appreciation Right shall expire or be cancelled prior to its exercise in full for any reason, the shares subject to such Stock Option or Stock Appreciation Right shall be thereafter available under the Plan. - 6 - Article V. Option Price 5.1 Option Price on Date of Grant ----------------------------- The Option Price on the date of grant of Stock Options or Stock Appreciation Right under the Plan shall be determined by the Committee upon recommendation of the CEO and shall be an amount not less than the Fair Market Value of a share of Common Stock at the time such Stock Option or Stock Appreciation Right is granted. 5.2 Adjustments to Option Price --------------------------- In addition to the adjustments provided in Section 9.8, upon recommendation by the CEO the Committee may grant Stock Options and/or Stock Appreciation Rights which provide that the Option Price on the date of exercise shall be determined by subtracting from the Option Price on the date of grant, as determined under Section 5.1 and set forth in the Award Agreement, a percentage of the excess, if any, of (i) the Fair Market Value of a share of Common Stock as of the date of exercise over (ii) the Option Price on the date of grant, provided, however, that in no event may the Option Price, as adjusted, be less than $1.00. Article VI. Option Periods; Rights Upon Retirement, Death or Disability 6.1 Option Period ------------- Each Award Agreement shall state the period or periods within which a Stock Option or Stock Appreciation Right may, to the extent then vested, be exercised or surrendered by the Optionee, in whole or in part, which period shall be as determined by the Committee upon recommendation of the CEO; provided, however, except as otherwise determined by the Committee upon recommendation of the CEO, each Option Period shall cease upon termination of an Optionee's employment with the Company. Except as so determined by the Committee upon recommendation of the CEO, an Optionee may not exercise a Stock Option or Stock Appreciation Right, in whole or in part, after such termination of employment. 6.2 Rights in the Event of Retirement --------------------------------- Notwithstanding Section 6.1 hereof, if an Optionee retires with the consent of the Company without having fully exercised or surrendered the then vested portion of a Stock Option or Stock Appreciation Right, no additional shares shall vest after the date of such retirement unless otherwise provided by the Committee but the Optionee shall have the right to - 7 - exercise the outstanding and then exercisable portion of such Stock Option and/or Stock Appreciation Rights, or to surrender the outstanding and then exercisable portion of such Stock Option and/or Stock Appreciation Right pursuant to Article VII hereof at any time prior to the earlier of (i) the end of the Option Period set forth in the Award Agreement or (ii) the third anniversary of the date of such retirement. 6.3 Rights in the Event of Death or Disability ------------------------------------------ Notwithstanding Section 6.1 hereof, if an Optionee dies or becomes disabled without having fully exercised or surrendered the then vested portion of a Stock Option and/or Stock Appreciation Right, no additional shares shall vest after the date of such death or disability unless otherwise provided by the Committee but the Optionee and the executors, administrators, legatees or distributees of the Optionee shall have the right, to the extent of their respective custody and control, to exercise the outstanding and then exercisable portion of such Stock Option and/or Stock Appreciation Right, or to surrender the outstanding and then exercisable portion of the Stock Option and/or Stock Appreciation Right, pursuant to Article VII hereof, at any time prior to the earlier of (i) the end of the Option Period set forth in the Award Agreement or (ii) the third anniversary of the date of death or disability. Disability shall mean full, permanent disability as determined by the Committee. The date of disability shall be determined by the Committee. Article VII. Surrender of Options and Stock Appreciation Rights In addition to the rights to surrender Stock Options and/or Stock Appreciation Rights, to the extent then exercisable, as provided in Section 6.2 hereof and Section 6.3 hereof, the Committee may authorize, upon such conditions and restrictions as it deems advisable, the surrender, to the extent then exercisable, of the right to exercise a Stock Option and/or Stock Appreciation Right, or any portion thereof, and the payment by the Company in exchange therefor of an amount, after withholding for taxes as provided in Section 8.4 hereof, equal to the excess of the Fair Market Value of the shares of Common Stock covered by the Stock Option and/or Stock Appreciation Right, or portion thereof, surrendered over the aggregate Option Price of such shares. Such payment may be made in shares of Common Stock valued at Fair Market Value or in cash or partly in cash and partly in shares of Common Stock, as the Committee deems advisable. The shares of Common Stock covered by any Stock Option or Stock Appreciation Right, or portion of either, as to which the right to exercise shall have been so surrendered shall not again be available for purposes of the Plan. Any shares of Common Stock delivered upon any such surrender may be authorized unissued or reacquired Common Stock and shall not be charged - 8 - against the number of shares of Common Stock available for grant of Stock Options under the Plan. Article VIII. Manner of Exercise, Payment of Purchase Price and Withholding 8.1 Exercise of Options ------------------- A Stock Option may be exercised by an Optionee from time to time, in whole or in part, independent of any Stock Appreciation Right to the extent then exercisable by delivering an irrevocable written notice to the Committee of his or her intent to exercise the Stock Option with respect to a specified number of shares. The specified number of shares will be issued and transferred to the Optionee upon receipt by the Committee of (i) such notice and (ii) payment, including applicable taxes, for such shares. 8.2 Payment of Purchase Price ------------------------- The purchase price of the shares for which a Stock Option may be exercised shall be paid to the Company, prior to the delivery of the shares being purchased in the form of, at the discretion of the Optionee, (i) cash, (ii) whole shares of Common Stock already owned by the Optionee, valued at their Fair Market Value as of the day immediately preceding the date of exercise or (iii) a combination of cash and Common Stock equal in value to the purchase price. 8.3 Exercise of Stock Appreciation Rights ------------------------------------- A Stock Appreciation Right may be exercised independently of any Stock Option by an Optionee from time to time, in whole or in part, to the extent then exercisable by delivering written notice to the Committee of his or her intent to exercise the Stock Appreciation Right with respect to a specified number of shares. Upon exercise of a Stock Appreciation Right, the amount realized by the Optionee may be payable, in the discretion of the Committee, in the form of shares of Common Stock valued at their then Fair Market Value or cash or a combination of Common Stock and cash. The amount of cash or number of shares payable upon exercise of a Stock Appreciation Right, as determined by the Committee, will be delivered to the Optionee upon receipt of such notice and receipt of payment for, or withholding of, applicable taxes. 8.4 Withholding ----------- In each case where an Optionee shall exercise a Stock Option and/or Stock Appreciation Right, in whole or in part, the Company shall notify the Optionee of the amount of - 9 - withholding tax, if any, which must be paid under federal, state and local law. The Company shall, in the discretion of the Company, but with the consent of the Committee, arrange for payment for such withholding taxes in any one or combination of the following ways: (i) acceptance of an amount in cash paid by the Optionee, (ii) deduction of amounts for withholding taxes from Optionee's regular salary payments, (iii) deduction of amounts for withholding taxes from amounts of cash payable to Optionee upon exercise, (iv) reduction in the number of shares to be issued pursuant to such exercise by that number of shares having a Fair Market Value equal to the amount the Company is required to withhold and/or (v) acceptance of whole shares of Common Stock already owned by the Optionee having a Fair Market Value equal to the amount the Company is required to withhold. If the full amount of the withholding tax is not recovered in the above manner, the Optionee shall, forthwith upon receipt of notice, remit the deficiency to the Company. No shares acquired pursuant to exercise of a Stock Option or Stock Appreciation Right shall be issued or delivered to an Optionee until all applicable withholding taxes shall have been satisfied in full. 8.5 Delivery of Shares and/or Cash ------------------------------ As soon as practicable after each exercise and upon compliance by an Optionee with all applicable conditions, the Company will issue and deliver by mail, or cause delivery by mail to the Optionee at the address specified, the number of shares of Common Stock and/or the Company's check for the amount of cash which the Optionee is entitled to receive (subject to reduction for withholding tax as provided in Section 8.4 hereof) under the provisions of the Plan and the Award Agreement. Such shares, and any certificates issued to evidence such shares, shall be registered in the name of the Optionee or such other person or entity as the Optionee shall specify in writing at the time such options are exercised. 8.6. Authorization of Other Procedures --------------------------------- The Committee is authorized to establish procedures in order to facilitate the sale by an Optionee of a sufficient number of shares of Common Stock purchased under the Plan to pay the purchase price of such shares and to facilitate the delivery of shares of Common Stock purchased hereunder. Article IX. Miscellaneous 9.1 General Restriction ------------------- Any Award granted under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that any listing or registration of the shares of - 10 - Common Stock or any consent or approval of any governmental body, or any other agreement or consent is necessary or desirable as a condition of the granting of a Stock Option or issuance of shares of Common Stock or cash in satisfaction of the exercise of an Award, such grant of a Stock Option or issuance of shares of Common Stock may not be consummated unless such requirement is satisfied in a manner acceptable to the Committee. 9.2 Awards to Executive Officers ---------------------------- For the purposes of the Plan, and notwithstanding any provision of the Plan to the contrary, the selection of Executive Officers to receive Awards, and decisions concerning the timing, pricing, and amount of Awards to Executive Officers, shall be made solely by the Committee in its discretion. The Committee shall receive and review recommendations of the CEO relating to Executive Officers under the Plan, but shall not be bound by such recommendations and may initiate action under the Plan with respect to Executive Officers although not initiated by the CEO. 9.3 Non-Assignability ----------------- No Stock Option or Stock Appreciation Right granted under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, any Stock Option or Stock Appreciation Right shall be exercisable only by such individual. No assignment or transfer of a Stock Option or Stock Appreciation Right, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise (except by will or the laws of descent and distribution), shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Stock Option or Stock Appreciation Right shall terminate and become of no further effect. 9.4 Investment Representation ------------------------- Each Award Agreement may provide that the Optionee or recipient shall deliver to the Committee, upon demand by the Committee, at the time of any exercise of any Stock Option or Stock Appreciation Right for which the Committee elects to issue shares of Common Stock a written representation that the shares to be acquired are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to delivery of any shares shall be a condition precedent to the right of the Optionee or such other person to acquire any shares. - 11 - 9.5 No Right to Employment ---------------------- Nothing in the Plan or in any agreement entered into pursuant to it shall confer upon any Optionee or Eligible Participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such Participant. 9.6 Non-Uniform Determinations -------------------------- The recommendations of the CEO and the Committee and the determinations of the Board and the Committee under the Plan (including without limitation the respective determinations or recommendations of the persons to receive an Award, the form, amount and timing of such Awards and the terms and provisions of such Awards) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, an Award under the Plan, whether or not such persons are similarly situated. 9.7 No Rights as Shareholders ------------------------- Recipients of Stock Options and/or Stock Appreciation Rights under the Plan shall have no rights as shareholders of the Company with respect thereto unless and until shares of Common Stock are issued to them. 9.8 Adjustments of Stock Options and Stock Appreciation Rights ---------------------------------------------------------- In the event of any change or changes in the outstanding Common Stock of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares or any rights offering to purchase a substantial amount of Common Stock at below Fair Market Value or of any similar change affecting the Common Stock, any of which takes effect after the first grant of an Award under the Plan, the Committee may, in its discretion, appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Stock Options and/or Stock Appreciation Rights theretofore granted under the Plan, the Option Price of such Stock Options or Stock Appreciation Rights, and any and all other adjustments deemed appropriate by the Committee to prevent substantial dilution or enlargement of the rights granted to an employee in such manner as the Committee shall deem appropriate. 9.9 Options and/or Stock Appreciation Rights Not A Bar --------------------------------------------------- to Corporate Event ------------------ The existence of the Stock Options and/or Stock Appreciation Rights granted hereunder shall not affect in any way - 12 - the right or the power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 9.10 Amendment or Termination of the Plan ------------------------------------ The Board may at any time terminate the Plan or any part thereof and may from time to time amend the Plan as it may deem advisable; provided, however, that without shareholder approval, the Board may not (i) increase the aggregate number of shares of Common Stock which may be issued under the Plan (other than increases permitted under Paragraph 9.8 hereof), (ii) extend the term of the Plan, or (iii) extend the period during which Stock Options or Stock Appreciation Rights may be exercised. The termination or amendment of the Plan shall not, without the consent of an Optionee, affect such Optionee's rights under a previous grant of Stock Options or Stock Appreciation Rights. Article X. Effective Date of the Plan; Contingent Effectiveness The effective date of the Plan shall be the date upon which the latter of the following occurs: (i) the closing on an initial public offering by the Company of shares of Common Stock in a transaction registered under the Securities Act of 1933 on Form S-1 and (ii) the approval, at a regular or special meeting, by the shareholders of the Company holding not less than a majority of the issued and outstanding shares of Common Stock. Notwithstanding the foregoing, if the Plan shall have been approved by the Board prior to such shareholder approval, Stock Options and/or Stock Appreciation Rights may be granted hereunder subject to subsequent shareholder approval. Notwithstanding approval by the Board and the shareholders, in the event that no such offering takes place prior to January 1, 1988, the Plan, together with all actions taken and agreements executed in relation thereto, shall be null and void and without further effect. Article XI. Termination of Plan The Plan shall expire on January 1, 1997. - 13 - Article XII. Rule 16b-3 Compliance. It is intended that the Plan comply with Rule 16b-3 and that all interpretations of the Plan relating to Executive Officers shall be consistent with such Rule and the Exchange Act. In order to maintain compliance with such Rule and the Exchange Act and to facilitate and promote the conformity of the transactions of Executive Officer participants under the Plan with such Rule, the Committee may adopt such rules and policies as it deems advisable, including, but not limited to, rules and policies restricting the timing of a surrender of a Stock Option for cash or of an exercise of a Stock Appreciation Right for cash or of the reduction in the number of shares to be issued pursuant to the exercise of a Stock Option pursuant to Section 8.4 hereof and elections with respect thereto. PAT00462 - 14 - EX-13 4 ALLEGHENY LUDLUM ANNUAL REPORT Exhibit 13 Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL OVERVIEW 1995 was a significant year for strengthening the Company's financial condition: . Sales revenues reached a new record. . Strong earnings of $111.9 million were attained. . Operating cash flow reached $155.0 million. . New 30-year senior debt in the amount of $150 million was issued at a fixed interest rate of 6.95%. . Convertible subordinated debt of $100 million was extinguished prior to its maturity date, eliminating approximately 7.5% of potential dilution in common shareholder equity. . Excess liquidity was used to repurchase 3.8 million shares of common stock, or 6% of those outstanding, for $75.6 million. . At December 31, 1995, invested cash plus unused bank credit lines totaled $170.9 million, providing excellent financial liquidity. This financial review covers certain developments during the past three years relating to the results of operations and financial condition of the Company. RESULTS OF OPERATIONS Net sales by product line were as follows:
Fiscal Year (dollars in millions) 1995 % 1994 % 1993 % - ----------------------------------------------------------------------------------------------------------------------- Stainless Steel $1,223.6 81.9 $ 834.0 77.5 $ 892.3 81.1 Silicon Electrical Steel 147.2 9.9 141.5 13.1 156.0 14.2 Other Specialty Alloys 123.5 8.2 101.4 9.4 51.9 4.7 - ----------------------------------------------------------------------------------------------------------------------- Total Net Sales $1,494.3 100.0 $1,076.9 100.0 $1,100.2 100.0 =======================================================================================================================
Fiscal Year 1995 compared with Fiscal Year 1994 Net Sales Net sales dollars increased 39% in 1995, while shipments increased 16% from 490,400 tons in 1994 to 566,500 tons in 1995. The results of the 1995 period reflected strong market demand for most of the Company's products and were favorably affected by improved prices, selling price surcharges to cover increased raw material costs, higher volume and improved product mix. The results of the 1994 period were adversely affected by the ten-week strike called by the United Steelworkers of America (USWA) in April 1994. Stainless steel sales increased 47% in 1995 as a result of increased shipments, higher prices, surcharges and improved product mix, including reduced shipments of lower priced commodity stainless steel for automotive exhaust systems. The increase in sales reflected an increase in demand for stainless steel products. In addition, the labor strike had an adverse effect on stainless steel sales in 1994 which was only partially offset by the inclusion of sales of plate mill plate products from the Washington Plant which was acquired in November 1993. Silicon electrical steel sales increased 4% in 1995 but shipments did not return to pre-strike levels. While prices for most silicon products increased in 1995, silicon sales continued to be depressed due to low demand and increased imports. Other specialty alloy sales increased 22% in 1995 due to higher prices, surcharges and increased shipments of most specialty alloy products. Export sales increased to $87 million in 1995 compared to $73 million in 1994. Other Events The Company has announced price increases of approximately 5% for stainless sheet, strip and plate effective with shipments on May 6, 1996. Raw material selling price surcharges continue to apply but the amount of the surcharges has declined consistent with reductions in raw material prices since the peak levels of 1995. Unplanned equipment outages in January 1996 caused the Company to lose approximately 11 days of production at its hot strip mill and approximately 10 days of production at its continuous caster. While finishing operations and shipments were not significantly affected by the outages, operating expenses were adversely affected in the early weeks of the first quarter of 1996. 19 1995 Annual Report Cost and Expenses Cost of products sold includes raw material costs, labor costs, energy costs (primarily electricity and natural gas), and other operating and support costs related to the manufacturing process. Cost of products sold as a percentage of sales decreased 6 percentage points in 1995 compared to 1994. The improvement in 1995 reflects higher sales levels and continued efforts to contain costs. Also, 1994 was adversely affected by the strike which resulted in lower sales without a corresponding reduction in fixed costs and the further negative cost effect of the hourly signing bonus under the new labor agreement and the related bonus for salaried employees. Raw material costs are the major component of cost of products sold and include expenditures for carbon and stainless steel scrap, nickel and nickel alloys, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, manganese and manganese alloys and other alloying materials. Raw material costs increased 32% in 1995 compared to 1994 on a per ton shipped basis, primarily due to higher scrap and nickel, ferrochromium and molybdenum prices, as well as a mix of higher alloy steels. Raw material costs in 1996 have declined from the peak levels of 1995. Labor costs per net ton shipped increased 3% in 1995 compared to 1994 primarily due to contractual increases resulting from the July 1994 labor contract and a shift in mix to higher cost products. In 1995, a new 4-year labor contract was signed which covers employees at the Washington Plant. The Company believes that the economic terms of this contract are comparable to those the USWA has negotiated with other steel companies. Energy costs per net ton shipped decreased 3.4% in 1995 compared to 1994 primarily due to lower unit rates for electricity and gas. The lower electricity rates are attributable to operating efficiencies at the Company's plants and the lower gas rates resulted from the Company's ability to negotiate favorable terms. Depreciation and amortization increased as a result of capital additions. Research, development and technology costs relate to efforts to develop new products and product applications, improved or new manufacturing methods, process improvements, quality assurance methods and cost reductions. The increase in 1995 reflected higher technical support of manufacturing processes due to increased production levels and higher expenses for incentive compensation plans based on Company financial results and common stock values. The Company believes that its investment in technology, research and development and technical services, as a percent of annual sales revenue, exceeds the level of investment by other companies in the steel industry. Commercial and administrative expenses include salaries and benefits of sales, executive and other non-manufacturing administrative personnel and related corporate support expenditures. The increase in 1995 was primarily due to higher expenses for incentive compensation plans based on Company financial results and common stock values. The Company's continued control over spending and realized synergies in the operation of the Washington Plant partially offset the increase in the 1995 fiscal year. Operating earnings from assets held for sale are attributable primarily to two non-specialty steel companies that were acquired in 1993 in connection with the acquisition of the Washington Plant. The results of these businesses have been included as a separate line item in the results of the Company's operations in 1995. These results reflect the Company's successful efforts to improve the productivity and reduce the costs of these businesses as well as strong market conditions. See "Financial Condition." Interest expense - net decreased in 1995 primarily due to increased interest income earned on higher cash balances in 1995. The income tax rate of 39.8% for 1995 compares to 44.7% for 1994. The lower 1995 rate reflects a reduction in Pennsylvania's effective tax rate. Also, the 1994 rate temporarily increased as a result of the low earnings caused by the effects of the strike coupled with the fixed amortization of cost in excess of net assets acquired which is not tax deductible. Extraordinary Loss on Early Retirement of Debt resulted from the extinguishment of $100 million of convertible subordinated debentures prior to maturity. Fiscal Year 1994 compared with Fiscal Year 1993 Net Sales Net sales dollars decreased 2% in 1994, while shipments decreased 5% to 490,400 tons compared to 518,000 tons in 1993. The labor strike called by the USWA caused the decrease in sales which was partially offset by the inclusion of sales from the Washington Plant which was acquired in the fourth quarter of 1993. The Washington Plant, which has a separate USWA labor agreement, continued to produce and ship plate mill plate products during the 1994 strike. Stainless steel sales decreased 6% in 1994. The decreases caused by the strike were only partially offset by sales from the Washington Plant. Sales also benefited from price increases that became effective on September 5, 1994. The United States domestic stainless steel industry experienced a record performance in shipments in 1994. Total shipments of U.S. domestic stainless sheet and strip, the Company's principal product lines, increased approximately 15% to 1,240,000 tons. The Company believes that the record U.S. consumption of stainless steel sheet, strip and plate products was the principal cause of this increase. Allegheny Ludlum Corporation 20 Silicon electrical steel sales decreased 9% in 1994 as a direct result of the strike. Over the past four years, silicon sales have declined due to lower demand and increased imports. Other specialty alloy sales increased 95% in 1994 due to the inclusion of tool steels and other alloy sales from the Washington Plant for the full year, as compared to the inclusion of such sales for only two months in 1993. Other specialty alloy sales also benefited from price increases that became effective in the fourth quarter of 1994. Export sales decreased to $73 million in 1994 from $79 million in 1993. The sales decline was primarily due to lower shipments caused by the strike and was partially offset by increased sales of higher priced Precision Rolled Strip/TM/ stainless steel and plate mill plate products. Cost and Expenses Cost of products sold as a percentage of sales increased 5 percentage points in 1994 compared to 1993. The increase was primarily caused by raw material price increases, reduced sales due to the strike and continuing fixed costs, the expense of the hourly signing bonus resulting from the new labor contract with the USWA and a bonus for salaried employees. Raw material costs increased 23% in 1994 compared to 1993 on a per net ton shipped basis, primarily due to higher scrap and nickel prices. Labor costs per net ton shipped increased 11% in 1994 compared to 1993 primarily as a result of the hourly signing bonus and contractual increases resulting from the July 1, 1994 labor contract and a shift in mix to higher cost products. Energy costs per net ton shipped increased 4.5% in 1994 compared to 1993 primarily as a result of higher unit prices for electricity. Depreciation and amortization increased due to capital additions and the inclusion of the assets of the Washington Plant and a full year's amortization expense for cost in excess of net assets acquired in the 1993 acquisition. Research, development and technology costs decreased in 1994 primarily due to the strike which resulted in lower technical support of manufacturing processes and lower expense for profit-related compensation plans. The Company's continued control over spending also contributed to the decrease in the 1994 fiscal year. Commercial and administrative expenses remained flat in 1994 compared to 1993 as the additional costs of the Washington Plant were offset by lower expense for profit-related compensation plans and the Company's continued control over spending during the 1994 fiscal year. Interest expense-net increased in 1994 as a result of lower interest income due to lower cash balances available resulting from the use of cash reserves during the strike. Loss or gain from the limited partnership investment reflected the recording of equity valuation decreases or increases for the partnership investment in a Code, Hennessey & Simmons limited partnership fund. At the end of the first quarter of 1994, the Company voluntarily contributed an investment in the limited partnership fund to an irrevocable trust established for the purpose of partially funding the retiree medical and insurance obligations the Company has to its employees represented by the USWA. The Company also contributed $5 million in cash and investments it had made in a second limited partnership fund, in the amount of $5.6 million, to the trust. Other income-net was particularly significant in 1993 due to the inclusion of a cash payment the Company received in 1993 in settlement of a lawsuit for patent infringement against Nippon Steel. The effective tax rate of 44.7% for 1994 compares to 40.5% for 1993. The increase was primarily a result of a decrease in the Pennsylvania corporate net income tax rate and the full year's amortization of cost in excess of net assets acquired which is not tax deductible. Since the Company has a deferred tax asset, the change in rate reduced the previously recorded deferred tax benefits and required the Company to record a one-time charge for additional tax expense of approximately $1 million in the second quarter of 1994. Financial Condition Cash generated from operations of $155.0 million and cash on hand of $11.2 million were used to repurchase $75.6 million of common stock, pay dividends of $33.9 million, invest $30.9 million in capital equipment and make $2.0 million in scheduled debt payments. In December 1995, the Company issued $150 million of 6.95% debentures due in 2025. A portion of the proceeds of the offering was used to extinguish $100 million of 5 7/8% convertible subordinated debentures due in 2002 and pay the related prepayment premium of $4.1 million. The Company ended the year with a cash balance of $70.9 million. Working capital of $270.8 million at December 31, 1995 compares to $225.4 million at the end of 1994. The current ratios for 1995 and 1994 were 2.5 and 2.3, respectively. The debt to capitalization ratio was 33% in 1995 compared to 27% in 1994. This change reflects the issuance of the new debentures and the extinguishment of the old debentures. In 1995, the Company entered into a new credit agreement with a group of banks which replaced the Company's 1990 credit agreement. The new credit agreement provides for unsecured borrowings of up to $100 million on a revolving credit basis and extends total maturities to three years. The Company believes that the new credit agreement provides more favorable and more flexible covenants and conditions than the 1990 agreement. 21 1995 Annual Report Capital expenditures for 1996 are expected to approximate $35 million including $9.3 million for environmental control equipment and facilities. The Company continues to believe that it will be able to meet the requirements of applicable environmental law while continuing its commitment to attractive new capital investments. In addition to the capital expenditure program, in 1994 the Company committed to invest $30 million in a second Code, Hennessy and Simmons limited partnership fund over a five year period. At December 31, 1995, $13.1 million of this commitment has been invested. All of this investment has been contributed to an irrevocable trust of the Company established for the purpose of partially funding certain retiree medical and insurance obligations. Returns from investments held in this trust are being recorded in accordance with FAS No. 106. Internally generated funds, the availability of borrowings from existing credit arrangements and current cash on hand should be adequate to meet foreseeable needs. The Company expects its deferred tax assets to be realized in future periods due to the reversal of other offsetting temporary tax differences and the favorable profitability outlook. Assets held for sale include assets net of liabilities and valuation reserves of Green River Steel Corporation and Reynolds Fasteners, Inc. which were acquired in 1993 in connection with the acquisition of the Washington Plant. Since these businesses do not meet the Company's strategic objectives, they have been held for sale. See "Operating earnings from assets held for sale" on page 20. In the first quarter of 1996 Reynolds Fasteners, Inc. was sold for $25 million in cash and the assumption of debt. The transaction did not have a significant impact on earnings. In 1995, the Company decreased the discount rates used in the estimates of its liabilities related to pensions and postretirement benefits from 8.0% to 7.0%. This change did not affect the cash flow of the Company and is not expected to have a material effect on operating results. Other Matters Although inflationary trends in recent years have been moderate, during the same period certain critical raw material costs have been volatile. The Company 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 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. The Company believes that adequate controls are in place to monitor these activities which are not financially material. Accounting Pronouncements FAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long- lived Assets to be Disposed of" and FAS No. 123, "Accounting for Stock-based Compensation" were issued in 1995. The statements are not expected to have a material impact on the Company. The Company intends to continue to account for stock-based compensation under Accounting Principles Board Opinion No. 25 as allowed by FAS No. 123. Joint Venture In February 1996, the Company announced the formation of a joint venture company in the People's Republic of China with Shanghai No. 10 Iron and Steel Works, for the production and sale of precision rolled stainless steel strip. The Company, which owns 60% of the joint venture, will provide technology, engineering, technical and management services. The joint venture company will be known as Shanghai STAL Precision Stainless Steel Limited Company. The new plant will be located in Shanghai to produce and sell up to 15,000 metric tonnes of the Company's Precision Rolled Strip/TM/ products. It is expected to be operational in late 1997. Allegheny Ludlum Corporation 22 ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(In thousands of dollars except per share amounts) - --------------------------------------------------------------------------------------------------------------------------- December 31, January 1, January 2, 1995 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Net Sales $1,494,302 $1,076,871 $1,100,187 Costs and expenses: Cost of products sold 1,173,374 915,039 877,662 Research, development and technology 46,180 36,545 41,901 Commercial and administrative 55,290 45,752 46,048 Depreciation and amortization 40,525 38,167 30,708 - --------------------------------------------------------------------------------------------------------------------------- 1,315,369 1,035,503 996,319 - --------------------------------------------------------------------------------------------------------------------------- Income from Steel Operations 178,933 41,368 103,868 Operating earnings from assets held for sale 11,536 _ _ Other income (expense): Interest expense - net (1,516) (6,003) (2,638) (Loss) gain from limited partnership _ (2,590) 15,740 Other income - net 1,794 167 1,996 - --------------------------------------------------------------------------------------------------------------------------- 11,814 (8,426) 15,098 - --------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes and Extraordinary Loss 190,747 32,942 118,966 Income Taxes 75,952 14,730 48,206 - --------------------------------------------------------------------------------------------------------------------------- Income before Extraordinary Loss 114,795 18,212 70,760 Extraordinary Loss on Early Retirement of Debt, Net of Income Tax Benefit of $1,950 (2,924) _ _ - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 111,871 $ 18,212 $ 70,760 - --------------------------------------------------------------------------------------------------------------------------- Per Common Share: Income before extraordinary loss $ 1.66 $ .26 $ 1.06 Extraordinary loss (.04) _ _ - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 1.62 $ .26 $ 1.06 - ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 23 1995 Annual Report ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands of dollars) - --------------------------------------------------------------------------------------------------------------------------- December 31, January 1, 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 70,913 $ 11,185 Trade receivables, less allowances for doubtful accounts of $3,873 and $3,715 137,016 141,042 Inventories 236,459 232,379 Prepaid expenses and other current assets 9,886 11,035 - --------------------------------------------------------------------------------------------------------------------------- Total Current Assets 454,274 395,641 Properties, plants and equipment - net 451,623 464,977 Cost in excess of net assets acquired 130,103 133,862 Deferred income taxes 44,670 49,027 Assets held for sale 46,477 37,738 Other assets 17,125 13,453 - --------------------------------------------------------------------------------------------------------------------------- Total Assets $1,144,272 $1,094,698 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,941 $ 1,993 Accounts payable 93,464 96,417 Accrued compensation and benefits 60,892 46,115 Deferred income taxes 8,962 5,527 Income taxes 3,935 1,596 Other accrued expenses 14,293 18,632 - --------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 183,487 170,280 Long-term debt, less current portion 181,157 133,097 Pensions 105,699 135,758 Postretirement benefit liability 265,559 267,136 Other 32,922 26,721 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities 768,824 732,992 - --------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity: Preferred stock, par value $1: authorized--50,000,000 shares; issued--none Common stock, par value $.10: authorized--250,000,000 shares; issued--72,878,242 shares (outstanding--67,106,871 and 70,650,571 shares) 7,288 7,288 Additional capital 271,473 270,571 Retained earnings 214,128 136,027 Equity adjustment related to minimum liability for pension plans (14,727) (20,682) Common stock in treasury at cost--5,771,371 and 2,227,671 shares (102,714) (31,498) - --------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 375,448 361,706 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $1,144,272 $1,094,698 - ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Allegheny Ludlum Corporation 24 ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars) - --------------------------------------------------------------------------------------------------------------------------- December 31, January 1, January 2, Fiscal Year Ended 1995 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 111,871 $ 18,212 $ 70,760 Adjustments to reconcile net income to cash flow from operating activities: Depreciation and amortization 40,525 38,167 30,708 Loss (gain) from limited partnership _ 2,590 (15,740) Deferred taxes 3,485 3,141 (3,143) Net reinvested earnings of assets held for sale (8,739) _ _ Extraordinary loss on early retirement of debt 2,924 _ _ Change in operating assets and liabilities: Long-term pension liability (19,330) (13,385) (10,840) Long-term postretirement liability (1,577) 2,876) 18,236 Deferred employee benefits 6,611 (3,118) 4,185 Trade receivables 4,026 (30,080) 359 Inventories (4,080) 22,385 15,441 Trade payables (2,953) 12,665 1,047 Income taxes payable 3,525 (5,566) (5,191) Net change in other current assets and current liabilities 19,493 (14,036) (541) Other changes (738) 7,343 529 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities 155,043 41,194 105,810 Cash flows from investing activities: Purchases of properties, plants and equipment (30,863) (52,738) (50,446) Disposals of properties, plants and equipment 1,148 235 242 Sales of short-term investments _ 50,466 21,649 Increase in limited partnership investment _ _ (5,437) Limited partnership distribution 346 _ 22,822 Increase in notes receivable (1,175) (160) (892) Payments related to the 1993 acquisition primarily debt payment _ (25,000) (57,800) - --------------------------------------------------------------------------------------------------------------------------- Cash Used by Investing Activities (30,544) (27,197) (69,862) Cash flows from financing activities: Issuance of debentures 150,000 _ _ Payments on long-term debt (101,992) (6,938) (7,495) Dividends paid (33,893) (33,993) (31,571) Purchases of treasury stock (75,562) (10,910) (1,307) Debt prepayment premium (4,110) _ _ Employee stock plans 786 922 1,095 - --------------------------------------------------------------------------------------------------------------------------- Cash Used by Financing Activities (64,771) (50,919) (39,278) - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 59,728 (36,922) (3,330) Balance of cash and cash equivalents at beginning of year 11,185 48,107 51,437 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 70,913 $ 11,185 $ 48,107 - ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 25 1995 Annual Report ALLEGHENY LUDLUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Nature of Business The Company is one of the world's leading manufacturers of specialty materials and one of the largest domestic producers of stainless steel. The Company manufactures stainless steel sheet, strip, plate, foil, welded tubing and stampings; silicon electrical steel sheet and strip; and other specialty steel and specialty metals alloys, including tool steels, magnetic, thermostatic and electronic sheet and strip, and high-temperature alloys. 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, dies, food and chemical processing equipment, medical and health equipment and aircraft and defense equipment. The Company's products are sold worldwide. Estimates The use of estimates is inherent in the preparation of financial statements in conformity with generally accepted accounting principles. Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Business Segment The Company operates in a single business segment, specialty steel. Cash and Cash Equivalents Cash includes currency on hand and demand deposits with financial institutions. Cash equivalents are short-term, highly liquid investments both readily convertible to known amounts of cash and so near maturity, three months or less, that there is insignificant risk of fluctuations in value because of changes in interest rates and thus the carrying amounts approximate market. Accounts Receivable 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. Credit losses are provided for in the financial statements and have been within management's expectations. Inventories Inventories are valued at the lower of cost or market. Cost for most inventories is determined by the last-in, first-out (LIFO) method. Inventories not on LIFO (1995 - $24,588,000; 1994 - $25,031,000) are determined using the average cost method. Properties, Plants and Equipment Properties, plants and equipment are carried at cost. Depreciation is computed using the straight-line method at rates considered sufficient to amortize the costs over the estimated service lives. Depreciation for income tax purposes is computed principally using accelerated methods. Taxes on Income Provisions for income taxes include 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. Fiscal Year-End The Company's fiscal year ends on the Sunday nearest to December 31. Reclassifications Certain amounts in the prior year financial statements have been reclassified to conform to the 1995 presentation. Net Income per Share of Common Stock Net income per share is based upon the weighted average number of shares of common stock outstanding. The weighted average number of shares was 69,246,949 for the fiscal year ended December 31, 1995, 70,827,362 for the fiscal year ended January 1, 1995 and 66,614,353 for the fiscal year ended January 2, 1994. Accounting Pronouncements FAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long- lived Assets to be Disposed of" and FAS No. 123, "Accounting for Stock-based Compensation" were issued in 1995. The statements are not expected to have a material impact on the Company. The Company intends to continue to acount for stock-based compensation under Accounting Principles Board Opinion No. 25 as allowed by FAS No. 123. Allegheny Ludlum Corporation 26 Note 2 - Inventories
(In thousands of dollars) December 31, January 1, 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- Raw materials $ 63,994 $ 52,332 Work-in-process and finished products 249,139 213,282 Supplies 16,515 16,048 - --------------------------------------------------------------------------------------------------------------------------- Total inventories at current cost 329,648 281,662 Less allowance to reduce current cost values to LIFO basis 93,189 49,283 - --------------------------------------------------------------------------------------------------------------------------- Total Inventories $ 236,459 $ 232,379 - ---------------------------------------------------------------------------------------------------------------------------
Certain LIFO inventory quantities were reduced, resulting in a liquidation of items carried at costs that prevailed in prior years. The effect of the liquidations was to increase net income by approximately $32,000, $543,000 and $1,531,000 in 1995, 1994 and 1993, respectively. 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 hedged period. These contracts are not significant to the Company's total raw material purchases and are not material from a financial point of view. Note 3 - Properties, Plants and Equipment
(In thousands of dollars) December 31, January 1, 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- Land $ 8,267 $ 8,220 Buildings 65,174 64,679 Machinery and equipment 612,729 591,277 - --------------------------------------------------------------------------------------------------------------------------- 686,170 664,176 Less allowance for depreciation and amortization 234,547 199,199 - --------------------------------------------------------------------------------------------------------------------------- Total Properties, Plants and Equipment $ 451,623 $ 464,977 - ---------------------------------------------------------------------------------------------------------------------------
Note 4 - Credit Agreement and Long-Term Debt Credit Agreement The Company's credit agreement with a group of banks provides for borrowings of up to $100,000,000 on a revolving credit basis. Interest is payable at prime or other alternative interest rate bases, at the Company's option. The annual facility fee is 1/8%. The revolving credit facility was not used in 1995. The credit agreement has various covenants which 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 which can also limit the amount of dividend payments and share repurchases. Under the most restrictive requirement, 100% of retained earnings are currently free of restrictions pertaining to cash dividend distributions and share repurchases. Borrowings outstanding under the credit agreement are unsecured. Debentures In December of 1995, the Company issued $150 million of 6.95% debentures due December 15, 2025. In December of 1995, a portion of the proceeds from this issue was used to extinguish the Company's $100 million of 5 7/8% convertible subordinated debentures, which were scheduled to mature in 2002, at a call price of 104.11%. This transaction resulted in an extraordinary loss on early retirement of debt of $2,924,000 net of income tax benefit of $1,950,000. Other The industrial revenue bonds and capital lease obligations consist of 11 separate issues at December 31, 1995. Nine issues (aggregating $23,046,000) have an average interest rate of 4.8%, and two issues ($10,052,000) have variable interest rates, ranging from 2.50% to 6.3%. The average interest rate for all outstanding issues was 4.8% in 1995, 4.8% in 1994 and 4.6% in 1993. The variable rate obligations are subject to remarketing agreements, which provide that the bondholder may present the bonds to a remarketing agent for purchase prior to the stated maturity date. Bonds presented to the remarketing agent are then resold in the bond market. 27 1995 Annual Report Long-term debt consists of the following:
December 31, January 1, (In thousands of dollars) 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- 6.95% debentures due 2025 $ 150,000 $ _ 5 7/8% convertible subordinated debentures due 2002 _ 100,000 Industrial revenue bonds due 1996 through 2007 17,963 19,425 Capital lease obligations under industrial revenue bonds due 1996 through 2007 15,135 15,665 - --------------------------------------------------------------------------------------------------------------------------- 183,098 135,090 Less current portion 1,941 1,993 - --------------------------------------------------------------------------------------------------------------------------- Total long-term debt $ 181,157 $ 133,097 - ---------------------------------------------------------------------------------------------------------------------------
Properties, plants and equipment include the following amounts for leases that have been capitalized:
December 31, January 1, (In thousands of dollars) 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- Land and buildings $ 2,693 $ 2,693 Machinery 18,054 18,054 - --------------------------------------------------------------------------------------------------------------------------- 20,747 20,747 Less allowance for amortization 10,368 9,218 - --------------------------------------------------------------------------------------------------------------------------- Total leases $ 10,379 $ 11,529 - ---------------------------------------------------------------------------------------------------------------------------
Amortization of leased assets is included in depreciation and amortization expense. Scheduled maturities of all long-term obligations for the five years succeeding December 31, 1995 are $1,941,000 in 1996, $1,914,000 in 1997, $1,974,000 in 1998, $1,499,000 in 1999 and $1,320,000 in 2000. Interest expense was $8,260,000 in 1995, $8,515,000 in 1994 and $8,668,000 in 1993. Interest and commitment fees paid amounted to $9,630,000 in 1995, $8,448,000 in 1994 and $8,149,000 in 1993. Note 5 - Pension Plans and Other Postemployment Benefits The Company and its subsidiaries have several defined benefit pension plans and several defined contribution plans, which cover substantially all of their employees. Benefits under the defined benefit pension plans are generally based on years of service and the employee's average annual compensation in the five consecutive years of the ten years prior to retirement in which such earnings were the highest. The Company funds at least the amount necessary to meet the minimum funding requirements of ERISA and the Internal Revenue Code. The following table sets forth the funded status and amount recognized for the defined benefit pension plans in the consolidated balance sheets:
December 31, January 1, (In thousands of dollars) 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligations, including vested benefits of $570,243 in 1995 and $507,565 in 1994 $ 608,300 $ 535,057 - --------------------------------------------------------------------------------------------------------------------------- Actuarial present value of projected benefit obligations for services rendered to date 673,824 600,668 Less plan assets at fair value, primarily listed stocks, government securities and pooled investment funds 504,519 393,048 - --------------------------------------------------------------------------------------------------------------------------- Projected Benefit Obligations in Excess of Plan Assets 169,305 207,620 Unrecognized net loss from past experience different from assumed (49,666) (60,651) Unrecognized prior service costs (47,972) (48,518) Additional minimal liability 34,032 44,761 - --------------------------------------------------------------------------------------------------------------------------- Pension Liabilities $ 105,699 $143,212 - ---------------------------------------------------------------------------------------------------------------------------
Allegheny Ludlum Corporation 28 Pension liabilities are included in the balance sheets as follows:
December 31, January 1, (In thousands of dollars) 1995 1995 - --------------------------------------------------------------------------------------------------------------------------- Accrued compensation and benefits $ - $ 7,454 Pensions 105,699 135,758 - --------------------------------------------------------------------------------------------------------------------------- Total Pension Liabilities $ 105,699 $ 143,212 - ---------------------------------------------------------------------------------------------------------------------------
A summary of the net pension cost for the defined benefit pension plans is as follows:
(In thousands of dollars) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 6,506 $ 7,520 $ 4,751 Interest cost on projected benefit obligations 46,101 40,150 33,916 Actual return on plan assets (111,014) 3,674 (28,935) Net amortization and deferral 82,377 (35,803) 1,058 - --------------------------------------------------------------------------------------------------------------------------- Net Pension Cost $ 23,970 $ 15,541 $ 10,790 - ---------------------------------------------------------------------------------------------------------------------------
The average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0% in 1995 and 8.0% in 1994. The rates of increase of future years' compensation levels ranged from 3% to 4% in 1995, 1994 and 1993. The expected long-term rate of return on plan assets was 9% in 1995, 1994 and 1993. On November 10, 1988, the Board of Directors amended the salaried defined benefit pension plan to provide that no benefits would accrue thereunder on or after January 1, 1989. At the same time, the Board also adopted, effective January 1, 1989, a defined contribution plan. Pension costs for this plan were $5,780,000 in 1995, $5,165,000 in 1994 and $4,746,000 in 1993. The Company has guaranteed employees who meet certain age and service criteria that at retirement their aggregate benefit from the salaried defined benefit pension plan and the defined contribution plan will not be less than the benefit which would have been payable from the salaried defined benefit pension plan if such plan had not been amended. Other Postretirement Benefit Plans The Company sponsors several defined benefit postretirement plans covering most salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. The basic health care plans are noncontributory, and the major medical options are contributory, with retiree contributions adjusted periodically. The life insurance plans are generally noncontributory. The Company funds postretirement benefit obligations for hourly employees represented by the USWA based on the available funds and amounts allowable by the Internal Revenue Code. The following table sets forth the postretirement benefit plans' combined funded status reconciled with the amounts recognized in the balance sheet:
Health Life (In thousands of dollars) December 31, 1995 Care Insurance Total - --------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $ 186,932 $ 15,486 $ 202,418 Fully eligible active participants 61,481 3,906 65,387 Other active participants 115,027 4,561 119,588 - --------------------------------------------------------------------------------------------------------------------------- 363,440 23,953 387,393 Less plan assets at fair value, primarily investment in limited partnership funds 45,645 - 45,645 - --------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligations in excess of plan assets 317,795 23,953 341,748 Unrecognized net gain (52,853) (2,149) (55,002) Unrecognized prior service cost (21,167) (20) (21,187) - --------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 243,775 $ 21,784 $ 265,559 - ---------------------------------------------------------------------------------------------------------------------------
29 1995 Annual Report
Health Life (In thousands of dollars) January 1, 1995 Care Insurance Total - --------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $ 159,089 $ 13,731 $ 172,820 Fully eligible active participants 44,560 3,106 7,666 Other active participants 88,613 3,686 92,299 - --------------------------------------------------------------------------------------------------------------------------- 292,262 20,523 312,785 Less plan assets at fair value, primarily investment in limited partnership funds 31,834 - 31,834 - --------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligations in excess of plan assets 260,428 20,523 280,951 Unrecognized net gain 4,511 295 4,806 Unrecognized prior service cost (18,742) 121 (18,621) - --------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 246,197 $ 20,939 $ 267,136 - ---------------------------------------------------------------------------------------------------------------------------
The Company's Chairman serves on the advisory boards of the limited partnership funds. The discount rate used in determining the APBO was 7.0% at December 31, 1995 and 8.0% at January 1, 1995. The expected long-term rate of return on plan assets ranged from 9% to 15% in 1995 and 15% in 1994. Net postretirement benefit expenses included the following components:
Health Life (In thousands of dollars) 1995 Care Insurance Total - --------------------------------------------------------------------------------------------------------------------------- Service cost $ 5,857 $ 256 $ 6,113 Interest cost 22,124 1,509 23,633 Actual return on plan assets (419) - (419) Net amortization and deferral (1,751) 12 (1,739) - --------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit expense $ 25,811 $ 1,777 $ 27,588 - --------------------------------------------------------------------------------------------------------------------------- Health Life (In thousands of dollars) 1994 Care Insurance Total - --------------------------------------------------------------------------------------------------------------------------- Service cost $ 6,230 $ 263 $ 6,493 Interest cost 19,390 1,498 20,888 Actual return on plan assets (1,516) - (1,516) Net amortization and deferral 47 77 124 - --------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit expense $ 24,151 $ 1,838 $ 25,989 - --------------------------------------------------------------------------------------------------------------------------- Health Life (In thousands of dollars) 1993 Care Insurance Total - --------------------------------------------------------------------------------------------------------------------------- Service cost $ 4,700 $ 206 $ 4,906 Interest cost 18,679 1,424 20,103 - --------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit expense $ 23,379 $ 1,630 $ 25,009 - ---------------------------------------------------------------------------------------------------------------------------
The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans is 10.3% for 1996 and is assumed to decrease to 5.25% by 2002 and remain at that level thereafter. The health care cost trend rate assumption has 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 APBO for health care plans as of December 31, 1995 by $54,976,000 and the aggregate of service and interest cost components of net periodic postretirement benefit expense for 1995 by $4,416,000. The actual cash payments of retiree health care and life insurance benefits totaled approximately $15,870,000 in 1995, $13,064,000 in 1994 and $9,295,000 in 1993. Allegheny Ludlum Corporation 30 Note 6 - Shareholders' Equity
Common Additional Retained Treasury (In thousands of dollars except per share amounts) Stock Capital Earnings Shares - --------------------------------------------------------------------------------------------------------------------------- Balance at January 3, 1993 $ 6,772 $ 160,876 $ 113,169 $ (23,873) - --------------------------------------------------------------------------------------------------------------------------- Net income 70,760 Dividends on common stock at $.47 per share (31,571) Common stock issued 516 107,746 Employee stock plans 490 (100) 2,297 Purchase of 65,500 treasury shares at cost (1,307) - --------------------------------------------------------------------------------------------------------------------------- Balance at January 2, 1994 7,288 269,112 152,258 (22,883) - --------------------------------------------------------------------------------------------------------------------------- Net income 18,212 Dividends on common stock at $.48 per share (33,993) Employee stock plans 1,459 (450) 2,295 Purchase of 571,300 shares at cost (10,910) - --------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 7,288 270,571 136,027 (31,498) - --------------------------------------------------------------------------------------------------------------------------- Net income 111,871 Dividends on common stock at $.49 per share (33,893) Employee stock plans 902 123 4,346 Purchase of 3,826,900 treasury shares at cost (75,562) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $ 7,288 $ 271,473 $ 214,128 $ (102,714) - ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock The 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, 1995, there were no shares of preferred stock issued. Common Stock The Board of Directors adopted and the shareholders approved the 1987 Stock Option Incentive Plan ("Plan") in March, 1987. The Plan, which expires January 1, 1997, provides for the granting of stock options and stock appreciation rights ("Awards") of up to 2,700,000 shares of common stock to key employees. Awards may be granted under the Plan at a price not less than the fair market value of the stock as determined by the Personnel and Compensation Committee ("Committee") on the date the Awards are granted. Awards will not be immediately exercisable and vesting of the Awards will be established at the date of each grant but generally will not be more rapid than the rate of one-third of the number of shares in the third, fourth, and fifth years following the date of the Award. Transactions under the Plan are summarized as follows:
Stock Appreciation Stock Options Rights Price Range - --------------------------------------------------------------------------------------------------------------------------- Balance at January 3, 1993 999,152 11,250 Granted 620,400 - $ 22.94 Exercised (153,489) (11,250) 8.33-11.08 Cancelled (14,601) - 10.75 - --------------------------------------------------------------------------------------------------------------------------- Balance at January 2, 1994 1,451,462 - Granted 33,068 - 19.88 Exercised (119,731) - 8.33-11.88 Cancelled (44,935) - 10.75-22.94 - --------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 1,319,864 - Granted 13,801 - 17.00 Exercised (109,025) - 8.33-11.08 Cancelled (23,067) - 10.75-22.94 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 1,201,573 - $ 8.33-22.94 - ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1995 there were 579,704 options for shares exercisable under the Plan. 31 1995 Annual Report In March 1987, the Board of Directors adopted and the shareholders approved a Performance Share Plan for Key Employees, which provides that the Chief Executive Officer may establish certain performance objectives for a period established by the Board. The Committee, with the advice of the Chief Executive Officer, may grant performance units payable in common stock and/or cash to key employees. Up to 900,000 shares of common stock were reserved for the Plan. Upon full or partial achievement of the performance objectives for the period, the full or partial dollar amount and/or number of shares of common stock credited to an employee's account will be distributed to the employee in three equal annual installments. A three-year award period under the Performance Share Plan began in 1991 and 97% of the performance objectives to be achieved during this award period were achieved. Payments equal to 92.5% of the base value of awarded units began in 1994 and ended in February 1996. Forty-three participants held an aggregate of 69,050 performance units. The base value of each unit consisted of $50 in cash and four shares of common stock. In November 1994, the Board of Directors established the 1995-1996 award period under the Performance Share Plan and the performance objectives to be achieved during the 1995-1996 award period were set. Forty-five employees hold an aggregate of 76,000 performance units for the 1995-1996 award period. The base value of each unit consists of $50 in cash and four shares of common stock. In 1994, the Board of Directors adopted and the shareholders approved a Stock Acquisition and Retention Plan. The plan provides participating officers with an opportunity to purchase additional shares of common stock directly from the Company and provides for the grant of one share of restricted stock for each two shares purchased under the plan and one share of restricted stock for each two shares of common stock already owned by a participant that are designated as subject to the plan. In general, the restricted shares will vest only if the participant retains the shares that are purchased and/or designated by the participant as subject to the plan for five years. The expense related to the plan is being recognized over the vesting period. A maximum of 1,000,000 shares is available for issuance under the plan. In 1995, 60,238 restricted shares of common stock were issued under the plan and in 1994 17,681 restricted shares were issued under the plan. In 1993, the Board of Directors adopted and the shareholders approved a Director Share Incentive Plan, which provides for the annual delivery to non-employee directors of the Company of shares of common stock (rounded to the nearest whole share) with a fair market value equal to $5,000. A total of 200,000 shares have been reserved for the plan. Pursuant to the plan, on January 3, 1995, each of the Company's eleven non-employee directors received 268 shares of common stock and on January 2, 1996, each of the Company's twelve non-employee directors received 267 shares of common stock. Note 7 - Fair Values of Financial Instruments Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments. Cash and cash equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Debentures The fair values of the 6.95% debentures and 5 7/8% convertible subordinated debentures are based on quoted market prices. Long-term debt The fair values of long-term debt obligations are established from the market value of each issue if available or from market values of similar issues. Allegheny Ludlum Corporation 32 The carrying amounts and fair values of the Company's financial instruments are as follows:
December 31, 1995 January 1, 1995 (In thousands of dollars) Carrying Amount Fair Value Carrying Amount Fair Value - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 70,913 $ 70,913 $ 11,185 $ 11,185 6.95% debentures in 1995 and 5 7/8% convertible subordinated debentures in 1994 150,000 150,000 100,000 100,050 Long-term debt 33,098 33,110 35,090 34,133 - ---------------------------------------------------------------------------------------------------------------------------
Note 8 - Taxes on Income Income taxes (credits) consist of the following:
(In thousands of dollars) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 60,143 $ 9,411 $ 40,653 State 12,324 2,178 10,696 - --------------------------------------------------------------------------------------------------------------------------- Subtotal current expense 72,467 11,589 51,349 - --------------------------------------------------------------------------------------------------------------------------- Deferred: Federal 1,390 571 (1,828) State 2,095 2,570 (1,315) - --------------------------------------------------------------------------------------------------------------------------- Subtotal deferred expense 3,485 3,141 (3,143) - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 75,952 $ 14,730 $ 48,206 - --------------------------------------------------------------------------------------------------------------------------- Income taxes paid $ 69,642 $ 14,385 $ 56,649 - ---------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:
Percent of pretax income 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Federal tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefit 4.9 9.4 5.1 Amortization of cost in excess of net assets acquired .6 3.8 - Other (.7) (3.5) 0.4 - --------------------------------------------------------------------------------------------------------------------------- Total effective income tax rate 39.8% 44.7% 40.5% - ---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets and/or liabilities 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. They represent future tax benefits or costs to be recognized when those temporary differences reverse. 33 1995 Annual Report The categories of assets and liabilities which have resulted in differences in the timing of the recognition of income and/or expense are as follows:
Deferred Tax Assets (In thousands of dollars) 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Postretirement benefits other than pensions $104,553 $107,284 Deferred compensation and other benefit plans 60,238 71,604 Other items 19,733 18,524 - --------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 184,524 197,412 Deferred Tax Liabilities - --------------------------------------------------------------------------------------------------------------------------- Basis of property, plant and equipment - net 109,046 113,212 Inventory valuation - net 28,153 28,175 Other items 11,617 12,525 - --------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 148,816 153,912 - --------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 35,708 $ 43,500 - ---------------------------------------------------------------------------------------------------------------------------
Note 9 - Supplemental Operating Information Export sales were $87,000,000 in 1995, $73,000,000 in 1994 and $79,000,000 in 1993. Direct research and development expenditures aggregated $9,171,000 in 1995, $8,238,000 in 1994 and $9,170,000 in 1993. "Research, development and technology" in the income statement covers a broad range of activities throughout the Company. Approximately 70% of the Company's workforce are covered by various union contracts. None of the contracts expire within one year. Note 10 - Litigation As previously disclosed, the Company is a defendant in a case filed in 1989 by Allegheny International, Inc. in the United States District Court for the Western District of Pennsylvania which is being pursued by Sunbeam Corporation. The case involves a claim to recover a $5.5 million refund received by the Company in 1989 with respect to a federal income tax overpayment, plus interest. Immediately prior to the commencement of the trial of the case, Sunbeam withdrew with prejudice its related claims for reimbursement of various alleged insurance coverage costs in the amount of $.5 million plus interest. In August 1995, a jury verdict in favor of the Company was entered in this case which Sunbeam has appealed. The Company is vigorously defending the favorable decision. As previously announced, in June 1995, the U.S. Department of Justice commenced an action against the Company in the United States District Court for the Western District of Pennsylvania, asserting, in 64 claims, multiple violations of the federal Clean Water Act occurring at various times since 1987. The complaint seeks injunctive relief and assessment of penalties of up to $25,000 per day of violation. While it is too early to predict the outcome of the case, the Company believes that any costs or penalties should not be material to the financial condition of the Company or its results of operation. In addition, the Company is involved in various lawsuits from time to time arising in the ordinary course of business and otherwise. In management's opinion, the outcome of these matters will not have a material adverse affect on the Company's financial statements. Note 11 - Acquisition On November 10, 1993, the Company completed the acquisition of the stock of Athlone Industries, Inc. Athlone, through its subsidiary, Jessop Steel Company, was primarily a manufacturer of specialty steels in plate form. The Company issued 5,153,376 shares of common stock in the transaction. The transaction is being accounted for as a purchase. The excess of the purchase price paid over the value of net assets acquired is being amortized over 40 years on a straight- line basis. Accumulated amortization was $7,656,000 and $4,224,000 at December 31, 1995 and January 1, 1995, respectively. Allegheny Ludlum Corporation 34 Pro forma results, as if the transaction were completed at the beginning of 1993, are as follows:
Sales $1,215,039,000 Net income 77,126,000 Earnings per share $ 1.09
The pro forma presentation is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of 1993 or of future results of the combined companies. In addition to Jessop Steel, the Company acquired Green River Steel Corporation and Reynolds Fasteners, Inc., as part of the Athlone acquisition. The Company has determined that these businesses do not meet its strategic objectives and decided that they would be held for sale. The recorded value for assets held for sale represents management's estimate of net realizable value and includes a reserve for estimated losses until disposition which is not material in relation to the Company's results of operations. Net income for these companies in the amount of $3,603,000, which resulted from the Company's successful efforts to improve the productivity and reduce the costs of these businesses, was excluded from the Company's 1994 results. In 1996, Reynolds Fasteners, Inc. was sold. The sale will not have a significant effect on the Company's results of operation. Cash flows for 1994 and 1993 do not include non-cash items related to the acquisition. Note 12 - Quarterly Data (Unaudited)
(In thousands of dollars except per share amounts) Fiscal Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------- Fiscal 1995 April 2 July 2 October 1 December 31 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 395,332 $ 390,468 $ 373,631 $ 334,871 Cost of products sold 313,742 301,306 288,985 269,341 Operating income 46,474 53,142 48,461 30,856 Income before extraordinary loss 28,854 34,470 30,119 21,352 Extraordinary loss on early retirement of debt - - - (2,924) Net income 28,854 34,470 30,119 18,428 Net income per share: Primary Income before extraordinary loss $ .41 $ .49 $ .44 $ .32 Extraordinary loss - - - (.04) Net income $ .41 $ .49 $ .44 $ .28 Fully diluted $ .39 $ .47 $ .42 $ .28 Weighted average common shares outstanding 70,567,973 69,959,030 68,963,949 67,495,993 - ------------------------------------------------------------------------------------------------------------------------------- (In thousands of dollars except per share amounts) Fiscal Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------- Fiscal 1994 April 3 July 3 (1) October 2 January 1 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 313,932 $ 172,187 $ 262,255 $ 328,497 Cost of products sold 245,717 191,283 211,720 266,319 Operating income (loss) 35,747 (49,413) 20,913 34,121 Net income (loss) 18,118 (29,179) 10,328 18,945 Net income (loss) per share: Primary $ .26 $ (.41) $ .14 $ .27 Fully diluted $ .25 $ (.41) $ .14 $ .26 Weighted average common shares outstanding 70,938,937 70,792,035 70,787,897 70,790,579 - -------------------------------------------------------------------------------------------------------------------------------
(1) The USWA called a strike in the second quarter which lasted 10 weeks. 35 1995 Annual Report REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Allegheny Ludlum Corporation We have audited the accompanying consolidated balance sheets of Allegheny Ludlum Corporation and subsidiaries as of December 31, 1995 and January 1, 1995, and the related consolidated statements of income and cash flows for each of the three fiscal years in the period ended December 31, 1995. These financial statements are the responsibility of Allegheny Ludlum Corporation'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 audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allegheny Ludlum Corporation and subsidiaries at December 31, 1995 and January 1, 1995, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania January 30, 1996 Allegheny Ludlum Corporation 36 SELECTED FINANCIAL DATA
(In millions of dollars except per share amounts) 1995 (1) 1994 (2) 1993 (3) 1992 1991* 1990* 1989* 1988* - ------------------------------------------------------------------------------------------------------------------------------------ For Fiscal Year Income statement data: Net sales $1,494.3 $1,076.9 $1,100.2 $1,036.0 $1,004.6 $1,084.9 $1,180.2 $1,207.5 Operating income 178.9 41.4 103.9 76.4 73.7 111.0 208.9 175.0 Income before cumulative effect of accounting change and extraordinary loss 114.8 18.2 70.8 46.9 41.1 68.9 133.8 108.6 - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative effect of accounting change - - - (125.2) - - - - Extraordinary loss on early retirement of debt (2.9) - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 111.9 $ 18.2 $ 70.8 $ (78.3) $ 41.1 $ 68.9 $ 133.8 $ 108.6 - ------------------------------------------------------------------------------------------------------------------------------------ Per common share: Income before cumulative effect of accounting change and extraordinary loss $ 1.66 $ .26 $ 1.06 $ .71 $ .62 $ 1.04 $ 1.98 $ 1.60 Cumulative effect of accounting change - - - (1.90) - - - - Extraordinary loss (.04) - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 1.62 $ .26 $ 1.06 $ (1.19) $ .62 $ 1.04 $ 1.98 $ 1.60 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends declared $ .49 $ .48 $ .47 $ .44 $ .44 $ .43 $ .35 $ 1.37 - ------------------------------------------------------------------------------------------------------------------------------------ At Year End Balance sheet data: Working capital $ 270.8 $ 225.4 $ 258.9 $ 299.4 $ 192.9 $ 198.2 $ 237.3 $ 163.0 Total assets 1,144.3 1,094.7 1,174.0 871.2 764.5 793.2 784.6 703.9 Long-term debt due after one year 181.2 133.1 138.9 138.1 48.5 52.8 67.8 76.0 - ------------------------------------------------------------------------------------------------------------------------------------
*Amounts related to postretirement benefits are not comparable. Per share amounts have been adjusted for the 3-for-2 stock split effected in July of 1990 and for the 2-for-1 stock split effected in July of 1993. (1) Includes income from assets held for sale beginning January 2, 1995. (2) The USWA called a strike in the second quarter which lasted 10 weeks. (3) Beginning November 10, 1993, results include acquisition of Jessop Steel Company. 37 1995 Annual Report COMMON STOCK DATA
Fiscal Quarter Ended - ---------------------------------------------------------------------------------------------------- Fiscal 1995 April 2 July 2 October 1 December 31 - ---------------------------------------------------------------------------------------------------- Price range of common stock: High $21.375 $23.00 $22.625 $20.50 Low 18.375 18.75 19.75 16.375 Dividends declared .12 .12 .12 .13 - ---------------------------------------------------------------------------------------------------- Fiscal Quarter Ended - ---------------------------------------------------------------------------------------------------- Fiscal 1994 April 3 July 3 October 2 January 1 - ---------------------------------------------------------------------------------------------------- Price range of common stock: High $24.875 $21.25 $22.375 $21.875 Low 18.125 17.00 18.375 18.00 Dividends declared .12 .12 .12 .12 - ----------------------------------------------------------------------------------------------------
The principal market on which the Company's common stock is traded is the New York Stock Exchange, using the symbol ALS. As of March 6, 1996, there were 66,241,891 shares of common stock outstanding held by 2,859 shareholders of record. MANAGEMENT'S REPORT The accompanying consolidated financial statements of Allegheny Ludlum Corporation 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/ A. H. Aronson A. H. Aronson President and Chief Executive Officer /s/ J. L. Murdy J. L. Murdy Senior Vice President-- Finance and Chief Financial Officer /s/ R. R. Roeser R. R. Roeser Vice President, Controller Allegheny Ludlum Corporation 38 EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant Name of Subsidiary State of Incorporation - ------------------ ---------------------- AII Acquisition Corp. Delaware Jessop Steel Company Pennsylvania EX-23 6 CONSENT OF ERNST & YOUNG EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Number 33-18510 on Form S-8 dated November 13, 1987, Registration Statement Number 33-20884 on Form S-8 dated April 4, 1988, Registration Statement Number 33-27921 on Form S-8 dated April 10, 1989, Registration Statement Number 33-54061 on Form S-8 dated June 10, 1994 and Registration Statement Number 33-54787 on Form S-8 dated July 28, 1994 of our reports dated January 30, 1996, with respect to the consolidated financial statements and schedule included in the Annual Report on Form 10-K of Allegheny Ludlum Corporation for the year ended December 31, 1995. ERNST & YOUNG LLP Pittsburgh, Pennsylvania March 20, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-02-1995 DEC-31-1995 70,913 0 140,889 3,873 236,459 454,274 686,170 234,547 1,144,272 183,487 181,157 0 0 7,288 368,160 1,144,272 1,494,302 1,494,302 1,173,374 1,173,374 128,665 0 1,516 190,747 75,952 114,795 0 (2,924) 0 111,871 1.62 1.62
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