-----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, DdOohReXDGJl6dLp7zqPkmTgmJ/S+pXGVu9WR6y1wfZFr11okbAZ9AN2JDaTL493 fDND865lQuu4nPvY7UjxGg== 0000950128-99-001063.txt : 19991101 0000950128-99-001063.hdr.sgml : 19991101 ACCESSION NUMBER: 0000950128-99-001063 CONFORMED SUBMISSION TYPE: 10-12B/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19991029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEDYNE TECHNOLOGIES INC CENTRAL INDEX KEY: 0001094285 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 251843385 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12B/A SEC ACT: SEC FILE NUMBER: 001-15295 FILM NUMBER: 99737173 BUSINESS ADDRESS: STREET 1: 1000 SIX PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222-5479 BUSINESS PHONE: 4123942800 MAIL ADDRESS: STREET 1: 1000 SIX PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222-5479 10-12B/A 1 TELEDYNE TECHNOLOGIES INCORPORATED AMENDMENT NO. 2 1 FILE NO. 1-15295 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10/A-2 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 TELEDYNE TECHNOLOGIES INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 25-1843385 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
2049 CENTURY PARK EAST LOS ANGELES, CALIFORNIA 90067-3101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 277-3311 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED --------------------------------------- ------------------------------ COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ---------------- (TITLE OF CLASS)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TELEDYNE TECHNOLOGIES INCORPORATED INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY REFERENCE
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT - ---- ------------ --------------------------------- 1 Business.............................. "Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Our Business" 2 Financial Information................. "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Our Historical Selected Financial Data," "Our Unaudited Pro Forma Consolidated Financial Information," and "Index to Our Financial Statements" 3 Properties............................ "Our Business" 4 Security Ownership of Certain Beneficial Owners and Management...... "Security Ownership" 5 Directors and Officers................ "Management" and "Liability and Indemnification of Our Officers and Directors" 6 Executive Compensation................ "Management" 7 Certain Relationships and Related Transactions.......................... "Arrangements with ATI Relating to the Spin-Off" 8 Legal Proceedings..................... "Our Business" 9 Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters................... "The Spin-Off--Listing and Trading of our Common Stock," "Arrangements with ATI Relating to the Spin-Off" and "Index to Our Financial Statements" 10 Recent Sales of Unregistered Securities............................ Not Applicable 11 Description of Registrant's Securities to be Registered...................... "Description of Our Capital Stock" 12 Indemnification of Officers and Directors............................. "Liability and Indemnification of Our Officers and Directors" 13 Financial Statements and Supplementary Data.................... "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Our Historical Selected Financial Data," "Our Unaudited Pro Forma Consolidated Financial Information," and "Index to Our Financial Statements" 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. Not Applicable 15 Financial Statements and Exhibits..... "Index to Our Financial Statements" and "Exhibit Index"
3 [ALLEGHENY TELEDYNE INCORPORATED LOGO] , 1999 To Our Stockholders: These are exciting times at your company. In January we announced our plans to effect a major transformation of Allegheny Teledyne that included the spin-offs of two of our business segments into independent, publicly-traded companies. This transformation is now being implemented. The businesses formerly comprising our Aerospace and Electronics segment will now be a separate company known as Teledyne Technologies Incorporated. The businesses formerly comprising our Consumer segment will be a separate company known as Water Pik Technologies, Inc. The common stock of these companies will be traded on the New York Stock Exchange under the symbols "TDY" and "PIK," respectively. Concurrently with the spin-offs we will change our name to "Allegheny Technologies Incorporated." We also intend to effect a one-for-two reverse split of our common stock. The spin-offs will allow Allegheny Technologies to focus exclusively on its strategic growth objectives as one of the largest and most diversified specialty metals companies in the world. ATI's strong base of companies provides an excellent foundation for enhanced operating synergies and for adding strategically complementary acquisitions. At the same time, the spin-offs provide each new company with a sharper focus, more efficient access to capital markets, and substantial growth opportunities in its respective areas of expertise. By creating these new companies, we believe that we will unlock greater value for their respective businesses and enhance their ability to thrive in today's competitive marketplace. Both of the spin-offs, which will be tax-free to U.S. stockholders and which do not require any action on your part, will be completed on , 1999. For every seven shares of ATI common stock that you own as of the close of business on , 1999, you will receive one share of Teledyne Technologies common stock. For every 20 shares of ATI common stock that you own as of the close of business on that date, you will receive one share of Water Pik Technologies common stock. The enclosed Information Statement contains information about the spin-off of Teledyne Technologies and about Teledyne Technologies' business, management and financial performance. Information about the Water Pik Technologies spin-off is being provided to you in a separate document. We encourage you to read all of these materials carefully. Very truly yours, Richard P. Simmons Chairman 4 [TELEDYNE TECHNOLOGIES INCORPORATED LOGO] , 1999 To Our Future Stockholders: Welcome to Teledyne Technologies Incorporated. On , 1999 you will become a stockholder of our company. We hope that you share our enthusiasm about our new company and its future. Teledyne Technologies has a strong foundation. We are a leading provider of sophisticated electronic and communication products, systems engineering solutions and information technology services, and aerospace engines and components. Our customers include aerospace prime contractors, general aviation companies, government agencies and major communications and other commercial companies. We serve high-value niche market segments where performance, precision and reliability are critical and where we are in several cases the leading supplier. Our businesses are interrelated by their use of advanced engineering and specialized technology to provide cost-effective and value-added solutions. The business operations of our company were carefully selected to create a group of high technology businesses that have critical mass and shared core competencies, are strategically complementary and have the potential for profitable growth. Our products include avionics systems that collect and communicate information for airlines and business aircraft systems; broadband communications subsystems for wireless and satellite systems; engineering and information technology services for space, defense and industrial customers; and engines for general aviation aircraft and for cruise missiles. Our goal is to become the leading provider of specialized products, systems engineering solutions and information services for a broad range of high technology applications. We are fortunate to have a technically-sophisticated and well-educated workforce. I am excited to be working with a management team that will provide high-caliber, experienced leadership and that is committed to our new company. Please read the enclosed material for more information about our company. We look forward to your support and are pleased to have you share in this exciting opportunity. Very truly yours, Robert Mehrabian President and Chief Executive Officer 5 PRELIMINARY INFORMATION STATEMENT DATED OCTOBER 29, 1999 -- FOR INFORMATION ONLY INFORMATION STATEMENT ------------------------- ALLEGHENY TELEDYNE INCORPORATED'S SPIN-OFF OF TELEDYNE TECHNOLOGIES INCORPORATED ------------------------- We are furnishing you with this Information Statement in connection with the spin-off by Allegheny Teledyne Incorporated ("ATI") of all of the outstanding common stock of Teledyne Technologies Incorporated to stockholders of ATI. We will own and operate the businesses formerly comprising the Teledyne Electronic Technologies, Teledyne Brown Engineering, Teledyne Continental Motors and Teledyne Cast Parts divisions of ATI's Aerospace and Electronics segment. ATI will accomplish the spin-off by distributing all issued and outstanding shares of our common stock to holders of record of ATI common stock. ATI will distribute one share of our common stock for every seven ATI shares held as of the close of business on , 1999. The actual number of our shares to be distributed will depend on the number of ATI shares outstanding on that date. Concurrently with the spin-off, ATI will change its name to "Allegheny Technologies Incorporated." OWNING SHARES OF OUR COMMON STOCK WILL ENTAIL RISKS. PLEASE READ "RISK FACTORS" BEGINNING ON PAGE 16. NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE SPIN-OFF. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE NOT REQUESTED TO SEND US A PROXY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ------------------------- The date of this Information Statement is , 1999. 6 TABLE OF CONTENTS
PAGE ---- Summary..................................................... 3 Risk Factors................................................ 16 Cautionary Statement as to Forward-Looking Statements....... 22 The Spin-Off................................................ 22 Reasons for the Spin-Off.................................. 22 Manner of Effecting the Spin-Off.......................... 23 Results of the Spin-Off................................... 23 Material Federal Income Tax Consequences of the Spin-Off............................................... 24 Listing and Trading of Our Common Stock................... 25 Our Historical Selected Financial Data...................... 27 Our Unaudited Pro Forma Consolidated Financial Information............................................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 34 Our Business................................................ 44 Overview.................................................. 44 Our Business and Growth Strategy.......................... 44 Our Business Segments..................................... 47 Sales and Marketing....................................... 54 Competition............................................... 55 Research and Development.................................. 55 Intellectual Property..................................... 55 Our Facilities............................................ 56 Legal Proceedings......................................... 57 Employees................................................. 57 Arrangements with ATI Relating to the Spin-Off.............. 57 Separation and Distribution Agreement..................... 57 Employee Benefits Agreement............................... 58 Tax Sharing and Indemnification Agreement................. 59 Interim Services Agreement................................ 60 Trademark License Agreement............................... 60 Management.................................................. 61 Security Ownership.......................................... 71 Description of Our Capital Stock............................ 73 Liability and Indemnification of Our Officers and Directors................................................. 79 Available Information....................................... 79 Index to Our Financial Statements........................... F-1
7 SUMMARY This summary highlights material information from this Information Statement, but does not contain all the details concerning the spin-off, including information that may be important to you. To better understand us and the spin-off, you should carefully review this entire document. References to "we," "us," "our," "Teledyne Technologies" or "the Company" mean Teledyne Technologies Incorporated and our subsidiaries and divisions. References to "ATI" mean Allegheny Teledyne Incorporated and its subsidiaries and divisions. WHO WE ARE Teledyne Technologies is a leading provider of sophisticated electronic and communication products, systems engineering solutions and information technology services, and aerospace engines and components. Our customers include aerospace prime contractors, general aviation companies, government agencies and major communications and other commercial companies. We serve high-value niche market segments where performance, precision and reliability are critical and where we are in several cases the leading supplier. Our businesses are interrelated by their use of advanced engineering and specialized technology to provide cost-effective and value-added solutions. Our products include avionics systems that collect and communicate information for airlines and business aircraft systems; broadband communications subsystems for wireless and satellite systems; engineering and information technology services for space, defense and industrial customers; and engines for general aviation aircraft and for cruise missiles. Total sales in 1998 were $780 million, compared to $757 million and $716 million in 1997 and 1996, respectively. Our operating profits were $89 million, $75 million and $75 million in 1998, 1997 and 1996, respectively. Approximately 60% of our total sales in 1998 were to commercial customers and the balance was to the U.S. Government. Approximately 69% of these U.S. Government sales were attributable to fixed price-type contracts and the balance to cost plus fee-type contracts. International sales accounted for approximately 22% of total sales in 1998. We have a total workforce of approximately 5,800, of whom approximately 1,400 individuals have engineering, physics, mathematics or computer science degrees. We believe that as several of the markets we serve experience consolidation, customers have tended to become increasingly dependent on technologically-sophisticated specialized suppliers, such as ourselves, to provide a more comprehensive range of products and services. With our history of product innovation, advanced research and development and highly sophisticated engineering and manufacturing capabilities, we believe that we are well- positioned to take advantage of opportunities to expand our business. OUR HISTORY The original Teledyne, Inc. was founded by Dr. Henry Singleton in 1960. Over the following two decades, Teledyne acquired over 100 high technology and specialty metals businesses. The original Teledyne ultimately focused on four major business segments: aviation and electronics, specialty metals, industrial and consumer. In 1996, Teledyne and Allegheny Ludlum Corporation combined to form ATI, one of the largest and most diversified specialty metals producers in the world. Subsequently, ATI integrated the Teledyne specialty 3 8 metals businesses with those of Allegheny Ludlum. ATI also established new management and a new management philosophy for our businesses, with an increased emphasis on manufacturing discipline and on strengthening cost management systems. After a strategic review initiated in 1998, ATI concluded that its core Aerospace and Electronics businesses, which will comprise our company, would be able to grow faster and be a stronger competitor as a separate company. As a separate company, Teledyne Technologies will be better able to focus on its own strategic priorities and will have more efficient access to the capital markets than it could as part of ATI. The operations included in Teledyne Technologies were carefully selected to create a group of high technology businesses that have critical mass and shared core competencies, are strategically complementary and have the potential for profitable growth. Certain businesses in ATI's Aerospace and Electronics segment were determined not to have these characteristics and were sold. Concurrently with the spin-off, ATI will change its name to "Allegheny Technologies Incorporated." OUR BUSINESS SEGMENTS Teledyne Technologies' three business segments, their respective operating companies and their contribution to our sales in 1998 are summarized in the following table.
PERCENTAGE OF SEGMENT OPERATING COMPANIES 1998 SALES - --------------------------- -------------------------------- ------------- Electronics and Teledyne Electronic Technologies 44% Communications Systems Engineering Teledyne Brown Engineering 29% Solutions Aerospace Engines and Teledyne Continental Motors 27% Components Teledyne Cast Parts
Electronics and Communications Our Electronics and Communications segment, through Teledyne Electronic Technologies, applies proprietary technology, advanced software and hardware design skills and manufacturing capabilities in three areas: Data Acquisition and Communications Products; Precision Electronic Devices; and Electronic Contract Manufacturing Services. - Data Acquisition and Communications Products. With over 200 commercial airline customers, we are one of the leading suppliers of systems that collect and communicate essential performance data for the commercial airline industry. We have provided these data acquisition systems for our airline customers for over one-half of Boeing aircraft currently in production. We were recently selected by Airbus Industrie's partner, DaimlerChrysler Aerospace-Airbus, to provide our systems for certain of its aircraft customers. Teledyne Technologies is also one of the largest suppliers of air-to-ground telephony and facsimile and data transmission products to the growing business and commuter aircraft market. We also supply microwave power amplifiers used in satellite uplink transmitters for corporate networking and mobile news gathering, and are developing new products to support the growing market for high data rate broadband communications, including Internet applications. 4 9 - Precision Electronic Devices. We develop and manufacture specialized electronic components for demanding applications in the defense, commercial aerospace, medical, instrumentation and industrial markets, where high performance and reliability are of paramount importance. Our miniature electromechanical relays are used to switch high-speed digital and microwave signals in wireless systems, communication satellites, semiconductor test equipment and other applications where maintenance of signal fidelity is essential. We provide custom microelectronic modules for high reliability applications ranging from fiber optic systems on the International Space Station to life-sustaining medical devices such as cardiac pacemakers. We also manufacture instruments designed to provide the precise data that are essential for control of critical processes in the semiconductor and petrochemical industries. - Electronic Contract Manufacturing Services. We operate turnkey manufacturing facilities in Tennessee, Mexico and Scotland for low-to-moderate volume, technically-sophisticated products, ranging from individual printed circuit board assemblies to complete electronic systems. We manufacture subsystems used in such diverse products as weapons release systems and medical magnetic resonance imaging systems. We also support our customers with our patented REGAL(R) rigid-flex technology, which combines rigid and flexible printed circuits into one assembly that eliminates board-to-board connectors, resulting in improved reliability and packaging density. Systems Engineering Solutions Our Systems Engineering Solutions segment, through Teledyne Brown Engineering, offers a wide range of engineering solutions and information services to government defense, aerospace and commercial customers. Our solutions and services are focused on five areas: Aerospace Solutions, Defense Solutions, Information Services, Environmental Solutions, and Enterprise Control and Energy Products. - Aerospace Solutions. We provide a broad range of highly-sophisticated engineering solutions and services to U.S. space programs, including mission planning, payload integration, launch and flight operations and astronaut crew training for the Space Shuttle. We also provide various solutions and services for the International Space Station. - Defense Solutions. For over 45 years, we have played a key role in the development of the U.S. defense systems. For ballistic missile defense programs, we have provided solutions in systems engineering, integration, and testing; real-time distributed testing and training; radar and optical systems design; command center development; and intelligence studies and threat analysis. We provide battle simulation software as part of our role for the U.S. Ballistic Missile Defense Organization's National Missile Defense program. - Information Services. Our software products, most of which are certified to ISO 9001, are used for highly diverse applications, such as high-fidelity simulations, multi-media training, Internet website development, distributed real-time testing, and command and control centers. - Environmental Solutions. We utilize our systems engineering solutions to assist the U.S. Government in complying with terms of the Chemical Weapons Convention 5 10 Treaty. As the prime contractor for the U.S. Army's Non-Stockpile Chemical Materiel Demilitarization program, we are designing, fabricating, integrating and testing equipment to destroy chemical munitions. - Enterprise Control and Energy Products. Our systems engineering capabilities are applied to energy problems through a variety of services and products. Our OpenVector(TM) supervisory control and data acquisition systems are used for managing over half of the gas transportation pipelines in the United States. We also manufacture low-power, continuously-operating electrical generators. Aerospace Engines and Components Our Aerospace Engines and Components segment, through Teledyne Continental Motors and Teledyne Cast Parts, focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls, batteries and metal castings. - Piston Engines. We design, develop and manufacture piston engines and ignition systems for major general aviation airframe manufacturers and provide spare parts and engine rebuilding services. Teledyne Continental Motors piston engines have been powering airplanes for over 70 years. We have built approximately one-half of the general aviation piston engines currently in use in the United States. Our Aerosance unit has developed the first full authority digital electronic controls for piston engines to automate many functions, such as fuel flow, ignition and power management, that currently require manual control. These controls are currently undergoing FAA certification testing. - Turbine Engines. We design, develop and manufacture small turbine engines for missiles, unmanned air vehicles and military trainer aircraft. Since the late 1950s, we have delivered over 20,000 of these engines to defense contractors. Our engines power the HARPOON cruise missile and other missile systems. We have recently been selected as the sole source provider of engines to power the two new U.S. cruise missile systems, the Joint Air to Surface Standoff Missile (JASSM) and the Tactical Tomahawk Cruise Missile. - Battery Products. Our Gill(R) line of lead acid batteries is recognized as the premier dry-charged, starting and standby power source for general aviation. We are focused on providing highly engineered battery products in niche markets with favorable margins. - Cast Parts. Teledyne Cast Parts offers a wide range of complex aluminum and magnesium castings and nickel-based superalloy and stainless steel castings to the aerospace and defense industries. Many of our castings are used in specialized high pressure and high temperature applications where precision and product reliability are critical. 6 11 OUR COMPETITIVE STRENGTHS We have developed a number of competitive strengths as we have grown to become one of the leading developers of high technology product applications for the industries we serve. We believe that our competitive strengths include the following: - Product Innovation and Advanced Research and Development - Highly Sophisticated Engineering Capabilities - Widely-Recognized Brand Names - Advanced Manufacturing Capabilities - Established Customer and Regulatory Relationships - Technically-Sophisticated Workforce and Extensive Intellectual Property - Financial and Operating Discipline OUR BUSINESS AND GROWTH STRATEGY Our goal is to become the leading provider of specialized products, systems engineering solutions and information services for a broad range of high technology applications. Our core strategies for achieving our goal and growth objectives are to: - Focus on Operating Discipline and Manufacturing Excellence - Leverage Niche Market Leadership and Technical Expertise to Increase Market Penetration - Accelerate Introduction of Innovative High-Margin Products and Services - Capitalize on Synergies to Enter New Markets - Enhance and Strengthen Customer and Regulatory Relationships - Expand Value-Added Information Services - Pursue Selected Acquisitions and Strategic Alliances QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF Why are we being spun-off by ATI? After a strategic review initiated in 1998, ATI concluded that its core aerospace and electronics businesses, which will comprise our company, would be able to grow faster and more effectively as a separate company. As a separate company, we will be better able to focus on our own strategic priorities and have more efficient access to the capital markets than we could as part of ATI. The operations included in Teledyne Technologies were carefully selected to create a group of high technology businesses that have critical mass and shared core competencies, are strategically complementary and have the potential for profitable growth. Certain businesses in ATI's Aerospace and Electronics segment were determined not to have these characteristics and were sold. 7 12 We believe that the spin-off will enable our businesses to expand and grow more quickly and efficiently in the following ways: - Our high technology businesses have different fundamentals, growth characteristics and strategic priorities than the specialty metals businesses currently conducted by ATI. The separation of our businesses from those of ATI will enable us to focus on our own strategic priorities, which should increase our ability to capitalize on growth opportunities for our businesses and enhance our ability to respond more quickly to changes in the technically- sophisticated markets that we serve. - The spin-off will enable us to have direct access to the capital markets. We intend to raise our own equity capital that we will use: to expand our businesses by accelerating new higher-margin product introductions through increased research and development investment; to expand upon our extensive data acquisition and systems engineering capabilities to provide value-added information services to broaden and deepen our market penetration; to further develop our manufacturing capabilities; and to pursue selected acquisitions. - The spin-off will enable us to recruit, retain and motivate key employees by providing them with stock-based compensation incentives directly tied to the success of our businesses. What will I receive in the spin-off? ATI will distribute one share of our common stock for every seven shares of ATI common stock you owned as of , 1999. For example, if you own 100 shares of ATI common stock, you will receive 14 whole shares of our common stock and cash instead of the fractional share. You will continue to own your ATI stock. ATI intends to effect a one-for-two reverse split of its common stock immediately after the spin-off. The ATI reverse split will have no effect on Teledyne Technologies common stock or the distribution ratio of the spin-off. What do I have to do to participate in the spin-off? Nothing. No stockholder vote is required for the spin-off. How will ATI distribute Teledyne Technologies common stock to me? If you own ATI common stock on the record date, the distribution agent will automatically credit your shares of our common stock to a book-entry account established to hold your Teledyne Technologies 8 13 common stock on , 1999 and will mail you a statement of your Teledyne Technologies common stock ownership. Following the spin-off you may retain your shares of Teledyne Technologies common stock in your book-entry account, sell them, transfer them to a brokerage or other account, or request a physical certificate for whole shares. What is the record date? The record date is , 1999. What if I hold my shares of ATI stock through my stockbroker, bank or other nominee? If you hold your shares of ATI stock through your stockbroker, bank or other nominee, you are probably not a stockholder of record and your receipt of Teledyne Technologies common stock depends on your arrangements with the nominee that holds your shares of ATI stock for you. We anticipate that stockbrokers, banks and other nominees generally will credit their customers' accounts with Teledyne Technologies common stock on or about , 1999, but you should check with your stockbroker, bank or other nominee. Following the spin-off you may instruct your stockbroker, bank or other nominee to transfer your shares of Teledyne Technologies common stock into your own name to be held in book-entry form through the direct registration system operated by the distribution agent. How will you treat fractional shares? If you are otherwise entitled to receive a fractional share of Teledyne Technologies common stock you will receive cash instead of the fractional share. Fractional shares will be aggregated and sold by the distribution agent, which will distribute to you your portion of the cash proceeds promptly after the spin-off. No interest will be paid on any cash distributed instead of fractional shares. What is Teledyne Technologies' dividend policy? We currently anticipate that no cash dividends will be paid on Teledyne Technologies common stock in the foreseeable future in order to conserve cash for use in our businesses, including possible future acquisitions. Our current credit facility will limit our ability to pay dividends. Our board of directors will periodically re- evaluate this dividend policy taking into account our operating results, capital needs, the terms of our credit facility and other factors. How does Teledyne Technologies common stock differ from ATI common stock? Teledyne Technologies common stock and ATI common stock will be different securities and will not trade or be valued alike. Teledyne Technologies and ATI will be separate companies with different management, fundamentals, growth characteristics 9 14 and strategic priorities. However, as with ATI common stock, Teledyne Technologies common stock will have the following characteristics: - be fully paid and nonassessable; - have one vote per share, with no right to cumulate votes; - carry no preemptive rights; and - be accompanied by Preferred Share Purchase Rights. How will Teledyne Technologies common stock trade? We have applied to list Teledyne Technologies common stock on the New York Stock Exchange under the symbol "TDY" and expect that regular trading will begin on , 1999. A temporary form of interim trading called "when-issued trading" may occur for our common stock on or before , 1999 and continue through , 1999. If when-issued trading occurs, the listing for Teledyne Technologies common stock will be accompanied by the letters "wi" on the New York Stock Exchange. If when-issued trading develops, you will be able to buy Teledyne Technologies common stock in advance of the , 1999 spin-off and you may sell Teledyne Technologies common stock in advance of such date on a when-issued basis. How will ATI common stock trade? ATI common stock will continue to trade on a "regular way" basis and may also trade on a when-issued or ex-distribution basis, reflecting an assumed value for ATI common stock after giving effect to the spin-offs of Teledyne Technologies and Water Pik Technologies, Inc. When-issued or ex-distribution trading in ATI common stock, if available, could last from on or before , 1999 through , 1999. Is the spin-off taxable for United States federal income tax purposes? No. ATI has received a tax ruling from the Internal Revenue Service stating that the spin-off will be tax-free to ATI and to ATI's stockholders. The continuing validity of the IRS tax ruling is subject to various factual representations and assumptions, including the completion of a public offering of our common stock within one year of the spin-off. See "Risk Factors" and "The Spin-Off -- Material Federal Income Tax Consequences of the Spin-Off." Will we be related to ATI in any way after the spin-off? ATI will not own any of our common stock after the spin-off. 10 15 Until the third annual meeting of our stockholders held after the spin-off, at least a majority of the members of our Board of Directors will also be members of the Board of Directors of ATI. We will enter into the following agreements with ATI prior to the spin-off: - A Separation and Distribution Agreement, which provides for the various corporate transactions required to separate our businesses from other businesses of ATI and governs various relationships and circumstances that may arise between us after the spin-off; - An Employee Benefits Agreement, which contains various agreements between ATI and us concerning employees, pension and employee benefit plans and other compensation arrangements for current and former employees of our businesses; - A Tax Sharing and Indemnification Agreement allocating certain federal, state, local and foreign tax responsibilities and liabilities between ATI and us; - An Interim Services Agreement under which ATI will provide various services to us for limited periods of time following the spin-off; and - A Trademark License Agreement under which an affiliate of ATI will grant Teledyne Technologies an exclusive license to use the "Teledyne" name and related logos, symbols and marks in connection with Teledyne Technologies operations after the spin-off, which license will include Teledyne Technologies' option to purchase, on the fifth anniversary of the spin-off, all rights and interests in the Teledyne name and related logos, symbols and marks. See "Arrangements with ATI Relating to the Spin-Off." Are there any risks entailed in owning our stock? Yes. Stockholders should consider carefully the matters discussed in the section of this Information Statement called "Risk Factors." How can I obtain information about the separate spin-off of ATI's Consumer segment? The decision to spin-off Water Pik Technologies, Inc., the company that owns and operates the businesses formerly comprising ATI's Consumer segment, was part of the strategic planning process that lead to the decision to spin-off Teledyne 11 16 Technologies. You will be provided with a separate Information Statement describing the spin-off of Water Pik Technologies. WHAT WE HAVE ALREADY DONE IN PREPARATION FOR THE SPIN-OFF Board Appointments As of the date of the spin-off, the Board of Directors will consist of at least four members. Our initial directors will be Frank V. Cahouet, C. Fred Fetterolf and Charles J. Queenan, Jr., all of whom are also directors of ATI, as well as Robert Mehrabian, our President and Chief Executive Officer. Until the third annual meeting of our stockholders held after the spin-off, at least a majority of our directors will also be members of the Board of Directors of ATI. Senior Management Appointments Dr. Robert Mehrabian is our President and Chief Executive Officer. He has been the President and Chief Executive Officer of ATI's Aerospace and Electronics segment since July 1999. Dr. Mehrabian has served ATI in various senior executive capacities since July 1997, and prior to that, he served as President of Carnegie Mellon University. Stefan C. Riesenfeld is our Executive Vice President and Chief Financial Officer. He joined ATI in August 1999 as Executive Vice President and Chief Financial Officer of ATI's Aerospace and Electronics segment in anticipation of the spin-off. From 1996 to May 1999 he was Chief Financial Officer of ICL, PLC, a global information systems and services company based in London, England. Prior to that, from 1983 to 1996, he was with Unisys Corporation where he served as Vice President and Corporate Treasurer from 1989. John T. Kuelbs is our Senior Vice President, General Counsel and Secretary. He joined ATI's Aerospace and Electronics segment in October 1999. Mr. Kuelbs was Senior Vice President -- Acquisition Policy for Raytheon Company from November 1998 to September 1999 and Senior Vice President -- Legal of Raytheon Systems Company from January 1998 to November 1998. Before Raytheon's acquisition of Hughes Aircraft Company, Mr. Kuelbs spent 17 years at Hughes Aircraft Company where he served as Senior Vice President, General Counsel and Secretary from 1994 to 1998. New Credit Facility ATI will establish a five-year, $200 million revolving credit facility. Prior to the spin-off, ATI 12 17 will use $100 million of borrowings under this credit facility to repay certain of its debt obligations and we will assume the repayment obligations for those borrowings. Following that assumption, we will have $100 million of borrowing availability remaining under the credit facility, subject to the terms of the facility. WHO CAN HELP ANSWER YOUR QUESTIONS Stockholders of ATI with questions relating to the spin-off should contact: Richard J. Harshman Vice President, Investor Relations and Corporate Communications Allegheny Teledyne Incorporated 1000 Six PPG Place Pittsburgh, Pennsylvania 15222-5479 (412) 394-2861 The distribution agent for our common stock in the spin-off and the transfer agent and registrar for our common stock after the spin-off is: ChaseMellon Shareholder Services L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, New Jersey 07660 1-888-540-9867 13 18 HISTORICAL SELECTED COMBINED FINANCIAL DATA The following table summarizes certain selected combined financial data for Teledyne Technologies. The income statement data for each of the three years ended December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998 and 1997 set forth below are derived from audited combined financial statements of Teledyne Technologies. The income statement data for the nine months ended September 30, 1999 and 1998, and the years ended December 31, 1995 and 1994 and the balance sheet data at September 30, 1999 and 1998 and December 31, 1996, 1995 and 1994 set forth below are derived from unaudited combined financial statements of Teledyne Technologies. The historical selected combined financial data are not necessarily indicative of the results of operations or financial position that would have occurred if Teledyne Technologies had been a separate, independent company during the periods presented, nor are they indicative of our future performance. Such historical data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and related notes included in this Information Statement. Per share data has not been presented because Teledyne Technologies was not a publicly held company during the periods presented.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Sales................ $602,978 $588,690 $780,393 $756,601 $716,400 $680,475 $667,663 Net income........... $ 35,835 $ 37,803 $ 48,717 $ 41,624 $ 40,695 $ 30,850 $ 36,398 Working capital...... $ 93,085 $ 83,591 $ 78,568 $ 87,653 $104,184 $ 92,814 $ 68,896 Total assets......... $277,497 $255,850 $250,819 $255,366 $252,961 $234,301 $217,610 Stockholder's equity............. $126,370 $109,057 $106,402 $109,365 $128,018 $115,168 $ 99,337
14 19 PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA The pro forma selected consolidated financial data set forth below are derived from the unaudited pro forma consolidated financial information included in this Information Statement. The pro forma data do not represent what our financial position or results of operation would have been had we operated as a separate, independent public company, nor do they give effect to any events other than those discussed in the related notes. The pro forma data also do not project our financial position or results of operations as of any future date or for any future period. The capital structure that existed when our businesses operated as a part of ATI is not relevant because it does not reflect our expected future capital structure as a separate, independent public company. The basic weighted average shares outstanding were calculated by applying the distribution ratio (one share of Teledyne Technologies common stock for every seven shares of ATI common stock) to ATI's basic weighted average shares outstanding during each period.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Sales...................................... $602,978 $780,393 Net income................................. $ 29,227 $ 39,768 Basic earnings per share................... $ 1.06 $ 1.41 Weighted average shares outstanding -- basic..................... 27,481 28,107 Diluted earnings per share................. $ 1.06 $ 1.41 Weighted average shares outstanding -- diluted................... 27,507 28,134 Working capital............................ $ 93,085 Total assets............................... $294,505 Long-term debt............................. $100,000 Stockholders' equity....................... $ 13,062
15 20 RISK FACTORS You should carefully consider all the information we have included in this Information Statement. In particular, you should carefully consider the risk factors described below. In addition, please read "Cautionary Statement as to Forward Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" where we describe additional uncertainties associated with our business and certain forward-looking statements included in this Information Statement. WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER. Our operating results will depend in part on our ability to introduce new and enhanced products on a timely basis. Successful product development and introduction depends on numerous factors, including our ability to anticipate customer and market requirements, changes in technology and industry standards, our ability to differentiate our offerings from offerings of our competitors, and market acceptance. We may not be able to develop and introduce new or enhanced products in a timely and cost-effective manner or to develop and introduce products that satisfy customer requirements. Our new products also may not achieve market acceptance or correctly anticipate new industry standards and technological changes. TECHNOLOGICAL CHANGE COULD CAUSE CERTAIN OF OUR PRODUCTS OR SERVICES TO BECOME OBSOLETE OR NON-COMPETITIVE. The markets for a number of our products and services are generally characterized by rapid technological development, evolving industry standards, changes in customer requirements and new product introductions and enhancements. A faster than anticipated change in one or more of the technologies related to our products or services or in market demand for products based on a particular technology could result in faster than anticipated obsolescence of certain of our products or services and could have a material adverse effect on our business, results of operation and financial condition. Currently accepted industry standards are also subject to change, which may contribute to the obsolescence of our products or services. OUR DEPENDENCE ON REVENUE FROM GOVERNMENT CONTRACTS SUBJECTS US TO THE RISK THAT WE MAY NOT BE SUCCESSFUL IN BIDDING FOR FUTURE CONTRACTS AND THAT GOVERNMENT FUNDING FOR THESE CONTRACTS MAY BE DELAYED OR CONTINUE TO DECREASE. We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government. Sales under contracts with the U.S. Government as a whole, including sales under contracts with the Department of Defense, as prime or subcontractor, represented approximately 40% of our total revenue for 1998. Performance under government contracts has certain inherent risks that could have a material effect on our business, results of operations and financial condition. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress typically appropriates funds for a given program on a fiscal-year basis even though contract performance may take more than one year. As a result, at the beginning of a major program, a contract is typically only partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. The overall U.S. military budget declined in real dollars from the mid-1980's through the early 1990's. Although U.S. military budgets have stabilized in recent years, future levels of defense spending cannot be predicted. Delays or further declines in U.S. military expenditures could adversely affect our business, results of operations and financial condition, depending upon the programs affected, the timing and size of the changes and our ability to offset the impact with new business or cost reductions. Most of our U.S. Government contracts are subject to termination by the U.S. Government 16 21 either at its convenience or upon the default of the contractor. Termination-for-convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and profit on work completed prior to termination. Termination-for-default imposes liability on the contractor for excess costs incurred by the U.S. Government in procuring undelivered items from another source. We obtain many U.S. Government prime and subcontracts through the process of competitive bidding. We may not be successful in having our bids accepted. In addition, contracts may not be profitable. A number of our U.S. Government prime and subcontracts are fixed price-type contracts (69% in 1998). Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the fixed contract price. This is particularly true where the contract was awarded and the price finalized in advance of final completion of design. We believe that the U.S. Government is increasingly requesting proposals for fixed price-type contracts. We, like other government contractors, are subject to various audits, reviews and investigations (including private party "whistleblower" lawsuits) relating to our compliance with federal and state laws. In addition, we have a compliance program designed to surface issues that may lead to voluntary disclosures to the U.S. Government. Generally, claims arising out of these U.S. Government inquiries and voluntary disclosures can be resolved without resorting to litigation. However, should the business unit or division involved be charged with wrongdoing, or should the U.S. Government determine that the unit or division is not a "presently responsible contractor," that unit or division, and conceivably our company as a whole, could be temporarily suspended or, in the event of a conviction, could be debarred for up to three years from receiving new government contracts or government-approved subcontracts. In addition, we could expend substantial amounts in defending against such charges and in damages, fines and penalties if such charges are proven or result in negotiated settlements. WE MAY NOT HAVE SUFFICIENT RESOURCES TO FUND PLANNED OR NECESSARY RESEARCH AND DEVELOPMENT, CAPITAL EXPENDITURES AND POSSIBLE ACQUISITIONS. In order to remain competitive, we must make substantial investments in research and development to develop new and enhanced products and continuously upgrade our process technology and manufacturing capabilities. Although we believe that anticipated cash flows from operations and available borrowings under the Credit Facility will be sufficient to satisfy our working capital and normal operating requirements, we cannot fund our planned research and development, capital investment programs and possible acquisitions without additional financing. Our ability to raise additional capital will depend on a variety of factors, some of which will not be within our control, including investor perceptions of us, our businesses and the industries in which we operate, and general economic and market conditions. We may be unable to successfully raise needed capital and the amount of net proceeds that will be available to us may not be sufficient to meet our needs. Failure to successfully raise needed capital on a timely or cost-effective basis could have a material adverse effect on our business, results of operations and financial condition. IF WE FAIL TO UNDERTAKE A PUBLIC OFFERING OF OUR COMMON STOCK WITHIN ONE YEAR FOLLOWING THE SPIN-OFF, WE WILL BE IN BREACH OF OUR AGREEMENTS WITH ATI. ATI has received a tax ruling from the IRS stating in principle that the spin-off will be tax-free to ATI and to ATI's stockholders. One of the assumptions underlying the tax ruling is that we will undertake a public offering of our common stock within one year following the spin-off and use the anticipated gross proceeds of approximately $125 million (less associated costs) for research and development and related capital projects, for the further development of our manufacturing capabilities and for acquisitions and/or joint ventures. Pursuant to the Separation and Distribution Agreement and the Tax Sharing and Indemnification Agreement, we have also agreed with ATI to undertake such a public 17 22 offering. Our failure to do so would be a breach of those agreements and subject us to substantial liabilities. WE SELL PRODUCTS AND SERVICES TO CUSTOMERS IN INDUSTRIES WHICH ARE CYCLICAL AND SENSITIVE TO CHANGES IN GENERAL ECONOMIC ACTIVITY. We derive significant revenues from the commercial aerospace industry. Domestic and international commercial aerospace markets are cyclical in nature. Historic demand for new commercial aircraft has been related to the stability and health of domestic and international economies. Delays or changes in aircraft and component orders could impact the future demand for our products and have a material adverse effect on our business, results of operations and financial condition. In addition, we sell products and services to customers in industries that are sensitive to the level of general economic activity and in mature industries that are sensitive to capacity. Adverse economic conditions affecting these industries may reduce demand for our products and services, which may reduce our profits, or our production levels, or both. PRODUCT LIABILITY CLAIMS OR RECALLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REPUTATION, BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. As a manufacturer and distributor of various products, our results of operations are susceptible to adverse publicity regarding the quality or safety of our products. In part, product liability claims challenging the safety of our products may result in a decline in sales for a particular product which could adversely affect our results of operations. This could be true even if the claims themselves are proven to not be true or settled for immaterial amounts. While we will have general liability and other insurance policies concerning product liabilities, we will have self-insured retentions or deductibles under such policies with respect to a portion of these liabilities. For example, our annual self-insured retention for general aviation aircraft liabilities incurred in connection with products manufactured by Teledyne Continental Motors is $10 million. Product recalls could also have a material adverse effect on our business, results of operations and financial condition. For example, in the second quarter of 1999, Teledyne Continental Motors engaged in a product recall of piston engines produced in 1998, which had an adverse effect on our recent financial performance. Product recalls have the potential for tarnishing a company's reputation and could have a material adverse effect on the sales of our products. We cannot assure you that we will not have additional product liability claims or that we will not recall any additional products. WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH INTERNATIONAL SALES. During 1998, international sales accounted for approximately 22% of our total revenues. We anticipate that future international sales will continue to account for a significant percentage of our revenues. Risks associated with these sales include: - - political and economic instability; - - export controls; - - changes in legal and regulatory requirements; - - U.S. and foreign government policy changes affecting the markets for our products; - - changes in tax laws and tariffs; - - the impact of the transition to a common European currency; - - convertibility and transferability of international currencies; and - - exchange rate fluctuations (which may affect sales to international customers and the value of and profits earned on international sales when converted into dollars). Any of these factors could have a material adverse effect on our business, results of opera- 18 23 tions and financial condition. Recent weak conditions in Asian economies have affected our results of operations adversely. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE SUCCESS. Our future success depends to a significant extent upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualified personnel. The loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations. In particular, the loss of the services of Dr. Robert Mehrabian, our President and Chief Executive Officer, could materially and adversely affect us. ACQUISITIONS INVOLVE INHERENT RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION. Our growth strategy includes possible acquisitions. Acquisitions involve various inherent risks, such as: - - our ability to assess accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; - - the potential loss of key personnel of an acquired business; - - our ability to integrate acquired businesses and to achieve identified financial and operating synergies anticipated to result from an acquisition; and - - unanticipated changes in business and economic conditions affecting an acquired business. PROVISIONS OF OUR GOVERNING DOCUMENTS, APPLICABLE LAW AND THE TAX SHARING AND INDEMNIFICATION AGREEMENT COULD MAKE AN ACQUISITION OF TELEDYNE TECHNOLOGIES MORE DIFFICULT. Our Certificate of Incorporation, Bylaws and Rights Agreement, and the General Corporation Law of the State of Delaware (the "DGCL") contain several provisions that could make the acquisition of control of Teledyne Technologies in a transaction not approved by our board of directors more difficult. See "Description of Our Capital Stock -- Rights Plan," "-- Certain Provisions of Our Governing Documents," and "-- Anti-takeover Legislation." Certain tax aspects of the spin-off could also discourage an acquisition of control of Teledyne Technologies for some period of time. For example, the acquisition of Teledyne Technologies by a third party during the two-year period following the spin-off could result in the spin-off not qualifying as a tax-free distribution within the meaning of Section 355 of the Internal Revenue Code and trigger indemnification obligations of Teledyne Technologies under the Tax Sharing and Indemnification Agreement. See "Arrangements with ATI Relating to the Spin-Off -- Tax Sharing and Indemnification Agreement." IF WE ARE UNABLE TO MANAGE THE YEAR 2000 TRANSITION, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED. We are in the final stages of implementing plans to address issues related to the impact of the Year 2000 on our products, business systems, infrastructure, manufacturing systems and suppliers. The estimated costs associated with these efforts continue to be evaluated based on actual experience. While we believe, based on available information, that we will be able to manage the Year 2000 transition without any material adverse effect on our business, results of operations and financial condition, there can be no assurance that this will be the case. In addition, we may be adversely affected by the failure of suppliers, customers and federal, state, local and international governments to address Year 2000 issues affecting their systems. 19 24 See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness Disclosure." COMPLIANCE WITH INCREASING ENVIRONMENTAL REGULATIONS AND THE EFFECTS OF POTENTIAL ENVIRONMENTAL LIABILITIES COULD HAVE A MATERIAL ADVERSE FINANCIAL EFFECT ON US. We, like other industry participants, are subject to various federal, state, local and international environmental laws and regulations. We may be subject to increasingly stringent environmental standards in the future. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition. Some of our businesses work with highly dangerous substances which require heightened standards of care. For example, as the prime contractor for the U.S. Army's Non-Stockpile Chemical Materiel Demilitarization program, we are responsible for the destruction of small caches of chemical munitions and materiel located in over 30 states. The destruction of chemical weapons is an inherently dangerous activity. Although we have not experienced any accidents or other adverse consequences as a result of our participation in this program, we cannot assure you that we will not experience any problems in the future. INCREASING COMPETITION COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND SERVICES. Although we have certain advantages that we believe help us compete in our markets, each of our markets is highly competitive. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do. New or existing competitors may also develop new technologies which could adversely affect the demand for our products and services. Industry consolidation trends, particularly among aerospace and defense contractors, could adversely affect demand for our products and services if prime contractors seek to control more aspects of vertically-integrated projects. HAVING NO OPERATING HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT TO PREDICT OUR PROFITABILITY AS A STAND-ALONE COMPANY. We do not have an operating history as an independent company. Our businesses have historically relied on ATI for various financial, managerial and administrative services and have been able to benefit from the earnings, financial resources, assets and cash flows of ATI's other businesses. After the spin-off, ATI will only be obligated to provide us with the assistance and services set forth in the Interim Services Agreement. See "Arrangements with ATI Relating to the Spin-Off." Following the spin-off, we will incur costs and expenses associated with the management of a public company that we expect will be greater than the amount reflected in our historical financial statements. We will also incur interest expense and be subject to the other requirements associated with our credit facility. While we have been profitable as part of ATI, there can be no assurance that, as a stand-alone company, our future profits will be comparable to historical operating results before the spin-off. We also will need to dedicate significant managerial and other resources at the corporate level to establish the infrastructure and systems necessary for us to operate as an independent public company. While we believe that we have sufficient management resources, we cannot assure you that this will be the case or that we will successfully implement our operating and growth initiatives. Failure to implement these initiatives successfully could have a material adverse effect on our business, results of operations and financial condition. 20 25 SINCE THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK IT IS IMPOSSIBLE TO PREDICT THE PRICES AT WHICH OUR COMMON STOCK WILL TRADE IN THE OPEN MARKET. There has been no prior trading market for our common stock, and we cannot predict the prices at which trading in our common stock will occur after the spin-off. The trading prices for our common stock could fluctuate significantly. SUBSTANTIAL SALES OF OUR COMMON STOCK FOLLOWING THE SPIN-OFF OR THE PROSPECT OF THE REQUIRED PUBLIC OFFERING COULD CAUSE A DECREASE IN THE MARKET PRICE OF OUR COMMON STOCK. Substantially all of the shares of our common stock distributed in the spin-off will be eligible for immediate resale in the public market. In transactions similar to the spin-off, it is not unusual for a significant redistribution of shares to occur during the first few weeks or even months following completion of the transaction because of the differing objectives and strategies of investors, including mutual funds, who acquire shares of our common stock in the transaction. In addition, the prospect of our being required to undertake a public offering of our common stock within one year following the spin-off may adversely affect the market price of our common stock. Sales of substantial amounts of our common stock in the public market following the spin-off, the perception that any redistribution has not been completed, or the prospect of our having to undertake a public offering of our common stock following the spin-off, could materially adversely affect the market price of our common stock. FAILURE OF REPRESENTATIONS AND ASSUMPTIONS UNDERLYING THE IRS TAX RULING COULD CAUSE THE SPIN-OFF NOT TO BE TAX-FREE TO ATI OR TO ATI'S STOCKHOLDERS AND MAY REQUIRE US TO INDEMNIFY ATI. While the tax ruling relating to the qualification of the spin-off as a tax-free distribution within the meaning of Section 355 of the Internal Revenue Code generally is binding on the IRS, the continuing validity of the tax ruling is subject to certain factual representations and assumptions, including the assumption that we will complete a required public offering of our common stock within one year following the spin-off, and use the anticipated gross proceeds of approximately $125 million (less associated costs) for research and development and related capital projects, for the further development of our manufacturing capabilities and for acquisitions and/or joint ventures. ATI and Teledyne Technologies are not aware of any facts or circumstances that would cause such representations and assumptions to become untrue. If the spin-off were not to qualify as a tax-free distribution within the meaning of Section 355 of the Code, ATI would recognize taxable gain generally equal to the amount by which the fair market value of the Teledyne Technologies common stock distributed to ATI's stockholders exceeded the tax basis in our assets. In addition, the distribution of our common stock to each ATI stockholder would generally be treated as taxable in an amount equal to the fair market value of the Teledyne Technologies common stock such stockholder receives. If the spin-off qualified as a distribution under Section 355 of the Code but failed to be tax-free to ATI because of certain post-spin-off circumstances (such as an acquisition of Teledyne Technologies) ATI would recognize taxable gain as described above, but the distribution of our common stock in the spin-off would generally be tax-free to each ATI stockholder. The Tax Sharing and Indemnification Agreement provides that we will be responsible for any taxes imposed on, or other amounts paid by, ATI, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of Section 355 of the Code if the failure or disqualification is caused by certain post-spin-off actions by or with respect to us (including our subsidiaries) or our stockholders. For example, the acquisition of Teledyne Technologies by a third party during the two-year period following the spin-off could cause such a failure or disqualification. If any of the taxes or other 21 26 amounts described above were to become payable by us, the payment could have a material adverse effect on our financial condition, results of operations and cash flow and could exceed our net worth by a substantial amount. See "Arrangements with ATI Relating to the Spin-Off -- Tax Sharing and Indemnification Agreement." CAUTIONARY STATEMENT AS TO FORWARD LOOKING STATEMENTS We caution you that this document contains disclosures which are forward-looking statements. All statements regarding ATI's or Teledyne Technologies' expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, projected costs or cost savings, capital expenditures, competitive positions, continuation or expansion of government programs, growth opportunities for existing products or products under development, benefits from new technology, plans and objectives of management for future operations and markets for stock are forward-looking statements. In addition, forward-looking statements include statements in which we use words such as "expect," "believe," "anticipate," "intend," or similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure you that these expectations will prove to have been correct, and actual results may differ materially from those reflected in the forward-looking statements. Factors that could cause our actual results to differ from the expectations reflected in the forward-looking statements in this document include those set forth in "Risk Factors." Neither Teledyne Technologies nor ATI has any intention of or obligation to update the forward-looking statements, even if new information, future events or other circumstances make them incorrect or misleading. THE SPIN-OFF REASONS FOR THE SPIN-OFF After a strategic review initiated in 1998, ATI concluded that its core aerospace and electronics businesses, which will comprise our company, would be able to grow faster and more effectively as a separate, independent company. As a separate, independent company, we will be better able to focus on our own strategic priorities and have more efficient access to the capital markets than we could as part of ATI. The operations included in Teledyne Technologies were carefully selected to create a group of high technology businesses that have critical mass and shared core competencies, are strategically complementary and have the potential for profitable growth. Certain businesses in ATI's Aerospace and Electronics segment were determined not to have these characteristics and were sold. This Information Statement relates only to distribution of the common stock of Teledyne Technologies, whose businesses are those formerly comprising ATI's Aerospace and Electronics segment. A separate Information Statement will be provided to you regarding the spin-off of Water Pik Technologies, Inc., the company that owns and operates the businesses formerly comprising ATI's Consumer segment. We believe that the spin-off will enable our businesses to expand and grow more quickly and efficiently in the following ways: - - Our high technology businesses have different fundamentals, growth characteristics and strategic priorities than the specialty metals businesses currently conducted by ATI. The separation of our businesses from those of ATI will allow us to focus on our own strategic priorities, which should increase our ability to capitalize on growth opportunities for our businesses and enhance our ability to respond more quickly to changes in the technically- sophisticated markets that we serve. - - The spin-off will enable us to have direct access to the capital markets to finance the expansion of our businesses and support our 22 27 future growth. More specifically, we intend to raise our own equity capital: - to accelerate new higher-margin product introductions through increased research and development investment - to expand upon our extensive data acquisition and systems engineering capabilities to provide value-added information services to broaden and deepen our market penetration - to further develop our manufacturing capabilities - to pursue selected acquisitions - - The spin-off will enable us to recruit, retain and motivate key employees by providing them with stock-based compensation incentives directly tied to the success of our businesses. MANNER OF EFFECTING THE SPIN-OFF ATI will effect the spin-off by distributing all issued and outstanding shares of our common stock to holders of record of ATI common stock as of the close of business on , 1999. The spin-off will be made on the basis of one share of our common stock for every seven shares of ATI common stock held. If you own ATI common stock on the record date, the distribution agent will automatically credit your shares of our common stock to a book-entry account established to hold your Teledyne Technologies common stock on , 1999 and will mail you a statement of your Teledyne Technologies common stock ownership. Following the spin-off you may retain your shares of Teledyne Technologies common stock in your book-entry account, sell them, transfer them to a brokerage or other account, or request a physical certificate for whole shares. If a stockholder is otherwise entitled to receive a fractional share of Teledyne Technologies common stock, that stockholder will instead receive cash for that fractional share. The distribution agent will, promptly after the date of the spin-off, aggregate all fractional share interests in Teledyne Technologies common stock with those of other similarly situated stockholders and sell such interests in Teledyne Technologies common stock in open market transactions at then-prevailing prices. The distribution agent will have sole discretion regarding when, how, through which broker (which will not be affiliated with ATI or Teledyne Technologies) and at what prices to make such sales. The distribution agent will distribute the cash proceeds to stockholders entitled to such proceeds pro rata based upon their fractional interests in Teledyne Technologies common stock. No interest will be paid on any cash distributed instead of fractional shares. The distribution agent is not affiliated with ATI or Teledyne Technologies. No owner of ATI common stock will be required to pay any cash or other consideration for shares of Teledyne Technologies common stock received in the spin-off or to surrender or exchange any shares of ATI common stock to receive shares of Teledyne Technologies common stock. The actual total number of shares of Teledyne Technologies common stock to be distributed will depend on the number of shares of ATI common stock outstanding on , 1999. Participants in the ATI Investor Services Program will be credited with the number of shares (including fractional shares) of Teledyne Technologies common stock distributed in the spin-off in respect of the ATI common stock held in their accounts. NO CONSIDERATION WILL BE PAID BY STOCKHOLDERS OF ATI FOR THE SHARES OF OUR COMMON STOCK TO BE RECEIVED BY THEM IN THE SPIN-OFF. ATI STOCKHOLDERS WILL NOT BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF ATI COMMON STOCK OR TAKE ANY OTHER ACTION IN ORDER TO RECEIVE OUR COMMON STOCK. RESULTS OF THE SPIN-OFF After the spin-off, we will be a separate, independent public company. Our management, fundamentals, growth characteristics and strategic priorities will be different from those of ATI. 23 28 Concurrently with the spin-off, ATI will change its name to "Allegheny Technologies Incorporated." The number and identity of our stockholders immediately after the spin-off will be the same as the number and identity of ATI's stockholders at the close of business on , 1999. Immediately after the spin-off, we expect to have approximately 9,200 holders of record of our common stock and approximately 27,008,553 shares of our common stock outstanding, based on the number of record stockholders and issued and outstanding shares of ATI common stock as of the close of business on September 30, 1999 and on the distribution ratio of one share of our common stock for every seven shares of ATI common stock owned by ATI stockholders at that time. As with ATI common stock, the shares of Teledyne Technologies common stock will: - - be fully paid and nonassessable; - - have one vote per share, with no right to cumulate votes; - - carry no preemptive rights; and - - be accompanied by Preferred Share Purchase Rights. The Teledyne Technologies common stock and the ATI common stock, however, will be different securities and will not trade or be valued alike. See "Description of Our Capital Stock." We have applied to have our common stock approved for listing on the New York Stock Exchange under the trading symbol "TDY." The spin-off will not, in and of itself, affect the number of outstanding shares of ATI common stock or the rights associated with these shares. ATI intends to effect a one-for-two reverse split of its common stock immediately following the spin-off. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF The following is a summary of the material United States Federal income tax consequences of the spin-off. It is not intended to address the tax consequences applicable to every stockholder. In particular, this summary does not cover state, local, or international income and other tax consequences. Accordingly, stockholders are strongly encouraged to consult their individual tax advisors for information on the tax consequences applicable to their individual situations. ATI has received a tax ruling from the IRS that states that the spin-off will qualify as a tax-free distribution under Section 355 of the Internal Revenue Code. In accordance with this tax ruling: - - No gain or loss will be recognized by ATI upon the distribution of Teledyne Technologies common stock to ATI's stockholders. - - No gain or loss will be recognized by ATI's stockholders as a result of your receipt of our common stock in the spin-off except to the extent that you receive cash instead of a fractional share. - - If you receive cash instead of a fractional share of our common stock in the spin-off, you will be treated as having received the fractional share in the spin-off and then having sold the fractional share. Accordingly, you will recognize gain or loss equal to the difference between the cash you receive and the amount of tax basis allocable (as described below) to the fractional share. The gain or loss will be capital gain or loss if you would have had the fractional share as a capital asset. - - Your tax basis in your ATI common stock will be apportioned among the ATI common stock and the common stock of Teledyne Technologies and common stock of Water Pik Technologies, Inc. you receive in the spin-offs on the basis of the relative fair market values of the shares at the time of the spin-offs. Promptly following the spin-off, ATI will send a letter to the holders of ATI common stock who receive our common stock in the spin-off that will 24 29 explain the allocation of tax basis among ATI common stock and the Teledyne Technologies common stock and the Water Pik common stock you receive in the spin-offs. - - The holding period of Teledyne Technologies common stock that you receive in the spin-off will be the same as the holding period of ATI common stock with respect to which you received our common stock so long as you hold the ATI common stock as a capital asset on the date of the spin-off. The tax ruling relating to the qualification of the spin-off as a tax-free distribution within the meaning of Section 355 of the Internal Revenue Code generally is binding on the IRS. However, the continuing validity of the tax ruling is subject to certain factual representations and assumptions, including completion of a public offering of our common stock within one year of the spin-off, and use of the anticipated gross proceeds of approximately $125 million (less associated costs) for research and development and related capital projects, for the further development of our manufacturing capabilities and for acquisitions and/or joint ventures, as well as the lack of a plan or intention on the part of ATI or Teledyne Technologies to merge with any other corporation or to sell assets otherwise than in the ordinary course of business, or (subject to certain exceptions) to purchase shares of its outstanding stock. If the spin-off were not to qualify as a tax-free distribution within the meaning of Section 355 of the Code, ATI would recognize taxable gain generally equal to the amount by which the fair market value of Teledyne Technologies common stock distributed to ATI's stockholders exceeds the tax basis in our assets. In addition, each ATI stockholder who receives our common stock in the spin-off would generally be treated as having received a taxable distribution in an amount equal to the fair market value of our common stock. If the spin-off qualified under Section 355 of the Code but failed to be tax-free to ATI because of certain post-spin-off circumstances, ATI would recognize taxable gain as described above but the spin-off would generally be tax-free to each ATI stockholder as described in the preceding paragraph. See "Risk Factors." THE FOREGOING SUMMARIZES THE MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF UNDER CURRENT LAW. YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE SPIN-OFF TO YOU, INCLUDING THE APPLICATION OF STATE, LOCAL AND INTERNATIONAL TAX LAWS, AND AS TO POSSIBLE CHANGES IN TAX LAW THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE. The Tax Sharing and Indemnification Agreement provides that we are not to take any action inconsistent with, nor fail to take any action required by, the request for the tax ruling or the tax ruling unless ATI has given its prior written consent or, in certain circumstances, a supplemental ruling that permits such action is obtained. The Tax Sharing and Indemnification Agreement also provides that we will be responsible for any taxes imposed on, or amounts paid by, ATI, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of Section 355 of the Code if the failure or disqualification is attributable to certain post-spin-off actions or failures to act by or with respect to us (including our subsidiaries) or our stockholders, such as the acquisition of Teledyne Technologies by a third party at a time and in a manner that would cause such a failure or disqualification. See "Arrangements with ATI Relating to the Spin-Off -- Tax Sharing and Indemnification Agreement." LISTING AND TRADING OF OUR COMMON STOCK Currently, there is no public market for our common stock. We have applied to have our common stock approved for listing on the New York Stock Exchange under the trading symbol "TDY." A temporary form of interim trading called "when-issued trading" may occur for our common stock on or before , 1999 and continue through , 1999. If when-issued trading occurs, the listing for Teledyne Technologies common stock will be 25 30 accompanied by the letters "wi" on the New York Stock Exchange. If when-issued trading develops, you will be able to buy Teledyne Technologies common stock in advance of the , 1999 spin-off and you may sell Teledyne Technologies common stock in advance of such date on a when-issued basis. ATI common stock will continue to trade on a "regular way" basis and may also trade on a when-issued or ex-distribution basis, reflecting an assumed value for ATI common stock after giving effect to the spin-offs of Teledyne Technologies and Water Pik Technologies, Inc. When issued or ex-distribution trading in ATI common stock, if available, could last from on or before , 1999 through , 1999. Beginning on the first New York Stock Exchange trading day after the date of the spin-off, we expect that ATI common stock will trade "regular way" only, entitling the buyer to receive only ATI common stock. Until our common stock is fully distributed and an orderly market develops, the prices at which trading in our common stock occurs may fluctuate significantly and may be lower or higher than the price that would be expected for a fully-distributed issue. The prices at which our common stock will trade following the spin-off will be determined by the marketplace and may be influenced by many factors, including: - - the depth and liquidity of the market for our common stock; - - investor perceptions of us, our businesses and the industries in which we operate; - - our dividend policy; - - our financial results; and - - general economic and market conditions. Substantially all of the shares of our common stock that are distributed in the spin-off will be eligible for immediate resale. In transactions similar to the spin-off, it is not unusual for a significant redistribution of shares to occur during the first few weeks or even months following completion of the transaction because of the differing objectives and strategies of investors who acquire shares of our common stock in the transaction. We are not able to predict whether substantial amounts of our common stock will be sold in the open market following the spin-off or what effect these sales may have on prices at which our common stock may trade. Sales of substantial amounts of our common stock in the public market during this period, the perception that any redistribution has not been completed or the prospect of our having to undertake a public offering of our common stock following the spin-off could materially adversely affect the market price of our common stock. Generally, the shares of our common stock that are distributed in the spin-off will be freely transferable, except for securities received by persons deemed to be our "affiliates" under the Securities Act of 1933, as amended ("Securities Act"). Persons who may be deemed to be our affiliates after the spin-off generally include individuals or entities that control, are controlled by, or are in common control with us, including our directors. Persons who are our affiliates will be permitted to sell shares of our common stock they receive in the spin-off only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as in accordance with the requirements of Rule 144 under the Securities Act. 26 31 OUR HISTORICAL SELECTED FINANCIAL DATA The following table summarizes certain selected combined financial data for Teledyne Technologies. The income statement data for each of the three years ended December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998 and 1997 set forth below are derived from audited combined financial statements of Teledyne Technologies. The income statement data for the nine months ended September 30, 1999 and 1998 and the years ended December 31, 1995 and 1994 and the balance sheet data at September 30, 1999 and 1998 and December 31, 1996, 1995 and 1994 set forth below are derived from unaudited combined financial statements of Teledyne Technologies. The historical selected combined financial data are not necessarily indicative of the results of operations or financial position that would have occurred if Teledyne Technologies had been a separate, independent company during the periods presented, nor are they indicative of our future performance. Such historical data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and related notes included in this Information Statement. Per share data has not been presented because Teledyne Technologies was not a publicly held company during the periods presented.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Sales......................... $602,978 $588,690 $780,393 $756,601 $716,400 $680,475 $667,663 Net income.................... $ 35,835 $ 37,803 $ 48,717 $ 41,624 $ 40,695 $ 30,850 $ 36,398 Working capital............... $ 93,085 $ 83,591 $ 78,568 $ 87,653 $104,184 $ 92,814 $ 68,896 Total assets.................. $277,497 $255,850 $250,819 $255,366 $252,961 $234,301 $217,610 Stockholder's equity.......... $126,370 $109,057 $106,402 $109,365 $128,018 $115,168 $ 99,337
27 32 OUR UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma consolidated income statements for the nine months ended September 30, 1999 and for the year ended December 31, 1998 and the unaudited pro forma consolidated balance sheet at September 30, 1999 present the combined results of operations and financial position of Teledyne Technologies assuming that the transactions contemplated by the spin-off had been completed as of the beginning of 1998 with respect to the pro forma consolidated income statements for the nine months ended September 30, 1999 and for the year ended December 31, 1998 and as of September 30, 1999 with respect to the pro forma consolidated balance sheet. In the opinion of management, they include all material adjustments necessary to reflect, on a pro forma basis, the impact of transactions contemplated by the spin-off on the historical financial information of Teledyne Technologies. The adjustments are described in the notes to pro forma consolidated financial information and are set forth in the "Pro Forma Adjustments" column. The unaudited pro forma consolidated financial information of Teledyne Technologies should be read in conjunction with the historical financial statements of Teledyne Technologies and the related notes. The pro forma financial information has been presented for informational purposes only and does not reflect the results of operations or financial position of Teledyne Technologies that would have occurred had Teledyne Technologies operated as a separate, independent company for the periods presented. Actual results might have differed from pro forma results if Teledyne Technologies had operated independently. The pro forma financial information should not be relied upon as being indicative of results Teledyne Technologies would have had or of future results after the spin-off. 28 33 TELEDYNE TECHNOLOGIES INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999
HISTORICAL PRO FORMA TELEDYNE TELEDYNE TECHNOLOGIES PRO FORMA TECHNOLOGIES INCORPORATED ADJUSTMENTS INCORPORATED ------------ ----------- ------------ (IN THOUSANDS) ASSETS Cash.................................... $ -- $ -- $ -- Accounts receivable................... 120,627 -- 120,627 Inventories........................... 53,852 -- 53,852 Deferred income taxes................. 18,855 -- 18,855 Prepaid expenses and other current assets............................. 2,157 -- 2,157 -------- --------- -------- TOTAL CURRENT ASSETS............... 195,491 -- 195,491 Property, plant and equipment......... 50,453 -- 50,453 Deferred income taxes................. 17,232 8,456 25,688 Cost in excess of net assets acquired........................... 9,201 -- 9,201 Other assets.......................... 5,120 8,552 13,672 -------- --------- -------- TOTAL ASSETS....................... $277,497 $ 17,008 $294,505 ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable...................... $ 51,224 $ -- $ 51,224 Accrued liabilities................... 51,182 -- 51,182 -------- --------- -------- TOTAL CURRENT LIABILITIES 102,406 -- 102,406 Long-term debt........................ -- 100,000 100,000 Net unrecognized actuarial gains on pension obligation................. -- 16,552 16,552 Accrued postretirement benefits....... 33,337 -- 33,337 Other long-term liabilities........... 15,384 13,764 29,148 -------- --------- -------- TOTAL LIABILITIES.................. 151,127 130,316 281,443 -------- --------- -------- STOCKHOLDERS' EQUITY: Preferred stock, par value $0.01: authorized -- 15,000,000 shares; issued and outstanding -- none..... -- -- -- Common stock, par value $0.01: authorized -- 125,000,000 shares; issued and outstanding -- 27,008,553 shares... -- 270 270 Additional paid-in capital............ -- 11,172 11,172 Net advances from (to) Allegheny Teledyne Incorporated.............. 124,750 (124,750) -- Foreign currency translation gains.... 1,620 -- 1,620 -------- --------- -------- TOTAL STOCKHOLDERS' EQUITY......... 126,370 (113,308) 13,062 -------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $277,497 $ 17,008 $294,505 ======== ========= ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Information. 29 34 TELEDYNE TECHNOLOGIES INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
HISTORICAL TELEDYNE PRO FORMA TELEDYNE TECHNOLOGIES PRO FORMA TECHNOLOGIES INCORPORATED ADJUSTMENTS INCORPORATED ------------------- ----------- ------------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SALES.......................... $602,978 $ -- $602,978 Costs and expenses: Cost of sales................ 442,146 -- 442,146 Selling, general and administrative expenses... 100,500 5,220 105,720 Interest expense............. -- 6,038 6,038 -------- -------- -------- 542,646 11,258 553,904 -------- -------- -------- Earnings before other income... 60,332 (11,258) 49,074 Other income................... 716 -- 716 -------- -------- -------- INCOME BEFORE INCOME TAXES..... 61,048 (11,258) 49,790 Provision for income taxes..... 25,213 (4,650) 20,563 -------- -------- -------- NET INCOME..................... $ 35,835 $ (6,608) $ 29,227 ======== ======== ======== BASIC NET INCOME PER COMMON SHARE........................ $ 1.06 ======== DILUTED NET INCOME PER COMMON SHARE........................ $ 1.06 ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Information. 30 35 TELEDYNE TECHNOLOGIES INCORPORATED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998
HISTORICAL TELEDYNE PRO FORMA TELEDYNE TECHNOLOGIES PRO FORMA TECHNOLOGIES INCORPORATED ADJUSTMENTS INCORPORATED ------------------- ----------- ------------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SALES.......................... $780,393 $ -- $780,393 Costs and expenses: Cost of sales................ 572,087 -- 572,087 Selling, general and administrative expenses... 126,875 7,196 134,071 Interest expense............. -- 8,050 8,050 -------- -------- -------- 698,962 15,246 714,208 -------- -------- -------- Earnings before other income... 81,431 (15,246) 66,185 Other income................... 1,562 -- 1,562 -------- -------- -------- INCOME BEFORE INCOME TAXES..... 82,993 (15,246) 67,747 Provision for income taxes..... 34,276 (6,297) 27,979 -------- -------- -------- NET INCOME..................... $ 48,717 $ (8,949) $ 39,768 ======== ======== ======== BASIC NET INCOME PER COMMON SHARE........................ $ 1.41 ======== DILUTED NET INCOME PER COMMON SHARE........................ $ 1.41 ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Information. 31 36 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION NOTE 1. The historical financial statements of Teledyne Technologies reflect periods during which Teledyne Technologies did not operate as a separate, independent company. Certain estimates, assumptions and allocations were made in preparing such financial statements. Therefore, the historical financial statements do not necessarily reflect the results of operations or financial position that would have occurred had Teledyne Technologies been a separate, independent company during the periods presented, nor are they indicative of future performance. Management believes that the estimates, assumptions and allocations made in preparing the historical financial statements are reasonable. NOTE 2. The pro forma unaudited consolidated balance sheet was prepared assuming the distribution occurred on September 30, 1999 and includes "Pro Forma Adjustments" for transactions that occurred subsequent to September 30, 1999 as follows: (a) To record debt of $100,000,000 to be assumed by Teledyne Technologies at the date of the spin-off. (b) To record the transfer of net unrecognized actuarial gains on pension obligation of $16,552,000 as of September 30, 1999 and the related deferred tax effect of $6,419,000. The components of net unrecognized actuarial gains on pension obligation are as follows: Projected benefit obligation.... $361,593 Fair value of plan assets....... 420,352 -------- Funded status of plan -- plan assets in excess of projected benefit obligation............ 58,759 Unrecognized prior service cost.......................... 15,956 Unrecognized transition obligation.................... (12,744) Unrecognized actuarial gains.... (78,523) -------- Total net unrecognized actuarial gains on pension obligation... $(16,552) ========
(c) To record the transfer of worker's compensation and general liability insurance reserves of $5,253,000 and the related deferred taxes of $2,037,000. (d) To record the transfer of deferred compensation long-term assets of $8,552,000 and long-term liabilities of $8,511,000. (e) To record the planned liquidation of the remaining investment by ATI and the issuance of 27,008,553 shares of Teledyne Technologies common stock. The effect on income from the balance sheet transfers of the pension plan, insurance reserves and deferred compensation plan is reflected in the historical financial statements. See Note 7 of Notes to Combined Financial Statements. NOTE 3. Pro forma net income was adjusted to include interest expense and commitment fees on the ATI revolving debt we will assume in the amount of $6,038,000 before tax, or $3,544,000 after tax, for the nine months ended September 30, 1999 and $8,050,000 before tax, or $4,725,000 after tax, for the year ended December 31, 1998. Interest expense and commitment fees were calculated assuming the $100,000,000 of assumed debt had been outstanding for the entire period with an average 32 37 interest rate of 7.7% based upon LIBOR plus 1.5% and commitment fees of 0.35% on the unused portion of the facility. A 0.125% increase in the assumed interest rate on the revolving debt would increase interest expense by $94,000 ($55,000 after tax) for the nine months ended September 30, 1999 and by $125,000 ($73,000 after tax) for the year ended December 31, 1998. In addition, pro forma net income was adjusted to include additional corporate expenses of $5,220,000 and $7,196,000 before tax for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively. These expenses in combination with the corporate expenses allocated for historical purposes ($6,030,000 and $7,804,000 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively), represent what management believes to be the reasonable corporate expenses of Teledyne Technologies had it operated as a separate stand alone company during the periods presented. We determined the additional corporate expenses for the periods presented by estimating the number, seniority and compensation levels of additional employees that would likely be required to fully carry out the finance, legal, tax, human resources, investor and public relations and other functions associated with being a stand alone public company. In addition, we included estimates of various corporate and related administrative expenses that can be expected to be incurred as a stand alone public company, such as board of directors fees and expenses and independent accounting and legal fees and expenses. In making these estimates, we also examined expenses historically incurred by ATI for these personnel and expenses. NOTE 4. The average number of shares of Teledyne Technologies common stock used in the computation of basic net income per share was 27,481,371 and 28,107,241 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively, based on a distribution ratio of one share of Teledyne Technologies common stock for every seven shares of ATI common stock. The average number of shares of Teledyne Technologies common stock used in the computation of diluted net income per share was 27,506,953 and 28,133,879 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively. A distribution ratio of one share of Teledyne Technologies common stock for every seven shares of ATI common stock was used to adjust the stock options. The actual stock option adjustment will be based upon the relation of the market price of ATI common stock prior to the spin-off to the market price of Teledyne Technologies after the spin-off and therefore cannot be determined at the present time. 33 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW After a strategic review initiated in 1998, ATI concluded that its core Aerospace and Electronics businesses, which comprise our Company, would be able to grow faster and be a stronger competitor as a separate company. The operations included in Teledyne Technologies were carefully selected to create a group of high technology businesses that have critical mass and shared core competencies, are strategically complementary and have the potential for profitable growth. Certain businesses in ATI's Aerospace and Electronics segment were determined not to have these characteristics and were sold. Teledyne Technologies is a leading provider of sophisticated electronic and communication products, systems engineering solutions and information technology services, and aerospace engines and components. Our customers include aerospace prime contractors, general aviation companies, government agencies and major communications and other commercial companies. We serve high-value niche market segments where performance, precision and reliability are critical and where we are in several cases the leading supplier. Our businesses are interrelated by their use of advanced engineering and specialized technology to provide cost-effective and value-added solutions. We operate in three business segments: Electronics and Communications; Systems Engineering Solutions; and Aerospace Engines and Components. Our products include avionics systems that collect and communicate information for airlines and business aircraft systems; broadband communications subsystems for wireless and satellite systems; engineering and information technology services for space, defense and industrial customers; and engines for general aviation aircraft and for cruise missiles. Our segments' respective contributions to total sales for the nine months ended September 30, 1999 and for 1998, 1997 and 1996 are summarized in the following table:
NINE MONTHS ENDED SEGMENT OPERATING COMPANIES SEPTEMBER 30, 1999 1998 1997 1996 - -------------------------------- -------------------------------- ------------------ ---- ---- ---- Electronics and Communications Teledyne Electronic Technologies 43% 44% 45% 44% Systems Engineering Solutions Teledyne Brown Engineering 28% 29% 28% 30% Aerospace Engines and Components Teledyne Continental Motors Teledyne Cast Parts 29% 27% 27% 26% --- --- --- --- 100% 100% 100% 100%
Our historical financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred if we had been a separate, independent company during the periods presented, nor is it indicative of our future performance. The historical financial statements do not reflect any changes that may occur in our capitalization or results of operations as a result of, or after, the spin-off. On an historical basis, the capital for our businesses was provided by ATI's net investment in our businesses. In addition, no ATI debt was allocated to us. Accordingly, our historical financial statements reflect no interest income or interest expense. In connection with the spin-off, we will assume repayment obligations for $100.0 million under a five-year revolving credit facility initially established by ATI. Our historical financial statements also do not fully reflect the corporate costs and expenses we expect to incur in connection with our being an independent public company. These financial statements reflect a $6.0 million allocation of part of ATI corporate expenses for the nine months ended September 30, 1999, and allocations of $7.8 million, $7.6 million and $7.2 million for 1998, 1997 and 1996, respec- 34 39 tively. We do not believe that these recorded amounts are indicative of what our actual corporate expenses will be in the future. We expect that our actual corporate expenses will be approximately $15.0 million annually, significantly greater than those reflected in our historical financial statements, as we add significant managerial and other resources to complete the infrastructure and systems necessary for us to operate as an independent public company. Assuming the spin-off had occurred on January 1, 1998 and that the applicable interest rate under our credit facility was 7.7% and our commitment fees were 0.35% on the unused portion of the facility throughout all periods, we would have incurred interest expense of $6.0 million during the nine months ended September 30, 1999 and $8.1 million during 1998. If annual corporate expenses were approximately $15 million incurred ratably over the year, our net income would have been $29.2 million and $39.8 million during the 1999 nine-month period and 1998, respectively. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Our sales were $603.0 million in the first nine months of 1999, compared to $588.7 million in the same 1998 period. International sales represented approximately 18% and 22% of our sales in the 1999 and 1998 nine-month periods, respectively. Sales under contracts with the U.S. Government, which included contracts with the Department of Defense, represented approximately 43% and 39% of our total sales in the nine months ended September 30, 1999 and 1998, respectively. For the 1999 nine-month period, operating profit decreased 4% to $66.4 million from the 1998 period. Product recall costs at Teledyne Continental Motors and a continuing slow economic recovery in some of our Asian markets negatively impacted our performance and were partially offset by an increase in net pension income. Net income for the 1999 nine-month period was $35.8 million, a decrease of 5.2% from the corresponding period of 1998. Assuming that the spin-off had been completed as of January 1, 1998 and that the applicable interest rate under our credit facility was 7.7% and our commitment fees were 0.35% on the unused portion of the facility throughout all periods, our pro forma interest expense would have been approximately $6.0 million, our pro forma corporate expenses would have been approximately $11.3 million and our pro forma net income would have been approximately $29.2 million in the 1999 nine-month period. See "Our Unaudited Pro Forma Consolidated Financial Information." Sales and operating profit for our three segments for the nine months ended September 30, 1999 and 1998 are presented separately below and in Note 3 of the Notes to Interim Combined Financial Statements.
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1999 % CHANGE SEPTEMBER 30, 1998 ELECTRONICS AND COMMUNICATIONS ------------------ -------- ------------------ (DOLLARS IN THOUSANDS) (UNAUDITED) Sales.......................................... $258,710 (1)% $261,950 Operating profit............................... $ 31,277 (5)% $ 33,081 Operating profit as a percentage of sales...... 12.1% 12.6% International sales as a percentage of sales... 17.7% 21.7% Government sales as a percentage of sales...... 29.4% 31.6%
Sales of our Electronics and Communications segment decreased 1% and operating profit decreased 5% in the nine months ended September 30, 1999 compared to the 1998 nine- 35 40 month period. Sales decreased in the 1999 nine- month period primarily due to a $1.6 million decrease in sales of electronic contract manufacturing services and a $5.8 million decrease in sales of precision electronic devices, which was partially offset by a $4.1 million increase in sales of data acquisition and communication products. Operating profits for the period were also adversely affected by the reduced sales and were further affected by an additional $670,000 in costs related to a workforce reduction of 90 employees of Teledyne Electronic Technologies.
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1999 % CHANGE SEPTEMBER 30, 1998 SYSTEMS ENGINEERING SOLUTIONS ------------------ -------- ------------------ (DOLLARS IN THOUSANDS) (UNAUDITED) Sales........................................... $166,535 1% $165,465 Operating profit................................ $ 13,308 (6)% $ 14,227 Operating profit as a percentage of sales....... 8.0% 8.6% International sales as a percentage of sales.... 13.1% 22.6% Government sales as a percentage of sales....... 82.4% 70.6%
Sales of our Systems Engineering Solutions segment increased 1% and operating profit decreased 6% in the nine months ended September 30, 1999 compared to the 1998 nine-month period. For the 1999 nine-month period, sales and operating profit included increases in defense energy systems and environmental programs of $12.6 million and $3.4 million, respectively and lower sales and operating profit in marine instrumentation products of $16.1 million and $4.1 million, respectively. The decrease in sales and operating profit for marine instrumentation products was attributable, in large part, to adverse conditions in the oil industry. Sales in space programs increased by $3.8 million, while operating profit decreased by $474,000, due to a development program for aircraft loaders.
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1999 % CHANGE SEPTEMBER 30, 1998 AEROSPACE ENGINES AND COMPONENTS ------------------ -------- ------------------ (DOLLARS IN THOUSANDS) (UNAUDITED) Sales........................................... $177,733 10% $161,275 Operating profit................................ $ 21,777 (1)% $ 22,092 Operating profit as a percentage of sales....... 12.3% 13.7% International sales as a percentage of sales.... 23.4% 22.0% Government sales as a percentage of sales....... 26.5% 20.0%
Sales of our Aerospace Engines and Components increased 10% and operating profit decreased 1% in the nine months ended September 30, 1999 compared to the 1998 nine-month period. While sales improved in the 1999 nine-month period, sales and operating profit at Teledyne Continental Motors were negatively impacted by a recall of piston engines produced in 1998. Efforts associated with the recall resulted in a $3.0 million charge and impacted sales during the period. The decline in operating profit for this period was due in part to the recall charge as well as to a decline in operating profit at Teledyne Cast Parts. Operating results for Teledyne Continental Motors' turbine engines increased during the period. COMPARISON OF ANNUAL PERIOD RESULTS Our sales were $780.4 million in 1998, compared to $756.6 million in 1997 and $716.4 million in 1996. International sales represented approximately 22%, 21% and 23% of our sales for 1998, 1997 and 1996, respectively. Sales 36 41 under contracts with the U.S. Government, which included contracts with the Department of Defense, were approximately 40%, 40% and 44% of our total sales for 1998, 1997 and 1996, respectively. Defense sales represented approximately 27%, 26% and 27% of our total sales for 1998, 1997 and 1996, respectively. In 1998, our operating profit was $89.2 million, compared to $74.9 million in 1997 and $75.2 million in 1996. Net income for 1998 was $48.7 million, compared to $41.6 million in 1997 and $40.7 million in 1996. Assuming that the spin-off had been completed as of January 1, 1998 and that the applicable interest rate under our credit facility was 7.7% and our commitment fees were 0.35% on the unused portion of the facility throughout all periods, our pro forma interest expense would have been approximately $8.1 million, our pro forma corporate expenses would have been approximately $15.0 million and our pro forma net income would have been approximately $39.8 million in 1998. See "Our Unaudited Pro Forma Consolidated Financial Information." Sales and operating profit for our three segments are presented separately below and in Note 11 of Notes to Combined Financial Statements.
1998 % CHANGE 1997 % CHANGE 1996 ELECTRONICS AND COMMUNICATIONS -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Sales................................... $342,110 1% $340,034 8% $313,488 Operating profit........................ $ 42,620 16% $ 36,787 (3)% $ 37,907 Operating profit as a percentage of sales................................. 12.5% 10.8% 12.1% International sales as a percentage of sales................................. 22.2% 23.0% 26.9% Government sales as a percentage of sales................................. 29.9% 30.2% 36.6%
1998 Compared to 1997. Sales of our Electronics and Communications segment increased 1% and operating profit increased 16% in 1998 compared to 1997. For this period, improvements in sales and operating profit for the segment were due primarily to increases in sales and operating profit of our data acquisition and communications products, which increased by $9.8 million and $11.8 million, respectively. These increases were attributable to expanded demand by commercial airlines as well as business and consumer aircraft, coupled with a reduction in research and development expenses. Improved sales and operating profit for electronic contract manufacturing services of $7.4 million and $2.6 million, respectively, reflected a continued strength in this market. These improvements offset declines in sales and operating profit with respect to precision electronic devices during the period, which decreased by $15.8 and $9.4 million, respectively, due to continuing economic difficulties in Asia and the continued weakness in the semiconductor equipment market. 1997 Compared to 1996. Sales of our Electronics and Communications segment increased 8% and operating profit decreased 3% in 1997 compared to 1996. The increase in sales during this period was primarily due to sales of our data acquisition and communications products, precision electronic devices and electronic contract manufacturing services, which increased by $9.4 million, $8.8 million and $8.3 million, respectively. Nonrecurring expenses, consisting primarily of research and development-related expenses for electronic components for aircraft, resulted in a decline in operating profit of $8.3 million for Teledyne Controls' data acquisition and communication products. 37 42
1998 % CHANGE 1997 % CHANGE 1996 SYSTEMS ENGINEERING SOLUTIONS -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Sales................................... $223,185 6% $210,375 (3)% $216,090 Operating profit........................ $ 20,543 57% $ 13,117 (34)% $ 19,880 Operating profit as a percentage of sales................................. 9.2% 6.2% 9.2% International sales as a percentage of sales................................. 21.8% 17.4% 16.3% Government sales as a percentage of sales................................. 71.3% 75.1% 78.4%
1998 Compared to 1997. Sales of our Systems Engineering Solutions segment increased 6% and operating profit increased 57% in 1998 compared to 1997. The improvement in sales and operating profit was principally due to the increased sales and operating profit of $18.6 million and $5.2 million, respectively, of our marine instrumentation products due to favorable conditions in the oil industry, as well as our participation in defense programs, primarily ballistic missile defense activities. Aerospace program sales decreased by $6.9 million in 1998 as a result of the winding down of our NASA payload integration contract, but operating profit for aerospace programs increased by $800,000 due to increased deliveries of international aerospace hardware. 1997 Compared to 1996. Sales of our Systems Engineering Solutions segment decreased by 3% and operating profit decreased 34% in 1997 compared to 1996. Operating results declined in 1997 due to lower shipments and funding levels on defense and NASA contracts and costs totaling $2.4 million, consisting primarily of charges related to asset impairments for discontinued businesses.
1998 % CHANGE 1997 % CHANGE 1996 AEROSPACE ENGINES AND COMPONENTS -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Sales.................................. $215,098 4% $206,192 10% $186,822 Operating profit....................... $ 26,072 4% $ 24,950 43% $ 17,444 Operating profit as a percentage of sales................................ 12.1% 12.1% 9.3% International sales as a percentage of sales................................ 22.5% 21.5% 23.9% Government sales as a percentage of sales................................ 21.8% 20.7% 17.4%
1998 Compared to 1997. Sales of our Aerospace Engines and Components segment increased 4% and operating profit increased 4% in 1998 compared to 1997. These sales and operating profit increases were due principally to a $10.6 million increase in sales and a $4.7 million increase in operating profit for new piston engine and turbine engine programs. These increases offset higher costs associated with manufacturing plant reconfiguration and the development of new products, including new digital electronic piston engine controls and a NASA-sponsored new piston engine program, as well as sales decreases of $1.7 million and a decrease in operating profit of $3.6 million as a result of production inefficiencies and delays in shipments experienced by our Teledyne Cast Parts operations. 1997 Compared to 1996. Sales of our Aerospace Engines and Components segment increased 10% and operating profit increased 43% in 1997 compared to 1996. Improvements in sales and operating profit were principally due to turbine engine programs, which had sales increases of $5.1 million and operating profit increases of $2.4 million during the period. These increases were partially offset by the termination of a program in the third quarter of 1997. A decline in sales of rebuilt engines and aftermarket new engines resulted in a decrease of $4.6 million in sales for piston engines. Sales and operating profit in this segment benefited, however, from increased orders for airframe and engine cast parts, which resulted in increases of $18.8 million in sales and $5.1 million in operating profit. These increases were attributable to the increased production of commercial 38 43 aircraft and increased tooling sales associated with the JASSM cruise missile program. FINANCIAL CONDITION AND LIQUIDITY Our principal capital requirements are to fund working capital needs and capital expenditures and to meet required debt payments. We anticipate that our operating cash flow, together with available borrowings under our credit facility described below, will be sufficient to meet our working capital requirements, capital expenditure requirements and interest service requirements on our debt obligations. Assuming that the transactions contemplated by the spin-off had been consummated on September 30, 1999, our pro forma long-term debt and stockholders' equity at September 30, 1999 would have been approximately $100.0 million and $13.1 million, respectively. Our pro forma interest expense would have been approximately $6.0 million for the nine months ended September 30, 1999 and approximately $8.1 million in 1998 had the spin- off occurred as of the beginning of 1998. See "Our Unaudited Pro Forma Consolidated Financial Information." For the nine months ended September 30, 1999 and 1998, cash generated from operations amounted to $31.6 million and $45.2 million. This decrease resulted from reduced income of $2.0 million, increased working capital of $16.0 million, and decreased long-term liabilities of $4.4 million, and was partially offset by an increase in depreciation and amortization and deferred taxes of $8.8 million. Cash generated from operations totaled $67.1 million, $72.9 million and $44.9 million in 1998, 1997 and 1996, respectively. Working capital increased to $93.1 million at September 30, 1999, compared to $78.6 million at December 31, 1998. The current ratio was 1.9 at September 30, 1999, compared to 1.8 at December 31, 1998. The increase in working capital was primarily due to the increase in accounts receivable and current deferred tax asset balances partially offset by an increase in the accounts payable balance. In connection with the spin-off, we will assume repayment obligations for $100.0 million under a five-year revolving credit facility initially established by ATI. As a result of the spin-off, we will have $100.0 million of borrowing availability remaining under the credit facility. Borrowings under the credit facility will bear interest at variable rates at, or at margins above, prevailing prime or Eurodollar rates (or, in certain circumstances, the prevailing federal funds rate) and will depend on the ratio of our consolidated total indebtedness to consolidated total capitalization from time to time. The credit facility will require us to comply with various financial covenants and restrictions, including covenants and restrictions relating to indebtedness, liens, investments, dividend payments, consolidated net worth, interest coverage and the relationship of our total consolidated indebtedness to our earnings before interest, taxes, depreciation and amortization. The credit agreement will prohibit us from declaring dividends or making other specified payments in amounts exceeding 25% of our cumulative net income after the effective date of the credit agreement. The stock of our wholly owned subsidiary, Teledyne Brown Engineering, Inc., will be pledged to the lenders under the credit agreement as collateral to secure our obligations under the credit agreement until our required public offering is completed. Capital expenditures for 1999 are expected to approximate $25.0 million, of which $16.1 million were spent during the first nine months of 1999. In connection with the spin-off, we will establish a new defined benefit pension plan and assume the existing pension obligations for all of our employees, both active and inactive, at our operations which perform government contract work and for our active employees at our operations which do not perform government contract work. ATI will transfer sufficient pension assets to fund our new defined benefit pension plan such that at the time of the transfer, pension assets will exceed pension obligations by approximately $50.0 million. As a result, we anticipate that we will not have to make contributions to the pension plan for the foreseeable future. Additionally, in accordance with Internal Revenue Code regulations, we would be able to 39 44 recover from the excess pension assets amounts paid for retiree medical expenses. We currently anticipate that no cash dividends will be paid on Teledyne Technologies common stock in order to conserve cash for use in our business, including possible future acquisitions. Our Board of Directors will periodically re-evaluate this dividend policy taking into account operating results, capital needs and other factors. In connection with the spin-off, ATI received a tax ruling from the IRS stating in principle that the spin-off will be tax-free to ATI and to ATI's stockholders. The continuing validity of the IRS tax ruling is subject to certain factual representations and assumptions, including our completion of the required public offering of our common stock within one year following the spin-off and use of the anticipated gross proceeds of approximately $125 million (less associated costs) for research and development and related capital projects, for the further development of our manufacturing capabilities and for acquisitions and/or joint ventures. Pursuant to the Separation and Distribution Agreement, we have also agreed with ATI to undertake such a public offering. The Tax Sharing and Indemnification Agreement between ATI and Teledyne Technologies provides that we will indemnify ATI and its agents or representatives for taxes imposed on, and other amounts paid by, them or ATI's stockholders if we take actions or fail to take actions (such as completing the public offering) that result in the spin-off not qualifying as a tax-free distribution. If any of the taxes or other amounts described above were to become payable by us, the payment could have a material adverse effect on our financial condition, results of operations and cash flow and could exceed our net worth by a substantial amount. ACCOUNTING PRONOUNCEMENTS FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133 was issued. This statement delays the effective date of Statement No. 133 to all fiscal quarters beginning after June 15, 2000. We are presently evaluating the effect of adopting these statements. OTHER MATTERS INCOME TAXES Our effective income tax rate was 41.3%, 39.4% and 41.8% in 1998, 1997 and 1996, respectively. We have determined, based on our history of operating earnings, expectations of future operating earnings and potential tax planning strategies, that it is more likely than not that the deferred income tax assets at December 31, 1998 will be realized. COSTS AND PRICING Inflationary trends in recent years have been moderate. We primarily use the last-in, first-out method of inventory accounting that reflects current costs in the costs of products sold. We consider these costs, the increasing costs of equipment and other costs in establishing sales pricing policies. We emphasize cost containment in all aspects of our business. IMPACT OF THE EURO CONVERSION In 1998, ATI initiated an internal analysis to determine the effects of the January 1, 1999 conversion and related transition by 11 member states of the European Union to a common currency, the "euro." The United Kingdom, where all of our European operations are located, is not currently a participating country. We do not expect the euro conversion to have a material impact on our results of operation or financial condition. Like other companies with European sales and operations, we anticipate that we will face wage and product pricing transparency 40 45 issues in participating countries; however, we do not expect the resolution of these issues to have a material adverse effect on us. Additionally, while we expect to encounter some technical challenges to adapt information technology and other systems to accommodate euro-denominated transactions, we do not anticipate associated costs to be material. Our computer software and hardware at our European operations have been modified and replaced due to evolving business needs and continuing technological advances. We believe that the euro conversion will not have a material adverse effect on our foreign currency activities described below. HEDGING We use derivative financial instruments from time to time to hedge ordinary business risks regarding foreign currencies on product sales. Foreign currency exchange contracts are used to limit transactional exposure to changes in currency exchange rates. We sometimes purchase foreign currency forward contracts that permit us to sell specified amounts of foreign currencies expected to be received from our export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts, which are not financially material, are designated as hedges of export sales transactions in which settlement will occur in future periods and which otherwise would expose us, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk. We believe that adequate controls are in place to monitor these hedging activities, which are not financially material. However, many factors, including those beyond our control such as changes in domestic and foreign political and economic conditions, as well as the magnitude and timing of interest rate changes, could adversely affect these activities. ENVIRONMENTAL We are subject to various federal, state, local and international environmental laws and regulations which require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. This includes sites at which we have been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. We are currently involved in the investigation and remediation of a number of sites. Our reserves for environmental investigation and remediation totaled approximately $1.3 million at September 30, 1999. As investigation and remediation of these sites proceed and we receive new information, we expect that we will adjust our accruals to reflect new information. Based on current information, we do not believe that future environmental costs, in excess of those already accrued, will materially and adversely affect our financial condition or liquidity. However, resolution of one or more of our environmental matters or future accrual adjustments in any one reporting period could have a material adverse effect on our results of operations for that period. With respect to proceeding brought under the federal Superfund laws, or similar state statutes, we have been identified as a potentially responsible party at approximately 17 such sites, excluding those sites at which we believe we have no future liability. Our involvement is very limited or de minimis at approximately 10 of these sites, and the potential loss exposure with respect to any of the remaining seven sites is not considered to be material. For additional discussion of environmental matters, see Notes 2 and 12 to our Notes to Combined Financial Statements and "Risk Factors." GOVERNMENT CONTRACTS We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government. Sales under contracts with the U.S. Government, which included contracts with the Department of Defense, were approximately 40%, 40% and 44% of our total sales for 1998, 1997 and 1996, respectively. A breakdown of sales to the U.S. Government by segment appears 41 46 in Note 11 to Notes to Combined Financial Statements. Defense sales represented approximately 27%, 26% and 27% of our total sales for 1998, 1997 and 1996, respectively. Performance under government contracts has certain inherent risks that could have a material adverse effect on our business, results of operations and financial condition. Government contracts are conditioned upon the continuing availability of Congressional appropriations, which usually occurs on a fiscal year basis even though contract performance may take more than one year. The U.S. defense budget has been declining since the mid-1980's, resulting in some delays in new program starts, program stretch-outs and program cancellations. Future levels of defense spending cannot be predicted. Of our U.S. Government contracts, 69%, 56% and 43% were fixed price-type contracts for the years 1998, 1997 and 1996, respectively. Fixed price-type contracts have the inherent risk that actual performance cost may exceed the fixed contract price. This is particularly true where the contract was awarded and the price finalized in advance of completion of design (which may result in unforeseen technological difficulties and/or cost overruns). We believe that the U.S. Government is increasingly requesting proposals for fixed price-type contracts. For additional discussion of government contract matters, see Note 12 to our Notes to Combined Financial Statements, Note 4 to our Notes to Interim Combined Financial Statements (Unaudited) and "Risk Factors." YEAR 2000 READINESS DISCLOSURE Year 2000 Task Forces. Over the past several years, ATI has put in place management task forces at its operating companies, including companies in ATI's Aerospace and Electronics segment, to identify whether its computer systems, which include business computers, mill equipment and process control computers and other devices using microprocessors, as well as telecommunication and payroll and employee benefit processing systems, would function properly with respect to dates in the Year 2000 and thereafter. These task forces have reported to ATI's Executive Resource Information Committee, a senior management committee of ATI charged with reviewing and establishing priorities for information technology-related matters, including Year 2000 issues, and which reports to the Audit and Finance Committee of ATI's Board of Directors. Through these efforts, Year 2000 identification, solution development, testing and implementation initiatives, and contingency planning initiatives have proceeded at Teledyne Technologies. Targeted Completion of Internal Solutions. In part as a result of ATI's Year 2000 initiatives, but mostly due to evolving business needs and continuing technological advancements, we have been modifying and replacing portions of our computer software and hardware systems. We estimate, based on dollars expended, that installation of solutions to identified Year 2000 issues relating to our information technology systems is nearly 100% complete. We estimate that based on dollars expended nearly 100% of solutions have been implemented for our non-information technology systems. We believe that a substantial portion of our internal solutions relating to Year 2000 functionality of our computer systems have been completed and implemented. Confirmatory testing of implemented solutions is ongoing. Other Year 2000 Areas of Focus. We have provided many customers and suppliers who we believe to be material to our business with Year 2000 questionnaires. None of the responding customers and suppliers has identified for us any material Year 2000 issues. Efforts continue to be made to identify and resolve other customer- and supplier-based Year 2000 issues that could affect us and our operating and support systems. We believe that we have identified substantially all material customer- and supplier-based Year 2000 issues. Efforts also continue to be made to identify whether products we have produced and sold have Year 2000 issues. Various of our electronic products contain embedded microprocessors. We believe that we have identified substantially all products that have Year 2000 issues, primarily a limited number of products of Teledyne Electronic Technologies and Teledyne Brown Engineering, and we are working to resolve such issues. We believe that there are no significant product-related Year 2000 42 47 issues. Neither Teledyne Technologies nor ATI have conducted any extensive review of products manufactured and sold by discontinued businesses or businesses that they have sold. Year 2000 Expenditures. Excluding expenditures necessitated by ordinary business needs and continuing technological advancements in the computer industry, we spent approximately $2.0 million in 1998 and we anticipate spending another estimated $1.3 million in 1999 to address Year 2000 issues, of which over $1.0 million were spent during the first nine months of 1999. These expenditures do not include expenditures that may be required to address Year 2000 issues associated with some products. Substantially all costs related to our Year 2000 initiatives are expensed as incurred and funded through operating cash flows. Although we currently do not have any plans for additional expenditures, additional amounts may be spent in later years. Overall Assessment; Worst Case Scenario. Based upon internal assessments, formal communications with suppliers and customers with which we exchange electronic data, and work completed to date, we believe that Year 2000 issues should not pose significant operational problems or have a material impact on our business, results of operations, financial condition, or cash flow. A failure of third party vendors or customers to be Year 2000 ready, however, could adversely affect these beliefs and is not quantifiable at the present time. Such failure could have a material adverse effect on our business, results of operations, financial condition, or cash flow in a given period, but probably not over the long-term. The most reasonably likely worst case scenario of our failure (or the failure of our suppliers or customers) to resolve Year 2000 problems would be a temporary slowdown or cessation of manufacturing operations at one or more of our facilities and our temporary inability to timely process orders and to deliver finished products to customers. Delays in meeting customers' orders would affect the timing of billings to and payments received from customers with respect to orders and could result in other liabilities. Customers' Year 2000 problems could also delay the timing of payments to us for orders. Contingency Plans. We have been working to establish contingency plans with respect to our critical business and operating systems should unplanned situations arise on or after January 1, 2000, and expect such contingency plans to be in place prior to December 31, 1999. Most of our current contingency plans contemplate the use of current personnel to make certain manual adjustments to systems or to perform various tasks manually. Vacations for information technology professionals and other relevant personnel are expected to be limited toward the end of December 1999 and the early part of 2000 in order to have employees on hand to assist in avoiding and responding to adverse scenarios. We are considering establishing additional inventories and back-up procedures in the event suppliers are unable to deliver raw materials and services in a timely manner. Factors that May Affect Year 2000 Estimates. While we have been conducting a comprehensive Year 2000 review of our computer systems and products, there may be Year 2000-related matters that have not been identified. Actual dollar amounts spent by us to address Year 2000 issues could materially differ from the estimates for a number of reasons, including: - changes in the availability or costs of personnel trained in this area; - changes made to our remediation plans; - the ability of our significant suppliers, customers and others with which we conduct business, including governmental agencies, to identify and resolve their own Year 2000 issues; or - identification of other Year 2000-related matters. 43 48 OUR BUSINESS OVERVIEW Teledyne Technologies provides sophisticated electronic and communication products, systems engineering solutions and information technology services, and aerospace engines and components. Our customers include aerospace prime contractors, general aviation companies, government agencies and major communications and other commercial companies. We serve high-value niche market segments where performance, precision and reliability are critical and where we are in several cases the leading supplier. Our businesses are interrelated by their use of advanced engineering and specialized technology to provide cost-effective and value-added solutions. Our products include avionics systems that collect and communicate information for airlines and business aircraft systems; broadband communications subsystems for wireless and satellite systems; engineering and information technology services for space, defense and industrial customers; and engines for general aviation aircraft and for cruise missiles. We have strong, established relationships with many of our customers which include: - - major commercial aerospace and electronics companies, and defense prime contractors; - - the U.S. Department of Defense; - - NASA; - - general aviation original equipment manufacturers and aftermarket suppliers and airlines; and - - other commercial customers in the communications, electronics, medical devices, and oil and gas industries. In 1998, approximately 60% of our total sales were to commercial customers with the balance to the U.S. Government: Commercial customers: Aerospace..................... 35% Electronics................. 16% Industrial.................. 9% --- 60% U.S. Government: Defense industry............ 36% NASA........................ 4% --- 40%
Approximately 69% of our U.S. Government sales in 1998 were attributable to fixed price-type contracts, with the remaining 31% to cost plus fee-type contracts. International sales accounted for approximately 22% of our total sales in 1998. Our three business segments, their respective operating companies, and their contribution to our sales in 1998 are summarized in the following table.
PERCENTAGE OF SEGMENT OPERATING COMPANIES 1998 SALES - -------------------------------- -------------------------------- ------------- Electronics and Communications Teledyne Electronic Technologies 44% Systems Engineering Solutions Teledyne Brown Engineering 29% Aerospace Engines and Components Teledyne Continental Motors 27% Teledyne Cast Parts
OUR BUSINESS AND GROWTH STRATEGY Building upon our competitive strengths and technological capabilities, our goal is to become the leading provider of specialized products, systems engineering solutions and information services for a broad range of high technology applications. With our history of product innovation, advanced research and development and highly sophisticated engineering and manufacturing capabilities, we believe that we are well-positioned to take advantage of opportunities 44 49 to expand our business by pursuing the following strategies. FOCUS ON OPERATING DISCIPLINE AND MANUFACTURING EXCELLENCE Measuring and controlling manufacturing costs has become a core discipline of Teledyne Technologies, and we are committed to a continuous improvement philosophy. Most of our key manufacturing operations are ISO 9000 certified, and meet the rigid military specification qualifications necessary in our markets, where required. We have adopted a comprehensive program of manufacturing excellence initiatives which focus on lean manufacturing cells, cost reduction programs and product redesign in order to minimize manufacturing costs and maximize product quality. We have also developed manufacturing technologies and rapid prototyping capabilities that in many cases have become the standards in their industries. Our efforts are intended to create additional cost reductions and increased efficiencies in management of our working capital. Our increasing emphasis on cost reduction programs yielded savings of $7.7 million in 1997 and $22.1 million in 1998. Through active management of our working capital, working capital as a percentage of sales decreased from 15% for 1996 to 10% for 1998. We believe that our financial discipline will enable us to maintain our competitive posture while continuing to provide leading edge products and services. LEVERAGE NICHE MARKET LEADERSHIP AND TECHNICAL EXPERTISE TO INCREASE MARKET PENETRATION We serve high-value niche market segments where performance, precision and reliability are critical and where we are in several cases the leading supplier. These market segments exist within very large, highly fragmented markets for electronic and communications equipment and devices, engineering and information systems and services, and aviation and aerospace components. We have a reputation for solving complex manufacturing and systems problems, and have sophisticated software, simulation and modeling capabilities. For example, Teledyne Technologies is recognized as a leader in the development of real-time simulations for weapons systems testing and training. These capabilities have led to our selection to play a key role in the U.S. Ballistic Missile Defense Organization's National Missile Defense program. The collective expertise and training of our employees foster a culture of innovation and a technology-driven focus. Out of a total workforce of approximately 5,800, approximately 1,400 individuals have engineering, physics, mathematics and computer science degrees. Our employees have developed over 700 patents. We believe that as several of the markets we serve experience consolidation, customers have tended to become increasingly dependent on technologically-sophisticated specialized suppliers, such as ourselves, to provide a more competitive range of products and services. With our history of product innovation, advanced research and development and highly sophisticated engineering and manufacturing capabilities, we believe that we are well-positioned to take advantage of opportunities to expand our niche market leadership positions to provide leading products and services in related markets. ACCELERATE INTRODUCTION OF INNOVATIVE HIGH-MARGIN PRODUCTS AND SERVICES We have a well-established history of developing innovative products and services to meet the exacting specifications of our customers' performance-critical applications. For example, building on our history as the manufacturer of the engine for the first turbine-powered cruise missile, we have developed advanced versions leading to our sole-source position with respect to each of two new U.S. cruise missile programs. We are also a leading supplier of traveling wave tubes for military applications. We have adapted this product to create our microwave power amplifiers, which were the first to permit operation in multiple frequency bands for mobile satellite news gathering systems. We are 45 50 extending our position in power amplifiers by developing and producing amplifiers for the emerging higher-frequency Ka band market for broadband wireless and satellite communications systems. New products that we are currently introducing for the emerging broadband communications market include high frequency relays for wireless and satellite systems, high data rate networks and high speed digital semiconductor test equipment. As an independent company we intend to increase our spending on research and development to accelerate the introduction of new products and services. CAPITALIZE ON SYNERGIES TO ENTER NEW MARKETS Our businesses are interrelated by their use of advanced engineering and specialized technology to provide cost-effective and value-added solutions. We believe that by better utilizing our extensive base of technical expertise that extends across our operating units, we will be able to provide superior products and services and to reduce product development and manufacturing costs. For example, we have benefited from our commercial aviation electronics experience in the development of new electronic controls for general aviation piston engines. We plan to use the expertise of Teledyne Electronic Technologies to provide data acquisition and communications products to the general aviation aircraft market served by Teledyne Continental Motors. In addition, both Teledyne Electronic Technologies and Teledyne Brown Engineering provide data acquisition and communication products in their current markets. We believe that we can draw on these and other capabilities to access additional markets for our products and services. ENHANCE AND STRENGTHEN CUSTOMER AND REGULATORY RELATIONSHIPS We are a long-term supplier to several government agencies and major manufacturers and integrators of systems and services. Our close relationships are a key competitive advantage. We are often integrally involved early in our customers' product development efforts. Our knowledge of customers' requirements enables us to more rapidly develop products and services ideally suited to meet those needs. This close relationship with our customers has led to a significant amount of repeat business. We plan to capitalize on our strong relationships to secure additional contracts as prime contractors expand their outsourcing initiatives. Government certification of products and facilities is required to participate in many of the markets we serve. We have extensive experience and established working relationships with the various federal regulatory agencies that certify our products. For example, we work proactively with the Federal Aviation Administration in the continuous certification processes applicable to our commercial aviation electronics and communications products, and general aviation engines. We are also regularly engaged in consultations with the FAA regarding new technologies and the development of new or changing standards applicable to our products and markets. In addition, we are able to serve the specialized needs of our customers with medical devices, such as pacemaker and defibrillator providers, by maintaining the registration of our medical electronics contract manufacturing facilities with the Federal Food and Drug Administration. EXPAND VALUE-ADDED INFORMATION SERVICES We believe that our extensive customer base has growing requirements for information services and that we have the capabilities to meet these needs. For example, our flight data acquisition systems have been purchased worldwide by over 200 airline customers. These customers are increasingly committed to obtaining additional operational and maintenance information to improve safety and increase efficiency. We are developing systems that will automatically transfer flight data to an airline's operations center soon after its aircraft lands. These systems are designed to translate data into useable reports and distribute the reports and raw data through the Internet. 46 51 We believe that our extensive technical, engineering and manufacturing capabilities will enable us to expand the development and sale of additional value-added engineering and information services. PURSUE SELECTED ACQUISITIONS AND STRATEGIC ALLIANCES We operate in many large, highly fragmented markets that provide opportunities for growth through complementary acquisitions. The basic criteria will be whether the particular acquisition: - - has strategic value - - achieves our financial return criteria - - enhances our ability to achieve a market leadership position - - provides the opportunity to grow profitability Specifically, we expect to target acquisitions that permit: - - a broader product offering - - entry into new markets - - access to product innovation and unique product design capabilities - - access to new manufacturing processes - - access to off-shore suppliers and increased procurement leverage - - new distribution channels OUR BUSINESS SEGMENTS ELECTRONICS AND COMMUNICATIONS SEGMENT Teledyne Electronic Technologies applies proprietary technology, advanced software and hardware design skills and manufacturing capabilities in three areas: Data Acquisition and Communications Products; Precision Electronic Devices; and Electronic Contract Manufacturing Services. Data Acquisition and Communications Products We are a leading supplier of systems and software for data acquisition and communications applications in commercial aviation, as well as critical components and subsystems for wireless and satellite communications terminals. We are focused on expanding our technology base to support the emerging needs for high data rate broadband communications technology. We also supply a range of specialized components, subsystems and equipment to domestic and international government aviation and aerospace customers. We participate in the markets for data acquisition and communications equipment and services for both air transport (including commercial passenger aircraft) and business and commuter aircraft. Air Transport Products. Our aircraft information management solutions are designed to increase the safety and efficiency of airline transportation throughout the world. With over 200 commercial airline customers, we are a leading supplier of digital flight data acquisition systems for the commercial airline industry. We have provided these systems for our airline customers for over one-half of Boeing aircraft currently in production. We were recently selected by Airbus Industrie's partner, DaimlerChrysler Aerospace-Airbus, to provide our systems for certain of its aircraft customers. These systems acquire both mandatory data for use by the aircraft's flight data recorder, and record additional data for the airline's use, such as performance and engine condition monitoring. The markets for data acquisition and communication systems include both new and retrofitted aircraft. Boeing estimates that the operational air transport fleet will grow from a current fleet of 12,600 to 19,100 aircraft by 2008. Our newest digital flight data acquisition units have the most advanced features in the industry. These systems conform with the required expansion of data recording capabilities, which were mandated by the FAA in 1997. At that time, the FAA increased the number of mandatory parameters to be monitored from 17 (prior to the rule change) to 88 by the year 2002. Our flight data units also perform additional, non-mandatory aircraft and engine condition monitoring for use by airline customers. 47 52 Business and Commuter Products. Communication capabilities for business and commuter aircraft are growing rapidly as these aircraft have begun to mirror air transport aircraft in data gathering and aircraft monitoring. We are one of the largest suppliers of air-to-ground telephony and facsimile and data transmission products to the growing business and commuter aircraft market. Bombardier Aerospace recently selected us to provide a suite of communications products for its new, ultra long-range Global Express business jet. These products include an air-to-ground telephone system and our TeleLink(TM) datalink system that link onboard avionics with ground service providers to facilitate air traffic management and flight operations. The business and commuter fleet is significantly larger than the air transport fleet, with approximately 27,000 aircraft currently operational. Forecast International, an industry consultant, projects that the business and commuter fleet will increase by approximately 40% during the next decade. We expect continued demand for these systems for both new installations and upgrades by business and commuter aircraft customers. Wireless Ground Link. In March 1999 we demonstrated a prototype of our new Wireless Ground Link that automates the transfer of in-flight data recorded by our data acquisition systems to an airline's operations center. Transmission of the data can occur anytime an aircraft is on the ground utilizing the existing digital wireless infrastructure. The raw data are then forwarded to the airline through the Internet, where they can be processed into useful formats by our Flight Data Replay and Analysis System. Such data can then be used by the airline in scheduling maintenance services and implementing safety procedures. Wireless and Satellite Communication Components. Our communications components and subsystems are used in satellite earth terminals, communications satellites, and base stations for Personal Communication Services (PCS) and wireless local loops. The technology that we apply to wireless and satellite communications originated in defense applications. We supply power amplifiers used in the L, C and Ku band satellite uplink transmitters. These products encompass both solid state monolithic microwave integrated circuits and high power helix traveling wave tubes. Applications include Very Small Aperture Terminals (VSATs) used for credit card verification, corporate networking, and mobile news gathering. The markets for both wireless and satellite systems are being driven by the growing need for high data rate (HDR) communications. In order to obtain sufficient bandwidth to support transmission of these data, wireless and satellite systems are moving to higher frequencies. We are extending our position in power amplifiers by developing and producing amplifiers for the emerging higher-frequency Ka band market for broadband wireless and satellite communications systems. According to Allied Business Intelligence and other independent market analysts, the market segment for high frequency solid state power amplifiers is projected to grow from approximately $47 million in 1999 to $118 million in 2003. We have developed a unique line of microwave filters that are manufactured with a patented injection molding technique. These metal-plated plastic filters are lighter in weight than competing metal filters, and can be used efficiently in the new lightweight microcell and picocell base stations for PCS systems. Our filters and our new VSAT transceivers have applications in wireless local loops, which are used to supply communications infrastructure in the developing world where the cost and time to deploy wireline communications can be excessive. Defense and Space Electronics. We are a leading supplier of high power traveling wave tubes for electronic warfare systems, radar systems, and military satellite communications systems for both domestic and international applications. Our tubes are used in airborne systems on many aircraft, including the B-52, B-1B, F-15 and E-A6B, and Global Hawk, and 48 53 on surface systems, such as AEGIS ships. We believe that there will be a continuing demand for our tubes in both new and existing systems. We believe that the use of traveling wave tubes for radar applications will grow as these systems are upgraded with advanced capabilities that cannot be achieved with current transmitter technologies. We have also supplied thousands of microprocessor-controlled ejection seat sequencers for U.S. Air Force and U.S. Navy tactical aircraft, such as the F-16, F-18 and the new F-22 fighter. Precision Electronic Devices We develop and manufacture microelectronic devices, high-performance relays, microelectromechanical systems (MEMS), high-density connectors and precision instruments that are engineered for demanding applications in the defense, commercial aerospace, medical, instrumentation and industrial markets where small size, high performance and reliability are of paramount importance. We also provide precision instruments to manufacturers in these industries. Microelectronic Devices. Our hybrid microcircuits are used in applications such as military (including F-18 and F-22 aircraft and the M1A2 tank), aerospace, medical and instrumentation systems. These compact and complex electronic building blocks combine multiple transistors and integrated circuits in multi-chip modules (MCMs). Our fiber optic transmitter and receiver modules are used for video distribution on the International Space Station. We have applied our MCM technology to the manufacture of life sustaining and life enhancing implantable medical devices, including cardiac pacemakers and defibrillators, neural stimulators and cochlear implant hearing aids. Newer products include biological signal sensors and ambulatory digital recorders for diagnosis and monitoring of epilepsy and sleep disorders. These products are distributed on a private label basis by our customers. Our medical manufacturing operations are FDA-registered, and like all of our electronics manufacturing facilities, are certified to ISO 9000. High-Performance Relays. Our Teledyne Relays miniature electromechanical relays are used where maintenance of signal fidelity is essential. Examples of applications include switching of high-speed digital and microwave signals in semiconductor and microwave test equipment, wireless systems and communications satellites. According to Venture Development, an industry consultant, the telecommunications and instrumentation relay market is approximately $870 million annually and is expected to grow at more than 5% per year. Growth in the transmission of broadband data via the Internet, increases in clock speeds of microprocessors, and the migration of wireless and satellite systems to higher frequency bands are all contributing to a need for switching devices that operate at higher frequencies. With the introduction of our new high-frequency relay in 1999, we more than tripled the range of frequencies that can be switched reliably and accurately by available technologies. Microelectromechanical Systems. We are leveraging our experience with precision electromechanical devices and microelectronics fabrication technology to develop new MEMS. The first product we are developing in this line is a microrelay based on an exclusively licensed patented electromagnetic actuation technique. The microrelay will be significantly smaller than current electromechanical relays, an important factor in modern, miniaturized electronic systems, and will provide us with access to a new market segment in which we do not currently compete. Venture Development estimates this market segment to be approximately $150 million. High-Density Connectors. We supply custom, low profile, surface mount connectors for applications in computer disk drives and consumer medical electronic devices. We have increased our development efforts for high-density microprocessor connectors, targeted for use in high-volume applications such as personal computers and workstations and personal communication systems handsets. Prismark Partners, an industry consultant, estimates that the 49 54 market for this type of connector will grow from 100 million units per year in 1999 to 200 million by 2003, with the price of a typical connector expected to be approximately $6. Precision Instruments. We design and manufacture precision instruments for process applications in semiconductor and petrochemical manufacturing with a broad line of analyzers for oxygen and other gases, vacuum gauges, and mass flow meters and controllers. These instruments are sold under the Teledyne Analytical Instruments and Teledyne Hastings brand names. Electronic Contract Manufacturing Services We operate turnkey manufacturing facilities in Tennessee, Mexico and Scotland for low-to-moderate volume, technically-sophisticated products, ranging from individual printed circuit board assemblies to complete electronic systems, used in the aerospace, medical and communications industries. We manufacture subsystems used in such diverse products as weapons release systems and medical magnetic resonance imaging systems. Our customers include major aerospace and electronics companies. Our production capabilities include through-hole, surface mount and multi-chip module assembly; and digital, analog, radio frequency and microwave testing. Our patented REGAL(R) rigid-flex technology combines rigid and flexible printed circuits into one assembly that eliminates board-to-board connectors, which results in improved reliability and packaging density. These rigid-flex circuit boards are used in military (such as the AMRAAM missiles, the Airborne Self Protection Jammer and the Apache Longbow Helicopter), commercial aerospace and medical applications. In late 1998 we added rapid prototyping capability for rigid-flex printed circuits to improve customer service. During 1998 we expanded our capacity for low-cost manufacturing in Mexico. Subject to prevailing labor conditions, we plan additional growth in Mexico and at our Scotland facility. According to Frost & Sullivan, an industry consultant, the market for military electronic contract manufacturing services was approximately $800 million in 1998 and is expected to grow at an 8% annual rate as major military systems companies increasingly focus more on integration of systems and rely on merchant suppliers for electronics manufacturing. SYSTEMS ENGINEERING SOLUTIONS SEGMENT Teledyne Brown Engineering offers a wide range of engineering solutions and information services to government defense, aerospace and commercial customers. Our software solutions center on the following five areas: - - Aerospace Solutions - - Defense Solutions - - Information Services - - Environmental Solutions - - Enterprise Control and Energy Products Aerospace Solutions We provide a broad range of highly sophisticated engineering solutions and services to U.S. space programs. U.S. Government budgeted expenditures in this market are approximately $10.3 billion in 1999. As the payload integration contractor for NASA's Marshall Space Flight Center, we have had major responsibilities in the numerous scientific missions of the Space Shuttle. This work has ranged from experiment planning, through designing and fabricating interface hardware, to manning the mission control center during flight operations. The centerpiece of our current space activities is the International Space Station. We are involved in both space-borne and ground-support hardware development and we participate in mission planning and operations. We have approximately 300 people working on International Space Station projects and realized sales associated with these projects of approximately $25 million in 1998. We expect to generate a similar level of revenue with respect to these projects in 1999. The development and integration of complex ground support equipment has long been one of 50 55 our specialties. Recognition of this is reflected in our selection by the U.S. Air Force to produce three prototype aircraft cargo loaders as a part of the Air Force's Next Generation Small Loader program. Defense Solutions For over 45 years, we have played a key role in the development of U.S. defense systems. The Department of Defense has budgeted $4.04 billion in expenditures in 1999 for various missile defense programs, which are projected to grow at a modest rate for the next five years. The current projected 2000 budget for the National Missile Defense program is approximately $800 million and is projected to grow to $1.8 billion in 2002. During the last 10 years alone, our systems engineering solutions in defense technologies have averaged over 1,000,000 man-hours per year. In ballistic missile defense programs, we have provided solutions in systems engineering, integration, and testing; real-time distributed testing and training; radar and optical systems design; command center development; and intelligence studies and threat analysis. We provide battle simulation software as part of our role for the U.S. Ballistic Missile Defense Organization's National Missile Defense program. We also provide an array of engineering solutions related to combat systems technologies, including research and development test support, operational test and evaluation, systems survivability analysis, and body armor development. Information Services One of our strongest capabilities is in information technology. The government sector of the information technology market is approximately $33.6 billion in 1999, and is expected to grow at an annual rate of between 4% and 10%. Approximately 30% of our contracts are in this sector. Our software products, most of which are certified to ISO 9001, are used for highly diverse applications, such as high-fidelity simulations, multi-media training, Internet website development, distributed real-time testing, and command and control centers. We have developed hundreds of simulation programs, including the Extended Air Defense Simulation, which is used by friendly governments worldwide and was combat-proven during Operation Desert Storm and more recent operations. We have recently upgraded the U.S. Army's land-combat model to include amphibious and tactical air operations. We are recognized as a leader in the development of real-time, vehicle-and weapons-integrated simulations for systems testing and training. Our Systems Exerciser is a simulation tool used to verify the inter-operational compatibility of geographically separated, complex defense systems. The Systems Exerciser "drives" actual weapons systems with a simulated environment including threats, weather and terrain, creating a robust virtual world in which real systems can operate and interact. We have been continuously involved in weapons signature management development efforts since 1989, with over 47 successful programs, of which 37 were sole source contracts. We are particularly well-known for systems that limit the detection of soldiers on the battlefield by radar or infrared sensors, as to which we hold several issued and pending patents. The Optical Signatures Code, which we developed and maintain, is the recognized standard in missile defense. We also developed the world's largest on-line database for optical signatures. Environmental Solutions We utilize our systems engineering solutions to assist the U.S. Government in complying with terms of the Chemical Weapons Convention Treaty. This Treaty requires the United States to destroy all chemical weapons and materiel by 2007. As a 50% participant in a joint venture, we are developing alternative technologies to incineration for the destruction of stockpile chemical munitions. We are presently the only contractor operating in the non-stockpile chemical munitions sector. As the prime contractor for the U.S. Army's Non-Stockpile Chemical Materiel Demil- 51 56 itarization program, we are designing, fabricating, integrating, and testing equipment to safely destroy small caches of chemical munitions and materiel located in over 30 states. We were recently selected by the Air Force to establish and operate a highly-specified analysis laboratory. This laboratory, used for performing nuclear forensic analysis of gas samples, has been operated for many years by military personnel at McClellan Air Force Base in California, and is now being transferred to contractor operation. Enterprise Control and Energy Products Our systems engineering capabilities are applied to energy problems through a variety of services and products. Our OpenVector(TM) supervisory control and data acquisition systems are used for managing over half of the gas transportation pipelines in the United States, and we have recently added new international customers in South Korea, Hungary and Brazil. While most of our Open Vector(TM) software sales have been in the United States, additional significant market opportunities exist in the international arena as well as in new applications such as satellite control. Applications of OpenVector(TM) software are expanding into water/waste water control and general enterprise consolidated information management. Frost & Sullivan has estimated that the international market for commercial system control and data acquisition applications would be approximately $2.6 billion in 1998 and will grow at approximately 15% per year. We manufacture and sell low-power, continuously-operating electrical generators utilized in energy remote locations. We market our line of low-power radioisotope thermoelectric generators under the SENTINEL(TM) brand name. One of our units aboard the Pioneer spacecraft has exited the solar system, after flawlessly providing power for more than two decades. Our TELAN(TM) thermoelectric systems provide up to 90 watts of constant, reliable power at remote locations throughout the world. Our recently announced 2.5-kilowatt Minotaur(TM) engine-generator system runs on natural gas and is designed for long-term, continuous, low-maintenance operation for the oil and gas production industry, and to provide prime power for applications in emerging countries that lack sophisticated infrastructures. AEROSPACE ENGINES AND COMPONENTS SEGMENT Our Aerospace Engines and Components segment, through Teledyne Continental Motors and Teledyne Cast Parts, focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls, batteries and metal castings. Piston Engines We design, develop and manufacture piston engines and ignition systems for major general aviation airframe manufacturers and provide spare parts and engine rebuilding services. We are one of two primary worldwide producers of piston engines and after-market service providers for the general aviation marketplace. Over 300,000 piston-powered aircraft have been produced since the inception of the general aviation industry. The active fleet of single and twin-engine aircraft is estimated to be 165,000, with approximately 200,000 engines currently in service. We estimate that our engines power approximately one half of the active fleet. The average age of this fleet is approximately 30 years. Our share of the installed base is extremely important in a business in which repair and replacement parts can provide substantial ongoing revenue. Our product lines include engines powering the industry benchmark Raytheon Beech Bonanza and Baron aircraft, the Mooney Aircraft line of advanced single engine aircraft, and the popular New Piper Seneca V twin-engine aircraft. In addition to these long-standing products, all four new high-speed, composite aircraft currently entering production will be powered by our engines. These are the Cirrus SR20, Lancair Columbia, Diamond Katana C1, and the Extra 400. The market for piston powered general aviation aircraft has shown a strong resurgence in recent years. Following the passage of the 52 57 General Aviation Revitalization Act (GARA) of 1994, which limited manufacturers' product liability for aircraft over 18 years in age, the domestic production of new aircraft has increased from 444 new units in 1994 to over 1,500 units in 1998. Following the passage of GARA, the industry has introduced new and advanced airframes and avionics and increased the rate of spending for new product research and development. Additionally, NASA is sponsoring three new programs aimed at increasing the efficient commercial use of small general aviation aircraft. NASA is also co-sponsoring our development of a new engine that will use commonly available and less expensive Jet-A fuel. In addition to the sales of new aircraft engines to aircraft producers, we also actively support the aircraft engine aftermarket. Piston aircraft engines are produced with a finite utilization life generally expressed as time between overhaul (TBO). Rebuilding or overhauling of the engine is required at TBO, which can range between 1,600 and 2,000 hours for our aircraft engines. With an installed base of approximately 100,000 Teledyne Continental Motors engines and an average aircraft utilization of 133 hours per year, approximately 10,000 of our aircraft engines can be expected to be overhauled in the aftermarket each year. Our aftermarket support includes the rebuilding of nearly 3,000 of these units annually with our Gold Medallion Rebuilt Engine. We also provide a full complement of spare parts such as cylinders, crankcases, fuel systems, crankshafts, camshafts and ignition products. Our Aerosance unit has developed the first first full authority digital electronic controls for piston aircraft engines. These controls are designed to automate many functions that currently require manual control, such as fuel flow, ignition and power management. This system also saves fuel as a result of improved engine management. We believe that these control systems, which are in the process of FAA certification testing, will become standard equipment on new aircraft, and will be retrofitted on higher-end, piston-powered general aviation aircraft. Turbine Engines We design, develop and manufacture small turbine engines for missiles and unmanned aerial vehicles. We also produce engines that power military trainer aircraft. Since the late 1950s, we have delivered over 20,000 of these engines to defense contractors. We believe that the near-term demand for these engines will increase as a result of the depletion of cruise missiles in recent international conflicts. Our J402 engine powers the HARPOON missile system. Derivatives of this engine power the Standoff Land Attack Missile and the Standoff Land Attack Missile Expanded Response. Over 7,400 of these engines have been produced for these missile systems, which are deployed by the U.S. Navy and various NATO countries. A derivative of the J402 engine has been selected by Lockheed Martin to power the Joint Air to Surface Standoff Missile which is scheduled to be fielded in 2002. The U.S. Air Force and the U.S. Navy plan to purchase approximately 2,400 of these missiles by 2008. Another derivative has been selected by Raytheon to provide propulsion for the Tactical Tomahawk Cruise Missile, with over 1,300 missiles planned for field deployment beginning in 2003. We are the sole source provider of engines for the Joint Air to Surface Standoff and Tactical Tomahawk cruise missiles systems. Another of our engines provides the turbine power for the Improved Tactical Air Launched Decoy being built for the U.S. Navy. This system enhances stand-off capability by identifying the enemy radar sources for lethal weapons. This low-cost turbine engine is the first of a family of lower-thrust engines to enter production. Another of our engines serves as the propulsion source for the T-37 aircraft, the primary jet trainer for the U.S. Air Force. This engine has been in service for over 40 years and will continue to power the T-37 well into the next decade. We are the sole source for major spare parts for this engine. 53 58 Battery Products Our battery products operations specialize in the design, development and manufacture of engineered products for the lead acid battery markets. We are focused on providing engineered products in niche markets with more favorable margins than typical battery products. We design, develop and manufacture dry-charged batteries that can be stored for years without deterioration. Our maintenance-free, valve-regulated, recombinant batteries offer electrical performance and rechargeable characteristics that are superior to other types of maintenance-free batteries. Our Gill(TM) line of lead acid batteries is widely recognized as the premier dry-charged, starting and standby power source for general aviation. More companies manufacturing new general aviation aircraft choose the Gill(TM) product line than any other lead acid battery. The technical characteristics of our batteries offer the possibility of sales to growing non-aviation markets, such as the cable television and telecommunications industries backup. Cast Parts Teledyne Cast Parts offers a wide range of complex sand-cast aluminum and magnesium castings and nickel-based superalloy and stainless steel investment castings to the aerospace and defense industries. Premium quality castings are produced from various processes in accordance with military, aerospace and commercial customer specifications to exacting tolerances and mechanical strengths. Our major customers include airframe and turbine engine manufacturers, missile producers and other defense contractors. We supply castings to the U.S. Navy for use in its Phalanx weapons system, as well as castings used in Tomahawk Cruise Missiles, jet engines and armament systems for both airborne and land vehicles. Based on publicly-available sales data, we estimate that the market for aluminum and magnesium casting was approximately $1 billion in 1998 and the market for air melt steel and vacuum melt superalloys was approximately $2.6 billion. The metals casting industry has been highly fragmented and has experienced consolidation in recent years. We believe that this trend may provide us with additional growth opportunities. SALES AND MARKETING No commercial customer accounted for more than 10% of our total sales during 1998, 1997 or 1996. Approximately 40%, 40% and 44% of our total sales for 1998, 1997 and 1996 were derived from contracts with agencies of, and prime contractors to, the U.S. Government. We do not regard sales to the U.S. Government as constituting sales to a single customer, because various U.S. Government customers exercise independent purchasing decisions. Our principal U.S. Government customer is the U.S. Department of Defense. Our largest program with the U.S. Government, the Systems Engineering and Technical Assistance contract with the Space and Missiles Defense Command accounted for 7.3%, 7.1% and 8% of total sales for 1998, 1997 and 1996. No other program represented more than 4% of total sales for 1998, 1997 and 1996. Sales by our segments to agencies of and prime contractors to, the U.S. Government in each of the past three years were as follows:
1998 1997 1996 ------ ------ ------ (IN MILLIONS) Electronics and Communications..... $102.4 $102.7 $114.8 Systems Engineering Solutions............ $159.2 $158.0 $169.4 Aerospace Engines and Components......... $ 46.8 $ 42.6 $ 32.5
Our sales and marketing approach varies by segment and by products within our segments. A shared fundamental tenet is the commitment to work closely with our customers to understand their needs, with an aim to secure preferred supplier and longer-term relationships. Our business segments use a combination of internal sales forces, distributors and commis- 54 59 sioned sales representatives to market and sell our products and services. Products are also advertised in appropriate trade journals and by means of various Internet web sites. To promote our products and other capabilities, our personnel regularly participate in relevant trade shows and professional associations. Many of our government contracts are awarded after a competitive bidding process in which we seek to emphasize our ability to provide superior products and technical solutions in addition to competitive pricing. COMPETITION We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete generally. Although we have certain advantages that we believe help us compete in our markets effectively, each of our markets is highly competitive. Our businesses variously compete on the basis of quality, product performance and reliability, technical expertise, price and service. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do. RESEARCH AND DEVELOPMENT We spent a total of $160.5 million, $175.0 million, $188.8 million and $202.6 million on research and development for the nine months ended September 30, 1999 and for 1998, 1997, and 1996, respectively. Customer-funded research and development, most of which was attributable to work under contracts with the U.S. Government, represented approximately 87%, 86%, 85%, and 86% of total research and development costs for the nine months ended September 30, 1999 and for 1998, 1997, and 1996, respectively. INTELLECTUAL PROPERTY While we own and control various intellectual property rights, including patents, trade secrets, confidential information, trademarks, trade names, and copyrights, which, in the aggregate, are of material importance to our business, our management believes that our business as a whole is not materially dependent upon any one intellectual property or related group of such properties. We own over 700 active patents and are licensed to use certain patents, technology and other intellectual property rights owned and controlled by others. Similarly, other companies are licensed to use certain patents, technology and other intellectual property rights owned and controlled by us. Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the expiration or termination of these patents, patent applications and license agreements to have a material adverse effect on our business, results of operations or financial condition. 55 60 OUR FACILITIES Our principal facilities as of September 30, 1999 are listed below. Although the facilities vary in terms of age and condition, our management believes that these facilities have generally been well-maintained.
SQUARE FOOTAGE FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED) - -------------------------------------- -------------------------------------- ------------------- ELECTRONICS AND COMMUNICATIONS SEGMENT Teledyne Electronic Technologies Los Angeles, California Development and production of 123,000 (leased) electronic components and subsystems. 17,000 (owned) Los Angeles, California Production of digital data acquisition 154,000 (leased) systems for monitoring commercial aircraft and engines. Lewisburg, Tennessee Development and production of 153,000 (owned) electronic components and subsystems. Mountain View, California Production of ferrite components, 100,000 (owned) switching devices, filters and monolithic microwave integrated circuits. Hawthorne, California Production of electronic components. 83,000 (owned) Rancho Cordova, California Development and production of 75,000 (owned) traveling wave tubes and power 16,000 (leased) supplies for use in commercial markets. SYSTEMS ENGINEERING SOLUTIONS SEGMENT Teledyne Brown Engineering Huntsville, Alabama Provision of engineered services and 475,000 (owned) products, including systems 123,000 (leased) engineering, optical engineering, software and hardware engineering, and instrumentation technology. AEROSPACE ENGINES AND COMPONENTS SEGMENT Teledyne Continental Motors Mobile, Alabama Design, development and production of 1,270,000 (leased) new and rebuilt piston engines, ignition systems and spare parts for the general aviation market. Redlands, California Manufacturing of batteries for the 91,000 (owned) general aviation market. Toledo, Ohio Design, development and production of 373,000 (leased) small turbine engines for aerospace and automotive markets. Teledyne Cast Parts Pomona, California Manufacturing of aluminum and 231,000 (owned) magnesium castings for air frames, turbine engines and missiles. City of Industry, California Manufacturing of nickel-based 70,000 (owned) superalloy and stainless steel investment castings.
We also own or lease facilities elsewhere in the U.S. and in countries outside the U.S., including Tijuana, Mexico, Gloucester, England and Cumbernauld, Scotland. Our executive offices are currently located at 2049 Century Park East, 56 61 Los Angeles, California 90067-3101 and will be subleased from a subsidiary of ATI. LEGAL PROCEEDINGS From time to time, we become involved in various lawsuits, claims and proceedings related to the conduct of our business. While we cannot predict the outcome of any lawsuits, claims or proceedings, our management does not believe that the disposition of any pending matters is likely to have a material adverse effect on our financial condition or liquidity. EMPLOYEES Out of a total workforce of 5,800, approximately 1,400 individuals have engineering, physics, mathematics or computer science degrees. Approximately 370 of our employees are represented by the International Union of United Automobile, Aerospace and Agricultural Implement Workers of America under a collective bargaining agreement that expires on December 16, 2000. We consider our relations with our employees to be good. ARRANGEMENTS WITH ATI RELATING TO THE SPIN-OFF For the purpose of governing certain of the relationships between ATI and Teledyne Technologies relating to the spin-off, to provide for an orderly transition and for other matters, ATI and Teledyne Technologies will enter into the agreements described below, copies of which have been filed as exhibits to the Registration Statement of which this Information Statement is a part. The following summaries of the material terms of these agreements are qualified by reference to the agreements as so filed. SEPARATION AND DISTRIBUTION AGREEMENT ATI and Teledyne Technologies and certain other companies affiliated with ATI will enter into a Separation and Distribution Agreement that will provide for the principal corporate transactions required to effect the separation of our businesses from those of ATI, the spin-off and certain other matters governing the relationship among us after the spin-off. To separate our businesses from other businesses of ATI, the subsidiary of ATI that has historically held most of the assets used in our businesses will transfer those assets to us and we will purchase the remaining assets used in our business from other subsidiaries of ATI, without representation or warranty and on an "as is," "where is" basis and "with all faults". We will assume all liabilities associated with our businesses, including those arising from the operation of our businesses both before and after the spin-off. Each of ATI and Teledyne Technologies will release the other from all other obligations and liabilities owed to such party existing on the date of the spin-off, other than liabilities and obligations arising under the Separation and Distribution Agreement and the other agreements entered into in connection with the spin-off. Likewise, each of ATI and Teledyne Technologies will indemnify the other for liabilities arising from a breach of these agreements or the failure to pay or discharge the liabilities assumed by such party under the Separation and Distribution Agreement. The Separation and Distribution Agreement requires that we initiate a public offering of our common stock within eight months following the spin-off, and complete the public offering within one year following the spin-off. It also requires that we use proceeds of the offering as contemplated by the tax ruling request. It was represented in the tax ruling request that we expected that gross proceeds of the public offering would be approximately $125 million, and that we intend to use the net proceeds of the offering for research and development and related capital projects, for further development of our manufacturing capabilities, and for acquisitions and/or joint ventures. We are currently an additional named insured under various ATI insurance policies. Under the Separation and Distribution Agreement, we will be entitled to the benefit of pre-spin-off historical coverage under ATI's property, liability and certain other insurance policies to the extent coverage is applicable or potentially 57 62 available and where limits of liability have not been exhausted, either on a per occurrence or aggregate basis. The terms and conditions of these policies, including limits of liability, will not be amended as a consequence of the spin-off. To the extent that these policies feature a deductible or self-insured retention, we will continue to be responsible for our allocable share of the deductibles and retentions, based on the same allocation formulas that applied prior to the spin-off and, in the case of aircraft product liability policies, to the full extent of the deductible or retention for each claim made against our Company under those policies. The Separation and Distribution Agreement provides that until the third annual meeting of our stockholders held following the spin-off, at least a majority of our directors will also be members of the Board of Directors of ATI. The initial members of our board of directors will be Frank V. Cahouet (Class I), Robert Mehrabian (Class II) and C. Fred Fetterolf and Charles J. Queenan, Jr. (Class III). The Separation and Distribution Agreement also provides that we will nominate Mr. Cahouet (or, if he is unable or unwilling to serve, such other candidate as Messrs. Fetterolf and Queenan or the survivor of them shall designate) for re-election as a Class I director at the first annual meeting of our stockholders following the spin-off. EMPLOYEE BENEFITS AGREEMENT Prior to the date of the spin-off, ATI and Teledyne Technologies will enter into an Employee Benefits Agreement to set forth the manner in which assets and liabilities under employee benefit plans and other employment-related liabilities will be divided between them, and to help ensure a smooth transition for employees' benefits in the spin-off. In general, we will be responsible for compensation and employee benefits relating to our employees. The Employee Benefits Agreement provides that we will establish a new defined benefit pension plan on terms substantially similar to the parts of ATI's Pension Plan applicable to all of our employees, both active and inactive at our operations which perform government contract work and for our active employees at our operations which do not perform government contract work. It is anticipated that we will receive pension assets equal to liabilities as well as approximately $50 million in surplus pension assets. With this transfer, it is anticipated that we will not have to make a pension contribution in the foreseeable future. In addition, we will assume certain retiree medical obligations and should be able to withdraw cash from our pension plan to pay our retiree medical costs. The Employee Benefits Agreement will also provide for the treatment of outstanding options to acquire ATI common stock issued under ATI benefit plans. At the time of the spin-off, ATI stock options held by our employees will be converted into options to purchase shares of Teledyne Technologies common stock. The number of shares the option holder would be able to purchase and the exercise price of the options would be adjusted in the conversion based on the relationship of the ATI stock price and the stock price of Teledyne Technologies over a fixed period of time, so that the "intrinsic value" of the options (that is, the difference between the market value of the stock acquired on the exercise and the exercise price of the options) before the spin-off would be equivalent to the intrinsic value of the options immediately after the spin-off. The options would otherwise continue to be and become exercisable on the terms and conditions set forth in the original ATI benefit plans. Under the Employee Benefit Agreement, the current award period under the ATI Performance Share Program would be terminated when the spin-off occurs. ATI's compensation committee will determine the amount of the awards, if any, that have been earned, based on the achievement of plan goals through the spin-off date, and will make awards pro-rated for the shortened Program term. Pursuant to the Program, payments will be made in cash and stock. Stock payments to our employees will be paid in Teledyne Technologies common stock. Pursuant to the Program, we will make the payments in three annual installments, with the first payment expected to be made early in the year 2000. 58 63 The Employee Benefits Agreement also provides for the treatment of purchased, designated and restricted shares issued under the ATI Stock Acquisition and Retention Program prior to the spin-off. Under the Agreement, participants who have purchased or designated ATI shares will receive distributions of the common stock of Teledyne Technologies and Water Pik Technologies in the spin-offs on the purchased or designated ATI shares. The shares they receive in the spin-off, as well as the original ATI shares, will continue to be held as collateral for the loans for the purchased shares, all of which will be retained by ATI, until the loans are fully paid. Restricted shares issued under the Program to our employees will be converted into shares of Teledyne Technologies common stock. The new Teledyne Technologies shares will also be restricted shares until the restriction lapse on the terms and conditions set forth in the original ATI Program. The Employee Benefits Agreement provides, in general, that we will receive no assets with which to fund liabilities under non-qualified plans. An exception applies with respect to the Allegheny Teledyne Executive Deferred Compensation Plan under which employees with total annual compensation in excess of $100,000 may elect to defer a portion or all of their salary and/or bonus; it is anticipated that we will receive company-owned life insurance policies or other assets with a cash value equal to the amount of deferred compensation liabilities at the time of the spin-off. In addition, while we would assume liabilities for pension benefits in excess of qualified plan limits under the Teledyne, Inc. Pension Equalization Plan, ATI would guarantee to participants the payments of these obligations -- as of the spin-off date -- if we cannot pay such obligations. TAX SHARING AND INDEMNIFICATION AGREEMENT On or prior to the date of the spin-off, ATI and Teledyne Technologies will enter into a Tax Sharing and Indemnification Agreement that will set forth each party's rights and obligations regarding payment and refunds, if any, with respect to taxes for periods before and after the spin-off and related matters such as the filing of tax returns and the conduct of audits or other proceedings involving claims made by taxing authorities. In general, ATI will be responsible for filing consolidated U.S. federal and consolidated, combined or unified state income tax returns for periods through the date of the spin-off, and for paying the taxes relating to such returns including any subsequent adjustments resulting from the redetermination of such tax liability by the applicable taxing authorities. We will be responsible for other taxes attributable to our operations. The Tax Sharing and Indemnification Agreement provides that we will indemnify ATI and its directors, officers, employees, agents and representatives for any taxes imposed on, or other amounts paid by, them or ATI's stockholders, if we take actions or fail to take actions (such as completing the public offering) that result in the spin-off not qualifying as a tax-free distribution. For example, pursuant to the Tax Sharing and Indemnification Agreement, Teledyne Technologies will agree that for a two-year period following the date of the spin-off: (i) we will continue to engage in the Teledyne Technologies businesses; (ii) we will continue to own and manage at least 50% of the assets which we own directly or indirectly immediately after the spin-off; and (iii) we will not, unless we obtain the written consent of ATI, engage in a number of specified transactions. Transactions subject to these restrictions will include, among others, issuance of Teledyne Technologies common stock (or certain derivatives of our stock) in amounts which represent 40% or more of the Teledyne Technologies common stock, issuance of instruments other than Teledyne Technologies common stock (or derivatives of our stock) constituting equity for U.S. federal tax purposes, certain redemptions and other acquisitions of capital stock or equity securities of Teledyne Technologies, or the merger, dissolution or liquidation of our company. If our obligations under the Tax Sharing and Indemnification Agreement were breached and the spin-off were to fail to qualify as tax-free for 59 64 U.S. federal income tax purposes as a result of such breach, we would be required to satisfy the indemnification obligation described above. This indemnification obligation could exceed our net worth at that time. Though valid as between the parties thereto, the Tax Sharing and Indemnification Agreement is not binding on the IRS and does not affect the several liability of ATI, Teledyne Technologies and their respective subsidiaries to the IRS for all U.S. federal taxes of the consolidated group relating to periods prior to the spin-off. INTERIM SERVICES AGREEMENT On or prior to the date of the spin-off, ATI and Teledyne Technologies will enter into an Interim Services Agreement pursuant to which ATI will provide us with transitional administrative and support services for a period of time not expected to exceed 12 months. The Interim Services Agreement will provide that we will pay a fee to ATI intended to approximate ATI's cost for such services plus 10%. The Interim Services Agreement will provide that we will indemnify ATI for all claims, losses, damages, liabilities and costs incurred by ATI to a third party arising in connection with the provisions of a service under the agreement, other than those costs resulting from ATI's willful misconduct or gross negligence. In general, we can terminate an interim service after an agreed notice period. TRADEMARK LICENSE AGREEMENT On or prior to the date of the spin-off, an affiliate of ATI and Teledyne Technologies will enter into certain intellectual property related agreements, including a license agreement pursuant to which Teledyne Technologies will be granted a license to use the "Teledyne" name and related logos, symbols and marks (collectively, "Teledyne Marks") in connection with Teledyne Technologies operations after the spin-off. Under the terms of this license agreement, Teledyne Technologies will have the right to use the Teledyne Marks anywhere in the world in connection with the manufacture, distribution, marketing, advertising, promotion and sale of its products. We have agreed to pay an annual fee of $100,000 for this license and at the end of five years have an option to purchase all rights and interests in the Teledyne Marks for $412,000. 60 65 MANAGEMENT DIRECTORS Our Board of Directors is expected initially to consist of the individuals named below. Until the third annual meeting of our stockholders following the spin-off, at least a majority of the members of our Board of Directors will also be directors of ATI. See "Arrangements with ATI Relating to the Spin-Off -- Separation and Distribution Agreement" and "Description of Our Capital Stock." Our Certificate of Incorporation provides that we will have three classes of directors, the initial terms of office of which will expire, respectively, at the annual meeting of stockholders in 2000, 2001 and 2002. Successors to any directors whose terms are expiring are elected to three-year terms and hold office until their successors are elected and qualified. Also set forth below with respect to each director is the class of which such director will be a member. The business address for each person listed below is 2049 Century Park East, Los Angeles, California 90067-3101. Each individual listed below is a citizen of the United States. Our Bylaws contain provisions designed to ensure that at least a majority of our directors are also directors of ATI until the third annual meeting of our stockholders held after the spin-off. The Bylaws also provide that no quorum of the Board will be deemed present unless at least a majority of the directors present are also members of the Board of Directors of ATI. CLASS I DIRECTOR The Class I Director will serve until the 2000 annual meeting of our stockholders and until his successor is elected and qualified. Our Class I Director will be: C. Fred Fetterolf Age 70 C. Fred Fetterolf was President and Chief Operating Officer of Alcoa, Inc. prior to his retirement in 1991. He is also a director of ATI, Commonwealth Industries, Dentsply International Inc., Mellon Bank Corporation, Union Carbide Corporation, Praxair, Inc. and Pennzoil-Quaker State Corporation. CLASS II DIRECTOR The Class II Director will serve until the 2001 annual meeting of our stockholders and until his successor is elected and qualified. Our Class II Director will be: Robert Mehrabian Age 58 Robert Mehrabian has been the President and Chief Executive Officer of ATI's Aerospace and Electronics segment since July 1999 and has served ATI in various senior executive capacities since July 1997. Prior to that, Dr. Mehrabian served as President of Carnegie Mellon University. Dr. Mehrabian is a director of ATI, Mellon Bank Corporation, PPG Industries Inc. and BEI Technologies, Inc. CLASS III DIRECTORS Class III directors will serve until the 2002 annual meeting of our stockholders and until their respective successors are elected and qualified. Our Class III Directors will be: Frank V. Cahouet Age 67 Frank V. Cahouet served as the Chairman, President and Chief Executive Officer of Mellon Bank Corporation, a bank holding corporation, and Mellon Bank, N.A. prior to his retirement on December 31, 1998. Mr. Cahouet is also a director of ATI, Avery Dennison Corporation, 61 66 Mellon Bank Corporation, Saint-Gobain Corporation and USEC, Inc. Charles J. Queenan, Jr. Age 69 Charles J. Queenan, Jr. is Senior Counsel to Kirkpatrick & Lockhart LLP, attorneys-at-law. Prior to January 1996, he was a partner of that firm. Mr. Queenan is also a director of ATI and Crane Co. Kirkpatrick & Lockhart LLP performs legal services for ATI, including in connection with the spin-off, and may in the future perform services for us. COMMITTEES OF OUR BOARD OF DIRECTORS In addition to other committees established by our Board of Directors from time to time, our board has established an Audit and Finance Committee, a Governance Committee and a Personnel and Compensation Committee. AUDIT AND FINANCE COMMITTEE. The principal audit functions of the Audit and Finance Committee include: - - Making recommendations to the Board of Directors regarding the appointment of the independent accountants for the coming year. - - Reviewing the scope and general extent of, and proposed fees for, the annual audit plan and other activities of the independent accountants and the audit plan of the internal auditors. - - Reviewing with management and the independent accountants, upon completion of the annual audit, the financial statements and related reports for their adequacy and compliance with generally accepted accounting, reporting and disclosure standards. - - Evaluating the effectiveness of our internal and external audit efforts, accounting and financial controls, policies and procedures and business ethics policies and practices through a review of reports by, and at regular meetings with, the internal and external auditors and with management, as appropriate. The principal finance functions of the Audit and Finance Committee include: - - Reviewing and evaluating proposed bank credit agreements and other major financial proposals. - - Reviewing and evaluating our relationships with banks and other financial institutions. - - Reviewing and making recommendations to the Board of Directors concerning policies with respect to dividends and capital structure. - - Meeting with the independent auditors and the internal auditors, with and without management being present, to discuss all appropriate matters. GOVERNANCE COMMITTEE. The Governance Committee will: - - Make recommendations to the Board of Directors with respect to candidates for nomination as new board members and with respect to incumbent directors for nomination as continuing board members. - - Make recommendations to the Board of Directors concerning the memberships of committees of the board and the chairpersons of the respective committees. - - Make recommendations to the Board of Directors with respect to the remuneration paid and benefits provided to members of the board in connection with their service on the board and its committees. - - Administer our formal compensation programs for directors, including the Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan. - - Make recommendations to the Board of Directors concerning the composition, organization and operations of the board of directors, including the orientation of new members and the flow of information. - - Evaluate board tenure policies as well as policies covering the retirement or resignation of incumbent directors. 62 67 PERSONNEL AND COMPENSATION COMMITTEE. The Personnel and Compensation Committee will: - - Make recommendations to the Board of Directors concerning general executive management organization matters. - - Make recommendations to the Board of Directors concerning compensation and benefits for employees who are also our directors, consult with our Chief Executive Officer on compensation and benefit matters relating to other officers who are required to file reports under Section 16 of the Securities Exchange Act of 1934, as amended ("statutory insiders") and make recommendations to the board of directors concerning compensation policies and procedures relating to officers who are statutory insiders. - - Make recommendations to the Board of Directors concerning policy matters relating to employee benefits and employee benefit plans. - - Make awards of stock-based compensation to officers who are our statutory insiders. - - Administer our formal incentive compensation plans. COMPENSATION OF OUR DIRECTORS Directors who are not our employees will be paid an annual retainer fee of $24,000. Directors will also be paid $1,200 for each board meeting and $1,000 for each committee meeting attended. Each non-employee chair of a committee will be paid an annual fee of $2,500. Directors who are our employees will not receive any compensation for their services on our board or its committees. The non-employee directors will also participate in the 1999 Non-Employee Director Stock Compensation Plan (the "Director Stock Plan"). The purpose of the Director Stock Plan is to provide non-employee directors with an increased personal interest in our performance. Under the Director Stock Plan, options to purchase 2,000 shares of our common stock will be granted to non-employee directors on the date of the distribution of our common stock to ATI stockholders and at the conclusion of each annual meeting of stockholders. If, after the spin-off, a non-employee director first becomes a director on a date other than an annual meeting date, an option covering 2,000 shares of our common stock will be granted to such non-employee director on his or her first date of board service. The purchase price of our common stock covered by these options will be the fair market value of our common stock on the date the option is granted. The Director Stock Plan also provides that each non-employee director will receive at least 25% of the annual retainer fee in the form of our common stock and/or options to acquire our common stock. Each director may elect a greater percentage. Options granted under this part of the Director Stock Plan are intended to provide each electing director with options having an exercise value on the date of grant equal to the foregone fees; that is, the difference between the exercise price and the market price of the underlying shares of common stock on the date of grant is intended to be equal to the foregone fees. In order to continue to attract and retain non-employee directors of exceptional ability and experience, we will also maintain a Fee Continuation Plan for Non-Employee Directors. Under the plan, benefits will be payable to a person who serves as a non-employee director for at least five years. The annual benefit will equal the retainer fee in effect when the director retires from the board. Benefits will be paid for each year of the participant's credited service as a director up to a maximum of ten years. EXECUTIVE OFFICERS Set forth below are the name, age, position and office to be held with us, and principal occupations and employment during the past five years, of those individuals who are expected to serve as our executive officers immediately following the spin-off. Those individuals named below who are currently officers or employees of ATI will resign from all such positions prior to the spin-off. Our executive officers will be elected to serve until they resign or are removed, 63 68 or are otherwise disqualified to serve, or until their successors are elected and qualified. Robert Mehrabian Age 58 President and Chief Executive Officer Robert Mehrabian has been the President and Chief Executive Officer of ATI's Aerospace and Electronics segment since July 1999 and has served ATI in various senior executive capacities since July 1997. Prior to that, Dr. Mehrabian served as President of Carnegie Mellon University. Dr. Mehrabian is a director of ATI, Mellon Bank Corporation, PPG Industries, Inc. and BEI Technologies, Inc. Stefan C. Riesenfeld Age 51 Executive Vice President and Chief Financial Officer Stefan Riesenfeld has been the Executive Vice President and Chief Financial Officer of ATI's Aerospace and Electronics segment since August 1999. From 1996 to May 1999, Mr. Riesenfeld was Chief Financial Officer of ICL, PLC, a global information systems and services company based in London, England. From 1983 to 1996, he was with Unisys Corporation where he served as Vice President and Corporate Treasurer from 1989. John T. Kuelbs Age 57 Senior Vice President, General Counsel and Secretary John T. Kuelbs is the Senior Vice President, General Counsel and Secretary of Teledyne Technologies, having joined ATI's Aerospace and Electronics segment in October 1999. Mr. Kuelbs was Senior Vice President -- Acquisition Policy for Raytheon Company from November 1998 to September 1999 and Senior Vice President -- Legal of Raytheon Systems Company from January 1998 to November 1998. Before Raytheon's acquisition of Hughes Aircraft Company, Mr. Kuelbs spent 17 years at Hughes Aircraft Company where he served as Senior Vice President, General Counsel and Secretary from 1994 to 1998. From 1976 to 1981, Mr. Kuelbs was Division Counsel for Ford Aerospace and Communications Company, Newport Beach, California. Mr. Kuelbs began his legal career in 1973 with the Office of the Army Chief Trial Counsel. SEGMENT MANAGEMENT Marvin H. Fink Age 63 President, Teledyne Electronic Technologies Marvin Fink has been the President of Teledyne Electronic Technologies since 1993. From 1986 to 1993, he was President of Teledyne Microelectronics. Mr. Fink has held various management positions with several of Teledyne's aerospace and electronics companies for over 36 years. Prior to joining Teledyne, Mr. Fink was a manager and engineer with Litton Industries and Hughes Aircraft Company. Mr. Fink is a director of Gul Technologies Singapore Ltd, an electronics components company headquartered in Singapore. 64 69 Richard A. Holloway Age 57 President, Teledyne Brown Engineering Richard Holloway has been the President of Teledyne Brown Engineering since February 1998. From 1986 until joining Teledyne Brown Engineering, Mr. Holloway was Senior Vice President, Government Division of SCI Systems, Inc., a provider of manufacturing and design services to commercial companies, the U.S. military and foreign governments. From 1964 to 1986, he held various positions with The Boeing Company, including General Manager, Director of High-Technology Products. Bryan L. Lewis Age 50 President, Teledyne Continental Motors Bryan Lewis has been the President of Teledyne Continental Motors since 1992. Mr. Lewis first joined Teledyne 18 years ago as a project engineer for its turbine engine business. Mr. Lewis began his industry career in 1972 at the Pratt & Whitney Aircraft Division of United Technologies in Hartford, Connecticut. Charles E. McGill Age 64 President, Teledyne Cast Parts Charles E. McGill has been President of Teledyne Cast Parts since March 1999. Prior to that, he was Vice President of ATI's Aerospace and Electronics segment and from 1993 through 1997 he was Vice President, Finance and Administration of Teledyne Electronics Technologies. Mr. McGill has held various management and financial positions with several of Teledyne's aerospace and electronics companies for over 34 years. Prior to joining Teledyne, Mr. McGill worked for the Ford Motor Company. EMPLOYMENT ARRANGEMENTS Messrs. Riesenfeld and Kuelbs were retained at an annual base salary of $300,000 and $275,000, respectively, and are entitled to certain additional payments. Each of them is also entitled to participate in Teledyne Technologies' annual incentive bonus plan. In addition, at the spin-off date, Messrs. Riesenfeld and Kuelbs will receive options to purchase approximately 75,000 shares and 70,000 shares, respectively, of Teledyne Technologies common stock. The stock option price will be the average price of our common stock over the first 20 days of trading following the spin-off. Options to purchase 10% of the shares will become exercisable one year after the grant date, options to purchase an additional 20% of the shares will become exercisable two years after the grant date, and options to purchase the remaining 70% of the shares will become exercisable three years after the grant date. 65 70 HISTORICAL COMPENSATION OF EXECUTIVE OFFICERS Shown below is information concerning the annual and long-term compensation for services rendered in all capacities to ATI and its subsidiaries for the years ended December 31, 1997 and 1998 of the individual who will serve as our Chief Executive Officer and who was the only executive officer employed by ATI or an affiliate of ATI at December 31, 1998. The compensation described in this table was paid by ATI or an affiliate of ATI. The table does not reflect the compensation to be paid to our executive officers in the future.
LONG-TERM COMPENSATION ANNUAL COMPENSATION --------------------- ----------------------------------- RESTRICTED OPTIONS FISCAL OTHER ANNUAL STOCK (SHARES) ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) (2) COMPENSATION - --------------------------- ---------- -------- -------- ------------- ---------- -------- ---------------- Robert Mehrabian............. 1998 $370,833 $501,120 $6,171 170,991 40,000 $226,492(3) 1997 145,833 160,000 0 0 0 9,696 (5 months)
- ------------------------- (1) Represents the closing market price on the award date of ATI restricted stock awarded to Dr. Mehrabian under ATI's Stock Acquisition and Retention Program. Dividends are paid on the restricted shares. On December 31, 1998, the number of shares (and closing price of such shares, if unrestricted) held by Dr. Mehrabian under the Program were: 6,847 shares ($140,487). Prior to 1998, Dr. Mehrabian was not eligible to participate in the Program. (2) Reflects options granted under ATI's Incentive Plan. Does not include options awarded to Dr. Mehrabian under ATI's Non-Employee Director Stock Compensation Plan for his service as a director of ATI before becoming as employee of ATI. (3) Includes annual accruals for possible future payments to Dr. Mehrabian under the ATI Supplemental Pension Plan in the amount of $182,068, company contributions pursuant to the retirement portion of the ATI Retirement Savings Plan in the amount of $10,920, company contributions to the ATI Benefit Restoration Plan in the amount of $24,104, and the dollar value of the benefit to Dr. Mehrabian of the remainder of company-paid premiums for split-dollar life insurance in the amount of $9,400. OPTION GRANTS IN LAST FISCAL YEAR Shown below is information on grants to Dr. Mehrabian of options to purchase shares of ATI common stock pursuant to the ATI Incentive Plan during the year ended December 31, 1998, which are reflected in the Summary Compensation Table above.
POTENTIAL REALIZABLE VALUE AT ASSUMED RATES OF STOCK NUMBER OF % OF TOTAL PRICE APPRECIATION FOR SECURITIES OPTIONS EXERCISE OPTION TERM(1) UNDERLYING GRANTED TO OR BASE -------------------------- OPTIONS EMPLOYEES IN PRICE EXPIRATION 0% 5% 10% NAME GRANTED FISCAL YEAR ($/SHARE) DATE $ $ $ - ---- ---------- ------------ --------- ---------- ---- -------- -------- Robert Mehrabian................. 20,000 * 25.88 2/11/2008 0 325,600 825,000 20,000 * 20.375 12/17/2008 0 256,300 649,500
- ------------------------- * Less than 1%. (1) No gain to the optionee is possible without stock price appreciation, which will benefit all stockholders commensurately. The assumed "potential realizable values" are mathematically derived from certain prescribed rates of stock price appreciation. The actual value of these option grants depends on the future performance of ATI common stock and overall stock market condition. There is no assurance that the values reflected in this table will be realized. 66 71 Under the Employee Benefits Agreement, options to purchase shares of ATI common stock that are held by Dr. Mehrabian will be converted into options to purchase shares of Teledyne Technologies common stock. The number of our shares that Dr. Mehrabian will be able to purchase and the exercise price of the options will be adjusted in the conversion based on the relationship of the ATI stock price and the stock price of Teledyne Technologies over a fixed period of time. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY SHARES UNEXERCISED OPTIONS AT OPTIONS AT FISCAL ACQUIRED ON VALUE FISCAL YEAR END(#) YEAR END($)(2) NAME AND PRINCIPAL POSITION EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - --------------------------- ------------- ----------- ----------------------------- ------------------------- Robert Mehrabian(1)............ 0 0 8,660/40,000 31,364/0
- ------------------------- (1) Includes options to purchase shares of ATI common stock granted to Dr. Mehrabian under ATI's Non-Employee Director Stock Compensation Plan with respect to his service as a non-employee director. (2) The "value of unexercised in-the-money options" is calculated by subtracting the exercise price per share from $20.21875 which was the average of the high and low sales prices of a share of ATI common stock on the New York Stock Exchange on December 31, 1998. ATI PERFORMANCE SHARE PROGRAM AWARDS The following table sets forth information about awards for the 1998-2000 award period made in 1998 under the ATI Performance Share Program. The amounts included in the Estimated Future Payouts columns represent the potential payment of ATI common stock and cash to the named officers depending on the level of achievement (i.e., threshold, target or maximum) of the performance goals for the three-year award period. Participants will not receive any payment of ATI common stock or cash under the program if ATI and/or designated business unit does not achieve the threshold level of performance objectives during the award period.
ESTIMATED NUMBER OF FUTURE PAYOUTS UNDER SHARES, PERFORMANCE NON-STOCK PRICE-BASED PLANS UNITS OR OR OTHER PERIOD -------------------------------------------- OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM NAME RIGHTS(#) OR PAYOUT ($ OR #) ($ OR #) ($ OR #) - ---- -------------- ------------------------- ------------ ------------- ------------- Robert Mehrabian........... * 1998-2000 award period 3,284 shs. 13,134 shs. 26,268 shs. (2001-2003 payout period) $41,667 $166,667 $333,334
- ------------------------- * The amount of the award is based on base salary at the beginning of the award period. Two-thirds of the award is to be paid in ATI common stock, with the number of shares based on the average price of a share of ATI common stock on the New York Stock Exchange for the last 30 trading days in 1997. One-third of the award is to be paid in cash. Under the Employee Benefits Agreement, the current award period under the ATI Performance Share Program would be terminated when the spin-off occurs and ATI's compensation committee will determine the amount of awards, if any, that have been earned. Stock awards 67 72 payable under the Program to our employees will be payable in shares of our common stock. See "Arrangements with ATI Relating to the Spin-Off--Employee Benefits Agreement." BENEFIT PLANS FOLLOWING THE SPIN-OFF Our Incentive Plans On or prior to the date of the spin-off, our Board of Directors will adopt, and ATI as our sole stockholder will approve, the following incentive compensation plans. Long-Term Incentive Plan Our long-term incentive plan is expected to provide for the grant of various types of long-term incentive awards to selected employees, consistent with the objectives and restrictions of the plan. Although these awards may include non-qualified stock options, incentive stock options under the Internal Revenue Code, stock appreciation rights, and restricted and unrestricted share awards, it is expected that only stock options and restricted stock awards under a stock acquisition and retention program will be granted under the plan initially. A total of 2,650,000 shares of our common stock will be available for issuance under our long-term incentive plan. The term of the plan is expected to be ten years. The plan will vest broad powers in the Personnel and Compensation Committee of our Board of Directors to administer and interpret the plan. This power will include the authority to select the persons to be granted awards, to determine the terms, goals and conditions of awards, and to determine whether such goals and conditions have been met. While the precise number of shares is yet to be determined, it is anticipated that we will grant options for up to 187,500 shares of our Common Stock to our senior management following the spin-off in addition to those options granted in connection with the conversion of options to purchase ATI common stock under the Employee Benefits Agreement. We also expect to establish a stock acquisition and retention program ("SARP") under our incentive plan with terms that are similar to the SARP established by ATI. Under this program, each year, key executives will be given the opportunity to purchase shares of our stock, or designate shares of our stock previously acquired by them, with a value equal to their base salary at the beginning of the year. Under the SARP, executives who purchase shares can deliver a promissory note, payable to Teledyne Technologies, as payment of the purchase price. Executives will receive an award of one restricted share of our common stock for each two shares they purchase or designate. In general, the restricted shares will vest only if the participant retains the shares purchased or designated by the participant as subject to the SARP for a period of five years. Annual Incentive Plan Our annual incentive plan is expected to give the Personnel and Compensation Committee of our Board of Directors the discretion to determine the aggregate amount of money to be used for awards based upon competitive compensation practices and such measures of our performance as the Committee selects from time to time. Individual awards will be determined annually by the Personnel and Compensation Committee in accordance with performance goals established by the Committee at the beginning of the year. Deferred Compensation Plan It is anticipated that we will implement a deferred compensation plan that will allow certain of our executives to defer all or a portion of their annual salary and annual incentive plan awards, as well as amounts due under certain of our other compensation programs. A participant's deferred benefit will be credited with earnings based on one or more hypothetical investments available under the plan. The plan is not funded. We expect, however, to hold insurance policies on the lives of participants in the plan, to the extent insurance is reasonably available, to provide a possible source of cash for payments that become due under the plan. Pension and Other Plans Pension Plans Many of our employees will have been participants in various parts of the ATI Pension 68 73 Plan. On or prior to the date of the spin-off, we intend to adopt the Teledyne Technologies Pension Plan on terms substantially similar to the parts of the ATI Pension Plan applicable to all of our employees, both active and inactive at our operations which perform government contract work and for our active employees at our operations which do not perform government contract work. The annual benefits payable under these parts of the pension plans to participating salaried employees retiring at or after age 65 will be calculated under a formula which takes into account the participant's compensation and years of service. The Code limits the amounts payable to participants under a qualified pension plan. We intend to adopt a Pension Equalization Plan which is designed to restore benefits which would be payable under the pension plan provisions but for the limits imposed by the Code, to the levels calculated pursuant to the formulas contained in the pension plan provisions. The following table illustrates the approximate annual pension that may become payable to a Teledyne Technologies employee in the higher salary classifications under our regular and supplemental pension plans.
ESTIMATED ANNUAL PENSIONS(1) AVERAGE PAY IN HIGHEST YEARS OF SERVICE(3) 60 MONTHS OF LAST 120 ------------------------------ MONTHS OF EMPLOYMENT(2) 15 20 30 - ----------------------- -------- -------- -------- $ 200,000 $ 46,277 $ 61,702 $ 92,553 300,000 71,027 94,702 142,053 400,000 95,777 127,702 191,553 500,000 120,527 160,702 241,053 600,000 145,277 193,702 290,553 700,000 170,027 226,702 340,053 800,000 194,777 259,702 389,553 1,000,000 244,277 325,702 488,553
- --------------- (1) The estimated amounts assume retirement at age 65 (normal retirement age) with a straight-life annuity without reduction for a survivor annuity or for optional benefits. They are not subject to deduction for Social Security benefits. (2) For the period through December 31, 1994, for Teledyne employees who are in the higher salary classifications, compensation for the purposes of the plan was limited to an individual's base salary. Effective January 1, 1995, plan compensation for those employees includes base salary and up to five annual incentive compensation received on and after January 1, 1995. (3) The maximum benefits payable under the pension provisions applicable to our employees are reached after 30 years of credited service. Savings Plan We plan to establish a defined contribution 401(k) program for our employees on terms substantially similar to the Teledyne, Inc. 401(k) Plan prior to April 1, 2000 and transfer account balances of affected employees under the Teledyne, Inc. 401(k) Plan directly to our new plan. Until we establish our new plan, our employees will continue to participate in a part of the Teledyne, Inc. 401(k) Plan that is maintained for the benefit of our employees. After the spin-off and until we establish our new savings plan, our part of the Teledyne, Inc. 401(k) Plan will offer along with funds, three common stock funds as investment alternatives: (i) our common stock fund, (ii) a Water Pik Technologies, Inc. common stock fund and (iii) an ATI common stock fund. Our plan participants will be able to increase their holdings in our stock fund. They will not, however, be able to increase their holdings in the Water Pik Technologies or ATI stock funds. To the extent that the plan fiduciaries have not already done so, on December 31, 2002, all remaining investments in the Water Pik 69 74 Technologies and ATI stock funds under our part of the Teledyne, Inc. 401(k) Plan or our new savings plan will be liquidated and the proceeds transferred to the Teledyne Technologies common stock fund under the applicable plan. Similar investment restrictions and automatic liquidations will apply to our stock fund available under the ATI and Water Pik Technologies savings plans. Employee Stock Purchase Plan We expect to adopt an employee stock purchase plan similar to ATI's Stock Advantage Plan, under which our employees will be permitted to purchase shares of our common stock through payroll deductions supplemented by company contributions. Other Benefit Plans It is expected that we will adopt a number of plans to provide certain employee welfare benefits to our active employees as well as our retirees after the spin-off, including medical, short and long-term disability, life insurance, severance and other benefits, and our Board of Directors will reserve the right to amend, suspend or terminate any of these welfare plans. 70 75 SECURITY OWNERSHIP The following table sets forth the number of shares of our common stock expected to be beneficially owned following the spin-off, directly or indirectly, by each person known to us who is expected to own beneficially more than five percent of our outstanding common stock, each director, each of our Named Executive Officers and such persons as a group, in each case based upon the beneficial ownership of such persons of ATI common stock reported to ATI as of October 15, 1999, and the distribution ratio of one share of our common stock for every seven shares of ATI common stock owned by the named persons, including shares as to which a right to acquire ownership within 60 days of October 15, 1999 exists (for example, through the exercise of stock options) within the meaning of Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. Each person has sole voting and investment power with respect to the shares listed unless otherwise indicated.
NUMBER OF BENEFICIAL OWNER SHARES PERCENT OF CLASS - ---------------- --------- ---------------- J. P. Morgan & Co. Incorporated(1).......................... 3,080,600 11.4% 60 Wall Street New York, NY 10260 Richard P. Simmons(2)....................................... 2,311,935 8.6% 1000 Six PPG Place Pittsburgh, PA 15222 Caroline W. Singleton(3).................................... 1,999,902 7.4% Sole Trustee of the Singleton Family Trust 335 North Maple Drive, Suite 177 Beverly Hills, CA 90210 Scudder Kemper Investments, Inc.(4)......................... 1,575,311 5.8% 345 Park Avenue New York, NY 10154 Capital Research and Management Company(5).................. 1,450,057 5.4% 333 South Hope Street Los Angeles, CA 90071 Robert Mehrabian............................................ 9,409 * Stefan C. Riesenfeld........................................ 0 * John T. Kuelbs.............................................. 0 * Frank V. Cahouet(6)......................................... 27 * C. Fred Fetterolf(6)........................................ 985 * Charles J. Queenan, Jr.(6).................................. 101,374 * All directors and executive officers as a group (6 persons).................................................. 111,795 *
- ------------------------- * Less than one percent of the outstanding shares. (1) J.P. Morgan & Co. Incorporated filed a Form 13F under the Securities Exchange Act of 1934 indicating that as of June 30, 1999, it beneficially owned 21,564,205 shares of ATI common stock, including 15,924,890 shares as to which it had sole voting power and 158,369 shares as to which it had shared voting power. (2) Mr. Simmons will have the sole power to direct the voting of all 2,311,935 shares, and sole power to direct the disposition of 1,157,451 of these shares. Mrs. Richard P. Simmons will have the sole 71 76 power to direct the disposition of 1,154,484 of these shares. The amount shown reflects shares held for Mr. Simmons as of September 30, 1999 under the ATI Retirement Savings Plan. Mr. Simmons disclaims beneficial ownership of shares, not shown in the table, that will be owned by R.P. Simmons Family Foundation, a private charitable foundation with respect to which Mr. Simmons serves as trustee. (3) Caroline W. Singleton filed a Schedule 13D dated August 25, 1999, indicating that as of July 26, 1999, she beneficially owned 13,999,320 shares of ATI common stock, which had been held by Dr. Henry E. Singleton. The shares had been transferred to the Singleton Family Trust, of which she is the sole trustee. (4) Scudder Kemper Investments, Inc. filed a Schedule 13G dated February 12, 1999 indicating that as of December 31, 1998, it beneficially owned ATI common stock as follows: 2,326,862 sole voting power; 7,974,265 shared voting power; 10,928,613 sole dispositive power; and 98,569 shared dispositive power. (5) Capital Research and Management Company filed a Schedule 13G dated February 8, 1999 indicating that as of December 31, 1998, it held sole dispositive power, and no voting power, with respect to 10,150,400 shares of ATI common stock as a result of acting as investment adviser to various registered investment companies. (6) The amounts include shares to which beneficial ownership will be disclaimed as follows: 7,728 shares that will be owned by Mr. Queenan's wife. The amounts do not include 371 shares that will be owned by the Fetterolf Family Foundation for which beneficial ownership will be disclaimed. 72 77 DESCRIPTION OF OUR CAPITAL STOCK Our Restated Certificate of Incorporation ("Certificate") provides that our authorized capital consists of (i) 125,000,000 shares of common stock, $.01 par value, of which (based on the number of shares of ATI common stock outstanding as of September 30, 1999) 27,008,553 shares of our common stock will be issued to stockholders of ATI in the spin-off, and (ii) 15,000,000 shares of preferred stock, par value $.01 per share, of which 1,250,000 shares have been designated as Series A Junior Participating Preferred Stock for issuance in connection with the exercise of Teledyne Technologies Rights. See "-- Rights Plan." COMMON STOCK Each share of our common stock will entitle its holder of record to one vote for the election of directors and all other matters to be voted on by the stockholders. Holders of our common stock will not have cumulative voting rights. As a result, the holders of a majority of the shares of our common stock voting for the election of directors may elect all nominees standing for election as our directors. Subject to the rights of holders of preferred stock, holders of our common stock will be entitled to receive such dividends, if any, as may be declared from time to time by our Board of Directors in its discretion from funds legally available for that use. Subject to the rights of holders of preferred stock, holders of our common stock will be entitled to share on a pro rata basis in any distribution to stockholders upon our liquidation, dissolution or winding up. No holder of our common stock will have any preemptive right to subscribe for any of our stock or other security. PREFERRED STOCK Our Board of Directors, without further action by the stockholders, may from time to time authorize the issuance of shares of our preferred stock in one or more series and, within certain limitations, fix the powers, preferences and rights and the qualifications, limitations or restrictions thereof and the number of shares constituting any series or designations of such series. Satisfaction of any dividend preferences of our outstanding preferred stock would reduce the amount of funds available for the payment of dividends on our common stock. Holders of our preferred stock would normally be entitled to receive a preference payment in the event of our liquidation, dissolution or winding up before any payment is made to the holders of our common stock. Under certain circumstances, the issuance of our preferred stock may render more difficult or tend to discourage our change in control. Although we currently have no plans to issue shares of our preferred stock, our Board of Directors, without stockholder approval, may issue our preferred stock with voting and conversion rights which could adversely affect the rights of holders of shares of our common stock. For a description of the terms of our Series A Junior Participating Preferred Stock. See "-- Rights Plan." RIGHTS PLAN Our Board of Directors has, subject to completion of the spin-off, declared a dividend of one preferred share purchase Right for each outstanding share of our common stock. Each Right entitles the registered holder to purchase from us one one-hundredth of a share of Series A Junior Participating Preferred Stock (the "Preferred Shares") of Teledyne Technologies at a price of $ per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between us and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. Until the earlier to occur of: - a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person"), has acquired beneficial ownership of 15% or more of our outstanding shares of common stock; or 73 78 - 10 business days (or such later date as may be determined by our board of directors) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of our outstanding common stock (the earlier of such dates being the "Distribution Date"), the Rights will be evidenced by the common stock certificate with a copy of the Summary of Rights attached to it. The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with our common stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new certificates of our common stock issued upon transfer or new issuance of our common stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for our common stock, even without such notation or a copy of the Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with our common stock represented by such certificate. As soon as practicable following the Distribution Date, separate Rights Certificates will be mailed to holders of record of our common stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The final expiration date for the Rights will occur at the close of business on the tenth anniversary of the date of the Rights Agreement, unless this date is extended or unless the Rights are earlier redeemed or exchanged by us, in each case, as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution: - in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares; - upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then-current market price of the Preferred Shares; or - upon the distribution to holders of the Preferred Shares of evidence of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one-hundredths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of our common stock or a stock dividend on our common stock payable in shares of our common stock or subdivisions, consolidations or combinations of our common stock occurring, in any such case, prior to the Distribution Date. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of our common stock. If we are liquidated, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per share of our common stock. Each Preferred Share will have 100 votes, voting together with our common stock. Finally, if we engage in a merger, consolidation, or any other transaction in which shares of our common stock are exchanged, each Preferred Share will be entitled to receive 100 times the amount received 74 79 per share of our common stock. These rights are protected by customary antidilution provisions. The dividend, liquidation and voting rights attendant to one one-hundredth of a Preferred Share purchasable upon exercise of each Right are designed to be the approximate economic equivalent of one share of our common stock. In the event that we are acquired in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. If any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of our common stock having a market value of two times the exercise price of the Right. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of our common stock, our board of directors may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of our common stock, or one one-hundredth of a Preferred Share, per Right. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares will be issued (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at our election, be evidenced by depository receipts) and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise. At any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the outstanding shares of our common stock, our Board of Directors may redeem the Rights in whole, but not in part, at a price of $.01 per Right. The redemption of the Rights may be made effective at such time on such basis with such conditions as our the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price. The terms of the Rights may be amended by our Board of Directors without the consent of the holders of the Rights, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person, no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder of the Right will have no rights as our stockholder, including, without limitation, the right to vote or to receive dividends. CERTAIN PROVISIONS OF OUR GOVERNING DOCUMENTS The following is a description of certain provisions of our Certificate and Bylaws. The description is qualified in its entirety by reference to the full texts of the Certificate and Bylaws. Certain provisions of our Certificate and Bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us, without the approval of our Board of Directors. Charter Provisions Affecting Control and Other Transactions. Our Certificate requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of our common stock to approve certain fundamental changes such as a merger, consolidation, sale of substantially all of our assets, dissolution, certain 75 80 purchases by us or one of our subsidiaries of shares of our common stock or other assets from a "significant shareholder," any merger of a "significant shareholder" into us or one of our subsidiaries, or any reclassification or recapitalization of us consummated within five years after a "significant shareholder" becomes such, if the result of such reclassification or recapitalization is to reduce the number of outstanding shares of our common stock or convert any such shares into cash or other securities. This supermajority voting requirement is not applicable if the fundamental change has been approved at a meeting of our board of directors by the vote of more than two-thirds of the incumbent directors. A "significant shareholder" is defined as any person who owns beneficially a number of shares of our common stock that is greater than 15% of the outstanding shares of our common stock, and any and all associates and affiliates of such person. Classification of Directors. Our Certificate provides that our Board of Directors will consist of three classes of directors. The initial members of our Board of Directors will be divided into three classes to serve as follows: the Class I Directors will initially hold office for a term to expire at the first annual meeting of stockholders after their initial election; the Class II Directors will initially hold office for a term to expire at the second annual meeting of stockholders after their initial election; and the Class III Directors will initially hold office for a term to expire at the third annual meeting of stockholders after their initial election. At each annual meeting of our stockholders, only the election of directors of the class whose term is expiring will be voted upon, and upon election each director will serve a three-year term. See "Management -- Directors." Right to Call a Special Meeting. Our Certificate provides that special meetings of the stockholders may only be called by the Chairman of our Board of Directors or the Chief Executive Officer or by our Board of Directors pursuant to a resolution passed by a majority of the directors then in office. Accordingly, our stockholders will not have the right to call a special meeting of the stockholders. Our Certificate further provides that only such business will be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to our notice of the special meeting. Nominations of persons for election to our Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to our notice of meeting (i) by or at the direction of our board of directors or (ii) by any stockholder of record at the time of the giving of notice of such meeting. Nominations by a stockholder of persons for election to our Board of Directors may be made if the stockholder's notice is delivered to our Secretary not earlier than the 90th day prior to the special meeting and not later than the 75th day prior to the special meeting or the 10th day following the day on which a public announcement is first made of the special meeting and of the nominees proposed by the Board of Directors to be elected at the meeting. Procedures to Bring Business Before a Meeting; No Action by Consent. Our Certificate provides that in order for nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder must give timely notice thereof in writing to our Secretary. To be timely, a stockholder's notice must be delivered to our Secretary not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Our Certificate also provides that any action required to be taken by our stockholders must be effected at a duly called annual or special meeting of our stockholders and may not be effected by the written consent of our stockholders. 76 81 Fiduciary Duties of Directors. Our Certificate provides that our directors may take into account the effects of their actions on our employees, suppliers, distributors and customers and the effect upon communities in which our offices or facilities are located or any other factors considered pertinent. As permitted by the DGCL, our Certificate includes a provision eliminating the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability: - for any breach of the director's duty of loyalty to the corporation or its stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - for unlawful payment of a dividend or an unlawful stock purchase or redemption, and - for any transaction from which the director derives an improper personal benefit. Our Certificate further provides that, if the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent so permitted. Our Certificate also specifies that no amendment to or repeal of the provision shall apply to or have any effect on the liability or alleged liability of any of our directors for or with respect to any acts or omissions of such director occurring prior to the amendment or repeal. Charter Amendments. Our Certificate provides that the affirmative vote of the holders of at least 75% of the combined voting power of the outstanding shares of our capital stock is required to amend or rescind, or adopt any provision inconsistent with the purpose or intent of the provisions of our Certificate relating to the adoption, amendment and repeal of our Bylaws, limitations of certain liabilities of directors, actions of stockholders, classification of directors, certain factors permitted to be considered by the directors, approval of certain fundamental changes, and amendments to our Certificate. Bylaw Provisions Regarding ATI Directors. Our Bylaws contain provisions designed to ensure that at least a majority of our directors are also directors of ATI until the third annual meeting of our stockholders held after the spin-off. The Bylaws also provide that no quorum of the board will be deemed present unless at least a majority of the directors present are also members of the Board of Directors of ATI. Bylaw Amendments. Our Certificate authorizes our Board of Directors to adopt, amend or repeal our Bylaws. Our Certificate also provides that our stockholders may not adopt, amend or repeal our Bylaws other than by the same affirmative vote that is required to amend certain provisions of our Certificate See "-- Charter Amendments") ANTI-TAKEOVER LEGISLATION Since neither our Certificate nor our Bylaws contain a provision expressly electing not to be governed by Section 203 of the DGCL, we are subject to this statutory anti-takeover provision. Section 203 provides that any person who acquires 15% or more of a corporation's voting stock (thereby becoming an "interested stockholder") may not engage in a "business combination" with the corporation for a period of three years following the time the person became an interested stockholder, unless: - the board of directors of the corporation approved, prior to such time, either the business combination or the transaction that resulted in the person becoming an interested stockholder; - upon consummation of the transaction that resulted in that person becoming an interested stockholder, that person owns at least 85% of the corporation's voting stock outstanding at the time the transaction commenced (excluding shares owned by persons who are directors and officers of that corporation and shares owned by 77 82 employee stock plans in which participants do not have the right to determine confidentially whether shares will be tendered in a tender or exchange offer); or - the business combination is approved by the board of directors and authorized by the affirmative vote (at an annual or special meeting and not by written consent) of at least 66 2/3% of the outstanding shares of voting stock not owned by the interested stockholder. In determining whether a stockholder is the "owner" of 15% or more of a corporation's voting stock for purposes of Section 203, ownership is defined to include the right, directly or indirectly, to acquire stock or to control the voting or disposition of stock. A "business combination" is defined to include: - mergers or consolidations of a corporation with an interested stockholder; - sales or other dispositions of ten percent or more of the assets of a corporation with or to an interested stockholder; - certain transactions resulting in the issuance or transfer to an interested stockholder of any stock of a corporation or its subsidiaries; - certain transactions which would result in increasing the proportionate share of the stock of a corporation or its subsidiaries owned by an interested stockholder, and - receipt by an interested stockholder of the benefit (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits from, by or to a corporation or any of its majority-owned subsidiaries. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock will be ChaseMellon Shareholder Services, L.L.C. 78 83 LIABILITY AND INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS ELIMINATION OF LIABILITY As permitted by the DGCL, our Certificate eliminates, subject to certain statutory limitations, the liability of directors to Teledyne Technologies or its stockholders for monetary damages for breaches of fiduciary duty, except for liability - for any breach of the director's duty of loyalty to the corporation or its stockholders, - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, - under Section 174 of the DGCL, or - for any transaction from which the director derived an improper personal benefit. INDEMNIFICATION OF OFFICERS AND DIRECTORS Under Section 145 of the DGCL, a corporation has the power to indemnify directors and officers under certain prescribed circumstances and, subject to certain limitations, against certain costs and expenses, including attorney's fees actually and reasonably incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his or her being a director or officer of the corporation if it is determined that he or she acted in accordance with the applicable standard of conduct set forth in such statutory provision. Our Certificate provides that we will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was one of our directors or officers, or is or was serving at our request as a director, officer, employee or agent of another entity, against certain liabilities, costs and expenses. We are also authorized to maintain, and do maintain, insurance on behalf of any person who is or was one of our directors or officers, or is or was serving at our request as a director, officer, employee or agent of another entity against any liability asserted against such person and incurred by such person in any such capacity or arising out of his or her status as such, whether or not we would have the power to indemnify such person against such liability under the DGCL. AVAILABLE INFORMATION We have filed a Registration Statement on Form 10 with the Securities and Exchange Commission with respect to our common stock. The Registration Statement and the exhibits to it contain some information not appearing in this Information Statement. This Information Statement provides a summary of some of the agreements and contracts appearing as exhibits to the Registration Statement. You are encouraged to see the exhibits to the Registration Statement for a more complete description of the contracts and agreements summarized in this Information Statement. You may access and read the Registration Statement and all of the exhibits to it through the SEC's Internet site at www.sec.gov. This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. You may also read and copy any document we file at the SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. After the spin-off, we will be required to file annual, quarterly and special reports and other information with the SEC. We will also be subject to proxy solicitation requirements. Once filed, you can access this information from the SEC in the manner set forth in the preceding paragraph. Following the spin-off, our filings will also be available at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. 79 84 INDEX TO OUR FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... F-2 Combined Statements of Income for the Years Ended December 31, 1998, 1997 and 1996................................... F-3 Combined Balance Sheets for December 31, 1998 and 1997...... F-4 Combined Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.......................... F-5 Combined Statements of Stockholder's Equity for the Years Ended December 31, 1998, 1997 and 1996.................... F-6 Notes to Combined Financial Statements...................... F-7 Combined Statements of Income (Unaudited) for the Nine Months Ended September 30, 1999 and 1998.................. F-24 Combined Balance Sheets for September 30, 1999 (Unaudited) and December 31, 1998 (Audited)........................... F-25 Combined Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 1999 and 1998.................. F-26 Combined Statements of Stockholder's Equity (Unaudited) for the Nine Months Ended September 30, 1999 and 1998......... F-27 Notes to Interim Combined Financial Statements (Unaudited)............................................... F-28
F-1 85 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Teledyne Technologies Incorporated We have audited the accompanying combined balance sheets of Teledyne Technologies Incorporated as of December 31, 1998 and 1997 and the related combined statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Teledyne Technologies Incorporated at December 31, 1998 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania April 30, 1999 F-2 86 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) SALES......................................... $780,393 $756,601 $716,400 Costs and expenses: Cost of sales............................... 572,087 551,064 511,772 Selling, general and administrative expenses................................. 126,875 138,249 136,561 -------- -------- -------- 698,962 689,313 648,333 -------- -------- -------- Earnings before other income.................. 81,431 67,288 68,067 Other income.................................. 1,562 1,399 1,855 -------- -------- -------- INCOME BEFORE INCOME TAXES.................... 82,993 68,687 69,922 Provision for income taxes.................... 34,276 27,063 29,227 -------- -------- -------- NET INCOME.................................... $ 48,717 $ 41,624 $ 40,695 ======== ======== ======== BASIC NET INCOME PER COMMON SHARE............. $1.73 $1.48 $1.49 ======== ======== ======== DILUTED NET INCOME PER COMMON SHARE........... $1.73 $1.48 $1.49 ======== ======== ========
The accompanying notes are an integral part of these statements. F-3 87 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) ASSETS Cash.............................................. $ -- $ -- Accounts receivable............................... 103,198 120,953 Inventories....................................... 53,186.... 47,072 Deferred income taxes............................. 12,913 16,216 Prepaid expenses and other current assets......... 1,751 543 -------- -------- TOTAL CURRENT ASSETS........................... $171,048 $184,784 -------- -------- Property, plant and equipment..................... 43,022 36,913 Deferred income taxes............................. 22,121 18,377 Cost in excess of net assets acquired............. 9,370 9,378 Other assets...................................... 5,258 5,914 -------- -------- TOTAL ASSETS................................... $250,819 $255,366 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable.................................. $ 43,344 $ 42,507 Accrued liabilities............................... 49,136 54,624 -------- -------- TOTAL CURRENT LIABILITIES...................... 92,480 97,131 Accrued postretirement benefits................... 32,953 32,797 Other long-term liabilities....................... 18,984 16,073 -------- -------- TOTAL LIABILITIES.............................. 144,417 146,001 -------- -------- STOCKHOLDER'S EQUITY: Net advances from Allegheny Teledyne.............. 104,682 107,451 Foreign currency translation gains................ 1,720 1,914 -------- -------- TOTAL STOCKHOLDER'S EQUITY..................... 106,402 109,365 -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $250,819 $255,366 ======== ========
The accompanying notes are an integral part of these statements. F-4 88 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income................................... $ 48,717 $ 41,624 $ 40,695 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 11,132 11,285 11,160 Deferred income taxes..................... (441) 255 (279) Gain on sale of property, plant and equipment............................... (427) (21) (13) Change in operating assets and liabilities: Accounts receivable....................... 17,755 200 (13,246) Inventories............................... (6,114) (2,897) 669 Accrued liabilities....................... (5,488) 2,762 (5,146) Other long-term liabilities............... 2,911 3,140 7,600 Accounts payable.......................... 837 14,319 2,229 Accrued postretirement.................... 156 423 352 Other........................................ (1,976) 1,782 856 -------- -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES..... 67,062 72,872 44,877 -------- -------- -------- INVESTING ACTIVITIES: Purchases of property, plant and equipment... (18,065) (15,822) (15,839) Disposals of property, plant and equipment... 740 111 77 Other........................................ 1,749 2,915 (689) -------- -------- -------- CASH USED IN INVESTING ACTIVITIES......... (15,576) (12,796) (16,451) -------- -------- -------- FINANCING ACTIVITIES: Net advances to Allegheny Teledyne........... (51,486) (60,232) (28,450) -------- -------- -------- CASH USED IN FINANCING ACTIVITIES......... (51,486) (60,232) (28,450) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. -- (156) (24) Cash and cash equivalents at beginning of year......................................... -- 156 180 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR....... $ -- $ -- $ 156 ======== ======== ========
The accompanying notes are an integral part of these statements. F-5 89 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
ADVANCES ACCUMULATED OTHER (TO) FROM COMPREHENSIVE STOCKHOLDER'S ALLEGHENY TELEDYNE INCOME EQUITY ------------------ ----------------- ------------- (IN THOUSANDS) BALANCE, DECEMBER 31, 1995................ $113,814 $1,354 $115,168 ======== ====== ======== Net income................................ 40,695 -- 40,695 Other comprehensive income, net of tax: Foreign currency translation gains...... -- 605 605 -------- ------ -------- Comprehensive income...................... 40,695 605 41,300 Net transactions with Allegheny Teledyne................................ (28,450) -- (28,450) -------- ------ -------- BALANCE DECEMBER 31, 1996................. 126,059 1,959 128,018 ======== ====== ======== Net income................................ 41,624 -- 41,624 Other comprehensive income, net of tax: Foreign currency translation losses..... -- (45) (45) -------- ------ -------- Comprehensive income...................... 41,624 (45) 41,579 Net transactions with Allegheny Teledyne................................ (60,232) -- (60,232) -------- ------ -------- BALANCE DECEMBER 31, 1997................. 107,451 1,914 109,365 ======== ====== ======== Net income................................ 48,717 -- 48,717 Other comprehensive income, net of tax: Foreign currency translation losses..... -- (194) (194) -------- ------ -------- Comprehensive income...................... 48,717 (194) 48,523 Net transactions with Allegheny Teledyne................................ (51,486) -- (51,486) -------- ------ -------- BALANCE, DECEMBER 31, 1998................ $104,682 $1,720 $106,402 ======== ====== ========
The accompanying notes are an integral part of these statements. F-6 90 NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1. ALLEGHENY TELEDYNE INCORPORATED SPIN-OFF OF TELEDYNE TECHNOLOGIES INCORPORATED In 1999, Allegheny Teledyne Incorporated ("Allegheny Teledyne") announced that it would pursue a course of action that would result in a transformation of Allegheny Teledyne, which was expected to include the spin-off of Teledyne Technologies Incorporated ("Teledyne Technologies" or the "Company") to Allegheny Teledyne stockholders as an independent, publicly-traded company (the "spin-off"). In August 1999, Allegheny Teledyne received a favorable ruling from the Internal Revenue Service that the proposed spin-off of Teledyne Technologies into a freestanding public company would be treated as a tax-free distribution for federal income tax purposes. In September 1999, Allegheny Teledyne's Board of Directors approved the various transactions pertaining to the spin-off and delegated to its Executive Committee the authority to set the record date and distribution date for the spin-off. Immediately following the spin-off, Allegheny Teledyne will no longer have a financial investment in Teledyne Technologies. Teledyne Technologies consists of the Aerospace and Electronics segment of Allegheny Teledyne which includes the operations of the Teledyne Electronic Technologies and the Teledyne Brown Engineering divisions, both with operations in the United States and United Kingdom, and the Teledyne Continental Motors and the Teledyne Cast Parts divisions, both with operations in the United States. A five-year $200,000,000 revolving credit facility will be established by Allegheny Teledyne, and $100,000,000 of borrowings under the facility will be used by Allegheny Teledyne prior to the spin-off to repay certain of Allegheny Teledyne's debt obligations. Teledyne Technologies will assume this credit facility, including the repayment obligations for Allegheny Teledyne's $100,000,000 of borrowings, in connection with the spin-off. Following the spin-off, Teledyne Technologies will have $100,000,000 of borrowing availability remaining. In addition, prior to and in connection with the spin-off, Teledyne Technologies and Allegheny Teledyne will enter into agreements providing for the separation of the companies and governing various relationships for separating employee benefits and tax obligations, indemnification and transition services. The financial statements of Teledyne Technologies include the combined financial position, results of operations and cash flows of the businesses described above. Allegheny Teledyne's historical cost basis of assets and liabilities has been reflected in the Teledyne Technologies financial statements. The financial information in these financial statements is not necessarily indicative of results of operations, financial position and cash flows that would have occurred if Teledyne Technologies had been a separate stand-alone entity during the periods presented or of future results. The combined financial statements included herein do not reflect any changes that may occur in the capitalization and operations of Teledyne Technologies as a result of, or after, the spin-off. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF COMBINATION The combined financial statements of Teledyne Technologies include the accounts of the businesses distributed by Allegheny Teledyne and its subsidiaries as described in Note 1. Significant intercompany accounts and transactions have been eliminated. F-7 91 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Management believes that the estimates are reasonable. REVENUE RECOGNITION Commercial sales and revenue from U.S. Government fixed-price type contracts are generally recorded as deliveries are made or as services are rendered. For certain fixed-price type contracts that require substantial performance over a long time period (one or more years) before deliveries begin, sales may be recorded based upon attainment of scheduled performance milestones. As of December 31, 1998, the average length of our long-term contracts was approximately two years. Sales under cost-reimbursement contracts are recorded as costs are incurred and fees are earned. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the effect of adjusting the current period earnings on a cumulative catch-up basis. When the current contract estimate indicates a loss, provision is made for the total anticipated loss. RESEARCH AND DEVELOPMENT Company-funded research and development costs ($24,728,000 in 1998, $28,116,000 in 1997 and $28,933,000 in 1996), which include bid and proposal costs, are expensed as incurred. Costs related to customer-funded research and development contracts ($150,254,000 in 1998, $160,675,000 in 1997 and $173,693,000 in 1996) are charged to costs and expenses as the related sales are recorded. A portion of the costs incurred for Company-funded research and development is recoverable through overhead cost allowances on government contracts. INCOME TAXES Provision for income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. NET INCOME PER COMMON SHARE The average number of shares of Teledyne Technologies common stock used in the computation of basic net income per common share was 28,107,241, 28,085,823 and 27,317,318 for the years ended December 31, 1998, 1997 and 1996, respectively, based on a distribution ratio of one share of Teledyne Technologies common stock for every seven shares of Allegheny Teledyne common stock. The average number of shares of Teledyne Technologies common stock used in the computation of diluted net income per common share was 28,133,879, 28,120,380 and 27,341,594 for the years ended December 31, 1998, 1997 and 1996, respectively. A distribution ratio of one share of Teledyne Technologies common stock for every seven shares of Allegheny Teledyne common stock was used to adjust the stock options. The actual stock option adjustment will be based upon the relation of the market price of Allegheny Teledyne common stock prior to the spin-off to the market F-8 92 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) price of Teledyne Technologies after the spin-off and therefore cannot be determined at the present time. ACCOUNTS RECEIVABLE Receivables are presented net of a reserve for doubtful accounts of $2,890,000 at December 31, 1998 and $3,205,000 at December 31, 1997. Expense recorded for the reserve for doubtful accounts was $1,432,000, $1,257,000 and $1,199,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Write-offs of doubtful accounts were $1,747,000, $76,000 and $1,092,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company markets its products and services principally throughout the United States, Europe, Japan and Canada to commercial customers and agencies of, and prime contractors to, the U.S. Government. Trade credit is extended based upon evaluations of each customer's ability to perform its obligations, which are updated periodically. INVENTORIES Inventories are stated at the lower of cost (last-in, first-out; first-in, first-out; and average cost methods) or market, less progress payments. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. PROPERTY AND EQUIPMENT Property, plant and equipment are carried at cost. The method of depreciation adopted for all property placed into service after July 1, 1996 is the straight-line method. For buildings and equipment acquired prior to July 1, 1996, depreciation is computed using a combination of accelerated and straight-line methods. The Company believes the straight-line method more appropriately reflects its financial results by better allocating costs of new property over the useful lives of these assets. The effect of this change on net income in 1996 was not material. COST IN EXCESS OF NET ASSETS ACQUIRED Cost in excess of net assets acquired related to businesses purchased after November 1970 is being amortized on a straight-line basis over periods not exceeding 10 years. Goodwill amortization expense was $582,000, $510,000 and $125,000 in 1998, 1997 and 1996, respectively. ENVIRONMENTAL Costs that mitigate or prevent future environmental contamination or extend the life, increase the capacity or improve the safety or efficiency of property utilized in current operations are capitalized. Other costs that relate to current operations or an existing condition caused by past operations are expensed. Environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable, but generally not later than the completion of the feasibility study or the Company's recommendation of a remedy or commitment to an appropriate plan of action. The accruals are reviewed periodically and, as investigations and remediations proceed, adjustments are made as necessary. Accruals for losses from environmental remediation obligations do not consider the effects of inflation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from insurance carriers or other third F-9 93 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) parties, but do reflect anticipated allocations among potentially responsible parties at federal Superfund sites or similar state-managed sites and an assessment of the likelihood that such parties will fulfill their obligations at such sites. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration the Company's prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of the Company's environmental experts in consultation with outside environmental specialists, when necessary. FOREIGN CURRENCY TRANSLATION The Company's foreign entities' accounts are measured using local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at year-end. Revenues and expenses are translated at the rates of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included in the cumulative foreign currency translation account in stockholder's equity. ACCOUNTING PRONOUNCEMENTS FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133" was issued. This statement delays the effective date of Statement No. 133 to all fiscal quarters beginning after June 15, 2000. The Company is presently evaluating the effect of adopting these statements. NOTE 3. ACCOUNTS RECEIVABLE Accounts receivable are summarized as follows:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) U.S. Government and prime contractors contract receivables: Billed receivables........................ $ 18,117 $ 26,339 Unbilled receivables...................... 21,260 18,830 Other receivables, primarily commercial..... 66,711 78,989 Reserve for doubtful accounts............... (2,890) (3,205) -------- -------- Total accounts receivable................... $103,198 $120,953 ======== ========
The billed contract receivables from the U.S. Government and prime contractors contain $5,901,000 and $13,426,000 at December 31, 1998 and 1997, respectively, due to long-term contracts. The unbilled contract receivables from the U.S. Government and prime contractors contain $21,260,000 and $17,980,000 at December 31, 1998 and 1997, respectively, due to long-term contracts. F-10 94 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Unbilled contract receivables represent accumulated costs and profits earned but not yet billed to customers. The Company believes that substantially all such amounts will be billed and collected within one year. NOTE 4. INVENTORIES
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) Raw materials and supplies.................. $ 23,296 $ 18,488 Work-in-process............................. 65,296 67,613 Finished goods.............................. 10,385 7,404 -------- -------- Total inventories at current cost........... 98,977 93,505 Less allowances to reduce current cost values to LIFO basis...................... (39,043) (38,761) Progress payments........................... (6,748) (7,672) -------- -------- Total inventories........................... $ 53,186 $ 47,072 ======== ========
Inventories, before progress payments, determined on the last-in, first-out method were $56,326,000 at December 31, 1998 and $50,801,000 at December 31, 1997. The remainder of the inventory was determined using the first-in, first-out and average cost methods. These inventory values do not differ materially from current cost. During 1998, 1997 and 1996, inventory usage resulted in liquidations of last-in, first-out inventory quantities. These inventories were carried at the lower costs prevailing in prior years as compared with the cost of current purchases. The effect of these last-in, first-out liquidations was to increase net income by $264,000 in 1998, $2,200,000 in 1997 and $2,464,000 in 1996. Inventories, before progress payments, related to long-term contracts were $2,035,000 and $2,292,000 at December 31, 1998 and 1997, respectively. Progress payments related to long-term contracts were $125,000 and $75,000 at December 31, 1998 and 1997, respectively. Under the contractual arrangements by which progress payments are received, the U.S. Government has a security interest in the inventories associated with specific contracts. F-11 95 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. SUPPLEMENTAL BALANCE SHEET INFORMATION Property, plant and equipment were as follows:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) Land........................................ $ 5,549 $ 5,573 Buildings................................... 36,734 35,868 Equipment and leasehold improvements........ 135,493 124,667 --------- --------- 177,776 166,108 Accumulated depreciation and amortization... (134,754) (129,195) --------- --------- Total property, plant and equipment......... $ 43,022 $ 36,913 ========= =========
Accrued liabilities included salaries and wages of $22,605,000 and $24,400,000 in 1998 and 1997, respectively. Other long-term liabilities consisted of reserves for self-insurance. NOTE 6. STOCKHOLDER'S EQUITY Allegheny Teledyne sponsors an incentive plan that provides for stock option awards to officers and key employees. Teledyne Technologies has officers and key employees that have participated in this plan. Teledyne Technologies accounts for its stock option plans in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB Opinion 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock at the date of the grant. If compensation cost for these options had been determined using the fair-value method prescribed by FASB Statement No. 123, "Accounting for Stock-based Compensation," net income would have been reduced by $673,000, $154,000, and $131,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Under FASB Statement No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions (there were no option grants in 1997):
1998 1997 1996 ----- ---- ----- Expected dividend yield................................. 2.8% --% 3.9% Expected volatility..................................... 31% --% 31% Risk-free interest rate................................. 5.0% --% 6.3% Expected lives.......................................... 8.0 -- 8.0 Weighted-average fair value of options granted during year.................................................. $7.25 $-- $4.53
The pro forma amounts above are not necessarily representative of the effects of awards on future pro forma earnings because future grants of employee stock options by Teledyne Technologies management will not be comparable to awards made to employees while Teledyne Technologies was part of Allegheny Teledyne. The assumptions used to compute the fair value of any stock option awards will be specific to Teledyne Technologies and therefore may not be comparable to the Allegheny Teledyne assumptions used. F-12 96 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Stock option transactions in Allegheny Teledyne common stock under Allegheny Teledyne's incentive plan for Teledyne Technologies employees are summarized as follows:
1998 1997 1996 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding beginning of year............. 398,842 $11.47 441,308 $11.38 346,501 $10.39 Granted............... 722,000 $22.89 -- $ -- 102,025 $14.61 Exercised............. (8,000) $10.14 (42,466) $10.48 (7,218) $ 9.96 --------- ------ ------- ------ ------- ------ Outstanding end of year................ 1,112,842 $18.89 398,842 $11.47 441,308 $11.38 ========= ====== ======= ====== ======= ====== Exercisable at end of year................ 308,456 $10.85 257,113 $10.20 198,878 $ 9.32 ========= ====== ======= ====== ======= ======
Further information about stock options outstanding and exercisable at December 31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------ ------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE - ------------- --------- ------------ --------- ------- --------- $ 8.51-$14.61 390,842 6.5 $11.50 308,456 $10.85 $20.38-$25.88 722,000 9.6 $22.89 -- -- --------- ------- 1,112,842 308,456 ========= =======
In connection with the spin-off of Teledyne Technologies from Allegheny Teledyne, outstanding stock options held by Teledyne Technologies employees will be converted into options to purchase Teledyne Technologies common stock. The number of shares and the exercise price of each Allegheny Teledyne option that is converted to a Teledyne Technologies option will be converted based upon a formula designed to preserve the inherent economic value, vesting and term provisions of such Allegheny Teledyne options as of the distribution date. The exchange ratio and fair market value of the Teledyne Technologies common stock, upon active trading, will also impact the number of options issued to Teledyne Technologies employees. The ultimate number and exercise price of the Teledyne Technologies stock options to be issued, subject to the above calculation, cannot yet be determined. Teledyne Technologies intends to establish its own long-term incentive plan which will provide its Board of Directors the flexibility to grant restricted stock, incentive stock options, stock appreciation rights and non-qualified stock options to officers and employees of Teledyne Technologies. F-13 97 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. RELATED PARTY TRANSACTIONS The accompanying financial statements include transactions with Allegheny Teledyne as follows:
1998 1997 1996 --------- --------- -------- (IN THOUSANDS) Net advances from Allegheny Teledyne, beginning of the year................................... $ 107,451 $ 126,059 $113,814 Net cash transactions with Allegheny Teledyne: Current provision for income taxes............ 34,717 26,808 29,506 Insurance expense............................. 17,196 18,637 19,977 Pension expense (income)...................... (1,719) 722 (965) Corporate general and administrative expense.................................... 7,804 7,566 7,164 Other net cash to Allegheny Teledyne.......... (109,484) (113,965) (84,132) --------- --------- -------- Net cash transactions with Allegheny Teledyne................................... (51,486) (60,232) (28,450) Net income...................................... 48,717 41,624 40,695 --------- --------- -------- Net advances from Allegheny Teledyne, end of the year.......................................... $ 104,682 $ 107,451 $126,059 ========= ========= ========
The average net advances from Allegheny Teledyne were $106,067,000, $116,755,000 and $119,937,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Teledyne Technologies participates in Allegheny Teledyne's centralized cash management system. Cash receipts in excess of cash requirements are transferred to Allegheny Teledyne. These transactions with Allegheny Teledyne are non-interest bearing and the net advances fluctuate on a daily basis. Corporate general and administrative expenses represent allocations for expenses incurred by Allegheny Teledyne on the Company's behalf including costs for finance, legal, tax and human resources functions. Amounts above were allocated based on net sales, which management believes to be reasonable. Teledyne Technologies participates in the defined benefit pension plan sponsored by Allegheny Teledyne. The expense for the plan was allocated to Teledyne Technologies based upon actuarially-determined amounts for the pension obligation and assets intended to be transferred from Allegheny Teledyne to Teledyne Technologies at the time of the spin-off. Teledyne Technologies also participates in casualty, medical and life insurance programs sponsored by Allegheny Teledyne. Insurance expense was allocated to Teledyne Technologies based upon actual losses incurred plus a share of pooled catastrophic losses under the Allegheny Teledyne self-insurance program. In the opinion of management, the allocations of these expenses are reasonable. The expenses allocated for these services and programs are not necessarily indicative of the expenses that would have been incurred if Teledyne Technologies had been a separate, independent entity and had managed these functions. Had Teledyne Technologies been a separate standalone company and managed these functions during the periods presented, management estimates that corporate general and administrative expenses would have been approximately $15,000,000 for each of the years ended December 31, 1998, 1997 and 1996. The Company determined the additional corporate expenses for the periods presented by estimating the number, seniority and compensation levels of additional employees that would likely be F-14 98 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) required to fully carry out the finance, legal, tax, human resources, investor and public relations and other functions associated with being a stand alone public company. In addition, we included estimates of various corporate and related administrative expenses that can be expected to be incurred as a stand alone public company, such as board of directors fees and expenses and independent accounting and legal fees and expenses. In making these estimates, the Company also examined expenses historically incurred by Allegheny Teledyne for these personnel and expenses. The Company may incur additional general and administrative expenses, pension and insurance costs as a result of operating independently of Allegheny Teledyne. In addition, prior to and in connection with the spin-off, Teledyne Technologies and Allegheny Teledyne will enter into agreements providing for the separation of the companies and governing various relationships for separating employee benefits and tax obligations, indemnification and transition services. Net sales include $1,074,000, $293,000 and $1,548,000 of sales to other Allegheny Teledyne subsidiaries for the years ended December 31, 1998, 1997 and 1996, respectively. There was a receivable of $532,000 at December 31, 1998 and $220,000 at December 31, 1997 from other Allegheny Teledyne subsidiaries. NOTE 8. INCOME TAXES Teledyne Technologies is included in the consolidated federal and certain state income tax returns of Allegheny Teledyne. Any required tax payments were made by Allegheny Teledyne as part of its consolidated returns. Provision for income taxes was calculated as if Teledyne Technologies had filed separate income tax returns. Provision for income taxes was as follows:
1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Current Federal........................................ $29,614 $22,729 $25,016 State.......................................... 5,103 4,079 4,490 ------- ------- ------- Total....................................... 34,717 26,808 29,506 ------- ------- ------- Deferred Federal........................................ (396) 235 (237) State.......................................... (45) 20 (42) ------- ------- ------- Total....................................... (441) 255 (279) ------- ------- ------- Provision for income taxes....................... $34,276 $27,063 $29,227 ======= ======= =======
F-15 99 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:
1998 1997 1996 ---- ---- ---- Federal tax rate.......................................... 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefit................................................. 4.5% 3.8% 3.3% Other..................................................... 1.8% 0.6% 3.5% ---- ---- ---- Effective income tax rate................................. 41.3% 39.4% 41.8% ==== ==== ====
Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. The categories of assets and liabilities that have resulted in differences in the timing of the recognition of income and expense were as follows:
1998 1997 ------- ------- (IN THOUSANDS) Deferred income tax assets: Postretirement benefits other than pensions...... $12,878 $12,751 Reserves......................................... 10,005 9,596 Inventory valuation.............................. 5,352 5,409 Accrued vacation................................. 4,200 4,279 Other items...................................... 4,218 2,806 ------- ------- Total deferred income tax assets................... 36,653 34,841 ------- ------- Deferred income tax liabilities: Bases of property, plant and equipment........... 1,619 248 ------- ------- Total deferred income tax liabilities.............. 1,619 248 ------- ------- Net deferred income tax asset...................... $35,034 $34,593 ======= =======
NOTE 9. PENSION PLANS Certain Teledyne Technologies employees participate in the noncontributory defined benefit plan sponsored by Allegheny Teledyne. Benefits under the defined benefit plan are generally based on years of service and/or final average pay. Allegheny Teledyne funds the pension plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. Net periodic pension income or expense allocated to Teledyne Technologies was $1,719,000 income, $722,000 expense and $965,000 income in the years ended December 31, 1998, 1997 and 1996, respectively. It is intended that as of the spin-off date, Teledyne Technologies will assume the existing defined benefit plan obligations for all of Teledyne Technologies' employees, both F-16 100 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) active and inactive, at its companies that perform government contract work and for Teledyne Technologies' active employees at its companies that do not perform government contract work. Allegheny Teledyne will transfer sufficient pension assets to fund the new Teledyne Technologies defined benefit pension plan such that at the time of the transfer, pension assets will exceed pension obligations by approximately $50,000,000. As a result, it is anticipated that Teledyne Technologies will not have to make contributions to the pension plan for the foreseeable future. Additionally, in accordance with Internal Revenue Code regulations, the Company would be able to recover from the excess pension assets amounts paid for retiree medical expenses. Teledyne Technologies also participates in a defined contribution plan sponsored by Allegheny Teledyne maintained for substantially all of its employees. The costs associated with this plan were $3,323,000, $1,209,000 and $1,266,000 in 1998, 1997 and 1996, respectively. It is intended that Teledyne Technologies will establish its own defined contribution plan subsequent to the distribution. NOTE 10. POSTRETIREMENT BENEFITS The Company sponsors several postretirement defined benefit plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for eligible retirees. Components of postretirement benefit expense included the following:
EXPENSE (INCOME) ----------------------------- OTHER POSTRETIREMENT BENEFITS ----------------------------- 1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Service cost -- benefits earned during the year..... $ 341 $ 356 $ 326 Interest cost on benefits earned in prior years..... 1,647 1,761 1,779 Amortization of prior service cost.................. (381) (381) (381) Amortization of net actuarial gain.................. (128) -- -- ------ ------ ------ Total benefit expense............................... $1,479 $1,736 $1,724 ====== ====== ======
Discount rates of 7.0%, 7.25% and 7.5% were used to develop postretirement benefit expense for the years ended December 31, 1998, 1997 and 1996, respectively. Discount rates of 7.0% at December 31, 1998 and 1997 were used for the valuation of postretirement obligations. F-17 101 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The accrued benefit cost at December 31, 1998 and 1997 was as follows:
OTHER POSTRETIREMENT BENEFITS -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year............ $26,634 $25,577 Service cost....................................... 341 356 Interest cost...................................... 1,647 1,761 Benefits paid...................................... (1,322) (1,314) Net actuarial (gains) and losses................... (2,230) 254 ------- ------- Benefit obligation at end of year.................. 25,070 26,634 ------- ------- Funded status of the plan.......................... 25,070 26,634 Unrecognized net actuarial gain.................... 6,399 4,298 Unrecognized prior service cost.................... 1,484 1,865 ------- ------- Accrued benefit cost............................... $32,953 $32,797 ======= =======
The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans was 8.16 percent in 1999 and was assumed to decrease to 5.0 percent in the year 2002 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE POINT INCREASE POINT INCREASE -------------- -------------- (IN THOUSANDS) Effect on total of service and interest cost components for the year ended December 31, 1998...................... $ 296 $ (253) Effect on postretirement benefit obligation at December 31, 1998........ $3,042 $(2,658)
NOTE 11. BUSINESS SEGMENTS Teledyne Technologies is a leading provider of sophisticated electronic and communications products, systems engineering solutions and information technology services, and aerospace engines and components. Its customers include aerospace prime contractors, general aviation companies, government agencies and major communications and other commercial companies. Teledyne Technologies operates in three business segments: Electronics and Communications, Systems Engineering Solutions and Aerospace Engines and Components. F-18 102 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Information on the Company's business segments was as follows:
1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Sales: Electronics and Communications.............. $342,110 $340,034 $313,488 Systems Engineering Solutions............... 223,185 210,375 216,090 Aerospace Engines and Components............ 215,098 206,192 186,822 -------- -------- -------- Total sales................................... $780,393 $756,601 $716,400 ======== ======== ========
The Company's backlog of confirmed orders was approximately $401,778,000 at December 31, 1998 and $388,804,000 at December 31, 1997.
1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Sales to the U.S. Government including direct sales as prime contractor and indirect sales as subcontractor: Electronics and Communications.............. $102,448 $102,714 $114,806 Systems Engineering Solutions............... 159,206 157,958 169,372 Aerospace Engines and Components............ 46,787 42,608 32,539 -------- -------- -------- Total sales to U.S. Government................ $308,441 $303,280 $316,717 ======== ======== ========
Sales to the U.S. Government included sales to the Department of Defense of $214,093,000 in 1998, $198,522,000 in 1997 and $193,450,000 in 1996. Total international sales were $172,920,000 in 1998, $159,212,000 in 1997 and $164,213,000 in 1996. Of these amounts, sales by operations in the United States to customers in other countries were $159,308,000 in 1998, $143,981,000 in 1997 and $144,362,000 in 1996. There were no sales to individual countries outside of the United States in excess of 10 percent of the Company's net sales. Sales between business segments, which were not material, generally were priced at prevailing market prices. F-19 103 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Operating profit: Electronics and Communications.............. $ 42,620 $ 36,787 $ 37,907 Systems Engineering Solutions............... 20,543 13,117 19,880 Aerospace Engines and Components............ 26,072 24,950 17,444 -------- -------- -------- Total operating profit........................ 89,235 74,854 75,231 Corporate expense............................. (7,804) (7,566) (7,164) Other income.................................. 1,562 1,399 1,855 -------- -------- -------- Income before income taxes.................... $ 82,993 $ 68,687 $ 69,922 ======== ======== ======== Depreciation and amortization: Electronics and Communications.............. $ 5,731 $ 5,735 $ 5,079 Systems Engineering Solutions............... 2,857 3,047 2,977 Aerospace Engines and Components............ 2,544 2,503 3,104 -------- -------- -------- $ 11,132 $ 11,285 $ 11,160 ======== ======== ======== Capital expenditures: Electronics and Communications.............. $ 10,300 $ 10,793 $ 9,425 Systems Engineering Solutions............... 2,612 2,343 3,004 Aerospace Engines and Components............ 5,153 2,686 3,410 -------- -------- -------- $ 18,065 $ 15,822 $ 15,839 ======== ======== ======== Identifiable assets: Electronics and Communications.............. $ 96,152 $ 93,048 $ 95,993 Systems Engineering Solutions............... 63,438 70,745 68,784 Aerospace Engines and Components............ 56,195 56,980 53,336 Corporate................................... 35,034 34,593 34,848 -------- -------- -------- $250,819 $255,366 $252,961 ======== ======== ========
NOTE 12. COMMITMENTS AND CONTINGENCIES Rental expense under operating leases was $10,424,000 in 1998, $10,179,000 in 1997 and $11,800,000 in 1996. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year as of December 31, 1998, were as follows: $9,017,000 in 1999, $5,393,000 in 2000, $5,051,000 in 2001, $4,812,000 in 2002, $2,418,000 in 2003 and $6,869,000 thereafter. The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company has been identified as a potentially F-20 104 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) responsible party at approximately 17 such sites, excluding those at which the Company believes it has no future liability. The Company recognized income of $469,000 in 1998 and $708,000 in 1996 as a result of favorable negotiations with other potentially responsible parties related to their level of financial responsibility for environmental remediation costs. In 1997, the Company recognized expense of $765,000 related to changes in environmental obligations. In accordance with the Company's accounting policy disclosed in Note 2, environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceeds, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but the amounts, and the possible range of loss in excess of the amounts accrued, are not reasonably estimable. Based on currently available information, however, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. At December 31, 1998, the Company's reserves for environmental remediation obligations totaled approximately $1,600,000, of which approximately $823,000 were included in other current liabilities. The reserve includes estimated probable future costs of $1,022,000 for federal Superfund and comparable state-managed sites; $359,000 for formerly owned or operated sites for which the Company has remediation or indemnification obligations; and $219,000 for sites utilized by the Company in its ongoing operations. The Company is evaluating whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties other than participating potentially responsible parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites with which it has been identified in up to thirty years. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. Although such claims are generally F-21 105 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. However, although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. The Company learns from time to time that it has been named as a defendant in civil actions filed under seal pursuant to the False Claims Act. Generally, since such cases are under seal, the Company does not in all cases possess sufficient information to determine whether the Company could sustain a material loss in connection with such cases, or to reasonably estimate the amount of any loss attributable to such cases. In connection with the spin-off, Allegheny Teledyne received a tax ruling from the Internal Revenue Service stating that the spin-off will be tax-free to Allegheny Teledyne and to Allegheny Teledyne's stockholders. The continuing validity of the Internal Revenue Service tax ruling is subject to certain factual representations and assumptions, including completion of a public offering of the Company's common stock within one year following the spin-off and use of the anticipated gross proceeds of approximately $125 million (less associated costs) for research and development and related capital projects, for the further development of the Company's manufacturing capabilities and for acquisitions and/or joint ventures. Pursuant to the Separation and Distribution Agreement that Teledyne Technologies will sign prior to the spin-off, the Company will agree with Allegheny Teledyne to undertake such a public offering. The Tax Sharing and Indemnification Agreement between Allegheny Teledyne and Teledyne Technologies provides that the Company will indemnify Allegheny Teledyne and its agents and representatives for taxes imposed on, and other amounts paid by, them or ATI's stockholders if the Company takes actions or fails to take actions (such as completing the public offering) that result in the spin-off not qualifying as a tax-free distribution. If the Company were required to so indemnify Allegheny Teledyne, such an obligation could have a material adverse effect on its financial condition, results of operations and cash flow and the amount the Company could be required to pay could exceed its net worth by a substantial amount. A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, patent infringement, commercial, employment and employee benefits. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any F-22 106 NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. NOTE 13. QUARTERLY DATA (UNAUDITED)
QUARTER ENDED ------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- -------------- ------------- (IN THOUSANDS) 1998 -- Sales........................ $198,760 $200,468 $189,462 $191,703 Gross profit................. $ 52,742 $ 55,066 $ 48,616 $ 51,882 Net income................... $ 11,300 $ 13,918 $ 12,585 $ 10,914 1997 -- Sales........................ $182,126 $192,757 $188,388 $193,330 Gross profit................. $ 49,176 $ 49,496 $ 51,859 $ 55,006 Net income................... $ 10,126 $ 8,181 $ 10,854 $ 12,463
In the 1998 third quarter, results reflect the favorable impact of an adjustment to product liability self-insurance reserves as a result of favorable experience. In the 1997 second quarter, nonrecurring expenses, primarily research and development-related expenses for electronic components for aircraft, resulted in declines in operating profit for Teledyne Controls' data acquisition and communication products. F-23 107 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) SALES.................................................... $602,978 $588,690 Costs and expenses: Cost of sales.......................................... 442,146 432,266 Selling, general and administrative expenses........... 100,500 92,911 -------- -------- 542,646 525,177 -------- -------- Earnings before other income............................. 60,332 63,513 Other income............................................. 716 887 -------- -------- INCOME BEFORE INCOME TAXES............................... 61,048 64,400 Provision for income taxes............................... 25,213 26,597 -------- -------- NET INCOME............................................... $ 35,835 $ 37,803 ======== ======== BASIC NET INCOME PER COMMON SHARE........................ $1.30 $1.34 ======== ======== DILUTED NET INCOME PER COMMON SHARE...................... $1.30 $1.34 ======== ========
The accompanying notes are an integral part of these statements. F-24 108 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED BALANCE SHEETS
PRO FORMA CAPITALIZATION HISTORICAL -------------- ---------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1999 1999 1998 -------------- ------------- ------------ (UNAUDITED) (UNAUDITED) (AUDITED) (IN THOUSANDS) ASSETS Cash.......................................... $ -- $ -- Accounts receivable........................... 120,627 103,198 Inventories................................... 53,852 53,186 Deferred income taxes......................... 18,855 12,913 Prepaid expenses and other current assets..... 2,157 1,751 --------- --------- TOTAL CURRENT ASSETS...................... 195,491 171,048 Property, plant and equipment................. 50,453 43,022 Deferred income taxes......................... 17,232 22,121 Cost in excess of net assets acquired......... 9,201 9,370 Other assets.................................. 5,120 5,258 --------- --------- TOTAL ASSETS.............................. $ 277,497 $ 250,819 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable.............................. $ 51,224 $ 43,344 Accrued liabilities........................... 51,182 49,136 --------- --------- TOTAL CURRENT LIABILITIES................. 102,406 92,480 Long-term debt................................ $ 100,000 -- -- Accrued postretirement benefits............... 33,337 32,953 Other long-term liabilities................... 15,384 18,984 --------- --------- TOTAL LIABILITIES......................... 151,127 144,417 --------- --------- STOCKHOLDER'S EQUITY: Preferred stock, par value $0.01: authorized -- 15,000,000 shares; issued and outstanding -- none................... -- -- -- Common stock, par value $0.01: authorized -- 125,000,000 shares; issued and outstanding -- 27,008,553 shares...... 270 -- -- Additional paid-in capital.................. 11,172 -- -- Net advances from Allegheny Teledyne........ -- 124,750 104,682 Foreign currency translation gains.......... 1,620 1,620 1,720 --------- --------- --------- TOTAL STOCKHOLDER'S EQUITY................ 13,062 126,370 106,402 --------- --------- --------- TOTAL CAPITALIZATION...................... $ 113,062 ========= TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................. $ 277,497 $ 250,819 ========= =========
The accompanying notes are an integral part of these statements. F-25 109 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income................................................ $ 35,835 $ 37,803 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 9,044 8,358 Deferred income taxes................................ (1,053) (8,766) Gain on sale of property, plant and equipment........ -- (427) Change in operating assets and liabilities: Accounts receivable.................................. (17,429) 14,215 Accounts payable..................................... 7,880 (350) Other long-term liabilities.......................... (3,600) 1,350 Accrued liabilities.................................. 2,046 (104) Inventories.......................................... (666) (5,477) Accrued postretirement............................... 384 (104) Other................................................... (846) (1,260) -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES................ 31,595 45,238 -------- -------- INVESTING ACTIVITIES: Purchases of property, plant and equipment.............. (16,089) (9,503) Disposals of property, plant and equipment.............. -- 719 Other................................................... 261 1,415 -------- -------- CASH USED IN INVESTING ACTIVITIES.................... (15,828) (7,369) -------- -------- FINANCING ACTIVITIES: Net advances to Allegheny Teledyne...................... (15,767) (37,869) -------- -------- CASH USED IN FINANCING ACTIVITIES.................... (15,767) (37,869) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... -- -- Cash and cash equivalents at beginning of year............ -- -- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ -- $ -- ======== ========
The accompanying notes are an integral part of these statements. F-26 110 TELEDYNE TECHNOLOGIES INCORPORATED COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
ADVANCES ACCUMULATED (TO) FROM OTHER ALLEGHENY COMPREHENSIVE STOCKHOLDER'S TELEDYNE INCOME EQUITY --------- ------------- ------------- (IN THOUSANDS) BALANCE, DECEMBER 31, 1997............. $107,451 $1,914 $109,365 ======== ====== ======== Net income............................. 37,803 -- 37,803 Other comprehensive income, net of tax: Foreign currency translation losses.... -- (242) (242) -------- ------ -------- Comprehensive income................... 37,803 (242) 37,561 Net transactions with Allegheny Teledyne............................. (37,869) -- (37,869) -------- ------ -------- BALANCE, SEPTEMBER 30, 1998............ $107,385 $1,672 $109,057 ======== ====== ======== BALANCE, DECEMBER 31, 1998............. $104,682 $1,720 $106,402 ======== ====== ======== Net income............................. 35,835 -- 35,835 Other comprehensive income, net of tax: Foreign currency translation losses.... -- (100) (100) -------- ------ -------- Comprehensive income................... 35,835 (100) 35,735 Net transactions with Allegheny Teledyne............................. (15,767) -- (15,767) -------- ------ -------- BALANCE, SEPTEMBER 30, 1999............ $124,750 $1,620 $126,370 ======== ====== ========
The accompanying notes are an integral part of these statements. F-27 111 NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION These interim combined financial statements include the accounts of Teledyne Technologies Incorporated and its subsidiaries ("Teledyne Technologies" or the "Company"). These unaudited combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited combined financial statements should be read in conjunction with the annual combined historical financial statements and notes thereto included in this Information Statement. The results of operations for these interim periods are not necessarily indicative of the operating results for a full year. The average number of shares of Teledyne Technologies common stock used in the computation of basic net income per common share was 27,481,371 and 28,126,024 for the nine months ended September 30, 1999 and 1998, respectively, based on a distribution ratio of one share of Teledyne Technologies common stock for every seven shares of Allegheny Teledyne common stock. The average number of shares of Teledyne Technologies common stock used in the computation of diluted net income per common share was 27,506,953 and 28,154,010 for the nine months ended September 30 1999 and 1998, respectively. A distribution ratio of one share of Teledyne Technologies common stock for every seven shares of Allegheny Teledyne common stock was used to adjust the stock options. The actual stock option adjustment will be based upon the relation of the market price of Allegheny Teledyne common stock prior to the spin-off to the market price of Teledyne Technologies after the spin-off and therefore cannot be determined at the present time. FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133" was issued. This statement delays the effective date of Statement No. 133 to all fiscal quarters beginning after June 15, 2000. The Company is presently evaluating the effect of adopting these statements. F-28 112 NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. INVENTORIES
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (IN THOUSANDS) Raw materials and supplies................. $ 25,177 $ 23,296 Work-in-process............................ 65,684 65,296 Finished goods............................. 9,398 10,385 -------- -------- Total inventories at current cost.......... 100,259 98,977 Less allowances to reduce current cost values to LIFO basis..................... (39,364) (39,043) Progress payments.......................... (7,043) (6,748) -------- -------- Total inventories.......................... $ 53,852 $ 53,186 ======== ========
NOTE 3. BUSINESS SEGMENTS Information on the Company's business segments for the nine months ended September 30, 1999 and 1998 was as follows:
1999 1998 -------- -------- (IN THOUSANDS) Sales: Electronics and Communications................... $258,710 $261,950 Systems Engineering Solutions.................. 166,535 165,465 Aerospace Engines and Components............... 177,733 161,275 -------- -------- Total sales................................. $602,978 $588,690 ======== ======== Operating profit: Electronics and Communications................. $ 31,277 $ 33,081 Systems Engineering Solutions.................. 13,308 14,227 Aerospace Engines and Components............... 21,777 22,092 -------- -------- Total operating profit........................... 66,362 69,400 Corporate expense................................ (6,030) (5,887) Other income..................................... 716 887 -------- -------- Income before income taxes....................... $ 61,048 $ 64,400 ======== ========
NOTE 4. COMMITMENTS AND CONTINGENCIES The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party under the federal Superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under these laws. The Company recognized expense related F-29 113 NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED) to changes in environmental obligations of $60,000 for the nine months ended September 30, 1999 and income of $681,000 for the nine months ended September 30, 1998. In accordance with the Company's accounting policy, environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceeds, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but the amounts, and the possible range of loss in excess of the amounts accrued, are not reasonably estimable. Based on currently available information, however, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. At September 30, 1999, the Company's reserves for environmental remediation obligations totaled approximately $1,334,000, of which approximately $922,100 were included in other current liabilities. The reserve includes estimated probable future costs of $782,400 for federal Superfund and comparable state-managed sites; $292,000 for formerly owned or operated sites for which the Company has remediation or indemnification obligations; and $259,600 for sites utilized by the Company in its ongoing operations. The Company is evaluating whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties other than participating potentially responsible parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites with which it has been identified in up to thirty years. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classifications and actions under the False Claims Act. Although such claims are generally resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or F-30 114 NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED) more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. However, although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. The Company learns from time to time that it has been named as a defendant in civil actions filed under seal pursuant to the False Claims Act. Generally, since such cases are under seal, the Company does not in all cases possess sufficient information to determine whether the Company could sustain a material loss in connection with such cases, or to reasonably estimate the amount of any loss attributable to such cases. In connection with the spin-off, Allegheny Teledyne received a tax ruling from the Internal Revenue Service stating that the spin-off will be tax-free to Allegheny Teledyne and to Allegheny Teledyne's stockholders. The continuing validity of the Internal Revenue Service tax ruling is subject to certain factual representations and assumptions, including completion of a public offering of the Company's common stock within one year following the spin-off and use of the anticipated gross proceeds of approximately $125 million (less associated costs) for research and development and related capital projects, for the further development of the Company's manufacturing capabilities and for acquisitions and/or joint ventures. Pursuant to the Separation and Distribution Agreement that Teledyne Technologies will sign prior to the spin-off, the Company will agree with Allegheny Teledyne to undertake such a public offering. The Tax Sharing and Indemnification Agreement between Allegheny Teledyne and Teledyne Technologies will provide that the Company will indemnify Allegheny Teledyne and its agents and representatives for taxes imposed on, and other amounts paid by, them or ATI's stockholders if the Company takes actions or fails to take actions (such as completing the public offering) that result in the spin-off not qualifying as a tax-free distribution. If the Company were required to so indemnify Allegheny Teledyne, such an obligation could have a material adverse effect on its financial condition, results of operations and cash flow and the amount the Company could be required to pay could exceed its net worth by a substantial amount. A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, patent infringement, commercial, employment and employee benefits. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company's financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company's results of operations for that period. F-31 115 NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. UNAUDITED PRO FORMA CAPITALIZATION The unaudited pro forma capitalization at September 30, 1999 presented on the balance sheet was prepared assuming the distribution occurred on September 30, 1999 and includes the following transactions that occurred subsequent to September 30, 1999: (a) Recording debt of $100,000,000 to be assumed by Teledyne Technologies at the date of the spin-off. (b) Recording the transfer of net unrecognized actuarial gains on pension obligation, insurance reserves, deferred compensation long-term assets and liabilities and deferred taxes. (c) Recording the planned liquidation of the remaining investment by Allegheny Teledyne and the issuance of 27,008,553 shares of Teledyne Technologies common stock. F-32 116 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Form of Separation and Distribution Agreement by and among Allegheny Teledyne Incorporated, TDY Holdings, LLC, Teledyne Industries, Inc. and Teledyne Technologies Incorporated* 3.1 Form of Restated Certificate of Incorporation of Teledyne Technologies Incorporated* 3.2 Form of Amended and Restated Bylaws of Teledyne Technologies Incorporated* 4.1 Specimen Certificate for Common Stock of Teledyne Technologies Incorporated* 4.2 Form of Rights Agreement between Teledyne Technologies Incorporated and ChaseMellon Shareholder Services, L.L.C.* 4.3 Form of Credit Agreement among Allegheny Teledyne Incorporated, Teledyne Technologies Incorporated, Bank of America, N.A., as Administrative Agent, Swing Line Lender and Issuing Lender, and the other financial institutions party thereto. 10.1 Form of Tax Sharing and Indemnification Agreement between Allegheny Teledyne Incorporated and Teledyne Technologies Incorporated* 10.2 Form of Interim Services Agreement between Allegheny Teledyne Incorporated and Teledyne Technologies Incorporated* 10.3 Form of Employee Benefits Agreement between Allegheny Teledyne Incorporated and Teledyne Technologies Incorporated* 10.4 Form of Trademark License Agreement between Allegheny Teledyne Incorporated and Teledyne Technologies Incorporated* 10.5 Form of Teledyne Technologies Incorporated 1999 Incentive Plan* 10.6 Form of Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan* 10.7 Form of Fee Continuation Plan for Non-Employee Directors* 21 Significant Subsidiary of Teledyne Technologies Incorporated* 27 Financial Data Schedule
- --------------- * Previously filed. 117 SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. TELEDYNE TECHNOLOGIES INCORPORATED (Registrant) By: /s/ ROBERT MEHRABIAN ----------------------------------- Name: Robert Mehrabian Title: President and Chief Executive Officer Date: October 29, 1999 EX-4.3 2 EXHIBIT 4.3 1 Exhibit 4.3 ================================================================================ FORM OF CREDIT AGREEMENT AMONG ALLEGHENY TELEDYNE INCORPORATED, TELEDYNE TECHNOLOGIES INCORPORATED AND BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT, SWING LINE LENDER AND ISSUING LENDER AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO DATED AS OF OCTOBER 29, 1999 MELLON BANK, N.A. AND THE CHASE MANHATTAN BANK, AS SYNDICATION AGENTS, AND BANC OF AMERICA SECURITIES LLC, AS SOLE ARRANGER AND SOLE BOOK MANAGER [Bank of America Logo] ================================================================================ 2 TABLE OF CONTENTS
Section Page - ------- ---- SECTION 1. DEFINITIONS AND ACCOUNTING TERMS................................................................1 1.01 Defined Terms...................................................................................1 1.02 Use of Certain Terms...........................................................................26 1.03 Accounting Terms...............................................................................26 1.04 Rounding.......................................................................................26 1.05 Exhibits and Schedules.........................................................................27 1.06 References to Agreements and Laws..............................................................27 SECTION 2. THE COMMITMENTS AND EXTENSIONS OF CREDIT.......................................................27 2.01 Amount and Terms of Commitments................................................................27 2.02 Borrowings, Conversions and Continuations of Loans.............................................27 2.03 Letters of Credit..............................................................................28 2.04 Swing Line.....................................................................................33 2.05 Prepayments....................................................................................34 2.06 Reduction or Termination of Commitments........................................................35 2.07 Principal and Interest.........................................................................35 2.08 Fees...........................................................................................35 2.09 Computation of Interest and Fees...............................................................36 2.10 Making Payments................................................................................37 2.11 Funding Sources................................................................................38 2.12 Release of ALT.................................................................................38 SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY.........................................................38 3.01 Taxes..........................................................................................38 3.02 Illegality.....................................................................................39 3.03 Inability to Determine Rates...................................................................40 3.04 Increased Cost and Reduced Return; Capital Adequacy............................................40 3.05 Breakfunding Costs.............................................................................41 3.06 Matters Applicable to all Requests for Compensation............................................41 3.07 Survival.......................................................................................41 SECTION 4. CONDITIONS PRECEDENT...........................................................................41 4.01 Conditions to Effectiveness of the Credit Agreement............................................41 4.02 Conditions of Initial Extension of Credit to ALT...............................................44 4.03 Conditions to Assumption of Obligations and Initial Extensions of Credit to TTI................46 4.04 Conditions to all Extensions of Credit.........................................................48 SECTION 5. REPRESENTATIONS AND WARRANTIES.................................................................48 5.01 Existence and Qualification; Power; Compliance with Laws.......................................49 5.02 Power; Authorization; Enforceable Obligations..................................................49
-i- 3 5.03 No Legal Bar...................................................................................49 5.04 Financial Statements; No Material Adverse Effect...............................................50 5.05 Litigation.....................................................................................50 5.06 No Default.....................................................................................50 5.07 Ownership of Property; Liens...................................................................51 5.08 Taxes..........................................................................................51 5.09 Margin Regulations; Investment Company Act; Public Utility Holding Company Act.................51 5.10 ERISA Compliance...............................................................................51 5.11 Intellectual Property..........................................................................52 5.12 Compliance With Laws...........................................................................52 5.13 Environmental Compliance.......................................................................52 5.14 Insurance......................................................................................52 5.15 Year 2000......................................................................................52 5.16 Disclosure.....................................................................................53 5.17 Solvency.......................................................................................53 SECTION 6. AFFIRMATIVE COVENANTS..........................................................................53 6.01 Financial Statements...........................................................................53 6.02 Certificates, Notices and Other Information....................................................54 6.03 Payment of Taxes...............................................................................55 6.04 Preservation of Existence......................................................................55 6.05 Maintenance of Properties......................................................................55 6.06 Maintenance of Insurance.......................................................................55 6.07 Compliance With Laws...........................................................................56 6.08 Inspection Rights..............................................................................56 6.09 Keeping of Records and Books of Account........................................................56 6.10 Compliance with ERISA..........................................................................56 6.11 Compliance With Agreements.....................................................................56 6.12 Use of Proceeds................................................................................56 6.13 Additional Borrower Parties....................................................................57 SECTION 7. NEGATIVE COVENANTS.............................................................................57 7.01 Indebtedness...................................................................................57 7.02 Liens..........................................................................................58 7.03 Fundamental Changes............................................................................59 7.04 Dispositions...................................................................................60 7.05 Investments....................................................................................60 7.06 Restricted Payments............................................................................61 7.07 ERISA..........................................................................................61 7.08 Limitation on Nature of Business...............................................................61 7.09 Transactions with Affiliates...................................................................61 7.10 Hostile Acquisitions...........................................................................61 7.11 Limitations on Upstreaming, etc................................................................61 7.12 Financial Covenants............................................................................62
-ii- 4 7.13 Limitation on Amendments to Spinoff Documents..................................................62 7.14 ALT Subordination Agreement....................................................................62 SECTION 8. EVENTS OF DEFAULT AND REMEDIES.................................................................62 8.01 Events of Default..............................................................................62 8.02 Remedies Upon Event of Default.................................................................65 SECTION 9. ADMINISTRATIVE AGENT...........................................................................66 9.01 Appointment and Authorization of Administrative Agent..........................................66 9.02 Delegation of Duties...........................................................................67 9.03 Liability of Administrative Agent..............................................................67 9.04 Reliance by Administrative Agent...............................................................68 9.05 Notice of Default..............................................................................68 9.06 Credit Decision; Disclosure of Information by Administrative Agent.............................69 9.07 Indemnification of Administrative Agent........................................................69 9.08 Administrative Agent in Individual Capacity....................................................70 9.09 Successor Administrative Agent.................................................................70 SECTION 10. MISCELLANEOUS..................................................................................71 10.01 Amendments; Consents...........................................................................71 10.02 Release of Collateral..........................................................................72 10.03 Transmission and Effectiveness of Notices and Signatures.......................................72 10.04 Attorney Costs, Expenses and Taxes.............................................................73 10.05 Binding Effect; Assignment.....................................................................74 10.06 Set-off........................................................................................75 10.07 Sharing of Payments............................................................................75 10.08 No Waiver; Cumulative Remedies.................................................................76 10.09 Usury..........................................................................................77 10.10 Counterparts...................................................................................77 10.11 Integration....................................................................................77 10.12 Nature of Lenders' Obligations.................................................................77 10.13 Survival of Representations and Warranties.....................................................77 10.14 Indemnity by Borrower..........................................................................78 10.15 Nonliability of Lenders........................................................................78 10.16 No Third Parties Benefited.....................................................................79 10.17 Severability...................................................................................79 10.18 Confidentiality................................................................................79 10.19 Further Assurances.............................................................................80 10.20 Headings.......................................................................................80 10.21 Time of the Essence............................................................................80 10.22 Foreign Lenders and Participants...............................................................80 10.23 Removal and/or Replacement of Lenders..........................................................81 10.24 Governing Law..................................................................................82 10.25 Waiver of Right to Trial by Jury; Other Waivers................................................82 10.26 Entire Agreement...............................................................................83
-iii- 5 EXHIBITS FORM OF A Request for Extension of Credit B Compliance Certificate C Note D Notice of Assignment and Acceptance E-1 Opinions of Counsel on the Signing Date E-2 Opinions of Counsel on the ALT Closing Date E-3 Opinions of Counsel on the TTI Closing Date F ALT Global Note G Guaranty H Pledge Agreement I ALT Subordination Agreement J Assumption Agreement SCHEDULES 1.01 Consolidated EBITDA 2.01 Commitments and Pro Rata Shares 7.01(b) Existing Indebtedness of TTI and its Subsidiaries 7.02(a) Liens of TTI and its Subsidiaries 7.05(a) Investments by TTI and its Subsidiaries 10.03 Eurodollar and Domestic Lending Offices, Addresses for Notices -iv- 6 CREDIT AGREEMENT This CREDIT AGREEMENT is entered into as of October 29, 1999, by and among ALLEGHENY TELEDYNE INCORPORATED, a Delaware corporation ("ALT"), TELEDYNE TECHNOLOGIES INCORPORATED, a Delaware corporation ("TTI"), each lender from time to time party hereto (collectively, "Lenders" and individually, a "Lender"), and BANK OF AMERICA, N.A., as Administrative Agent, Issuing Lender and Swing Line Lender. BANC OF AMERICA SECURITIES LLC has acted as sole arranger and sole book manager. RECITALS WHEREAS, ALT has incorporated TTI, a wholly-owned Subsidiary of ALT, for the purpose of effecting the transfer by ALT to TTI of certain assets and liabilities and operations of the Aerospace and Electronics segment of ALT (the "Line of Business Transfer") in accordance with the Spinoff Documents (as defined below). WHEREAS, following consummation of the Line of Business Transfer, ALT will make a distribution of all the capital stock of TTI to the stockholders of ALT (the "Spinoff") in accordance with the Spinoff Documents (as defined below). WHEREAS, ALT and TTI have requested that Lenders make credit facilities available to ALT and TTI for the purposes set forth herein. NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree intending to be legally bound as follows: AGREEMENT SECTION 1. DEFINITIONS AND ACCOUNTING TERMS 1.01 DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings set forth below: "Acquired Indebtedness" means Indebtedness of any Person that becomes a Subsidiary of TTI or Indebtedness directly attributable to assets acquired by TTI or any of its Subsidiaries, in each case, after the TTI Closing Date pursuant to a Permitted Acquisition, if such Indebtedness was outstanding prior to the time such Person became a Subsidiary of TTI or such assets were so acquired and was not created in contemplation of or in connection with such Person becoming a Subsidiary of TTI or the acquisition of such assets and constitutes either (i) obligations under capital leases or (ii) purchase money or other Indebtedness incurred to finance the acquisition of fixed or capital assets and otherwise satisfying the requirements of Section 7.02(f). "Acquisition" means the acquisition, in one transaction or a series of transactions, by Borrower or any of its Subsidiaries of all or substantially all the stock, partnership or other equity -1- 7 interests or assets of any other Person or all or substantially all of the assets of any division or business of any other Person. "Acquisition Consideration" means the purchase consideration for any Permitted Acquisition and all other payments made and liabilities incurred by Borrower or any of its Subsidiaries in exchange for, or as part of, or in connection with, any Permitted Acquisition, whether paid in cash or by exchange of assets or otherwise and whether payable at or prior to the consummation of such Permitted Acquisition or deferred for payment at any future time, whether or not any such future payment is subject to the occurrence of any contingency, and includes any and all payments and liabilities representing the purchase price and any assumptions of liabilities, "earn-outs" and other Profit Payment Agreements, consulting agreements, services agreements and non-competition agreements and other liabilities of every type and description. "Administrative Agent" means Bank of America, N.A., in its capacity as administrative agent under any of the Loan Documents, and any successor administrative agent. "Administrative Agent's Office" means Administrative Agent's address and, as appropriate, account as set forth on Schedule 10.03, or such other address or account as Administrative Agent hereafter may designate by written notice to Borrower and Lenders. "Administrative Agent-Related Persons" means Administrative Agent (including any successor agent), together with its Affiliates (including, in the case of Administrative Agent, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Affiliate" means any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agreement" means this Credit Agreement, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. "ALT" has the meaning set forth in the introductory paragraph hereto. "ALT Closing Date" means the date on which all the conditions precedent in Section 4.02 are satisfied or waived in accordance with Section 4.02, which date shall be no later than November 24, 1999. "ALT Global Note" means the promissory note made by Borrower in favor of Administrative Agent for the account of Lenders, substantially in the form of Exhibit F. "ALT Subordination Agreement" means the ALT subordination agreement in the form of Exhibit I. -2- 8 "Applicable Amount" means (a) prior to the consummation of a Qualified Public Offering, (i) with respect to the Facility Fee, .35%, (ii) with respect to the Utilization Fee, 0.0%, (iii) with respect to the Base Rate, 0.75%, and (iv) with respect to the Eurodollar Rate and Letters of Credit, 1.15%, and (b) from and after the consummation of a Qualified Public Offering, the following amounts per annum, based upon the Capitalization Ratio as set forth in the then most recent Compliance Certificate received by Administrative Agent pursuant to Section 6.02(b) (provided, however, that, if this clause (b) is applicable, until Administrative Agent receives the first Compliance Certificate after the TTI Closing Date, such amounts shall be those indicated for pricing level I set forth below):
PRICING CAPITALIZATION FACILITY UTILIZATION BASE EURODOLLAR RATE/ LEVEL RATIO FEE FEE RATE LETTERS OF CREDIT - -------------------------------------------------------------------------------------------------------------------- I Greater than or equal to 55% .35% .25% .50% .90% II Greater than or equal to 45% .30% .25% .375% .825% III Greater than or equal to 35% .25% .25% .125% .625% IV Less than 35% .20% .125% 0% .55%
The Applicable Amount shall be in effect from the date the most recent Compliance Certificate is received by Administrative Agent to but excluding the date the next Compliance Certificate is received; provided, however, that if Borrower fails to timely deliver the next Compliance Certificate, the Applicable Amount from the date such Compliance Certificate was due to but excluding the date such Compliance Certificate is received by Administrative Agent shall be the highest pricing level set forth above, and, thereafter, the pricing level indicated by such Compliance Certificate when received. "Applicable Payment Date" means, (a) as to any Eurodollar Rate Loan, the last day of the relevant Interest Period and any date that such Loan is prepaid or converted in whole or in part and the Maturity Date; provided, however, that if any Interest Period for a Eurodollar Rate Loan exceeds three months, interest shall also be paid on the date which falls every three months after the beginning of such Interest Period, and (b) as to any other Obligations, the last Business Day of each calendar quarter and the Maturity Date; provided, further, that interest accruing at the Default Rate shall be payable from time to time at any time upon written demand of Administrative Agent. "Arranger" means Banc of America Securities LLC, in its capacity as sole arranger and sole book manager. "Assumption Agreement" means an assumption agreement in the form of Exhibit J. -3- 9 "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel and the allocated cost of internal legal services and all disbursements of internal counsel. "Audited ALT Financial Statements" means the audited consolidated balance sheet of ALT and its Subsidiaries for the fiscal year ended December 31, 1998, and the related consolidated statements of income and cash flows for such fiscal year of ALT. "Audited TTI Financial Statements" means, collectively, (i) the audited combined balance sheet of TTI for the fiscal years ended December 31, 1997 and December 31, 1998, and (ii) the combined statements of income, stockholders equity and cash flows for the fiscal years ended December 31, 1996, December 31, 1997 and December 31, 1998. "Bank of America" means Bank of America, N.A. "Base Rate" means, for any day, a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate." Such prime rate is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan which bears interest based on the Base Rate. "Borrower" means (i) on or prior to the TTI Closing Date and the assumption by TTI pursuant to the Assumption Agreement of ALT's Obligations (other than ALT's Obligations under the ALT Subordination Agreement), ALT, and (ii) thereafter, TTI. "Borrower Party" means Borrower or any Person other than Lenders and any Affiliates of Lenders, Administrative Agent and Issuing Lender from time to time party to a Loan Document. "Borrowing" and "Borrow" each mean, a borrowing hereunder consisting of Loans of the same type made on the same day and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means the date that a Loan is made, which shall be a Business Day. "Business Day" means any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where Administrative Agent's Office is located or the State of California and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market. -4- 10 "Capitalization Ratio" means, as of any date of determination, for Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) Consolidated Total Indebtedness as of such date to (b) Consolidated Total Capitalization as of such date. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means all property of the Borrower Parties, now owned or hereafter acquired, with respect to which a Lien is purported to be created by the Pledge Agreement. "Collateral Release Date" means the date on which each of the following shall have occurred: (i) TTI shall have consummated a Qualified Public Offering on or before the date that is 12 months after the ALT Closing Date, (ii) no Default or Event of Default shall have occurred and be continuing, (iii) Borrower shall have delivered to Administrative Agent a written request for the release of the Collateral and a certificate of the chief financial officer of Borrower certifying that the requirements of clauses (i) and (ii) of this definition have been satisfied. "Commitment" means, for each Lender, the obligation of such Lender to make Extensions of Credit in an aggregate principal amount not exceeding the amount set forth opposite such Lender's name on Schedule 2.01 at any one time outstanding, as such amount may be reduced or adjusted from time to time in accordance with this Agreement (collectively, the "combined Commitments"). "Compliance Certificate" means a certificate in the form of Exhibit B, properly completed and signed by a Responsible Officer of Borrower. "Consolidated EBIT" means, for any period, for TTI and its Subsidiaries on a consolidated basis, an amount equal to the sum of (a) Consolidated Net Income (excluding gains or losses from Dispositions of assets), (b) Consolidated Interest Charges, and (c) the amount of taxes, based on or measured by income, used or included in the determination of such Consolidated Net Income. "Consolidated EBITDA" means, for any period, for TTI and its Subsidiaries on a consolidated basis, an amount equal to the sum of (a) Consolidated Net Income (excluding gains or losses from Dispositions of assets), (b) Consolidated Interest Charges, (c) the amount of taxes, based on or measured by income, used or included in the determination of such Consolidated Net Income, and (d) the amount of depreciation and amortization expense deducted in determining such Consolidated Net Income; provided that for purposes of calculating Consolidated EBITDA of TTI and its Subsidiaries for any period, (i) the Consolidated EBITDA of any Person or assets acquired by TTI and its Subsidiaries in a Permitted Acquisition during such period shall be included on a pro forma basis for such period (assuming the consummation of such Permitted Acquisition occurred on the first day of such period) if the consolidated balance sheet of such acquired Person and its consolidated Subsidiaries (or, in the case of a Permitted Acquisition of assets, a consolidated balance sheet reflecting such assets in a manner satisfactory to Administrative Agent) as at the end of the period preceding the acquisition of such Person or assets and the related consolidated statements of income and stockholders' equity and of cash -5- 11 flows for the period in respect of which Consolidated EBITDA is to be calculated either (1) have been reported on without a qualification arising out of the scope of the audit by independent certified public accountants of nationally recognized standing or (2) have been reasonably approved by Administrative Agent and (ii) the Consolidated EBITDA of any Person or assets Disposed of by TTI or its Subsidiaries during such period shall be excluded for such period (assuming the consummation of such Disposition and the repayment of any Indebtedness in connection therewith occurred on the first day of such period). "Consolidated Interest Charges" means, for any period, for TTI and its Subsidiaries on a consolidated basis, the sum of all interest, premium payments, fees, charges and related expenses payable for such period by TTI and its Subsidiaries in connection with Indebtedness (including capitalized interest and other fees and charges incurred under any asset securitization program), in each case to the extent treated as interest in accordance with GAAP (including any such amounts payable in respect of Indebtedness of any Person acquired during such period and in respect of Indebtedness incurred in connection with such acquisition, in each case as if such Indebtedness was incurred on the first day of such period); provided that, for purposes of calculating the Interest Coverage Ratio and the Leverage Ratio only, "Consolidated Interest Charges" shall include, for any period, rent payable for such period by TTI and its Subsidiaries pursuant to any Synthetic Lease Obligations. "Consolidated Net Income" means, for any period, for TTI and its Subsidiaries on a consolidated basis, the net income of TTI and its Subsidiaries from continuing operations after extraordinary items for that period, determined in accordance with GAAP. "Consolidated Net Worth" means, as of any date of determination, for TTI and its Subsidiaries on a consolidated basis, Stockholders' Equity of TTI and its Subsidiaries on that date, determined in accordance with GAAP. "Consolidated Total Assets" means, as of any date of determination, for TTI and its Subsidiaries on a consolidated basis, the value of all properties and all right, title and interest in such properties which would be classified as assets of TTI and its Subsidiaries, determined in accordance with GAAP. "Consolidated Total Capitalization" means, as of any date of determination, the sum of (i) Consolidated Total Indebtedness, and (ii) Consolidated Net Worth, in each case as of such date. "Consolidated Total Indebtedness" means, as of any date of determination, for TTI and its Subsidiaries on a consolidated basis, the sum of (a) the outstanding principal amount of all obligations and liabilities of TTI and its Subsidiaries, whether current or long-term, for borrowed money (including Extensions of Credit hereunder), (b) that portion of obligations with respect to capital leases that are capitalized in the consolidated balance sheet of TTI and its Subsidiaries, (c) without duplication, all Guaranty Obligations with respect to Indebtedness of the type specified in subsections (a) and (b) above of Persons other than TTI or any of its Subsidiaries, (d) the outstanding principal amount of all obligations and liabilities, whether current or long-term, -6- 12 associated with any sale by TTI or any of its Subsidiaries of its accounts receivable, (e) Synthetic Lease Obligations of TTI and its Subsidiaries, (f) Indebtedness of TTI and its Subsidiaries in respect of Swap Contracts, in each case, determined in accordance with GAAP, (g) Joint Venture Indebtedness of TTI and its Subsidiaries, and (h) Indebtedness of the type described in clause (b) of the definition of Indebtedness. "Continuation" and "Continue" mean, with respect to any Eurodollar Rate Loan, the continuation of such Eurodollar Rate Loan as a Eurodollar Rate Loan on the last day of the Interest Period for such Loan. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Conversion" and "Convert" mean, with respect to any Loan, the conversion of such Loan from or into another type of Loan. "Debtor Relief Laws" means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States of America or other applicable jurisdictions from time to time in effect affecting the rights of creditors generally. "Default" means any event that, with the giving of any notice, the passage of time, or both, would be an Event of Default. "Default Rate" means an interest rate equal to the Base Rate plus the Applicable Amount, if any, applicable to Base Rate Loans plus 2% per annum, to the fullest extent permitted by applicable Laws; provided, however, that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Amount) otherwise applicable to such Loan plus 2% per annum. "Designated Deposit Account" means a deposit account reasonably acceptable to Administrative Agent, as from time to time designated by Borrower by written notification to Administrative Agent. "Disposition" means the sale, transfer, license (excluding any license on reasonable terms for fair value) or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal with or without recourse of any notes or accounts receivable or any rights and claims associated therewith, and the terms "Dispose" and "Disposed of" have correlative meanings. "Dollar" and "$" means lawful money of the United States of America. "Eligible Assignee" means (a) a financial institution organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least -7- 13 $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Lender, (ii) a Subsidiary of a Person of which a Lender is a Subsidiary, or (iii) a Person of which a Lender is a Subsidiary; (d) another Lender; or (e) other lenders or institutional investors consented to in writing in advance by Administrative Agent and, so long as no Default or Event of Default shall have occurred and be continuing, Borrower. No Borrower Party or any Affiliate of a Borrower Party shall be an Eligible Assignee. "Environmental Laws" means all foreign, federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case relating to environmental, health, safety and land use matters applicable to any property. "ERISA" means the Employee Retirement Income Security Act of 1974 and any regulations issued pursuant thereto, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with Borrower within the meaning of Sections 414(b) or (c) of the Code (and Sections 414(m) or (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA), a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA, or the termination of a Pension Plan subject to Section 4064 of ERISA; (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate. "Eurodollar Base Rate" has the meaning set forth in the definition of Eurodollar Rate. "Eurodollar Rate" means for any Interest Period with respect to any Eurodollar Rate Loan, a rate per annum determined by Administrative Agent pursuant to the following formula: -8- 14 Eurodollar Rate = Eurodollar Base Rate ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Base Rate" means, for such Interest Period: (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Administrative Agent to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by Administrative Agent as the rate of interest at which dollar deposits (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Eurodollar Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "Eurodollar Rate Loan" means a Loan bearing interest based on the Eurodollar Rate. "Event of Default" means any of the events specified in Section 8. -9- 15 "Existing ALT Credit Agreement" means that certain Credit Agreement, dated as of August 30, 1996, among ALT, the lenders from time to time parties thereto, Bank of America Illinois, The Chase Manhattan Bank, Mellon Bank, N.A. and PNC Bank, National Association, as managing agents, and PNC Bank, National Association, as documentation and administrative agent, as amended by First Amendment to Credit Agreement, dated as of August 31, 1997, Second Amendment to Credit Agreement, dated as of March 24, 1998, Third Amendment to Credit Agreement dated as of March 30, 1999, and Fourth Amendment to Credit Agreement and Waiver, dated as of August 6, 1999. "Extension of Credit" means (a) the Borrowing of Loans, (b) the Conversion or Continuation of any Loans, or (c) any Letter of Credit Action which has the effect of increasing the amount of any Letter of Credit, extending the maturity of any Letter of Credit or making any material modification to any Letter of Credit or the reimbursement of drawings thereunder (collectively, the "Extensions of Credit"). "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Bank of America on such day on such transactions as determined by Administrative Agent. "Foreign Subsidiary" means any "controlled foreign corporation" within the meaning of Section 957(a) of the Code as to which TTI or any of its Subsidiaries is a "United States shareholder" as defined in Section 951(b) of the Code; provided that a "controlled foreign corporation" that is treated as a pass through entity for United States federal income tax purposes shall not be a Foreign Subsidiary while so treated. "Form 10" means TTI's Form 10 Registration Statement, as filed with the Securities and Exchange Commission on September 13, 1999, including, without limitation, the information statement contained therein, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination, consistently applied. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either Borrower or the Required Lenders shall so request, Administrative Agent, Lenders and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of, and to reflect, -10- 16 such change in GAAP (subject to the approval of the Required Lenders), provided that, until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (b) Borrower shall provide to Administrative Agent and Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. "Governing State" means the State of New York. "Governmental Authority" means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality, central bank or public body, or (c) any court, administrative tribunal or public utility. "Guaranty" means collectively, (i) the guaranty substantially in the form of Exhibit G, and (ii) any supplements thereto substantially in the form of Annex A to Exhibit G executed and delivered pursuant to Section 6.13. "Guarantor" means each Material Subsidiary of TTI (other than any Foreign Subsidiary) that is a party to the Guaranty. "Guaranty Obligation" means, as to any Person, any (a) guaranty by that Person of Indebtedness of, or other obligation payable by, any other Person or (b) agreement, undertaking or arrangement given by that Person to an obligee of any other Person with respect to the payment of an obligation by, or the financial condition of, such other Person, whether direct, indirect or contingent, including any purchase or repurchase agreement covering such obligation or any collateral security therefor, any agreement to provide funds (by means of loans, capital contributions or otherwise) to such other Person, any agreement to support the solvency or level of any balance sheet item of such other Person or any "keep-well" or other arrangement of whatever nature given for the purpose of assuring or holding harmless such obligee against loss with respect to any obligation of such other Person; provided, however, that the term Guaranty Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guaranty Obligation shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, covered by such Guaranty Obligation or, if not stated or determinable, the reasonably anticipated liability in respect thereof as determined by the Person in good faith. "Indebtedness" means, as to any Person at any time, all items which would, in conformity with GAAP, be classified as indebtedness on a balance sheet of such Person at such time, but in any event including: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; -11- 17 (b) any direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), banker's acceptances, bank guaranties, surety bonds and similar instruments; provided that any obligations of such Person arising under a performance letter of credit or a surety bond shall constitute Indebtedness only to the extent of any monetary obligation thereunder; (c) net obligations under any Swap Contract in an amount equal to (i) if such Swap Contract has been closed out, any outstanding termination value thereof, or (ii) if such Swap Contract has not been closed out, the mark-to-market value thereof determined on the basis of readily available quotations provided by any recognized dealer in such type of Swap Contract; (d) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (e) lease payment obligations under capital leases or Synthetic Lease Obligations; (f) all Guaranty Obligations of such Person in respect of any of the foregoing; (g) obligations and liabilities associated with any sale by such Person of its accounts receivable; (h) Joint Venture Indebtedness; and (i) trade and other accounts payable in the ordinary course of business in accordance with customary trade terms which are overdue for a period of more than 90 days (unless disputed by such Person in good faith). "Indemnified Liabilities" has the meaning set forth in Section 10.14. "Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) Consolidated EBIT for the period of the four prior fiscal quarters ending on such date (or, if the number of fiscal quarters of TTI ending after the Signing Date is less than four, such number of fiscal quarters) to (b) Consolidated Interest Charges during such period. "Interest Period" means, for each Eurodollar Rate Loan as requested by Borrower, (a) initially, the period commencing on the date such Eurodollar Rate Loan is disbursed, Continued as, or Converted into, a Eurodollar Rate Loan and (b) thereafter, the period commencing on the last day of the preceding Interest Period, and ending, in each case, on the earlier of (x) the scheduled Maturity Date, or (y) one, two, three or six months thereafter; provided that: -12- 18 (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) unless Administrative Agent otherwise consents, there may not be more than 10 Interest Periods in effect at any time. "Investment" means, as to any Person, any acquisition or any investment by such Person, whether by means of the purchase or other acquisition of stock or other securities of any other Person or by means of a loan, creating a debt, capital contribution, guaranty or other debt or equity participation or interest in any other Person, including any partnership and joint venture interests in such other Person. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment. "IRS" means the Internal Revenue Service. "Issuing Lender" means Bank of America, or any successor issuing lender hereunder. "Joint Venture Indebtedness" means, as to any Person at any time, all Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer, unless and to the extent (i) such Indebtedness is expressly made non-recourse to such Person except for customary exceptions, (ii) such Person is otherwise protected (including, without limitation, pursuant to indemnification agreements) from liability for such Indebtedness in a manner reasonably satisfactory to Required Lenders, or (iii) under applicable Law, the holders of the ownership interests in such partnership or joint venture are not liable for such Indebtedness. "Laws" or "Law" means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, in each case whether or not having the force of law. "Lender" means each lender from time to time party hereto, Issuing Lender and Swing Line Lender. "Lending Office" means, as to any Lender, the office or offices of such Lender described as such on Schedule 10.03, or such other office or offices as such Lender may from time to time notify Borrower and Administrative Agent. -13- 19 "Letter of Credit" means any letter of credit issued or outstanding hereunder. A Letter of Credit may be a standby letter of credit only. "Letter of Credit Action" means the issuance, supplement, amendment, renewal, extension, modification or other action relating to a Letter of Credit. "Letter of Credit Application" means an application for a Letter of Credit Action as shall at any time be in use by Issuing Lender. "Letter of Credit Cash Collateral Account" means a blocked deposit account at Bank of America with respect to which Borrower hereby grants a security interest in such account to Administrative Agent for and on behalf of Lenders as security for Letter of Credit Usage and with respect to which Borrower agrees to execute and deliver from time to time such documentation as Administrative Agent may reasonably request to further assure and confirm such security interest. "Letter of Credit Commitment" means an amount equal to the lesser of the combined Commitments and $25,000,000. "Letter of Credit Expiration Date" means the date which is 5 days prior to the Maturity Date. "Letter of Credit Usage" means, as at any date of determination, the aggregate undrawn face amount of outstanding Letters of Credit plus the aggregate amount of all drawings under the Letters of Credit honored by Issuing Lender and not reimbursed to Issuing Lender by Borrower or converted into Loans. "Leverage Ratio" means, as of any date of determination, for TTI and its Subsidiaries on a consolidated basis, the ratio of (a) Consolidated Total Indebtedness as of such date (in the case of periods prior to the consummation of the Spinoff, giving pro forma effect to the Line of Business Transfer and the Spinoff) to (b) Consolidated EBITDA for the period of the four fiscal quarters ending immediately prior to that date; provided, however, that for purposes of determining Consolidated EBITDA for any period of four fiscal quarters that includes the quarters ended December 31, 1998, March 31, 1999, June 30, 1999 or September 30, 1999, Consolidated EBITDA for such fiscal quarters shall be as set forth on Schedule 1.01 (which shall give pro forma effect to the Line of Business Transfer and the Spinoff and shall be subject to adjustments for Permitted Acquisitions occurring after the TTI Closing Date as described in the definition of "Consolidated EBITDA"); provided further that, for purposes of calculating Consolidated Total Indebtedness for purposes of the Leverage Ratio only, in the event that there are no Outstanding Obligations, the amount of Consolidated Total Indebtedness shall be reduced by an amount equal to the amount, if any, by which the amount set forth opposite the line-item "cash and cash equivalents" on the balance sheet of TTI as of the date of determination exceeds $10,000,000. -14- 20 "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement (in the nature of compensating balances, cash collateral accounts or security interests), encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable. "Line of Business Transfer" has the meaning set forth in the recitals hereto. "Loan" means any advance made by any Lender to Borrower as provided in Section 2 (collectively, the "Loans"). "Loan Documents" means this Agreement, the Guaranty, the Pledge Agreement, the ALT Subordination Agreement, the Assumption Agreement, any Letter of Credit Application, any Request for Extension of Credit, the ALT Global Note, any Note and any certificate, any fee letter, any commitment letter, and other instrument, document or agreement from time to time delivered in connection with this Agreement. "Material Adverse Effect" means any set of circumstances or events which (a) has or would reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of any Loan Document, (b) is or would reasonably be expected to be material and adverse to the condition (financial or otherwise), business, assets, operations or liabilities (contingent or otherwise) of Borrower and its Subsidiaries taken as a whole, or (c) materially impairs or would reasonably be expected to materially impair the ability of any Borrower and its Subsidiaries taken as a whole to perform the Obligations. For purposes of this definition, the phrase "Borrower and its Subsidiaries" means (i) on and prior to the consummation of the Spinoff and the assumption by TTI of ALT's Obligations (other than ALT's Obligations under the ALT Subordination Agreement) pursuant to the Assumption Agreement, each of (a) ALT and its Subsidiaries, or (b) the assets and liabilities and operations of the Aerospace and Electronics segment of ALT intended to be transferred in connection with the Line of Business Transfer to TTI and its Subsidiaries, and (ii) following the consummation of the Spinoff and the assumption by TTI of ALT's Obligations (other than ALT's Obligations under the ALT Subordination Agreement) pursuant to the Assumption Agreement, TTI and its Subsidiaries. "Material Division" means, as of any date of determination, any division of TTI or any of its Subsidiaries that has on such date (i) Total Assets constituting ten percent or more of Consolidated Total Assets or (ii) total revenues constituting ten percent or more of the consolidated total revenues of TTI and its Subsidiaries, determined in accordance with GAAP. "Material Subsidiary" means, as of any date of determination, any Subsidiary of TTI that has on such date (i) Total Assets constituting ten percent or more of Consolidated Total Assets or (ii) total revenues constituting ten percent or more of the consolidated total revenues of TTI and its Subsidiaries, determined in accordance with GAAP. -15- 21 "Maturity Date" means (i) if the ALT Closing Date does not occur on or before November 24, 1999, November 24, 1999, (ii) if the TTI Closing Date does not occur on or before the date that is one month following the ALT Closing Date, the date that is one month following the ALT Closing Date, (iii) otherwise, the date that is five years following the ALT Closing Date, in each case, as it may be earlier terminated or extended in accordance with the terms hereof. "Minimum Amount" means, with respect to each of the following actions, the minimum amount and any multiples in excess thereof set forth opposite such action:
MINIMUM INCREMENTS IN TYPE OF ACTION AMOUNT EXCESS THEREOF ------------------------------------------------------------------------------- Borrowing of, prepayment of, or $ 500,000 $ 100,000 Conversion into, Base Rate Loans Borrowing of, prepayment of, $ 5,000,000 $ 1,000,000 Continuation of, or Conversion into, Eurodollar Rate Loans Borrowing of, or prepayment of, $ 100,000 None Swing Line Loans Letter of Credit Action $ 50,000 None Reduction in Commitments $ 1,000,000 $ 500,000 Assignments $10,000,000 $ 1,000,000
"Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. "Notes" means, collectively each promissory note made by Borrower in favor of a Lender evidencing Loans made by such Lender, substantially in the form of Exhibit C. "Notice of Assignment and Acceptance" means a Notice of Assignment and Acceptance substantially in the form of Exhibit D. "Obligations" means all advances to, and debts, liabilities, obligations (including, without limitation, obligations to provide cash collateral and indemnification obligations), covenants and duties of, any Borrower Party arising under any Loan Document, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and including interest that accrues after the commencement of any proceeding under any Debtor Relief Laws by or against any Borrower Party or any Subsidiary or Affiliate of any Borrower Party. "Ordinary Course Dispositions" means: -16- 22 (a) Dispositions of obsolete or worn out property, whether now owned or hereafter acquired, in the ordinary course of business; (b) Dispositions of cash, cash equivalents, inventory and other property in the ordinary course of business; (c) Dispositions of property in the ordinary course of business to the extent that such property is exchanged for credit against the purchase price of similar replacement property, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement property or where TTI or its Subsidiary determine in good faith that the failure to replace such equipment will not be detrimental to the business of TTI or such Subsidiary; and (d) Dispositions of assets or property by any Subsidiary of TTI to TTI or another wholly-owned Solvent Subsidiary of TTI; provided, however, that no such Disposition shall be for less than the fair market value of the property being disposed of. "Ordinary Course Indebtedness" means: (a) Indebtedness under the Loan Documents; (b) intercompany Guaranty Obligations of TTI or any of its Subsidiaries guarantying Indebtedness and other obligations otherwise permitted hereunder of TTI or any wholly-owned Subsidiary of TTI; (c) Indebtedness arising from the honoring of a check, draft or similar instrument against insufficient funds; and (d) Ordinary Course Swap Obligations. "Ordinary Course Investments" means: (a) Investments consisting of cash and cash equivalents; (b) Investments consisting of advances to officers, directors and employees of TTI and its Subsidiaries for travel, entertainment, relocation and analogous ordinary business purposes; (c) Investments of TTI in any Guarantor and Investments of any Subsidiary of TTI in TTI or any Guarantor; (d) Investments consisting of or evidencing the extension of credit to customers or suppliers of TTI and its Subsidiaries in the ordinary course of business and any Investments received in satisfaction or partial satisfaction thereof; and -17- 23 (e) Investments consisting of Guaranty Obligations permitted by Section 7.01. "Ordinary Course Liens" means: (a) Liens pursuant to any Loan Document; (b) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP; (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person; (d) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of any Person; and (g) attachment, judgment or other similar Liens arising in connection with litigation or other legal proceedings (and not otherwise a Default hereunder) in the ordinary course of business that is currently being contested in good faith by appropriate proceedings, so long as adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP and no material property is subject to a material risk of loss or forfeiture. "Ordinary Course Swap Obligations" means all obligations (contingent or otherwise) of TTI or any Subsidiary existing or arising under any Swap Contract, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain (i) any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party, or (ii) any provision creating or permitting the declaration of -18- 24 an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder (other than an Event of Default under Section 8.01(f)(ii)). "Organization Documents" means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws; (b) with respect to any limited liability company, the articles of formation and operating agreement; and (c) with respect to any partnership, joint venture or other form of business entity, the partnership agreement and any agreement, filing or notice with respect thereto filed with the secretary of state of the state of its formation, in each case as amended from time to time. "Outstanding Obligations" means, as of any date, and giving effect to making any Extensions of Credit requested on such date and all payments, repayments and prepayments made on such date, (a) when reference is made to all Lenders, the sum of (i) the aggregate outstanding principal amount of all Loans, and (ii) all Letter of Credit Usage, and (b) when reference is made to one Lender the sum of (i) the aggregate outstanding principal amount of all Loans (excluding, in the case of the Swing Line Lender, Swing Line Loans) made by such Lender, (ii) such Lender's ratable participation in all Letter of Credit Usage, and (iii) such Lender's ratable participation in all outstanding Swing Line Loans. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto established under ERISA. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by Borrower or any ERISA Affiliates or to which Borrower or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. "Permitted Acquisition" means any non-hostile Acquisition by TTI or any Guarantor if all of the following conditions are met: (a) before and immediately after giving effect thereto, (i) no Default or Event of Default has occurred and is continuing or would result therefrom, and (ii) the representations and warranties of each Borrower Party set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Acquisition, as though made on and as of such date, other than any such representations or warranties that by their terms refer to a date other than the date of such Acquisition, in which case such representations and warranties shall be true and correct in all material respects as of such other date; (b) such Acquisition has not been preceded by an unsolicited tender offer for such Person by TTI or any of its Affiliates; -19- 25 (c) all transactions related thereto shall be consummated in all material respects in accordance with applicable Laws; (d) in the case of any Acquisition of shares, partnership interests or other equity interests in any Person, such Acquisition is an Acquisition of at least 80% of the equity interests in such Person and, after giving effect to such Acquisition, such Person becomes an at least 80%-owned Subsidiary of TTI; (e) all actions required to be taken, if any, with respect to any acquired or newly formed Material Subsidiary under Section 6.13 shall have been taken; (f) such assets are used for, or such Person is engaged in, a line of business permitted under Section 7.08; (g) after giving pro forma effect to such Acquisition, (A) TTI would have been in compliance with the covenants set forth in Section 7.12 as of the last day of TTI's fiscal quarter most recently ended prior to the consummation of such Acquisition, and (B) based solely on TTI's then-current good faith and reasonable financial projections for the fiscal quarter ending after the consummation of such Acquisition and the succeeding three quarters and without any assurance that such projections will be achieved, TTI can reasonably be expected to remain in compliance with such covenants for the twelve-month period following the consummation of such Acquisition, and to have sufficient cash liquidity to conduct its business, to support working capital requirements and pay its debts and other liabilities as they become due and otherwise remain Solvent; (h) neither TTI nor any of its Subsidiaries shall incur, assume or otherwise become liable for or subject to any Indebtedness in connection with such Acquisition except for Indebtedness permitted by Section 7.01; and (i) the assets acquired in such Acquisition shall be acquired free and clear of all Liens other than Ordinary Course Liens and Liens permitted by Section 7.02(g) or Section 7.02(i). "Person" means any individual, trustee, corporation, general partnership, limited partnership, limited liability company, joint stock company, trust, unincorporated organization, bank, business association, firm, joint venture, Governmental Authority, or otherwise. "Plan" means any employee benefit plan maintained or contributed to by a Borrower Party or by any trade or business (whether or not incorporated) under common control with a Borrower Party as defined in Section 4001(b) of ERISA and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Pledge Agreement" means, collectively, (i) the pledge agreement executed and delivered by TTI, substantially in the form of Exhibit H, and (ii) any supplements thereto substantially in the form of Annex A to Exhibit H executed and delivered pursuant to Section 6.13. -20- 26 "Private Letter Ruling" mean an IRS private letter ruling confirming the tax free treatment of the Spinoff under Section 355 of the Code, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. "Profit Payment Agreement" means any agreement to make any payment the amount of which is, or the terms of payment of which are, in any respect subject to or contingent upon the revenues, income, cash flow or profits (or the like) of any Person or business. "Pro Rata Share" means, with respect to each Lender, the percentage of the combined Commitments set forth opposite the name of that Lender on Schedule 2.01, as such share may be adjusted pursuant to Section 10.23. "Qualified Public Offering" means an underwritten public offering, pursuant to an effective registration statement under the Securities Act of 1933, as amended, of shares of common stock of TTI which results in gross proceeds to TTI of not less than $115,000,000. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. "Request for Extension of Credit" means a written request substantially in the form of Exhibit A duly completed and signed by a Responsible Officer, or a telephonic request followed by such a written request, in each case delivered to Administrative Agent by Requisite Notice. In the case of a request for a new or amended Letter of Credit, the written Letter of Credit Application shall be deemed to be the Request for Extension of Credit. "Required Lenders" means (a) as of any date of determination if the Commitments are then in effect, Lenders having in the aggregate more than 50% of the combined Commitments then in effect and (b) as of any date of determination if the Commitments have then been terminated and there are Loans and/or Letter of Credit Usage outstanding, Lenders holding Loans and Letter of Credit Usage aggregating more than 50% of the aggregate outstanding principal amount of the Loans and Letter of Credit Usage. "Requisite Notice" means, unless otherwise provided herein, (a) irrevocable written notice to the intended recipient or (b) except with respect to Letter of Credit Actions (which must be in writing), irrevocable telephonic notice to the intended recipient, promptly followed by a written notice to such recipient. Such notices shall be (i) delivered to such recipient at the address or telephone number specified on Schedule 10.03 or as otherwise designated by such recipient by Requisite Notice to each other party hereto, and (ii) if made by any Borrower Party, given or made by a Responsible Officer of such Borrower Party. Any written notice delivered in connection with any Loan Document shall be in the form, if any, prescribed in the applicable section hereof or thereof and may be delivered as provided in Section 10.03. Any notice sent by other than hardcopy shall be promptly confirmed by a telephone call to the recipient and, if requested by Administrative Agent, by a manually-signed hardcopy thereof. -21- 27 "Requisite Time" means, with respect to any of the actions listed below, the time and date set forth below opposite such action (all times are local time (standard or daylight) as observed in the State of California):
TYPE OF ACTION TIME DATE OF ACTION ----------------------------------------------------------------------------------------------------------------- Delivery of Request for Extension of Credit for, or notice for: o Borrowing of, prepayment of, or 9:00 A.M. Same date as such Borrowing, prepayment or Conversion into, Base Rate Loans Conversion o Borrowing of, prepayment of, Continuation 10:00 A.M. 3 Business Days prior to such Borrowing, of, or Conversion into, prepayment or Conversion Eurodollar Rate Loans o Borrowing of Swing Line Loans 1:00 P.M. Same date as such Borrowing o Prepayment of Swing Line Loans 1:00 P.M. Same date as such prepayment o Letter of Credit Action 10:00 A.M. 2 Business Days prior to such action (or such lesser time which is acceptable to Issuing Lender) o Voluntary reduction in or termination of 10:00 A.M. 2 Business Days prior to such reduction or Commitments termination o Payments by Lenders or Borrower to 11:00 A.M. On date payment is due Administrative Agent
"Responsible Officer" means the president, chief financial officer, treasurer or assistant treasurer of any Borrower Party. Any document or certificate hereunder that is signed by a Responsible Officer of a Borrower Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Borrower Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Borrower Party. "Restricted Payment" means: (a) the declaration or payment of any dividend or distribution by Borrower or any of its Subsidiaries, either in cash or property, on any shares of the capital stock of any class of Borrower or any of its Subsidiaries (except dividends or other distributions payable solely in shares of capital stock of Borrower or any of its Subsidiaries or payable by a Subsidiary to Borrower or another wholly-owned Subsidiary of Borrower that is a Guarantor); (b) the purchase, redemption or retirement by Borrower or any of its Subsidiaries of any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock, whether directly or indirectly; -22- 28 (c) any other payment or distribution by Borrower or any of its Subsidiaries in respect of its capital stock, either directly or indirectly; and (d) any Investment other than an Investment otherwise permitted under any Loan Document. "Separation and Distribution Agreement" means that certain Separation and Distribution Agreement, entered into in connection with the Spinoff, among ALT, TII Holdings, LLC, Teledyne Industries, Inc. and TTI. "Signing Date" means the date on which all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 4.01, which date shall be no later than October 29, 1999. "Solvent" means, when used with respect to any Person, as of any date of determination, that (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state Laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, (d) such Person will be able to pay its debts as they mature, and (e) such Person is not insolvent within the meaning of any applicable Law. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "Spinoff" has the meaning set forth in the introductory paragraph hereto. "Spinoff Documents" means, collectively, (i) the Form 10, (ii) the Private Letter Ruling, (iii) the Separation and Distribution Agreement, (iv) the Tax Sharing and Indemnification Agreement, (v) the Interim Services Agreement, entered into in connection with the Spinoff, between ALT and TTI, (vi) the Employee Benefits Agreement, entered into in connection with the Spinoff, between ALT and TTI, (vii) the Trademark License Agreement, entered into in connection with the Spinoff, among TII Holdings, LLC and TTI, and (viii) and all schedules, exhibits, annexes and amendments thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith. "Stockholders' Equity" means, as of any date of determination for TTI and its Subsidiaries on a consolidated basis, stockholders' equity as of that date determined in accordance with GAAP. -23- 29 "Subsidiary" means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by Borrower. "Swap Contract" means (a) any and all rate swap transactions, basis swaps, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, or (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any other master agreement (any such master agreement, together with any related schedules, as amended, restated, extended, supplemented or otherwise modified in writing from time to time, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, any outstanding termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Lender). "Swing Line" means the revolving line of credit established by Swing Line Lender in favor of Borrower pursuant to Section 2.04. "Swing Line Commitment" means an amount equal to the lesser of (a) $10,000,000 and (b) the combined Commitments. "Swing Line Lender" means Bank of America, or any successor swing line lender hereunder. "Swing Line Loan" means a loan which bears interest at a rate per annum equal to interest payable on a Base Rate Loan (plus the Applicable Amount, if any) and made by Swing Line Lender to Borrower under the Swing Line. -24- 30 "Swing Line Outstandings" means, as of any date, the aggregate principal amount of all outstanding Swing Line Loans. "Synthetic Lease Obligations" means all monetary obligations of a Person under (a) a so-called synthetic or tax retention off-balance sheet lease, or (b) an agreement for the use or possession of property creating obligations which do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the Indebtedness of such Person (without regard to accounting treatment). "Tax Sharing and Indemnification Agreement" means that certain Tax Sharing and Indemnification Agreement, entered into in connection with the Spinoff, between ALT and TTI. "Threshold Amount" means $10,000,000. "Total Assets" means, as of any date of determination, for any Person, the value of all properties and all right, title and interest in such properties which would be classified as assets of such Person, determined in accordance with GAAP. "to the best knowledge of" means, when modifying a representation, warranty or other statement of any Person, that the fact or situation described therein is known by such Person (or, in the case of a Person other than a natural Person, known by any officer of such Person) making the representation, warranty or other statement, or with the exercise of reasonable due diligence under the circumstances (in accordance with the standard of what a reasonable Person in similar circumstances would have done) would have been known by such Person (or, in the case of a Person other than a natural Person, would have been known by an officer of such Person). "TTI" has the meaning set forth in the introductory paragraph hereto. "TTI Closing Date" means the date on which all the conditions precedent in Section 4.03 are satisfied or waived in accordance with Section 4.03, which date shall be no later than the date that is one month following the ALT Closing Date. "TTI Financial Statements" means, collectively, (i) the Audited TTI Financial Statements and (ii) the Unaudited TTI Financial Statements. "TTI Group" means, collectively, TTI and its Subsidiaries. "type", when used with respect to any Loan, means the designation of whether such Loan is a Base Rate Loan or a Eurodollar Rate Loan. "Unaudited TTI Financial Statements" means the unaudited pro forma consolidated statement of income of TTI for the fiscal year ended December 31, 1998, (ii) the unaudited pro forma consolidated balance sheets of TTI as at June 30, 1999 and September 30, 1999, respectively, (iii) the unaudited pro forma consolidated statement of income of TTI for the six months ended June 30, 1999, and (iv) the unaudited pro forma consolidated statement of income of TTI for the nine months ended September 30, 1999. -25- 31 "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "Utilization Fee" has the meaning set forth in Section 2.08(a). "Voting Stock" means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency. 1.02 USE OF CERTAIN TERMS. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. (b) As used herein, unless the context requires otherwise, the masculine, feminine and neuter genders and the singular and plural include one another. (c) The words "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term "including" is by way of example and not limitation. References herein to a Section, subsection or clause shall refer to the appropriate Section, subsection or clause in this Agreement. (d) The term "or" is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the term "may" is permissive. Masculine terms also apply to females; feminine terms also apply to males. 1.03 ACCOUNTING TERMS. All accounting terms not specifically or completely defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. 1.04 ROUNDING. Any financial ratios required to be maintained by Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in this Agreement. -26- 32 1.05 EXHIBITS AND SCHEDULES. All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. 1.06 REFERENCES TO AGREEMENTS AND LAWS. Unless otherwise expressly provided herein, (a) references to the Loan Documents, the Private Letter Ruling, the Form 10 and the other Spinoff Documents shall include all amendments, restatements, extensions, supplements or other modifications thereto in accordance with this Agreement, (b) references to agreements and other contractual instruments (other than those included in clause (a) above) shall include all amendments, restatements, extensions, supplements or other modifications thereto (unless prohibited by any Loan Document), and (c) references to any statute or regulation shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. SECTION 2. THE COMMITMENTS AND EXTENSIONS OF CREDIT 2.01 AMOUNT AND TERMS OF COMMITMENTS. (a) Subject to the terms and conditions set forth in this Agreement, each Lender severally agrees to make, Convert and Continue Loans until the Maturity Date as Borrower may from time to time request; provided, however, that the Outstanding Obligations of each Lender shall not exceed such Lender's Commitment, and the Outstanding Obligations of all Lenders shall not exceed the combined Commitments at any time. Subject to the foregoing and the other terms and conditions hereof, Borrower may borrow, Convert, Continue, prepay and reborrow Loans as set forth herein without premium or penalty. (b) Loans made by each Lender shall be evidenced by one or more loan accounts or records maintained by such Lender in the ordinary course of business. Upon the request of any Lender made through Administrative Agent, such Lender's Loans may be evidenced by one or more Notes, instead of or in addition to loan accounts; provided that Loans made to ALT shall be evidenced by the ALT Global Note only. Each such Lender may attach schedules to its Note(s) and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto. Such loan accounts, records or Notes shall be conclusive absent manifest error of the amount of such Loans and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of Borrower to pay any amount owing with respect to the Loans. 2.02 BORROWINGS, CONVERSIONS AND CONTINUATIONS OF LOANS. (a) Borrower may irrevocably request a Borrowing, Conversion or Continuation of Loans in a Minimum Amount therefor by delivering a Request for Extension of Credit therefor by Requisite Notice to Administrative Agent not later than the Requisite Time therefor. All Borrowings, Conversions and Continuations shall constitute Base Rate Loans unless properly and timely otherwise designated as set forth in the prior sentence. -27- 33 (b) Following receipt of a Request for Extension of Credit, Administrative Agent shall promptly notify each Lender of its Pro Rata Share thereof by Requisite Notice. In the case of a Borrowing of Loans, each Lender shall make the funds for its Loan available to Administrative Agent at Administrative Agent's Office not later than the Requisite Time therefor on the Business Day specified in such Request for Extension of Credit. Upon satisfaction of the applicable conditions set forth in Section 4, all funds so received shall be made available to Borrower in like funds received. (c) Administrative Agent shall promptly notify Borrower and Lenders of the interest rate applicable to any Loan other than a Base Rate Loan upon determination of same. (d) Except as otherwise provided herein, a Eurodollar Rate Loan may be Continued or Converted only on the last day of the Interest Period for such Eurodollar Rate Loan. No Loans may be requested as, Converted into or Continued as Eurodollar Rate Loans during the existence of a Default or Event of Default. During the existence of a Default or Event of Default, the Required Lenders may demand that any or all of the then outstanding Eurodollar Rate Loans be Converted immediately into Base Rate Loans. Such Conversion shall be effective upon notice to Borrower and shall continue so long as such Default or Event of Default continues to exist. (e) If a Loan is to be made on the same date that another Loan is due and payable, Borrower or Lenders, as the case may be, shall, unless Administrative Agent otherwise requests, make available to Administrative Agent the net amount of funds giving effect to both such Loans and the effect for purposes of this Agreement shall be the same as if separate transfers of funds had been made with respect to each such Loan. (f) The failure of any Lender to make any Loan on any date shall not relieve any other Lender of any obligation to make a Loan on such date, but no Lender shall be responsible for the failure of any other Lender to so make its Loan. 2.03 LETTERS OF CREDIT. (a) THE LETTER OF CREDIT COMMITMENT. Subject to the terms and conditions hereof, at any time and from time to time from the TTI Closing Date through the Letter of Credit Expiration Date, Issuing Lender shall take such Letter of Credit Actions under the Commitments as Borrower may request; provided, however, that (i) the Outstanding Obligations of each Lender shall not exceed such Lender's Commitment and the Outstanding Obligations of all Lenders shall not exceed the combined Commitments at any time, and (ii) the aggregate outstanding Letter of Credit Usage shall not exceed the Letter of Credit Commitment at any time. Each Letter of Credit Action shall be in a form reasonably acceptable to Issuing Lender and shall not violate any policies of Issuing Lender. Subject to subsection (f) below and unless consented to by the Issuing Lender and the Required Lenders, no Letter of Credit may expire more than 12 months after the date of its issuance or last renewal; provided, however, that no Letter of Credit shall expire after the Letter of Credit Expiration Date. If any Letter of Credit Usage remains outstanding after the Letter of Credit Expiration Date, Borrower shall, not later than the Letter of -28- 34 Credit Expiration Date, deposit cash in an amount equal to such Letter of Credit Usage in a Letter of Credit Cash Collateral Account. (b) REQUESTING LETTER OF CREDIT ACTIONS. Borrower may irrevocably request a Letter of Credit Action in a Minimum Amount therefor by delivering a Letter of Credit Application therefor to Issuing Lender, with a copy to Administrative Agent (who shall notify Lenders), by Requisite Notice not later than the Requisite Time therefor. Unless Administrative Agent notifies Issuing Lender that such Letter of Credit Action is not permitted hereunder or Issuing Lender determines that such Letter of Credit Action is contrary to any Laws or policies of Issuing Lender or does not otherwise conform to the requirements of this Agreement, Issuing Lender shall effect such Letter of Credit Action. This Agreement shall control in the event of any conflict with any Letter of Credit Application. Upon the issuance of a Letter of Credit, each Lender shall be deemed to have purchased a pro rata participation in such Letter of Credit from Issuing Lender in an amount equal to that Lender's Pro Rata Share. (c) REIMBURSEMENT OF PAYMENTS UNDER LETTERS OF CREDIT. Borrower shall reimburse Issuing Lender through Administrative Agent for any payment that Issuing Lender makes under a Letter of Credit no later than the date of such payment; provided, however, that if the conditions precedent set forth in Section 4 can be satisfied, Borrower may request a Borrowing of Loans to reimburse Issuing Lender for such payment on or before the date thereof by complying with Section 2.02, or Borrower may allow a deemed Borrowing of Loans which are Base Rate Loans to take place on such payment date pursuant to subsection (e) below. (d) FUNDING BY LENDERS WHEN ISSUING LENDER NOT REIMBURSED. Upon any drawing under a Letter of Credit, Issuing Lender shall notify Administrative Agent and Borrower. If Borrower fails to timely make the payment required pursuant to subsection (c) above, Issuing Lender shall notify Administrative Agent of such fact and the amount of such unreimbursed payment. Administrative Agent shall promptly notify each Lender of its Pro Rata Share of such amount by Requisite Notice. Each Lender shall make funds in an amount equal its Pro Rata Share of such amount available to Administrative Agent at Administrative Agent's Office not later than the Requisite Time on the Business Day specified by Administrative Agent, and Administrative Agent shall remit the funds so received to reimburse Issuing Lender. The obligation of each Lender to so reimburse Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrower to reimburse Issuing Lender for the amount of any payment made by Issuing Lender under any Letter of Credit, together with interest as provided herein. (e) NATURE OF LENDERS' FUNDING. If the conditions precedent set forth in Section 4 can be satisfied (except for the giving of a Request for Extension of Credit) on the date Borrower is obligated to make, but fails to make, a reimbursement of a payment under a Letter of Credit, the funding by Lenders pursuant to subsection (d) above shall be deemed to be part of a Borrowing of Loans which are Base Rate Loans (without regard to the Minimum Amount therefor) requested by Borrower. If the conditions precedent set forth in Section 4 cannot be satisfied on the date Borrower is obligated to make, but fails to make, a reimbursement of a -29- 35 payment under a Letter of Credit, the funding by Lenders pursuant to subsection (d) above shall be deemed to be a funding by each Lender of its participation in such Letter of Credit, and such funds shall be payable by Borrower upon demand and shall bear interest at the Default Rate payable on demand, and each Lender making such funding shall thereupon acquire a pro rata participation, to the extent of such reimbursement, in the claim of Issuing Lender against Borrower in respect of such payment and shall share, in accordance with that pro rata participation, in any payment made by Borrower with respect to such claim. If Administrative Agent or Issuing Lender is required at any time to return to Borrower, or to a trustee, receiver, liquidator, custodian, or any official under any proceeding under Debtor Relief Laws, any portion of the payments made by Borrower to Administrative Agent for the account of Issuing Lender pursuant to this subsection in reimbursement of a payment made under a Letter of Credit or interest or fee thereon, each Lender shall, on demand of Administrative Agent, forthwith return to Administrative Agent or Issuing Lender the amount of its Pro Rata Share of any amounts so returned by Administrative Agent or Issuing Lender plus interest thereon from the date such demand is made to the date such amounts are returned by such Lender to Administrative Agent or Issuing Lender, at a rate per annum equal to the daily Federal Funds Rate. (f) SPECIAL PROVISIONS RELATING TO EVERGREEN LETTERS OF CREDIT. Borrower may request Letters of Credit that have automatic extension or renewal provisions ("evergreen" Letters of Credit) so long as Issuing Lender has the right to not permit any such extension or renewal at least annually within a notice period to be agreed upon at the time each such Letter of Credit is issued. Once an evergreen Letter of Credit is issued, unless Administrative Agent has notified Issuing Lender that all Lenders have elected not to permit such extension or renewal, the Borrower Parties, Administrative Agent and Lenders shall be deemed to authorize (but may not require) Issuing Lender to, in its sole and absolute discretion, permit the renewal of such evergreen Letter of Credit at any time to a date not later than the Letter of Credit Expiration Date, and, unless directed by Issuing Lender, Borrower shall not be required to request such extension or renewal. Notwithstanding the foregoing, Issuing Lender may, in its sole and absolute discretion, upon not less than 60 days' advance written notice to Borrower, elect not to permit an evergreen Letter of Credit to be extended or renewed at any time. (g) OBLIGATIONS ABSOLUTE. The obligation of Borrower to pay to Issuing Lender the amount of any payment made by Issuing Lender under any Letter of Credit shall be absolute, unconditional, and irrevocable. Without limiting the foregoing, Borrower's obligation shall not be affected by any of the following circumstances: (i) any lack of validity or enforceability of the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (ii) any amendment or waiver of or any consent to departure from the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (iii) the existence of any claim, setoff, defense, or other rights which Borrower may have at any time against Issuing Lender, Administrative Agent or any Lender, any beneficiary of the Letter of Credit (or any persons or entities for whom any such beneficiary may -30- 36 be acting) or any other Person, whether in connection with the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto, or any unrelated transactions; (iv) any demand, statement, or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever so long as any such document appeared to comply with the terms of the Letter of Credit; (v) payment by Issuing Lender in good faith under the Letter of Credit against presentation of a draft or any accompanying document which does not strictly comply with the terms of the Letter of Credit; or any payment made by Issuing Lender under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Laws; (vi) the existence, character, quality, quantity, condition, packing, value or delivery of any property purported to be represented by documents presented in connection with any Letter of Credit or for any difference between any such property and the character, quality, quantity, condition, or value of such property as described in such documents; (vii) the time, place, manner, order or contents of shipments or deliveries of property as described in documents presented in connection with any Letter of Credit or the existence, nature and extent of any insurance relative thereto; (viii) the solvency or financial responsibility of any party issuing any documents in connection with a Letter of Credit; (ix) any failure or delay in notice of shipments or arrival of any property; (x) any error in the transmission of any message relating to a Letter of Credit not caused by Issuing Lender, or any delay or interruption in any such message; (xi) any error, neglect or default of any correspondent of Issuing Lender in connection with a Letter of Credit; (xii) any consequence arising from acts of God, wars, insurrections, civil unrest, disturbances, labor disputes, emergency conditions or other causes beyond the control of Issuing Lender; (xiii) so long as Issuing Lender in good faith determines that the document appears to comply with the terms of the Letter of Credit, the form, accuracy, genuineness or legal effect of any contract or document referred to in any document submitted to Issuing Lender in connection with a Letter of Credit; and -31- 37 (xiv) where Issuing Lender has acted in good faith under any other circumstances whatsoever. In addition, Borrower will promptly examine a copy of each Letter of Credit and amendments thereto delivered to it and, in the event of any claim of noncompliance with Borrower's instructions or other irregularity, Borrower will promptly notify Issuing Lender in writing. Borrower shall be conclusively deemed to have waived any such claim against Issuing Lender and its correspondents unless such notice is given as aforesaid. (h) ROLE OF ISSUING LENDER. Each Lender and Borrower Party agree that, in paying any drawing under a Letter of Credit, Issuing Lender shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. No Administrative Agent-Related Person nor any of the respective correspondents, participants or assignees of Issuing Lender shall be liable to any Lender for any action taken or omitted in connection herewith at the request or with the approval of Lenders or the Required Lenders, as applicable; any action taken or omitted in the absence of gross negligence or willful misconduct as determined in a final, nonappealable judgment by a court of competent jurisdiction; or the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit. Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude Borrower's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Administrative Agent-Related Person, nor any of the respective correspondents, participants or assignees of Issuing Lender, shall be liable or responsible for any of the matters described in subsection (g) above. In furtherance and not in limitation of the foregoing, Issuing Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and Issuing Lender shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; provided that the Issuing Lender shall be responsible for its gross negligence or willful misconduct as determined in a final, nonappealable judgment by a court of competent jurisdiction. (i) APPLICABILITY OF ISP98. Unless otherwise expressly agreed by the Issuing Lender and Borrower when a Letter of Credit is issued, performance under Letters of Credit by the Issuing Lender, its correspondents, and beneficiaries will be governed by the rules of the "International Standby Practices 1998" (ISP98) or such later revision as may be published by the International Chamber of Commerce. (j) LETTER OF CREDIT FEE. On each Applicable Payment Date, Borrower shall pay to Administrative Agent in arrears, for the account of each Lender in accordance with its Pro Rata Share, a Letter of Credit fee equal to the indicated Applicable Amount for Letters of Credit times the actual daily maximum amount available to be drawn under each Letter of Credit since -32- 38 the later of the TTI Closing Date and the previous Applicable Payment Date. If there is any change in the Applicable Amount during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Amount separately for each period during such quarter that such Applicable Amount was in effect. (k) FRONTING FEE AND DOCUMENTARY AND PROCESSING CHARGES PAYABLE TO ISSUING LENDER. Borrower shall pay to Administrative Agent for the sole account of Issuing Lender a fronting fee in an amount equal to 1/8 of 1% per annum on the daily average face amount thereof, payable quarterly in arrears on each Applicable Payment Date. In addition, Borrower shall pay directly to Issuing Lender for its sole account its customary documentary and processing charges in accordance with its standard schedule, as from time to time in effect, for any Letter of Credit Action or other occurrence relating to a Letter of Credit for which such charges are customarily made. Such fees and charges are nonrefundable. 2.04 SWING LINE. (a) Subject to the terms and conditions set forth in this Agreement, Swing Line Lender agrees to make Swing Line Loans from the TTI Closing Date until the Maturity Date in such amounts as Borrower may from time to time request; provided, however, that (i) the aggregate principal amount of all Swing Line Loans shall not exceed the Swing Line Commitment, and (ii) the Outstanding Obligations of each Lender shall not exceed such Lender's Commitment and the Outstanding Obligations of all Lenders shall not exceed the combined Commitments at any time. No Swing Line Loan shall be made during the continuation of an Event of Default without the consent of the Required Lenders (or, if the waiver of any such Event of Default requires the consent of all Lenders under Section 10.01, all Lenders) and Swing Line Lender. Borrower may borrow, repay and reborrow under this Section. Unless notified to the contrary by Swing Line Lender, Borrowings under the Swing Line shall be made in the Minimum Amount therefor upon Requisite Notice made to Swing Line Lender not later than the Requisite Time therefor. Each such request for a Swing Line Loan shall constitute a representation and warranty by Borrower that the conditions set forth in Sections 4.04(a) and (b) are satisfied. Promptly after receipt of such request, Swing Line Lender shall obtain telephonic verification from Administrative Agent that there is availability for such Swing Line Loan under the Commitments. Unless notified to the contrary by Swing Line Lender, each repayment of a Swing Line Loan shall be made directly to Swing Line Lender in the Minimum Amount therefor by payment or debit at a demand deposit account at the Swing Line Lender. All payments received after the Requisite Time therefor shall be deemed received on the next succeeding Business Day. Swing Line Lender shall promptly notify Administrative Agent of the Swing Line Outstandings each time there is a change therein. Upon the making of a Swing Line Loan, each Lender shall be deemed to have purchased from Swing Line Lender a risk participation therein in an amount equal to that Lender's Pro Rata Share times the amount of the Swing Line Loan. (b) Swing Line Loans shall bear interest at a fluctuating rate per annum equal to the rate of interest payable on Base Rate Loans (plus the Applicable Amount, if any) payable on such dates, not more frequent than monthly, as may be specified by Swing Line Lender and, -33- 39 in any event, on the Maturity Date. Interest on Swing Line Loans shall be payable upon demand of Swing Line Lender, and Swing Line Lender shall be responsible for invoicing Borrower for such interest. The interest payable on Swing Line Loans is solely for the account of Swing Line Lender. (c) Each Swing Line Loan shall be payable on the earliest of (i) the fifth Business Day after it is made and (ii) the Maturity Date. (d) Unless Borrower has made other arrangements satisfactory to Swing Line Lender in Swing Line Lender's sole discretion, if any Swing Line Loan remains outstanding in excess of five consecutive Business Days, then on the next Business Day, Borrower shall repay such Swing Line Loan by payment directly to Swing Line Lender or by debit at a demand deposit account at Swing Line Lender not later than the Requisite Time for payments hereunder. Borrower shall also pay accrued interest on any principal amount so repaid. (e) If Borrower fails to timely make any principal or interest payment required pursuant to subsection (d) above, Swing Line Lender shall notify Administrative Agent of such fact and the unpaid amount. Administrative Agent shall promptly notify each Lender of its Pro Rata Share of such amount by Requisite Notice. Each Lender shall make funds in an amount equal its Pro Rata Share of such amount available to Administrative Agent at Administrative Agent's Office not later than the Requisite Time for payments hereunder on the following Business Day. The obligation of each Lender to make such payment shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default or any other occurrence or event. Any such payment shall not relieve or otherwise impair the obligation of Borrower to repay Swing Line Lender for any amount of Swing Line Loans, together with interest as provided herein. (f) If the conditions precedent set forth in Section 4 can be satisfied (except for the giving of a Request for Extension of Credit) on any date Borrower is obligated to make, but fails to make, a repayment of Swing Line Loans, the funding by Lenders pursuant to subsection (e) above shall be deemed to be part of a Borrowing of Loans which are Base Rate Loans (without regard to the Minimum Amount therefor) requested by Borrower. If the conditions precedent set forth in Section 4 cannot be satisfied on the date Borrower is obligated to make, but fails to make, such payment, the funding by Lenders pursuant to subsection (e) above shall be deemed to be a funding by each Lender of its participation in such Swing Line Loans, and such funds shall be payable by Borrower upon demand and shall bear interest at the Default Rate, and each Lender making such funding shall thereupon acquire a pro rata participation, to the extent of such payment, in the claim of Swing Line Lender against Borrower in respect of such payment and shall share, in accordance with that pro rata participation, in any payment made by Borrower with respect to such claim. 2.05 PREPAYMENTS. (a) Upon Requisite Notice to Administrative Agent not later than the Requisite Time therefor, Borrower may at any time and from time to time voluntarily prepay -34- 40 Loans in part in the Minimum Amount therefor or in full without premium or penalty. Administrative Agent will promptly notify each Lender thereof and of such Lender's Pro Rata Share of such prepayment. Any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest thereon, together with the costs set forth in Section 3.05. (b) If for any reason the Outstanding Obligations exceed the combined Commitments as in effect or as reduced or because of any limitation set forth in this Agreement or otherwise, Borrower shall immediately prepay Loans and/or deposit cash in a Letter of Credit Cash Collateral Account in an aggregate amount equal to such excess. 2.06 REDUCTION OR TERMINATION OF COMMITMENTS. Upon Requisite Notice to Administrative Agent not later than the Requisite Time therefor, Borrower may at any time and from time to time, without premium or penalty, permanently and irrevocably reduce the Commitments in a Minimum Amount therefor to an amount not less than the Outstanding Obligations at such time or terminate the Commitments. Any such reduction or termination shall be accompanied by payment of all accrued and unpaid fees payable under Section 2.08 with respect to the portion of the Commitments being reduced or terminated. Administrative Agent shall promptly notify Lenders of any such request for reduction or termination of the Commitments. Each Lender's Commitment shall be reduced by an amount equal to such Lender's Pro Rata Share times the amount of such reduction. 2.07 PRINCIPAL AND INTEREST. (a) If not sooner paid, Borrower agrees to pay the outstanding principal amount of each Loan on the Maturity Date. (b) Subject to subsection (c) below, Borrower shall pay interest on the unpaid principal amount of each Loan (before and after default, before and after maturity, before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Laws) from the date borrowed until paid in full (whether by acceleration or otherwise) on each Applicable Payment Date at a rate per annum equal to the interest rate determined in accordance with the definition of such type of Loan, plus, to the extent applicable in each case, the Applicable Amount. (c) If any amount payable by any Borrower Party under any Loan Document is not paid when due (without regard to any applicable grace periods), it shall thereafter bear interest (after as well as before entry of judgment thereon to the extent permitted by law) at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Law. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be payable upon demand. 2.08 FEES. (a) UTILIZATION FEE. After the consummation of a Qualified Public Offering, Borrower shall pay to Administrative Agent for the account of each Lender pro rata according to -35- 41 its Pro Rata Share, a utilization fee (the "Utilization Fee") equal to the Applicable Amount times the actual daily amount of the Outstanding Obligations (including Swing Line Loans) in respect of each day on which the actual daily amount of such Outstanding Obligations exceeds an amount equal to 50% of the combined Commitments. The utilization fee shall accrue at all times from and after the consummation of a Qualified Public Offering until the Maturity Date and shall be payable quarterly in arrears on each Applicable Payment Date. The utilization fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Amount during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Amount separately for each period during such quarter that such Applicable Amount was in effect. (b) FACILITY FEE. Borrower shall pay to Administrative Agent for the account of each Lender a facility fee equal to the Applicable Amount times the actual daily amount of each Lender's Commitment, regardless of usage. The facility fee shall accrue at all times from the Signing Date until the Maturity Date and shall be payable quarterly in arrears on each Applicable Payment Date. The facility fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Amount during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Amount separately for each period during such quarter that such Applicable Amount was in effect. The facility fee shall accrue at all times, including at any time during which one or more conditions in Section 4 are not met. (c) AGENT FEES. Borrower shall pay to Administrative Agent an agency fee and such other fees, if any, in such amounts and at such times as set forth in a separate letter agreement or agreements among Borrower, Administrative Agent and Arranger. The agency fee is for the services to be performed by Administrative Agent in acting as Administrative Agent and is fully earned on the date paid. Any such fees paid to Administrative Agent are solely for its own account and are nonrefundable. (d) STRUCTURING AND SYNDICATING FEE. On the Signing Date, Borrower shall pay to the Arranger a structuring and syndicating fee in the amount set forth in a separate letter agreement among Borrower, Administrative Agent and Arranger. Such arrangement fee is for the services of Arranger in structuring and syndicating the credit facilities under this Agreement and is fully earned on the date paid. The structuring and syndicating fee paid to Arranger is solely for its own account and is nonrefundable. (e) LENDERS' UPFRONT FEE. On the earlier of ALT Closing Date and the Maturity Date, Borrower shall pay to Administrative Agent, for the respective accounts of Lenders pro rata according to their Pro Rata Share, an upfront fee in an amount set forth in a separate letter from the Arranger to each Lender and acknowledged by that Lender as the applicable upfront fee for such Lender. Such upfront fees are for the combined Commitments made by each Lender under this Agreement and are fully earned on the date paid. The upfront fee paid to each Lender is solely for its own account and is nonrefundable. 2.09 COMPUTATION OF INTEREST AND FEES. Computation of interest on Base Rate Loans when the Base Rate is determined by Bank of America's "prime rate" shall be calculated on the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed. -36- 42 Computation of all other types of interest and all fees shall be calculated on the basis of a year of 360 days and the actual number of days elapsed, which results in a higher yield to Lenders than a method based on a year of 365 or 366 days. Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall bear interest for one day. 2.10 MAKING PAYMENTS. (a) Except as otherwise provided herein, all payments by Borrower or any Lender shall be made to Administrative Agent at Administrative Agent's Office not later than the Requisite Time for such type of payment. All payments received after such Requisite Time shall be deemed received on the next succeeding Business Day. All payments shall be made in immediately available funds in Dollars. All payments by Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. (b) Upon satisfaction of any applicable terms and conditions set forth herein, Administrative Agent shall promptly make any amounts received in accordance with the prior subsection available in like funds received as follows: (i) if payable to Borrower, by crediting or by wire transfer to the Designated Deposit Account, and (ii) if payable to any Lender, by wire transfer to such Lender at the address specified in Schedule 10.03. (c) Subject to the definition of "Interest Period," if any payment to be made by any Borrower Party shall come due on a day other than a Business Day, payment shall instead be considered due on the next succeeding Business Day, and such extension of time shall be reflected in computing interest and fees. (d) Except as otherwise provided in Section 2.03(c) with respect to Borrower reimbursing drawings under Letters of Credit, unless Borrower or any Lender has notified Administrative Agent prior to the date any payment to be made by it is due, that it does not intend to remit such payment, Administrative Agent may, in its sole and absolute discretion, assume that Borrower or such Lender, as the case may be, has timely remitted such payment and may, in its sole and absolute discretion and in reliance thereon, make available such payment to the Person entitled thereto. If such payment was not in fact remitted to Administrative Agent in immediately available funds, then: (i) if Borrower failed to make such payment, each Lender shall forthwith on demand repay to Administrative Agent the amount of such assumed payment made available to such Lender, together with interest thereon in respect of each day from and including the date such amount was made available by Administrative Agent to such Lender to the date such amount is repaid to Administrative Agent at the Federal Funds Rate; and (ii) if any Lender failed to make such payment, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand -37- 43 therefor, Administrative Agent promptly shall notify Borrower, and Borrower shall pay such corresponding amount to Administrative Agent. Administrative Agent also shall be entitled to recover interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by Administrative Agent to Borrower to the date such corresponding amount is recovered by Administrative Agent, (A) from such Lender at a rate per annum equal to the daily Federal Funds Rate, and (B) from Borrower, at a rate per annum equal to the interest rate applicable to such Borrowing. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment or to prejudice any rights which Administrative Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. 2.11 FUNDING SOURCES. Nothing in this Agreement shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner. 2.12 RELEASE OF ALT. Upon the effectiveness of the assumption by TTI pursuant to the Assumption Agreement of the Obligations of ALT, ALT shall be released in full from such Obligations (other than ALT's Obligations under the ALT Subordination Agreement) and shall have no further Obligations under the Loan Documents (except for its Obligations under the ALT Subordination Agreement), in each case, without further action on the part of Administrative Agent or any Lender. In connection with such release, Administrative Agent shall execute all such further documents and instruments as may be reasonably requested by ALT in order to more fully evidence or effect such release. All such deliveries shall be at the expense of ALT, with no liability to Administrative Agent or any Lender, and with no representation or warranty by or recourse to Administrative Agent or any Lender. Promptly upon the effectiveness of the assumption by TTI pursuant to the Assumption Agreement of the Obligations of ALT, Administrative Agent shall deliver the ALT Global Note to ALT, marked "cancelled". SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 TAXES. (a) Any and all payments by Borrower to or for the account of Administrative Agent or any Lender under any Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of Administrative Agent and any Lender, taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which Administrative Agent or such Lender, as the case may be, is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to Administrative -38- 44 Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), Administrative Agent and such Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Laws, and (iv) within 30 days after the date of such payment, Borrower shall furnish to Administrative Agent (who shall forward the same to such Lender) the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes"). (c) If Borrower shall be required by the Laws of any jurisdiction outside the United States to deduct any Taxes from or in respect of any sum payable under any Loan Document to Administrative Agent or any Lender, Borrower shall also pay to such Lender or Administrative Agent (for the account of such Lender), at the time interest is paid, such additional amount that the respective Lender specifies as necessary to preserve the after-tax yield (after factoring in United States (federal and state) taxes imposed on or measured by net income) the Lender would have received if such deductions (including deductions applicable to additional sums payable under this Section) had not been made. (d) Borrower agrees to indemnify Administrative Agent and each Lender for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by Administrative Agent and such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. The obligations of Borrower under this subsection shall survive payment of all Obligations. 3.02 ILLEGALITY. If any Lender determines that any Laws have made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Rate Loans, or materially restricts the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the applicable eurodollar market, or to determine or charge interest rates based upon the Eurodollar Rate, then, on notice thereof by Lender to Borrower through Administrative Agent, any obligation of that Lender to make Eurodollar Rate Loans shall be suspended until Lender notifies Administrative Agent and Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, Borrower shall, upon demand from such Lender (with a copy to Administrative Agent), prepay or Convert all Eurodollar Rate Loans of that Lender, either on the last day of the Interest Period thereof, if Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if Lender may not lawfully continue to maintain such Eurodollar Rate Loans. Each Lender agrees to designate a different Lending -39- 45 Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender. 3.03 INABILITY TO DETERMINE RATES. If, in connection with any Request for Extension of Credit involving any Eurodollar Rate Loan, Administrative Agent determines that (a) Dollar deposits are not being offered to banks in the applicable eurodollar market for the applicable amount and Interest Period of the requested Eurodollar Rate Loan, (b) adequate and reasonable means do not exist for determining the underlying interest rate for such Eurodollar Rate Loan, or (c) such underlying interest rate does not adequately and fairly reflect the cost to any Lender of funding such Eurodollar Rate Loan, Administrative Agent will promptly notify Borrower and all Lenders. Thereafter, the obligation of all Lenders to make or maintain such Eurodollar Rate Loan shall be suspended until Administrative Agent revokes such notice. Upon receipt of such notice, Borrower may revoke any pending request for a Borrowing of Eurodollar Rate Loans or, failing that, be deemed to have converted such request into a request for a Borrowing of Base Rate Loans in the amount specified therein. 3.04 INCREASED COST AND REDUCED RETURN; CAPITAL ADEQUACY. (a) If after the Signing Date any Lender determines that the adoption of or any change in any Laws or in the interpretation or application thereof or compliance by such Lender therewith: (i) subjects such Lender to any Tax, duty, or other charge with respect to any Eurodollar Rate Loans or its obligation to make Eurodollar Rate Loans, or changes the basis on which taxes are imposed on any amounts payable to such Lender under this Agreement in respect of any Eurodollar Rate Loans; (ii) shall impose or modify any reserve, special deposit, or similar requirement (other than the reserve requirement utilized in the determination of the Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (including its Commitment); or (iii) shall impose on such Lender or on the eurodollar interbank market any other condition affecting this Agreement or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender of making, Converting into, Continuing, or maintaining any Eurodollar Rate Loans or to reduce any sum received or receivable by such Lender under this Agreement with respect to any Eurodollar Rate Loans, then from time to time upon demand of such Lender (with a copy of such demand to Administrative Agent), Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction. (b) If after the Signing Date any Lender determines that any change in or the interpretation of any Laws have the effect of reducing the rate of return on the capital of such -40- 46 Lender or compliance by such Lender (or its Lending Office) or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder (taking into consideration its policies with respect to capital adequacy and such Lender's desired return on capital), then from time to time upon demand of such Lender (with a copy to Administrative Agent), Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such reduction. 3.05 BREAKFUNDING COSTS. Upon demand of any Lender (with a copy to Administrative Agent) from time to time, Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of: (a) any Continuation, Conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or (b) any failure by Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, Continue or Convert any Loan other than a Base Rate Loan on the date or in the amount notified by Borrower; including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing. 3.06 MATTERS APPLICABLE TO ALL REQUESTS FOR COMPENSATION. (a) A certificate of Administrative Agent claiming compensation under this Section 3 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of clearly demonstrable error. In determining such amount, Administrative Agent may use any reasonable averaging and attribution methods. For purposes of this Section 3, a Lender shall be deemed to have funded each Eurodollar Rate Loan at the Eurodollar Base Rate used in determining the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the eurodollar interbank market, whether or not such Eurodollar Rate Loan was in fact so funded. (b) Upon any Lender making a claim for compensation under Sections 3.01 or 3.04, Borrower may remove and replace such Lender in accordance with Section 10.23. 3.07 SURVIVAL. All of Borrower's obligations under this Section 3 shall survive termination of the Commitments and payment in full of all Obligations. SECTION 4. CONDITIONS PRECEDENT 4.01 CONDITIONS TO EFFECTIVENESS OF THE CREDIT AGREEMENT. The effectiveness of this Agreement is subject to satisfaction of the following conditions precedent: -41- 47 (a) Unless waived by all Lenders (or by Administrative Agent with respect to immaterial matters, or items specified in subsections (iv) or (v) below, that the Borrower has given assurances reasonably satisfactory to Administrative Agent that they will be delivered promptly following the Signing Date), Administrative Agent's receipt of the following, each of which shall be originals unless otherwise specified, each properly executed by a Responsible Officer of each applicable Borrower Party, each dated on or about the Signing Date and each in form and substance reasonably satisfactory to Administrative Agent and its legal counsel: (i) executed counterparts of this Agreement and the ALT Subordination Agreement, sufficient in number for distribution to Administrative Agent, Lenders, ALT and TTI; (ii) the ALT Global Note executed by ALT in favor of Administrative Agent for the account of each Lender, in a principal amount equal to the combined Commitments; (iii) such certificates or resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Borrower Party as Administrative Agent may reasonably require to establish the identities of and verify the authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer thereof; (iv) certified copies of each Borrower Party's Organization Documents and a certificate of good standing for each Borrower Party in its jurisdiction of organization; (v) a certificate signed by a Responsible Officer of ALT certifying that (A) the conditions specified in Sections 4.01(c) and 4.01(d) have been satisfied, and (B) there has been no event or circumstance since December 31, 1998 which would reasonably be expected to have a Material Adverse Effect; (vi) opinions of counsel to ALT and TTI substantially in the form of Exhibit E-1 hereto; and (vii) such other assurances, certificates, documents, consents or opinions as Administrative Agent, Issuing Lender or the Required Lenders reasonably may require. (b) Administrative Agent, Arranger, each Lender and/or their respective Affiliates shall have received all fees and expenses required to be paid on or before the Signing Date. (c) The representations and warranties made by Borrower herein, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be true and correct in all material respects on and as of the Signing Date. -42- 48 (d) Each Borrower Party shall be in compliance with all the terms and provisions of the Loan Documents to which it is a party, and no Default or Event of Default shall have occurred and be continuing. (e) Borrower shall have paid all reasonable Attorney Costs of Administrative Agent to the extent invoiced prior to or on the Signing Date, plus such additional amounts of reasonable Attorney Costs as shall constitute its reasonable estimate of reasonable Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between Borrower and Administrative Agent). (f) Administrative Agent and Lenders shall have received the Form 10 and all amendments thereto and the other Spinoff Documents (or, to the extent not then finalized, the then current drafts thereof), including (x) the form and substance of the private letter requests to the IRS regarding the tax free treatment of the Spinoff, (y) the Private Letter Ruling, and (z) all documents relating to the indemnification by TTI of ALT regarding the tax-free treatment of the Spinoff (which indemnification shall be subordinated to the prior payment in full of all Obligations pursuant to the ALT Subordination Agreement), which documents shall, in each case, be reasonably satisfactory in form and substance to Administrative Agent and the Lenders. (g) The corporate, capital and ownership structure and management of TTI and its Subsidiaries shall not have changed in any material respect from that described in the Spinoff Documents (or, to the extent not then finalized, the then current drafts thereof) provided to Administrative Agent and Lenders pursuant to Section 4.01(f). (h) There shall not have occurred a material adverse change since December 31, 1998 in the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole or of TTI and its Subsidiaries taken as a whole or in the facts and information regarding such entities as represented on or prior to the Signing Date. (i) Administrative Agent and Lenders shall have received and reviewed, with results reasonably satisfactory to Administrative Agent and Lenders, information confirming that (a) ALT, TTI and their respective Subsidiaries are taking all necessary and appropriate steps to ascertain the extent of, and to quantify and successfully address, business and financial risks facing ALT, TTI and their respective Subsidiaries as a result of what is commonly referred to as the "Year 2000 problem" (i.e., the inability of certain computer applications and devices containing imbedded computer chips to recognize correctly and perform properly date-sensitive functions involving certain dates prior to and after December 31, 1999), including risks resulting from the failure of key vendors and customers of ALT, TTI and their respective Subsidiaries to successfully address the Year 2000 problem, and (b) ALT's, TTI's and their respective Subsidiaries' material computer applications and those of their key vendors and customers will, on a timely basis, adequately address the Year 2000 problem in all material respects. -43- 49 (j) All governmental and third party consents and approvals required to be obtained on or before the Signing Date (other than any such consents and approvals the failure of which to obtain on or before the Signing Date would not reasonably be expected to have a Material Adverse Effect), including but not limited to the consent of the lenders under the Existing ALT Credit Agreement, necessary or desirable in connection with the Line of Business Transfer, the Spinoff and the other transactions contemplated hereby and by the Spinoff Documents shall have been obtained; all such consents and approvals shall be in full force and effect; and all applicable waiting periods shall have expired without any action being taken by any authority that could restrain, prevent or impose any material adverse conditions on the Line of Business Transfer, the Spinoff or such other transactions or that could seek to enjoin or threaten any of the foregoing, and no Law shall be applicable which in the reasonable judgment of Administrative Agent would reasonably be expected to have such effect. (k) There shall not exist (a) any order, decree, judgment, ruling or injunction which restrains the consummation of the Spinoff or the Extensions of Credit in the manner contemplated by the Spinoff Documents or the Loan Documents, and (b) any pending or, to Borrower's knowledge, threatened action, suit, investigation or proceeding, which would reasonably be expected to materially and adversely affect ALT, TTI or any of their respective Material Subsidiaries, any transaction contemplated hereby or by the Spinoff Documents or the ability of ALT, TTI or any of their respective Subsidiaries to perform their obligations under the Loan Documents or the ability of Lenders to exercise their rights thereunder. (l) Borrower shall have delivered to Administrative Agent a certificate of a Responsible Officer of Borrower certifying that the insurance required to be maintained pursuant to Section 6.06 is in full force and effect, is adequate in nature and amount and complies in all material respects with Borrower's and each Subsidiary's obligations under Section 6.06. 4.02 CONDITIONS OF INITIAL EXTENSION OF CREDIT TO ALT. The obligation of each Lender to make the initial Extension of Credit to ALT is subject to satisfaction of the following conditions precedent: (a) Unless waived by all Lenders (or by Administrative Agent with respect to immaterial matters, or items specified in subsections (ii) or (iii) below, that the Borrower has given assurances reasonably satisfactory to Administrative Agent that they will be delivered promptly following the ALT Closing Date), Administrative Agent's receipt of the following, each of which shall be originals unless otherwise specified, each properly executed by a Responsible Officer of each applicable Borrower Party, each dated on or about the ALT Closing Date and each in form and substance reasonably satisfactory to Administrative Agent and its legal counsel: (i) such certificates or resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Borrower Party as Administrative Agent may reasonably require to establish the identities of and verify the authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer thereof; -44- 50 (ii) certified copies of each Borrower Party's Organization Documents and a certificate of good standing for each Borrower Party in its jurisdiction of organization; (iii) a certificate signed by a Responsible Officer of ALT certifying that (A) the conditions specified in Sections 4.02(c) and 4.02(d) have been satisfied, and (B) there has been no event or circumstance since December 31, 1998 which would reasonably be expected to have a Material Adverse Effect; (iv) opinions of counsel to ALT and TTI substantially in the form of Exhibit E-2 hereto; and (v) such other assurances, certificates, documents, consents or opinions as Administrative Agent, Issuing Lender or the Required Lenders reasonably may require. (b) Administrative Agent, Arranger, each Lender and/or their respective Affiliates shall have received all fees and expenses required to be paid on or before the ALT Closing Date. (c) The representations and warranties made by Borrower herein, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be true and correct in all material respects on and as of the ALT Closing Date. (d) Each Borrower Party shall be in compliance with all the terms and provisions of the Loan Documents to which it is a party, and no Default or Event of Default shall have occurred and be continuing. (e) All conditions precedent, if any, to the Spinoff set forth in the Spinoff Documents (in each case, with no material modifications from such documents (or, to the extent applicable, the drafts thereof) reviewed by Lenders on or before the Signing Date) shall have been satisfied in accordance with the terms thereof. (f) All governmental and third party consents and approvals (other than any such consents and approvals the failure of which to obtain on or before the ALT Closing Date would not reasonably be expected to have a Material Adverse Effect), including but not limited to (x) the consent of the lenders under the Existing ALT Credit Agreement and (y) the receipt of the Private Letter Ruling in form and substance satisfactory to all Lenders, and approvals necessary or desirable in connection with the Line of Business Transfer, the Spinoff and the other transactions contemplated hereby and by the Spinoff Documents shall have been obtained; all such rulings, consents and approvals shall be in full force and effect without modification; and all applicable waiting periods shall have expired without any action being taken by any authority that could restrain, prevent or impose any material adverse conditions on the Line of Business Transfer, the Spinoff or such other transactions or that would reasonably be expected to seek to -45- 51 enjoin or threaten any of the foregoing, and no Law shall be applicable which in the reasonable judgment of Administrative Agent would reasonably be expected to have such effect. (g) There shall not exist (a) any order, decree, judgment, ruling or injunction which restrains the consummation of the Line of Business Transfer or the Spinoff or the Extensions of Credit in the manner contemplated by the Spinoff Documents or the Loan Documents, and (b) any pending or, to Borrower's knowledge, threatened action, suit, investigation or proceeding, which would reasonably be expected to materially and adversely affect ALT, TTI or any of their respective Material Subsidiaries, any transaction contemplated hereby or by the Spinoff Documents or the ability of ALT, TTI or any of their respective Subsidiaries to perform their obligations under the Loan Documents or the ability of Lenders to exercise their rights thereunder. (h) There shall not have occurred a material adverse change since December 31, 1998 in the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of ALT and its Subsidiaries taken as a whole or of TTI and its Subsidiaries taken as a whole or in the facts and information regarding such entities as represented on or prior to the ALT Closing Date. 4.03 CONDITIONS TO ASSUMPTION OF OBLIGATIONS AND INITIAL EXTENSIONS OF CREDIT TO TTI. The assumption by TTI of the Obligations of ALT (other than ALT's Obligations under the ALT Subordination Agreement) and the obligation of each Lender to make the initial Extensions of Credit to TTI are subject to satisfaction of the following conditions precedent: (a) Unless waived by all Lenders (or by Administrative Agent with respect to immaterial matters, or items specified in subsections (iii) or (iv) below, that Borrower has given assurances reasonably satisfactory to Administrative Agent that they will be delivered promptly following the Signing Date), Administrative Agent's receipt of the following, each of which shall be originals unless otherwise specified, each properly executed by a Responsible Officer of each applicable Borrower Party, each dated on or about the Signing Date and each in form and substance reasonably satisfactory to Administrative Agent and its legal counsel: (i) executed counterparts of the Assumption Agreement, the Guaranty and the Pledge Agreement, sufficient in number for distribution to Administrative Agent, Lenders, ALT and TTI; (ii) Notes executed by TTI in favor of each Lender requesting a Note, each in a principal amount equal to that Lender's Commitment; (iii) such certificates or resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Borrower Party as Administrative Agent may reasonably require to establish the identities of and verify the authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer thereof; -46- 52 (iv) certified copies of each Borrower Party's Organization Documents and a certificate of good standing for each Borrower Party in its jurisdiction of organization; (v) a certificate signed by a Responsible Officer of each of ALT and TTI certifying that (A) the conditions specified in Sections 4.03(c) and 4.03(d) have been satisfied, and (B) there has been no event or circumstance since December 31, 1998 which would reasonably be expected to have a Material Adverse Effect; (vi) opinions of counsel to ALT and TTI substantially in the form of Exhibit E-3 hereto; and (vii) such other assurances, certificates, documents, consents or opinions as Administrative Agent, Issuing Lender or the Required Lenders reasonably may require. (b) Administrative Agent, Arranger, each Lender and/or their respective Affiliates shall have received all fees and expenses required to be paid on or before the TTI Closing Date. (c) The representations and warranties made by Borrower herein, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be true and correct in all material respects on and as of the TTI Closing Date. (d) Each Borrower Party shall be in compliance with all the terms and provisions of the Loan Documents to which it is a party, and no Default or Event of Default shall have occurred and be continuing. (e) Both the Line of Business Transfer and the Spinoff shall have been (or shall concurrently be) consummated in accordance with the terms of the Spinoff Documents (in each case, with no material modifications from such documents (or, to the extent applicable, the drafts thereof) reviewed by Administrative Agent and Lenders prior to the ALT Closing Date) and in compliance in all material respects with applicable Law and regulatory approvals. None of the Spinoff Documents shall have been altered, amended or otherwise changed or supplemented in any material respect or any material condition therein waived without the prior written consent of Administrative Agent. (f) There shall not exist (i) any order, decree, judgment, ruling or injunction which restrains the consummation of the Line of Business Transfer or the Spinoff or the Extensions of Credit in the manner contemplated by the Spinoff Documents or the Loan Documents, and (ii) any pending or, to Borrower's knowledge, threatened action, suit, investigation or proceeding, which would reasonably be expected to materially and adversely affect ALT, TTI or any of their respective Material Subsidiaries, any transaction contemplated hereby or by the Spinoff Documents or the ability of ALT, TTI or any of their respective -47- 53 Subsidiaries to perform their obligations under the Loan Documents or the ability of Lenders to exercise their rights thereunder. (g) After giving effect to the transactions contemplated by the Line of Business Transfer and the Spinoff, and the assumption by TTI of ALT's Obligations (other than ALT's Obligations under the ALT Subordination Agreement) pursuant to the Assumption Agreement, (i) each of TTI and each of its Subsidiaries, taken as a whole, Borrower and each Material Subsidiary shall be Solvent, and (ii) the Leverage Ratio on such date shall be not greater than 3.0: 1.0, and, with respect to the matters set forth in clauses (i) and (ii), TTI shall have delivered to Administrative Agent and all Lenders a certificate of its chief financial officer (together with supporting calculations), in form and substance satisfactory to Administrative Agent, to such effect. (h) After giving effect to any outstanding Extensions of Credit, the combined Commitments shall exceed the Outstanding Obligations by not less than $100,000,000. 4.04 CONDITIONS TO ALL EXTENSIONS OF CREDIT. In addition to any applicable conditions precedent set forth elsewhere in this Section 4 or in Section 2, the obligation of each Lender to honor any Request for Extension of Credit is subject to the following conditions precedent: (a) the representations and warranties of Borrower contained in Section 5, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be true and correct in all material respects on and as of the date of such Extension of Credit, except to the extent that such representations and warranties specifically refer to any earlier date. (b) no Default or Event of Default exists or would result from such proposed Extension of Credit. (c) Administrative Agent shall have timely received a Request for Extension of Credit by Requisite Notice by the Requisite Time therefor. (d) Administrative Agent shall have received, in form and substance satisfactory to it, such other certificates, documents or consents related to the foregoing as Administrative Agent or Required Lenders reasonably may require. Each Request for Extension of Credit by Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.04(a) and (b) have been satisfied and on and as of the date of such Extension of Credit. SECTION 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Administrative Agent and Lenders that: -48- 54 5.01 EXISTENCE AND QUALIFICATION; POWER; COMPLIANCE WITH LAWS. Each Borrower Party is a corporation, partnership or limited liability company duly organized or formed, validly existing and in good standing under the Laws of the state of its incorporation or organization, has the power and authority and the legal right to own and operate its properties, to lease the properties it operates and to conduct its business, is duly qualified and in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification (other than under the Laws of any jurisdiction in which the failure to be so qualified as a foreign corporation or other entity would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect), and is in compliance with all Laws except to the extent that noncompliance does not have a Material Adverse Effect. As of the date hereof and as of the TTI Closing Date, Teledyne Brown Engineering, Inc. is the only Material Subsidiary of TTI. 5.02 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each Borrower Party has the power and authority and the legal right to make, deliver and perform each Loan Document and Spinoff Document to which it is a party and Borrower has power and authority to Borrow and request the issuance of Letters of Credit hereunder and has taken all necessary action to authorize the Borrowings and other Extensions of Credit on the terms and conditions of this Agreement and to authorize the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party. No consent or authorization of, filing with, or other act by or in respect of any Governmental Authority, is required in connection with the Borrowings and other Extensions of Credit hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, or any of the other Loan Documents other than any consent or authorization of, filing with, or other act by or in respect of any Governmental Authority, the failure of which to have been obtained on or before the date hereof would not reasonably be expected to have a Material Adverse Effect. The Loan Documents have been duly executed and delivered by each Borrower Party party thereto, and constitute a legal, valid and binding obligation of each such Borrower Party, enforceable against each such Borrower Party in accordance with their respective terms. On or before the ALT Closing Date, each Borrower Party will have taken all necessary action to authorize the execution, delivery and performance of the Spinoff Documents to which it is a party. On and after the ALT Closing Date, no consent or authorization of, filing with, or other act by or in respect of any Governmental Authority will be required in connection the execution, delivery, performance, validity or enforceability of any Spinoff Document, other than any consent or authorization of, filing with, or other act by or in respect of any Governmental Authority, the failure of which to have been obtained on or before the ALT Closing Date would not reasonably be expected to have a Material Adverse Effect. Upon the due authorization, execution and delivery by each Borrower Party party thereto, the Spinoff Documents shall constitute a legal, valid and binding obligation of each such Borrower Party, enforceable against each such Borrower Party in accordance with their respective terms. 5.03 NO LEGAL BAR. Other than exceptions to any of the following (other than the requirements of clause (a)(i) below) that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the execution, delivery, and performance by each Borrower Party of the Loan Documents to which it is a party and compliance with the provisions thereof have been duly authorized by all requisite action on the part of such Borrower Party and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) any Organization Documents of such Borrower Party or any of its Subsidiaries, (ii) any applicable Laws, rules, or regulations or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any Contractual Obligation (including, without limitation, on and after the ALT Closing Date any Spinoff Document) of such Borrower Party or any of its Subsidiaries or by which any of them or any of their property is bound or subject, -49- 55 (b) constitute a default under any such Contractual Obligation, or (c) result in, or require, the creation or imposition of any Lien on any of the properties of such Borrower Party or any of its Subsidiaries. Other than exceptions to any of the following (other than the requirements of clause (a)(i) below), that would not, individually or in the aggregate, reasonable be expected to have a Material Adverse Effect, on and after the ALT Closing Date, the execution, delivery and performance by each Borrower Party of the Spinoff Documents to which it is a party and compliance with the provisions thereof will have been duly authorized by all requisite action on the part of such Borrower Party and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) any Organizational Documents of such Borrower Party or any of its Subsidiaries, (ii) any applicable Laws, rules or regulations or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any Contractual Obligation (including, without limitation, any Spinoff Document) of such Borrower Party or any of its Subsidiaries or by which any of them or any of their property is bound or subject, (b) constitute a default under any such Contractual Obligations, or (c) result in, or require, the creation or imposition of any Lien on any of the properties of such Borrower Party or any of its Subsidiaries. Neither the consummation of the transactions contemplated by, nor the execution and delivery of, the Loan Documents and the Spinoff Documents will constitute or result in a tortious interference with any Contractual Obligation of any Borrower Party. 5.04 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE EFFECT. (a) The Audited ALT Financial Statements and the Audited TTI Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the periods covered thereby, except as otherwise expressly noted therein; (ii) fairly present in all material respects the financial condition of ALT and its Subsidiaries and TTI and its Subsidiaries, respectively, as of the dates thereof and their results of operations for the periods covered thereby in accordance with GAAP consistently applied throughout the periods covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of ALT and its Subsidiaries and TTI and its Subsidiaries, respectively, as of the dates thereof, including liabilities for taxes, material commitments and Indebtedness in accordance with GAAP consistently applied throughout the periods covered thereby. (b) The Unaudited TTI Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the periods covered thereby, except as otherwise expressly noted therein, (ii) fairly present in all material respects the pro forma financial condition of TTI and its Subsidiaries as of the dates thereof and their pro forma results of operations for the periods covered thereby; and (iii) show all pro forma material indebtedness and other liabilities, direct or contingent, of TTI and its Subsidiaries as of the dates thereof, including liabilities for taxes, material commitments and Indebtedness in accordance with GAAP consistently applied throughout the periods covered thereby. (c) Since December 31, 1998, there has been no event or circumstance which is continuing which (or the continuing effects or results of which) would reasonably be expected to have a Material Adverse Effect. 5.05 LITIGATION. No litigation or proceeding of or before an arbitrator or Governmental Authority is pending and no litigation, investigation or proceeding, to the knowledge of Borrower, is threatened by or against any Borrower Party or any of its Subsidiaries or against any of their properties or revenues which would reasonably be expected to have a Material Adverse Effect. 5.06 NO DEFAULT. Neither any Borrower Party nor any of their respective Subsidiaries are in default under or with respect to any Contractual Obligation (including, without limitation, any Spinoff Document) which could have a Material Adverse Effect, and no Default or Event of Default has occurred and is continuing or will result from the consummation of this Agreement, any of the other Loan Documents or any Spinoff Document, or the making of the Extensions of Credit hereunder. -50- 56 5.07 OWNERSHIP OF PROPERTY; LIENS. Each Borrower Party and its Subsidiaries have valid fee or leasehold interests in all material real property which they use in their respective businesses, and each Borrower Party and their respective Subsidiaries have good and marketable title to all their other material property, and none of such material property is subject to any Lien, except as permitted in Section 7.02. 5.08 TAXES. Each Borrower Party and its Subsidiaries have filed all federal and other material tax returns which are required to be filed, and have paid, or made provision for the payment of, all taxes with respect to the periods, property or transactions covered by said returns, or pursuant to any assessment received by such Borrower Party or its respective Subsidiaries, except (a) such taxes, if any, as are being contested in good faith by appropriate proceedings and as to which adequate reserves have been established and maintained in accordance with GAAP, and (b) immaterial taxes; provided, however, that in each case no material item or portion of property of any Borrower Party or any of its Material Subsidiaries is in jeopardy of being seized, levied upon or forfeited. 5.09 MARGIN REGULATIONS; INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. (a) No Borrower Party is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any Extensions of Credit hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of Regulations T, U or X of such Board of Governors. (b) No Borrower Party or any of its Subsidiaries (i) is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (ii) is or is required to be registered as an "investment company" under the Investment Company Act of 1940, as amended. 5.10 ERISA COMPLIANCE. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of Borrower, nothing has occurred which would prevent, or cause the loss of, such qualification. Borrower and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. -51- 57 (b) There are no pending or, to the best knowledge of Borrower, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that would reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that would reasonably be expected to have a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability that would reasonably be expected to have a Material Adverse Effect; (iii) neither Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. 5.11 INTELLECTUAL PROPERTY. Each Borrower Party and its Subsidiaries own, or possess the right to use, all material trademarks, trade names, copyrights, patents, patent rights, franchises, licenses and other intangible assets that are used in the conduct of their respective businesses as now operated, and none of such items conflicts with the valid trademark, trade name, copyright, patent, patent right or intangible asset of any other Person to the extent that such conflict would reasonably be expected to have a Material Adverse Effect. 5.12 COMPLIANCE WITH LAWS. Each Borrower Party and its Subsidiaries are in compliance in all material respects with all Laws that are applicable to it. 5.13 ENVIRONMENTAL COMPLIANCE. Each Borrower Party and its Subsidiaries conduct in the ordinary course of business a review of the effect of existing Environmental Laws and claims alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof Borrower has reasonably concluded that such Environmental Laws and claims would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.14 INSURANCE. The properties of each Borrower Party and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where Borrower or such Subsidiary operates. 5.15 YEAR 2000. Borrower has (a) initiated a review and assessment of all material areas within its and each of its Subsidiaries' business and operations (including those affected by customers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications and devices containing imbedded computer chips used by any Borrower Party or any of its Subsidiaries (or their respective key customers and vendors) may be -52- 58 unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (b) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (c) to date, implemented that plan in all material respects in accordance with that timetable. Based on the foregoing, Borrower believes that all computer applications and devices containing imbedded computer chips (including those of its and its Subsidiaries' key customers and vendors) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so would not reasonably be expected to have a Material Adverse Effect. 5.16 DISCLOSURE. No statement, information, report, representation, or warranty made by any Borrower Party in any Loan Document or Spinoff Document or furnished to Administrative Agent or any Lender in connection with any Loan Document or Spinoff Document contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein under the circumstances when made not misleading. 5.17 SOLVENCY. Each of Borrower and its Subsidiaries, taken as a whole, the Borrower and each Material Subsidiary is, and after giving effect to the Line of Business Transfer, the Spinoff, the assumption by TTI of ALT's Obligations (other than ALT's Obligations under the ALT Subordination Agreement) pursuant to the Assumption Agreement and the incurrence of all Indebtedness and obligations being incurred in connection with the Loan Documents, the Line of Business Transfer and the Spinoff will be and will continue to be, Solvent. SECTION 6. AFFIRMATIVE COVENANTS So long as any Obligation remains unpaid, or any portion of the Commitments remains outstanding, Borrower shall, and shall (except in the case of Borrower's reporting covenants) cause each of its Subsidiaries to: 6.01 FINANCIAL STATEMENTS. Deliver to Administrative Agent in form and detail reasonably satisfactory to Administrative Agent and the Required Lenders, with sufficient copies for each Lender: (a) as soon as available, but in any event within 100 days after the end of each fiscal year of Borrower, a consolidated balance sheet of Borrower and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing, which report and opinion shall be prepared in accordance with GAAP and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualifications and exceptions (including possible errors -53- 59 generated by financial reporting and related systems due to the Year 2000 Problem) not reasonably acceptable to the Required Lenders; and (b) as soon as available, but in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year of Borrower commencing with the fiscal quarter ended September 30, 1999, a consolidated balance sheet of Borrower and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statements of income and cash flows for such fiscal quarter and for the portion of Borrower's fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail and certified by a Responsible Officer of Borrower as fairly presenting in all material respects the financial condition, results of operations and cash flows of Borrower and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes. 6.02 CERTIFICATES, NOTICES AND OTHER INFORMATION. Deliver to Administrative Agent in form and detail reasonably satisfactory to Administrative Agent and the Required Lenders, with sufficient copies for each Lender: (a) concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of Borrower; (b) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of Borrower, and copies of all annual, regular, periodic and special reports and registration statements which Borrower may file or be required to file with the Securities and Exchange Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and not otherwise required to be delivered to Administrative Agent pursuant hereto; (c) promptly after the occurrence thereof, notice of any Default or Event of Default; (d) promptly after Borrower becomes aware thereof and has made a determination with respect thereto (the making of which determination shall not be unreasonably delayed), notice of any litigation, investigation or proceeding affecting any Borrower Party in which there is a reasonable possibility of an adverse determination and which, if adversely determined, would reasonably be expected to have a Material Adverse Effect; (e) promptly after the occurrence thereof, notice of any Reportable Event with respect to any Plan or a decision to terminate any Plan, or the institution of proceedings or the taking or expected taking of any other action to terminate any Plan or withdraw from any Plan; (f) promptly of any discovery or determination that any computer application (including those of its key suppliers and vendors) that is material to any Borrower Parties' or any -54- 60 of their Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure would not reasonably be expected to have a Material Adverse Effect; (g) promptly after receipt thereof, copies of any notice relating to revocation of the Private Letter Ruling and any claim for indemnification, individually or in the aggregate, in excess of the Threshold Amount under any Spinoff Document; (h) concurrently with the delivery of the financial statements referred to in Section 6.01(a), a certificate of a Responsible Officer of Borrower certifying that the insurance required to be maintained pursuant to Section 6.06 is in full force and effect, is adequate in nature and amount and complies in all material respects with Borrower's and each Subsidiary's obligations under Section 6.06; and (i) promptly (following the elapse of a reasonable time to obtain such requested data and information), such other data and information as from time to time may be reasonably requested by Administrative Agent, or, through Administrative Agent or any Lender. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of Borrower in reasonable detail setting forth details of the occurrence referred to therein and stating what action Borrower has taken and proposes to take with respect thereto. 6.03 PAYMENT OF TAXES. Pay and discharge in all material respects when due all taxes, assessments, and governmental charges, Ordinary Course Liens or levies imposed on any Borrower Party or its Subsidiaries or on its income or profits or any of its property, except for any such tax, assessment, charge, or levy which is an Ordinary Course Lien under subsection (b) of the definition of such term. 6.04 PRESERVATION OF EXISTENCE. Preserve and maintain its existence, licenses, permits, rights, franchises and privileges necessary or desirable in the normal conduct of its business, except as permitted under Section 7.03 or, with respect to such licenses, permits, rights, franchises and privileges, where failure to do so would not reasonably be expected to have a Material Adverse Effect. 6.05 MAINTENANCE OF PROPERTIES. Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good order and condition, subject to wear and tear in the ordinary course of business, and not permit any waste of its properties, except, in each case, where the failure to do so would not reasonably be expected to have a Material Adverse Effect. 6.06 MAINTENANCE OF INSURANCE. Maintain liability and casualty insurance with responsible insurance companies in such amounts and against such risks as is customary for similarly situated businesses. -55- 61 6.07 COMPLIANCE WITH LAWS. (a) Comply with the requirements of all applicable Laws and orders of any Governmental Authority, noncompliance with which would reasonably be expected to have a Material Adverse Effect. (b) Conduct its operations and keep and maintain its property in compliance with all Environmental Laws, noncompliance with which would reasonably be expected to have a Material Adverse Effect. 6.08 INSPECTION RIGHTS. At any time during regular business hours and as often as reasonably requested upon reasonable notice, permit Administrative Agent or any Lender, or any employee, agent or representative thereof, to examine and make copies and abstracts from the Borrower Parties' financial records and books of account and to visit and inspect their properties and to discuss their affairs, finances and accounts with a Responsible Officer, and, upon request, furnish promptly to Administrative Agent or any Lender true copies of all financial information as Administrative Agent or any Lender may reasonably request. 6.09 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep in all material respects adequate records and books of account reflecting all financial transactions in conformity with GAAP, consistently applied, and in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over Borrower or any of its Subsidiaries. 6.10 COMPLIANCE WITH ERISA. Cause, and cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state Law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.11 COMPLIANCE WITH AGREEMENTS. Promptly and comply in all material respects with the Private Letter Ruling and all Spinoff Documents and all other Contractual Obligations under all material agreements, indentures, leases and/or instruments to which any one or more of them is a party, except for any such Contractual Obligations (a) the performance of which would cause a Default, (b) then being contested by any of them in good faith by appropriate proceedings, or (c) if the failure to comply therewith would not reasonably be expected to have a Material Adverse Effect. 6.12 USE OF PROCEEDS. Use the proceeds of Extensions of Credit: (i) for the repayment of a portion of ALT's indebtedness related to the assets to be transferred by ALT to TTI in accordance with the Spinoff Documents in conjunction with the Spinoff, (ii) for working capital, capital expenditures, and other lawful general corporate purposes of TTI following consummation of the Spinoff, and (iii) to finance acquisitions by TTI following consummation of the Spinoff to the extent expressly permitted under the Loan Documents. -56- 62 6.13 ADDITIONAL BORROWER PARTIES. Substantially concurrently with the formation or acquisition of any Material Subsidiary of TTI (and upon any Subsidiary of TTI becoming a Material Subsidiary), (i) cause such Subsidiary (unless such Subsidiary is a Foreign Subsidiary) to guarantee the payment and performance of the Obligations hereunder and under the other Loan Documents by executing and delivering to Administrative Agent a supplement to the Guaranty in substantially the form of Annex A to Exhibit G, (ii) at all times prior to the Collateral Release Date, (A) cause the direct parent or parents (excluding any Person other than TTI or any of its Subsidiaries) of such Subsidiary to execute and deliver to Administrative Agent a supplement to the Pledge Agreement, in substantially the form of Annex A to Exhibit H (whereby each such parent shall grant a Lien on those of its assets described in the Pledge Agreement), (B) promptly pledge to Administrative Agent or cause to be pledged to Administrative Agent all of the outstanding capital stock of such Subsidiary (or, if such Subsidiary is a Foreign Subsidiary, 65% of such capital stock) owned by TTI or any of its Subsidiaries to secure the Obligations under the Loan Documents, and (C) promptly take, and cause such Subsidiary and each other Borrower Party to take all action necessary or (in the opinion of Administrative Agent or the Required Lenders) desirable to perfect and protect the Liens intended to be created by the Pledge Agreement, as amended pursuant to this Section 6.13, and (iii) promptly deliver to Administrative Agent such opinions of counsel, if any, as Administrative Agent or the Required Lenders may reasonably require with respect to the foregoing (including opinions as to enforceability and, prior to the Collateral Release Date, perfection of security interests). SECTION 7. NEGATIVE COVENANTS So long as any Obligations remain unpaid, or any portion of the Commitments remains outstanding, Borrower shall not, nor shall it permit any of its Subsidiaries to, directly or indirectly: 7.01 INDEBTEDNESS. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Ordinary Course Indebtedness of TTI and its Subsidiaries; (b) Indebtedness of TTI and its Subsidiaries outstanding on the date hereof and listed on Schedule 7.01(b) and any refinancings, refundings, renewals or extensions thereof, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to the premium or other amount paid, and fees and expenses incurred, in connection with such refinancing and by an amount equal to any utilized commitments thereunder; (c) Indebtedness of TTI and the Guarantors secured by Liens permitted by Section 7.02(f) in an aggregate principal amount not to exceed $25,000,000 at any time outstanding; -57- 63 (d) additional unsecured (except to the extent of any Liens permitted pursuant to Section 7.02(i)) Indebtedness of TTI and the Guarantors; provided such additional Indebtedness, when added to the then outstanding Indebtedness of TTI and its Subsidiaries, would not cause TTI to be in violation of Section 7.12; and provided further that (i) the additional Indebtedness permitted pursuant to this clause (d) which is Indebtedness of the Guarantors shall not exceed, in the aggregate at any one time outstanding, $25,000,000, and (ii) Indebtedness permitted under this clause (d) may not (other than additional unsecured (except to the extent of any Liens permitted pursuant to Section 7.02(i)) Indebtedness assumed in connection with a Permitted Acquisition in an aggregate amount not to exceed at any one time outstanding $20,000,000) contain covenants more restrictive than those contained herein; (e) Acquired Indebtedness of TTI and its Subsidiaries in an aggregate principal amount not to exceed $35,000,000 at any time outstanding; and (f) on and prior to the TTI Closing Date, Indebtedness of ALT and its Subsidiaries (other than any member of the TTI Group) to the extent permitted under Section 5.1 of the Existing ALT Credit Agreement, as in effect on the date hereof. 7.02 LIENS. Incur, assume or suffer to exist, any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except: (a) Liens of TTI and its Subsidiaries existing on the date hereof and listed on Schedule 7.02(a) and any renewals or extensions thereof, provided that the obligations secured or benefited thereby or the property covered thereby are not increased, except as permitted by Section 7.01(b); (b) Ordinary Course Liens of TTI and its Subsidiaries; (c) Security interests granted by TTI or any of its Subsidiaries in favor of lessors of personal property, which property is the subject of a true lease between such lessor and TTI or any of its Subsidiaries as lessee; (d) Liens granted by TTI or any of its Subsidiaries in favor of any Governmental Authority created pursuant to cost-type contracts, progress-billing contracts or advance-pay contracts with such Governmental Authority to which TTI or any of its Subsidiaries is a party in the materials and products of TTI and its Subsidiaries subject to such contracts or, in the case of advance-pay contracts only, any advance payments made thereunder to TTI and its Subsidiaries by such Governmental Authority; (e) Liens of TTI and its Subsidiaries arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by TTI or any of its Subsidiaries in excess of those set forth by -58- 64 regulations promulgated by the Federal Reserve Board, and (ii) such deposit account is not intended by TTI or any of its Subsidiaries to provide collateral to the depository institution; (f) Liens granted by TTI and the Guarantors securing Indebtedness of TTI or any Guarantor incurred after the TTI Closing Date pursuant to Section 7.01(c) to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness and (iii) the amount of Indebtedness secured thereby is not increased; (g) any Lien on any property or asset owned by TTI or any of its Subsidiaries that was existing on such property or asset prior to the acquisition thereof by TTI or such Subsidiary or that was owned by any Person that becomes a Subsidiary of TTI after the date hereof prior to the time such Person became a Subsidiary of TTI, in each case, if (i) such Lien was not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary of TTI, as the case may be, (ii) such Lien is not enforceable against, or spread to cover, any other property or assets of TTI or any of its Subsidiaries, and (iii) such Lien secures only (A) those obligations (including Acquired Indebtedness other than Acquisition Consideration) that it secures on the date of such acquisition or the date such Person becomes a Subsidiary of TTI, as the case may be and (B) Acquired Indebtedness permitted hereunder; (h) on and prior to the TTI Closing Date, Liens granted by ALT and its Subsidiaries (other than any member of the TTI Group) on property and assets of ALT and its Subsidiaries (other than any capital stock of or assets of any member of the TTI Group) to the extent permitted under Section 5.2 of the Existing ALT Credit Agreement, as in effect on the date hereof; and (i) other Liens which secure Indebtedness of TTI and its Subsidiaries; provided that the aggregate principal amount of Indebtedness secured thereby shall not at any time exceed $10,000,000. 7.03 FUNDAMENTAL CHANGES. Merge or consolidate with or into any Person or liquidate, wind-up or dissolve itself, or permit or suffer any liquidation or dissolution or sell all or substantially all of its assets, except, that so long as no Default or Event of Default exists or would result therefrom: (a) any Solvent Subsidiary of TTI may merge with (i) TTI provided that TTI shall be the continuing or surviving corporation, (ii) with any one or more other Solvent Subsidiaries of TTI (provided that if either party to such merger is a Guarantor, the surviving entity shall be a Guarantor), and (iii) with any joint ventures, partnerships and other Persons, so long as such joint ventures, partnerships and other Persons will, as a result of making such merger and all other contemporaneous related transactions, become a wholly owned Subsidiary of TTI; provided that when any wholly-owned Material Subsidiary of TTI is merging into another Subsidiary of TTI, the wholly-owned Material Subsidiary of TTI shall be the continuing or surviving Person; -59- 65 (b) any Subsidiary of TTI may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to TTI or any of its Solvent Subsidiaries that is a Guarantor; provided that when any wholly-owned Subsidiary of TTI is selling all or substantially all of its assets to another Subsidiary of TTI, the Subsidiary acquiring such assets shall be a wholly-owned Subsidiary of TTI; (c) on and prior to the TTI Closing Date, ALT and its Subsidiaries (other than any member of the TTI Group) may merge or consolidate with other Persons to the extent permitted under Section 5.6 of the Existing ALT Credit Agreement, as in effect on the date hereof; (d) TTI and its Subsidiaries may make Dispositions permitted under Sections 7.04(a), (c) and (d); and (e) ALT and its Subsidiaries may undertake transactions permitted under, and in accordance with, the Separation and Distribution Agreement. 7.04 DISPOSITIONS. Make any Dispositions, except: (a) Ordinary Course Dispositions by TTI and its Subsidiaries; (b) Dispositions by TTI and its Subsidiaries permitted by Section 7.03; (c) Dispositions by TTI and its Subsidiaries after the TTI Closing Date, so long as the total book value of any assets or property so Disposed of in any fiscal year of TTI does not exceed in the aggregate ten percent of Consolidated Total Assets determined as of the last day of the immediately preceding fiscal year; provided that, in determining compliance with this Section 7.04(c), a Disposition shall be excluded to the extent the net proceeds of such Disposition are used within a period of 180 days following such Disposition to acquire assets or property useful in the ordinary course of TTI's or its Subsidiaries' businesses; and (d) on and prior to the TTI Closing Date, Dispositions by ALT and its Subsidiaries (other than any member of the TTI Group) to the extent permitted under Section 5.5 of the Existing ALT Credit Agreement, as in effect on the date hereof. 7.05 INVESTMENTS. Make or hold any Investments, except: (a) Investments by TTI and its Subsidiaries existing on the date hereof and listed on Schedule 7.05(a); (b) Ordinary Course Investments by TTI and its Subsidiaries; (c) Investments by TTI and its Subsidiaries permitted by Section 7.03; (d) Permitted Acquisitions; -60- 66 (e) Investments by TTI and the Guarantors in joint ventures not to exceed at any time an amount equal to 20% of Consolidated Total Assets as of the last day of the immediately preceding fiscal quarter of TTI for which TTI shall have delivered financial statements pursuant to Section 6.01(a) or (b), as the case may be; and (f) on and prior to the TTI Closing Date, Investments by ALT and its Subsidiaries (other than any member of the TTI Group) not prohibited under the Existing ALT Credit Agreement, as in effect on the date hereof. 7.06 RESTRICTED PAYMENTS. Make any Restricted Payments, except (i) the distribution by ALT of all of the capital stock of TTI to the stockholders of ALT in accordance with the Spinoff Documents, (ii) on and prior to the TTI Closing Date, ALT and its Subsidiaries (other than any member of the TTI Group) may make Restricted Payments to the extent permitted under the Existing ALT Credit Agreement, as in effect on the date hereof, and (iii) from and after the TTI Closing Date, TTI and its Subsidiaries may make dividends and other distributions payable solely in cash in an aggregate amount not to exceed an amount equal to 25% of cumulative Consolidated Net Income since the TTI Closing Date. 7.07 ERISA. At any time engage in a transaction which could be subject to Sections 4069 or 4212(c) of ERISA, or permit any Pension Plan to (a) engage in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code); (b) fail to comply with ERISA or any other applicable Laws; or (c) incur any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), which, with respect to each event listed in clauses (a) through (c) above, would reasonably be expected to have a Material Adverse Effect. 7.08 LIMITATION ON NATURE OF BUSINESS. Enter into any business, either directly or through a Subsidiary, except for (i) any business in which Borrower or the applicable Subsidiary is engaged on the date hereof, (ii) any business that is reasonably related thereto, (iii) any business that is in substantially the same industry as any business conducted by Borrower or such Subsidiary on the date hereof, or (iv) any other business on a non-material basis to the extent acquired by Borrower in a Permitted Acquisition so long as the other business or businesses acquired by Borrower in such Permitted Acquisition otherwise satisfy the requirements of clauses (i), (ii) or (iii) of this Section 7.08. 7.09 TRANSACTIONS WITH AFFILIATES. Enter into any transaction of any kind with any Affiliate of Borrower other than arm's-length transactions with Affiliates that are otherwise permitted hereunder. 7.10 HOSTILE ACQUISITIONS. Use the proceeds of any Extension of Credit in connection with the acquisition of any voting interest in any Person if such acquisition is opposed by the board of directors or management of such Person. 7.11 LIMITATIONS ON UPSTREAMING, ETC. Suffer to exist or become effective any consensual restriction or limitation on the ability of Borrower or any of its Subsidiaries (or, in the case of clause (a) only, any Subsidiary of Borrower) to: (a) make Restricted Payments, (b) pay or -61- 67 subordinate any Indebtedness owed to Borrower or any other Subsidiary, (c) make Investments in Borrower or any other Subsidiary or (d) transfer any of its assets to Borrower or any other Subsidiary, except for the restrictions contained in the Loan Documents. 7.12 FINANCIAL COVENANTS. (a) CONSOLIDATED NET WORTH. Permit Consolidated Net Worth at any time to be less than the sum of (a) an amount equal to 75% of Consolidated Net Worth as of the TTI Closing Date, (b) an amount equal to 50% of the Consolidated Net Income earned in each fiscal quarter of TTI ending after the TTI Closing Date (with no deduction for a net loss in any such fiscal quarter) and (c) an amount equal to 75% of the net proceeds after the TTI Closing Date of the issuance and sale of capital stock of TTI (including upon any conversion of debt securities of TTI into such capital stock). (b) INTEREST COVERAGE RATIO. Permit the Interest Coverage Ratio as of the end of any fiscal quarter of TTI to be less than 3.0: 1.0. (c) LEVERAGE RATIO. Permit the Leverage Ratio at any time to be greater than 3.0: 1.0. 7.13 LIMITATION ON AMENDMENTS TO SPINOFF DOCUMENTS. Amend, supplement, replace or otherwise modify (whether pursuant to a waiver granted by or to such Person or otherwise) or fail to enforce the terms and conditions of any Spinoff Document, except for exceptions to the foregoing that would not, individually or in the aggregate, reasonably be expected to be adverse to Administrative Agent or any Lender. 7.14 ALT SUBORDINATION AGREEMENT. Make any payment in violation of the subordination provisions of the ALT Subordination Agreement or otherwise fail to perform or observe any of the terms or conditions of the ALT Subordination Agreement applicable to it. SECTION 8. EVENTS OF DEFAULT AND REMEDIES 8.01 EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default: (a) Borrower fails to pay any principal on any Outstanding Obligation (other than fees) as and on the date when due; or (b) Borrower fails to pay any interest on any Outstanding Obligation, or any fees payable under Section 2.08 due hereunder, or any other fees or amount payable to Administrative Agent or any Lender under any Loan Document, in each case, within three Business Days after the date when due; or (c) Any default occurs in the observance or performance of any agreement contained in Sections 6.01, 6.02, 6.08 or 7; or -62- 68 (d) The occurrence of an Event of Default (as such term is or may hereafter be specifically defined in any other Loan Document) under any other Loan Document; or any Borrower Party fails to perform or observe any other covenant or agreement (not specified in subsections (a), (b) or (c) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days; or (e) Any representation or warranty in any Loan Document or in any certificate, agreement, instrument or other document made or delivered by any Borrower Party pursuant to or in connection with any Loan Document proves to have been incorrect in any material respect when made or deemed made; or (f) (i) any Borrower Party (x) defaults in any payment when due of principal of or interest on any Indebtedness (other than Indebtedness hereunder) or (y) defaults in the observance or performance of any other agreement or condition relating to any Indebtedness (other than Indebtedness hereunder) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, Indebtedness having an aggregate principal amount in excess of the Threshold Amount to be demanded or become due (automatically or otherwise) prior to its stated maturity, or any Guaranty Obligation in such amount to become payable or cash collateral in respect thereof to be demanded, or any Borrower Party is unable or admits in writing its inability to pay its debts as they mature; or (ii) the occurrence under any Swap Contract of an Early Termination Date (as defined in such Swap Contract) resulting from (x) any event of default under such Swap Contract as to which Borrower or any Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (y) any Termination Event under any Swap Contract (as defined therein) as to which Borrower or any Subsidiary is an Affected Party (as defined therein), if, in either event, the Swap Termination Value owed by Borrower or such Subsidiary as a result thereof is greater than the Threshold Amount; or (g) Any Loan Document, at any time after its execution and delivery ceases (other than, in the case of the Pledge Agreement, pursuant to the terms thereof on or after the Collateral Release Date) to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect; or any Borrower Party denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or (h) The Pledge Agreement, at any time after its execution and delivery ceases (other than pursuant to the terms thereof on or after the Collateral Release Date) to create a valid and perfected first priority Lien on the Collateral purported to be covered thereby; or (i) A final judgment against any Borrower Party is entered for the payment of money in excess of the Threshold Amount, or any non-monetary final judgment is entered against any Borrower Party which has a Material Adverse Effect and, in each case if such judgment remains unsatisfied without procurement of a stay of execution within 30 calendar days -63- 69 after the date of entry of judgment or, if earlier, five days prior to the date of any proposed sale, or any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 30 calendar days after its issue or levy; or (j) Any Borrower Party or any of its Subsidiaries institutes or consents to the institution of any proceeding under Debtor Relief Laws, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under Debtor Relief Laws relating to any such Person or to all or any part of its property is instituted without the consent of that Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or (k) (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or would reasonably be expected to result in liability of Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time would reasonably be expected to have a Material Adverse Effect; or (iii) Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or (l) TTI fails, on or before the date that is 12 months after the ALT Closing Date, to consummate a Qualified Public Offering; or (m) The Private Letter Ruling is withdrawn or otherwise ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect; or, prior to its satisfaction of its liabilities and obligations thereunder, any Borrower Party denies that it has any or further liability or obligation under the Private Letter Ruling, or fails to satisfy any condition contained therein, or purports to revoke, terminate or rescind the Private Letter Ruling; or (n) Any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended), directly or indirectly, of Voting Stock of Borrower (or other securities convertible into such Voting Stock) representing 25% or more of the combined voting power of all Voting Stock of Borrower; or (ii) during any period of up to 24 consecutive months, commencing after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of Borrower, or individuals whose nomination for election to the board of directors of Borrower was recommended by at least 66-2/3% of the then directors of Borrower, shall cease for any reason to constitute a majority of the -64- 70 board of directors of Borrower; or (iii) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, control over Voting Stock of Borrower (or other securities convertible into such securities) representing 25% or more of the combined voting power of all Voting Stock of Borrower; or (o) There shall be any suspension or debarment of any contracting rights of Borrower, any of its Material Subsidiaries or any Material Division in effect for more than 30 days from its commencement (or Borrower shall learn that any such suspension or debarment shall be imposed for a period in excess of 30 days); or (p) An indemnification claim in excess of the Threshold Amount shall be made against any member of the TTI Group by ALT, any of its Affiliates or any of their respective stockholders pursuant to, or in connection with, any of the Spinoff Documents including, without limitation, pursuant to Section 6.1 of the Tax Sharing and Indemnification Agreement and Section 5.02 of the Separation and Distribution Agreement. 8.02 REMEDIES UPON EVENT OF DEFAULT. Without limiting any other rights or remedies of Administrative Agent or Lenders provided for elsewhere in this Agreement, or the other Loan Documents, or by applicable Law, or in equity, or otherwise: (a) Upon the occurrence, and during the continuance, of any Event of Default other than an Event of Default described in Section 8.01(j): (i) the Required Lenders may request Administrative Agent to, and Administrative Agent thereupon shall, terminate the Commitments and/or declare all or any part of the unpaid principal of all Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be immediately due and payable, whereupon the same shall become and be immediately due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrower; and (ii) Issuing Lender may, with the approval of Administrative Agent on behalf of the Required Lenders, demand immediate payment by Borrower of an amount equal to the aggregate amount of all outstanding Letters of Credit Usage to be held in a Letter of Credit Cash Collateral Account. (b) Upon the occurrence of any Event of Default described in Section 8.01(j): (i) the Commitments and all other obligations of Administrative Agent or Lenders shall automatically terminate without notice to or demand upon Borrower, which are expressly waived by Borrower; (ii) the unpaid principal of all Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents shall be immediately due and -65- 71 payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrower; and (iii) an amount equal to the aggregate amount of all outstanding Letters of Credit Usage shall be immediately due and payable to Issuing Lender without notice to or demand upon Borrower, which are expressly waived by Borrower, to be held in a Letter of Credit Cash Collateral Account. (c) Upon the occurrence of any Event of Default, Lenders and Administrative Agent, or any of them, without notice to (except as expressly provided for in any Loan Document) or demand upon Borrower, which are expressly waived by Borrower (except as to notices expressly provided for in any Loan Document), may proceed to (but only with the consent of the Required Lenders) protect, exercise and enforce their rights and remedies under the Loan Documents against any Borrower Party and such other rights and remedies as are provided by Law or equity or otherwise. (d) Except as permitted by Section 10.06, no Lender may exercise any rights or remedies with respect to the Obligations without the consent of the Required Lenders in their sole and absolute discretion. The order and manner in which Administrative Agent's and Lenders' rights and remedies are to be exercised shall be determined by the Required Lenders in their sole and absolute discretion. Regardless of how a Lender may treat payments for the purpose of its own accounting, for the purpose of computing the Obligations hereunder, payments shall be applied first, to costs and expenses (including Attorney Costs) incurred by Administrative Agent and each Lender, second, to the payment of accrued and unpaid interest on the Loans to and including the date of such application, third, to the payment of the unpaid principal of the Loans, and fourth, to the payment of all other amounts (including fees) then owing to Administrative Agent and Lenders under the Loan Documents, in each case paid pro rata to each Lender in the same proportions that the aggregate Obligations owed to each Lender under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all Lenders, without priority or preference among Lenders. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Administrative Agent and Lenders hereunder or thereunder or at Law or in equity or otherwise. SECTION 9. ADMINISTRATIVE AGENT 9.01 APPOINTMENT AND AUTHORIZATION OF ADMINISTRATIVE AGENT. (a) Each Lender hereby irrevocably (subject to Section 9.09) appoints, designates and authorizes Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. -66- 72 Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Administrative Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) Issuing Lender shall act on behalf of Lenders with respect to any Letters of Credit issued by it and the documents associated therewith until such time and except for so long as Administrative Agent may agree at the request of the Required Lenders to act for Issuing Lender with respect thereto; provided, however, that Issuing Lender shall have all of the benefits and immunities (i) provided to Administrative Agent in this Section 9 with respect to any acts taken or omissions suffered by Issuing Lender in connection with Letters of Credit issued by it or proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Administrative Agent" as used in this Section 9 included Issuing Lender with respect to such acts or omissions, and (ii) as additionally provided in this Agreement with respect to Issuing Lender. 9.02 DELEGATION OF DUTIES. Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.03 LIABILITY OF ADMINISTRATIVE AGENT. None of Administrative Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct as determined in a final, nonappealable judgment by a court of competent jurisdiction), or (ii) be responsible in any manner to any Lender for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer thereof, contained in this Agreement or in any other Loan Document or Spinoff Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Administrative Agent under or in connection with, this Agreement, any other Loan Document or any Spinoff Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any other Loan Document or any Spinoff Document, or for any failure of Borrower or any other party to any Loan Document or Spinoff Document to perform its obligations hereunder or thereunder. No Administrative Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or -67- 73 conditions of, this Agreement, any other Loan Document or any Spinoff Document, or to inspect the properties, books or records of Borrower or any of Borrower's Subsidiaries or Affiliates. 9.04 RELIANCE BY ADMINISTRATIVE AGENT. (a) Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower), independent accountants and other experts selected by Administrative Agent. Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders or all Lenders, as the case may be, as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders or all Lenders, if required hereunder, and such request and any action taken or failure to act pursuant thereto shall be binding upon all Lenders. Where this Agreement expressly permits or prohibits an action unless the Required Lenders otherwise determine, and in all other instances, Administrative Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of Lenders. (b) For purposes of determining compliance with the conditions specified in Sections 4.01, 4.02 and 4.03, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Lender. 9.05 NOTICE OF DEFAULT. Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to Administrative Agent for the account of Lenders, unless Administrative Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". Administrative Agent will notify Lenders of its receipt of any such notice. Administrative Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 8; provided, however, that unless and until Administrative Agent has received any such request, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of Lenders. -68- 74 9.06 CREDIT DECISION; DISCLOSURE OF INFORMATION BY ADMINISTRATIVE AGENT. Each Lender acknowledges that none of Administrative Agent-Related Persons has made any representation or warranty to it, and that no act by Administrative Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of Borrower and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Administrative Agent-Related Person to any Lender as to any matter, including whether Administrative Agent-Related Persons have disclosed material information in their possession. Each Lender, including any Lender by assignment, represents to Administrative Agent and Borrower that it has, independently and without reliance upon any Administrative Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon any Administrative Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower or any of its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to Lenders by Administrative Agent herein, Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower or any of its Subsidiaries which may come into the possession of any of Administrative Agent-Related Persons. 9.07 INDEMNIFICATION OF ADMINISTRATIVE AGENT. Whether or not the transactions contemplated hereby are consummated, Lenders shall indemnify upon demand each Administrative Agent-Related Person (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), pro rata, and hold harmless each Administrative Agent-Related Person from and against any and all Indemnified Liabilities incurred by it; provided, however, that no Lender shall be liable for the payment to any Administrative Agent-Related Person of any portion of such Indemnified Liabilities resulting from such Person's gross negligence or willful misconduct as determined by a final nonappealable judgment by a court of competent jurisdiction; provided, however, that no action taken in accordance with the directions of the Required Lenders or all Lenders, as the case may be, shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to -69- 75 the extent that Administrative Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Administrative Agent. 9.08 ADMINISTRATIVE AGENT IN INDIVIDUAL CAPACITY. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates as though Bank of America were not Administrative Agent or Issuing Lender hereunder or Swing Line Lender and without notice to or consent of Lenders. Lenders acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of Borrower or such Affiliate) and acknowledge that Administrative Agent shall be under no obligation to provide such information to them. With respect to its Loans and Letters of Credit, Bank of America shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not Administrative Agent or Issuing Lender. 9.09 SUCCESSOR ADMINISTRATIVE AGENT. Administrative Agent may, and at the request of the Required Lenders shall, resign as Administrative Agent upon 30 days' notice to Lenders and Borrower. If Administrative Agent resigns under this Agreement, the Required Lenders shall appoint from among Lenders a successor administrative agent for Lenders which successor administrative agent shall, so long as no Default or Event of Default shall have occurred and be continuing, be approved by Borrower. If no successor administrative agent is appointed prior to the effective date of the resignation of Administrative Agent, Administrative Agent may appoint, after consulting with Lenders and Borrower, a successor administrative agent from among Lenders. Upon the acceptance of its appointment as successor administrative agent hereunder, such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term "Administrative Agent" shall mean such successor administrative agent and the retiring Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Section 9 and Sections 10.04 and 10.12 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor administrative agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and Lenders shall perform all of the duties of Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. Notwithstanding the foregoing, however, Bank of America may not be removed as Administrative Agent at the request of the Required Lenders unless Bank of America shall also simultaneously be replaced as "Issuing Lender" and "Swing Line Lender" hereunder pursuant to documentation in form and substance reasonably satisfactory to Bank of America. -70- 76 SECTION 10. MISCELLANEOUS 10.01 AMENDMENTS; CONSENTS. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, and no consent to any departure by any Borrower Party therefrom shall be effective unless in writing signed by Borrower and the Required Lenders and acknowledged by Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, without the approval in writing of Borrower, Administrative Agent and all Lenders, no amendment, modification, supplement, termination, waiver or consent may be effective: (a) to reduce the amount of principal, principal prepayments or the rate of interest payable on, any Loan, or the amount of any fee or other amount payable to any Lender under the Loan Documents (unless such modification is consented to by each Lender entitled to receive such fee) or to waive an Event of Default consisting of the failure of Borrower to pay when due principal, interest or any utilization fee or facility fee; (b) to postpone any date fixed for any payment of principal of, prepayment of principal of, or any installment of interest on, any Loan or any installment of any fee payable to Lenders under Section 2.08, to extend the term of, or increase the amount of, any Lender's Commitment (it being understood that a waiver of an Event of Default shall not constitute an extension or increase in the Commitment of any Lender) or modify the Pro Rata Share of any Lender; (c) to amend the provisions of the definition of "Required Lenders", Sections 4, 9, this Section 10.01 or Section 10.07; (d) to amend any provision of this Agreement that expressly requires the consent or approval of all Lenders; (e) to release all or substantially all of the Guarantors from their guarantee obligations under the Guaranty; or (f) to release all or substantially all of the Collateral (other than pursuant to Section 10.02); provided, however, that (i) no amendment, waiver or consent shall, unless in writing and signed by Issuing Lender in addition to Borrower and Required Lenders or all Lenders, as the case may be, affect the rights or duties of Issuing Lender under any Loan Document relating to Letters of Credit, (ii) no amendment, waiver or consent shall, unless in writing and signed by Administrative Agent in addition to Borrower and Required Lenders or all Lenders, as the case may be, affect the rights or duties of Administrative Agent under any Loan Document, (iii) no amendment, waiver or consent shall, unless in writing and signed by Swing Line Lender in -71- 77 addition to Borrower and Required Lenders or all Lenders, as the case may be, affect the rights or duties of Swing Line Lender under any Loan Document, (iv) no amendment, waiver or consent shall, unless in writing and signed by TTI in addition to ALT and Administrative Agent affect the rights or duties of TTI under the ALT Subordination Agreement, and (v) any fee letter may be amended adversely to TTI, or rights or privileges thereunder waived, in a writing executed by the parties thereto. Any amendment, modification, supplement, termination, waiver or consent pursuant to this Section shall apply equally to, and shall be binding upon, all Lenders and Administrative Agent. Administrative Agent shall provide TTI with a copy of each amendment, waiver or consent of or to the ALT Subordination Agreement. 10.02 RELEASE OF COLLATERAL. Anything contained in this Agreement or any of the other Loan Documents to the contrary notwithstanding, on the Collateral Release Date, the Pledge Agreement shall be terminated, and all Collateral pledged thereunder shall be released, without further action on the part of Administrative Agent or any Lender. Any release of Collateral pledged under the Pledge Agreement in accordance with the provisions of this Section 10.02 shall be deemed to be a release of such pledged Collateral approved by all Lenders for purposes of the Loan Documents. In connection with any such release, Administrative Agent shall execute all such further documents and instruments as may be reasonably requested by Borrower in order to more fully evidence or effect such release. All such deliveries shall be at the expense of Borrower, with no liability to Administrative Agent or any Lender, and with no representation or warranty by or recourse to Administrative Agent or any Lender. Notwithstanding anything to the contrary herein or in any other Loan Document, the Guaranty shall not be terminated on the Collateral Release Date. 10.03 TRANSMISSION AND EFFECTIVENESS OF NOTICES AND SIGNATURES. (a) MODES OF DELIVERY. Except as otherwise provided in any Loan Document, notices, requests, demands, directions, agreements and documents delivered in connection with the Loan Documents (collectively, "communications") shall be transmitted by Requisite Notice to the number and address set forth on Schedule 10.03, may be delivered by the following modes of delivery, and shall be effective as follows:
MODE OF DELIVERY EFFECTIVE ON EARLIER OF ACTUAL RECEIPT AND: ------------------------------------------------------------------------------------ Courier Scheduled delivery date Facsimile When transmission in legible form complete Mail Fourth Business Day after deposit in U.S. mail first class postage pre-paid Personal delivery When received Telephone When conversation completed
-72- 78 provided, however, that communications delivered to Administrative Agent pursuant to Section 2 shall not be effective until actually received by Administrative Agent. (b) RELIANCE BY ADMINISTRATIVE AGENT AND LENDERS. Administrative Agent and Lenders shall be entitled to rely and act on any communications purportedly given by or on behalf of any Borrower Party and believed by it to be genuine and correct and to have been signed, made or given by the proper Person. Borrower shall indemnify Administrative Agent and Lenders pursuant to Section 10.14 from any loss, cost, expense or liability as a result of relying on any communications permitted herein. The obligations of Borrower in this subsection shall survive payment of all Obligations. (c) EFFECTIVENESS OF FACSIMILE SIGNATURES. Signatures on communications may be transmitted by facsimile; provided that the Administrative Agent may, in its sole and absolute discretion in each instance, require the delivery of originally executed signature pages. The effectiveness of any such facsimile signatures accepted by Administrative Agent shall, subject to applicable Law, have the same force and effect as manual signatures and shall be binding on all Borrower Parties and Administrative Agent and Lenders. Administrative Agent may also require that any such facsimile signature be confirmed by a manually-signed hardcopy thereof; provided, however, that the failure to request any such manually-signed hardcopy confirmation shall not affect the effectiveness of any facsimile signatures. 10.04 ATTORNEY COSTS, EXPENSES AND TAXES. Borrower agrees (a) to pay or reimburse Administrative Agent for all reasonable costs and expenses incurred in connection with the development, preparation, negotiation and execution of the Loan Documents, and the development, preparation, negotiation and execution of any amendment, waiver, consent, supplement or modification to, any Loan Documents, and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including reasonable Attorney Costs, and (b) to pay or reimburse Administrative Agent and each Lender for all costs and expenses incurred in connection with any refinancing, restructuring, reorganization (including a bankruptcy reorganization) and enforcement or attempted enforcement, or preservation of any rights under any Loan Documents, and any other documents prepared in connection herewith or therewith, or in connection with any refinancing, or restructuring of any such documents in the nature of a "workout" or of any insolvency or bankruptcy proceeding, including all Attorney Costs. The foregoing costs and expenses shall include all (and, in the case of clause (a) of the immediately preceding sentence only, all reasonable) search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and (and, in the case of clause (a) of the immediately preceding sentence only, all reasonable) other out-of-pocket expenses incurred by Administrative Agent and the cost of independent public accountants and other outside experts retained by Administrative Agent or any Lender. Such costs and expenses shall also include administrative costs of Administrative Agent reasonably attributable to the administration of the Loan Documents. Any amount payable by Borrower under this Section shall bear interest from the second Business Day following the date of demand for payment at the Default Rate, unless waived by Administrative Agent. The agreements in this Section shall survive repayment of all Obligations. -73- 79 10.05 BINDING EFFECT; ASSIGNMENT. (a) This Agreement and the other Loan Documents to which Borrower is a party will be binding upon and inure to the benefit of Borrower, Administrative Agent, Lenders and their respective successors and assigns, except that, Borrower may not assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent of all Lenders and any such attempted assignment shall be void. Any Lender may at any time pledge its Note or any other instrument evidencing its rights as a Lender under this Agreement to a Federal Reserve Bank, but no such pledge shall release that Lender from its obligations hereunder or grant to such Federal Reserve Bank the rights of a Lender hereunder absent foreclosure of such pledge. (b) From time to time following the Signing Date, each Lender may assign to one or more Eligible Assignees all or any portion of its Pro Rata Share of its Commitment and/or Extensions of Credit; provided that (i) such assignment, if not to a Lender or an Affiliate of the assigning Lender, shall be consented to by Borrower at all times other than during the existence of a Default or Event of Default and Administrative Agent, Issuing Lender and Swing Line Lender (which approval of Borrower, Administrative Agent, Issuing Lender and Swing Line Lender shall not be unreasonably withheld or delayed), (ii) a copy of a duly signed and completed Notice of Assignment and Acceptance shall be delivered to Administrative Agent, (iii) except in the case of an assignment to an Affiliate of the assigning Lender, to another Lender or of the entire remaining Commitment of the assigning Lender, the assignment shall not assign a Pro Rata Share equivalent to less than the Minimum Amount therefor, and (iv) the effective date of any such assignment shall be as specified in the Notice of Assignment and Acceptance, but not earlier than the date which is five Business Days after the date Administrative Agent has received the Notice of Assignment and Acceptance. Upon acceptance by Administrative Agent of such Notice Assignment and Acceptance and consent thereto by Administrative Agent, Issuing Lender and Swing Line Lender and payment of the requisite fee described below, the Eligible Assignee named therein shall be a Lender for all purposes of this Agreement, with the Pro Rata Share therein set forth and, to the extent of such Pro Rata Share, the assigning Lender shall be released from its further obligations under this Agreement. Borrower agrees that it shall execute and deliver upon request (against delivery by the assigning Lender to Borrower of any Note) to such assignee Lender, one or more Notes evidencing that assignee Lender's Pro Rata Share, and to the assigning Lender if requested, one or more Notes evidencing the remaining balance Pro Rata Share retained by the assigning Lender; provided that Loans made to ALT shall be evidenced by the ALT Global Note only. Administrative Agent's consent to and acceptance of any assignment shall not be deemed to constitute any representation or warranty by any Administrative Agent-Related Person as to any matter. (c) After receipt of a completed Notice of Assignment and Acceptance, and receipt of an assignment fee of $3,500 from such Eligible Assignee (including Affiliates of assigning Lenders), Administrative Agent shall, promptly following the effective date thereof, provide to Borrower and Lenders a revised Schedule 10.03 giving effect thereto. -74- 80 (d) Each Lender may from time to time grant participations to one or more other Person (including another Lender) all or any portion of its Pro Rata Share of its Commitment and/or Extensions of Credit; provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other financial institutions shall not be a Lender hereunder for any purpose except, if the participation agreement so provides, for the purposes of Section 3 (but only to the extent that the cost of such benefits to Borrower does not exceed the cost which Borrower would have incurred in respect of such Lender absent the participation) and subject to Sections 10.06 and 10.07, (iv) Borrower, Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, (v) the participation shall not restrict an increase in the Commitment or in granting Lender's Pro Rata Share, so long as the amount of the participation interest is not affected thereby, and (vi) the consent of the holder of such participation interest shall not be required for amendments or waivers of provisions of the Loan Documents; provided, however, that the assigning Lender may, in any agreement with a participant, give such participant the right to consent to any matter which (A) extends the Maturity Date as to such participant or any other date upon which any payment of money is due to such participant, (B) reduces the rate of interest owing to such participant, any fee or any other monetary amount owing to such participant, (C) reduces the amount of any installment of principal owing to such participant, or (D) releases of all or substantially all of the Guarantors or releases of all or substantially all of the Collateral (other than pursuant to Section 10.02). 10.06 SET-OFF. In addition to any rights and remedies of Administrative Agent and Lenders or any assignee or participant of Lenders or any Affiliates thereof (each, a "Proceeding Party") provided by law or in equity or otherwise, upon the occurrence and during the continuance of any Event of Default, each Proceeding Party is authorized at any time and from time to time, without prior notice to Borrower, any such notice being waived by Borrower to the fullest extent permitted by law, to proceed directly, by right of set-off, banker's lien or counterclaim, or otherwise, against any assets of the Borrower Parties which may be in the hands of such Proceeding Party (including all general or special, time or demand, provisional or other deposits and other indebtedness owing by such Proceeding Party to or for the credit or the account of Borrower but excluding any trust or custodial accounts in respect of Plans of any Borrower Party) and apply such assets against the Obligations, irrespective of whether such Proceeding Party shall have made any demand therefor and although such Obligations may be unmatured. Each Lender agrees promptly to notify Borrower and Administrative Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.07 SHARING OF PAYMENTS. Each Lender severally agrees that if it, through the exercise of any right of setoff, banker's lien or counterclaim against Borrower, or otherwise, receives payment of the Obligations held by it that is ratably more than any other Lender, through any means, receives in payment of the Obligations held by that Lender, then, subject to applicable Laws: (a) Lender exercising the right of setoff, banker's lien or counterclaim or -75- 81 otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Lender a participation in the Obligations held by the other Lender and shall pay to the other Lender a purchase price in an amount so that the share of the Obligations held by each Lender after the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment; and (b) such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of Lenders share any payment obtained in respect of the Obligations ratably in accordance with each Lender's Pro Rata Share of the Obligations immediately prior to, and without taking into account, the payment; provided that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Lender by Borrower or any Person claiming through or succeeding to the rights of Borrower, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Lender that purchases a participation in the Obligations pursuant to this Section shall from and after the purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Lender were the original owner of the Obligations purchased. Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim or otherwise with respect to the participation as fully as if Lender were the original owner of the Obligation purchased. 10.08 NO WAIVER; CUMULATIVE REMEDIES. (a) No failure by any Lender or Administrative Agent to exercise, and no delay by any Lender or Administrative Agent in exercising, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. (b) The rights, remedies, powers and privileges herein or therein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by Law. Any decision by Administrative Agent or any Lender not to require payment of any interest (including Default Interest), fee, cost or other amount payable under any Loan Document or to calculate any amount payable by a particular method on any occasion shall in no way limit or be deemed a waiver of Administrative Agent's or such Lender's right to require full payment thereof, or to calculate an amount payable by another method that is not inconsistent with this Agreement, on any other or subsequent occasion. (c) The terms and conditions of Section 9 are inserted for the sole benefit of Administrative Agent and Lenders; the same may be waived in whole or in part, with or without terms or conditions, in respect of any Extension of Credit without prejudicing Administrative Agent's or Lenders' rights to assert them in whole or in part in respect of any other Extension of Credit. -76- 82 10.09 USURY. Notwithstanding anything to the contrary contained in any Loan Document, the interest and fees paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the "Maximum Rate"). If Administrative Agent or any Lender shall receive interest or a fee in an amount that exceeds the Maximum Rate, the excessive interest or fee shall be applied to the principal of the Outstanding Obligations or, if it exceeds the unpaid principal, refunded to Borrower. In determining whether the interest or a fee contracted for, charged, or received by Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations. 10.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.11 INTEGRATION. This Agreement, together with the other Loan Documents and any letter agreements referred to herein, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of Administrative Agent or Lenders in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 10.12 NATURE OF LENDERS' OBLIGATIONS. The obligations of Lenders hereunder are several and not joint or joint and several. Nothing contained in this Agreement or any other Loan Document and no action taken by Administrative Agent or Lenders or any of them pursuant hereto or thereto may, or may be deemed to, make Lenders a partnership, an association, a joint venture or other entity, either among themselves or with Borrower or any Affiliate of Borrower. Each Lender's obligation to make any Extension of Credit pursuant hereto is several and not joint or joint and several, and in the case of the initial Extension of Credit only is conditioned upon the performance by all other Lenders of their obligations to make initial Extensions of Credit. A default by any Lender will not increase the Pro Rata Share attributable to any other Lender. 10.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any Loan Document, certificate or statement delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery thereof but shall terminate the later of (a) when the Commitments are terminated and (b) when no Obligations remain outstanding under any Loan Document. Such representations and warranties have been or will be relied upon by Administrative Agent and each Lender, -77- 83 notwithstanding any investigation made by Administrative Agent or any Lender or on their behalf. 10.14 INDEMNITY BY BORROWER. Borrower agrees to indemnify, save and hold harmless each Administrative Agent-Related Person and each Lender and their respective Affiliates, directors, officers, agents, advisors and employees (collectively the "Indemnitees") from and against, and to pay upon demand: (a) any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person relating directly or indirectly to a claim, demand, action or cause of action that such Person asserts or may assert against any Borrower Party, any of their Affiliates or any of their officers or directors; (b) any and all claims, demands, actions or causes of action, losses, costs, expenses or liabilities arising out of or relating to, the Spinoff Documents, the Spinoff, the Line of Business Transfer, the Loan Documents, any predecessor loan documents, the Commitments, the use or contemplated use of the proceeds of any Extension of Credit, or the relationship of any Borrower Party, Administrative Agent and Lenders under this Agreement; (c) any administrative or investigative proceeding by any Governmental Authority arising out of or related to a claim, demand, action or cause of action described in subsection (a) or (b) above; and (d) any and all liabilities, losses, costs or expenses (including reasonable Attorney Costs) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action, cause of action or proceeding, or as a result of the preparation of any defense in connection with any foregoing claim, demand, action, cause of action or proceeding, in all cases, whether or not an Indemnitee is a party to such claim, demand, action, cause of action or proceeding, including those liabilities caused by an Indemnitee's own negligence (all the foregoing, collectively, the "Indemnified Liabilities"); provided that no Indemnitee shall be entitled to indemnification for any loss caused by its own gross negligence or willful misconduct as determined by a final nonappealable judgment by a court of competent jurisdiction. No Indemnitee shall be liable for any damages arising from the use by others of information or other materials obtained through internet, Intralinks or other similar information transmission systems in connection with Extensions of Credit or the Loan Documents. The obligations of Borrower under this Section shall survive payment of all Obligations. 10.15 NONLIABILITY OF LENDERS. Borrower acknowledges and agrees that: (a) Any inspections of any property of Borrower made by or through Administrative Agent or Lenders are for purposes of administration of the Loan Documents only, and Borrower is not entitled to rely upon the same (whether or not such inspections are at the expense of Borrower); (b) By accepting or approving anything required to be observed, performed, fulfilled or given to Administrative Agent or Lenders pursuant to the Loan Documents, neither Administrative Agent nor Lenders shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Administrative Agent or Lenders; -78- 84 (c) The relationship between Borrower and Administrative Agent and Lenders is, and shall at all times remain, solely that of borrower and lenders; neither Administrative Agent nor Lenders shall under any circumstance be construed to be partners or joint venturers of Borrower or its Affiliates; neither Administrative Agent nor Lenders shall under any circumstance be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrower or its Affiliates, or to owe any fiduciary duty to Borrower or its Affiliates; neither Administrative Agent nor Lenders undertake or assume any responsibility or duty to Borrower or its Affiliates to select, review, inspect, supervise, pass judgment upon or inform Borrower or its Affiliates of any matter in connection with their property or the operations of Borrower or its Affiliates; Borrower and its Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Administrative Agent or Lenders in connection with such matters is solely for the protection of Administrative Agent and Lenders and neither Borrower nor any other Person is entitled to rely thereon; and (d) Administrative Agent and Lenders shall not be responsible or liable to any Person for any loss, damage, liability or claim of any kind relating to injury or death to Persons or damage to property caused by the actions, inaction or negligence of Borrower and/or its Affiliates and Borrower hereby indemnifies and holds Administrative Agent and Lenders harmless from any such loss, damage, liability or claim. The obligations of Borrower under this subsection shall survive payment of all Obligations. 10.16 NO THIRD PARTIES BENEFITED. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of Borrower, Administrative Agent and Lenders in connection with the Extensions of Credit, and is made for the sole benefit of Borrower, Administrative Agent and Lenders, and Administrative Agent's and Lenders' successors and assigns. Except as provided in Sections 10.05 and 10.14, no other Person shall have any rights of any nature hereunder or by reason hereof. 10.17 SEVERABILITY. Any provision of the Loan Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.18 CONFIDENTIALITY. Administrative Agent and each Lender shall use any confidential non-public information concerning the Borrower Parties and their Subsidiaries that is furnished to Administrative Agent or such Lender by or on behalf of the Borrower Parties and their Subsidiaries in writing in connection with the Loan Documents (collectively, "Confidential Information") solely for the purpose of administering and enforcing the Loan Documents, and it will hold the Confidential Information in confidence. Notwithstanding the foregoing, Administrative Agent and each Lender may disclose Confidential Information (a) to their Affiliates or any of their or their Affiliates' directors, officers, employees, advisors, or representatives (collectively, the "Representatives") whom it determines need to know such information for the purposes set forth in this Section; (b) to any bank or financial institution or -79- 85 other entity to which such Lender has assigned or desires to assign an interest or participation in the Loan Documents or the Obligations, provided that any such foregoing recipient of such Confidential Information agrees to keep such Confidential Information confidential as specified herein; (c) to any governmental agency or regulatory body having or claiming to have authority to regulate or oversee any aspect of Administrative Agent's or such Lender's business or that of their Representatives in connection with the exercise of such authority or claimed authority; (d) to the extent necessary or appropriate to effect or preserve Administrative Agent's or such Lender's or any of their Affiliates' security (if any) for any Obligation or to enforce any right or remedy or in connection with any claims asserted by or against Administrative Agent or such Lender or any of their Representatives; and (e) pursuant to, and as required to comply with, any subpoena or any similar legal process; provided that, in the case of clause (e) only, to the extent permitted under applicable Law, Administrative Agent or such Lender, as the case may be, shall notify Borrower of any such requirement applicable to it so that Borrower may seek a protective order or other appropriate remedy to prevent the disclosure thereof. For purposes hereof, the term "Confidential Information" shall not include information that (x) is in Administrative Agent's or a Lender's possession prior to its being provided by or on behalf of the Borrower Parties, provided that such information is not known by Administrative Agent or such Lender to be subject to another confidentiality agreement with, or other legal or contractual obligation of confidentiality to, a Borrower Party, (y) is or becomes publicly available (other than through a breach hereof by Administrative Agent or such Lender), or (z) becomes available to Administrative Agent or such Lender on a nonconfidential basis, provided that the source of such information was not known by Administrative Agent or such Lender to be bound by a confidentiality agreement or other legal or contractual obligation of confidentiality with respect to such information. 10.19 FURTHER ASSURANCES. Borrower and its Subsidiaries shall, at their expense and without expense to Lenders or Administrative Agent, do, execute and deliver such further acts and documents as any Lender or Administrative Agent from time to time reasonably requires for the assuring and confirming unto Lenders or Administrative Agent of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document. 10.20 HEADINGS. Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 10.21 TIME OF THE ESSENCE. Time is of the essence of the Loan Documents. 10.22 FOREIGN LENDERS AND PARTICIPANTS. Each Lender, and each holder of a participation interest herein, that is a "foreign corporation, partnership or trust" within the meaning of the Code shall deliver to Administrative Agent, prior to receipt of any payment subject to withholding (or after accepting an assignment or receiving a participation interest herein), two duly signed completed copies of either Form W-8BEN or any successor thereto (relating to such Person and entitling it to a complete exemption from withholding on all payments to be made to such Person by Borrower pursuant to this Agreement) or Form W-8ECI -80- 86 or any successor thereto (relating to all payments to be made to such Person by Borrower pursuant to this Agreement) of the IRS or such other evidence satisfactory to Borrower and Administrative Agent that no withholding under the federal income tax Laws is required with respect to such Person. Thereafter and from time to time, each such Person shall (a) promptly submit to Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States Laws and regulations to avoid, or such evidence as is satisfactory to Borrower and Administrative Agent of any available exemption from, United States withholding taxes in respect of all payments to be made to such Person by Borrower pursuant to this Agreement, and (b) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office, if any) to avoid any requirement of applicable Laws that Borrower make any deduction or withholding for taxes from amounts payable to such Person. If such Persons fails to deliver the above forms or other documentation, then Administrative Agent may withhold from any interest payment to such Person an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. If any Governmental Authority asserts that Administrative Agent did not properly withhold any tax or other amount from payments made in respect of such Person, such Person shall indemnify Administrative Agent therefor, including all penalties and interest and costs and expenses (including Attorney Costs) of Administrative Agent. The obligation of Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Administrative Agent. 10.23 REMOVAL AND/OR REPLACEMENT OF LENDERS. (a) Under any circumstances set forth in this Agreement providing that Borrower shall have the right to remove and/or replace a Lender as a party to this Agreement, Borrower may, upon notice to such Lender and Administrative Agent, remove such Lender by (i) non ratably terminating such Lender's Commitment and/or (ii) causing such Lender to assign its Commitment to one or more other Lenders or Eligible Assignees acceptable to Borrower, Administrative Agent, Swing Line Lender and Issuing Bank. Any removed or replaced Lender shall be entitled to (x) payment in full of all principal, interest, fees and other amounts owing to such Lender through the date of termination or assignment (including any amounts payable pursuant to Section 3.05), (y) appropriate assurances and indemnities (which may include letters of credit) as such Lender may reasonably require with respect to its participation interest in any Letters of Credit or any Swing Line Loans then outstanding and (z) a release of such Lender from its obligations under the Loan Documents. Any Lender being replaced shall execute and deliver a Notice of Assignment and Acceptance covering that Lender's Commitment. Administrative Agent shall distribute an amended Schedule 2.01, which shall thereafter be incorporated into this Agreement, to reflect adjustments to Lenders and their Commitments. (b) In order to make all Lender's interests in any outstanding Extensions of Credit ratable in accordance with any revised Pro Rata Shares after giving effect to the removal or replacement of a Lender, Borrower shall pay or prepay, if necessary, on the effective date thereof, all outstanding Extensions of Credit of all Lenders, together with any amounts due under -81- 87 Section 3.05. Borrower may then request Extensions of Credit from Lenders in accordance with their revised Pro Rata Shares. 10.24 GOVERNING LAW. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE GOVERNING STATE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT ADMINISTRATIVE AGENT AND EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF THE GOVERNING STATE OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF THE GOVERNING STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH BORROWER PARTY, ADMINISTRATIVE Agent AND EACH LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH BORROWER PARTY, ADMINISTRATIVE Agent AND EACH LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED HERETO. EACH BORROWER PARTY, ADMINISTRATIVE Agent AND EACH LENDER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF THE GOVERNING STATE. 10.25 WAIVER OF RIGHT TO TRIAL BY JURY; OTHER WAIVERS. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. EACH PARTY TO THIS AGREEMENT WAIVES, TO THE FULLEST EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN SECTION 10.24(b) ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. -82- 88 10.26 ENTIRE AGREEMENT. THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ANY LETTER AGREEMENTS REFERRED TO HEREIN REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -83- 89 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed as of the date first above written. ALLEGHENY TELEDYNE INCORPORATED By:____________________________ Name:__________________________ Title:_________________________ -84- 90 TELEDYNE TECHNOLOGIES INCORPORATED By:_______________________________ Name:_____________________________ Title:____________________________ -85- 91 BANK OF AMERICA, N.A., as Administrative Agent By:____________________________ Name:__________________________ Title:_________________________ -86- 92 BANK OF AMERICA, N.A., as Issuing Lender, Lender and Swing Line Lender By:____________________________ Name:__________________________ Title:_________________________ -87- 93 MELLON BANK, N.A., as Syndication Agent and Lender By:____________________________ Name:__________________________ Title:_________________________ -88- 94 THE CHASE MANHATTAN BANK, as Syndication Agent and Lender By:____________________________ Name:__________________________ Title:_________________________ -89- 95 THE BANK OF NEW YORK, as Co-Agent and Lender By:____________________________ Name:__________________________ Title:_________________________ -90- 96 BANK ONE, NA, as Co-Agent and Lender By:____________________________ Name:__________________________ Title:_________________________ -91- 97 NATIONAL CITY BANK OF PENNSYLVANIA, as Co-Agent and Lender By:________________________________ Name:______________________________ Title:_____________________________ -92- 98 BANK OF TOKYO - MITSUBISHI TRUST COMPANY, as Lender By:______________________________________ Name:____________________________________ Title:___________________________________ -93- 99 THE FUJI BANK, LIMITED, as Lender By:____________________________ Name:__________________________ Title:_________________________ -94- 100 WACHOVIA BANK, N.A., as Lender By:____________________________ Name:__________________________ Title:_________________________ -95- EX-27 3 EXHIBIT 27
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND COMBINED BALANCE SHEET AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001094285 TELEDYNE TECHNOLOGIES INCORPORATED 1,000 12-MOS 9-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 SEP-30-1999 0 0 0 0 106 124 3 3 53 54 171 195 178 182 135 132 251 277 92 102 0 0 0 0 0 0 0 0 106 126 251 277 780 603 780 603 572 442 572 442 0 0 0 0 0 0 83 61 34 25 49 36 0 0 0 0 0 0 49 36 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----