UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3610
ALUMINUM COMPANY OF AMERICA
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
425 Sixth Avenue, Alcoa Building, Pittsburgh, Pennsylvania
15219-1850
(Address of principal executive offices)
(Zip code)
Registrant's telephone number--area code 412
Investor Relations------------553-3042
Office of the Secretary------553-4707
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
Common Stock, par value $1.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 6, 1998 there were 168,134,011 shares of common
stock, par value $1.00, of the registrant outstanding. The
aggregate market value of such shares, other than shares held by
persons who may be deemed affiliates of the registrant, was
approximately $12,001 million.
Documents incorporated by reference.
Parts I and II of this Form 10-K incorporate by reference
certain information from the registrant's 1997 Annual Report to
Shareholders. Part III of this Form 10-K incorporates by
reference the registrant's Proxy Statement dated March 11, 1998,
except for the performance graph and Compensation Committee
Report.
-1-
ALUMINUM COMPANY OF AMERICA
Aluminum Company of America, with headquarters in Pittsburgh,
Pennsylvania, was formed in 1888 under the laws of the
Commonwealth of Pennsylvania. In this report, unless the context
otherwise requires, Alcoa or the Company means Aluminum Company
of America and all subsidiaries consolidated for the purposes of
its financial statements.
PART I
Item 1. Business.
Overview
Alcoa is the world's largest aluminum company. It is also
the world's largest alumina producer, with close proximity of
bauxite mines to its refineries in Australia, Jamaica and
Suriname, and high quality bauxite in Brazil. Alumina, a white
powdery material, is an intermediate product in the production of
aluminum from bauxite and is also a valuable chemical. As a
growing, worldwide company, Alcoa now has over 180 operating
locations in 28 countries, serving a broad range of markets in
developing and industrialized economies.
Alcoa's products are used in and on beverage containers,
airplanes and automobiles, commercial and residential buildings,
chemicals and a wide array of consumer and industrial
applications. These products are sold directly to industrial
customers and other end-users or through independent distributors
in the U.S., Brazil, Europe and Asia.
The Company is organized into 21 independently-managed
business units. Business unit leaders are assigned clear
performance responsibilities that concentrate authority closer to
customers-where most of Alcoa's value creation takes place.
The U.S. remains the largest market for aluminum. However,
the Pacific region, Latin America, Asia and Europe all present
opportunities for substantial growth in aluminum use. To take
advantage of these growth opportunities, Alcoa has made
acquisitions or formed joint ventures and strategic alliances in
key regional markets.
Recent Announcement
On March 9, 1998, Alcoa and Alumax Inc. announced that they
have entered into a definitive agreement under which Alcoa will
acquire all outstanding shares of Alumax for a combination of
cash and stock. Alcoa will commence the transaction with a cash
tender offer for one-half the outstanding Alumax shares at $50.00
per share. The second step will be a merger in which each
remaining outstanding Alumax share will be converted into 0.6975
of a share of Alcoa common stock.
The transaction is valued at approximately $3.8 billion,
including the assumption of debt. It is conditioned upon
approval by Alumax's shareholders of the merger as well as
expiration of antitrust waiting periods and other customary
conditions, and is expected to be completed in the second quarter
of 1998.
Market and Geographic Area Information
Alcoa serves a variety of customers in a number of markets.
Consolidated revenues from these markets during the past three
years were:
-2-
<TABLE>
<CAPTION>
(dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Packaging $3,201 $3,326 $3,797
Transportation 3,119 2,655 2,232
Distributor and Other 2,151 2,154 1,988
Alumina and Chemicals 1,961 1,940 1,705
Aluminum Ingot 1,521 1,449 1,247
Building and Construction 1,366 1,537 1,531
------ ----- ------
Total $13,319 $13,061 $12,500
====== ====== ======
</TABLE>
Close to one-half of Alcoa's consolidated sales now is
derived from geographic regions other than the U.S., reflecting
the Company's growing global presence.
<TABLE>
<CAPTION>
(dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. $7,189 $7,246 $7,043
Pacific 2,222 2,248 1,986
Europe 2,090 1,841 1,691
Other Americas 1,818 1,726 1,780
------ ------ ------
Total $13,319 $13,061 $12,500
====== ====== ======
</TABLE>
Major Operations
U.S. - The Company has six aluminum smelters with a combined
annual rated capacity of 1.285 million metric tons (mt) that
mostly support its internal primary aluminum requirements. It
has three large rolling plants, including two facilities for can
sheet, and a number of aluminum fabricating facilities that serve
the aerospace, automobile, truck, building and construction,
packaging and other markets. A substantial majority of 1997
consolidated revenues generated in the U.S. was derived from
these major operations.
Alcoa Fujikura Ltd. (AFL), a 51%-owned subsidiary, designs,
produces and markets automotive electrical distribution systems.
AFL also produces fiber optic products and systems for electric
utilities, telecommunications, cable television and datacom
markets. AFL's 1997 revenues were 13% of Alcoa's consolidated
revenues. AFL also has operations in Europe, Mexico and South
America.
Australia - Alcoa of Australia Limited (AofA) is 60%-owned
by Alcoa and is the Company's largest subsidiary. AofA's
aluminum operations include bauxite mining facilities, three
alumina refineries, two aluminum smelters and two alumina-based
chemicals plants. AofA is the world's largest, and one of the
lowest-cost, producers of alumina. An AofA subsidiary also mines
gold in Western Australia. AofA's 1997 revenues were 14% of
Alcoa's consolidated revenues. Kaal Australia Pty. Ltd., 50%-
owned by Alcoa, produces can sheet at its two rolling mills.
Brazil - Alcoa Aluminio S.A. (Aluminio) is owned 59% by
Alcoa. Aluminio operates bauxite mining facilities and two
alumina refineries that principally serve its two aluminum
smelters. It has several alumina-based chemicals, aluminum
fabricating and extrusion plants, plastic closures and container
operations, packaging equipment and building and automotive
product facilities. Aluminio's revenues in 1997 were 9% of
Alcoa's consolidated revenues.
-3-
Alcoa's Financial Reporting Segments
Alcoa's operations consist of three segments: Alumina and
Chemicals, Aluminum Processing and Nonaluminum Products. See
Notes A and P to the Financial Statements for segment and
related geographic area financial information.
Alumina and Chemicals Segment
The Alumina and Chemicals segment includes the production
and sale of bauxite, alumina and alumina-based chemicals used
principally in industrial applications, and transportation
services for bauxite and alumina. The segment consists of a
group of companies and assets referred to as Alcoa World Alumina
and Chemicals (AWAC). Alcoa provides operating management for
AWAC, which is owned 60% by Alcoa and 40% by WMC Limited (WMC).
Bauxite
Bauxite, aluminum's principal raw material, is refined into
alumina through a chemical process. Most of the bauxite mined
and alumina produced by the Company, except by AofA, is further
processed by Alcoa into aluminum. All of the Company's active
bauxite interests are part of AWAC, except for Aluminio's mines
in Pocos de Caldas, Brazil and its 8.6% interest in Mineracao Rio
do Norte S.A. (MRN), a joint venture described under "Alumina"
below.
AofA's bauxite mineral leases expire in 2003. Renewal
options allow AofA to extend the leases until 2045.
Suriname Aluminum Company, L.L.C. (Suralco) mines bauxite in
Suriname under rights that expire in 2032. Suralco also holds a
24% minority interest in a bauxite mining joint venture managed
by the majority owner, an affiliate of Gencor Limited of South
Africa. Bauxite from both mining operations serves Suralco's
share of a refinery in Suriname. Current mine reserves at both
operations are expected to be depleted in the period 2005-2010.
Alcoa has long-term contracts to purchase bauxite mined by a
partially-owned entity in the Republic of Guinea in Western
Africa. The bauxite services most of the requirements of the
Point Comfort, Texas and San Ciprian, Spain alumina refineries.
The contracts expire after 2011.
Bauxite mining rights in Jamaica expire after the year 2020.
These rights are owned by a joint venture with the Government of
Jamaica.
Alumina
Alcoa is the world's leading supplier of alumina. Alumina
is sold principally from operations in Australia, Jamaica and
Suriname. About 65% of the Company's alumina production in 1997
was sold under supply contracts to third parties worldwide. Most
alumina supply contracts are negotiated on the basis of agreed
volumes over multi-year periods to assure a continuous supply to
the smelters. Prices are negotiated periodically or are based on
formulas related to aluminum ingot market prices or to alumina
production costs.
Australia. AofA's three alumina refineries, located in
Kwinana, Pinjarra and Wagerup, in Western Australia, have an
aggregate annual rated capacity of 6.7 million metric tons (mt).
AofA has begun a 440,000 mt per year expansion of the Wagerup
refinery with construction expected to be completed by mid-1999.
This US$193 million expansion will increase Wagerup's operating
capacity from 1.75 million mt per year to 2.19 million mt per
year. This is the first stage of a planned expansion to 3.30
million mt per year at Wagerup, for which AofA has obtained
environmental approval.
-4-
The natural gas requirements of the refineries are supplied
primarily under a contract with parties comprising the North West
Shelf Gas Joint Venture. The prior contract expired in 2005 and
imposed minimum purchase requirements. In December 1997, these
arrangements were extended through a renegotiation of the prior
contract and the signing of a new contract running from 2005
through 2020. These new arrangements now are under review by the
Australian competition authorities.
AWAC entities and Sino Mining Alumina Limited (SMAL), a
subsidiary of China National Nonferrous Metals Industry
Corporation (CNNC), have a long-term agreement for the purchase
of alumina for the CNNC smelter system. The arrangements entitle
a subsidiary of SMAL to purchase a minimum of 400,000 mt of
alumina per year for 30 years. It also has the option to
increase its alumina purchases as CNNC's needs grow. CNNC is a
Chinese state-owned enterprise, which operates and controls the
state-owned nonferrous industry in China.
Suriname. Suralco owns 55% of a 1.7 million mt per year
alumina refinery in Paranam, Suriname and operates the plant. An
affiliate of Gencor holds the remaining 45% interest.
Jamaica. An Alcoa subsidiary and a corporation owned by the
Government of Jamaica are equal participants in an alumina
refinery in Clarendon Parish, Jamaica. The Alcoa subsidiary
manages the joint venture. The refinery's annual capacity is
expected to increase from 800,000 to about 1 million mt by 1999.
Brazil. Aluminio manages the operation of the Alumar
Consortium (Alumar), a cost-sharing and production-sharing
venture that owns a large refining and smelting project near Sao
Luis, in the northeastern state of Maranhao. In late 1996, the
Alumar refinery was expanded by 260,000 mt per year, bringing
total annual capacity to 1.3 million mt. It is owned 35.1% by
Aluminio, 36% by an affiliate of Gencor, 18.9% by Abalco S.A.
(owned 60% by Alcoa and 40% by WMC) and 10% by an affiliate of
Alcan Aluminium Limited (Alcan). Most of this alumina production
is consumed at the smelter.
Aluminio holds an 8.6% interest and Abalco S.A. holds a 4.6%
interest in MRN, a mining company that is jointly owned by
affiliates of Alcan, Companhia Brasileira de Aluminio, Companhia
Vale do Rio Doce, Gencor, Norsk Hydro and Reynolds Metals
Company. Aluminio and Abalco S.A. purchase bauxite from MRN
under long-term supply contracts.
At Pocos de Caldas, Aluminio mines bauxite and operates a
refinery. The refinery has an annual capacity of 270,000 mt and
primarily supplies Aluminio's nearby smelter.
Spain. In February 1998, Alcoa acquired from the Spanish
State Entity for Industrial Participations the stock of the main
sectors of the aluminum business of Industria Espanola del
Aluminio, S.A. (Inespal), Spain's state-owned aluminum producer
headquartered in Madrid. Inespal had 1997 revenues of $1.1
billion. The acquisition includes a 1.1 million mt per year
alumina refinery at San Ciprian, as well as three aluminum
smelters, three aluminum rolling facilities, two extrusion plants
and an administrative center. Alcoa and a WMC affiliate will
hold a 60% and 40% interest, respectively, in the refinery.
U.S. Alcoa Alumina & Chemicals, L.L.C., through a majority-
owned entity, St. Croix Alumina, L.L.C., owns a 600,000 mt per
year alumina refinery located on St. Croix, U.S. Virgin Islands.
In February 1998, AWAC restarted the refinery to fill customer
orders because AWAC's worldwide demand for alumina, including the
material it will produce at St. Croix, is sold out for 1998. The
refinery had been inactive due to world alumina market
conditions.
Alcoa Alumina & Chemicals, L.L.C. owns an alumina refinery
at Point Comfort, Texas. A 365,000 mt per year expansion was
completed during 1997 and brought annual capacity to 2.3 million
mt.
-5-
Industrial Chemicals
Alcoa sells industrial chemicals to customers in a broad
spectrum of markets for use in refractories, ceramics, abrasives,
chemicals processing and other specialty applications.
Industrial chemicals, principally alumina-based chemicals,
are produced or processed at the locations that follow. Except
for the plants located in Brazil, all of these facilities are
part of AWAC.
United States Outside the United States
Mobile, Alabama Kwinana and Rockingham, Australia
Bauxite, Arkansas Pocos de Caldas and Salto, Brazil
Ft. Meade, Florida Ludwigshafen, Germany
Dalton, Georgia Falta, India (joint venture)
Lake Charles, Port Allen
and Vidalia, Louisiana Iwakuni and Naoetsu, Japan
Leetsdale, Pennsylvania Moerdijk and Rotterdam, The
Netherlands
Nashville, Tennessee Singapore, Singapore
Point Comfort, Texas
Aluminum fluoride, used in aluminum smelting, is produced
from fluorspar at Point Comfort and from hydrofluosilicic acid at
Ft. Meade.
In late 1998, AWAC will begin construction of a facility in
China to process tabular alumina and other alumina-based
materials for sale to the Chinese refractory market.
Aluminum Processing Segment
The Aluminum Processing segment comprises the production and
sale of molten metal, ingot and aluminum products that are flat-
rolled, engineered or finished. Also included are power,
transportation and other services.
Revenues and shipments for the principal classes of products
in the Aluminum Processing segment follow.
<TABLE>
<CAPTION>
(dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Flat-rolled products $3,956 $3,920 $4,177
Engineered products 2,476 2,269 2,303
Aluminum ingot 1,521 1,449 1,197
Other aluminum products 287 338 357
----- ----- -----
Total $8,240 $7,976 $8,034
===== ===== =====
(mt in thousands)
Shipments:
Flat-rolled products 1,392 1,357 1,380
Engineered products 562 495 454
Aluminum ingot 920 901 673
Other aluminum products 82 88 75
----- ----- -----
Total 2,956 2,841 2,582
===== ===== =====
</TABLE>
-6-
Aluminum Ingot
The Company smelts primary aluminum from alumina obtained
principally from its alumina refineries. Alcoa's consolidated
primary aluminum capacity is rated at approximately 2.1 million
mt per year. When operating at capacity, Alcoa's smelters more
than satisfy the primary aluminum requirements of its fabricating
operations. Most of the Company's primary aluminum production in
1997 was delivered to other Alcoa operations for alloying and/or
further fabricating. Purchases of aluminum scrap, principally
used beverage cans, supplemented by purchases of ingot when
necessary, satisfy additional aluminum requirements.
Since 1994, Alcoa has had 450,000 mt of its worldwide
smelting capacity idle because of an oversupply of ingot on world
markets.
Aluminum is produced from alumina by an electrolytic process
requiring large amounts of electric power. Electric power
accounts for about 25% of the Company's primary aluminum costs.
Alcoa generates approximately 40% of the power used at its
smelters worldwide. Most purchase contracts for firm power tie
prices to aluminum prices or to prices based on various indices.
Australia. AofA is a participant in a joint venture smelter
at Portland, State of Victoria, with an annual rated capacity of
320,000 mt. The venture is owned 45% by AofA, 25% by the State
of Victoria and 10% each by the First National Resources Trust,
the China International Trust and Investment Corporation and
Marubeni Aluminium Australia Pty., Ltd. A subsidiary of AofA
operates the smelter. Each participant in this smelter is
required to contribute to the cost of operations and construction
in proportion to its interest in the venture and is entitled to
its proportionate share of the output. Alumina is supplied by
AofA. The Portland site can accommodate additional smelting
capacity.
Currently, approximately 40% of the power for the 180,000 mt
Point Henry smelter is generated by AofA using its extensive
brown coal deposits. The balance of the power for this smelter
and power for the Portland smelter are provided under contracts
with the State Electricity Commission of Victoria (SECV). Power
prices are tied by formula to aluminum prices. During 1997, AofA
concluded contractual discussions with SECV, resulting in an
agreement on a supplemental power arrangement through 2002 that
meets the full supply requirements of the smelters. Discussions
continue with SECV to clarify various commercial aspects of power
supplies to the smelters, including the value of
"interruptibility" to the power supply at both plants.
Brazil. The Alumar smelter at Sao Luis, Brazil has an
annual rated capacity of 362,000 mt. Aluminio receives about 54%
of the production from this smelter. Electric power is purchased
from the government-controlled power grid in Brazil at a small
discount from the applicable industrial tariff price and is
protected by a cap based on the London Metal Exchange (LME) price
of aluminum.
Aluminio contracted with Central Eletricas de Minas Gerais
S.A. (CEMIG), the government-controlled electric utility, to
supply power to Aluminio's 90,000 mt Pocos de Caldas smelter for
a 30-month period that began in October 1996. Aluminio purchased
the plant's anticipated full power requirements for this 30-month
period through a single payment based on the price of energy on
the date of the agreement. At the end of this period, Aluminio
may be subject to increased power prices for the plant and may
decide to negotiate another purchase of power from CEMIG or from
another utility.
In 1996, Aluminio participated in a consortium that won a
bidding process to build the new Machadinho hydroelectric power
plant in Southern Brazil. If all environmental and other
approvals that are necessary for the construction of the dam and
related facilities are received, Aluminio would be entitled to a
share of the output beginning in 2002. Aluminio's share is
expected to be sufficient to supply approximately one-half of the
power requirements for the Pocos de Caldas smelter. In addition,
Aluminio intends to participate in an auction process that could
result in its purchase of the regional Rio Pardo hydroelectric
utility.
-7-
Europe. In 1996, Alcoa acquired the principal operating
assets of Alumix S.p.A. (Alumix), Italy's state-owned aluminum
producer. Aluminum smelters at Portovesme and Fusina, with
combined annual capacity of 187,000 mt, were among the assets
purchased. Alumina is supplied under an evergreen agreement with
the owners of the Eurallumina refinery, located on Sardinia
adjacent to the Portovesme smelter. Power for these smelters is
supplied by ENEL, Italy's state-owned utility.
The acquisition of Inespal mentioned earlier included the
purchase of aluminum smelters at San Ciprian, La Coruna and
Aviles, with a combined annual capacity of 365,000 mt. Alumina
is supplied from Inespal's San Ciprian refinery. Electric power
currently is purchased from the government-controlled power grid
at the lowest applicable industrial tariff rate.
U.S. Approximately 55% of the power requirements for
Alcoa's six U.S. smelters is generated by the Company; the
remainder is purchased under long-term contracts. Approximately
12% of the self-generated power is obtained from Alcoa's
entitlement to a fixed percentage of the output from Chelan
County Public Utility District's Rocky Reach hydroelectric power
facility located in the State of Washington.
The Company has generated substantially all of the power
used at its Warrick, Indiana smelter using nearby coal reserves.
A 1996 coal supply contract satisfies 50% of the smelter's fuel
requirement through 2006. Existing low-sulfur coal contracts
satisfy an additional 35% of the requirement through 1999.
Lignite is used to generate power for the Rockdale, Texas
smelter. Company-owned generating units supply about half of the
total requirements, and the balance is purchased through a long-
term power contract expiring in 2013 with Texas Utilities.
Two subsidiaries of the Company own and operate
hydroelectric facilities under Federal Energy Regulatory
Commission licenses. They provide electric power for the
aluminum smelters at Alcoa, Tennessee and Badin, North Carolina.
The Tennessee plant also purchases firm and interruptible power
from the Tennessee Valley Authority under a contract that
recently was extended to 2010. At the Badin plant, additional
power is purchased from Duke Power under an evergreen contract
providing for specified periods of notice before termination by
either party.
The purchased power (primarily hydroelectric) contract for
the Massena, New York smelter expires not earlier than 2003, but
may be terminated by Alcoa with one year's notice.
In addition to the power output entitlement contract for its
Wenatchee, Washington smelter referred to earlier, Alcoa has a
contract with the Bonneville Power Administration (BPA). Several
contractual provisions allow restrictions when power is in short
supply. Beginning in 1995, a portion of the power supplied under
the BPA contract was replaced by power purchased from a local
public utility district. Additional power subsequently has been
purchased from the district, and currently no BPA power is
utilized at Wenatchee Works.
Suriname. Suralco owns and operates a 30,000 mt per year
smelter in Paranam, Suriname. Suralco also operates the Afobaka
hydro project, which supplies power to the smelter.
Norway. Although not included in the revenues and shipment
tables above, the Company reports equity earnings from its
interest in two smelters in Norway. Elkem Aluminium ANS, 50%-
owned by an Alcoa subsidiary, Norsk Alcoa A/S, is a partnership
that owns and operates the smelters.
Canada. On February 25, 1998, Alcoa and the government of
British Columbia, Canada signed a memorandum of understanding to
proceed with a feasibility study for the construction of a
250,000 mt per year primary aluminum smelter. The study will be
completed no later than December 31, 1998. If
-8-
the study produces a favorable result, construction could start
in 1999 and would represent an investment of approximately
$850 million.
Flat-Rolled Products
Alcoa's flat-rolled products serve three principal markets:
light gauge sheet products mainly serve the packaging market, and
sheet and plate products serve the transportation and building
and construction markets. Alcoa employs its own sales force for
most products sold in the packaging market.
Rigid Container Sheet (RCS). Most of the 1997 revenues in
the packaging market were derived from RCS which is sold to can
companies for production of beverage and food cans and can ends.
The number of RCS customers in the U.S. is relatively small.
Use of aluminum beverage cans continues to increase 3% annually
worldwide-particularly in Asia, Europe and South America, where
per capita consumption remains relatively low.
Aluminum's diverse characteristics, particularly its light
weight, recyclability and flexiblity for package designs, are
significant factors in packaging markets where alternatives such
as steel, plastic and glass are competitive materials.
Leadership in the packaging markets is maintained by improving
processes and facilities, as well as by providing marketing,
research and technical support to customers. RCS is produced at
the following locations:
RCS Facilities
Warrick, Indiana Yennora, Australia*
Alcoa, Tennessee Moka, Japan*
Point Henry, Australia* Swansea, Wales
*Joint venture
Kaal Australia Pty. Ltd., 50%-owned by Alcoa, owns and
operates the former AofA rolling mill at Point Henry and the
former Comalco Limited rolling mill at Yennora. These mills
produce RCS for the Australian and Asian markets. AofA continues
to supply Kaal Australia with aluminum ingot.
A subsidiary of Alcoa participates in a 50/50 joint venture
with Kobe Steel, Ltd. to serve RCS markets in Japan and other
Asian countries. In connection with this venture, Alcoa has a
long-term contract to supply metal to Kobe Steel.
Used aluminum beverage cans are an important source of metal
for RCS. Recycling aluminum conserves raw materials, reduces
litter and saves energy -- about 95% of the energy needed to
produce aluminum from bauxite. In addition, recycling capacity
costs much less than new primary aluminum capacity. Can
recycling or remelt facilities are located at or near Alcoa's
Warrick, Indiana; Alcoa, Tennessee; and Yennora, Australia
plants.
In April 1997, Alcoa announced that it had signed a Letter
of Intent with Reynolds Metals Company to acquire Reynolds'
rolling mill in Muscle Shoals, Alabama, two nearby can
reclamation plants and a coil coating facility in Sheffield,
Alabama. In late December 1997, Alcoa announced that it was
ending its acquisition plans with respect to those operations in
light of U.S. Department of Justice opposition.
Foil. Industrial foil, laminated foil and brazing sheet for
the automotive, packaging and building and construction markets
are produced at Alcoa's Lebanon, Pennsylvania facility.
Continuous casting facilities in Hawesville, Kentucky and Badin,
North Carolina produce reroll stock in support of the Lebanon
facility. Light gauge sheet, foil products and laminated
evaporator panels are manufactured by
-9-
Aluminio near Recife, Brazil. Light gauge sheet also is
produced at Yennora, Australia. Foil products are produced at
Inespal's facilities at Alicante and Sabinanigo, Spain.
Alcoa and Shanghai Aluminum Fabrication Plant (SAFP) have a
joint venture, owned 60% by Alcoa and 40% by SAFP, that operates
the former SAFP aluminum foil and foil laminate production
facility in Shanghai, China. The joint venture facility
currently produces approximately 13,000 mt of aluminum foil per
year. Through the use of technology and the addition of a second
caster, annual output is expected to increase to about 18,000 mt
within two years.
Sheet and Plate. Sheet and plate products serve the
aerospace, auto and truck, lithographic, railroad, ship-building,
building and construction, defense and other industrial and
consumer markets. The Company maintains its own sales forces for
most of these products.
Differentiation of material properties, price and service
are significant competitive factors. Aluminum's diverse
characteristics are important in these markets where competitive
materials include steel and plastics for automotive and building
applications; magnesium, titanium, composites and plastics for
aerospace and defense applications; and wood and vinyl in
building and construction applications. Alcoa continues to
develop alloys and products for aerospace and defense
applications, such as those developed for the Boeing 777,
Lockheed F-16, Canadair aircraft and the Advanced Amphibious
Assault Vehicle.
Alcoa's largest sheet and plate plant is located at
Davenport, Iowa. It produces products requiring special
alloying, heat-treating and other processing, some of which are
unique or proprietary. In 1996, Alcoa announced an increase in
the Davenport, Iowa plant's heat-treating capacity for sheet and
plate as part of a $75 million investment to meet aerospace and
automotive demand. Alcoa also commissioned the largest vertical
heat-treat furnace in North America, thus tripling the plant's
capacity for wide-width fuselage sheet. A horizontal plate heat-
treating furnace that will increase capacity by 30% began
production in the 1997 second quarter.
The Company continues to produce cast aluminum plate at its
Vernon, California plant after closing its hard alloy extrusion,
tube and forgings facilities there in 1994. Alcoa has invested
approximately $10 million in new machinery and equipment for the
plant's cast aluminum plate operation since the restructuring.
Alcoa and Kobe Steel have a joint venture in the U.S. and
one in Japan to serve the transportation industry. Initial
emphasis of these ventures is focused on expanding the use of
aluminum sheet products in passenger cars and light trucks.
The Company's Hungarian subsidiary, Alcoa-Kofem Kft,
produces common alloy flat and coiled sheet as well as soft alloy
extrusions and end products for the building, construction, food
and agricultural markets in central and western Europe. In 1996,
Alcoa acquired the remaining 49.9% interest in Kofem from the
Hungarian government.
Kofem began delivering aluminum truck bodies to major
beverage companies in Russia and Poland in 1996. Kofem delivered
additional truck bodies to customers in central and eastern
European countries in 1997.
The Company's Alcoa Italia S.p.A. subsidiary, part of the
1996 Alumix acquisition, produces industrial plate and common
alloy flat and coiled sheet for the building and construction,
transportation and other industrial markets in Europe at its
Fusina, Italy rolling mill.
Alcoa has a 165,000 square-feet plant in Hutchinson, Kansas
for further processing and just-in-time stocking of aluminum
sheet products for the U.S. aerospace market. Alcoa serves
European sheet and plate markets through a distribution center in
Paal, Belgium.
-10-
Alcoa has completed construction of a 165,000 square-feet
plant in Danville, Illinois for further processing and just-in-
time stocking of aluminum sheet products for the North American
automotive market. The Company expects this facility to begin
production in the 1998 first quarter.
The Inespal acquisition mentioned earlier also included the
purchase of rolling mills at Amorebieta, Alicante and Sabinanigo,
Spain which produce industrial plate and common alloy flat and
coiled sheet for the building and construction, transportation
and other industrial markets in Europe.
Engineered Products
Engineered products include extrusions used in the
transportation and construction markets; aluminum forgings and
castings; aluminum wheels; wire, rod and bar; and automotive
components.
Extrusions. Aluminum extrusions and tube are produced
principally at five U.S. locations:
- the Chandler, Arizona plant produces hard alloy
extrusions, tube and forge stock;
- the Lafayette, Indiana plant produces a broad range of
hard alloy extrusions and tube;
- the Baltimore, Maryland plant produces large press
extrusions; and
- the Tifton, Georgia and Delhi, Louisiana plants produce
common alloy extrusions.
Aluminum extruded products are manufactured by a subsidiary
in Argentina and by Aluminio at several locations in Brazil. In
1996, Aluminio acquired the extrusion assets of an Alcan
affiliate in Brazil. The assets included four plants and eight
extrusion presses. The transaction has been submitted to
Brazilian antitrust authorities for review and approval, and that
approval is pending.
Alcoa Extrusions Hannover GmbH & Co. KG produces and markets
high-strength aluminum extrusions and rod and bar to serve
European transportation and defense markets. In January 1997,
Alcoa acquired the remaining 40% interest and now owns 100% of
this company.
The subsidiaries of Alcoa Nederland Holding B.V. produce
extrusions, common alloy sheet products and a variety of finished
products for the building industry, such as aluminum windows,
doors and aluminum ceiling systems. These companies also
manufacture products for the agricultural industry such as
automated greenhouse systems.
Aluminum East ZAO, through its Building Systems
International branch, assembled and sold aluminum windows and
doors in Russia. This business is being discontinued.
The Alumix acquisition mentioned earlier also included the
purchase of extrusion plants in Bolzano, Fossanova, Feltre and
Iglesias, Italy and an extrusion die shop in Mori, Italy.
The Inespal acquisition also included the purchase of
extrusion plants at Noblejas and La Coruna, Spain.
Alcoa also has extrusion plants in Valls, Spain, Hungary and
the United Kingdom.
Mechanical-grade redraw rod, wire and cold-finished rod and
bar are produced at Massena, New York and are sold to
distributors and customers for applications in the building and
transportation markets.
Forgings/Castings. Aluminum forgings, sold principally in
the aerospace, automotive, commercial transportation and defense
markets, are produced at Cleveland, Ohio and Szekesfehervar,
Hungary.
-11-
In 1997 Alcoa completed construction of a multi-phase
facility to increase wheel production at its Cleveland
operations. This represented a $42 million investment to
increase production of forged aluminum wheels to meet market
demand for U.S. light trucks.
Alcoa and Superior Industries International Inc. have formed
a company to produce cast aluminum wheels for commercial trucks
and buses. The wheels will be marketed through Alcoa's existing
wheel sales organization. The initial manufacturing operations
are located at Superior's Van Nuys, California facility. The
parties expect to reach commercial production levels by mid-1999.
Alcoa's plant in Szekesfehervar, Hungary manufactures forged
aluminum truck wheels for the European market. The plant also
manufactures wheels for export to Asian, South American and other
geographic markets where European-style wheels are used. The
plant began production in mid-1997.
Alcoa has a 50% interest in a partnership, A-CMI, with a
subsidiary of CMI International, Inc. to produce cast and forged
aluminum automotive parts. A-CMI's first European manufacturing
plant in Lista, Norway develops and produces cast aluminum
chassis, suspension, brake and powertrain components and systems.
The plant represents a total investment of approximately $40
million. It is located near the 50%-owned Elkem Aluminium ANS
smelter, which delivers molten aluminum to the plant. Production
began in late 1997.
A-CMI's Kentucky Casting Center in Hawesville, Kentucky, its
second North American facility, produces aluminum chassis and
suspension structural components for the automotive market.
Alcoa also designs and builds specialized die-casting
machines through a subsidiary in Montreal, Canada.
Automotive Body Structures. Alcoa Automotive Structures
GmbH produces aluminum components and sub-assemblies for aluminum
automotive spaceframes. Aluminum spaceframes represent a
significant departure from the traditional method and material
used to manufacture primary auto body structures.
In 1993, Alcoa began operating a unique multi-million dollar
plant in Soest, Germany to supply aluminum components and
subassemblies to its first customer, Audi AG. In 1994, Audi
began marketing its A8 luxury sedan in Europe-the first
production automobile to utilize a complete aluminum spaceframe
body structure. The aluminum spaceframe of the A8 is a result of
a cooperative effort between Alcoa and Audi that began in 1981
and is constructed from these components and sub-assemblies
produced by Alcoa. The 1997 A8 debuted in U.S. showrooms in the
fall of 1996. The Soest plant also produces the front end module
for the new Mercedes-Benz A Class car.
Alcoa also operates design and engineering offices in
Esslingen (Stuttgart), Germany; Detroit, Michigan and at Alcoa
Technical Center, near Pittsburgh, Pennsylvania, where it designs
aluminum auto body structures for a variety of European car
manufacturers.
Alcoa is working with several other automobile manufacturers
in North America and Japan to develop new automotive applications
for aluminum products. For example, Chrysler Corporation's
Plymouth Prowler, a new roadster, entered initial, low-volume
production in 1997. Carrying 900 pounds of aluminum (or
approximately one-third of its weight), the Prowler is
constructed of an all-aluminum frame and body as well as aluminum
for brake rotors and suspension components. Alcoa and Chrysler
designed the car's spaceframe and Alcoa provides aluminum sheet
stock to be stamped into body panels and bumper assemblies.
Alcoa's plant in Northwood, Ohio manufactures the Prowler frame
and a variety of aluminum structural assemblies for the U.S.
automotive industry including the Corvette windshield surround.
-12-
Other Aluminum Products. Aluminio produces aluminum truck
and van bodies and aluminum casting products in Sao Paulo, Brazil
and aluminum electrical cable at its Pocos de Caldas plant.
Aluminio is negotiating for the sale of the assets of its
aluminum truck body division.
In December 1997, Aluminio and Phelps Dodge Corporation
signed a joint venture agreement to produce aluminum electric
cable and copper wiring and cables in Brazil. The venture,
Phelps Dodge & Alcoa Fios e Cabos Eletricos S.A., is owned 60% by
Phelps Dodge and 40% by Aluminio. Production takes place at the
venture's plant in Pocos de Caldas. The transaction has been
submitted to Brazilian antitrust authorities for review and
approval.
Alcoa Building Products, Inc. manufactures and markets
residential aluminum siding and other aluminum building products.
These products are sold principally to wholesale distributors.
Alcoa Closure Systems International, Inc. produces aluminum
closures for bottles at Worms, Germany; Nogi and Ichikawa, Japan;
and Barcelona, Spain. In April 1997, Alcoa sold the assets of
its Richmond, Indiana works to Silgan Holdings Inc.
Alcoa and Sinter Metals, Inc. of Cleveland, Ohio, have
formed a strategic alliance to develop and expand the market for
aluminum parts produced by powder metallurgy techniques,
especially for the automotive, business machine, appliance, lawn
care and leisure equipment markets.
Alcoa produces and markets aluminum paste, particles, flakes
and atomized powder. It also produces high-purity aluminum.
Nonaluminum Products Segment
The Nonaluminum Products segment includes the production and
sale of electrical, plastic and composite materials products,
manufacturing and packaging equipment, gold, magnesium products
and steel and titanium forgings.
Alcoa Fujikura Ltd. (AFL)
AFL produces and markets electronic and electrical
distribution systems (EDS) for the automotive industry, as well
as fiber optic products and systems for selected electric
utilities, telecommunications, cable television and datacom
markets. AFL supplies EDS to Ford, Subaru, Kenworth, Peterbilt,
Mack and Navistar.
In 1995, AFL acquired the operations of Electro-Wire
Products, Inc. Electro-Wire manufactured EDS for autos, trucks
and farm equipment. Combining these two businesses created a
worldwide enterprise that is the largest supplier of EDS to Ford
Motor Company's worldwide operations. The combined enterprise
also is the largest supplier of EDS to the heavy truck industry.
AFL owns Michels GmbH & Co. K.G. (Michels), a manufacturer
of EDS for automobiles, appliances and farm equipment, with two
plants in Germany and five plants in Hungary. In mid-1997, AFL
acquired the remaining 10% interest in Michels from its founder.
The Stribel group of companies, European manufacturers of
electromechanical and electronic components for the European
automotive market, also are owned by AFL.
AFL and Aluminio have a joint venture, AFL do Brasil Ltda.,
that manufactures and sells EDS in Brazil. During 1997, AFL
established an EDS manufacturing facility in Venezuela.
Significant competitive factors in the EDS markets include
price, quality and full service supplier capability. Automakers
increasingly require support from their selected suppliers on a
global basis.
-13-
In mid-1997, AFL's telecommunications division acquired the
assets of Six "R" Communications Inc., a Monroe, North Carolina-
based provider of EF&I services (engineer, furnish and install)
to the telecom, CATV and electric utility industries. Six "R"
Communications, L.L.C., a majority-owned entity, now operates
this business.
Packaging and Closures
Alcoa Closure Systems International, Inc. (ACSI) is the
world's largest producer of plastic closures for beverage
containers. Its business is coordinated from Indianapolis,
Indiana. The use of plastic closures has surpassed that of
aluminum closures for beverage containers in the U.S. and is
gaining momentum in other countries. Alcoa has plastic closure,
PET (polyethylene terephthalate) plastic bottles or packaging
equipment design and assembly facilities at the following
locations:
Packaging and Closures Facilities
Crawfordsville, Indiana
Santiago, Chile
Ichikawa and Nogi, Japan
Olive Branch, Mississippi
Tianjin, China
Saltillo, Mexico
Buenos Aires, Argentina
Bogota, Colombia
Lima, Peru
Manama, Bahrain
Szekesfehervar, Hungary
Lyubuchany, Russia
Barueri, Itapissuma, Lages and Queimados, Brazil
Barcelona, Spain
In September 1997, ACSI began production of plastic closures
at Lyubuchany, Russia, south of Moscow. The unit is known as
Alcoa CSI Vostok.
The Alcoa Packaging Equipment business unit (APE) designs,
manufactures and services bodymakers, decoration equipment,
registered embossers, end conversion presses and a variety of
testing equipment for the can making industry, along with plastic
and aluminum closure handling, orientation, inspection and
capping equipment for the food and beverage industry. Alcoa
Advanced Technologies, a division of APE, supplies advanced
material products to the semiconductor equipment industry.
Other Nonaluminum Products
The former Stolle Corporation was comprised of four
divisions -- Alcoa Building Products (whose principal products
for building and construction markets are vinyl siding and
accessories, plastic injected molded shutters and architectural
accessories and coated aluminum trim and rain carrying products);
Dayton Technologies (which produced extruded profiles for the
vinyl window and patio door markets); Norcold (which produced
refrigerator units) and Caradco (which manufactured vinyl and
wood windows and patio doors).
In February 1997, Alcoa sold the assets of Dayton
Technologies to Deceuninck Plastics Industries, N.V., a Belgian
building materials company, and the assets of Norcold and a
related Alcoa subsidiary, Arctek Corporation, to The Dyson-
Kissner-Moran Corporation. In April 1997, Alcoa sold the assets
of Caradco to JELD-WEN inc., a privately-held building products
and millwork manufacturer. The Stolle Corporation was renamed
Alcoa Building Products, Inc.
Northwest Alloys, Inc., in Addy, Washington, produces
magnesium from minerals in the area owned by the Company. The
magnesium is used by Alcoa for certain aluminum alloys and also
is sold to third parties.
Aluminio and Alcatel Cable Ameriques (ACA), a subsidiary of
Alcatel of France, have formed a joint venture to manufacture, in
Brazil, and sell telecommunication cables and related accessories
in South America. The venture, called Alcatel Cabos Brazil, is
owned 40% by Aluminio and 60% by ACA
-14-
and affiliates. The transaction has been submitted to the
Brazilian antitrust authorities for review and approval.
Aluminio formerly owned and operated a chain of retail
construction materials outlets in Brazil. Aluminio disposed of
its interest in these outlets in September 1997.
In January 1997, Alcoa sold the assets of Composite
Structures, in Monrovia, California (which was the last operating
division of Alcoa Composites, Inc.), to an investment group. ACI
has been conducting a transition and/or liquidation of its
remaining assets and liabilities. ACI principally designed and
manufactured composite parts and structures for aerospace and
transportation applications.
An AofA subsidiary, Hedges Gold Pty. Ltd., mines gold in
Western Australia under leases that expire in 2009 subject to
renewal options. Gold production has been declining since 1990.
Large press steel, titanium and special super-alloy forgings
are produced at Cleveland, Ohio. These products are sold
principally in aerospace and commercial markets.
Alcoa owns a 36% interest in American Trim, L.L.C., a joint
venture that manufactures primarily auto parts and appliance
control panels.
Competition
The markets for most aluminum products are highly
competitive. Price, quality and service are the principal
competitive factors in most of these markets. Where aluminum
products compete with other materials, the diverse
characteristics of aluminum are also a significant factor,
particularly its light weight and recyclability. The competitive
conditions are discussed earlier for each of the Company's major
product classes.
The Company continues to examine all aspects of its
operations and activities and redesign them where necessary to
enhance effectiveness and achieve cost reductions. Alcoa
believes that its competitive position is enhanced by its
improved processes, extensive facilities and willingness and
ability to commit capital where necessary to meet growth in
important markets, and by the capability of its employees. This
includes implementation of Alcoa Business System and the Alcoa
Production System. Research and development has led to improved
product quality and production techniques, new product
development and cost control.
Other Risk Factors
The following discussion about the Company's risk management
activities includes forward-looking statements that involve risk
and uncertainties. Actual results could differ materially from
those projected in the forward-looking statements.
In addition to inherent operating risks, Alcoa is exposed to
financial, market, political and economic risks.
Commodity Price Risks
Alcoa is a leading global producer of aluminum ingot and
aluminum fabricated products. Aluminum ingot is an
internationally-produced, priced and traded commodity. The
principal trading market for ingot is the LME. Alcoa
participates in this market by buying and selling future portions
of its aluminum requirements and output.
The aluminum industry is highly cyclical and the Company's
results of operations are influenced by LME-based prices of
primary aluminum. This price sensitivity impacts a portion of
the Company's
-15-
alumina sales and many of the Company's aluminum
products, with less impact on the more specialized and value-
added products.
For aluminum price risk management purposes, Alcoa divides
its operations into four regions: U.S., Pacific, Other Americas
and Europe. AofA in the Pacific region and Aluminio in the Other
Americas are generally in net long metal positions. From time to
time, they may sell production forward. Operations in the
European region are generally net metal short and may purchase
forward positions periodically. Historically, forward purchase
and sales activity within these three regions has not been
material.
In the normal course of business, Alcoa enters into long-
term contracts with a number of its fabricated products
customers. At December 31, 1997 and 1996, such contracts
approximated 2.093 million mt and 2.369 million mt, respectively.
Alcoa may enter into similar arrangements in the future.
In order to hedge the risk of higher prices for the
anticipated metal purchases required to fulfill these long-term
customer contracts, Alcoa enters into long positions, principally
using futures and options. Alcoa follows a stable pattern of
purchasing metal; therefore, it is highly likely that anticipated
metal requirements will be met. At December 31, 1997 and 1996,
these contracts totaled approximately 1,084,000 mt and 872,000
mt, respectively.
A hypothetical 10% change from the 1997 year-end, three-
month LME aluminum ingot price of $1,552 per mt would result in a
pre-tax gain or loss to future earnings of $170 million related
to these contracts. However, it should be noted that any change
in the value of these contracts, real or hypothetical, would be
significantly offset by an inverse change in the cost of
purchased metal. Earnings were selected as the measure of
sensitivity due to the historical relationship between aluminum
ingot prices and Alcoa's earnings. The hypothetical change of
10% was calculated using a parallel shift in the existing
December 31, 1997 forward price curve for aluminum ingot. The
price curve takes into account the time value of money, as well
as future expectations regarding the price of aluminum ingot.
The model also assumes there will be no aluminum smelter capacity
restarted by Alcoa.
The futures and options contracts noted above are with
creditworthy counterparties and are further supported by cash,
treasury bills or irrevocable letters of credit issued by
carefully chosen banks.
For financial accounting purposes, the gains and losses on
the hedging contracts are reflected in earnings concurrent with
the hedged costs. The cash flows from these contracts are
classified in a manner consistent with the underlying nature of
the transactions.
Alcoa intends to close out the hedging positions at the time
it purchases the metal from third parties, thus creating the
right economic match both in time and price. Deferred gains of
$113 million on the hedging contracts at December 31, 1997 are
expected to offset the increase in the price of the purchased
metal.
The expiration dates of the options and the delivery dates
of the futures contracts do not always coincide exactly with the
dates on which Alcoa is required to purchase metal to meet its
contractual commitments with customers. Accordingly, some of the
futures and options positions will be rolled forward. This may
result in significant cash inflows if the hedging contracts are
"in-the-money" at the time they are rolled forward. Conversely,
there could be significant cash outflows if metal prices fall
below the price of contracts being rolled forward.
In addition to the above-noted aluminum positions, Alcoa
also had 259,000 mt and 205,000 mt of futures and options
contracts outstanding at year-end 1997 and 1996, respectively,
that cover long-term, fixed-price commitments to supply customers
with metal from internal sources. Accounting convention requires
that these contracts be marked-to-market, which resulted in after-
tax charges to earnings of $13 million in 1997 and $57 million in
1996.
-16-
A hypothetical 10% change in aluminum ingot prices from the
year-end 1997 level of $1,552 per mt would result in a pre-tax
gain or loss of $30 million related to these positions. The
hypothetical gain or loss was calculated using the same model and
assumptions noted earlier.
Alcoa also purchases certain other commodities, such as gas
and copper, for its operations and enters into futures contracts
to eliminate volatility in the prices of such products. None of
these contracts are material. For additional information on
financial instruments, see Notes A and Q to the Financial
Statements.
Foreign Exchange Risks
Alcoa is subject to significant exposure from fluctuations
in foreign currencies. As a matter of company policy, foreign
currency exchange contracts, including forwards and options, are
used to limit transactional exposure to changes in currency
exchange rates. The forward contracts principally cover existing
exposures and firm commitments, while options are generally used
to hedge anticipated transactions.
A hypothetical 10% change in applicable 1997 year-end
forward rates would result in a pre-tax gain or loss of
approximately $80 million related to these positions. However,
it should be noted that any change in value of these contracts,
real or hypothetical, would be significantly offset by an inverse
change in the value of the underlying hedged items. The model
assumes a parallel shift in the forward curve for the applicable
currencies. See Note Q to the Financial Statements for
information related to the notional and fair market values of
Alcoa's foreign exchange contracts at December 31, 1997 and 1996.
Interest Rate Risks
Alcoa attempts to maintain a reasonable balance between
fixed and floating rate debt and uses interest rate swaps and
caps to keep financing costs as low as possible.
At December 31, 1997 and 1996, Alcoa had $1,952 million and
$2,075 million of debt outstanding at effective interest rates of
7.00% and 6.71% after the impact of interest rate swaps and caps
is taken into account. A hypothetical change of 10% in Alcoa's
effective interest rate from year-end 1997 levels would increase
or decrease interest expense by $14 million. For more
information related to Alcoa's use of interest rate instruments,
see Notes A and Q to the Financial Statements.
Risk Management
All of the aluminum and other commodity contracts, as well
as the various types of financial instruments, are
straightforward and are held for purposes other than trading.
They are used primarily to mitigate uncertainty and volatility,
and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to
the management, direction and control of the Strategic Risk
Management Committee (SRMC). It is composed of the chief
executive officer, the president, the chief financial officer and
other officers and employees whom the chief executive officer may
select from time to time. SRMC reports to the Board of Directors
at each of its scheduled meetings on the scope of its derivative
activities.
Material Limitations
The disclosures with respect to aluminum prices and foreign
exchange risk do not take into account the underlying anticipated
purchase obligations and the underlying transactional foreign
exchange exposures. If the underlying items were included in the
analysis, the gains or losses on the
-17-
futures and options contracts may be offset. Actual results
will be determined by a number of factors that are not under
Alcoa's control and could vary significantly from those
disclosed.
Year 2000 Issue
Alcoa, assisted by outside consultants, has conducted a
detailed review of its administrative and process control
computer systems to identify areas that are affected by the "Year
2000" issue. The Year 2000 issue is the result of computer
programs being written using two digits (rather than four) to
define the applicable year. This could result in computational
errors as dates are compared across the century boundary. The
vast majority of the Company's products do not contain
microprocessors or other electronic components and thus are not
susceptible to Year 2000 issues in their operation.
The Company's evaluation of the Year 2000 readiness of
process control systems includes monitoring and control devices
for plants and other operating locations. Plans detailing the
tasks and resources required to ensure Year 2000 readiness for
process control are expected to be in place by mid-year. The
total cost associated with any required modifications for the
Company's critical process control systems is not expected to be
material to the Company's financial position.
An unexpected failure to have corrected a Year 2000 problem
could result in an interruption in certain normal business
activities or operations. However, the Company believes that,
with the completion of its Year 2000 project, significant
interruptions will not be encountered. See also Year 2000 Issue
on page 35 in the Annual Report to Shareholders.
Employees
Alcoa had 81,600 employees worldwide at year-end 1997.
About one-third of the employees are located in the U.S.
New six-year labor agreements covering the majority of
Alcoa's U.S. production workers were ratified in mid-1996. As
part of the agreements, Alcoa and the unions agreed to an
unprecedented partnership mandating that they work cooperatively
on customer requirements, business objectives and shareholder and
union interests. The agreements set broad, new goals for
employee safety, job security, influence, control and
accountability for the work environment. Other major provisions
include: wage increases over the first five years; enhanced
pension benefits; increases in sickness and accident insurance,
life insurance and dental benefits and the amount of income a
spouse may earn before sharing medical benefit costs. The new
agreements have five years of defined provisions. At the end of
the fifth year, the entire contract will be reopened. If
agreement cannot be reached, the economic provisions will be
submitted to arbitration.
In 1996, a new five-year labor agreement covering about
1,100 employees at Alcoa's Forged Products business unit in
Cleveland, Ohio was ratified. A three-week strike followed the
expiration of the previous three-year pact.
Wages for AofA employees are covered by agreements that are
negotiated under guidelines established by a national industrial
relations authority.
Wages for both hourly and salaried employees of Aluminio are
negotiated annually in compliance with government guidelines.
Each Aluminio location, however, has a separate compensation
package for its employees.
Research and Development
Alcoa, a technology leader in the aluminum industry, engages
in research and development programs which include basic and
applied research, and process and product development. These
-18-
activities are conducted principally at Alcoa Technical Center.
Several business units conduct their own R&D programs.
Expenditures for R&D activities were $143 million in 1997,
$166 million in 1996 and $141 million in 1995. Substantially all
R&D is funded by the Company.
Environmental
Alcoa's Environment, Health and Safety Policy confirms its
commitment to operate worldwide in a manner which protects the
environment and the health and safety of employees and of the
citizens of the communities where the Company operates.
Alcoa continues its efforts to develop and implement modern
technology, and standards and procedures, to meet its
Environment, Health and Safety Policy. Approximately $94 million
was spent during 1997 for new or expanded facilities for
environmental control. Capital expenditures for such facilities
will approximate $102 million in 1998. The costs of operating
these facilities are not included in these figures. Remediation
expenses are continuing at many of the Company's facilities. See
Environmental Matters on page 33 in the Annual Report to
Shareholders and "Item 3 - Legal Proceedings" below.
Alcoa's operations worldwide, like those of others in
manufacturing industries, have in recent years become subject to
increasingly stringent legislation and regulations intended to
protect human health and safety and the environment. This trend
is expected to continue. Compliance with new laws, regulations
or policies could require substantial expenditures by the Company
in addition to those referenced above.
Alcoa supports the use of sound scientific research and
realistic risk criteria to analyze environmental and human health
and safety effects and to develop effective laws and regulations
in all countries where it operates. The Company also relies on
internal standards that are applied worldwide to ensure that its
facilities operate with minimal adverse environmental, health and
safety impacts, even where no regulatory requirements exist.
Alcoa recognizes that recycling and pollution prevention offer
real solutions to many environmental problems, and it continues
vigorously to pursue efforts in these areas.
Item 2. Properties.
See "Item 1 - Business." Alcoa believes that its
facilities, substantially all of which are owned, are suitable
and adequate for its operations.
Item 3. Legal Proceedings.
In the ordinary course of its business, Alcoa is involved in
a number of lawsuits and claims, both actual and potential,
including some which it has asserted against others. While the
amounts claimed may be substantial, the ultimate liability cannot
now be determined because of the considerable uncertainties that
exist. It is possible that results of operations or liquidity in
a particular period could be materially affected by certain
contingencies. Management believes, however, that the
disposition of matters that are pending or asserted will not have
a material adverse effect on the financial position of the
Company.
Environmental Matters
Alcoa is involved in proceedings under the Superfund or
analogous state provisions regarding the usage, disposal, storage
or treatment of hazardous substances at a number of sites in the
U.S. The Company has committed to participate, or is engaged in
negotiations with Federal or state authorities relative to its
alleged liability for participation, in clean-up efforts at
several such sites.
-19-
In response to a unilateral order issued under Section 106
of the Comprehensive Environmental Compensation and Liability Act
of 1980 (CERCLA) by the U.S. Environmental Protection Agency
(EPA) Region II regarding releases of hazardous substances,
including polychlorinated biphenyls (PCBs), into the Grasse River
near its Massena, New York facility, Alcoa conducted during 1995
certain remedial activities in the Grasse River for the removal
and appropriate disposal of certain river sediments. During
1996, the Company submitted an Analysis of Alternatives Report,
which is being reviewed by the EPA.
Representatives of various Federal and state agencies and a
Native American tribe, acting in their capacities as trustees for
natural resources, have asserted that Alcoa may be liable for
loss or damage to such resources under Federal and state law
based on Alcoa's operations at its Massena, New York facility.
While formal proceedings have not been instituted, the Company is
actively investigating these claims.
The New York State Department of Environmental Conservation
(DEC), in a letter dated October 10, 1997, notified Alcoa that
its Massena, New York facility allegedly is in violation of
certain air pollution control requirements. The allegations
included operation of certain emission sources without permits,
non-compliance with permitting and control standards for sulfur
dioxide, carbon monoxide and carbonyl sulfide and violation of
requirements related to the deposition of fluoride on vegetation.
In early March 1998, the Company agreed to an Order on Consent
with the DEC. Resolution includes a civil penalty of $57,500.
The settlement is expected to be effective by the end of the
first quarter of 1998.
In March 1994, Alcoa and Region VI of the EPA entered into
an administrative order on consent, EPA Docket No. 6-11-94,
concerning the Alcoa (Point Comfort)/Lavaca Bay National
Priorities List site which includes portions of Alcoa's Point
Comfort, Texas bauxite refining operations and portions of Lavaca
Bay, Texas, adjacent to the Company's plant. The administrative
order requires the Company to conduct a remedial investigation
and feasibility study at the site overseen by the EPA. Work
under the administrative order is proceeding. The Company and
certain Federal and state natural resource trustees, who
previously served Alcoa with notice of their intent to file suit
to recover damages for alleged loss or injury of natural
resources in Lavaca Bay, entered into several agreements during
1996 to cooperatively identify restoration alternatives and
approaches for Lavaca Bay. Efforts under those agreements are
ongoing.
In March 1997, Alcoa Italia received an order from Italian
governmental authorities relating to several environmental
deficiencies at its Fusina Plant. Alcoa Italia and the
governmental authorities commenced discussions that resulted in a
plan for sampling certain emission points. The plan is expected
to be implemented in the near future and will confirm compliance
of these sources with legal requirements.
Other Matters
Alcoa was named as one of several defendants in a number of
lawsuits filed as a result of the Sioux City, Iowa DC-10 plane
crash in 1989. The plaintiffs claim that Alcoa fabricated the
titanium fan disk involved in the alleged engine failure of the
plane from a titanium forging supplied by a third party. All of
the 117 cases originally filed have been resolved.
In August 1994, the U.S. Department of Justice (DOJ) issued
a Civil Investigative Demand (CID) to Alcoa regarding activities
undertaken by Alcoa in response to a multinational Memorandum of
Understanding negotiated by the U.S. government and other
sovereign nations. In the second quarter of 1997, Alcoa received
a letter from the DOJ closing the investigation.
On June 13, 1995, the Company was served with a class action
complaint in the matter of John P. Cooper, et al. v. Aluminum
Company of America, Case Number 3-95-CV-10074, pending in the
United States District Court for the Southern District of Iowa.
The named plaintiffs alleged violation of Federal and state civil
rights laws prohibiting discrimination on the basis of race and
gender. In June
-20-
1997, the court approved a settlement agreement
which provides for complete settlement of all class-wide claims
for injunctive relief in consideration for $212,000 and
implementation of certain structural changes. The settlement
also provides for mediation of certain remaining individual
claims for damages due to a hostile work environment or wrongful
termination. All other claims were released under the terms of
the agreement. The mediation process is ongoing.
Alcoa initiated a lawsuit in King County, Washington in
December 1992 against nearly one hundred insurance companies that
provided insurance coverage for environmental property damage at
Alcoa plant sites between the years 1956 and 1985. The trial for
the first three sites concluded in October 1996 with a jury
verdict partially in Alcoa's favor and an award of damages to
Alcoa. In its post-trial decisions, the trial court
substantially reduced the amount that Alcoa will be able to
recover from its insurers on the three test sites. Alcoa has
appealed these rulings to the Washington Court of Appeals and
expects briefing and argument on the appeal to be completed in
1998.
In March 1996, a class action complaint was filed in Los
Angeles County (California) Superior Court against U.S. producers
of primary aluminum, including Alcoa, claiming conspiracy and
collusive action in violation of state antitrust laws. The suit
alleged that the defendants colluded to raise prices of aluminum
products by cutting production. The defendants removed the case
to Federal court in April 1996. On July 1, 1996, the U.S.
District Court for the Central District of California granted the
defendants' motion for summary judgment and the complaint was
dismissed. Plaintiff filed a notice of appeal with the Ninth
Circuit Court of Appeals. In December 1997, plaintiff's appeal
of the dismissal of this action was denied.
In March 1996, Alcoa received a subpoena from the U.S.
Department of Commerce in connection with the export of potassium
fluoride by a subsidiary for use at its alumina refineries in
Jamaica and Suriname. Following a review of records provided by
the Company, the Department of Commerce has charged that the
Company made shipments without export licenses, which had been
required since 1991 as a result of a regulatory change.
In December 1996, JMB Realty Corporation (JMB) filed a
complaint for declaratory relief and damages against Alcoa and
two subsidiaries, Alcoa Properties, Inc. and Alcoa Securities
Corporation, in the Circuit Court of Cook County, Illinois. JMB
claims that it is entitled to a rebate of approximately $78
million (including interest through 1997) from Alcoa Properties,
Inc., arising from a stock transaction that occurred in 1986 in
which a subsidiary of JMB purchased the outstanding stock of
substantially all of Alcoa Properties, Inc.'s real estate holding
subsidiaries. JMB also is seeking an order canceling three
promissory notes that it made and delivered to Alcoa Securities
Corporation. JMB owes Alcoa Securities Corporation approximately
$58 million on the notes (including interest through 1997). In
response to JMB's suit, Alcoa and Alcoa Properties, Inc. have
denied that any rebate is owed to JMB, and Alcoa Securities
Corporation has counterclaimed for collection of the outstanding
balance due on the notes.
In April 1997, German customs authorities conducted a search
of the offices of Alcoa VAW Hannover Presswerk GmbH & Co. KG
(Alcoa VAW) in Hannover, Germany, seeking materials relating to
export transactions dating from 1992. In November 1997, German
customs authorities reported 53 documentary customs violations,
and in January 1998, the local district attorney opened legal
proceedings on the matter. Discussions between Alcoa VAW and
German customs authorities continue.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's
security holders during the fourth quarter of 1997.
-21-
Item 4A. Executive Officers of the Registrant.
The names, ages, positions and areas of responsibility of
the executive officers of the Registrant as of March 1, 1998 are
listed below.
Paul H. O'Neill, 62, Chairman of the Board and Chief
Executive Officer. Mr. O'Neill was elected a director of Alcoa
in 1986 and became Chairman of the Board and Chief Executive
Officer in June 1987. Before joining Alcoa, Mr. O'Neill had been
an officer since 1977 and President and a director since 1985 of
International Paper Company.
Alain J. P. Belda, 54, President and Chief Operating
Officer. Mr. Belda was elected President and Chief Operating
Officer in January 1997. He was President of Alcoa Aluminio S.A.
in Brazil from 1979 to March 1994. Mr. Belda was elected Vice
President of Alcoa in 1982 and, in 1989, was given responsibility
for all of Alcoa's interests in Latin America (other than
Suriname). In August 1991 he was named President - Latin America
for the Company. Mr. Belda was elected Executive Vice President
in 1994 and Vice Chairman in 1995.
George E. Bergeron, 56, Executive Vice President. Mr.
Bergeron was named President - Alcoa Closure Systems
International in 1982 and was elected Vice President and General
Manager - Rigid Packaging Division in July 1990. He was
appointed President - Rigid Packaging Division in 1991.
Mr. Bergeron was elected Executive Vice President of Alcoa in
January 1998 and is responsible for corporate growth initiatives.
Michael Coleman, 47, Vice President and President - Alcoa
Rigid Packaging Division. Mr. Coleman joined Alcoa in January
1998. He had been Vice President - Operations of North Star
Steel from 1993 to 1994, Executive Vice President - Operations
from 1994 to 1996 and President from 1996 through 1997. Mr.
Coleman joined North Star Steel in 1982.
Richard L. Fischer, 61, Executive Vice President -
Chairman's Counsel. Mr. Fischer was elected Vice President and
General Counsel in 1983 and became Senior Vice President in 1984.
He was given the additional responsibility for Corporate
Development in 1986 and in 1991 named to his present position.
In his current assignment, Mr. Fischer is responsible for
Corporate Development and the expansion and integration of
Alcoa's international business activities.
L. Patrick Hassey, 52, Vice President and President - Alcoa
Europe. Mr. Hassey joined Alcoa in 1967 and was named Davenport
Works Manager in 1985. In 1991, he was elected a Vice President
of Alcoa and appointed President - Aerospace/Commercial Rolled
Products Division. Mr. Hassey was appointed President - Alcoa
Europe in November 1997.
Patricia L. Higgins, 48, Vice President and Chief
Information Officer. Ms. Higgins joined Alcoa in January 1997
and is responsible for the integration and implementation of the
Company's computer initiatives. She began her career at American
Telephone & Telegraph Co. in 1977 and was Vice President of
International Sales Operations in Network Systems before joining
Nynex Corporation in 1991 as Group Vice President, Manhattan
Market Area. In 1995, Ms. Higgins moved to Unisys Corporation
where she was President, Communications Market Sector Group.
Richard B. Kelson, 51, Executive Vice President and Chief
Financial Officer. Mr. Kelson was appointed Assistant Secretary
and Managing General Attorney in 1984 and Assistant General
Counsel in 1989. He was elected Senior Vice President -
Environment, Health and Safety in 1991 and Executive Vice
President and General Counsel in May 1994. Mr. Kelson was named
to his current position in May 1997.
Frank L. Lederman, 48, Vice President and Chief Technical
Officer. Mr. Lederman was Senior Vice President and Chief
Technical Officer for Noranda, Inc., a company he joined in 1988.
-22-
Mr. Lederman joined Alcoa as a Vice President in May 1995 and
became Chief Technical Officer in December 1995. In his current
position Mr. Lederman directs operations of the Alcoa Technical
Center.
G. John Pizzey, 52, Vice President and President, Alcoa
World Alumina. Mr. Pizzey joined Alcoa of Australia Limited in
1970 and was appointed to the board of Alcoa of Australia as
Executive Director - Victoria Operations and Managing Director of
Portland Smelter Services in 1986. He was named President -
Bauxite and Alumina Division of Alcoa in 1994 and President -
Primary Metals Division of Alcoa in 1995. Mr. Pizzey was elected
a Vice President of Alcoa in 1996 and was appointed President -
Alcoa World Alumina in November 1997.
Lawrence R. Purtell, 50, Executive Vice President -
Environment, Health and Safety and General Counsel. Mr. Purtell
joined Alcoa in November 1997. He had been Corporate Secretary
and Associate General Counsel of United Technologies Corporation
from 1989 to 1992 and Vice President and General Counsel of
Carrier Corporation from 1992 to 1993. Mr. Purtell was Senior
Vice President and General Counsel and Corporate Secretary of
McDermott International, Inc. from 1993 to 1996. In 1996, he
joined Koch Industries, Inc. as Senior Vice President, General
Counsel and Corporate Secretary.
Robert F. Slagle, 57, Executive Vice President, Human
Resources and Communications. Mr. Slagle was elected Treasurer
in 1982 and Vice President in 1984. In 1986, he was named Vice
President - Industrial Chemicals and, in 1987, was named Vice
President - Industrial Chemicals and U.S. Alumina Operations.
Mr. Slagle was named Vice President - Raw Materials, Alumina and
Industrial Chemicals in 1989, and Vice President of Alcoa and
Managing Director - Alcoa of Australia Limited in 1991. He was
named President - Alcoa World Alumina in 1996 and was elected to
his current position in November 1997.
G. Keith Turnbull, 62, Executive Vice President - Alcoa
Business System. Dr. Turnbull was appointed Assistant Director
of Alcoa Laboratories in 1980. He was named Director -
Technology Planning in 1982, Vice President - Technology Planning
in 1986 and Executive Vice President - Strategic
Analysis/Planning and Information in 1991. In January 1997 he
was named to his current position, with responsibility for
company-wide implementation of Alcoa Business System.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
Dividend per share data, high and low prices per share and
the principal exchanges on which the Company's common stock is
traded are set forth on pages 60 through 61 of the 1997 Annual
Report to Shareholders (the Annual Report) and are incorporated
herein by reference.
At February 9, 1998 (the record date for the Company's 1998
annual shareholders meeting), there were approximately 95,800
Alcoa shareholders, including both record holders and an estimate
of the number of individual participants in security position
listings.
Item 6. Selected Financial Data.
The comparative columnar table showing selected financial
data for the Company is set forth on page 27 of the Annual Report
and is incorporated herein by reference.
-23-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Management's review and comments on the consolidated
financial statements are set forth on pages 28 through 35 of the
Annual Report and are incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
The information regarding quantitative and qualitative
disclosures about market risk is set forth on pages 32 through 33
of the 1997 Annual Report to Shareholders and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements, the notes
thereto and the report of the independent public accountants are
set forth on pages 37 through 49 of the Annual Report and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding Directors is contained under the
caption "The Board of Directors" on pages 7 through 13 of the
Registrant's definitive Proxy Statement dated March 11, 1998 (the
Proxy Statement) and is incorporated herein by reference.
The information regarding executive officers is set forth in
Part I, Item 4A under "Executive Officers of the Registrant."
Item 11. Executive Compensation.
This information is contained under the caption
"Compensation of Executive Officers" on pages 13 through 20 of
the Proxy Statement and is incorporated herein by reference. The
performance graph and Report of the Compensation Committee shall
not be deemed to be "filed."
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
This information is contained under the caption "Alcoa
Common Stock Ownership" on page 6 of the Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
This information is contained under the caption
"Transactions with Directors' Companies" on page 12 of the Proxy
Statement and is incorporated herein by reference.
-24-
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K.
(a) The consolidated financial statements, financial
statement schedule and exhibits listed below are filed as part of
this report.
(1) The Company's consolidated financial statements, the
notes thereto and the report of the independent public
accountants are set forth on pages 37 through 49 of the Annual
Report and are incorporated herein by reference.
(2) The following report and schedule should be read in
conjunction with the Company's consolidated financial statements
in the Annual Report:
Independent Accountant's Report of Coopers & Lybrand L.L.P.
dated January 8, 1998, except for Note V, for which the date
is February 6, 1998, on the Company's financial statement
schedule filed as a part hereof for the fiscal years ended
December 31, 1997, 1996 and 1995.
Schedule II - Valuation and Qualifying Accounts - for the
fiscal years ended December 31, 1997, 1996 and 1995.
(3) Exhibits
Exhibit
Number Description *
2. Agreement and Plan of Merger among the Company, AMX
Acquisition Corp. and Alumax Inc. dated as of March 8,
1998 (filed herewith). The Registrant will furnish
supplementally a copy of all omitted Schedules to
Exhibit 2 upon the request of the Securities and
Exchange Commission.
3(a).Articles of the Registrant as amended, incorporated by
reference to exhibit 3(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993.
3(b).By-Laws of the Registrant, incorporated by reference to
exhibit 3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1991.
10(a). Long Term Stock Incentive Plan (restated) effective
January 1, 1997, as amended January 1, 1998 (filed
herewith).
10(b). Employees' Excess Benefit Plan, Plan A, incorporated by
reference to exhibit 10(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1980.
10(c). Incentive Compensation Plan, as amended effective January
1, 1993, incorporated by reference to exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10(d). Employees' Excess Benefit Plan, Plan C, as amended and
restated in 1994, effective January 1, 1989, incorporated
by reference to exhibit 10(d) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
10(e). Employees' Excess Benefit Plan, Plan D, as amended
effective October 30, 1992, incorporated by reference to
exhibit 10(e) to the Company's Annual Report on Form 10-K
-25-
for the year ended December 31, 1992 and exhibit 10(e)(1)
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
10(f). Employment Agreement of Paul H. O'Neill, as amended
through February 25, 1993, incorporated by reference to
exhibit 10(h) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1987, exhibit 10(g) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990 and exhibit 10(f)(2) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10(g). Deferred Fee Plan for Directors, as amended effective
November 10, 1995, incorporated by reference to exhibit
10(g) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
10(h). Restricted Stock Plan for Non-Employee Directors, as
amended effective March 10, 1995, incorporated by
reference to exhibit 10(h) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
10(h)(1). Amendment to Restricted Stock Plan for Non-Employee
Directors, effective November 10, 1995, incorporated by
reference to exhibit 10(h)(1) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
10(i). Fee Continuation Plan for Non-Employee Directors,
incorporated by reference to exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
10(i)(1). Amendment to Fee Continuation Plan for Non-Employee
Directors, effective November 10, 1995, incorporated by
reference to exhibit 10(i)(1) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
10(j). Deferred Compensation Plan, as amended effective October
30, 1992, incorporated by reference to exhibit 10(k) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10(j)(1). Amendments to Deferred Compensation Plan, effective
January 1, 1993, February 1, 1994 and January 1, 1995,
incorporated by reference to exhibit 10(j)(1) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10(j)(2). Amendment to Deferred Compensation Plan, effective
June 1, 1995, incorporated by reference to exhibit
10(j)(2) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
10(k). Summary of the Executive Split Dollar Life Insurance
Plan, dated November 1990, incorporated by reference to
exhibit 10(m) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990.
10(l). Dividend Equivalent Compensation Plan, effective February
3, 1997, incorporated by reference to exhibit 10(l) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
10(m). Form of Indemnity Agreement between the Company and
individual directors or officers, incorporated by
reference to exhibit 10(j) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987.
-26-
12. Computation of Ratio of Earnings to Fixed Charges.
13. Portions of Alcoa's 1997 Annual Report to Shareholders.
21. Subsidiaries and Equity Entities of the Registrant.
23. Consent of Independent Certified Public Accountants.
24. Power of Attorney for certain directors.
27. Financial data schedule.
*Exhibit Nos. 10(a) through 10(l) are management contracts
or compensatory plans required to be filed as Exhibits to this
Form 10-K.
Amendments and modifications to other Exhibits previously
filed have been omitted when in the opinion of the Registrant
such Exhibits as amended or modified are no longer material or,
in certain instances, are no longer required to be filed as
Exhibits.
No other instruments defining the rights of holders of long-
term debt of the Registrant or its subsidiaries have been filed
as Exhibits because no such instruments met the threshold
materiality requirements under Regulation S-K. The Registrant
agrees, however, to furnish a copy of any such instruments to the
Commission upon request.
(b) Reports on Form 8-K. None was filed in the fourth
quarter of 1997.
-27-
Independent Accountant's Report
To the Shareholders and Board of Directors
Aluminum Company of America
Our report on the consolidated financial statements of
Aluminum Company of America has been incorporated by reference in
this Form 10-K from page 36 of the 1997 Annual Report to
Shareholders of Aluminum Company of America. In connection with
our audits of such financial statements, we have also audited the
related financial statement schedule listed under Item 14 of this
Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
January 8, 1998, except
for Note V, for which the
date is February 6, 1998
-28-
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(in millions)
Col. A Col. B Col. C Col. D Col. E
- ------ ------ ------ ------ ------
Additions
---------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of period expenses (A) accounts (B) Deductions end of period
----------- --------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997 $ 48.4 $ 5.8 $(4.0)(A) $13.6(B) $ 36.6
1996 $ 45.8 $24.0 $ 1.5(A) $22.9(B) $ 48.4
1995 $ 37.4 $17.4 $(1.8)(A) $ 7.2(B) $ 45.8
Income tax valuation allowance:
1997 $110.0 $11.9 $(13.2)(A) $5.2(C) $103.5
1996 $112.1 $23.9 - $26.0(C) $110.0
1995 $170.0 $16.2 - $74.1(C) $112.1
<FN>
Notes: (A) Collections on accounts previously written off,
acquisition/divestiture of subsidiaries and foreign
currency translation adjustments.
(B) Uncollectible accounts written off
(C) Related primarily to reductions in the valuation
reserve based on a change in circumstances.
</TABLE>
-29-
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALUMINUM COMPANY OF AMERICA
March 11, 1998 By /s/Earnest J. Edwards
Earnest J. Edwards
Senior Vice President and
Controller
(Also signing as Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/Paul H. O'Neill Chairman of the Board March 11, 1998
Paul H. O'Neill and Chief Executive
Officer (Principal
Executive Officer
and Director)
/s/Richard B. Kelson Executive Vice President March 11, 1998
Richard B. Kelson and Chief Financial
Officer
(Principal Financial
Officer)
Kenneth W. Dam, Joseph T. Gorman, Judith M. Gueron, Sir Ronald
Hampel, John P. Mulroney, Sir Arvi Parbo, Henry B. Schacht,
Forrest N. Shumway, Franklin A. Thomas and Marina v.N. Whitman,
each as a Director, on March 11, 1998, by Denis A. Demblowski,
their Attorney-in-Fact.*
*By /s/Denis A. Demblowski
Denis A. Demblowski
Attorney-in-Fact
-30-
<PAGE> EXHIBIT 2
CONFORMED COPY
================================================================================
AGREEMENT AND PLAN OF MERGER
among
ALUMINUM COMPANY OF AMERICA,
AMX ACQUISITION CORP.
and
ALUMAX INC.
Dated as of March 8, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
The Offer
Section 1.1. The Offer....................................................... 2
Section 1.2. Company Actions................................................. 4
Section 1.3. Directors of the Company........................................ 5
ARTICLE II
The Merger
Section 2.1. The Merger...................................................... 6
Section 2.2. Closing......................................................... 7
Section 2.3. Effective Time.................................................. 7
Section 2.4. Effects of the Merger........................................... 7
Section 2.5. Certificate of Incorporation; By-laws........................... 7
Section 2.6. Directors; Officers of Surviving Corporation.................... 8
Section 2.7. Conversion of Securities........................................ 8
Section 2.8. Exchange of Certificates........................................ 9
Section 2.9. Appraisal Rights................................................12
Section 2.10. Adjustment to Prevent Dilution..................................13
ARTICLE III
Representations and Warranties of the Company
Section 3.1. Organization, Qualification, Etc................................14
Section 3.2. Capital Stock...................................................15
Section 3.3. Corporate Authority Relative to this Agreement; No Violation....16
Section 3.4. Reports and Financial Statements................................17
Section 3.5. No Undisclosed Liabilities......................................19
Section 3.6. No Violation of Law.............................................19
Section 3.7. Environmental Matters...........................................19
Section 3.8. Employee Benefit Plans; ERISA...................................21
Section 3.9. Absence of Certain Changes or Events............................24
Section 3.10. Litigation......................................................24
i
<PAGE>
Section 3.11. Schedule 14D-9; Offer Documents; Registration Statement and
Proxy Statement.................................................24
Section 3.12. Intellectual Property...........................................25
Section 3.13. Tax Matters.....................................................26
Section 3.14. Opinion of Financial Advisor....................................28
Section 3.15. Required Vote of the Company Stockholders.......................28
Section 3.16. Employment Matters..............................................28
ARTICLE IV
Representations and Warranties of the Parent and the Purchaser
Section 4.1. Organization, Qualification, Etc................................29
Section 4.2. Capital Stock...................................................30
Section 4.3. Corporate Authority Relative to this Agreement; No Violation....30
Section 4.4. Reports and Financial Statements................................32
Section 4.5. No Undisclosed Liabilities......................................33
Section 4.6. No Violation of Law.............................................33
Section 4.7. Environmental Matters...........................................33
Section 4.8. Employee Benefit Plans; ERISA...................................34
Section 4.9. Absence of Certain Changes or Events............................36
Section 4.10. Litigation......................................................36
Section 4.11. Proxy Statement/Prospectus; Registration Statement..............36
Section 4.12. Intellectual Property...........................................37
Section 4.13. Tax Matters.....................................................38
Section 4.14. Opinion of Financial Advisor....................................39
Section 4.15. Employment Matters..............................................39
Section 4.16. Ownership of Shares.............................................39
ARTICLE V
Covenants and Agreements
Section 5.1. Conduct of Business by the Company..............................40
Section 5.2. Access; Confidentiality.........................................43
Section 5.3. Special Meeting, Proxy Statement, Registration Statement.......44
Section 5.4. Best Efforts; Further Assurances................................46
Section 5.5. Employee Stock Options and Other Employee Benefits..............47
Section 5.6. Takeover Statute................................................48
ii
<PAGE>
Section 5.7. Solicitation by the Company.....................................49
Section 5.8. Public Announcements............................................49
Section 5.9. Indemnification and Insurance...................................49
Section 5.10. Additional Reports and Information..............................50
Section 5.11. Affiliates......................................................51
Section 5.12. NYSE Listing....................................................51
Section 5.13. Tax-Free Reorganization.........................................51
Section 5.14. The Company Rights Plan.........................................52
ARTICLE VI
Conditions to the Merger
Section 6.1. Conditions to Each Party's Obligation to Effect the Merger......52
Section 6.2. Conditions to Obligation of the Parent and the Purchaser
to Effect the Merger............................................53
Section 6.3. Conditions to Obligation of the Company to Effect
the Merger......................................................53
Section 6.4. Additional Conditions to the Obligations of the Parent
and the Purchaser to Effect the Merger..........................53
Section 6.5. Additional Conditions to the Obligations of the Company
to Effect the Merger............................................54
ARTICLE VII
Termination
Section 7.1. Termination.....................................................55
Section 7.2. Effect of Termination...........................................56
ARTICLE VIII
Miscellaneous
Section 8.1. No Survival of Representations and Warranties...................57
Section 8.2. Expenses........................................................57
Section 8.3. Counterparts; Effectiveness.....................................57
Section 8.4. Governing Law...................................................57
Section 8.5. Notices.........................................................57
Section 8.6. Assignment; Binding Effect......................................58
iii
<PAGE>
Section 8.7. Severability....................................................59
Section 8.8. Enforcement of Agreement........................................59
Section 8.9. Entire Agreement; No Third-Party Beneficiaries..................59
Section 8.10. Headings........................................................59
Section 8.11. Definitions.....................................................59
Section 8.12. Finders or Brokers..............................................60
Section 8.13. Amendment or Supplement.........................................60
Section 8.14. Extension of Time, Waiver, Etc..................................60
Annex A -- Conditions to the Offer
Exhibit A -- Form of Affiliate Letter for Affiliates of Alumax Inc.
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AGREEMENT AND PLAN OF MERGER, dated as of March 8, 1998 (the
"Agreement"), among ALUMINUM COMPANY OF AMERICA, a Pennsylvania corporation (the
"Parent"), AMX ACQUISITION CORP., a Delaware corporation (the "Purchaser"), and
ALUMAX INC., a Delaware corporation (the "Company").
WHEREAS, the Boards of Directors of the Parent, the Purchaser and the
Company deem it advisable and in the best interests of their respective
stockholders that the Parent acquire the Company upon the terms and subject to
the conditions provided for in this Agreement;
WHEREAS, in furtherance thereof it is proposed that the acquisition be
accomplished by the Purchaser commencing a cash tender offer (as it may be
amended from time to time as permitted by this Agreement, the "Offer") to
acquire 27,000,000 shares of common stock, par value $0.01 per share, of the
Company (the "Company Common Stock," and together with the rights issued
pursuant to the Rights Agreement (as hereinafter defined) associated with such
shares, the "Shares"), or such other number of Shares as represents an absolute
majority of the excess of (i) all shares of Company Common Stock outstanding on
the Expiration Date on a fully-diluted basis, minus (ii) the total number of
Shares issuable upon exercise of all outstanding employee stock options, for
$50.00 per Share (such amount or any greater amount per Share paid pursuant to
the Offer being hereinafter referred to as the "Per Share Cash Amount"), subject
to applicable withholding taxes, net to the seller in cash, to be followed by a
merger of the Company with and into the Purchaser (the "Merger") pursuant to
which outstanding shares of Company Common Stock will be converted into the
right to receive shares of common stock, par value $1.00 per share, of the
Parent (the "Parent Common Stock"), and cash under certain circumstances, in
each case upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, the Board of Directors of the Company has unanimously
approved the making of the Offer and the Merger and resolved and agreed to
recommend that holders of Shares tender their Shares pursuant to the Offer and
approve and adopt this Agreement and the Merger;
WHEREAS, for U.S. federal income tax purposes, it is intended that the
Merger contemplated hereby qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and that this Agreement shall be, and is hereby, adopted as a plan of
reorganization for purposes of Section 368 of the Code; and
<PAGE>
WHEREAS, the Boards of Directors of the Parent (on its own behalf and
as the sole stockholder of the Purchaser), the Purchaser and the Company have
each approved this Agreement and the Merger in accordance with the General
Corporation Law of the State of Delaware (the "DGCL") and upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, and intending to be
legally bound hereby, the Parent, the Purchaser and the Company agree as
follows:
ARTICLE I
Section 1.1. The Offer.
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(a) Provided that this Agreement shall not have been terminated in
accordance with Section 7.1 and none of the events set forth in Annex A hereto
shall have occurred or be existing (and shall not have been waived by the
Purchaser), the Purchaser shall commence the Offer as promptly as reasonably
practicable after the date hereof, but in no event later than five business days
after the public announcement of the execution of this Agreement. The Purchaser
shall, on the terms of and subject to the prior satisfaction or waiver of the
conditions of the Offer, accept for payment and pay for up to 27,000,000 Shares
validly tendered and not withdrawn pursuant to the Offer (or such other number
of Shares as represents an absolute majority of the excess of (i) all shares of
Company Common Stock outstanding on the Expiration Date on a fully-diluted
basis, minus (ii) the total number of Shares issuable upon exercise of all
outstanding employee stock options, with 27,000,000 Shares or such other number
being herein referred to as the "50% Share Number") as soon as practicable after
the later of the satisfaction of the conditions of the Offer and the expiration
of the Offer; provided, however, that no such payment shall be made until after
the calculation of the applicable proration factor in the Offer. The obligation
of the Purchaser to purchase and pay for shares tendered pursuant to the Offer
shall be subject to the conditions set forth in Annex A hereto. The Company
agrees that no Shares held by the Company or any of its Subsidiaries will be
tendered to the Purchaser pursuant to the Offer. The Purchaser expressly
reserves the right to waive any of such conditions, to increase the price per
Share payable in the Offer and to make any other changes in the terms and
conditions of the Offer; provided, however, that no change may be made which
decreases the price per Share payable in the Offer, reduces the number of Shares
to be purchased in the Offer, changes the form of
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consideration to be paid in the Offer, modifies any of the conditions set forth
in Annex A hereto in any manner adverse to the holders of Shares or, except as
provided in the next two sentences, extends the Offer. Notwithstanding the
foregoing, the Purchaser may, without the consent of the Company, (i) extend the
Offer beyond the scheduled expiration date, which shall be 20 business days
following the date of commencement of the Offer, if, at the scheduled expiration
of the Offer, any of the conditions to the Purchaser's obligation to accept for
payment and to pay for the Shares shall not be satisfied or waived, or (ii)
extend the Offer for any period required by any rule, regulation or
interpretation of the Securities and Exchange Commission (the "SEC") or the
staff thereof applicable to the Offer. So long as this Agreement is in effect
and the condition to the Offer set forth in clause (i) of the first paragraph of
Annex A has not been satisfied or waived, the Purchaser shall extend the Offer
from time to time for a period or successive periods not to exceed 10 business
days each after the previously scheduled expiration date of the Offer. The Per
Share Cash Amount shall, subject to applicable withholding of taxes, be net to
the seller in cash, upon the terms and subject to the conditions of the Offer.
(b) As promptly as practicable on the date of commencement of the
Offer, the Purchaser shall file with the SEC a Tender Offer Statement on
Schedule 14D-1 (together with all amendments and supplements thereto, the
"Schedule 14D-1") with respect to the Offer. The Schedule 14D-1 shall contain
or incorporate by reference an offer to purchase (the "Offer to Purchase") and
forms of the related letter of transmittal and all other ancillary Offer
documents (collectively, together with all amendments and supplements thereto,
the "Offer Documents"). The Parent and the Purchaser shall cause the Offer
Documents to be disseminated to the holders of the Shares as and to the extent
required by applicable federal securities laws. The Parent and the Purchaser,
on the one hand, and the Company, on the other hand, will promptly correct any
information provided by it for use in the Offer Documents if and to the extent
that it shall have become false or misleading in any material respect, and the
Purchaser will cause the Offer Documents as so corrected to be filed with the
SEC and to be disseminated to holders of the Shares, in each case as and to the
extent required by applicable federal securities laws. The Company and its
counsel shall be given a reasonable opportunity to review and comment upon the
Schedule 14D-1 before it is filed with the SEC.
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Section 1.2. Company Actions.
----------------
(a) The Company hereby approves of and consents to the Offer and
represents and warrants that the Company's Board of Directors, at a meeting duly
called and held, has (i) unanimously (with one director absent) determined that
the terms of the Offer and the Merger are fair to and in the best interests of
the stockholders of the Company, (ii) approved this Agreement and approved the
transactions contemplated hereby and thereby, including the Offer and the Merger
and (iii) resolved to recommend that the stockholders of the Company accept the
Offer, tender their Shares to the Purchaser thereunder and approve and adopt
this Agreement and the Merger. The Company hereby consents to the inclusion in
the Offer Documents of the recommendation of the Board described in the
immediately preceding sentence.
(b) As promptly as practicable on the date of commencement of the
Offer, the Company shall file with the SEC a Solicitation/Recommendation
Statement on Schedule 14D-9 (together with all amendments and supplements
thereto, the "Schedule 14D-9") which shall contain the recommendation referred
to in clause (iii) of Section 1.2(a) hereof. The Company further agrees to take
all steps necessary to cause the Schedule 14D-9 to be disseminated to holders of
the Shares as and to the extent required by applicable federal securities laws.
The Company, on the one hand, and each of the Parent and the Purchaser, on the
other hand, will promptly correct any information provided by it for use in the
Schedule 14D-9 if and to the extent that it shall have become false or
misleading in any material respect, and the Company will cause the Schedule
14D-9 as so corrected to be filed with the SEC and to be disseminated to holders
of the Shares, in each case as and to the extent required by applicable federal
securities laws. The Parent and its counsel shall be given a reasonable
opportunity to review and comment upon the Schedule 14D-9 before it is filed
with the SEC. In addition, the Company agrees to provide the Parent, the
Purchaser and their counsel with any comments, whether written or oral, that the
Company or its counsel may receive from time to time from the SEC or its staff
with respect to the Schedule 14D-9 promptly after the receipt of such comments.
(c) The Company shall promptly furnish the Purchaser with mailing
labels containing the names and addresses of all record holders of Shares and
with security position listings of Shares held in stock depositories, each as of
a recent date, together with all other available listings and computer files
containing names, addresses and security position listings of record holders and
beneficial owners of Shares. The Company shall furnish the Purchaser with such
additional information,
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including, without limitation, updated listings and computer files of
stockholders, mailing labels and security position listings, and such other
assistance as the Parent, the Purchaser or their agents may reasonably request.
Subject to the requirements of applicable law, and except for such steps as are
necessary to disseminate the Offer Documents and any other documents necessary
to consummate the Offer or the Merger, the Parent and the Purchaser shall hold
in confidence the information contained in such labels, listings and files,
shall use such information solely in connection with the Offer and the Merger,
and, if this Agreement is terminated in accordance with Section 7.1 or if the
Offer is otherwise terminated, shall promptly deliver or cause to be delivered
to the Company all copies of such information, labels, listings and files then
in their possession or in the possession of their agents or representatives.
Section 1.3. Directors of the Company.
-------------------------
(a) Promptly upon the purchase of and payment for any Shares by the
Purchaser or any of its affiliates pursuant to the Offer, the Parent shall be
entitled to designate such number of directors, rounded up to the next whole
number, on the Board of Directors of the Company as is equal to the product
obtained by multiplying the total number of directors on such Board (giving
effect to the directors designated by the Parent pursuant to this sentence) by
the percentage that the number of Shares so accepted for payment bears to the
total number of Shares then outstanding. In furtherance thereof, the Company
shall, upon request of the Purchaser, promptly increase the size of its Board of
Directors or exercise its best efforts to secure the resignations of such number
of directors, or both, as is necessary to enable the Parent's designees to be so
elected to the Company's Board and shall cause the Parent's designees to be so
elected. At such time, the Company shall, if requested by the Parent, also
cause directors designated by the Parent to constitute at least the same
percentage (rounded up to the next whole number) as is on the Company's Board of
Directors of (i) each committee of the Company's Board of Directors, (ii) each
board of directors (or similar body) of each Significant Subsidiary (as
hereinafter defined) of the Company, and (iii) each committee (or similar body)
of each such board. Notwithstanding the foregoing, if Shares are purchased
pursuant to the Offer, there shall be until the Effective Time at least one
member of the Company's Board of Directors who is a director on the date hereof
and is not an employee of the Company.
(b) The Company shall promptly take all actions required pursuant to
Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange
5
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Act") and Rule 14f-1 promulgated thereunder in order to fulfill its obligations
under Section 1.3(a), including mailing to stockholders together with the
Schedule 14D-9 the information required by such Section 14(f) and Rule 14f-1 as
is necessary to enable the Parent's designees to be elected to the Company's
Board of Directors. The Parent and the Purchaser will supply the Company and be
solely responsible for any information with respect to them and their nominees,
officers, directors and affiliates required by such Section 14(f) and Rule
14f-1. The provisions of this Section 1.3 are in addition to and shall not limit
any rights which the Purchaser, the Parent or any of their affiliates may have
as a holder or beneficial owner of Shares as a matter of law with respect to the
election of directors or otherwise.
(c) Following the election of the Parent's designees to the Company's
Board of Directors pursuant to this Section 1.3, prior to the Effective Time (as
hereinafter defined) (i) any amendment or termination of this Agreement by the
Company, (ii) any extension or waiver by the Company of the time for the
performance of any of the obligations or other acts of the Parent or the
Purchaser, or (iii) any waiver of any of the Company's rights hereunder shall,
in any such case, require the concurrence of a majority of the directors of the
Company then in office who neither were designated by the Purchaser nor are
employees of the Company (the "Independent Director Approval").
ARTICLE II
The Merger
----------
Section 2.1. The Merger. Upon the terms and subject to the
----------
conditions set forth in this Agreement, and in accordance with the DGCL, the
Company shall merge with and into the Purchaser (the "Merger"), and the separate
corporate existence of the Company shall thereupon cease, and the Purchaser
shall be the surviving corporation in the Merger (the "Surviving Corporation").
The Surviving Corporation shall possess all the rights, privileges, powers and
franchises as well of a public as of a private nature and shall be subject to
all of the restrictions, disabilities, duties, debts and obligations of the
Company and the Purchaser, all as provided in the DGCL.
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Section 2.2. Closing. The closing of the Merger (the "Closing")
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will take place at 10:00 a.m. on a date to be specified by the parties (the
"Closing Date"), which shall be no later than the second business day after
satisfaction of the conditions set forth in Article VI, unless another time or
date is agreed to in writing by the parties hereto. The Closing will be held at
the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New
York, New York, unless another place is agreed to in writing by the parties
hereto.
Section 2.3. Effective Time. Subject to the provisions of this
--------------
Agreement, on the Closing Date the parties shall file with the Secretary of
State of the State of Delaware a certificate of merger (the "Certificate of
Merger") executed in accordance with the relevant provisions of the DGCL and
shall make all other filings or recordings required under the DGCL in order to
effect the Merger. The Merger shall become effective upon the filing of the
Certificate of Merger or at such other time as is specified in the Certificate
of Merger (the time at which the Merger becomes fully effective being
hereinafter referred to as the "Effective Time").
Section 2.4. Effects of the Merger. The Merger shall have the
---------------------
effects set forth in Section 259 of the DGCL.
Section 2.5. Certificate of Incorporation; By-laws.
--------------------------------------
(a) At the Effective Time, the Certificate of Incorporation of the
Purchaser, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation; provided, however,
that Article FIRST of the Certificate of Incorporation of the Surviving
Corporation shall be amended to read in its entirety as follows: "FIRST: The
name of the corporation is Alumax Inc." and, as so amended shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by the DGCL and such Certificate of Incorporation.
(b) At the Effective Time, the By-laws of the Purchaser, as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter amended as provided by the DGCL, the Certificate of
Incorporation of the Surviving Corporation and such By-laws.
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Section 2.6. Directors; Officers of Surviving Corporation.
---------------------------------------------
(a) The directors of the Purchaser at the Effective Time shall be the
directors of the Surviving Corporation until their respective successors are
duly elected and qualified or their earlier death, resignation or removal in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation.
(b) The officers of the Purchaser at the Effective Time shall be the
officers of the Surviving Corporation until their respective successors are duly
elected and qualified or their earlier death, resignation or removal in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation.
Section 2.7. Conversion of Securities. At the Effective Time, by
-------------------------
virtue of the Merger and without any action on the part of the holders of any
securities of the Purchaser or the Company:
(a) Each Share that is owned by the Parent, the Purchaser, any of
their respective Subsidiaries, the Company or any Subsidiary of the Company
shall automatically be cancelled and retired and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
(b) Each issued and outstanding Share, other than Excluded Shares and
Dissenting Shares, shall be converted into, and become exchangeable for the
right to receive:
(A) 0.6975 (the "Exchange Ratio") of a share of Parent Common
Stock; provided that the Purchaser shall have purchased no fewer than the
50% Share Number of Shares in the Offer; or
(B) that fraction of a share of Parent Common Stock equal to the
Adjusted Exchange Ratio, plus an amount in cash equal to the Merger Cash
Prorate Amount, if the Purchaser shall have purchased fewer than the 50%
Number of Shares in the Offer.
As used herein: (i) the term "Excluded Shares" shall mean that number of Shares
owned by the Parent and its Subsidiaries immediately prior to the Effective Time
(excluding Shares held by the Company and its Subsidiaries); (ii) the term
"Adjusted Exchange Ratio" shall mean that quotient (rounded to the nearest cent)
determined by dividing (1) the product of the 50% Share Number times 0.6975 by
(2) the Final
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Outstanding Number; (iii) the term "Merger Cash Prorate Amount" shall mean that
U.S. dollar cash amount (rounded to the nearest cent) equal to the quotient
determined by dividing (3) the product of the Per Share Cash Amount times the
excess of (a) the 50% Share Number over (b) the Purchased Share Number by (4)
the Final Outstanding Number; (iv) the term "Final Outstanding Number" shall
mean that number of Shares equal to the total number of Shares outstanding
immediately prior to the Effective Time minus the Excluded Shares; and (v) the
term "Purchased Share Number" shall mean that number of Shares actually
purchased by the Purchaser in the Offer. The per Share consideration referred to
in clause (A) or clause (B) of this Section 2.7(b), as the case may be, is
referred to herein as the "Merger Consideration." All such Shares, when so
converted, shall no longer be outstanding and shall automatically be cancelled
and retired and shall cease to exist, and the certificates representing such
Shares shall thereafter represent only the right to receive (i) Merger
Consideration, (ii) certain dividends and other distributions in accordance with
Section 2.8(g), and (iii) cash in lieu of fractional shares of Parent Common
Stock in accordance with Section 2.8(h), without interest.
(c) Each issued and outstanding share of common stock, par value $.01
per share, of the Purchaser shall be converted into one validly issued, fully
paid and nonassessable share of common stock of the Surviving Corporation.
Section 2.8. Exchange of Certificates.
-------------------------
(a) Exchange Agent. The Parent shall designate a bank or trust
--------------
company reasonably acceptable to the Company to act as agent for the holders of
the Shares (other than Excluded Shares) in connection with the Merger (the
"Exchange Agent") to receive in trust from the Parent as of the Effective Time
for the benefit of such holders (i) certificates ("Parent Certificates")
representing the number of whole shares of Parent Common Stock and (ii) the
aggregate amount of cash (if any) issuable pursuant to Section 2.7(b) in
exchange for outstanding Shares (such shares of Parent Common Stock and cash (if
any), together with any dividends or distributions with respect thereto with a
record date after the Effective Time and any cash payable in lieu of any
fractional shares of Parent Common Stock being hereinafter referred to as the
"Exchange Fund").
(b) Exchange Procedures. As soon as reasonably practicable after the
-------------------
Effective Time, the Exchange Agent shall mail to each holder of record, as of
the Effective Time, of a certificate or certificates, which immediately prior to
the Effective Time represented outstanding Shares (the "Certificates"), whose
Shares were
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converted pursuant to Section 2.7(b) into the right to receive the Merger
Consideration, a letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as the Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by the Parent, together with such letter of transmittal, properly
completed and duly executed in accordance with the instructions thereto, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a Parent Certificate representing that number of whole shares of Parent Common
Stock which such holder has the right to receive pursuant to Section 2.7(b),
(ii) any cash included in the Merger Consideration, (iii) certain dividends or
other distributions in accordance with Section 2.8(g) and (iv) cash in lieu of
any fractional share in accordance with Section 2.8(h) for each Share formerly
represented by such Certificate, and the Certificate so surrendered shall
forthwith be cancelled. No interest will be paid or accrued on the cash payable
upon the surrender of the Certificates. If the issuance of the Merger
Consideration is to be made to a Person (as hereinafter defined) other than the
Person in whose name the surrendered Certificate is registered, it shall be a
condition of exchange that the Certificate so surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and that the Person
requesting such exchange shall have paid all transfer and other Taxes (as
hereinafter defined) required by reason of the issuance to a Person other than
the registered holder of the Certificate surrendered or shall have established
to the satisfaction of the Surviving Corporation that such Tax either has been
paid or is not applicable.
(c) Transfer Books; No Further Ownership Rights in the Shares. At
---------------------------------------------------------
the Effective Time, the stock transfer books of the Company shall be closed, and
thereafter there shall be no further registration of transfers of the Shares on
the records of the Company. From and after the Effective Time, the holders of
Certificates evidencing ownership of the Shares outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to such Shares,
except as otherwise provided for herein or by applicable law. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be cancelled and exchanged as provided in this Article II.
(d) Termination of Fund; No Liability. At any time following six
----------------------------------
months after the Effective Time, the Surviving Corporation shall be entitled to
require
10
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the Exchange Agent to deliver to it any funds (including any interest
received with respect thereto) which had been made available to the Paying
Agent, and holders shall be entitled to look to the Surviving Corporation
(subject to abandoned property, escheat or other similar laws) only as general
creditors thereof with respect to the Merger Consideration payable upon due
surrender of their Certificates, without any interest thereon. Notwithstanding
the foregoing, neither the Surviving Corporation nor the Exchange Agent shall be
liable to any holder of a Certificate for Merger Consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(e) Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates for Shares shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate(s)
to be lost, stolen or destroyed and, if required by the Parent, the posting by
such Person of a bond in such sum as the Parent may reasonably direct as
indemnity against any claim that may be made against it or the Surviving
Corporation with respect to such Certificate(s), the Exchange Agent will issue
the Merger Consideration pursuant to Section 2.8(b) deliverable in respect of
the Shares represented by such lost, stolen or destroyed Certificates.
(f) Withholding Taxes. The Parent and the Purchaser shall be entitled
-----------------
to deduct and withhold, or cause the Exchange Agent to deduct and withhold from
the Per Share Cash Amount or the Merger Consideration payable to a holder of
Shares pursuant to the Offer or the Merger any stock transfer Taxes and such
amounts as are required under the Code, or any applicable provision of state,
local or foreign Tax law, as specified in the Offer Documents. To the extent
that amounts are so withheld by the Parent or the Purchaser, such withheld
amounts shall be treated for all purposes of this Agreement as having been paid
to the holder of the Shares in respect of which such deduction and withholding
was made by the Parent or the Purchaser, in the circumstances described in the
Offer Documents.
(g) Dividends; Distributions. No dividends or other distributions
------------------------
with respect to Parent Common Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby, and no cash payment in lieu
of fractional shares shall be paid to any such holder pursuant to Section
2.8(h), and all such dividends, other distributions and cash in lieu of
fractional shares of Parent Common Stock shall be paid by Parent to the Exchange
Agent and shall be included in the Exchange Fund, in each case until the
surrender of such Certificate in accordance with
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<PAGE>
this Article II. Subject to the effect of applicable escheat or similar laws,
following surrender of any such Certificate there shall be paid to the holder of
the Parent Certificate representing whole shares of Parent Common Stock issued
in exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock and the amount of any cash payable in lieu of a fractional share of
Parent Common Stock to which such holder is entitled pursuant to Section 2.8(h)
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of Parent Common Stock. The Parent shall make
available to the Exchange Agent cash for these purposes.
(h) No Fractional Shares. No Parent Certificates or scrip
--------------------
representing fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates, no dividend or distribution of Parent
shall relate to such fractional share interests and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of Parent. In lieu of any such fractional shares, each holder of a
Certificate who would otherwise have been entitled to receive a fractional share
interest in exchange for such Certificate pursuant to this Section shall receive
from the Exchange Agent an amount in cash equal to the product obtained by
multiplying (A) the fractional share interest to which such holder (after taking
into account all Shares held at the Effective Time by such holder) would
otherwise be entitled by (B) the closing price for a share of Parent Common
Stock as reported on the New York Stock Exchange (the "NYSE") Composite
Transactions Tape (as reported in The Wall Street Journal, or, if not reported
thereby, any other authoritative source) on the Closing Date.
(i) Investment of Exchange Fund. The Exchange Agent shall invest any
---------------------------
cash included in the Exchange Fund, as directed by the Parent, on a daily basis.
Any interest and other income resulting from such investments shall be paid to
the Parent.
Section 2.9. Appraisal Rights. Notwithstanding anything in this
----------------
Agreement to the contrary, if by reason of the composition of the Merger
Consideration Section 262 of the DGCL affords appraisal rights in the Merger,
then Shares (the "Dissenting Shares") that are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders who
did not vote in favor of the Merger and who comply with all of the relevant
provisions of Section 262 of the DGCL (the
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"Dissenting Stockholders") shall not be converted into or be exchangeable for
the right to receive the Merger Consideration, unless and until such holders
shall have failed to perfect or shall have effectively withdrawn or lost their
rights to appraisal under the DGCL. If any Dissenting Stockholder shall have
failed to perfect or shall have effectively withdrawn or lost such right, such
holder's Shares shall thereupon be converted into and become exchangeable for
the right to receive, as of the Effective Time, the Merger Consideration without
any interest thereon. The Company shall give the Parent (i) prompt notice of any
written demands for appraisal of any Shares, attempted withdrawals of such
demands and any other instruments served pursuant to the DGCL and received by
the Company relating to stockholders' rights of appraisal, and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under the DGCL. Neither the Company nor the Surviving Corporation
shall, except with the prior written consent of the Parent, voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
payment. If any Dissenting Stockholder shall fail to perfect or shall have
effectively withdrawn or lost the right to dissent, the Shares held by such
Dissenting Stockholder shall thereupon be treated as though such Shares had been
converted into the right to receive the Merger Consideration pursuant to Section
2.7(b).
Section 2.10. Adjustments to Prevent Dilution. In the event that
-------------------------------
the Parent changes the number of shares of Parent Common Stock or securities
convertible or exchangeable into or exercisable for shares of Parent Common
Stock, issued and outstanding prior to the Effective Time as a result of a
reclassification, stock split (including a reverse split), stock dividend or
distribution, recapitalization, merger, subdivision, issuer tender or exchange
offer, or other similar transaction, the Merger Consideration shall be equitably
adjusted.
ARTICLE III
Representations and Warranties of the Company
---------------------------------------------
Except as set forth on the schedule delivered by the Company to the
Parent simultaneously and in connection with the execution and delivery of this
Agreement (the "Company Disclosure Schedule") or disclosed in the Company SEC
Reports, the Company represents and warrants to the Parent and the Purchaser as
set forth below:
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<PAGE>
Section 3.1. Organization, Qualification, Etc. The Company is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has the corporate power and authority and all
governmental approvals required for it to own its properties and assets and to
carry on its business as it is now being conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its properties or the conduct of its business requires such qualification,
except for jurisdictions in which the failure to be so organized, existing and
in good standing or to have such power, authority and governmental approvals
would not, individually or in the aggregate, have a Material Adverse Effect (as
hereinafter defined) on the Company or delay consummation of the transactions
contemplated by this Agreement or otherwise prevent the Company from performing
its obligations hereunder. As used in this Agreement, any reference to any state
of facts, event, change or effect having a "Material Adverse Effect" on or with
respect to the Company or the Parent, as the case may be, means such state of
facts, event, change or effect that has had, or would reasonably be expected to
have, a material adverse effect on the business, results of operations, assets,
liabilities or financial condition of the Company and its Subsidiaries, taken as
a whole, or the Parent and its Subsidiaries, taken as a whole, as the case may
be. The Company has delivered or made available to the Parent copies of the
certificate of incorporation and by-laws or other similar organizational
documents for the Company and each of its Significant Subsidiaries. Such
certificates of incorporation and by-laws or other organizational documents are
complete and correct and in full force and effect, and neither the Company nor
any of its Significant Subsidiaries is in violation of any of the provisions of
their respective certificates of incorporation, by-laws or similar
organizational documents. Each of the Company's Significant Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has the corporate power
and authority and all governmental approvals required for it to own its
properties and assets and to carry on its business as it is now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so organized, existing and in good standing or to have such power,
authority and governmental approvals would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. All the outstanding
shares of capital stock of, or other ownership interests in, the Company's
Subsidiaries are duly authorized, validly issued, fully paid and non-assessable
and are owned by the Company, directly or indirectly, free and clear of all
liens, claims, mortgages, encumbrances, pledges, security interests, equities or
charges of any kind (each, a "Lien"). Other than the Subsidiaries, there are no
other Persons in which the
14
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Company owns, of record or beneficially, any direct or indirect equity or
similar interest or any right (contingent or otherwise) to acquire the same.
Section 3.2. Capital Stock. The authorized capital stock of the
--------------
Company consists of 200,000,000 shares of Company Common Stock and 50,000,000
shares of preferred stock, par value $1.00 per share ("Company Preferred
Stock"). As of March 8, 1998, (i) 53,458,062 shares of Company Common Stock are
issued and outstanding; (ii) 3,161,525 shares of Company Common Stock are
subject to outstanding options issued and 319,610 shares of Company Common Stock
are subject to other stock-based awards, including 113,580 awarded on March 5,
1998, pursuant to The Alumax Inc. 1993 Long Term Incentive Plan (the "1993
Plan"), and 4,784,929 shares of Company Common Stock are reserved for issuance
under the 1993 Plan; (iii) 571,475 shares of Company Common Stock are subject to
outstanding options, and an additional 190,564 shares are issuable if the holder
retains the shares acquired for two years after the date of exercise, issued
pursuant to The Alumax Inc. 1995 Employee Equity Ownership Plan (the "1995
Plan"), and 997,000 shares of Company Common Stock are reserved for issuance
under the 1995 Plan; (iv) 80,000 shares of Company Common Stock are subject to
outstanding options, 20,750 deferred shares of Company Common Stock and 730,301
shares of Company Common Stock are reserved for issuance under The Alumax Inc.
Non-Employee Directors' Stock Compensation Plan and 74,148 shares are deferred
and 192,009 shares of Company Common Stock are reserved for issuance under The
Alumax Inc. Non-Employee Directors' Deferred Compensation Plan; (v) 794,624
shares of Company Common Stock are reserved for issuance under the Alumax Inc.
Thrift Plan for Salaried Employees, Alumax Inc. Thrift Plan for Hourly
Employees, and Alumax Inc. Thrift Plan for Collectively Bargained Employees;
(vi) 695,567 shares of Company Common Stock are reserved for issuance pursuant
to employee deferred compensation arrangements, of which 623,350 shares of
Company Common Stock are subject to outstanding options and 26,603 shares of
Company Common Stock are subject to deferred stock units; (vii) 112 shares of
Company Common Stock are reserved for conversion of the Company's Series A
Preferred Stock; (viii) 1,812,900 shares of Company Common Stock are issued and
held in the treasury of the Company; and (ix) no shares of Company Preferred
Stock are issued, outstanding or reserved for issuance. Section 3.2 of the
Company Disclosure Schedule sets forth a complete and correct list of all
holders of options to acquire Shares, including such person's name, the number
of options (vested, unvested and total) held by such person and the exercise
price for each such option. All the outstanding Shares are and the exercise of
outstanding options described in the second sentence of this Section 3.2 will
be, when issued in accordance with the terms thereof, duly authorized, validly
issued,
15
<PAGE>
fully paid and non-assessable. Except as set forth above, except for the
Company's obligations under the Rights Agreement, dated as of February 22, 1996
(the "Rights Agreement"), between the Company and Chemical Mellon Shareholder
Services, L.L.C., as rights agent, and except for the transactions contemplated
by this Agreement, (1) there are no shares of capital stock of the Company
authorized, issued or outstanding, (2) there are no authorized or outstanding
options, warrants, calls, preemptive rights, subscriptions or other rights,
agreements, arrangements or commitments of any character relating to the issued
or unissued capital stock of the Company or any of its Subsidiaries, obligating
the Company or any of its Subsidiaries to issue, transfer or sell or cause to be
issued, transferred or sold any shares of capital stock or other equity interest
in the Company or any of its Subsidiaries or securities convertible into or
exchangeable for such shares or equity interests, or obligating the Company or
any of its Subsidiaries to grant, extend or enter into any such option, warrant,
call, subscription or other right, agreement, arrangement or commitment, or (3)
there are no outstanding contractual obligations of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any Shares or other
capital stock of the Company or any Subsidiary or to provide funds to make any
investment (in the form of a loan, capital contribution or otherwise) in any
Subsidiary or any other entity other than loans to Subsidiaries in the ordinary
course of business.
Section 3.3. Corporate Authority Relative to this Agreement; No
--------------------------------------------------
Violation.
- ----------
(a) The Company has the corporate power and authority to enter into
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of the
Company and, except for obtaining the Company Stockholder Approval (as
hereinafter defined) as contemplated by Section 5.3 hereof and the filing of the
Certificate of Merger, no other corporate proceedings on the part of the Company
are necessary to authorize the consummation of the transactions contemplated
hereby. The Board of Directors of the Company has taken all appropriate action
so that neither the Parent nor the Purchaser will be an "interested stockholder"
within the meaning of Section 203 of the DGCL by virtue of the Parent, the
Purchaser and the Company entering into this Agreement and consummating the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and, assuming this Agreement constitutes a
valid and binding agreement of the Parent and the Purchaser, constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms.
16
<PAGE>
(b) Except for the filings, permits, authorizations, consents and
approvals set forth in Section 3.3(b) of the Company Disclosure Schedule or as
may be required under, and other applicable requirements of, the Securities Act
of 1933, as amended (the "Securities Act"), the Exchange Act, the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), state
securities or blue sky laws, and the DGCL (the "Company Required Approvals"),
none of the execution, delivery or performance of this Agreement by the Company,
the consummation by the Company of the transactions contemplated hereby or
compliance by the Company with any of the provisions hereof will (i) conflict
with or result in any breach of any provision of the certificate of
incorporation, by-laws or similar organizational documents of the Company or any
of its Significant Subsidiaries, (ii) require any filing with, or permit,
authorization, consent or approval of, any federal, regional, state or local
court, arbitrator, tribunal, administrative agency or commission or other
governmental or other regulatory authority or agency, whether U.S. or foreign (a
"Governmental Entity"), (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of its Subsidiaries is a party or by which any of them or any
of their properties or assets may be bound (the "Company Agreements"), or (iv)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, any of its Subsidiaries or any of their properties or
assets, excluding from the foregoing clauses (ii), (iii) and (iv) such
violations, breaches or defaults which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company or prevent or
substantially delay the consummation of the transactions contemplated hereby.
Section 3.3(b) of the Company Disclosure Schedule sets forth a list of all third
party consents and approvals required to be obtained under the Company
Agreements prior to the consummation of the transactions contemplated by this
Agreement the failure of which to obtain would have, individually or in the
aggregate, a Material Adverse Effect on the Company.
Section 3.4. Reports and Financial Statements. The Company has
---------------------------------
previously furnished or otherwise made available to the Parent true and complete
copies of:
(a) the Company's Annual Reports on Form 10-K filed with the SEC for
each of the years ended December 31, 1996 and 1997;
17
<PAGE>
(b) the Company's Quarterly Report on Form 10-Q filed with the SEC
for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997;
(c) each definitive proxy statement filed by the Company with the SEC
since December 31, 1996;
(d) each final prospectus filed by the Company with the SEC since
December 31, 1996, except any final prospectus on Form S-8; and
(e) all Current Reports on Form 8-K filed by the Company with the SEC
since January 1, 1997.
As of their respective dates, such reports, proxy statements and
prospectuses (collectively with any amendments, supplements and exhibits
thereto, the "Company SEC Reports") (i) complied as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations promulgated thereunder, and (ii) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Except to the extent that information contained in any Company SEC Report was
amended or was superseded by a later filed Company SEC Report, none of the
Company SEC Reports contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. None of the Company's Subsidiaries is required to
file any forms, reports or other documents with the SEC. The audited
consolidated financial statements and unaudited consolidated interim financial
statements included in the Company SEC Reports (including any related notes and
schedules) fairly present the financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the results of operations
and cash flows for the periods or as of the dates then ended (subject, in the
case of the unaudited interim financial statements, to normal year-end
adjustments), in each case in accordance with past practice and generally
accepted accounting principles in the United States ("GAAP") consistently
applied during the periods involved (except as otherwise disclosed in the notes
thereto). Since January 1, 1996, the Company has timely filed all reports,
registration statements and other filings required to be filed by it with the
SEC under the rules and regulations of the SEC.
18
<PAGE>
Section 3.5. No Undisclosed Liabilities. Neither the Company nor
---------------------------
any of its Subsidiaries has any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, and there is no existing
condition, situation or set of circumstances which could reasonably be expected
to result in such a liability or obligation, except (a) liabilities or
obligations reflected in the Company SEC Reports and (b) liabilities or
obligations which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
Section 3.6. No Violation of Law. The businesses of the Company and
--------------------
its Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity (provided that no representation or
warranty is made in this Section 3.6 with respect to Environmental Laws (as
hereinafter defined)) except (a) as described in the Company SEC Reports filed
prior to the date hereof and (b) for violations or possible violations which
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company.
Section 3.7. Environmental Matters.
----------------------
(a) Each of the Company and its Subsidiaries has obtained all
licenses, permits, authorizations, approvals and consents from Governmental
Entities which are required under any applicable Environmental Law in respect of
its business or operations ("Environmental Permits"), except for such failures
to have Environmental Permits which, individually or in the aggregate, are not
reasonably expected to have a Material Adverse Effect on the Company. Each of
such Environmental Permits is in full force and effect, and each of the Company
and its Subsidiaries is in compliance with the terms and conditions of all such
Environmental Permits and with all applicable Environmental Laws, except for
such exceptions as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
(b) There is no Environmental Claim (as hereinafter defined) pending,
or to the best knowledge of the Company threatened, against the Company or any
of its Subsidiaries, or to the best knowledge of the Company against any Person
whose liability for such Environmental Claim the Company or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law, that would, individually or in the aggregate, have a Material
Adverse Effect on the Company.
(c) Except as set forth in Section 3.7(c) of the Company Disclosure
Schedule, to the best knowledge of the Company, there are no past or present
actions,
19
<PAGE>
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, threatened release or presence of any Hazardous
Material (as hereinafter defined), that have resulted in any Environmental Claim
against the Company or any of its Subsidiaries, or to the best knowledge of the
Company against any Person whose liability for any Environmental Claim the
Company or any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law, except for such liabilities which would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company.
(d) To the best knowledge of the Company, no site or facility now or
previously owned, operated or leased by the Company or any of its Subsidiaries
is listed or proposed for listing on the National Priorities List promulgated
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, and the rules and regulations thereunder ("CERCLA").
(e) No Liens have arisen under or pursuant to any Environmental Law on
any site or facility owned, operated or leased by the Company or any of its
Subsidiaries, except for such Liens which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company, and no action of any
Governmental Entity has been taken or, to the best knowledge of the Company, is
in process which could subject any of such properties to such Liens except for
any such action which would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
(f) As used in this Agreement:
(i) "Environmental Claim" means any claim, action, cause of
action, investigation or notice (written or oral) by any Person alleging
potential liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties)
arising out of, based on or resulting from (a) the presence, or release or
threatened release, of any Hazardous Materials at any location, whether or
not owned or operated by the Company or any of its Subsidiaries or Parent
or any of its Subsidiaries, as the case may be, or (b) circumstances
forming the basis of any violation, or alleged violation, of any
Environmental Law.
(ii) "Environmental Law" means any law or order of any
Governmental Entity relating to the regulation or protection of human
health
20
<PAGE>
or safety as it relates to Hazardous Materials or the environment or to
emissions, discharges, releases or threatened releases of Hazardous
Material, pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes into the environment.
(iii) "Hazardous Materials" means (A) any petroleum or petroleum
products, flammable materials, radioactive materials, friable asbestos,
urea formaldehyde foam insulation and transformers or other equipment that
contain dielectric fluid containing regulated levels of polychlorinated
biphenyls; (B) any chemicals or other materials or substances which are
become defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants" or
words of similar import under any Environmental Law; and (C) any other
chemical or other material or substance, exposure to which is prohibited,
limited or regulated by any Governmental Entity under any Environmental
Law.
Section 3.8. Employee Benefit Plans; ERISA.
------------------------------
(a) Except as described in the Company SEC Reports or as would not
have a Material Adverse Effect on the Company, (i) all Company Employee Benefit
Plans (as hereinafter defined) are in compliance with all applicable
requirements of law, including ERISA (as hereinafter defined) and the Code, and
(ii) neither the Company nor any of its Subsidiaries nor any ERISA Affiliate (as
hereinafter defined) has any liabilities or obligations with respect to any such
Company Employee Benefit Plans, whether accrued, contingent or otherwise, nor to
the best knowledge of the Company, are any such liabilities or obligations
expected to be incurred. Except as described in the Company SEC Reports or as
set forth in Section 3.8(a) of the Company Disclosure Schedule, the execution
of, and performance of the transactions contemplated in, this Agreement will
not (either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Company Employee Benefit Plan that will or may
result in any payment or any continuation benefit under COBRA (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any employee. The only severance agreements or severance policies applicable
to the Company or any of its Subsidiaries are the agreements and policies
specifically described in Section 3.8(a) of the Company Disclosure Schedule.
21
<PAGE>
(b) With respect to each of its Plans (as hereinafter defined), the
Company has heretofore delivered to the Parent complete and correct copies of
each of the following documents, as applicable: (i) a copy of the Plan; (ii) a
copy of the most recent annual report; (iii) a copy of the most recent actuarial
report; (iv) a copy of the most recent Summary Plan Description and all material
modifications; (v) a copy of the trust or other funding agreement; and (vi) the
most recent determination letter received from the Internal Revenue Service (the
"IRS") with respect to each Plan that is intended to be qualified under Section
401 of the Code and all notices of reportable events received following receipt
of such letter.
(c) Section 3.8(c) of the Company Disclosure Schedule sets forth a
list of each employee of the Company (or any Subsidiary) who is a party to any
agreement (whether written or oral) with respect to such person's employment by
the Company or a Subsidiary, other than offer letters which do not have
guaranteed periods of employment and statutory employment agreements under
foreign laws, and which provide for annual compensation in excess of $100,000.
The Company has provided to the Parent a complete and correct copy of each such
written employment agreement and a complete and correct summary of each such
oral agreement.
(d) No liability under Title IV of ERISA has been incurred by the
Company or any ERISA Affiliate within the past twelve years that has not been
satisfied in full. To the best knowledge of the Company, no condition exists
that presents a material risk to the Company, any of its Subsidiaries or any
ERISA Affiliate of incurring a liability under such Title. The Pension Benefit
Guaranty Corporation established under ERISA ("PBGC") has not instituted
proceedings to terminate any of the Plans, and no condition exists that presents
a material risk that such proceedings will be instituted. With respect to each
of the Plans that is subject to Title IV of ERISA, the present value of accrued
benefits under such Plan, based upon the actuarial assumptions used for funding
purposes in the most recent actuarial report prepared by such Plan's actuary
with respect to such Plan, did not, as of its latest valuation date, exceed the
then current value of the assets of such Plan allocable to such accrued
benefits, and there have been no changes since such latest valuation date which
would cause the present value of such accrued benefits to exceed the current
value of such assets. None of the Plans or any trust established thereunder has
incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of each of the Plans ended prior to the date of this
Agreement. None of the Plans is a "multiemployer plan," as such term is defined
in Section 3(37) of ERISA. Each of the Plans that is intended to be "qualified"
within the meaning of
22
<PAGE>
Section 401(a) of the Code is so qualified and the trusts maintained thereunder
are exempt from taxation under Section 501(a) of the Code. Except as set forth
in Section 3.8(d) of the Company Disclosure Schedule, no Plan provides benefits,
including without limitation death or medical benefits (whether or not insured),
with respect to current or former employees after retirement or other
termination of service (other than coverage mandated by applicable law or
benefits, the full cost of which is borne by the current or former employee).
There are no pending or threatened claims by or on behalf of any Plan, by any
employee or beneficiary covered under any such Plan, or otherwise involving any
such Plan (other than routine claims for benefits).
(e) As used in this Agreement:
(i) "Company Employee Benefit Plan" means any Plan entered into,
established, maintained, sponsored, contributed to or required to be
contributed to by the Company, any of its Subsidiaries or ERISA Affiliates
for the benefit of the current or former employees or directors of the
Company or any of its Subsidiaries and existing on the date of this
Agreement or at any time subsequent thereto and on or prior to the
Effective Time and, in the case of a Plan which is subject to the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder ("ERISA"), Section 412 of the Code or Title IV of
ERISA, at any time during the twelve-year period preceding the date of this
Agreement;
(ii) "Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock purchase,
stock option, stock ownership, stock appreciation rights, phantom stock,
leave of absence, layoff, vacation, day or dependent care, legal services,
cafeteria, life, health, medical, accident, disability, worker's
compensation or other insurance, severance, separation, termination, change
of control or other benefit plan, agreement, practice, policy, program or
arrangement of any kind, whether written or oral, including, but not
limited to any "employee benefit plan" within the meaning of Section 3(3)
of ERISA; and
(iii) "ERISA Affiliate" means, with respect to any Person, any
Person in the same controlled group as such Person (within the meaning of
Sections 414(b) and (c) of the Code).
23
<PAGE>
Section 3.9. Absence of Certain Changes or Events. Except as
-------------------------------------
disclosed in the Company SEC Reports, (a) since December 31, 1997 the businesses
of the Company and its Subsidiaries have been conducted in the ordinary course
consistent with past practice, and (b) there has not been any event, occurrence,
development or state of circumstances or facts that has had, individually or in
the aggregate, a Material Adverse Effect on the Company.
Section 3.10. Litigation. Except as disclosed in the Company SEC
-----------
Reports, there are no actions, suits or proceedings pending (or, to the best
knowledge of the Company, threatened) against or affecting the Company or its
Subsidiaries, or any of their respective properties at law or in equity, by or
before any Governmental Entity which, individually or in the aggregate, have a
Material Adverse Effect on the Company or would prevent or substantially delay
any of the transactions contemplated by this Agreement or otherwise prevent the
Company from performing its obligations hereunder.
Section 3.11. Schedule 14D-9; Offer Documents; Registration Statement
-------------------------------------------------------
and Proxy Statement. Neither the Schedule 14D-9 nor any information supplied
- --------------------
by the Company for inclusion in the Offer Documents shall, at the respective
times the Schedule 14D-9, the Offer Documents or any amendments or supplements
thereto are filed with the SEC or are first published, sent or given to
stockholders of the Company, as the case may be, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of the
circumstances under which they are made, not misleading. The Proxy Statement (as
hereinafter defined) will not, on the date the Proxy Statement (or any amendment
or supplement thereto) is first mailed to stockholders of the Company, contain
any untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they are made, not
misleading or shall, at the time of the Special Meeting (as hereinafter defined)
or at the Effective Time, omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation of
proxies for the Special Meeting which shall have become false or misleading in
any material respect. None of the information supplied by the Company for
inclusion or incorporation by reference in the Registration Statement will, at
the date it becomes effective and at the time of the Special Meeting (as
hereinafter defined) contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Schedule 14D-9 and the Proxy Statement
24
<PAGE>
will, when filed by the Company with the SEC, comply as to form in all material
respects with the applicable provisions of the Exchange Act and the rules and
regulations thereunder. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to the statements made in any of the
foregoing documents based on and in conformity with information supplied by or
on behalf of the Parent or the Purchaser specifically for inclusion therein.
Section 3.12. Intellectual Property.
----------------------
(a) The Company and its Subsidiaries own or have valid rights to use
all items of Intellectual Property (as hereinafter defined) utilized in the
conduct of the business of the Company and its Subsidiaries as presently
conducted, free and clear of all Liens with such exceptions as would not have,
individually or in the aggregate, a Material Adverse Effect on the Company.
(b) To the best knowledge of the Company, (i) neither the Company nor
any Subsidiary is in default (or with the giving of notice or lapse of time or
both, would be in default) under any license to use such Intellectual Property,
(ii) the Intellectual Property is not being infringed by any third party, (iii)
neither the Company nor any Subsidiary is infringing any Intellectual Property
of any third party with such exceptions as would not have, individually or in
the aggregate, a Material Adverse Effect on the Company and (iv) in the last
three years neither the Company nor any Subsidiary has received any claim or
notice of infringement by any third party.
(c) As used in this Agreement, "Intellectual Property" means all of
the following: (i) U.S. and foreign registered and unregistered trademarks and
pending trademark applications, trade dress, service marks, logos, trade names,
corporate names, assumed names, business names and logos and all registrations
and applications to register the same (the "Trademarks"), (ii) issued U.S. and
foreign patents and pending patent applications, invention disclosures, and any
and all divisions, continuations, continuations-in-part, reissues, continuing
patent applications, reexaminations, and extensions thereof, any counterparts
claiming priority therefrom, utility models, patents of
importation/confirmation, certificates of invention, certificates of
registration and like statutory rights (the "Patents"), (iii) U.S. and foreign
registered and unregistered copyrights (including, but not limited to, those in
computer software and databases), rights of publicity and all registrations and
applications to register the same (the "Copyrights"), (iv) all categories of
trade secrets as defined in the Uniform Trade Secrets Act and under
corresponding foreign
25
<PAGE>
statutory and common law, including, but not limited to, business, technical and
know-how information, (v) all licenses and agreements pursuant to which the
Company or any Subsidiary has acquired rights in or to any Trademarks, Patents,
trade secrets, technology, know-how, Computer Software (as defined below),
rights of publicity or Copyrights, or licenses and agreements pursuant to which
the Company has licensed or transferred the right to use any of the foregoing
("Licenses"), and (vi) all computer software, data files, source and object
codes, user interfaces, manuals and other specifications and documentation and
all know-how relating thereto (collectively, "Computer Software").
Section 3.13. Tax Matters.
------------
(a) All federal, state, local and foreign Tax Returns (as hereinafter
defined) required to be filed by or on behalf of the Company, each of its
Subsidiaries, and each affiliated, combined, consolidated or unitary group of
which the Company or any of its Subsidiaries (i) is a member (a "Current Company
Group") or (ii) was a member during any years not closed with the IRS for U.S.
federal income Tax purposes but is not currently a member, but only insofar as
any such Tax Return relates to a taxable period or portion thereof ending on a
date within the last six years during which the Company or such Subsidiary was a
member of such affiliated, combined, consolidated or unitary group for purposes
of the relevant Tax (a "Past Company Group," and together with Current Company
Groups, a "Company Affiliated Group") have been timely filed or requests for
extensions have been timely filed and any such extension has been granted and
has not expired, and all such filed Tax Returns are complete and accurate except
to the extent any failure to file or any inaccuracies in filed Tax Returns would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company (it being understood that the representations made in this Section 3.13,
to the extent that they relate to Past Company Groups, are made to the best
knowledge of the Company and only with respect to taxable periods or portions
thereof ending on a date within the last six years during which the Company or
any of its Subsidiaries was a member of such affiliated, combined, consolidated
or unitary group for purposes of the relevant Tax). All Taxes due and owing by
the Company, any Subsidiary of the Company or any Company Affiliated Group have
been paid, or adequately reserved for, except to the extent any failure to pay
or reserve would not, individually or in the aggregate, have a Material Adverse
Effect on the Company. There is no audit, examination, deficiency, refund
litigation, proposed adjustment or matter in controversy with respect to any
Taxes due and owing by the Company, any Subsidiary of the Company or any Company
Affiliated Group which if determined adversely would have a Material Adverse
Effect on the
26
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Company. All assessments for Taxes due and owing by the Company, any Subsidiary
of the Company or any Company Affiliated Group with respect to completed and
settled examinations or concluded litigation have been paid. Section 3.13(a) of
the Company Disclosure Schedule sets forth (i) the taxable years of the Company
for which the statutes of limitations with respect to U.S. federal income Taxes
have not expired and (ii) with respect to federal income Taxes for such years,
those years for which examinations have been completed, those years for which
examinations are presently being conducted, and those years for which
examinations have not yet been initiated. Neither the Company nor any of its
Subsidiaries has any liability under Treasury Regulation Section 1.1502-6 for
U.S. federal income Taxes of any Person other than the Company and its
Subsidiaries. The Company and each of its Subsidiaries have complied in all
material respects with all rules and regulations relating to the withholding of
Taxes, except to the extent any such failure to comply would not, individually
or in the aggregate, have a Material Adverse Effect on the Company.
(b) Neither the Company nor any Subsidiary of the Company has (i)
entered into a closing agreement or other similar agreement with a taxing
authority relating to Taxes of the Company or any Subsidiary of the Company with
respect to a taxable period for which the statute of limitations is still open,
or (ii) with respect to U.S. federal income Taxes, granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any income Tax, in either case, that is still outstanding. There
are no Liens relating to Taxes upon the assets of the Company or any Subsidiary
other than Liens relating to Taxes not yet due. Neither the Company nor any
Subsidiary is a party to any agreement relating to allocating or sharing of
Taxes which has not been disclosed in its Tax Returns. No consent under Section
341(f) of the Code has been filed with respect to the Company or any Subsidiary.
(c) Any amount or other entitlement that could be received (whether
in cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer or director
of the Company or any of its affiliates who is a "disqualified individual" (as
such term is defined in proposed Treasury Regulation Section 1.280G-1) under any
Plan currently in effect would not be characterized as an "excess parachute
payment" (as such term is defined in Section 280G(b)(1) of the Code).
(d) For purposes of this Agreement: (i) "Taxes" means any and all
federal, state, local, foreign or other taxes of any kind (together with any and
all
27
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interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any taxing authority, including, without limitation,
taxes or other charges on or with respect to income, franchises, windfall or
other profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation or
net worth, and taxes or other charges in the nature of excise, withholding, ad
valorem or value added, and (ii) "Tax Return" means any return, report or
similar statement (including the attached schedules) required to be filed with
respect to any Tax, including, without limitation, any information return, claim
for refund, amended return or declaration of estimated Tax.
Section 3.14. Opinion of Financial Advisor. The Board of Directors
-----------------------------
of the Company has received the opinion of BT Wolfensohn, dated the date of this
Agreement, substantially to the effect that each of the Per Share Cash Amount
and the Merger Consideration, taken as a whole, to be received by the
stockholders of the Company in the Offer and the Merger is fair to such holders
from a financial point of view.
Section 3.15. Required Vote of the Company Stockholders. The
------------------------------------------
affirmative vote of the holders of a majority of the outstanding shares of
Company Common Stock (the "Company Stockholder Approval") is the only vote of
the holders of any class or series of the Company's capital stock which is
necessary to approve this Agreement and the transactions contemplated hereby.
Section 3.16. Employment Matters. Neither the Company nor any of its
-------------------
Subsidiaries has experienced any work stoppages, strikes, collective labor
grievances, other collective bargaining disputes or claims of unfair labor
practices in the last five years which would, individually or in the aggregate,
have a Material Adverse Effect on the Company. To the best knowledge of the
Company, there is no organizational effort presently being made or threatened by
or on behalf of any labor union with respect to employees of the Company or any
of its Subsidiaries.
28
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ARTICLE IV
Representations and Warranties of the Parent and the Purchaser
--------------------------------------------------------------
Except as set forth on the schedule delivered by the Parent to the
Company simultaneously and in connection with the execution of this Agreement
(the "Parent Disclosure Schedule," and together with the Company Disclosure
Schedule, the "Disclosure Schedule") or disclosed in the Parent SEC Reports, the
Parent and the Purchaser represent and warrant to the Company as set forth
below:
Section 4.1. Organization, Qualification, Etc. Each of the Parent
---------------------------------
and the Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority and all governmental approvals required for it to
own its properties and assets and to carry on its business as it is now being
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so organized, existing and in good standing or to have such power,
authority and governmental approvals would not, individually or in the
aggregate, have a Material Adverse Effect on the Parent or delay consummation of
the transactions contemplated by this Agreement or otherwise prevent the Parent
or the Purchaser from performing its obligations hereunder. The Parent has
delivered or made available to the Company copies of the articles of
incorporation and by-laws for the Parent and the certificate of incorporation
and by-laws for the Purchaser. Such organizational documents are complete and
correct and in full force and effect, and neither the Parent nor the Purchaser
is in violation of any of the provisions of their respective certificates of
incorporation or by-laws. Each of the Parent's Significant Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has the corporate power
and authority and all governmental approvals required for it to own its
properties and assets and to carry on its business as it is now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so organized, existing and in good standing or to have such power,
authority and governmental approvals would not, individually or in the
aggregate, have a Material Adverse Effect on the Parent.
29
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Section 4.2. Capital Stock. The authorized capital stock of the
--------------
Parent consists of 300,000,000 shares of Parent Common Stock, 557,740 shares of
serial preferred stock, par value $100.00 per share ("Parent Serial Preferred
Stock") and 10,000,000 shares of Class B serial preferred stock, par value $1.00
per share ("Parent Class B Serial Preferred Stock"). As of February 28, 1998,
(i) 168,125,229 shares of Parent Common Stock were issued and outstanding; (ii)
14,050,000 shares of Parent Common Stock were subject to outstanding options
issued pursuant to Parent's long term stock incentive plan (the "Long Term
Incentive Plan"), and 19,300,152 shares of Parent Common Stock were reserved for
issuance under the Long Term Incentive Plan; (iii) 4,097,532 shares of Parent
Common Stock were reserved for issuance under the Parent's employees savings
plans; (iv) 169,228 shares of Parent Common Stock were reserved for issuance
under the Parent's incentive compensation plan; (v) 10,797,354 shares of Parent
Common Stock were issued and held in the treasury of the Parent; (vi) 557,649
shares of Parent Serial Preferred Stock were issued and outstanding; and (vii)
no shares of Parent Class B Serial Preferred Stock are issued and outstanding.
All the outstanding shares of Parent Common Stock and Parent Serial Preferred
Stock are, and all shares to be issued as part of the Merger Consideration will
be, when issued in accordance with the terms hereof, duly authorized, validly
issued, fully paid and non-assessable. Except as set forth above, and except for
the transactions contemplated by this Agreement, (1) there are no shares of
capital stock of the Parent authorized, issued or outstanding, (2) there are no
authorized or outstanding options, warrants, calls, preemptive rights,
subscriptions or other rights, agreements, arrangements or commitments of any
character relating to the issued or unissued capital stock of the Parent,
obligating the Parent to issue, transfer or sell or cause to be issued,
transferred or sold any shares of capital stock or other equity interest in the
Parent or securities convertible into or exchangeable for such shares or equity
interests, or obligating the Parent to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment, (3) there are no outstanding contractual obligations of the Parent
to repurchase, redeem or otherwise acquire any capital stock of the Parent.
Section 4.3. Corporate Authority Relative to this Agreement; No
--------------------------------------------------
Violation.
- ----------
(a) Each of the Parent and the Purchaser has the corporate power and
authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
the Boards of Directors of the Parent and the Purchaser and by the Parent as the
sole stockholder
30
<PAGE>
of the Purchaser, and other than the filing of the Certificate of Merger no
other corporate proceedings on the part of the Parent or the Purchaser are
necessary to authorize the consummation of the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by the Parent
and the Purchaser and, assuming this Agreement constitutes a valid and binding
agreement of the Company, constitutes a valid and binding agreement of each of
the Parent and the Purchaser, enforceable against each of the Parent and the
Purchaser in accordance with its terms.
(b) Except for the filings, permits, authorizations, consents and
approvals set forth in Section 4.3(b) of the Parent Disclosure Schedule or as
may be required under, and other applicable requirements of, the NYSE, the
Securities Act, the Exchange Act, the HSR Act, state securities or blue sky
laws, and the DGCL (the "Parent Required Approvals"), none of the execution,
delivery or performance of this Agreement by the Parent or the Purchaser, the
consummation by the Parent or the Purchaser of the transactions contemplated
hereby or compliance by the Parent or the Purchaser with any of the provisions
hereof or thereof will (i) conflict with or result in any breach of any
provision of the articles or by-laws of the Parent or the certificate of
incorporation or by-laws of the Purchaser, (ii) require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity, (iii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which the Parent, any of its
Subsidiaries or the Purchaser is a party or by which either of them or any of
their respective properties or assets may be bound (the "Parent and Purchaser
Agreements") or (iv) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to the Parent, any of its Subsidiaries or any of their
respective properties or assets, excluding from the foregoing clauses (ii),
(iii) and (iv) such violations, breaches or defaults which would not,
individually or in the aggregate have a Material Adverse Effect on the Parent or
prevent or substantially delay the consummation of the transactions contemplated
hereby. Section 4.3(b) of the Parent Disclosure Schedule sets forth a list of
all third party consents and approvals required to be obtained under the Parent
and Purchaser Agreements prior to the consummation of the transactions
contemplated by this Agreement the failure of which to obtain would have,
individually or in the aggregate, a Material Adverse Effect on the Parent.
31
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Section 4.4. Reports and Financial Statements. The Parent has
---------------------------------
previously furnished or otherwise made available to the Company true and
complete copies of:
(a) the Parent's Annual Reports on Form 10-K filed with the SEC for
each of the years ended December 31, 1996 and 1997;
(b) the Parent's Quarterly Report on Form 10-Q filed with the SEC for
the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997;
(c) each definitive proxy statement filed by the Parent with the SEC
since December 31, 1996;
(d) each final prospectus filed by the Parent with the SEC since
December 31, 1996, except any final prospectus on Form S-8; and
(e) all Current Reports on Form 8-K filed by the Parent with the SEC
since January 1, 1997.
As of their respective dates, such reports, proxy statements and
prospectuses (collectively with any amendments, supplements and exhibits
thereto, the "Parent SEC Reports") (i) complied as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations promulgated thereunder, and (ii) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Except to the extent that information contained in any Parent SEC Report was
amended or was superseded by a later filed Parent SEC Report, none of the Parent
SEC Reports contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. None of the Parent's Subsidiaries is required to file any
forms, reports or other documents with the SEC. The audited consolidated
financial statements and unaudited consolidated interim financial statements
included in the Parent SEC Reports (including any related notes and schedules)
fairly present the financial position of the Parent and its consolidated
Subsidiaries as of the dates thereof and the results of operations and cash
flows for the periods or as of the dates then ended (subject, in the case of the
unaudited interim financial statements, to normal year-end adjustments), in each
case in accordance with
32
<PAGE>
past practice and GAAP consistently applied during the periods involved (except
as otherwise disclosed in the notes thereto). Since January 1, 1996, the Parent
has timely filed all reports, registration statements and other filings required
to be filed by it with the SEC under the rules and regulations of the SEC.
Section 4.5. No Undisclosed Liabilities. Neither the Parent nor any
---------------------------
of its Subsidiaries has any liabilities or obligations of any nature, whether or
not accrued, contingent or otherwise, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability or obligation, except (a) liabilities or obligations
reflected in the Parent SEC Reports and (b) liabilities or obligations which
would not, individually or in the aggregate, have a Material Adverse Effect on
the Parent.
Section 4.6. No Violation of Law. The businesses of the Parent and
--------------------
its Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity (provided that no representation or
warranty is made in this Section 4.6 with respect to Environmental Laws) except
(a) as described in the Parent SEC Reports filed prior to the date hereof and
(b) for violations or possible violations which would not, individually or in
the aggregate, have a Material Adverse Effect on the Parent.
Section 4.7. Environmental Matters.
----------------------
(a) Each of the Parent and its Subsidiaries has obtained all
Environmental Permits, except for such failures to have Environmental Permits
which, individually or in the aggregate, are not reasonably expected to have a
Material Adverse Effect on the Parent. Each of such Environmental Permits is in
full force and effect, and each of the Parent and its Subsidiaries is in
compliance with the terms and conditions of all such Environmental Permits and
with all applicable Environmental Laws, except for such exceptions as would not,
individually or in the aggregate, have a Material Adverse Effect on the Parent.
(b) There is no Environmental Claim pending, or to the best knowledge
of the Parent threatened, against the Parent or any of its Subsidiaries, or to
the best knowledge of the Parent against any Person whose liability for such
Environmental Claim the Parent or any of its Subsidiaries has or may have
retained or assumed either contractually or by operation of law, that would,
individually or in the aggregate, have a Material Adverse Effect on the Parent.
33
<PAGE>
(c) Except as set forth in Section 4.7(c) of the Parent Disclosure
Schedule, to the best knowledge of the Parent, there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, threatened release or presence of any Hazardous
Material, that have resulted in any Environmental Claim against the Parent or
any of its Subsidiaries, or to the best knowledge of the Parent against any
Person whose liability for any Environmental Claim the Parent or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law, except for such liabilities which would not, individually or
in the aggregate, have a Material Adverse Effect on the Parent.
(d) To the best knowledge of the Parent, no site or facility now or
previously owned, operated or leased by the Parent or any of its Subsidiaries is
listed or proposed for listing on the National Priorities List promulgated
pursuant to CERCLA.
(e) No Liens have arisen under or pursuant to any Environmental Law on
any site or facility owned, operated or leased by the Parent or any of its
Subsidiaries, except for such Liens which would not, individually or in the
aggregate, have a Material Adverse Effect on the Parent, and no action of any
Governmental Entity has been taken or, to the best knowledge of the Parent, is
in process which could subject any of such properties to such Liens except for
any such action which would not, individually or in the aggregate, have a
Material Adverse Effect on the Parent.
Section 4.8. Employee Benefit Plans; ERISA.
------------------------------
(a) Except as described in the Parent SEC Reports or as would not
have a Material Adverse Effect on the Parent, (i) all Parent Employee Benefit
Plans (as hereinafter defined) are in compliance with all applicable
requirements of law, including ERISA (as hereinafter defined) and the Code, and
(ii) neither the Parent nor any of its Subsidiaries nor any ERISA Affiliate has
any liabilities or obligations with respect to any such Parent Employee Benefit
Plans, whether accrued, contingent or otherwise, nor to the best knowledge of
the Parent, are any such liabilities or obligations expected to be incurred.
Except as described in the Parent SEC Reports or as set forth in Section 4.8(a)
of the Parent Disclosure Schedule, the execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event under any
Parent Employee Benefit Plan that will or may result in any payment
34
<PAGE>
or any continuation benefit under COBRA (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any employee. The only
severance policies applicable to the Parent or any of its Subsidiaries are the
policies specifically described in Section 4.8(a) of the Parent Disclosure
Schedule.
(b) With respect to each of its Plans, the Parent has heretofore
delivered or otherwise made available to the Company complete and correct copies
of each of the following documents, as applicable: (i) a copy of the Plan; (ii)
a copy of the most recent annual report; (iii) a copy of the most recent
actuarial report; (iv) a copy of the most recent Summary Plan Description and
all material modifications; (v) a copy of the trust or other funding agreement;
and (vi) the most recent determination letter received from the IRS with respect
to each Plan that is intended to be qualified under Section 401 of the Code and
all notices of reportable events received following receipt of such letter.
(c) No liability under Title IV of ERISA has been incurred by the
Parent or any ERISA Affiliate within the past twelve years that has not been
satisfied in full. To the best knowledge of the Parent, no condition exists
that presents a material risk to the Parent, any of its Subsidiaries or any
ERISA Affiliate of incurring a liability under such Title. The PBGC has not
instituted proceedings to terminate any of the Plans, and no condition exists
that presents a material risk that such proceedings will be instituted. Except
as otherwise disclosed in the documents delivered or otherwise made available
pursuant to Section 4.8(b), with respect to each of the Plans that is subject to
Title IV of ERISA, the present value of accrued benefits under such Plan, based
upon the actuarial assumptions used for funding purposes in the most recent
actuarial report prepared by such Plan's actuary with respect to such Plan, did
not, as of its latest valuation date, exceed the then current value of the
assets of such Plan allocable to such accrued benefits, and there have been no
changes since such latest valuation date which would cause the present value of
such accrued benefits to exceed the current value of such assets. None of the
Plans or any trust established thereunder has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, as of the last day of the most recent fiscal year of each
of the Plans ended prior to the date of this Agreement. None of the Plans is a
"multiemployer plan," as such term is defined in Section 3(37) of ERISA. Each
of the Plans that is intended to be "qualified" within the meaning of Section
401(a) of the Code is so qualified and the trusts maintained thereunder are
exempt from taxation under Section 501(a) of the Code. Except as set forth in
Section 4.8(c) of the Parent Disclosure Schedule, no
35
<PAGE>
Plan provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees after
retirement or other termination of service (other than coverage mandated by
applicable law or benefits, the full cost of which is borne by the current or
former employee). Except as set forth in Section 4.8(c) of the Parent Disclosure
Schedule, there are no pending or threatened claims by or on behalf of any Plan,
by any employee or beneficiary covered under any such Plan, or otherwise
involving any such Plan (other than routine claims for benefits).
(d) As used in this Agreement: "Parent Employee Benefit Plan" means
any Plan entered into, established, maintained, sponsored, contributed to or
required to be contributed to by the Parent, any of its Subsidiaries or ERISA
Affiliates for the benefit of the current or former employees or directors of
the Parent or any of its Subsidiaries and existing on the date of this Agreement
or at any time subsequent thereto and on or prior to the Effective Time and, in
the case of a Plan which is subject to ERISA, Section 412 of the Code or Title
IV of ERISA, at any time during the twelve-year period preceding the date of
this Agreement.
Section 4.9. Absence of Certain Changes or Events. Except as
-------------------------------------
disclosed in the Parent SEC Reports, (a) since December 31, 1997 the businesses
of the Parent and its Subsidiaries have been conducted in the ordinary course
consistent with past practice, and (b) there has not been any event, occurrence,
development or state of circumstances or facts that has had, or is reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
the Parent.
Section 4.10. Litigation. Except as disclosed in the Parent SEC
-----------
Reports, there are no actions, suits or proceedings pending (or, to the best
knowledge of the Parent, threatened) against or affecting the Parent or its
Subsidiaries, or any of their respective properties at law or in equity, by or
before any Governmental Entity which, individually or in the aggregate, have a
Material Adverse Effect on the Parent or would prevent or substantially delay
any of the transactions contemplated by this Agreement or otherwise prevent the
Parent from performing its obligations hereunder.
Section 4.11. Proxy Statement/Prospectus; Registration Statement.
---------------------------------------------------
The Registration Statement and Form S-4 to be filed with the SEC by
the Parent in connection with the issuance of the Parent Common Stock pursuant
to the Merger, as amended or supplemented from time to time (as so amended and
supplemented, the "Registration Statement"), and any other documents to be filed
by the Parent with the SEC or any other Government Entity in connection with the
Merger and the other
36
<PAGE>
transactions contemplated hereby will (in the case of the Registration Statement
and any such other documents filed with the SEC under the Securities Act or the
Exchange Act) comply as to form in all material respects with the requirements
of the Exchange Act and the Securities Act, respectively, and will not, on the
date of filing with the SEC or, in the case of the Registration Statement, at
the time it becomes effective under the Securities Act, on the date the Proxy
Statement is first mailed to stockholders of the Company, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading or shall,
at the time of the Special Meeting or at the Effective Time, omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the Special Meeting which shall
have become false or misleading in any material respect. Notwithstanding the
foregoing, neither the Parent nor the Purchaser makes any representation or
warranty with respect to the statements made in any of the foregoing documents
based on and in conformity with information supplied by or on behalf of the
Company specifically for inclusion therein.
Section 4.12. Intellectual Property.
----------------------
(a) The Parent and its Subsidiaries own or have valid rights to use
all items of Intellectual Property utilized in the conduct of the business of
the Parent and its Subsidiaries as presently conducted, free and clear of all
Liens with such exceptions as would not have, individually or in the aggregate,
a Material Adverse Effect on the Parent.
(b) To the best knowledge of the Parent, (i) neither the Parent nor
any Subsidiary is in default (or with the giving of notice or lapse of time or
both, would be in default) under any license to use such Intellectual Property,
(ii) the Intellectual Property is not being infringed by any third party, (iii)
neither the Parent nor any Subsidiary is infringing any Intellectual Property of
any third party with such exceptions as would not have, individually or in the
aggregate, a Material Adverse Effect on the Parent, and (iv) within the last
three years neither the Parent nor any Subsidiary has received any claim or
notice of infringement by any third party except as would not, individually or
in the aggregate, have a Material Adverse Effect on the Parent.
37
<PAGE>
Section 4.13. Tax Matters.
------------
(a) All federal, state, local and foreign Tax Returns required to be
filed by or on behalf of the Parent, each of its Subsidiaries, and each
affiliated, combined, consolidated or unitary group of which the Parent or any
of its Subsidiaries (i) is a member (a "Current Parent Group") or (ii) was a
member during any years not closed with the IRS for U.S. federal income Tax
purposes but is not currently a member, but only insofar as any such Tax Return
relates to a taxable period or portion thereof ending on a date within the last
six years during which the Parent or such Subsidiary was a member of such
affiliated, combined, consolidated or unitary group for purposes of the
relevant Tax (a "Past Parent Group," and together with Current Parent Groups, a
"Parent Affiliated Group") have been timely filed or requests for extensions
have been timely filed and any such extension has been granted and has not
expired, and all such filed Tax Returns are complete and accurate except to the
extent any failure to file or any inaccuracies in filed Tax Returns would not,
individually or in the aggregate, have a Material Adverse Effect on the Company
(it being understood that the representations made in this Section 4.13, to the
extent that they relate to Past Parent Groups, are made to the best knowledge of
the Parent and only with respect to taxable periods or portions thereof ending
on a date within the last six years during which the Parent or any of its
Subsidiaries was a member of such affiliated, combined, consolidated or unitary
group for purposes of the relevant Tax). All Taxes due and owing by the Parent,
any Subsidiary of the Parent or any Parent Affiliated Group have been paid, or
adequately reserved for, except to the extent any failure to pay or reserve
would not, individually or in the aggregate, have a Material Adverse Effect on
the Parent. There is no audit, examination, deficiency, refund litigation,
proposed adjustment or matter in controversy with respect to any Taxes due and
owing by the Parent, any Subsidiary of the Parent or any Parent Affiliated Group
which if determined adversely would have a Material Adverse Effect on the
Parent. All assessments for Taxes due and owing by the Parent, any Subsidiary
of the Parent or any Parent Affiliated Group with respect to completed and
settled examinations or concluded litigation have been paid. Section 4.13(a) of
the Parent Disclosure Schedule sets forth (i) the taxable years of the Parent
for which the statutes of limitations with respect to U.S. federal income Taxes
have not expired and (ii) with respect to federal income Taxes for such years,
those years for which examinations have been completed, those years for which
examinations are presently being conducted, and those years for which
examinations have not yet been initiated. Neither the Parent nor any of its
Subsidiaries has any liability under Treasury Regulation Section 1.1502-6 for
U.S. federal income Taxes of any Person other than the Parent and its
Subsidiaries. The Parent and each of its Subsidiaries have complied
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in all material respects with all rules and regulations relating to the
withholding of Taxes, except to the extent any such failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on the Parent.
(b) Neither the Parent nor any Subsidiary of the Parent has (i)
entered into a closing agreement or other similar agreement with a taxing
authority relating to Taxes of the Parent or any Subsidiary of the Parent with
respect to a taxable period for which the statute of limitations is still open,
or (ii) with respect to U.S. federal income Taxes, granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any income Tax, in either case, that is still outstanding. There
are no Liens relating to Taxes upon the assets of the Parent or any Subsidiary
of the Parent other than Liens relating to Taxes not yet due. Neither the
Parent nor any Subsidiary of the Parent is a party to any agreement relating to
allocating or sharing of Taxes which has not been disclosed in its Tax Returns.
No consent under Section 341(f) of the Code has been filed with respect to the
Parent or any Subsidiary of the Parent.
Section 4.14. Opinion of Financial Advisor. The Board of Directors
-----------------------------
of the Parent has received the opinion of Credit Suisse First Boston
Corporation, dated the date of this Agreement, substantially to the effect that
the consideration to be offered by the Parent in the Offer and the Merger, taken
together, is fair to the Parent from a financial point of view.
Section 4.15. Employment Matters. Neither the Parent nor any of its
-------------------
Subsidiaries has experienced any work stoppages, strikes, collective labor
grievances, other collective bargaining disputes or claims of unfair labor
practices in the last five years which would, individually or in the aggregate,
have a Material Adverse Effect on the Parent. To the best knowledge of the
Parent, there is no organizational effort presently being made or threatened by
or on behalf of any labor union with respect to employees of the Parent or any
of its Subsidiaries.
Section 4.16. Ownership of Shares. As of the date hereof, neither
-------------------
the Parent nor the Purchaser is an "interested stockholder" of the Company, as
such term is defined in Section 203 of the DGCL.
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ARTICLE V
Covenants and Agreements
------------------------
Section 5.1. Conduct of Business by the Company. The Company agrees
-----------------------------------
that, from and after the date hereof and prior to the Effective Time or the
date, if any, on which this Agreement is earlier terminated pursuant to Section
7.1 (the "Termination Date"), and except as may be agreed in writing by the
other parties hereto or as may be expressly permitted pursuant to this
Agreement, the Company:
(i) shall, and shall cause each of its Subsidiaries to, conduct
its operations according to their ordinary and usual course of business in
substantially the same manner as heretofore conducted;
(ii) shall use its reasonable best efforts, and cause each of
its Subsidiaries to use its reasonable best efforts, to preserve intact its
business organization and goodwill, keep available the services of its
current officers and other key employees and preserve its relationships
with those persons having business dealings with the Company and its
Subsidiaries;
(iii) shall confer at such times as the Parent may reasonably
request with one or more representatives of the Parent to report material
operational matters and the general status of ongoing operations;
(iv) shall notify the Parent of any emergency or other change in
the normal course of its or its Subsidiaries' respective businesses or in
the operation of its or its Subsidiaries' respective properties and of any
complaints or hearings (or communications indicating that the same may be
contemplated) of any Governmental Entity if such emergency, change,
complaint, investigation or hearing would have a Material Adverse Effect on
the Company;
(v) shall not, and shall not permit any of its Subsidiaries that
is not wholly owned to, authorize or pay any dividends on or make any
distribution with respect to its outstanding shares of stock;
(vi) shall not, and shall not permit any of its Subsidiaries to,
except as otherwise provided in this Agreement, establish, enter into or
amend any Plan or increase the compensation payable or to become payable or
the
40
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benefits provided to its officers or employees, subject to such exceptions
as are set forth in Section 5.1(vi) of the Company Disclosure Schedule;
(vii) except as set forth in Section 5.1(vii) of the Company
Disclosure Schedule, shall not, and shall not permit any of its
Subsidiaries to, authorize, propose or announce an intention to authorize
or propose, or enter into an agreement with respect to, any merger,
consolidation or business combination (other than the Merger), any
acquisition of a material amount of assets or securities, any disposition
of a material amount of assets or securities, except (x) for the sale of
goods and products manufactured by the Company and held for sale in the
ordinary course (for purposes of this Section 5.1(vii) "material" shall
mean any amount in excess of $1 million) and (y) as provided in the Profit
and Capital Plan of 1998 previously provided to the Parent and not in
excess of $150 million in the aggregate;
(viii) shall not, and shall not permit any of its Subsidiaries
to, propose or adopt any amendments to its certificate of incorporation or
by-laws (or other similar organizational documents);
(ix) shall not, and shall not permit any of its Subsidiaries to,
issue or authorize the issuance of, or agree to issue or sell any shares of
capital stock of any class (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise), except for the issuance of (1) not more than 3,161,525 Shares
upon the exercise of employee stock options granted under, and 319,610
Shares issuable pursuant to, the 1993 Plan referred to in clause (ii) of
Section 3.2, (2) not more than 571,475 Shares upon the exercise of employee
stock options granted under, and 190,564 Shares issuable pursuant to, the
1995 Plan referred to in clause (iii) of Section 3.2, (3) not more than
80,000 Shares upon the exercise of stock options granted under, and 20,750
Shares issuable pursuant to, The Alumax Inc. Non-Employee Directors' Stock
Compensation Plan referred to in clause (iv) of Section 3.2, (4) not more
than 74,148 Shares issuable pursuant to The Alumax Inc. Non-Employee
Directors' Compensation Plan referred to in clause (iv) of Section 3.2, (5)
not more than 623,350 Shares upon the exercise of options granted under,
and 26,603 Shares issuable pursuant to, employee deferred compensation
arrangements referred to in clause (vi) of Section 3.2, and (6) not more
than 180,000 Shares issuable in connection with regularly scheduled
matching contributions to the Alumax Inc. Thrift Plans referred to in
clause (v) of Section 3.2;
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(x) shall not, and shall not permit any of its Subsidiaries to,
reclassify, combine, split, purchase or redeem any shares of its capital
stock or purchase or redeem any rights, warrants or options to acquire any
such shares;
(xi) other than in the ordinary course of business consistent
with past practice, shall not, and shall not permit any of its Subsidiaries
to, (a) incur, assume or prepay any indebtedness or any other material
liabilities or issue any debt securities, or (b) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any other person, other than
guarantees of obligations of wholly owned Subsidiaries of the Company in
the ordinary course of business;
(xii) shall not, and shall not permit any of its Subsidiaries
to, (a) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets (including
securitizations), other than in the ordinary course of business consistent
with past practice; (b) modify, amend or terminate any of its material
contracts or waive, release or assign any material rights (contract or
other); or (c) permit any insurance policy naming it as a beneficiary or a
loss payable payee to lapse, be cancelled for reasons within the Company's
control or expire unless a new policy with substantially identical coverage
is in effect as of the date of lapse, cancellation or expiration;
(xiii) shall not, and shall not permit any of its Subsidiaries
to, (a) make any material Tax election or settle or compromise any material
Tax liability or (b) change any of the accounting methods used by it unless
required by GAAP; and
(xiv) shall not, and shall not permit any of its Subsidiaries
to, agree, in writing or otherwise, to take any of the foregoing actions or
knowingly take any action which would (y) make any representation or
warranty in Article III hereof untrue or incorrect in any material respect
or (z) result in any of the conditions to the Offer set forth in Annex A
hereto or any of the conditions to the Merger set forth in Article VI
hereof not being satisfied.
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Section 5.2. Access; Confidentiality.
------------------------
(a) Except for competitively sensitive information as to which access,
use and treatment is covered by Section 5.2(c), the Company shall (and shall
cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other authorized representatives of the Parent
reasonable access on reasonable prior notice during normal business hours,
throughout the period prior to the earlier of the Effective Time or the
Termination Date, to all of its properties, offices, employees, contracts,
commitments, books and records (including but not limited to Tax Returns) and
any report, schedule or other document filed or received by it pursuant to the
requirements of federal or state securities laws and shall (and shall cause each
of its Subsidiaries to) furnish promptly to the Parent such additional financial
and operating data and other information as to its and its Subsidiaries'
respective businesses and properties as the Parent may from time to time
reasonably request. The Parent and the Purchaser will make all reasonable
efforts to minimize any disruption to the businesses of the Company and its
Subsidiaries which may result from the requests for data and information
hereunder. No investigation pursuant to this Section 5.2(a) shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
(b) Except for competitively sensitive information as to which access,
use and treatment is covered by Section 5.2(c), the Parent shall (and shall
cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other authorized representatives of the Company
reasonable access on reasonable prior notice during normal business hours,
throughout the period prior to the earlier of the Effective Time or the
Termination Date, to all of its properties, offices, employees, contracts,
commitments, books and records (including but not limited to Tax Returns) and
any report, schedule or other document filed or received by it pursuant to the
requirements of federal or state securities laws and shall (and shall cause each
of its Subsidiaries to) furnish promptly to the Company such additional
financial and operating data and other information as to its and its
Subsidiaries' respective businesses and properties as the Company may from time
to time reasonably request. The Company will make all reasonable efforts to
minimize any disruption to the businesses of the Parent and its Subsidiaries
which may result from the requests for data and information hereunder. No
investigation pursuant to this Section 5.2(b) shall affect any representation or
warranty in this Agreement of any party hereto or any condition to the
obligations of the parties hereto.
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(c) As promptly as possible following the date hereof the parties
intend to establish an appropriate protocol which shall remain in place until
the expiration of the applicable waiting periods under the HSR Act pursuant to
which each party may disclose to a limited number of representatives of the
other party confidential information which is competitively sensitive in nature.
(d) The Parent and the Company will not, and will cause their
respective officers, employees, accountants, counsel and representatives not to,
use any information obtained pursuant to this Section 5.2 for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, pending consummation of the
transactions herein contemplated, each of the Parent and the Company will keep
confidential, and will cause their respective officers, employees, accountants,
counsel and representatives to keep confidential, all information and documents
obtained pursuant to this Section 5.2 unless such information (i) was already
known to it, (ii) becomes available to it from other sources not known by it to
be bound by a confidentiality obligation, (iii) is independently acquired by it
as a result of work carried out by any of its employees or representatives to
whom no disclosure of such information has been made, (iv) is disclosed with the
prior written approval of the other party or (v) is or becomes readily
ascertainable from published information or trade sources. Upon any termination
of this Agreement, each party will collect and deliver to the other party all
documents obtained by it or any of its officers, employees, accountants, counsel
and representatives then in their possession and any copies thereof.
Section 5.3. Special Meeting, Proxy Statement, Registration
----------------------------------------------
Statement.
- ----------
(a) As promptly as practicable following the date of this Agreement,
the Company, acting through its Board of Directors, shall, in accordance with
applicable law duly call, give notice of, convene and hold a special meeting of
its stockholders (the "Special Meeting") for the purposes of considering and
taking action upon the approval of the Merger and the approval and adoption of
this Agreement;
(b) As promptly as practicable following the date of this Agreement,
the Company shall:
(i) prepare and file with the SEC a preliminary proxy or
information statement relating to the Merger and this Agreement and (x)
obtain and furnish the information required to be included by the SEC in
the
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Proxy Statement (as hereinafter defined) and, after consultation with the
Parent, respond promptly to any comments made by the SEC with respect to
the preliminary proxy or information statement and cause a definitive proxy
or information statement, including any amendment or supplement thereto
(the "Proxy Statement") to be mailed to its stockholders at the earliest
practicable date after the Registration Statement is declared effective by
the SEC, provided that no amendment or supplement to the Proxy Statement
will be made by the Company without consultation with Parent and its
counsel and (y) use its reasonable best efforts to obtain the necessary
approvals of the Merger and this Agreement by its stockholders; and
(ii) unless this Agreement has been terminated in accordance with
Article VII, include in the Proxy Statement the recommendation of the Board
that stockholders of the Company vote in favor of the approval of the
Merger and the approval and adoption of this Agreement; provided, however,
that if the Board of Directors of the Company, based on the advice of
outside legal counsel, determines in good faith that the amendment or
withdrawal of its recommendation is necessary for the Board of Directors of
the Company to avoid breaching its fiduciary duties to the Company's
stockholders under applicable law, then any such amendment or withdrawal
shall not constitute a breach of this Agreement.
(c) As promptly as practicable following the date of this Agreement,
the Parent shall prepare and file with the SEC the Registration Statement, in
which the Proxy Statement shall be included as a prospectus, and shall use its
reasonable best efforts to have the Registration Statement declared effective by
the SEC as promptly as practicable. The Parent shall obtain and furnish the
information required to be included by the SEC in the Registration Statement
and, after consultation with the Company, respond promptly to any comments made
by the SEC with respect to the Registration Statement and cause the prospectus
included therein, including any amendment or supplement thereto, to be mailed to
the Company's stockholders at the earliest practicable date after the
Registration Statement is declared effective by the SEC. The Parent shall also
take any action required to be taken under state blue sky or other securities
laws in connection with the issuance of Parent Common Stock in the Merger.
(d) The Parent shall vote, or cause to be voted, all of the Shares
then owned by it, the Purchaser or any of its other Subsidiaries in favor of the
approval and adoption of this Agreement.
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Section 5.4. Reasonable Best Efforts; Further Assurances.
--------------------------------------------
(a) Subject to the terms and conditions of this Agreement and
applicable law, each of the parties shall act in good faith and use reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, all things necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement as soon as
practicable. Without limiting the foregoing, the parties shall (and shall cause
their respective subsidiaries, and use reasonable best efforts to cause their
respective affiliates, directors, officers, employees, agents, attorneys,
accountants and representatives, to) consult and fully cooperate with and
provide assistance to each other in (i) the preparation and filing with the SEC
of the Offer Documents, the Schedule 14D-9, the preliminary Proxy Statement, the
Proxy Statement and the Registration Statement and all necessary amendments or
supplements thereto; (ii) obtain all necessary consents, approvals, waivers,
licenses, permits, authorizations, registrations, qualifications or other
permissions or actions by, and give all necessary notices to and make all
necessary filings with and applications and submissions to, any Governmental
Entity or other Person as soon as reasonably practicable after filing; and (iii)
provide all such information concerning such party, its Subsidiaries and its
officers, directors, employees, partners and affiliates as may be necessary or
reasonably requested in connection with any of the foregoing. Prior to making
any application to or filing with a Governmental Entity or other entity in
connection with this Agreement (other than filing under the HSR Act), each party
shall provide the other party with drafts thereof and afford the other party a
reasonable opportunity to comment on such drafts.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each of the parties to this Agreement shall use their
reasonable best efforts to take all such action.
(c) Notwithstanding the foregoing, neither the Parent nor the
Purchaser shall be obligated to enter into any "hold-separate" agreement or
other agreement with respect to the disposition of any assets or businesses of
the Parent or any of its Subsidiaries or the Company or any of its Subsidiaries
in order to obtain clearance from the Federal Trade Commission or the Antitrust
Division of the Department of Justice or any state antitrust or competition
authorities to proceed with the consummation of the transactions contemplated by
this Agreement.
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(d) The Company, the Parent and the Purchaser each shall keep the
other apprised of the status of matters relating to completion of the
transactions contemplated hereby, including promptly furnishing the other with
copies of notices or other communications received by the Parent, the Purchaser
or the Company, as the case may be, or any of their respective Subsidiaries
(other than in any such case with respect to Acquisition Proposals), from any
third party and/or any Governmental Entity with respect to the transactions
contemplated by this Agreement.
(e) The Company, the Parent and the Purchaser shall each use their
reasonable best efforts to reduce or eliminate any amounts specified in Section
3.14(c) of the Company Disclosure Schedule, it being understood that the
foregoing shall not require the Company or any of its Subsidiaries to amend any
Plan, terminate or retire any employee or to otherwise adversely affect the
rights of any employee.
Section 5.5. Employee Stock Options and Other Employee Benefits.
---------------------------------------------------
(a) Simultaneously with the Merger, (i) each outstanding option (the
"Company Stock Options") to purchase or acquire a share of Company Common Stock
under employee incentive or benefit plans, programs or arrangements and non-
employee director plans presently maintained by the Company (the "Company Option
Plans") shall be converted into an option to purchase the number of shares of
Parent Common Stock equal to the product of (x) the Exchange Ratio multiplied by
(y) the number of shares of Company Common Stock which could have been issued
prior to the Effective Time upon the exercise of such option, at an exercise
price per share (rounded upward to the nearest cent) equal to the exercise price
for each share of Company Common Stock subject to such option divided by the
Exchange Ratio, and all references in each such option to the Company shall be
deemed to refer to the Parent, where appropriate, provided, however, that with
respect to any Option which is an "incentive stock option", within the meaning
of Section 422 of the Code, the adjustments provided in this Section shall, if
applicable, be modified in a manner so that the adjustments are consistent with
requirements of Section 424(a) of the Code, and (ii) the Parent shall assume the
obligations of the Company under the Company Option Plans. The other terms of
each such option, and the plans under which they were issued, shall continue to
apply in accordance with their terms, including any provisions providing for
acceleration. At or prior to the Effective Time, the Parent shall take all
corporate action necessary to reserve for issuance a sufficient number of shares
of Parent Common Stock for delivery upon exercise of Company Stock Options
assumed by it in accordance with this Section. As soon as practicable after the
Effective Time, if necessary, the Parent shall file a registration statement on
Form
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S-8 (or any successor or other appropriate forms), or another appropriate form
with respect to the Parent Common Stock subject to such Company Stock Options,
and shall use its best efforts to maintain the effectiveness of such
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as the Company Stock Options remain
outstanding.
(b) For the period through and including December 31, 1999, the Parent
shall, or shall cause the Surviving Corporation to, maintain employee benefit
plans, programs and arrangements which are, in the aggregate, for the employees
who were active full-time employees of the Company or any Subsidiary immediately
prior to the Effective Time and continue to be active full-time employees of the
Purchaser, the Surviving Corporation, any Subsidiary or any other affiliate of
the Purchaser, no less favorable than those provided by the Company and any
Subsidiary immediately prior to the Effective Time. From and after the
Effective Time, for purposes of determining eligibility, vesting and entitlement
to vacation and severance and other benefits for employees actively employed
full-time by the Company or any Subsidiary immediately prior to the Effective
Time under any compensation, severance, welfare, pension, benefit, savings or
other Plan of the Parent or any of its Subsidiaries in which active full-time
employees of the Company and any Subsidiary become eligible to participate
(whether pursuant to this Section 5.5(b) or otherwise), service with the Company
or any Subsidiary (whether before or after the Effective Time) shall be credited
as if such service had been rendered to the Parent or such Subsidiary. Parent
will, and will cause the Surviving Corporation to, observe all employee benefit
obligations to current and former employees under the Company Employee Benefit
Plans existing as of the Effective Time and all employment or severance
agreements, plans or policies of the Company and its Subsidiaries, copies of
which have been made available to Parent pursuant to Section 3.8, in accordance
with their terms.
Section 5.6. Takeover Statute. If any "fair price," "moratorium,"
-----------------
"control share acquisition" or other form of anti-takeover statute or regulation
shall become applicable to the transactions contemplated hereby, each of the
Company, the Parent and the Purchaser and the members of their respective Boards
of Directors shall grant such approvals and take such actions as are reasonably
necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
eliminate or minimize the effects of such statute or regulation on the
transactions contemplated hereby.
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Section 5.7. Solicitation by the Company.
----------------------------
(a) Nothing contained in this Agreement shall prohibit the Board of
Directors of the Company from furnishing information to, or entering into
discussions with, any Person that makes a bona fide Acquisition Proposal. The
term "Acquisition Proposal" as used herein means any tender or exchange offer
involving the capital stock of the Company or any of its Subsidiaries, any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, the Company or any of its
Subsidiaries, any proposal or offer with respect to any merger, consolidation,
business combination, recapitalization, liquidation, dissolution or
restructuring of or involving the Company or any of its Subsidiaries, or any
proposal or offer with respect to any other transaction similar to any of the
foregoing with respect to the Company or any of its Subsidiaries, other than the
transactions contemplated by this Agreement. Except for the transactions
contemplated by this Agreement, as of the date of this Agreement, neither the
Company nor any of its officers, directors, employees, financial advisors,
attorneys or other representatives, is engaged in, or is a party to, any
discussions or negotiations, or is currently furnishing any information with
respect to the Company, relating to, or which could be reasonably expected to
lead to, an Acquisition Proposal.
(b) Nothing contained in this Agreement shall prohibit the Company
from taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's stockholders if the Board of Directors of the Company determined in
good faith, after consultation with outside legal counsel, that it is necessary
to do so in order to avoid breaching its fiduciary duties under applicable law;
provided, however, that neither the Company nor its Board of Directors nor any
committee thereof shall withdraw or modify, or propose publicly to withdraw or
modify, its position with respect to this Agreement, the Offer or the Merger, or
approve or recommend, or propose publicly to approve or recommend, an
Acquisition Proposal, except if, and only to the extent that, the Board of
Directors of the Company, based on the advice of outside legal counsel,
determines in good faith that such Acquisition Proposal is a Superior Proposal
(as hereinafter defined) and that such action is necessary for the Board of
Directors of the Company to avoid breaching its fiduciary duties to the
Company's stockholders under applicable law. Nothing herein shall require the
Board of Directors of the Company to violate applicable laws.
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Section 5.8. Public Announcements. The Parent and the Company agree
---------------------
that neither one of them will issue any press release or otherwise make any
public statement or respond to any press inquiry with respect to this Agreement
or the transactions contemplated hereby or thereby without the prior approval of
the other party (which approval will not be unreasonably withheld), except as
may be required by applicable law or the rules of the New York Stock Exchange,
Inc. (the "NYSE").
Section 5.9. Indemnification and Insurance.
------------------------------
From and after the Effective Time, the Parent will indemnify and hold
harmless each present and former director and officer of the Company and its
subsidiaries (the "Indemnified Parties"), against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages or
liabilities (collectively, "Costs") incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, to the fullest extent
that the Company or such subsidiary would have been permitted under applicable
law and the Certificate of Incorporation or Bylaws of the Company or such
subsidiary in effect on the date hereof to indemnify such person (and the Parent
shall also advance expenses as incurred to the fullest extent permitted under
applicable law provided the Person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
Person is not entitled to indemnification).
Section 5.10. Additional Reports and Information.
-----------------------------------
(a) The Company shall furnish to the Parent copies of all reports of
the type referred to in Section 3.4 which it files with the SEC on or after the
date hereof, and the Company represents and warrants that as of the respective
dates thereof, such reports will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
the unaudited consolidated interim financial statements included in such reports
(including any related notes and schedules) will fairly present the financial
position of the Company and its consolidated Subsidiaries as of the dates
thereof and the results of operations and cash flows or other information
included therein for the periods or as of the date then ended (subject, in the
case of the interim financial statements, to normal, year-end adjustments and
the absence of footnotes), in each case in accordance with past
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practice and GAAP consistently applied during the periods involved (except as
otherwise disclosed in the notes thereto).
(b) The Parent shall furnish to the Company copies of all reports of
the type referred to in Section 4.4 which it files with the SEC on or after the
date hereof, and the Parent represents and warrants that as of the respective
dates thereof, such reports will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
the unaudited consolidated interim financial statements included in such reports
(including any related notes and schedules) will fairly present the financial
position of the Parent and its consolidated Subsidiaries as of the dates thereof
and the results of operations and cash flows or other information included
therein for the periods or as of the date then ended (subject, in the case of
the interim financial statements, to normal, year-end adjustments and the
absence of footnotes), in each case in accordance with past practice and GAAP
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto).
Section 5.11. Affiliates. At the time the Proxy Statement is mailed
-----------
to stockholders of the Company, the Company shall deliver to the Parent a list
identifying, to the best of the Company's knowledge, all persons who are, at the
time of the Company Stockholder Approval, deemed to be "affiliates" of the
Company for purposes of Rule 145 under the Securities Act. The Company shall
advise the Parent of any additions or deletions to or from such list from time
to time thereafter. The Company shall use its reasonable best efforts to cause
each such person to deliver to the Parent at least 30 days prior to the Closing
Date a written agreement substantially in the form of Exhibit A to this
Agreement.
Section 5.12. NYSE Listing. The Parent shall use its best efforts to
-------------
cause the shares of Parent Common Stock to be issued in the Merger to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Closing Date.
Section 5.13. Tax-Free Reorganization. The parties intend that the
------------------------
transactions contemplated hereby qualify as a reorganization under Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code; each party and its affiliates shall
use all reasonable efforts to cause such transactions to so qualify; neither
party nor any affiliate shall take any action that would cause such transactions
not to qualify as a
51
<PAGE>
reorganization under such Sections; and the parties will take the position for
all purposes that the transactions qualify as a reorganization under such
Sections.
Section 5.14. The Company Rights Plan. On the date of the
------------------------
commencement of the Offer, (i) the Company will take all necessary action to
redeem all the preferred stock purchase rights outstanding under the Rights
Agreement, and (ii) shall provide the Parent with prompt notice that such action
has been taken.
ARTICLE VI
Conditions to the Merger
------------------------
Section 6.1. Conditions to Each Party's Obligation to Effect the
---------------------------------------------------
Merger. The respective obligations of each party to effect the Merger shall
- -------
be subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) The Company Stockholder Approval shall have been obtained.
(b) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits the consummation of the Merger substantially
on the terms contemplated hereby or has the effect of making the acquisition of
Shares by the Parent or the Purchaser or any affiliate of either of them
illegal.
(c) The Parent or the Purchaser or any affiliate of either of them
shall have purchased Shares pursuant to the Offer, except that this condition
shall not apply if the Parent, the Purchaser or such affiliate shall have failed
to purchase Shares pursuant to the Offer in breach of their obligations under
this Agreement.
(d) The applicable waiting period under the HSR Act shall have expired
or been terminated.
(e) The shares of Parent Common Stock to be issued in the Merger shall
have been approved for listing on the NYSE, subject to official notice of
issuance.
(f) The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act.
52
<PAGE>
Section 6.2. Conditions to Obligation of the Parent and the
----------------------------------------------
Purchaser to Effect the Merger. The obligation of the Parent and the Purchaser
- -------------------------------
to effect the Merger shall be subject to the satisfaction at or prior to the
Effective Time of the following additional condition, unless waived in writing
by the Parent:
(a) Tax Opinion. The Parent shall have received an opinion of
-----------
Skadden, Arps, Slate, Meagher & Flom LLP, tax counsel to the Parent, dated as of
the Effective Time, to the effect that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code. The issuance
of such opinion shall be conditioned upon the receipt by such tax counsel of
customary representation letters from each of the Parent, the Purchaser and the
Company, in each case, in form and substance reasonably satisfactory to such tax
counsel. Each such representation letter shall be dated on or before the date of
such opinion and shall not have been withdrawn or modified in any material
respect.
Section 6.3. Conditions to Obligation of the Company to Effect the
-----------------------------------------------------
Merger. The obligation of the Company to effect the Merger shall be subject
- -------
to the satisfaction at or prior to the Effective Time of the following
additional condition, unless waived in writing by the Company:
(a) Tax Opinion. The Company shall have received an opinion of
-----------
Sullivan & Cromwell, tax counsel to the Company, dated as of the Effective Time,
to the effect that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code. The issuance of such opinion shall be
conditioned upon the receipt by such tax counsel of customary representation
letters from each of the Parent, the Purchaser and the Company, in each case, in
form and substance reasonably satisfactory to such tax counsel. Each such
representation letter shall be dated on or before the date of such opinion and
shall not have been withdrawn or modified in any material respect.
Section 6.4. Additional Conditions to the Obligations of the Parent
------------------------------------------------------
and the Purchaser to Effect the Merger. In the event that the Purchaser
- ---------------------------------------
purchases a number of Shares in the Offer which is less than the 50% Share
Number, the obligation of the Parent and the Purchaser to effect the Merger
shall be subject to the fulfillment at or prior to the Effective Time of the
following conditions, unless waived in writing by the Parent or unless the
Company Stockholder Approval is obtained prior thereto, in which event such
conditions shall thereupon be deemed fulfilled:
53
<PAGE>
(a) The representations and warranties of the Company set forth in
this Agreement shall be true and correct, ignoring for this purpose any
qualification as to materiality or Material Adverse Effect, as if such
representations or warranties were made as of the Effective Time, except for
such inaccuracies as, individually or in the aggregate, would not have a
Material Adverse Effect on the Company.
(b) The Company shall have performed and complied in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed and complied with by it on or prior to the Closing
Date.
(c) The Company shall have furnished a certificate of an officer to
evidence compliance with the conditions set forth in Sections 6.4(a) and (b) of
this Agreement.
Section 6.5. Additional Conditions to the Obligations of the Company
--------------------------------------------------------
to Effect the Merger. In the event that the Purchaser purchases a number of
- ---------------------
Shares in the Offer which is less than the 50% Share Number, the obligation of
the Company to effect the Merger shall be subject to the fulfillment at or prior
to the Effective Time of the following conditions, unless waived in writing by
the Company or unless the Company Stockholder Approval is obtained prior
thereto, in which event such conditions shall thereupon be deemed fulfilled:
(a) The representations and warranties of the Parent and the Purchaser
set forth in this Agreement shall be true and correct, ignoring for this purpose
any qualification as to materiality or Material Adverse Effect, as if such
representations or warranties were made as of the Effective Time, except for
such inaccuracies as, individually or in the aggregate, would not have a
Material Adverse Effect on the Parent.
(b) The Parent and the Purchaser shall have performed and complied in
all material respects with all agreements, obligations and conditions required
by this Agreement to be performed and complied with by them on or prior to the
Closing Date.
(c) The Parent and the Purchaser shall have furnished a certificate of
their respective officers to evidence compliance with the conditions set forth
in Section 6.5(a) and (b) of this Agreement.
54
<PAGE>
ARTICLE VII
Termination
-----------
Section 7.1. Termination. This Agreement may be terminated and the
------------
other transactions contemplated herein abandoned at any time prior to the
Effective Time, whether before or after obtaining the Company Stockholder
Approval:
(a) by the mutual written consent of the Company, the Parent and the
Purchaser;
(b) by either the Parent or the Company if (i) (1) the Offer shall
have expired without any Shares being purchased pursuant thereto, or (2) the
Offer has not been consummated on or before September 30, 1998 (the "Termination
Date"); provided, however, that the right to terminate this Agreement pursuant
to this Section 7.1(b)(i) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Shares to have been purchased pursuant to the Offer; (ii)
a statute, rule, regulation or executive order shall have been enacted, entered
or promulgated prohibiting the consummation of the Offer or the Merger
substantially on the terms contemplated hereby; or (iii) an order, decree,
ruling or injunction shall have been entered permanently restraining, enjoining
or otherwise prohibiting the consummation of the Offer or the Merger
substantially on the terms contemplated hereby and such order, decree, ruling or
injunction shall have become final and non-appealable; provided further that the
Termination Date shall be extended by one business day for each business day
which elapses from March 16, 1998, until the date upon which the applicable
filings under the HSR Act are made by the Company with the appropriate
Governmental Entity;
(c) by the Parent, (i) if due to an occurrence or circumstance, other
than as a result of a breach by the Parent or the Purchaser of its obligations
hereunder, resulting in a failure to satisfy any condition set forth in Annex A
hereto, the Purchaser shall have (1) failed to commence the Offer within 30 days
following the date of this Agreement, or (2) terminated the Offer without having
accepted any Shares for payment thereunder; or (ii) if either the Parent or the
Purchaser is entitled to terminate the Offer as a result of the occurrence of
any event set forth in paragraph (e) of Annex A hereto;
55
<PAGE>
(d) by the Company, upon approval of its Board of Directors, if due
to an occurrence or circumstance, other than as a result of a breach by the
Company of its obligations hereunder, that would result in a failure to satisfy
any of the conditions set forth in Annex A hereto, the Purchaser shall have
terminated the Offer without having accepted any Shares for payment thereunder;
(e) by the Company, if the Company receives a Superior Proposal and
the Board of Directors of the Company, based on the advice of outside legal
counsel, determines in good faith that such action is necessary for the Board of
Directors to avoid breaching its fiduciary duties to the Company's stockholders
under applicable law. The term "Superior Proposal" as used herein means any
bona fide Acquisition Proposal made by a third party to acquire, directly or
indirectly, 20% or more of the outstanding Shares on a fully diluted basis or
all or substantially all the assets of the Company and its Subsidiaries and
otherwise on terms and conditions which the Board of Directors of the Company
determines in good faith, after consultation with and based upon the written
opinion of its financial advisor, to be a superior financial alternative to the
stockholders of the Company than the Offer and the Merger; or
(f) by the Parent or the Company, if after the Company convenes and
holds the special Meeting and certifies the vote with respect to the Merger the
Company's stockholders have voted against granting the Company Stockholder
Approval.
Section 7.2. Effect of Termination. In the event of termination of
----------------------
this Agreement pursuant to Section 7.1, written notice thereof shall forthwith
be given to the other party or parties specifying the provision hereof pursuant
to which such termination is made, and this Agreement shall terminate and be of
no further force and effect (except for the provisions of Sections 5.2 and 8.2),
and there shall be no other liability on the part of the Parent, the Purchaser
or the Company except liability arising out of a breach of this Agreement. In
the event of termination of this Agreement pursuant to Section 7.1 prior to the
expiration of the Offer, the Parent and the Purchaser will promptly terminate
the Offer upon such termination of this Agreement.
56
<PAGE>
ARTICLE VIII
Miscellaneous
-------------
Section 8.1. No Survival of Representations and Warranties. None of
----------------------------------------------
the representations or warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time.
Section 8.2. Expenses. Except as expressly contemplated by this
---------
Agreement, all costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring such
costs and expenses.
Section 8.3. Counterparts; Effectiveness. This Agreement may be
----------------------------
executed in two or more separate counterparts, each of which shall be deemed to
be an original but all of which shall constitute one and the same agreement.
This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by each of the other parties hereto.
Section 8.4. Governing Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of Delaware, without regard
to the principles of conflicts of laws thereof.
Section 8.5. Notices. All notices and other communications
--------
hereunder shall be in writing (including telecopy or similar writing) and shall
be effective (a) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section 8.5 and the appropriate telecopy
confirmation is received or (b) if given by any other means, when delivered at
the address specified in this Section 8.5:
To the Parent or the Purchaser:
Aluminum Company of America
425 Sixth Avenue
Pittsburgh, Pennsylvania 15219
Attention: Lawrence R. Purtell, Esq.
Executive Vice President and
General Counsel
Telecopy: (412) 553-3113
57
<PAGE>
copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: J. Michael Schell, Esq.
Telecopy: (212) 735-2000
To the Company:
Alumax Inc.
3424 Peachtree Road, N.E.
Suite 2100
Atlanta, Georgia 30326
Attention: Robert P. Wolf, Esq.
Senior Vice President
and General Counsel
Telecopy: (404) 846-4769
copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: John Evangelakos, Esq.
Telecopy: (212) 558-3588
Section 8.6. Assignment; Binding Effect. Neither this Agreement nor
---------------------------
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, except that the Purchaser may
assign, in its sole discretion, all or any of its rights and interests hereunder
to the Parent or to any direct or indirect wholly owned Subsidiary of the Parent
and in the event of any such assignment, the Parent hereby unconditionally
guarantees the performance by the assignee of all obligations assigned
thereunder in accordance with the terms of this Agreement. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Any assignment not permitted under this Section 8.6 shall be null and
void.
58
<PAGE>
Section 8.7. Severability. Any term or provision of this Agreement
-------------
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
Section 8.8. Enforcement of Agreement. The parties hereto agree
-------------------------
that money damages or other remedy at law would not be sufficient or adequate
remedy for any breach or violation of, or a default under, this Agreement by
them and that in addition to all other remedies available to them, each of them
shall be entitled to the fullest extent permitted by law to an injunction
restraining such breach, violation or default or threatened breach, violation or
default and to any other equitable relief, including, without limitation,
specific performance, without bond or other security being required.
Section 8.9. Entire Agreement; No Third-Party Beneficiaries. This
-----------------------------------------------
Agreement constitute the entire agreement, and supersede all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof and thereof and except for
the provisions of Section 5.9 hereof, is not intended to and shall not confer
upon any Person other than the parties hereto any rights or remedies hereunder.
Section 8.10. Headings. Headings of the Articles and Sections of this
---------
Agreement are for convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section 8.11. Definitions. References in this Agreement to (a)
------------
"Subsidiaries" of the Company or the Parent shall mean any corporation or other
form of legal entity of which more than 50% of the outstanding voting securities
are on the date hereof directly or indirectly owned by the Company or the Parent
or in which the Company or the Parent has the right to elect a majority of the
members of the board of directors or other similar governing body; (b)
"Significant Subsidiaries" shall mean Subsidiaries which constitute "significant
subsidiaries" under Rule 405 promulgated by the SEC under the Securities Act;
(c) (except as otherwise specifically defined) "affiliates" shall mean, as to
any Person, any other Person which, directly or indirectly, controls, or is
controlled by, or is under common control with, such Person; and (d) "Person"
shall mean an individual, a corporation, a partnership, an association, a trust
or any other entity or organization, including, without limitation,
59
<PAGE>
a Governmental Entity. As used in the definition of "affiliates," "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of management or policies of a Person, whether
through the ownership of securities or partnership of other ownership interests,
by contract or otherwise.
Section 8.12. Finders or Brokers. Except for BT Wolfensohn with
-------------------
respect to the Company, a copy of whose engagement agreement has been or will be
provided to the Parent, and Credit Suisse First Boston Corporation with respect
to the Parent, neither the Company nor the Parent nor any of their respective
Subsidiaries has employed any investment banker, broker, finder or intermediary
in connection with the transactions contemplated hereby who might be entitled to
any fee or any commission in connection with or upon consummation of the Offer
and the Merger.
Section 8.13. Amendment or Supplement. At any time prior to the
------------------------
Effective Time, this Agreement may be amended or supplemented in any and all
respects, whether before or after the Company Stockholder Approval, by written
agreement of the parties hereto, by action taken by their respective Boards of
Directors (which in the case of the Company shall include the Independent
Director Approval contemplated in Section 1.3(c)), with respect to any of the
terms contained in this Agreement; provided, however that following the Company
Stockholder Approval there shall be no amendment or change to the provisions
hereof which would reduce the amount or change the type of consideration into
which each Share shall be converted upon consummation of the Merger without
further approval by the stockholders of the Company.
Section 8.14. Extension of Time, Waiver, Etc. At any time prior to
-------------------------------
the Effective Time, any party may (a) extend the time for the performance of any
of the obligations or acts of any other party hereto; (b) waive any inaccuracies
in the representations and warranties of any other party hereto contained herein
or in any document delivered pursuant hereto; or (c) subject to the proviso of
Section 8.13 waive compliance with any of the agreements or conditions of any
other party hereto contained herein; provided, however, in the case of the
Company following the acceptance of Shares for payment in the Merger, the
Independent Director Approval contemplated in Section 1.3(c) is obtained.
Notwithstanding the foregoing no failure or delay by the Company, the Parent or
the Purchaser in exercising any right hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right hereunder. Any
agreement on the part of a party hereto to any such extension
60
<PAGE>
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
61
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
ALUMINUM COMPANY OF AMERICA
By: /s/ Paul H. O'Neill
-------------------------------------------------------
Name: Paul H. O'Neill
Title: Chairman and Chief Executive Officer
AMX ACQUISITION CORP.
By: /s/ Richard B. Kelson
-------------------------------------------------------
Name: Richard B. Kelson
Title: Vice President and Treasurer
ALUMAX INC.
By: /s/ Allen Born
-------------------------------------------------------
Name: Allen Born
Title: Chairman and Chief Executive Officer
<PAGE>
ANNEX A
-------
Conditions to the Offer
-----------------------
Notwithstanding any other provision of the Offer and subject to the
terms of this Agreement, the Purchaser shall not be required to accept for
payment any Shares tendered pursuant to the Offer, and may terminate the Offer
and may postpone the acceptance for payment of and payment for Shares tendered,
if (i) any applicable waiting period under the HSR Act shall not have expired or
been terminated prior to the expiration of the Offer, or (ii) immediately prior
to the acceptance for payment of Shares, any of the following conditions shall
be reasonably determined by the Parent to be existing:
(a) there shall have been entered, enforced, promulgated or issued by
any court or governmental, administrative or regulatory authority or agency
of competent jurisdiction, domestic or foreign, any judgment, order,
injunction or decree, (i) which makes illegal or prohibits or makes
materially more costly the making of the Offer, the acceptance for payment
of, or payment for, any Shares by the Parent, the Purchaser or any other
affiliate of the Parent, or the consummation of any other transaction
contemplated by this Agreement, or imposes material damages in connection
with any transaction contemplated by this Agreement; (ii) which prohibits
the ownership or operation by the Company or any of its Subsidiaries or, as
a result of the transactions contemplated by this Agreement, the Parent and
its Subsidiaries, of all or any material portion of the business or assets
of the Company, the Parent or any of their Subsidiaries as a whole, or
compels the Company, the Parent or any of their Subsidiaries to dispose of
or hold separate all or any material portion of the business or assets of
the Company, the Parent or any of their Subsidiaries as a whole; (iii)
which imposes or confirms limitations on the ability of the Parent, the
Purchaser or any other affiliate of the Parent to exercise effectively full
rights of ownership of any Shares, including, without limitation, the right
to vote any Shares acquired by the Purchaser pursuant to the Offer or
otherwise on all matters properly presented to the Company's stockholders,
including, without limitation, the approval and adoption of this Agreement
and the transactions contemplated by this Agreement; (iv) requires
divestiture by the Parent, the Purchaser or any other affiliate of the
Parent of any Shares; or (v) which otherwise would have a
A-1
<PAGE>
Material Adverse Effect on the Company or, as a result of the transactions
contemplated by this Agreement, the Parent and its Subsidiaries;
(b) there shall have been any action taken, or any statute, rule,
regulation, legislation or interpretation enacted, entered, enforced,
promulgated, amended, issued or deemed applicable to (i) the Company or any
Subsidiary of the Company or, as a result of the transactions contemplated
by this Agreement, the Parent or any Subsidiary or affiliate of the Parent,
or (ii) any transaction contemplated by this Agreement, by any legislative
body, court, government or governmental, administrative or regulatory
authority or agency, domestic or foreign, other than the routine
application of the waiting period provisions of the HSR Act to the Offer or
the Merger, which is reasonably likely to result, directly or indirectly,
in any of the consequences referred to in clauses (i) through (v) of
paragraph (a) above;
(c) there shall have occurred and be continuing, (i) any general
suspension of, or limitation on prices for, trading in securities on the
NYSE other than a shortening of trading hours or any coordinated trading
halt triggered solely as a result of a specified increase or decrease in a
market index, (ii) a declaration of a banking moratorium or any suspension
of payments in respect of banks in the United States, (iii) the
commencement of a war, material armed hostilities or any other material
international or national calamity involving the United States, or (iv) in
the case of any of the foregoing existing at the time of the commencement
of the Offer, a material acceleration or worsening thereof;
(d) the representations or warranties of the Company set forth in the
Agreement shall not be true and correct, ignoring for this purpose any
qualification as to materiality or Material Adverse Effect, as if such
representations or warranties were made as of such time on or after the
date of this Agreement, except where the failure to be so true and correct,
individually and in the aggregate would not have a Material Adverse Effect;
(e) the Company shall have failed to perform in any material respect
any obligation or to comply in any material respect with any agreement or
covenant of the Company to be performed or complied with by it under the
Agreement;
A-2
<PAGE>
(f) the Agreement shall have been terminated in accordance with its
terms; or
(g) the Purchaser and the Company shall have agreed that the Purchaser
shall terminate the Offer or postpone the acceptance for payment of or
payment for Shares thereunder;
which, in the reasonable good faith judgment of the Purchaser in any such case,
and regardless of the circumstances (including any action or inaction by the
Parent or any of its affiliates) giving rise to any such condition, makes it
inadvisable to proceed with such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of the Purchaser and
the Parent and may be asserted by the Purchaser or the Parent regardless of the
circumstances giving rise to any such condition or may be waived by the
Purchaser or the Parent in whole or in part at any time and from time to time in
their sole discretion. The failure by the Parent or the Purchaser at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right; the waiver of any such right with respect to particular facts and other
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right that may be
asserted at any time and from time to time.
A-3
<PAGE>
EXHIBIT A
FORM OF
AFFILIATE LETTER FOR AFFILIATES OF ALUMAX INC.
Aluminum Company of America
425 Sixth Avenue
Pittsburgh, Pennsylvania 15219
Alumax Inc.
3424 Peachtree Road, NE
Atlanta, Georgia 30326
AMX Acquisition Corp.
425 Sixth Avenue
Pittsburgh, Pennsylvania 15219
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed
to be an "affiliate" of Alumax, Inc., a Delaware corporation (the "Company"), as
the term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of
Rule 145 of the rules and regulation (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"). Pursuant to the terms of the Agreement and
Plan of Merger, dated as of March 8, 1998 (the "Merger Agreement"), among
Aluminum Company of America, a Pennsylvania corporation (the "Parent"), AMX
Acquisition Corp., a Delaware corporation (the "Purchaser") and the Company
pursuant to which the Company will be merged with and into the Purchaser with
the Purchaser continuing as the surviving corporation (the "Merger").
Capitalized terms used in this letter without definition shall have the meanings
assigned to them in the Merger Agreement.
As a result of the Merger, I may receive shares of common stock, par
value $1.00 per share, of the Parent (the "Parent Common Stock"). I would
receive such Parent Common Stock in exchange for shares (or upon exercise of
options for
<PAGE>
shares) owned by me of common stock, par value $.01 per share, of the Company
(the "Company Common Stock").
1. I hereby represent, warrant and covenant to the Parent, the Purchaser and
the Company that in the event I receive any shares of Parent Common Stock as a
result of the Merger:
A. I shall not make any offer, sale, pledge, transfer or other disposition
of the shares of Parent Common Stock in violation of the Act or the Rules and
Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and other applicable limitations
upon my ability to sell, transfer or otherwise dispose of the shares of Parent
Common Stock, to the extent I felt necessary, with my counsel or counsel for the
Company.
C. I have been advised that the issuance of the shares of Parent Common
Stock to me pursuant to the Merger has been registered with the Commission under
the Act on a Registration Statement on Form S-4. However, I have also been
advised that, because at the time the Merger is submitted for a vote of the
stockholders of the Company (a) I may be deemed to be an affiliate of the
Company and (b) the distribution by me of the shares of Parent Common Stock has
not been registered under the Act, I may not sell, transfer or otherwise dispose
of the shares of Parent Common Stock issued to me in the Merger unless (i) such
sale, transfer or other disposition is made in conformity with the volume and
other limitations of Rule 145 promulgated by the Commission under the Act, (ii)
such sale, transfer or other disposition has been registered under the Act or
(iii) in the opinion of counsel reasonably acceptable to the Parent, or a "no
action" letter obtained by the undersigned from the staff of the Commission such
sale, transfer or other disposition is otherwise exempt from registration under
the Act.
D. I understand that the Parent is under no obligation to register the
sale, transfer or other disposition of the Parent Common Stock by me or on my
behalf under the Act or except as provided in paragraph 2(A) below, to take any
other action necessary in order to make compliance with an exemption from such
registration available.
E. I also understand that stop transfer instructions will be given to the
Companys' transfer agent with respect to the shares of Company Common Stock
currently held and to Parent's transfer agent with respect to the shares of
Parent
2
<PAGE>
Common Stock issued to me in the Merger, and there will be placed on the
certificates for such shares of Parent Common Stock, a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED [ ], 1998 BETWEEN THE
REGISTERED HOLDER HEREOF, ALUMINUM COMPANY OF AMERICA, ALUMAX INC., AND AMX
ACQUISITION CORP., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICES OF ALUMINUM COMPANY OF AMERICA."
F. I also understand that unless a sale or transfer is made in conformity
with the provisions of Rule 145, or pursuant to a registration statement, Parent
reserves the right to put the following legend on the certificates issued to my
transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN
ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933."
G. Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter, nor as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
2. By Parent's acceptance of this letter, Parent hereby agrees with me as
follows:
A. For so long as and to the extent necessary to permit me to sell the
shares of Parent Common Stock pursuant to Rule 145 and, to the extent
applicable, Rule 144
3
<PAGE>
under the Act, Parent shall (a) use its reasonable best efforts to (i) file, on
a timely basis, all reports and data required to be filed with the Commission by
it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended,
and (ii) furnish to me upon request a written statement as to whether Parent has
complied with such reporting requirements during the 12 months preceding any
proposed sale of the shares of Parent Common Stock by me under Rule 145, and (b)
otherwise use its reasonable efforts to permit such sales pursuant to Rule 145
and Rule 144.
B. It is understood and agreed that certificates with the legends set
forth in paragraphs E and F above will be substituted by delivery of
certificates without such legend if (i) one year shall have elapsed from the
date the undersigned acquired the Parent Common Stock received in the Merger and
the provisions of Rule 145(d)(2) are then available to the undersigned, (ii) two
years shall have elapsed from the date the undersigned acquired the shares of
Parent Common Stock received in the Merger and the provisions of Rule 145(s)(3)
are then applicable to the undersigned, or (iii) Parent received either an
opinion of counsel, which opinion and counsel shall be reasonably satisfactory
to the Parent, or a "no-action" letter obtained by the undersigned from the
staff of the Commission, to the effect that the restrictions imposed by Rule 144
and Rule 145 under the Act no longer apply to the undersigned.
Very truly yours,
--------------------------------------------------
Name:
4
<PAGE>
Agreed and accepted this day of
,1998, by
ALUMINUM COMPANY OF AMERICA
By: ____________________________________________________
Name:
Title:
ALUMAX INC.
By: ____________________________________________________
Name:
Title:
AMX ACQUISITION CORP.
By: ____________________________________________________
Name:
Title:
5
Exhibit 10(a)
LONG TERM STOCK INCENTIVE PLAN
OF
ALUMINUM COMPANY OF AMERICA
(Revised, Effective January 1, 1997; Amended January 1, 1998)
ARTICLE I
DEFINITIONS
The following words as used herein shall have the following
meanings unless the context otherwise requires.
PLAN means the Long Term Stock Incentive Plan of Aluminum Company
of America, as amended from time to time, which is a continuation
of the Employees' Stock Option Plan.
COMPANY means Aluminum Company of America.
SUBSIDIARY means any corporation in which the Company owns,
directly or indirectly, stock possessing 50% or more of the total
combined voting power of all classes of stock in such other
corporation, and any corporation, partnership, joint venture or
other business entity as to which the company possesses a direct
or indirect ownership interest where either (a) such interest
equals 50% or more or (b) the Company directly or indirectly has
power to exercise management control.
BOARD means the Board of Directors of the Company and includes
any duly authorized Committee when acting in lieu thereof.
EMPLOYEE means any employee of the Company or a Subsidiary.
AWARD means any stock option award granted or delivered under the
Plan.
OPTIONEE means any person who has been granted a stock option
under the Plan.
COMMITTEE means the Committee established under Section 1 of
Article V to administer the Plan.
COMPANY STOCK means common stock of the Company and such other
stock and securities, described in Section 2 of Article IV, as
shall be substituted therefor.
FAIR MARKET VALUE means, with respect to Company Stock, (1) the
mean of the high and low sales prices of such stock (a) as
reported on the composite tape (or other appropriate reporting
vehicle as determined by the Committee) for a specified date or,
if no such report of such price shall be available for such date,
as reported for the New York Stock Exchange for such date or (b)
if the New York Stock Exchange is closed on such date, the mean
of the high and low sales prices of such stock as reported in
accordance with (a) above for the next preceding day on which
such stock was traded on the New York Stock Exchange, or (2) at
the option of and as determined by the Committee, the average of
the mean of the high and low sales prices of such stock as
reported in accordance with (1) above for a period of up to ten
consecutive business days.
OPTION PERIOD means the period of time provided pursuant to
Section 4 of Article III within which a stock option may be
exercised, without regard to the limitations on exercise imposed
pursuant to Section 5 of Article III.
ARTICLE II
PARTICIPATION
SECTION 1. Purpose. The purposes of the Plan are to motivate
key employees, to permit them to share in the long-term growth
and financial success of the Company and its Subsidiaries while
giving them an increased incentive to promote the well-being of
those companies, and to link the interests of key employees to
the long-term interests of the Company's shareholders.
SECTION 2. Eligibility. Employees who, in the sole opinion of
the Committee, play a key role in the management, operation,
growth or protection of some part or all of the business of the
Company and its Subsidiaries (including officers and employees
who are members of the Board) shall be eligible to be granted
Awards under the Plan. The Committee shall select from time to
time the Employees to whom Awards shall be granted. No Employee
shall have any right whatsoever to receive any Award unless
selected therefor by the Committee.
SECTION 3. Limitation on Optioned Shares. In no event may any
stock option be granted to any Employee who owns stock possessing
more than five percent of the total combined voting power or
value of all classes of stock of the Company. The maximum number
of shares subject to options awarded to any one individual in any
calendar year may not exceed one million shares.
SECTION 4. No Employment Rights. The Plan shall not be
construed as conferring any rights upon any person for a
continuation of employment, nor shall it interfere with the
rights of the Company or any Subsidiary to terminate the
employment of any person and/or take any personnel action
affecting such person without regard to the effect which such
action might have upon such person as an Optionee or prospective
Optionee.
ARTICLE III
TERMS OF OPTIONS
SECTION 1. General. The Committee from time to time shall
select the Employees to whom stock options shall be granted, the
type of stock options and the number of shares of Company Stock
to be included in each such option. Each option granted under
the Plan shall be subject to the terms and conditions required by
this Article III, and such other terms and conditions not
inconsistent therewith as the Committee may deem appropriate in
each case.
SECTION 2. Option Price. The price at which each share of
Company Stock covered by an option may be purchased shall be
determined by the Committee. In no event shall such price be
less than one hundred percent of the Fair Market Value of Company
Stock either on the date the option is granted or over a period
of up to ten business days as specified by the Committee. The
option price of each share purchased pursuant to an option shall
be paid in full at the time of such purchase. The purchase price
of an option shall be paid in cash, provided however that, to the
extent permitted by and subject to any limitations contained in
any stock option agreement or in rules adopted by the Committee,
such option purchase price may be paid by the delivery to the
Company of shares of Company Stock having an aggregate Fair
Market Value on the date of exercise which, together with any
cash payment by the Optionee, equals or exceeds such option
purchase price. The Committee shall determine whether and if so
the extent to which actual delivery of share certificates to the
Company shall be required. The foregoing provisions relating to
the delivery of Company Stock in lieu of payment of cash upon
exercise of an option apply to all outstanding options.
SECTION 3. Types of Options. The Committee shall have the
authority, in its sole discretion, to grant to Employees from
time to time non-qualified stock options and such other types of
options as are permitted by law or the provisions of the Plan.
SECTION 4. Period for Exercise. The Committee shall determine
the period or periods of time within which the option may be
exercised by the Optionee, in whole or in part, provided that the
Option Period shall not exceed ten years from the date the option
is granted.
SECTION 5. Special Limitations. Notwithstanding the Option
Period provided in Section 4 of this Article III, a stock option
(other than a reload stock option) shall not be exercisable until
one year after the date the option is granted.
SECTION 6. Termination of Employment.
(a) Subject to the provisions of Section 4 and 5 of this
Article III, the Committee shall specify in administrative rules
or otherwise, the rules that shall apply to stock options with
respect to the exercise of any stock options upon termination of
the Optionee's employment.
(b) Following the Optionee's death, the option may be
exercised by the Optionee's legal representative or
representatives, or by the person or persons entitled to do so
under the Optionee's last will and testament, or, if the Optionee
shall fail to make testamentary disposition of the option or
shall die intestate, by the person or persons entitled to receive
said option under the intestate laws.
(c) The Committee in its sole discretion may shorten the
period of exercise of any such stock option in the event that the
Optionee takes any action which in the judgment of the Committee
is not in the best interests of the Company and its Subsidiaries.
SECTION 7. Transferability; Beneficiaries; Etc. Each stock
option shall be nontransferable by the Optionee except by last
will and testament or the laws of descent and distribution and is
exercisable during the Optionee's lifetime only by the Optionee
or a legal representative. Notwithstanding the foregoing and the
preceding Section 6, at the discretion of the Committee,
(a) some or all Optionees may be permitted to transfer some or
all of their options to one or more immediate family members,
and/or
(b) some or all Optionees may be permitted to designate one or
more beneficiaries to receive some or all of their Awards and
stock appreciation rights in the event of death prior to
exercise thereof, in which event a permitted beneficiary or
beneficiaries shall then have the right to exercise or
receive payment for each affected Award or stock
appreciation right in accordance with its other terms
and conditions.
SECTION 8. Employment Obligation. In consideration for the
granting of each stock option, except options delivered under
Section 11 of this Article III, the Optionee shall agree to
remain in the employment of the Company or one or more of its
Subsidiaries, at the pleasure of the Company or such Subsidiary,
for a continuous period of at least one year after the date of
grant of such stock option or until retirement, on a date which
is at least six months after the date of such grant, under any
retirement plan of the Company or a Subsidiary, whichever may be
earlier, at the salary rate in effect on the grant date or at
such changed rate as may be fixed from time to time by the
Company or such Subsidiary. At the discretion of the Committee,
this obligation may be deemed to have been fulfilled under
specified circumstances, such as if the Optionee enters
government service.
SECTION 9. Date Option Granted. For the purposes of the Plan, a
stock option shall be considered as having been granted on the
date on which the Committee authorized the grant of such stock
option, except where the Committee has designated a later date,
in which event such designated date shall constitute the date of
grant of such stock option, provided, however, that in either
case notice of the grant of the option shall be given to the
Employee within a reasonable time.
SECTION 10. Alternative Settlement Methods. Where local law may
interfere with the normal exercise of an option, the Committee in
its discretion may approve stock appreciation rights or other
alternative methods of settlement for stock options.
SECTION 11. Reload Stock Options. The Committee shall have the
authority to specify, either at the time of grant of a stock
option or at a later date, that upon exercise of all or a portion
of that stock option (except an option referred to in the next
section, Section 12) a reload stock option shall be granted under
specified conditions. A reload stock option may entitle the
Optionee to purchase shares (i) which are covered by the
exercised option or portion thereof at the time of exercise of
such option or portion but are not issued upon such exercise, or
(ii) whose value (on the date of grant) equals the purchase price
of the exercised option or portion thereof and any related tax
withholdings. The exercise price of the reload stock option
shall be the Fair Market Value at the time of grant, determined
in accordance with Section 2 of this Article III. The duration
of a reload stock option shall not extend beyond the expiration
date of the option it replaces. The specific terms and
conditions applicable for reload stock options shall be
determined by the Committee and shall be set forth in rules
adopted by the Committee and/or in agreements or other
documentation evidencing reload stock options.
SECTION 12. Dividend Equivalents. Stock options delivered in
payment of contingent awards of performance shares (effective
January 1993, these types of awards are no longer granted) may
provide the Optionee with dividend equivalents payable in cash,
shares, additional discount options or other consideration prior
to exercise.
ARTICLE IV
COMPANY STOCK
SECTION 1. Number of Shares. The shares of Company Stock that
may be issued under the Plan, out of authorized but heretofore
unissued Company Stock, or out of Company Stock held as treasury
stock, or partly out of each, shall not exceed 8.6 million shares
plus (i) an additional number of shares equal to the number of
shares which at January 1, 1997 were reserved for issuance under
the Plan as then in effect and (ii) the number of shares
purchased or acquired by the Company with an aggregate price no
greater than the cash proceeds received by the Company after
January 1, 1998 from the exercise of stock options granted under
the Plan. Except as otherwise determined by the Committee, the
number of shares of Company Stock so reserved shall be reduced by
the number of shares issued upon an Option exercise, less (i) the
shares, if any, used to pay withholding taxes and/or (ii) the
shares, if any, delivered by the Optionee in full or partial
payment of the option purchase price. Unless the Committee
otherwise determines, shares not purchased under any option
granted under the Plan which are no longer available for purchase
thereunder by virtue of the total or partial expiration,
termination or voluntary surrender of the option and which were
not issued upon exercise of a related stock appreciation right
and shares referred to in clauses (i) or (ii) of the preceding
sentence shall continue to be otherwise available for the
purposes of the Plan. Payments for Awards in cash shall reduce
the number of shares available for issuance by such number of
shares as has a Fair Market Value at the time of such payment
equal to such cash.
SECTION 2. Adjustments in Stock.
(a) Stock Dividends. If a dividend shall be declared upon
Company Stock payable in shares of said stock, (i) the number of
shares of Company Stock subject to outstanding Awards and (ii)
the number of shares reserved for issuance pursuant to the Plan
shall be adjusted by adding to each such share the number of
shares which would be distributable thereon if such share had
been outstanding on the date fixed for determining the
shareholders entitled to receive such stock dividend.
(b) Reorganization, Etc. In the event that the outstanding
shares of Company Stock shall be changed into or exchanged for a
different number or kind of shares of stock or other securities
of the Company or of another corporation, whether through
reorganization, recapitalization, stock split-up, combination of
shares, merger or consolidation, or otherwise, then there shall
be substituted for each share of Company Stock subject to
outstanding Awards and for each share of Company Stock reserved
for issuance pursuant to the Plan, the number and kind of shares
of stock or other securities which would have been substituted
therefor if such share had been outstanding on the date fixed for
determining the shareholders entitled to receive such substituted
stock or other securities.
(c) Other Changes in Stock. In the event there shall be
any change, other than as specified in subsections (a) and (b) of
this Section 2, in the number or kind of outstanding shares of
Company Stock or of any stock or other securities into which such
Company Stock shall be changed or for which it shall have been
exchanged, then and if the Committee shall at its discretion
determine that such change equitably requires an adjustment in
the number or kind of shares subject to outstanding Awards or
which have been reserved for issuance pursuant to the Plan, such
adjustments shall be made by the Committee and shall be effective
and binding for all purposes of the Plan and each outstanding
stock option and other Award.
(d) General Adjustment Rules. No adjustment or
substitution provided for in this Section 2 shall require the
Company to sell or deliver a fractional share under any stock
option or other Award and the total substitution or adjustment
with respect to each Award shall be handled in the discretion of
the Committee either by deleting any fractional shares or by
appropriate rounding up to the next whole share. In the case of
any such substitution or adjustment, the option price per share
for each stock option shall be equitably adjusted by the
Committee to reflect the greater or lesser number of shares of
stock or other securities into which the stock subject to the
option may have been changed.
ARTICLE V
GENERAL MATTERS
SECTION 1. Administration. The Plan shall be administered by a
Committee of not less than three Directors appointed by the
Board, none of whom shall have been eligible to receive an Award
under the Plan within the twelve months preceding their
appointment.
SECTION 2. Authority of Committee. Subject to the provisions of
the Plan, the Committee shall have full and final authority to
determine the Employees to whom Awards shall be granted, the type
of Awards to be granted, the number of shares to be included in
each Award, and the other terms and conditions of the Awards.
Nothing contained in this Plan shall be construed to give any
Employee the right to be granted an Award or, if granted, to any
terms and conditions therein except such as may be authorized by
the Committee. The Committee is empowered, in its discretion, to
(i) modify, amend, extend or renew any Award theretofore granted,
subject to the limitations set forth in Article III and with the
proviso that no modification or amendment shall impair without
the Optionees' consent any option theretofore granted under the
Plan, (ii) adopt such rules and regulations and take such other
action as it shall deem necessary or proper for the
administration of the Plan and (iii) delegate any or all of its
authority (including the authority to select eligible employees
and to grant stock options) to one or more senior officers of the
Company, except with respect to Awards for officers or any
performance share awards, and except in the event that any such
delegation would cause this Plan not to comply with Securities
and Exchange Commission Rule 16b-3 (or any successor rule). The
Committee shall have full power and authority to construe,
interpret and administer the Plan, and the decisions of the
Committee shall be final and binding upon all parties.
SECTION 3. Withholding. The Company or any Subsidiary shall
have the right to deduct from all amounts paid in cash under this
Plan any taxes required by law to be withheld therefrom. In the
case of payments of Awards in the form of Company Stock, at the
Committee's discretion, (a) the Optionee may be required to pay
over the amount of any withholding taxes, (b) the Optionee may be
permitted to deliver to the Company the number of shares of
Company Stock whose Fair Market Value is equal to or less than
the withholding taxes due or (c) the Company may retain the
number of shares calculated under (b) above.
SECTION 4. Nonalienation. No Award shall be assignable or
transferable, except by will or the laws of descent and
distribution, and except that in its discretion the Committee may
authorize exercise by or payment to a beneficiary designated by
an Optionee. No right or interest of any Optionee in any Award
shall be subject to any lien, obligation or liability.
SECTION 5. General Restriction. Each Award shall be subject to
the requirement that if at any time the Board or the Committee
shall determine in its discretion that the listing, registration
or qualification of shares upon any securities exchange or under
any state or Federal law, rule, regulation or decision, or the
consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with,
the granting of such Award or the issue, purchase or delivery of
shares or payment thereunder, such Award may not be exercised in
whole or in part and no payment therefor shall be delivered
unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any
conditions not acceptable to the Board or Committee.
SECTION 6. Effective Date and Duration of Plan. The Plan
initially became effective May 1, 1965. The Plan as amended
herein shall become effective January 1, 1997. No Awards shall
be granted under the Plan after January 1, 2002 although shares
thereafter may be delivered in payment of Awards granted prior
thereto.
SECTION 7. Amendments. The Board may from time to time amend,
modify, suspend or terminate the Plan, provided, however, that no
such action shall (a) impair without an Optionee's consent any
option theretofore granted under the Plan or deprive any Awardee
of any shares of Company Stock which that person may have
acquired through or as a result of the Plan or (b) be made
without the approval of the shareholders of the Company where
such change would materially increase the benefits accruing to
Optionees, materially increase the maximum number of shares which
may be issued under the Plan or materially modify the Plan's
eligibility requirements.
SECTION 8. Construction. The Plan shall be interpreted and
administered under the laws of the Commonwealth of Pennsylvania
without application of its rules on conflict of laws.
ARTICLE VI
[DELETED, Effective January 1997]
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31
(in millions, except ratios)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Earnings:
Income before taxes on income,
and before extraordinary
loss $1,601.7 $1,081.7 $1470.2 $822.5 $191.1
Minority interests' share of
earnings of majority-owned
subsidiaries
without fixed charges 3.0 4.1 2.0 - (5.9)
Less equity (earnings) losses (42.4) (29.6) (59.5) (.3) 13.0
Fixed charges added to net income 181.6 170.7 150.7 138.4 110.1
Proportionate share of income
(loss) of 50% owned persons 35.1 25.3 58.2 1.9 (11.5)
Distributed income of less
than 50% owned persons - - - - -
Amortization of capitalized
interest:
Consolidated 20.2 21.9 23.1 25.5 20.6
Proportionate share of 50%
owned persons .9 1.2 .8 1.2 .8
Total earnings $1,800.1 $1,275.3 $1645.5 $989.2 $318.2
Fixed Charges:
Interest expense:
Consolidated $140.9 $133.7 $119.8 $106.7 $87.8
Proportionate share of 50%
owned persons 3.3 4.9 6.7 7.4 5.5
144.2 138.6 126.5 114.1 93.3
Amount representative of the
interest factor in rents:
Consolidated 37.0 31.8 24.0 23.9 16.4
Proportionate share of 50%
owned persons .4 .3 .2 .4 .4
37.4 32.1 24.2 24.3 16.8
Fixed charges added to earnings 181.6 170.7 150.7 138.4 110.1
Interest capitalized:
Consolidated 9.0 5.3 1.9 1.5 3.5
Proportionate share of 50%
owned persons - - - - -
9.0 5.3 1.9 1.5 3.5
Preferred stock dividend
requirements of majority-owned
subsidiaries - - 4.9 13.1 29.6
Total fixed charges $190.6 $176.0 $157.5 $153.0 $143.2
Ratio of earnings to fixed charges
charges 9.44 7.25 10.45 6.47 2.22
</TABLE>
EXHIBIT 13
SELECTED FINANCIAL DATA
(dollars in millions, except per-share amounts and ingot prices)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 13,319.2 $ 13,061.0 $ 12,499.7 $ 9,904.3 $ 9,055.9
Income before extraordinary
loss* 805.1 514.9 790.5 443.1 4.8
Extraordinary loss** -- -- -- (67.9) --
Net income* 805.1 514.9 790.5 375.2 4.8
Basic earnings per common
share
Before extraordinary
loss** 4.66 2.94 4.43 2.48 .02
Net income 4.66 2.94 4.43 2.10 .02
Diluted earnings per
common share
Before extraordinary
loss** 4.62 2.91 4.39 2.46 .02
Net income 4.62 2.91 4.39 2.08 .02
- ----------------------------------------------------------------------------------------------------------------------------------
Alcoa's average realized
price per pound for
aluminum ingot .75 .73 .81 .64 .56
Average U.S. market price
per pound for aluminum
ingot (Metals Week) .77 .71 .86 .71 .53
- ----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per
common share .975 1.33 .90 .80 .80
Total assets 13,070.6 13,449.9 13,643.4 12,353.2 11,596.9
Long-term debt (noncurrent) 1,457.2 1,689.8 1,215.5 1,029.8 1,432.5
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Includes net after-tax gains of $43.9, or 25 cents per basic
share, in 1997; and net charges of $122.3, or 70 cents, in 1996;
$10.1, or six cents, in 1995; $50.0, or 28 cents, in 1994; and
$74.5, or 43 cents, in 1993. Also included in 1994 is a gain of
$300.2, or $1.69 per share, related to the Alcoa/WMC transaction.
** The extraordinary loss relates to the early redemption of
debentures.
</TABLE>
27
RESULTS OF OPERATIONS
(dollars in millions, except share amounts and ingot prices)
EARNINGS SUMMARY
Alcoa's 1997 earnings before special items totaled $761, an
increase of 19% over 1996 results. This significant earnings
improvement was the result of record shipments partially offset
by lower overall prices. Cost performance also played a role
in the increase, as improved manufacturing performance and
lower administrative costs more than offset higher material
costs.
Revenues of $13,319 were also at record levels in 1997,
as record volumes more than offset the loss of revenues
related to the sale of noncore businesses. Overall prices
were lower, but a more favorable mix in 1997 muted the
decline.
Net income of $805 for 1997 was the third best in Alcoa's
history, even though fabricated aluminum and alumina prices
were lower than 1996 and well below historic highs. In
addition, Alcoa continues to have 450,000 metric tons
(mt) of its worldwide smelting capacity idled.
Before special items, return on shareholders' equity for
1997 was 17.1%, compared with 14.4% in 1996 and 18.8%
in 1995. The following table summarizes Alcoa's results
adjusted for special items which are described in more
detail later in this section.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Net income $ 805.1 $ 514.9 $ 790.5
Special items, net (43.9) 122.3 10.1
- ------------------------------------------------------------------------------
Adjusted net income $ 761.2 $ 637.2 $ 800.6
- ------------------------------------------------------------------------------
</TABLE>
GEOGRAPHIC AND SEGMENT INFORMATION
Operating profit before special items was $1,475 in 1997
compared with $1,350 in 1996 and $1,435 in 1995. Operating
profit, for geographic and segment purposes, consists
of sales and operating revenues less operating expenses.
It excludes interest expense, nonoperating income, income
taxes, minority interests and special items. See Note P
to the financial statements for additional information.
OPERATIONS BY GEOGRAPHIC AREA
USA -- Revenues fell less than 1% from 1996 to $7,189.
The decline was the result of lower sales of building
products, packaging machinery and the loss of revenues
from the sale of noncore businesses. These declines were
nearly offset by higher aluminum and alumina revenues,
along with higher sales of automotive electrical components.
Revenues in 1996 were $7,246, up 3% from 1995, reflecting
higher shipments of automotive electrical components.
Operating profit in 1997 totaled $669, compared with $640 in
1996 and $594 in 1995. Improved profits in 1997 from
automotive electrical components, most aluminum products
and alumina operations were partially offset by lower
earnings related to building products. Improved profits
for 1996 relative to 1995 for building products, automotive
electrical components and alumina operations were partially
offset by lower earnings from aluminum operations and
plastic closures, and by the shutdown of Alcoa's ceramic
packaging operations (AEP). Exports from the U.S. in 1997
were $1,207, compared with $1,015 in 1996 and $1,206 in
1995.
28
Pacific -- Alcoa's primary operations in the Pacific region
are those of Alcoa of Australia (AofA). In 1997, revenues
for this region totaled $2,222, of which 84% were attributable
to AofA. Operating profit for 1997 amounted to $482, with
AofA accounting for 97% of the total. Relative to 1996,
operating profit fell 4% in 1997, as higher revenues for
ingot and alumina, along with improved cost performance,
were offset by lower realized prices. Due to Alcoa's relatively
small exposure to Asian markets, the financial problems
there did not have a significant impact on earnings in
1997. Operating profit for 1996 increased 22% from 1995
due to higher alumina prices while costs increased at
a much slower rate.
Other Americas -- Revenues of $1,818 in 1997 rose 5% from
1996 as a result of higher sales of rigid container sheet
(RCS) and ingot and the start-up of a new facility producing
automotive electrical components. Revenues for 1996 were
$1,726 compared with $1,780 in 1995. Operating profit
was $224 in 1997, $151 in 1996 and $333 in 1995. The increase
in 1997 operating profit was due to improved results at
Alcoa Aluminio in Brazil and at alumina operations in
Suriname. The decrease in 1996 operating profit relative
to 1995 relates principally to higher costs and lower
metal prices at Alcoa Aluminio's aluminum operations.
Europe -- Revenues improved 14% to $2,090 in 1997, versus
$1,841 in 1996 and $1,691 in 1995. Operating profit rose
to $100 in 1997 from $55 in 1996 and $92 in 1995. Higher
shipments at aluminum operations in Italy and Hungary,
along with strong cost control at operations in Great
Britain, drove the improvement in 1997 operating profit.
Lower 1996 results compared with 1995 were due to weak
economic conditions in Europe in 1996, partially mitigated
by earnings from Alcoa's acquisition of Alumix in Italy.
OPERATIONS BY SEGMENT
Alcoa's operations consist of three segments: Alumina
and Chemicals, Aluminum Processing and Nonaluminum Products.
I. ALUMINA AND CHEMICALS SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Revenues $ 1,961 $ 1,940 $ 1,758
Operating profit 415 459 307
- ------------------------------------------------------------------------------
</TABLE>
Approximately two-thirds of the revenues from this segment
are derived from sales of alumina. Revenues from alumina
in 1997 increased 5% from 1996, which rose 13% from 1995.
Shipments were the primary factor behind the 1997 increase,
rising 13% from 1996. Revenues for 1996 rose on the strength
of prices as shipments were unchanged from 1995 levels.
Revenues from alumina-based chemical products fell 3%
in 1997 as lower volumes more than offset higher realized
prices. Revenues in 1996 rose 3% relative to 1995 on higher
volumes, as a strengthening U.S. market more than offset
weaker sales in Europe.
Operating profit in 1997 for this segment was $415, down
10% from 1996. The decrease was the result of lower operating
profit at AofA, partially offset by volume-driven improvements
in Suriname and the U.S. In 1996, operating profit of
$459 was up 50% from 1995, as the alumina business benefited
from higher prices and good cost control.
In the 1997 second quarter, Alcoa World Alumina and Chemicals
(AWAC) received an advance payment of $240 related to
a long-term alumina supply contract with Sino Mining Alumina
Ltd. (SMAL). The contract entitles SMAL to purchase 400,000
mt of alumina per year for 30 years. SMAL has the option
to increase its alumina purchases as its needs grow. Per-
ton payments will also be made under the terms of the
agreement.
In late October 1997, AWAC announced that it would restart
its St. Croix alumina refinery. The refinery has a rated
operating capacity of 600,000 mt and production commenced
in February 1998.
In November 1997, AWAC announced a 440,000 mt expansion
of its Wagerup alumina refinery in Western Australia.
Construction is expected to be completed in mid-1999.
II. ALUMINUM PROCESSING SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Total aluminum shipments
(000 mt) 2,956 2,841 2,582
Revenues $ 8,240 $ 7,976 $ 8,034
Operating profit 863 774 1,015
- ------------------------------------------------------------------------------
</TABLE>
Total aluminum shipments were up 4% from 1996, primarily
due to strong shipments of engineered and flat-rolled
products. Revenues rose 3%, as the favorable impact of
higher shipments was partially offset by lower prices
for most fabricated products. Revenues in 1996 for this
segment fell 1% from 1995, reflecting lower prices for
most products, while shipments increased 10%.
This segment reported operating profit of $863 in 1997,
an increase of 12% over 1996. The factors contributing
to the increase were higher volumes and improved cost
performance, which were partially offset by lower fabricated
product prices. Products responsible for the improved
operating profit include sheet and plate, extruded products
and forgings. Operating profit in 1996 totaled $774, a
decrease of $241 from 1995. In addition to lower prices,
other conditions contributing to the decline included
a lower-value product mix and higher raw material costs
that were partially offset by better cost performance.
This segment's shipments and revenues are made up of the
following product classes.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Shipments (000 mt)
Flat-rolled products 1,392 1,357 1,380
Engineered products 562 495 454
Aluminum ingot 920 901 673
Other aluminum products 82 88 75
- ------------------------------------------------------------------------------
Total shipments 2,956 2,841 2,582
- ------------------------------------------------------------------------------
Revenues
Flat-rolled products $ 3,956 $ 3,920 $ 4,177
Engineered products 2,476 2,269 2,303
Aluminum ingot 1,521 1,449 1,197
Other aluminum products 287 338 357
- ------------------------------------------------------------------------------
Total revenues $ 8,240 $ 7,976 $ 8,034
- ------------------------------------------------------------------------------
</TABLE>
29
Flat-Rolled Products -- More than half of the shipments
and revenues in this product class are derived from the
sale of RCS, used in the production of beverage cans.
Revenues from RCS fell 4% from 1996, primarily due to
the 1996 sale of AofA's rolled products division, which
resulted in a 29,500 mt loss of shipments for 1997 relative
to 1996. Prices were down slightly from 1996 due to lower
underlying metal prices. Revenues in 1996 declined 16%
from 1995, resulting principally from a 10% decline in
shipments. The shipment decline was due primarily to weaker
U.S. export sales and the sale of AofA's rolled products
division in 1996.
In late December 1997, the U.S. Department of Justice
(DOJ) notified Alcoa that it had filed suit to block the
company's planned acquisition of Reynolds' aluminum rolling
operations in Muscle Shoals, Alabama. Subsequently, in
light of the DOJ position, Alcoa discontinued its efforts
to acquire this facility.
Revenues from sheet and plate, serving principally the
aerospace and commercial products markets, increased 11%
from 1996 as a result of a 10% increase in shipments.
Aerospace shipments have increased as a result of higher
aircraft build rates. Overall sheet and plate prices were
up slightly, with a richer mix offsetting lower prices
for commercial products. Sheet and plate revenues in 1996
rose 4% from 1995 as prices climbed 7%.
Engineered Products -- The products in this class include
extrusions used principally in the transportation and
construction markets, forgings, wheels, wire, rod and
bar. Total shipments were up 14% from 1996 and contributed
to a 9% increase in revenues. Revenues in 1996 fell 2%
from 1995 as prices decreased 11%.
Revenues from extruded products were up 12% from 1996,
as shipments increased 19% but prices fell 6%. Prices
for hard alloy extrusions were up 7% from 1996; however,
lower prices for soft alloy extrusions in the U.S. and
at Alcoa Nederland more than offset the increases. Extruded
products revenues for 1996 were up 15% from 1995 as shipments,
aided by acquisitions, rose 26%.
Revenues from forged wheels rebounded from 1996, increasing
18% on the strength of a 21% increase in shipments. Revenues
in 1996 declined from 1995 due to an 18% decline in shipments.
Aluminum Ingot -- For the fourth consecutive year, Alcoa
had 450,000 mt of smelting capacity idle, operating its
worldwide smelting system at 82% of rated capacity in
1997. Ingot revenues in 1997 increased 5% as prices climbed
3% and shipments rose 2%. In 1996, shipments of ingot
were 34% higher than those in 1995, primarily due to the
sale of AofA's rolled products division. The increase
in shipments resulted in a 21% increase in revenues. Alcoa's
average realized price for ingot in 1997 was 75 cents
per pound, compared with 73 cents in 1996 and 81 cents
in 1995.
Aluminum ingot produced by Alcoa and used internally is
transferred within the aluminum processing segment at
prevailing market prices.
Other Aluminum Products -- Revenues from these products,
which consist primarily of scrap and aluminum closures,
were down 15%
30
from 1996. The revenue decline is the result of a 9% reduction
in realized prices and a 7% drop in shipments. The shipment
decline was principally due to the sale of Alcoa's U.S.
aluminum closures facility in the first half of 1997.
Realized prices for aluminum closures continued to fall
in 1997, dropping 22% from 1996 levels. In 1996, revenues
from other aluminum products fell 5% from 1995 due to
lower prices, which were partially offset by a 17% increase
in shipments.
III. NONALUMINUM PRODUCTS SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Revenues $ 3,118 $ 3,146 $ 2,708
Operating profit 197 117 113
- ------------------------------------------------------------------------------
</TABLE>
Revenues from this segment were down slightly from 1996,
as improved results from the automotive electrical components
and plastic closures businesses were offset by the loss
of revenues from the sale of noncore businesses. Revenues
at Alcoa Fujikura Limited (AFL), which produces electrical
components for the auto and truck markets, increased 18%
due to significantly higher volumes, as prices declined
slightly. Closures revenues were up 15% as global expansion
drove higher shipments. Revenues from this segment in
1996 were up 16% from 1995, as higher revenues at AFL
were partially offset by lower revenues resulting from
the closing of AEP.
Operating profit was up 68% from 1996 as increased profits
from the sale of automotive electrical components and
plastic closures were fractionally offset by lower earnings
from building products, magnesium products and packaging
machinery. Operating profit in 1996 rose 4% from 1995,
as higher earnings from AFL were partially offset by lower
results for magnesium products, strong competition in
the closures business and the shutdown of AEP.
SPECIAL ITEMS
Special items in 1997 resulted in a net gain of $95.5
($43.9 after tax and minority interests). The fourth quarter
sales of a majority interest in Alcoa's Brazilian cable
business and land in Japan generated gains of $85.8. In
addition, the sale of equity securities resulted in a
gain of $38.0, while the divestiture of noncore businesses
provided $25.0. These gains were partially offset by charges
of $53.3 related to environmental and impairment matters.
Included in 1996 income from operations was a charge of
$198.9 ($122.3 after tax and minority interests) consisting
of several items. A net severance charge of $95.5, which
included pension and OPEB curtailment credits of $75.0,
relates to incentive costs for employees who voluntarily
left the company and for permanent layoff costs. In addition,
the shutdown of AEP resulted in a charge of $65.4, related
primarily to asset writedowns. Impairments at various
manufacturing locations added another $38.0 to special
items in 1996.
The 1995 special charge of $16.2 ($10.1 after tax and
minority interests) consisted of a $43.5 charge for severance
costs, partially offset by a net credit of $27.3 related
to environmental matters.
COSTS AND OTHER INCOME
Cost of Goods Sold -- Cost of goods rose 2% to $10,156
in 1997, following a 6% increase in 1996 from 1995. Contributing
to the 1997 increase was $175 related to higher volumes
partially offset by the absence of costs associated with
divested businesses. Additionally, higher material costs
of $155 were nearly offset by cost improvements of $140.
Cost of goods sold in 1996 was $606 higher than in 1995.
Higher costs related to newly acquired companies and higher
volumes were partially offset by a lower-cost product
mix and cost improvements.
Selling and General Administrative Expenses -- These expenses
totaled $671 in 1997, down $38 or 5% from 1996. The decrease
was the result of lower salary compensation costs resulting
from a reduction in the number of employees at U.S. aluminum
operations. Additionally, lower costs resulting from the
divestiture of noncore businesses also had a positive impact.
Expenses in 1996 were about even with those in 1995.
Research and Development Expenses -- R&D expenses totaled
$143 in 1997, a 13% decline from 1996. Lower activity
related to casting technology, closures and at AofA accounted
for the decline.
Interest Expense -- Interest expense increased $7 from
1996 as a result of the full-year effect of Aluminio's
1996 debt offering and higher debt levels in 1997 at AofA.
Income Taxes -- Alcoa's effective tax rate in 1997 was
33%, two percentage points below the statutory rate of
35%. The lower rate is primarily due to the favorable
tax effect of certain special items.
The 1996 effective tax rate was 33.3%, and differs from
the statutory rate due to the recognition of a tax benefit
resulting from reversal of the valuation allowance on
deferred tax assets at Suriname Aluminum Company, partially
offset by state taxes on income.
The 1995 effective tax rate was 30.3%, and differs from
the statutory rate primarily because of taxes on foreign
income, partially offset by a higher tax rate in Australia.
Other Income/Foreign Currency -- Other income rose to
$163 in 1997, a 141% increase from 1996. The majority
of the change was due to reduced losses from marking-to-
market certain aluminum commodity contracts. Higher equity
and interest income, partially offset by a negative swing
in foreign exchange, accounted for the remainder of the
change. Other income in 1996 was $67 compared with $155
in 1995. The decrease primarily reflects higher losses
from aluminum commodity contracts and lower equity and
interest income.
Exchange gains (losses) included in other income were
$(9.8) in 1997, $3.1 in 1996 and $(16.5) in 1995. The total
impact on net income, after taxes and minority interests,
was $6.9 in 1997, $(.3) in 1996 and $(10.2) in 1995.
31
RISK FACTORS
The following discussion about the company's risk management
activities includes forward-looking statements that involve
risk and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements.
In addition to inherent operating risks, Alcoa is exposed
to financial, market, political and economic risks.
Commodity Price Risks -- Alcoa is a leading global producer
of aluminum ingot and aluminum fabricated products. Aluminum
ingot is an internationally produced, priced, and traded
commodity. The principal trading market for ingot is the
London Metal Exchange (LME). Alcoa participates in this
market by buying and selling future portions of its aluminum
requirements and output.
For aluminum price risk management purposes, Alcoa divides
its operations into four regions: U.S., Pacific, Other
Americas and Europe. AofA in the Pacific region and Aluminio
in the Other Americas are generally in net long metal
positions. From time to time, they may sell production
forward. Operations in the European region are generally
net metal short and may purchase forward positions periodically.
Historically, forward purchase and sales activity within
these three regions has not been material.
In the normal course of business, Alcoa enters into long-
term contracts with a number of its fabricated products
customers. At December 31, 1997 and 1996, such contracts
approximated 2,093,000 mt and 2,369,000 mt, respectively.
Alcoa may enter into similar arrangements in the future.
In order to hedge the risk of higher prices for the anticipated
metal purchases required to fulfill these long-term customer
contracts, Alcoa enters into long positions, principally
using futures and options. Alcoa follows a stable pattern
of purchasing metal; therefore, it is highly likely that
anticipated metal requirements will be met. At December
31, 1997 and 1996, these contracts totaled approximately
1,084,000 mt and 872,000 mt, respectively. A hypothetical
10% change from the 1997 year-end, three-month LME aluminum
ingot price of $1,552 per mt would result in a pretax
gain or loss to future earnings of $170 related to these
contracts. However, it should be noted that any change
in the value of these contracts, real or hypothetical,
would be significantly offset by an inverse change in
the cost of purchased metal.
Earnings were selected as the measure of sensitivity due
to the historical relationship between aluminum ingot
prices and Alcoa's earnings. The hypothetical change
of 10% was calculated using a parallel shift in the existing
December 31, 1997 forward price curve for aluminum ingot.
The price curve takes into account the time value of money,
as well as future expectations regarding the price of
aluminum ingot. The model also assumes there will be no
aluminum smelter capacity restarted by Alcoa.
The futures and options contracts noted above are with
creditworthy counterparties and are further supported
by cash, treasury bills or irrevocable letters of credit
issued by carefully chosen banks.
32
For financial accounting purposes, the gains and losses
on the hedging contracts are reflected in earnings concurrent
with the hedged costs. The cash flows from these contracts
are classified in a manner consistent with the underlying
nature of the transactions.
Alcoa intends to close out the hedging positions at the
time it purchases the metal from third parties, thus creating
the right economic match both in time and price. Deferred
gains of $113 on the hedging contracts at December 31, 1997
are expected to offset the increase in the price of the
purchased metal.
The expiration dates of the options and the delivery dates
of the futures contracts do not always coincide exactly
with the dates on which Alcoa is required to purchase
metal to meet its contractual commitments with customers.
Accordingly, some of the futures and options positions
will be rolled forward. This may result in significant
cash inflows if the hedging contracts are "in-the-money"
at the time they are rolled forward. Conversely, there
could be significant cash outflows if metal prices fall
below the price of contracts being rolled forward.
In addition to the above noted aluminum positions, Alcoa
also had 259,000 mt and 205,000 mt of futures and options
contracts outstanding at year-end 1997 and 1996, respectively,
that cover long-term, fixed-price commitments to supply
customers with metal from internal sources. Accounting
convention requires that these contracts be marked-to-
market, which resulted in after-tax charges to earnings
of $13 in 1997 and $57 in 1996. A hypothetical 10% change
in aluminum ingot prices from the year-end 1997 level
of $1,552 per mt would result in a pretax gain or loss
of $30 related to these positions. The hypothetical gain
or loss was calculated using the same model and assumptions
noted earlier.
Alcoa also purchases certain other commodities, such as
gas and copper, for its operations and enters into futures
contracts to eliminate volatility in the prices of such
products. None of these contracts are material. For additional
information on financial instruments, see Notes A and Q.
Foreign Exchange Risks -- Alcoa is subject to significant
exposure from fluctuations in foreign currencies. As a
matter of company policy, foreign currency exchange contracts,
including forwards and options, are used to limit transactional
exposure to changes in currency exchange rates. The forward
contracts principally cover existing exposures and firm
commitments, while options are generally used to hedge
anticipated transactions. A hypothetical 10% change in
applicable 1997 year-end forward rates would result in
a pretax gain or loss of approximately $80 related to
these positions. However, it should be noted that any
change in value of these contracts, real or hypothetical,
would be significantly offset by an inverse change in
the value of the underlying hedged items. The model assumes
a parallel shift in the forward curve for the applicable
currencies. See Note Q for information related to the
notional and fair market values of Alcoa's foreign exchange
contracts at December 31, 1997 and 1996.
Interest Rate Risks -- Alcoa attempts to maintain a reasonable
balance between fixed- and floating-rate debt and uses
interest rate swaps and caps to keep financing costs as
low as possible. At December 31, 1997 and 1996, Alcoa
had $1,952 and $2,075 of debt outstanding at effective
interest rates of 7.00% and 6.71%, after the impact of
interest rate swaps and caps is taken into account. A
hypothetical change of 10% in Alcoa's effective interest
rate from year-end 1997 levels would increase or decrease
interest expense by $14. For more information related to
Alcoa's use of interest rate instruments, see Notes A and Q.
Risk Management -- All of the aluminum and other commodity
contracts, as well as the various types of financial instruments,
are straightforward and are held for purposes other than
trading. They are used primarily to mitigate uncertainty
and volatility, and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject
to the management, direction and control of the Strategic
Risk Management Committee (SRMC). It is composed of the
chief executive officer, the president, the chief financial
officer and other officers and employees that the chief
executive officer may select from time to time. SRMC reports
to the board of directors at each of its scheduled meetings
on the scope of its derivative activities.
Material Limitations -- The disclosures with respect to
aluminum prices and foreign exchange risk do not take
into account the underlying anticipated purchase obligations
and the underlying transactional foreign exchange exposures.
If the underlying items were included in the analysis,
the gains or losses on the futures and options contracts
may be offset. Actual results will be determined by a
number of factors that are not under Alcoa's control and
could vary significantly from those disclosed.
ENVIRONMENTAL MATTERS
Alcoa continues to participate in environmental assessments
and cleanups at a number of locations, including operating
facilities and adjoining properties, previously owned
or operated facilities and Superfund and other waste sites.
A liability is recorded for environmental remediation
costs or damages when a cleanup program becomes probable
and the costs or damages can be reasonably estimated.
See Notes A and U for additional information.
Alcoa's remediation reserve balance at the end of 1997
was $243 and reflects the most probable costs to remediate
identified environmental conditions for which costs can
be reasonably estimated. About 24% of this balance relates
to Alcoa's Massena, N.Y. plant site and 23% relates to
Alcoa's Pt. Comfort, Texas plant site. Remediation expenses
charged to the reserve were $64 in 1997, $72 in 1996 and
$62 in 1995. They include expenditures currently mandated,
as well as those not required by any regulatory authority
or third party.
Included in annual operating expenses are the recurring
costs of managing hazardous substances and environmental
programs. These costs are estimated to be about 2% of
cost of goods sold.
33
LIQUIDITY AND CAPITAL RESOURCES
(dollars in millions, except share amounts)
CASH FROM OPERATIONS
Cash from operations for 1997 totaled $1,888 versus $1,279
in 1996. The increase was primarily the result of higher
earnings and a prepayment from a long-term alumina supply
contract. Special item gains in 1997 compared with losses
in 1996 partially offset these items. Lower working capital
requirements for 1997 resulted in net cash inflows of
$94, compared with cash outlays of $64 in 1996. The decrease
in working capital requirements in 1997 relative to 1996
was essentially due to higher levels of accounts payable
and accrued expenses, partially offset by a decrease in
taxes.
Cash outlays related to 1996 severance costs have been
substantially completed. The majority of the 2,900 affected
employees have left the company.
FINANCING ACTIVITIES
Financing activities during 1997 resulted in cash outflows
of $989 compared with $535 in 1996. The 1997 total included
$604 to repurchase 8,077,267 shares of the company's common
stock at an average price of $74.72 per share. In 1996,
Alcoa used $317 to repurchase 5,402,500 shares. Stock
purchases in 1997 were partly offset by $203 of treasury
stock issued primarily for employee stock option plans.
Dividends paid to shareholders were $170 in the 1997 period,
a decrease of $64 over 1996. The difference was due to
Alcoa's bonus dividend program, which paid out 10.75 cents
in addition to the base dividend in each quarter of 1996.
The bonus program provides for the distribution in the
following year of 30% of Alcoa's annual earnings in excess
of $3.00 per share. There was no bonus dividend in 1997;
however, in 1998 the bonus program will pay out an additional
12.5 cents per quarter above the base dividend of 25 cents.
In the 1997 first quarter, Alcoa raised the quarterly
base dividend to 25 cents per share, an 11% increase.
Dividends paid and return of capital to minority interests
totaled $343 as AWAC and AofA returned funds to their
investors in 1997. Of the $343, $206 relates to payments
made by AofA to its minority shareholders, while a payment
of $96 was made by AWAC.
Payments on long-term debt during 1997 exceeded additions
by $218. During the 1997 fourth quarter, AFL issued a
$250 five-year term loan and entered into a $250 five-
year, revolving-credit facility. The term loan was used
to refinance existing debt, while the revolving-credit
facility will be used for general corporate purposes.
Higher short-term borrowings in 1997 relative to 1996
were a result of higher borrowings at Alcoa Italia.
For 1996, Alcoa had net long-term borrowings of $289.
Of this amount, $400 relates to notes issued by Aluminio.
The proceeds were used to prepay Aluminio's 1995 notes
and for its general corporate purposes.
Debt as a percentage of invested capital was 19.9% at
the end of 1997, compared with 21.8% for 1996 and 16.7%
for 1995.
INVESTING ACTIVITIES
Cash used for investing activities during 1997 totaled
$679, compared with $1,208 in 1996 and $1,072 in 1995.
Capital expenditures totaled
34
$912, compared with $996 in 1996 and $887 in 1995. Of
the total expenditures in 1997, 29% related to capacity
expansion, including forged wheel production in the U.S.
and Europe along with automotive sheet production in the
U.S. Also included are costs of new and expanded facilities
for environmental control in ongoing operations totaling
$94 in 1997, $68 in 1996 and $54 in 1995.
Alcoa received $265 in 1997 from the sale of assets including
its Caradco, Arctek, Alcoa Composites, Norcold, Dayton
Technologies and Richmond, Indiana facilities. Also included
was the sale of a majority interest in Alcoa's Brazilian
cable business. In 1996, Alcoa received $83 from the sale
of AofA's rolled products division to Kaal Australia.
Acquisitions accounted for $302 of investing cash outflows
during 1996 and included the purchase of Alumix in Italy
and Alcan's extrusion operations in Brazil. The company
also purchased the remaining 49.9% interest in Alcoa-Kofem
in Hungary.
SUBSEQUENT EVENTS
In January 1998, Alcoa issued $300 of 6.75% bonds due
2028. The net proceeds were used for general corporate
purposes.
On February 6, 1998, Alcoa completed its acquisition of
Inespal, S.A. of Madrid, Spain. Alcoa paid $210 in cash
and assumed $200 of debt in exchange for substantially
all of Inespal's businesses. Inespal is an integrated
aluminum producer with 1997 revenues of $1,100. The acquisition
included an alumina refinery, three aluminum smelters,
three aluminum rolling facilities, two extrusion plants,
an administrative center and related sales offices in
Europe.
On February 25, 1998, Alcoa and the government of British
Columbia, Canada, signed a memorandum of understanding
to proceed with a feasibility study for the construction
of a 250,000 mt per year primary aluminum smelter. The
study will be completed no later than December 31, 1998.
If the study produces a favorable result, construction
could start in 1999 and would represent an investment
of approximately $850.
YEAR 2000 ISSUE
The company, assisted by outside consults, has conducted
a detailed review of its administrative and process control
computer systems to identify areas that are affected by
the "Year 2000" issue. The Year 2000 issue is the result
of computer programs being written using two digits (rather
than four) to define the applicable year. This could result
in computational errors as dates are compared across the
century boundary.
A detailed implementation plan has been developed to manage
and resolve the issues identified in the review. The plan
includes the modification of existing systems as well
as the purchase of new software. It also requires that
each system be audited after the modifications are complete
to ensure compliance with Year 2000 requirements. Employees
of the company as well as outside resources have been
assigned to the completion of the implementation plan.
The total cost of purchasing new software and altering
the applicable program codes is estimated to be between
$50 and $75 for 1998. The company is currently assessing
the impact of the implementation plan on its 1999 operations.
35
MANAGEMENT'S REPORT TO ALCOA SHAREHOLDERS
The accompanying financial statements of Alcoa and consolidated
subsidiaries were prepared by management, which is responsible
for their integrity and objectivity. The statements were
prepared in accordance with generally accepted accounting
principles and include amounts that are based on management's
best judgments and estimates. The other financial information
included in this annual report is consistent with that
in the financial statements.
The company maintains a system of internal controls, including
accounting controls, and a strong program of internal
auditing. The system of controls provides for appropriate
procedures that are consistent with high standards of
accounting and administration. The company believes that
its system of internal controls provides reasonable assurance
that assets are safeguarded against losses from unauthorized
use or disposition and that financial records are reliable
for use in preparing financial statements.
Management also recognizes its responsibility for conducting
the company's affairs according to the highest standards
of personal and corporate conduct. This responsibility
is characterized and reflected in key policy statements
issued from time to time regarding, among other things,
conduct of its business activities within the laws of
the host countries in which the company operates and potentially
conflicting outside business interests of its employees.
The company maintains a systematic program to assess compliance
with these policies.
/S/ Paul H. O'Neill
Paul H. O'Neill
Chairman of the Board and Chief Executive Officer
/S/ Richard B.Kelson
Richard B. Kelson
Executive Vice President and Chief Financial Officer
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, which is
composed of six independent directors, met eight times
in 1997.
The Audit Committee oversees Alcoa's financial reporting
process on behalf of the Board of Directors. In fulfilling
its responsibility, the committee recommended to the Board
the reappointment of Coopers & Lybrand L.L.P. as the company's
independent public accountants. The Audit Committee reviewed
with the Vice President-Audit and the independent accountants
the overall scope and specific plans for their respective
audits. The committee reviewed with management Alcoa's
annual and quarterly reporting process, and the adequacy
of the company's internal controls. Without management
present, the committee met separately with the Vice President-
Audit and the independent accountants to review the results
of their examinations, their evaluations of the company's
internal controls, and the overall quality of Alcoa's
financial reporting.
/S/ Henry B. Schacht
Henry B. Schacht
Chairman, Audit Committee
INDEPENDENT ACCOUNTANT'S REPORT
To the Shareholders and Board of Directors Aluminum Company
of America (Alcoa)
We have audited the accompanying consolidated balance
sheet of Alcoa as of December 31, 1997 and 1996, and the
related statements of consolidated income, shareholders'
equity and consolidated cash flows for each of the three
years in the period ended December 31, 1997. These financial
statements are the responsibility of Alcoa'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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Alcoa at December 31, 1997 and 1996,
and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted
accounting principles.
/S/ Coopers & Lybrand L.L.P.
600 Grant St., Pittsburgh, Pa.
January 8, 1998, except for Note V,
for which the date is February 6, 1998
36
STATEMENT OF CONSOLIDATED INCOME Alcoa and subsidiaries
(in millions, except per-share amounts)
<TABLE>
<CAPTION>
For the year ended December 31 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
REVENUES
Sales and operating revenues (P) $ 13,319.2 $ 13,061.0 $ 12,499.7
Other income, principally interest 162.5 67.4 155.2
- ------------------------------------------------------------------------------
13,481.7 13,128.4 12,654.9
- ------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold and operating
expenses 10,155.8 9,966.0 9,360.1
Selling, general administrative
and other expenses 670.6 708.8 707.6
Research and development expenses 143.2 165.5 141.3
Provision for depreciation,
depletion and amortization 734.9 747.2 712.9
Interest expense (N) 140.9 133.7 119.8
Taxes other than payroll taxes 130.1 126.6 126.8
Special items (B) (95.5) 198.9 16.2
- ------------------------------------------------------------------------------
11,880.0 12,046.7 11,184.7
- ------------------------------------------------------------------------------
EARNINGS
Income before taxes on income 1,601.7 1,081.7 1,470.2
Provision for taxes on income (T) 528.7 360.7 445.9
- ------------------------------------------------------------------------------
Income from operations 1,073.0 721.0 1,024.3
Minority interests (267.9) (206.1) (233.8)
- ------------------------------------------------------------------------------
NET INCOME $ 805.1 $ 514.9 $ 790.5
- ------------------------------------------------------------------------------
EARNINGS PER SHARE (K)
Basic $ 4.66 $ 2.94 $ 4.43
Diluted $ 4.62 $ 2.91 $ 4.39
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
37
CONSOLIDATED BALANCE SHEET Alcoa and subsidiaries
(in millions)
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- ---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (includes
cash of $100.8 in 1997 and $93.4 in
1996) (Q) $ 800.8 $ 598.1
Short-term investments (Q) 105.6 18.5
Receivables from customers, less
allowances: 1997-$36.6; 1996-$48.4 1,581.2 1,674.7
Other receivables 216.4 154.2
Inventories (C) 1,312.6 1,461.4
Deferred income taxes 172.3 159.9
Prepaid expenses and other current
assets 228.0 214.4
- ------------------------------------------------------------------------------
Total current assets 4,416.9 4,281.2
Properties, plants and equipment (D) 6,666.5 7,077.5
Other assets (E and Q) 1,987.2 2,091.2
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 13,070.6 $ 13,449.9
- ------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Short-term borrowings (weighted average
rate of 6.3% in 1997 and 6.5% in
1996) (Q) $ 347.7 $ 206.5
Accounts payable, trade 811.7 799.2
Accrued compensation and retirement
costs 436.0 404.3
Taxes, including taxes on income 334.2 407.9
Other current liabilities 375.7 377.0
Long-term debt due within one year (G
and Q) 147.2 178.5
- ------------------------------------------------------------------------------
Total current liabilities 2,452.5 2,373.4
Long-term debt, less amount due within
one year (G and Q) 1,457.2 1,689.8
Accrued postretirement benefits (S) 1,749.6 1,791.2
Other noncurrent liabilities and deferred
credits (F) 1,271.2 1,205.5
Deferred income taxes 281.0 317.1
- ------------------------------------------------------------------------------
Total liabilities 7,211.5 7,377.0
- ------------------------------------------------------------------------------
MINORITY INTERESTS (A and H) 1,439.7 1,610.5
- ------------------------------------------------------------------------------
Contingent liabilities (M) -- --
SHAREHOLDERS' EQUITY
Preferred stock (O) 55.8 55.8
Common stock (O) 178.9 178.9
Additional capital 578.1 591.9
Retained earnings 4,717.3 4,082.6
Treasury stock, at cost (758.0) (371.3)
Accumulated other comprehensive income (A
and Q) (352.7) (75.5)
- ------------------------------------------------------------------------------
Total shareholders' equity 4,419.4 4,462.4
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 13,070.6 $ 13,449.9
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
38
STATEMENT OF CONSOLIDATED CASH FLOWS Alcoa and subsidiaries
(in millions)
<TABLE>
<CAPTION>
For the year ended December 31 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
CASH FROM OPERATIONS
Net income $ 805.1 $ 514.9 $ 790.5
Adjustments to reconcile net
income to cash from operations:
Depreciation, depletion and
amortization 753.6 764.2 730.3
Change in deferred income taxes 83.2 120.3 (36.2)
Equity earnings before
additional taxes, net of
dividends (30.9) (6.6) (25.6)
Special items--net of payments (95.5) 168.3 16.2
Book value of asset disposals 42.2 61.8 44.6
Minority interests 267.9 206.1 233.8
Other (5.2) (8.5) (1.9)
(Increase) reduction in
receivables 12.0 42.7 (50.6)
(Increase) reduction in
inventories 52.5 87.8 (225.3)
Increase in prepaid expenses and
other current assets (25.6) (40.3) (13.4)
Increase (reduction) in accounts
payable and accrued expenses 81.5 (181.1) (40.3)
Increase (reduction) in taxes,
including taxes on income (26.5) 27.4 (95.1)
Cash received on long-term
alumina supply contract 240.0 -- --
Increase (reduction) in deferred
hedging gains (113.3) (264.5) 365.5
Net change in noncurrent assets
and liabilities (153.4) (213.6) 20.0
- ------------------------------------------------------------------------------
CASH FROM OPERATIONS 1,887.6 1,278.9 1,712.5
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net additions (reduction) to
short-term borrowings 142.5 (140.7) 83.3
Common stock issued and treasury
stock sold 203.0 41.4 58.1
Repurchase of common stock (603.5) (317.2) (224.9)
Dividends paid to shareholders (170.4) (234.2) (162.5)
Dividends paid and return of
capital to minority interests (342.5) (173.2) (121.9)
Additions to long-term debt 519.8 916.2 612.1
Payments on long-term debt (738.2) (627.1) (243.4)
Redemption of subsidiary preferred
stock -- -- (200.0)
- ------------------------------------------------------------------------------
CASH USED FOR FINANCING
ACTIVITIES (989.3) (534.8) (199.2)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (912.4) (995.7) (887.1)
Acquisitions, net of cash acquired -- (302.3) (426.1)
Sale of assets 265.2 82.8 --
Sale of (additions to) investments 51.7 (58.8) (15.2)
Changes in minority interests 14.2 (34.2) 30.9
Proceeds from Alcoa/WMC
transaction -- -- 366.9
Repayment from (loan to) WMC -- 121.8 (121.8)
Changes in short-term investments (87.3) (11.7) (1.3)
Other (10.0) (10.0) (17.8)
- ------------------------------------------------------------------------------
CASH USED FOR INVESTING
ACTIVITIES (678.6) (1,208.1) (1,071.5)
- ------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (17.0) 6.5 (5.4)
- ------------------------------------------------------------------------------
Net change in cash and cash
equivalents 202.7 (457.5) 436.4
Cash and cash equivalents at
beginning of year 598.1 1,055.6 619.2
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 800.8 $ 598.1 $ 1,055.6
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
39
STATEMENT OF SHAREHOLDERS' EQUITY Alcoa and subsidiaries
(in millions, except share amounts)
<TABLE>
<CAPTION>
Accumulated
other Total
Comprehensive Preferred Common Additional Retained Treasury comprehensive shareholders'
December 31 income stock stock capital earnings stock income equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1994 $ 55.8 $ 178.7 $ 663.5 $ 3,173.9 $ (.1) $ (72.6) $ 3,999.2
Comprehensive income--
1995:
Net income--1995 $790.5 790.5 790.5
Other comprehensive
income, net of
tax:
Minimum pension
liability, net
of $2.9 tax
benefit (5.3)
Unrealized
translation
adjustments (10.1)
Realize
translation
adjustments (.3) (15.7) (15.7)
--------------
Comprehensive income $774.8
--------------
Cash dividends:
Preferred @ $3.75 per
share (2.1) (2.1)
Common @ $.90 per
share (160.4) (160.4)
Treasury shares
purchased (224.9) (224.9)
Stock issued:
compensation plans .2 (26.4) (1.8) 86.1 58.1
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1995 55.8 178.9 637.1 3,800.1 (138.9) (88.3) 4,444.7
Comprehensive income--
1996:
Net income--1996 $514.9 514.9 514.9
Other comprehensive
income, net of
tax:
Minimum pension
liability, net
of $1.9 tax
expense 3.5
Unrealized
translation
adjustments (8.9)
Realized
translation
adjustments (5.2)
Unrealized gains
on securities,
net of $12.6 tax
benefit 23.4 12.8 12.8
--------------
Comprehensive income $527.7
--------------
Cash dividends:
Preferred @ $3.75 per
share (2.1) (2.1)
Common @ $1.33 per
share (232.1) (232.1)
Treasury shares
purchased (317.2) (317.2)
Stock issued:
compensation plans (45.2) 1.8 84.8 41.4
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1996 55.8 178.9 591.9 4,082.6 (371.3) (75.5) 4,462.4
Comprehensive income--
1997:
Net income--1997 $ 805.1 805.1 805.1
Other comprehensive
income, net of
tax:
Minimum pension
liability, net
of $2.3 tax
benefit (4.2)
Unrealized
translation
adjustments (249.6)
Unrealized gains
on securities,
net of $.7 tax
expense 1.3
Gains on
securities
included in net
income, net of
$13.3 tax
benefit (24.7) (277.2) (277.2)
--------------
Comprehensive income $ 527.9
--------------
Cash dividends:
Preferred @ $3.75 per
share (2.1) (2.1)
Common @ $.975 per
share (168.3) (168.3)
Treasury shares
purchased (603.5) (603.5)
Stock issued:
compensation plans (13.8) 216.8 203.0
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1997 $ 55.8 $ 178.9 $ 578.1 $ 4,717.3 $ (758.0) $ (352.7)* $ 4,419.4
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Comprised of unrealized translation adjustments of $(342.7) and
minimum pension liability of $(10.0)
</TABLE>
<TABLE>
<CAPTION>
SHARE ACTIVITY (number of shares)
Common stock
---------------------------------------------------------------------------
Preferred stock Issued Treasury Net outstanding
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1994 557,649 178,714,978 (2,502) 178,712,476
Treasury shares purchased (4,575,400) (4,575,400)
Stock issued: compensation
plans 207,605 1,969,349 2,176,954
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1995 557,649 178,922,583 (2,608,553) 176,314,030
Treasury shares purchased (5,402,500) (5,402,500)
Stock issued: compensation
plans 1,598,109 1,598,109
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1996 557,649 178,922,583 (6,412,944) 172,509,639
Treasury shares purchased (8,077,267) (8,077,267)
Stock issued: compensation
plans 3,843,254 3,843,254
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1997 557,649 178,922,583 (10,646,957) 168,275,626
- --------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial
statements include the accounts of Alcoa and companies
more than 50% owned. Investments in other entities are
accounted for principally on an equity basis.
The consolidated financial statements are prepared in
conformity with generally accepted accounting principles
and require management to make certain estimates and assumptions.
These may affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities
at the date of the financial statements. They may also
affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates upon subsequent resolution of some matters.
Inventory Valuation. Inventories are carried at the lower
of cost or market, with cost for a substantial portion
of U.S. inventories determined under the last-in, first-
out (LIFO) method. The cost of other inventories is principally
determined under the average-cost method.
Depreciation and Depletion. Depreciation is recorded principally
on the straight-line method at rates based on the estimated
useful lives of the assets. Profits or losses from the
sale of assets are included in other income. Repairs and
maintenance are charged to expense as incurred.
Depletion is taken over the periods during which the estimated
mineral reserves are extracted.
Amortization of Intangibles. The excess of purchase price
over net tangible assets of businesses acquired is included
in other assets in the consolidated balance sheet. Intangibles
are amortized on a straight-line basis over not more than
40 years. The carrying value of intangibles is evaluated
periodically in relation to the operating performance
and future undiscounted cash flows of the underlying businesses.
Adjustments are made if the sum of expected future net
cash flows is less than book value.
Environmental Expenditures. Expenditures for current operations
are expensed or capitalized, as appropriate. Expenditures
relating to existing conditions caused by past operations,
and which do not contribute to future revenues, are expensed.
Liabilities are recorded when remedial efforts are probable
and the costs can be reasonably estimated. The liability
may include elements of costs such as site investigations,
consultant fees, feasibility studies, outside contractor
expenses and monitoring expenses. Estimates are not discounted
or reduced by potential claims for recovery. Claims for
recovery are recognized when received. The estimates also
include costs related to other potentially responsible
parties to the extent that Alcoa has reason to believe
such parties will not fully pay their proportionate share.
The liability is periodically reviewed and adjusted to
reflect current remediation progress, prospective estimates
of required activity and other factors that may be relevant,
including changes in technology or regulations. See Note U
for additional information.
Interest Costs. Interest related to construction of qualifying
assets is capitalized as part of construction costs.
Financial Instruments and Commodity Contracts. Alcoa enters
into long-term contracts to supply fabricated products
to a number of its customers. To hedge the market risk
of changing prices for purchases or sales of metal, Alcoa
uses commodity futures and options contracts.
Gains and losses related to transactions that qualify
for hedge accounting, including closed futures contracts,
are deferred and reflected in cost of goods sold when
the underlying physical transaction takes place. The deferred
gains or losses are reflected on the balance sheet in
other current and noncurrent liabilities or assets. If
future purchased metal needs are revised lower than initially
anticipated, the futures contracts associated with the
reduction no longer qualify for deferral and are marked-
to-market. Gains and losses are recorded in other income
in the current period.
The effectiveness of the hedge is measured by a historical
and probable future high correlation of changes in the
fair value of the hedging instruments with changes in
value of the hedged item. If correlation ceases to exist,
hedge accounting will be terminated and gains or losses
recorded in other income. To date, high correlation has
always been achieved.
Alcoa also enters into futures and options contracts that
cover long-term, fixed-price commitments to supply customers
with metal from internal sources. These contracts are
marked-to-market, and the gains and losses from changes
in market value of the contracts are recorded in other
income in the current period. This resulted in after-tax
losses of $12.7 in 1997, $57.1 in 1996 and $37.9 in 1995.
Alcoa also attempts to maintain a reasonable balance between
fixed- and floating-rate debt, using interest rate swaps
and caps, to keep financing costs as low as possible.
Amounts to be paid or received under swap and cap agreements
are recognized over the life of such agreements as adjustments
to interest expense.
Upon early termination of an interest rate swap or cap,
gains or losses are deferred and amortized as adjustments
to interest expense of the related debt over the remaining
period covered by the terminated swap or cap.
Alcoa is subject to significant exposure from fluctuations
in foreign currencies. To mitigate these risks, foreign
exchange contracts are used to manage transactional exposures
to changes in currency exchange rates. Gains and losses
on forward contracts that hedge firm foreign currency
commitments, and options that hedge anticipated transactions,
are deferred and included in the basis of the transactions
underlying the commitments. If the underlying transaction
is not completed, the financial position is closed and
gains or losses are recognized in other income in the
period such commitment is terminated.
Cash flows from financial instruments are recognized in
the statement of cash flows in a manner consistent with
the underlying transactions.
Stock-Based Compensation. Alcoa accounts for stock-based
compensation in accordance with the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation
cost is not required to be recognized
41
on options granted. Disclosures required with respect
to alternative fair value measurement and recognition
methods prescribed by Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation," are presented in Note O.
Foreign Currency. The local currency is the functional
currency for Alcoa's significant operations outside the
U.S., except in Brazil, where the U.S. dollar is used
as the functional currency. The determination of the functional
currency for Alcoa's Brazilian operations is made based
on the appropriate economic and management indicators
and is not dependent on Brazil's status as a hyperinflationary
economy.
Recently Adopted Accounting Standards. Alcoa has adopted
SFAS No. 128, "Earnings per Share," issued in February
1997. This statement requires the disclosure of basic
and diluted earnings per share and revises the method
required to calculate these amounts. The adoption of this
standard did not impact previously reported earnings per-
share amounts.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income,"
was issued. Alcoa has adopted this standard which requires
the display of comprehensive income and its components
in the financial statements. In Alcoa's case, comprehensive
income includes net income and unrealized gains and losses
from currency translation, equity investments and pension
liability adjustments.
Recently Issued Accounting Standards. A new accounting
rule, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued in June
1997. The implementation of SFAS No. 131 will require
the disclosure of segment information on the same basis
that is used internally for evaluating segment performance
and allocating resources to segments. The company is currently
assessing the effect of this new standard; however, it
will not have a financial impact on the company. Implementation
of this new standard is required for calendar year 1998.
In February 1998, SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits," was
issued. The implementation of SFAS No. 132 will revise
certain footnote disclosure requirements related to pension
and other retiree benefits. The new standard will not
have a financial impact on the company. Implementation
is required for calendar year 1998.
Reclassification. Certain amounts in previously issued
financial statements were reclassified to conform to 1997
presentations.
B. SPECIAL ITEMS
Special items in 1997 resulted in a gain of $95.5 ($43.9
after tax and minority interests). The fourth quarter
sales of a majority interest in Alcoa's Brazilian cable
business and land in Japan generated gains of $85.8. In
addition, the sale of equity securities resulted in a
gain of $38.0, while the divestiture of noncore businesses
provided $25.0. These gains were offset by charges of
$53.3, related primarily to environmental and impairment
matters.
Special items in 1996 consisted of a charge totaling $198.9
($122.3 after tax and minority interests). A net severance
charge of $95.5, which included pension and OPEB curtailment
credits of $75.0, relates to incentive costs for employees
who voluntarily left the company and for permanent layoff
costs. The shutdown of Alcoa Electronic Packaging resulted
in an additional charge of $65.4, related primarily to
asset writedowns. Impairments at various manufacturing
locations added another charge of $38.0.
Special items in 1995 totaled $16.2 ($10.1 after tax and
minority interests). It included a charge of $43.5 for
severance costs, partially offset by a net credit of $27.3,
related to environmental matters.
C. INVENTORIES
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------
Finished goods $ 314.9 $ 403.1
Work in process 433.0 421.1
Bauxite and alumina 263.9 283.1
Purchased raw materials 197.3 235.5
Operating supplies 103.5 118.6
- ----------------------------------------------------------------------
$ 1,312.6 $ 1,461.4
- ----------------------------------------------------------------------
</TABLE>
Approximately 57% of total inventories at December 31,
1997 were valued on a LIFO basis. If valued on an average-
cost basis, total inventories would have been $769.8 and
$753.7 higher at the end of 1997 and 1996, respectively.
D. PROPERTIES, PLANTS AND EQUIPMENT, AT COST
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------
Land and land rights,
including mines $ 221.2 $ 237.0
Structures 3,898.1 4,028.0
Machinery and equipment 10,482.8 10,742.5
- ----------------------------------------------------------------------
14,602.1 15,007.5
Less: accumulated
depreciation and depletion 8,587.5 8,652.4
- ----------------------------------------------------------------------
6,014.6 6,355.1
Construction work in
progress 651.9 722.4
- ----------------------------------------------------------------------
$ 6,666.5 $ 7,077.5
- ----------------------------------------------------------------------
</TABLE>
E. OTHER ASSETS
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------
Investments, principally
equity investments $ 464.7 $ 497.7
Intangibles, net of
accumulated amortization of
$257.5 in 1997 and $310.7
in 1996 607.4 571.1
Noncurrent receivables 83.9 75.5
Deferred income taxes 387.9 478.4
Deferred charges and other 443.3 468.5
- ----------------------------------------------------------------------
$ 1,987.2 $ 2,091.2
- ----------------------------------------------------------------------
</TABLE>
F. OTHER NONCURRENT LIABILITIES AND DEFERRED CREDITS
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------
Deferred hedging gains $ 101.6 $ 218.9
Deferred alumina sales
revenue 235.9 --
On-site environmental
remediation 170.3 216.9
Deferred credits 161.3 181.0
Other noncurrent liabilities 602.1 588.7
- ----------------------------------------------------------------------
$ 1,271.2 $ 1,205.5
- ----------------------------------------------------------------------
</TABLE>
The deferred hedging gains are associated with metal contracts
and will be reflected in future earnings concurrent with
the hedged revenues or costs.
42
G. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------
U.S.
5.75% Notes payable, due
2001 $ 248.8 $ 248.4
Commercial paper, variable
rate, (5.4% average rate) -- 173.6
Bank loans, 7.5 billion
yen, due 1999, (4.4% fixed
rate) 78.0 78.0
Tax-exempt revenue bonds
ranging from 3.5% to 6.6%,
due 2000-2012 130.5 131.1
Alcoa Fujikura Ltd.--
variable-rate term loan,
due 1998-2002 (6.1%
average rate) 250.0 262.5
Alcoa Aluminio
7.5% Fixed-rate note, due
2008 395.2 400.0
Variable-rate notes, due
1998-2001 (6.9% and 7.3%
average rates) 97.3 208.2
Alcoa of Australia
Euro-commercial paper,
variable rate, (5.7% and
5.5% average rates) 225.3 131.0
Other subsidiaries 179.3 235.5
- ----------------------------------------------------------------------
1,604.4 1,868.3
Less: amount due within one
year 147.2 178.5
- ----------------------------------------------------------------------
$ 1,457.2 $ 1,689.8
- ----------------------------------------------------------------------
</TABLE>
The amount of long-term debt maturing in each of the next
five years is $147.2 in 1998, $133.8 in 1999, $82.5 in
2000, $347.5 in 2001 and $347.4 in 2002.
In 1997, Alcoa Fujikura issued a $250 term loan and entered
into a five-year, $250 revolving-credit agreement. The
proceeds of the term loan were used to repay existing
debt. These agreements require Alcoa Fujikura to maintain
certain financial ratios.
In 1996, Alcoa Aluminio issued $400 of export notes. The
agreement requires Aluminio to maintain certain financial
ratios.
Under Alcoa's $1.3 billion revolving-credit facility,
which expires in July 2001, certain levels of consolidated
net worth must be maintained while commercial paper balances
are outstanding.
The commercial paper issued by Alcoa and the Euro-commercial
paper issued by Alcoa of Australia are classified as long-
term debt since they are backed by the revolving-credit
facility noted above.
H. MINORITY INTERESTS
The following table summarizes the minority shareholders'
interests in the equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------
Alcoa of Australia $ 390.7 $ 572.7
Alcoa Aluminio 387.7 362.5
Alcoa Alumina and Chemicals 320.9 376.7
Alcoa Fujikura 182.7 128.6
Other majority-owned
companies 157.7 170.0
- ----------------------------------------------------------------------
$1,439.7 $1,610.5
- ----------------------------------------------------------------------
</TABLE>
I. ACQUISITIONS
Alcoa made various acquisitions during 1996 totaling $302.
They include the purchase of Alumix, Italy's state-owned
integrated aluminum producer, and Alcan's extrusion operations
in Brazil. In 1995, acquisitions totaled $426, which resulted
in goodwill of approximately $250.
All of the acquisitions were accounted for by the purchase
method. Accordingly, the purchase prices were allocated
to assets acquired and liabilities assumed based on their
estimated fair values. Operating results have been included
in the Statement of Consolidated Income since the dates
of the acquisitions. If the acquisitions had been made
at the beginning of the year, net income for the year
would not have been materially different.
J. CASH FLOW INFORMATION
Cash payments for interest and income taxes follow.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Interest $ 145.9 $ 136.4 $ 123.4
Income taxes 342.5 265.8 508.3
- ------------------------------------------------------------------------------
</TABLE>
The details of cash payments related to acquisitions
follow.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Fair value of assets -- $ 365.2 $ 509.5
Liabilities -- 62.4 79.8
- ------------------------------------------------------------------------------
Cash paid -- 302.8 429.7
Less: cash acquired -- .5 3.6
- ------------------------------------------------------------------------------
Net cash paid for
acquisitions -- $ 302.3 $ 426.1
- ------------------------------------------------------------------------------
</TABLE>
K. EARNINGS PER SHARE
Basic earnings per common share (EPS) amounts are computed
by dividing earnings after the deduction of preferred
stock dividends by the average number of common shares
outstanding. Diluted EPS amounts assume the issuance of
common stock for all potentially dilutive equivalents
outstanding. See Note O for additional information.
The details of basic and diluted earnings per common share
follow.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Net income $ 805.1 $ 514.9 $ 790.5
Less: preferred stock
dividends 2.1 2.1 2.1
- ------------------------------------------------------------------------------
Income available to common
stockholders $ 803.0 $ 512.8 $ 788.4
Weighted average shares
outstanding 172,225,796 174,333,524 178,018,083
Basic EPS $ 4.66 $ 2.94 $ 4.43
Effect of dilutive
securities:
Shares issuable upon
exercise of dilutive
outstanding stock
options 1,633,925 1,846,215 1,642,922
- ------------------------------------------------------------------------------
Fully diluted shares
outstanding 173,859,721 176,179,739 179,661,005
Diluted EPS $ 4.62 $ 2.91 $ 4.39
- ------------------------------------------------------------------------------
</TABLE>
L. LEASE EXPENSE
Certain equipment, warehousing and office space and oceangoing
vessels are under operating lease agreements. Total expense
for all leases was $110.9 in 1997, $95.4 in 1996 and $71.9
in 1995. Under long-term operating leases, minimum annual
rentals are $62.1 in 1998, $46.1 in 1999, $31.4 in 2000,
$21.0 in 2001, $10.1 in 2002 and a total of $27.2 for
2003 and thereafter.
43
M. CONTINGENT LIABILITIES
Various lawsuits, claims and proceedings have been or
may be instituted or asserted against Alcoa, including
those pertaining to environmental, product liability,
and safety and health matters. While the amounts claimed
may be substantial, the ultimate liability cannot now
be determined because of the considerable uncertainties
that exist. Therefore, it is possible that results of
operations or liquidity in a particular period could be
materially affected by certain contingencies. However,
based on facts currently available, management believes
that the disposition of matters that are pending or asserted
will not have a materially adverse effect on the financial
position of the company.
N. INTEREST COST COMPONENTS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Amount charged to expense $ 140.9 $ 133.7 $ 119.8
Amount capitalized 9.0 5.3 1.9
- ------------------------------------------------------------------------------
$ 149.9 $ 139.0 $ 121.7
- ------------------------------------------------------------------------------
</TABLE>
O. PREFERRED AND COMMON STOCK
Preferred Stock. Alcoa has two classes of preferred stock.
Serial preferred stock has 557,740 shares authorized,
with a par value of $100 per share and an annual $3.75
cumulative dividend preference per share. Class B serial
preferred stock has 10 million shares authorized (none
issued) and a par value of $1 per share.
Common Stock. There are 300 million shares authorized
at a par value of $1 per share. As of December 31, 1997,
shares of common stock reserved for issuance were:
<TABLE>
<CAPTION>
Number of shares
<S> <C>
- ----------------------------------------------------
Long-term stock incentive
plan 19,447,255
Employees' savings plans 4,097,532
Incentive compensation plan 169,228
- ----------------------------------------------------
</TABLE>
Stock options under the long-term stock incentive plan
have been and may be granted, generally at not less than
market prices on the dates of grant, except for the 50 cents
per-share options issued as a payout of earned performance
share awards. The stock option program includes a reload
or stock continuation ownership feature. Stock options
granted have a maximum term of 10 years. Vesting occurs
one year from the date of grant and six months for options
granted under the reload feature.
Alcoa's net income and earnings per share would have been
reduced to the pro forma amounts shown below if compensation
cost had been determined based on the fair value at the
grant dates.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Net income:
As reported $ 805.1 $ 514.9 $ 790.5
Pro forma 755.5 472.2 756.9
- ------------------------------------------------------------------------------
Basic earnings per share:
As reported 4.66 2.94 4.43
Pro forma 4.37 2.70 4.24
- ------------------------------------------------------------------------------
Diluted earnings per
share:
As reported 4.62 2.91 4.39
Pro forma 4.33 2.67 4.20
- ------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted was
$11.79 per share in 1997, $8.03 per share in 1996 and
$7.62 per share in 1995.
The fair value of each option is estimated on the date
of grant or subsequent reload using the Black-Scholes
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Average risk-free interest
rate 6.1% 5.7% 6.7%
Expected dividend yield 1.3 2.2 1.8
Expected volatility 25.0 25.0 25.0
Expected life (years):
Stock options that are
not reloaded 2.5 3.0 3.0
Stock options that are
reloaded 1.0 1.0 1.0
- ------------------------------------------------------------------------------
</TABLE>
The transactions for shares under options were:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Outstanding, beginning of year:
Number 10,033,942 8,549,643 7,900,090
Weighted average exercise
price $51.73 $43.84 $35.55
Granted:
Number 6,387,807 8,700,677 7,945,977
Weighted average exercise
price $72.14 $56.30 $47.86
Exercised:
Number (5,712,176) (7,161,003) (7,212,081)
Weighted average exercise
price $52.79 $47.90 $44.39
Expired or forfeited:
Number (160,848) (55,375) (84,343)
Weighted average exercise
price $63.39 $51.42 $41.62
- ------------------------------------------------------------------------------
Outstanding, end of year:
Number 10,548,725 10,033,942 8,549,643
Weighted average exercise
price $63.33 $51.73 $43.84
- ------------------------------------------------------------------------------
Exercisable, end of year:
Number 5,205,556 4,346,793 3,063,335
Weighted average exercise
price $53.45 $46.59 $34.14
- ------------------------------------------------------------------------------
Shares reserved for future
options 8,898,530 4,655,935 7,738,143
- ------------------------------------------------------------------------------
</TABLE>
The following tables summarize certain stock option information
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding:
Range of Weighted average Weighted average
exercise price Number remaining life exercise price
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
$ 0.50 173,240 employment career $ 0.50
26.28-39.41 653,693 3.6 34.22
39.42-59.12 1,865,551 6.1 50.31
59.13-88.94 7,856,241 7.0 70.23
- ------------------------------------------------------------------------------
10,548,725 6.5 63.33
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options exercisable:
Weighted average
Range of exercisable
exercise price Number price
<S> <C> <C>
- ------------------------------------------------------------------------------
$ 0.50 173,240 $ 0.50
26.28-39.41 653,693 34.22
39.42-59.12 1,865,551 50.31
59.13-70.31 2,513,072 64.43
- ------------------------------------------------------------------------------
5,205,556 53.45
- ------------------------------------------------------------------------------
</TABLE>
44
P. SEGMENT AND GEOGRAPHIC AREA INFORMATION
Alcoa is the world's leading producer of aluminum and
alumina and a major participant in all segments of the
industry: mining, refining, smelting, fabricating, and
recycling. Alcoa serves customers worldwide in the packaging,
automotive, aerospace, construction and other markets
with a great variety of fabricated and finished products.
Its operations consist of the three segments that follow.
The Alumina and Chemicals segment includes the production
and sale of bauxite, alumina, alumina chemicals and related
transportation services.
The Aluminum Processing segment comprises the production
and sale of molten metal, ingot and aluminum products
that are flat-rolled, engineered or finished. Also included
are power, transportation and other services.
The Nonaluminum Products segment includes the production
and sale of electrical, plastic and composite materials
products, manufacturing equipment, gold, magnesium products
and steel and titanium forgings.
Total exports from the U.S. in 1997 were $1,207, compared
with $1,015 in 1996 and $1,206 in 1995.
<TABLE>
<CAPTION>
SEGMENT INFORMATION 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Sales to customers:
Alumina and chemicals $ 1,960.8 $ 1,939.6 $ 1,757.8
Aluminum processing 8,240.5 7,975.7 8,034.3
Nonaluminum products 3,117.9 3,145.7 2,707.6
Intersegment sales: (1)
Alumina and chemicals 634.0 617.1 540.1
Aluminum processing 14.4 .4 3.7
Nonaluminum products 90.1 81.8 97.6
Eliminations (738.5) (699.3) (641.4)
- ------------------------------------------------------------------------------
Total sales and operating
revenues $ 13,319.2 $ 13,061.0 $ 12,499.7
- ------------------------------------------------------------------------------
Operating profit before special
items:
Alumina and chemicals $ 415.1 $ 459.3 $ 306.9
Aluminum processing 862.5 774.1 1,014.7
Nonaluminum products 197.2 116.6 112.9
- ------------------------------------------------------------------------------
Total $ 1,474.8 $ 1,350.0 $ 1,434.5
- ------------------------------------------------------------------------------
Operating profit after special
items:
Alumina and chemicals $ 416.4 $ 431.1 $ 309.9
Aluminum processing 952.5 711.8 1,001.4
Nonaluminum products 201.4 8.2 107.0
- ------------------------------------------------------------------------------
Total operating profit 1,570.3 1,151.1 1,418.3
Other income 162.5 67.4 155.2
Translation (gain) loss in
operating profit 9.8 (3.1) 16.5
Interest expense (140.9) (133.7) (119.8)
- ------------------------------------------------------------------------------
Income before taxes on income $ 1,601.7 $ 1,081.7 $ 1,470.2
- ------------------------------------------------------------------------------
Identifiable assets:
Alumina and chemicals $ 3,022.5 $ 3,316.3 $ 3,101.9
Aluminum processing 6,578.8 6,691.0 6,621.6
Nonaluminum products 2,098.2 2,328.3 2,335.0
- ------------------------------------------------------------------------------
Total identifiable assets 11,699.5 12,335.6 12,058.5
Investments 464.7 497.7 397.3
Corporate assets (2) 906.4 616.6 1,187.6
- ------------------------------------------------------------------------------
Total assets $ 13,070.6 $ 13,449.9 $ 13,643.4
- ------------------------------------------------------------------------------
Depreciation and depletion:
Alumina and chemicals $ 166.9 $ 165.2 $ 153.8
Aluminum processing 448.3 443.9 442.1
Nonaluminum products 138.4 155.1 134.4
- ------------------------------------------------------------------------------
Total depreciation and
depletion (3) $ 753.6 $ 764.2 $ 730.3
- ------------------------------------------------------------------------------
Capital expenditures:
Alumina and chemicals $ 216.6 $ 314.6 $ 246.8
Aluminum processing 516.1 472.9 399.2
Nonaluminum products 179.7 208.2 241.1
- ------------------------------------------------------------------------------
Total capital expenditures $ 912.4 $ 995.7 $ 887.1
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREA INFORMATION 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Sales to customers:
USA $ 7,189.4 $ 7,245.9 $ 7,042.7
Pacific 2,221.7 2,247.8 1,985.7
Europe 2,089.8 1,841.3 1,691.2
Other Americas 1,818.3 1,726.0 1,780.1
Transfers between geographic
areas: (1)
USA 770.4 790.2 959.2
Pacific 44.1 34.2 37.6
Europe 39.4 18.3 23.3
Other Americas 465.6 361.5 511.4
Eliminations (1,319.5) (1,204.2) (1,531.5)
- ------------------------------------------------------------------------------
Total sales and operating
revenues $ 13,319.2 $ 13,061.0 $ 12,499.7
- ------------------------------------------------------------------------------
Operating profit before special
items:
USA $ 669.1 $ 639.5 $ 593.6
Pacific 482.4 504.7 415.4
Europe 99.5 54.5 92.4
Other Americas 223.8 151.3 333.1
- ------------------------------------------------------------------------------
Total $ 1,474.8 $ 1,350.0 $ 1,434.5
- ------------------------------------------------------------------------------
Operating profit after special
items:
USA $ 699.2 $ 479.3 $ 586.4
Pacific 520.2 491.0 415.4
Europe 93.6 40.7 86.3
Other Americas 257.3 140.1 330.2
- ------------------------------------------------------------------------------
Total operating profit $ 1,570.3 $ 1,151.1 $ 1,418.3
- ------------------------------------------------------------------------------
Identifiable assets:
USA $ 5,969.0 $ 6,401.7 $ 6,398.7
Pacific 2,245.7 2,671.0 2,603.1
Europe 1,404.9 1,204.2 1,053.4
Other Americas 2,079.9 2,058.7 2,003.3
- ------------------------------------------------------------------------------
Total identifiable assets $ 11,699.5 $ 12,335.6 $ 12,058.5
- ------------------------------------------------------------------------------
Capital expenditures:
USA $ 498.4 $ 534.4 $ 439.7
Pacific 130.7 162.9 168.3
Europe 147.6 137.5 93.0
Other Americas 135.7 160.9 186.1
- ------------------------------------------------------------------------------
Total capital expenditures $ 912.4 $ 995.7 $ 887.1
- ------------------------------------------------------------------------------
<FN>
(1) Transfers between segments and geographic areas are based on generally
prevailing market prices.
(2) Corporate assets include: cash and marketable securities of $906.4 in 1997,
$616.6 in 1996 and $1,062.4 in 1995; and a net receivable of $125.2 in 1995
related to the Alcoa/WMC transaction.
(3) Includes depreciation of $18.7 in 1997, $17.0 in 1996 and $17.4 in 1995
reported as research and development expenses in the income statement
</TABLE>
45
Q. FINANCIAL INSTRUMENTS
The carrying values and fair values of Alcoa's financial
instruments at December 31 follow.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE value value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Cash and cash
equivalents $ 800.8 $ 800.8 $ 598.1 $ 598.1
Short-term investments 105.6 105.6 18.5 18.5
Noncurrent receivables 83.9 83.9 75.5 75.5
Investments available
for sale -- -- 68.0 68.0
Short-term debt 494.9 494.9 385.0 385.0
Long-term debt 1,457.2 1,456.3 1,689.8 1,678.0
- ------------------------------------------------------------------------------
</TABLE>
The methods used to estimate the fair values of certain
financial instruments follow.
Cash and Cash Equivalents, Short-Term Investments and
Short-Term Debt. The carrying amounts approximate fair
value because of the short maturity of the instruments.
All investments purchased with a maturity of three months
or less are considered cash equivalents.
Noncurrent Receivables. The fair value of noncurrent receivables
is based on anticipated cash flows and approximates carrying
value.
Investments Available for Sale. The fair value of investments
is determined based on readily available market values.
Investments in marketable equity securities are classified
as "available for sale" and are carried at fair value.
In 1997, Alcoa sold all of its marketable equity securities
for $60, resulting in a gain of $24.7, net of $13.3 in
taxes.
Long-Term Debt. The fair value is based on interest rates
that are currently available to Alcoa for issuance of
debt with similar terms and remaining maturities.
Alcoa holds or purchases derivative financial instruments
for purposes other than trading. Details of the significant
instruments follow.
Foreign Exchange Contracts. The company enters into foreign
exchange contracts to hedge most of its firm and anticipated
purchase and sale commitments denominated in foreign currencies
for periods commensurate with its known or expected exposures.
The contracts generally mature within 12 months and are
principally unsecured foreign exchange contracts with
carefully selected banks. The market risk exposure is
essentially limited to risk related to currency rate movements.
Unrealized gains (losses) on these contracts at December
31, 1997 and 1996 were $(84.9) and $34.8, respectively.
The table below reflects the various types of foreign
exchange contracts Alcoa uses to manage its foreign exchange
risk.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
NOTIONAL MARKET Notional Market
AMOUNT VALUE amount value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Forwards $ 2,235.8 $ (102.7) $ 2,579.5 $ 32.8
Purchased options 232.5 (42.1) 649.9 5.6
Written options 202.1 40.3 390.8 (2.3)
- ------------------------------------------------------------------------------
</TABLE>
The notional values summarized earlier provide an indication
of the extent of the company's involvement in such instruments
but do not represent its exposure to market risk. Alcoa
utilizes written options mainly to offset or close out
purchased options.
The table below summarizes by major currency the contractual
amounts of Alcoa's forward exchange and option contracts
translated to U.S. dollars at December 31 rates. The "buy"
amounts represent the U.S. dollar equivalent of commitments
to purchase foreign currencies and the "sell" amounts
represent the U.S. dollar equivalent of commitments to
sell foreign currencies.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
BUY SELL Buy Sell
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Australian dollar $ 1,492.0 $ 291.3 $ 1,858.7 $ 808.6
Dutch guilder 111.9 18.1 198.8 18.7
Japanese yen 68.2 12.1 93.7 25.2
Deutsche mark 36.5 151.2 63.5 226.0
Pound sterling 62.3 115.3 21.5 74.3
Other 45.2 64.6 45.3 248.9
- ------------------------------------------------------------------------------
$ 1,816.1 $ 652.6 $ 2,281.5 $ 1,401.7
- ------------------------------------------------------------------------------
</TABLE>
Interest Rate Swaps. Alcoa manages its debt portfolio
by using interest rate swaps and options to achieve an
overall desired position of fixed and floating rates.
As of December 31, 1997, Alcoa had outstanding four interest
rate swap contracts maturing in 2001 to convert a fixed-
rate obligation to floating rates on a notional amount
of $175. In addition, Alcoa Fujikura had five outstanding
interest rate swap contracts to convert a floating-rate
obligation to a fixed rate on a notional amount of $238
at year-end 1997.
Alcoa utilizes cross-currency interest rate swaps to take
advantage of international debt markets while limiting
foreign exchange risk. At year-end 1997, Alcoa had in
place foreign currency forward contracts to effectively
convert the principal payment due in 1999 on its Y=7.5
billion loan to a U.S. dollar obligation on a notional
amount of $78. Alcoa also had in place cross-currency
interest rate swaps that effectively convert U.S. dollar-
denominated debt into liabilities in yen based on Japanese
interest rates.
Based on current interest rates for similar transactions,
the fair value of all interest rate swap agreements is
not material.
Credit and market risk exposures are limited to the net
interest differentials. The net payments or receipts from
interest rate swaps are recorded as part of interest expense
and are not material. The effect of interest rate swaps
on Alcoa's composite interest rate on long-term debt was
not material at the end of 1997 or 1996.
Alcoa is exposed to credit loss in the event of nonperformance
by counterparties on the above instruments, but does not
anticipate nonperformance by any of the counterparties.
For further information on Alcoa's hedging and derivatives
activities, see Note A.
46
R. PENSION PLANS
Alcoa maintains pension plans covering most U.S. employees
and certain other employees. Pension benefits generally
depend upon length of service, job grade and remuneration.
Substantially all benefits are paid through pension trusts
that are sufficiently funded to ensure that all plans
can pay benefits to retirees as they become due.
Pension costs include the following components that were
calculated as of January 1 of each year.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Benefits earned $ 95.4 $ 101.7 $ 78.9
Interest accrued on
projected benefit
obligation 304.6 291.0 285.9
Net amortization 38.8 37.8 28.5
- ------------------------------------------------------------------------------
438.8 430.5 393.3
Less: expected return on
plan assets* 346.2 324.1 305.0
- ------------------------------------------------------------------------------
$ 92.6 $ 106.4 $ 88.3
- ------------------------------------------------------------------------------
<FN>
* The actual returns were higher than the expected returns by $681.9 in 1997,
$155.5 in 1996 and $254.1 in 1995, and were deferred as actuarial gains.
</TABLE>
The status of the pension plans follows.
<TABLE>
<CAPTION>
Assets exceed Accumulated
accumulated benefit obligation
benefit obligation exceeds assets
------------------------------------------------------
December 31 1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Plan assets, primarily
stocks and bonds at
market $ 5,074.5 $ 4,327.6 $ 26.3 $ 7.6
- ------------------------------------------------------------------------------
Present value of
obligation:
Vested 3,963.4 3,779.2 169.2 134.5
Nonvested 268.1 292.9 9.8 7.5
- ------------------------------------------------------------------------------
Accumulated benefit
obligation 4,231.5 4,072.1 179.0 142.0
Effect of assumed
salary increases 257.4 283.5 32.4 37.3
- ------------------------------------------------------------------------------
Projected benefit
obligation $ 4,488.9 $ 4,355.6 $ 211.4 $ 179.3
- ------------------------------------------------------------------------------
Plan assets greater
(less) than projected
benefit obligation $ 585.6 $ (28.0) $ (185.1) $ (171.7)
Unrecognized:
Transition (assets)
obligations (2.4) (.8) 6.9 9.2
Prior service costs 114.6 145.0 11.7 16.2
Actuarial (gains)
losses, net (822.6) (272.0) 36.7 32.9
Minimum liability
adjustment -- -- (29.7) (24.9)
- ------------------------------------------------------------------------------
Accrued pension cost $ (124.8) $ (155.8) $ (159.5) $ (138.3)
- ------------------------------------------------------------------------------
</TABLE>
Assumptions used to determine plan liabilities and expenses
follow.
<TABLE>
<CAPTION>
December 31 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Settlement discount rate 6.75% 7.0% 7.0%
Long-term rate for
compensation increases 5.0 5.0 5.0
Long-term rate of return
on plan assets 9.0 9.0 9.0
- ------------------------------------------------------------------------------
</TABLE>
Alcoa also sponsors a number of defined contribution pension
plans. Expenses were $47.2 in 1997, $44.4 in 1996 and
$36.1 in 1995.
S. POSTRETIREMENT BENEFITS
Alcoa maintains health care and life insurance benefit
plans covering most eligible U.S. retired employees and
certain other retirees. Generally, the medical plans pay
a stated percentage of medical expenses, reduced by deductibles
and other coverages. These plans are generally unfunded,
except for certain benefits funded through a trust. Life
benefits are generally provided by insurance contracts.
Alcoa retains the right, subject to existing agreements,
to change or eliminate these benefits.
The components of postretirement benefit expense follow.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Service cost of benefits earned $ 17.8 $ 19.3 $ 16.3
Interest cost on liability 104.7 104.4 114.6
Net amortization (37.6) (44.1) (49.5)
Expected return on plan assets (6.8) (5.8) (4.8)
- ------------------------------------------------------------------------------
Postretirement benefit costs $ 78.1 $ 73.8 $ 76.6
- ------------------------------------------------------------------------------
</TABLE>
The status of the postretirement benefit plans was:
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------
Retirees $ 1,135.7 $ 1,022.6
Fully eligible active plan
participants 200.9 172.6
Other active participants 338.5 364.6
- ------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO) 1,675.1 1,559.8
Plan assets, primarily stocks and
bonds at market 88.3 75.1
- ------------------------------------------------------------------------------
APBO in excess of plan assets 1,586.8 1,484.7
Unrecognized net:
Reduction in prior service costs 185.5 227.4
Actuarial gains 82.3 174.1
- ------------------------------------------------------------------------------
Accrued postretirement benefit
liability $ 1,854.6 $ 1,886.2
- ------------------------------------------------------------------------------
</TABLE>
For measuring the liability and expense, a 7.5% annual
rate of increase in the per capita claims cost was assumed
for 1998, declining gradually to 5.0% by the year 2004
and thereafter. Other assumptions used to measure the
liability and expense follow.
<TABLE>
<CAPTION>
December 31 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Settlement discount rate 6.75% 7.0% 7.0%
Long-term rate for compensation
increases 5.0 5.0 5.0
Long-term rate of return on plan
assets 9.0 9.0 9.0
- ------------------------------------------------------------------------------
</TABLE>
For 1997, a 1% increase in the trend rate for health care
costs would have increased both the APBO and service and
interest costs by 8%.
47
T. INCOME TAXES
The components of income before taxes on income were:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
U.S. $ 707.5 $ 419.0 $ 556.5
Foreign 894.2 662.7 913.7
- ------------------------------------------------------------------------------
$ 1,601.7 $ 1,081.7 $ 1,470.2
- ------------------------------------------------------------------------------
</TABLE>
The provision for taxes on income consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Current:
U.S. federal* $ 172.1 $ 3.5 $ 246.4
Foreign 273.8 217.0 204.0
State and local (.4) 19.9 31.7
- ------------------------------------------------------------------------------
445.5 240.4 482.1
- ------------------------------------------------------------------------------
Deferred:
U.S. federal* 81.7 143.1 (55.3)
Foreign (3.5) (34.8) 34.8
State and local 5.0 12.0 (15.7)
- ------------------------------------------------------------------------------
83.2 120.3 (36.2)
- ------------------------------------------------------------------------------
Total $ 528.7 $ 360.7 $ 445.9
- ------------------------------------------------------------------------------
<FN>
* Includes U.S. taxes related to foreign income
</TABLE>
Deferred taxes in 1995 included charges of $66.5 for utilization
of a U.S. tax loss carryforward and for statutory rate
changes of $21.9 in Australia and $14.4 in Brazil.
Reconciliation of the U.S. federal statutory rate to Alcoa's
effective tax rate follows.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
Taxes on foreign income (.2) (3.0) (5.5)
State taxes net of federal
benefit (.2) 1.7 .6
Tax rate changes -- -- 2.5
Adjustments to prior
years' accruals .1 .3 (1.3)
Other (1.7) (.7) (1.0)
- ------------------------------------------------------------------------------
Effective tax rate 33.0% 33.3% 30.3%
- ------------------------------------------------------------------------------
</TABLE>
The components of net deferred tax assets and liabilities
follow.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
DEFERRED DEFERRED Deferred Deferred
TAX TAX tax tax
December 31 ASSETS LIABILITIES assets liabilities
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Depreciation -- $ 840.4 -- $ 921.5
Employee benefits $ 789.5 -- $ 780.9 --
Loss provisions 186.3 -- 197.1 --
Deferred income 128.9 113.0 176.1 120.6
Tax loss carryforwards 156.0 -- 155.1 --
Tax credit
carryforwards -- -- 48.2 --
Other 72.6 51.1 66.7 39.4
- ------------------------------------------------------------------------------
1,333.3 1,004.5 1,424.1 1,081.5
Valuation allowance (103.5) -- (110.0) --
- ------------------------------------------------------------------------------
$ 1,229.8 $ 1,004.5 $ 1,314.1 $ 1,081.5
- ------------------------------------------------------------------------------
</TABLE>
Of the total tax loss carryforwards, $42.6 expires over
the next 10 years and $113.4 is unlimited. A substantial
portion of the valuation allowance is for these carryforwards
because the ability to utilize a portion of them is uncertain.
The cumulative amount of Alcoa's share of undistributed
earnings for which no deferred taxes have been provided
was $1,389.1 at December 31, 1997. Management has no plans
to distribute such earnings in the foreseeable future.
It is not practical to determine the deferred tax liability
on these earnings.
U. ENVIRONMENTAL MATTERS
Alcoa continues to participate in environmental assessments
and cleanups at a number of locations, including at operating
facilities and adjoining properties, at previously owned
or operated facilities and at Superfund and other waste
sites. A liability is recorded for environmental remediation
costs or damages when a cleanup program becomes probable
and the costs or damages can be reasonably estimated.
See Note A for additional information.
As assessments and cleanups proceed, the liability is
adjusted based on progress in determining the extent of
remedial actions and related costs and damages. The liability
can change substantially due to factors such as the nature
and extent of contamination, changes in remedial requirements
and technological changes.
For example, there are certain matters, including several
related to alleged natural resource damage or alleged
off-site contaminated sediments, where investigations
are ongoing. It is not possible to determine the outcomes
or to estimate with any degree of certainty the ranges
of potential costs for these matters.
Alcoa's remediation reserve balance at the end of 1997
and 1996 was $243 and $271, respectively, and reflects
the most probable costs to remediate identified environmental
conditions for which costs can be reasonably estimated.
About 24% of the 1997 balance relates to Alcoa's Massena,
New York plant site and 23% of the 1997 balance relates
to Alcoa's Pt. Comfort, Texas plant site. Remediation
expenses charged to the reserve were $64 in 1997, $72
in 1996 and $62 in 1995. They include expenditures currently
mandated as well as those not required by any regulatory
authority or third party.
Included in annual operating expenses are the recurring
costs of managing hazardous substances and environmental
programs. These costs are estimated to be about 2% of
cost of goods sold.
V. SUBSEQUENT EVENTS
In January 1998, Alcoa issued $300 of 6.75% bonds due
2028. The net proceeds were used for general corporate
purposes.
On February 6, 1998, Alcoa completed its acquisition of
Inespal, S.A. of Madrid, Spain. Alcoa paid $210 in cash
and assumed $200 of debt in exchange for substantially
all of Inespal's businesses. Inespal is an integrated
aluminum producer with 1997 revenues of $1,100. The acquisition
included an alumina refinery, three aluminum smelters,
three aluminum rolling facilities, two extrusion plants,
an administrative center and related sales offices in
Europe.
48
W. MAJORITY-OWNED SUBSIDIARIES
The condensed financial statements of Alcoa's principal
majority-owned subsidiaries follow.
Alcoa Aluminio S.A.--a 59%-owned subsidiary of Alcoa Brazil
Holdings Company:
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------
Cash and short-term investments $ 305.8 $ 269.1
Other current assets 389.8 441.2
Properties, plants and equipment, net 825.4 897.5
Other assets 233.1 235.0
- ------------------------------------------------------------------------------
Total assets 1,754.1 1,842.8
- ------------------------------------------------------------------------------
Current liabilities 316.8 404.0
Long-term debt 403.2 492.5
Other liabilities 88.5 62.1
- ------------------------------------------------------------------------------
Total liabilities 808.5 958.6
- ------------------------------------------------------------------------------
Net assets $ 945.6 $ 884.2
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Revenues* $ 1,213.4 $ 1,188.1 $ 1,200.1
Costs and expenses (1,108.3) (1,183.5) (1,050.2)
Translation and exchange
adjustments 1.6 (.3) 4.3
Income tax (expense)
benefit 7.6 22.0 (2.3)
- ------------------------------------------------------------------------------
Net income $ 114.3 $ 26.3 $ 151.9
- ------------------------------------------------------------------------------
<FN>
* Revenues from Alcoa were $21.3 in 1997, $12.3 in 1996 and $188.4 in 1995.
The terms of the transactions were established by negotiation between
the parties.
</TABLE>
Alcoa of Australia Limited--a 60%-owned subsidiary of
Alcoa International Holdings Company:
<TABLE>
<CAPTION>
December 31 1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------
Cash and short-term investments $ 9.5 $ 13.9
Other current assets 386.1 522.4
Properties, plants and equipment, net 1,385.9 1,695.4
Other assets 86.2 108.6
- ------------------------------------------------------------------------------
Total assets 1,867.7 2,340.3
- ------------------------------------------------------------------------------
Current liabilities 304.1 341.9
Long-term debt 225.3 131.0
Other liabilities 361.6 435.7
- ------------------------------------------------------------------------------
Total liabilities 891.0 908.6
- ------------------------------------------------------------------------------
Net assets $ 976.7 $ 1,431.7
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Revenues* $ 1,949.3 $ 1,971.5 $ 1,785.0
Costs and expenses (1,486.7) (1,510.3) (1,372.3)
Income tax expense (167.9) (157.7) (164.1)
- ------------------------------------------------------------------------------
Net income $ 294.7 $ 303.5 $ 248.6
- ------------------------------------------------------------------------------
<FN>
* Revenues from Alcoa were $64.1 in 1997, $54.3 in 1996 and $55.4 in 1995. The
terms of the transactions were established by negotiation between the parties.
</TABLE>
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY DATA (UNAUDITED)
(dollars in millions, except per-share amounts)
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH YEAR
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 3,231.1 $ 3,432.0 $ 3,357.5 $ 3,298.6 $ 13,319.2
Income from operations 220.8 276.0 286.4 289.8 1,073.0
Net income* 159.1 207.6 228.1 210.3 805.1
Earnings per share:
Basic .92 1.19 1.32 1.23 4.66
Diluted .91 1.18 1.29 1.21 4.62
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* After special charges (gains) of $1.1, or one cent per basic share, in the
first quarter; $(12.3), or seven cents per basic share, in the third quarter;
and $(32.7), or 19 cents per basic share, in the fourth quarter
</TABLE>
<TABLE>
<CAPTION>
1996 First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 3,149.6 $ 3,413.1 $ 3,240.6 $ 3,257.7 $ 13,061.0
Income from operations 246.2 187.7 104.7 182.4 721.0
Net income* 178.2 132.2 68.4 136.1 514.9
Earnings per share:
Basic 1.01 .76 .39 .78 2.94
Diluted 1.00 .75 .39 .77 2.91
----------------------------------------------------------------------------------------------------------------------------------
<FN>
* After special charges of $40.0, or 23 cents per basic share, in the second
quarter; $65.5, or 38 cents per basic share, in the third quarter; and $16.8,
or 10 cents per basic share, in the fourth quarter
</TABLE>
NUMBER OF EMPLOYEES (UNAUDITED) (at year-end)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Other Americas 36,200 29,800 24,300
U.S. 27,200 28,900 31,600
Europe 11,900 12,500 10,100
Pacific 6,300 5,600 6,000
- ------------------------------------------------------------------------------
81,600 76,800 72,000
- ------------------------------------------------------------------------------
</TABLE>
49
GRAPHICS APPENDIX LIST
<TABLE>
<CAPTION>
Revenues by Segment - page 28
billions of dollars
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Alumina and Chemicals 1.4 1.5 1.8 1.9 2.0
Nonaluminum Products 1.7 1.9 2.7 3.2 3.1
Aluminum Processing 6.0 6.5 8.0 8.0 8.2
--- --- ---- ---- ----
9.1 9.9 12.5 13.1 13.3
Higher volumes for aluminum and alumina more than offset lower
overall prices for these products. Nonaluminum product
revenues fell as improved revenues from automotive electrical
components and plastic closures were offset by the loss of
revenues from divested operations.
</TABLE>
<TABLE>
<CAPTION>
Alumina Production - page 28
thousands of metric tons
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
10,129 10,195 10,578 10,644 11,048
Alumina production rose 4% from 1996 as a capacity expansion
project in the U.S. was completed and Australia returned to
full production. In addition, Alcoa's 1998 alumina production
is sold out.
</TABLE>
<TABLE>
<CAPTION>
Aluminum Product Shipments - page 30
thousands of metric tons
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ingot 841 655 673 901 920
Fabricated Products 1,739 1,896 1,909 1,940 2,036
----- ----- ----- ----- -----
Total 2,580 2,551 2,582 2,841 2,956
===== ===== ===== ===== =====
Shipments of fabricated products in 1997 reached a record
2,036 metric tons, reflecting greater volumes to the
transportation market.
</TABLE>
<TABLE>
<CAPTION>
Alcoa's Realized Ingot Price - page 30
cents per pound
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
$.56 $.64 $.81 $.73 $.75
Alcoa's realized ingot price for 1997 rose 3% from 1996 as
worldwide inventories declined slightly.
</TABLE>
<TABLE>
<CAPTION>
Number of Employees - page 32
in thousands at year-end
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaluminum 14.1 17.3 26.7 33.8 39.7
Alumina and Aluminum 49.3 42.9 45.3 43.0 41.9
---- ---- ---- ---- ----
Total 63.4 60.2 72.0 76.8 81.6
===== ==== ==== ==== ====
Growth in the automotive electrical components business
resulted in the hiring of nearly 7,000 additional employees
in 1997.
</TABLE>
<TABLE>
<CAPTION>
U.S. Exports - page 32 1993 1994 1995 1996 1997
(millions of dollars) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
896 988 1,206 1,015 1,207
Higher shipments of automotive electrical components and
rigid container sheet lead the rebound in export sales.
</TABLE>
<TABLE>
<CAPTION>
Cash From Operations - page 34
millions of dollars
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
535 1,394 1,713 1,279 1,888
The 48% increase in cash from operations in 1997 was due to
higher earnings, a $240 cash receipt from a long-term
alumina supply contract and better management of working
capital.
</TABLE>
<TABLE>
<CAPTION>
Debt as a Percent of Invested Capital - page 34
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
22.0 15.3 16.7 21.8 19.9
The decline in debt as a percent of invested capital was
primarily due to the 14% reduction in long-term debt in 1997
relative to 1996.
</TABLE>
<TABLE>
<CAPTION>
Free Cash Flow to Debt Coverage - page 35
times covered
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
.62 1.09 1.12 .79 1.13
The free cash flow to debt ratio improved significantly in
1997 due to better results and lower levels of
long-term debt.
</TABLE>
<TABLE>
<CAPTION>
Capital Expenditures and Depreciation - page 35
millions of dollars
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capital Expenditures 757 612 887 996 912
Depreciation 693 671 713 747 735
Capital expenditures for 1997 included a new automotive sheet
facility, expansions to forged wheel facilities in Cleveland
and Hungary and the construction of the new Alcoa Corporate
Center.
</TABLE>
<TABLE>
<CAPTION>
Employees by Geographic Area - page 49
1997: 81,600*
<S> <C>
Other Americas 44
U.S. 33
Europe 15
Pacific 8
*At year-end
</TABLE>
<TABLE>
<CAPTION>
Market Value of Common Stock* - page 61
billions of dollars
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
6.1 7.7 9.3 11.0 11.8
*Based on closing price and shares outstanding at year-end.
</TABLE>
<TABLE>
<CAPTION>
Dividends Paid per Common Share* - page 61
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Base .80 .80 .90 .90 .975
Bonus - - - .43 -
--- --- --- ---- ----
.80 .80 .90 1.33 .975
*Adjusted to reflect 2-for-1 stock split in February 1995.
</TABLE>
Stock Listing - page 61
Common: New York Stock Exchange, The Electronical Stock
Exchange in Switzerland and exchanges in Brussels, Frankfurt
and London
Preferred: American Stock Exchange Ticker Symbol: AA
<TABLE>
<CAPTION>
Quarterly Common Stock Information - page 61
1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter High Low Dividend High Low Dividend
First $76-1/4 $64-1/4 $.225 $64-3/8 $48-1/8 $.3325
Second 79-1/4 65-1/4 .250 66-1/4 57 .3325
Third 89-5/8 75-1/8 .250 64-1/8 55-1/8 .3325
Fourth 83-15/16 66 .250 64-3/4 55-3/4 .3325
- ---------------------------------------------------------------------------
Year $89-5/8 $64-1/4 $.975 $66-1/4 $49-1/8 $1.33
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Share Data - page 61
Estimated number Average shares
of Shareholders* Outstanding (000)
- --------------------------------------------------------------
<S> <C> <C>
1997 95,800 172,226
1996 88,300 174,334
1995 83,600 178,018
1994 55,200 177,882
1993 55,300 175,346
- --------------------------------------------------------------
*These estimates include Shareholders who own stock registered
in their own names and those who own stock through banks and
brokers.
</TABLE>
Exhibit 21
SUBSIDIARIES AND EQUITY ENTITIES OF THE REGISTRANT
(As of December 31, 1997)
<TABLE>
<CAPTION>
State or
country of
Name organization
<S> <C>
Alcoa Alumina & Chemicals, L.L.C.* Delaware
Alcoa ACC Industrial Chemicals Ltd. India
Alcoa Kasei Limited Japan
Alcoa Minerals of Jamaica, Inc., L.L.C. Delaware
Alcoa Steamship Company, Inc. New York
Halco (Mining) Inc. Delaware
Compagnie des Bauxites de Guinee Delaware
Lib-Ore Steamship Company, Inc. Liberia
Moralco Limited Japan
St. Croix Alumina, L.L.C. Delaware
Suriname Aluminum Company, L.L.C. Delaware
Alcoa Brazil Holdings Company Delaware
Alcoa Aluminio S.A. Brazil
Alcoa Building Products, Inc.** Ohio
Alcoa Closure Systems International, Inc. Delaware
Alcoa Generating Corporation Indiana
Alcoa International Holdings Company Delaware
Alcoa Inter-America, Inc. Delaware
Alcoa Japan Limited Japan
Alcoa-Kofem Kft Hungary
Alcoa Nederland Holding B.V. Netherlands
Alcoa International, S.A. Switzerland
Alcoa Italia S.p.A. Italy
Alcoa Nederland B.V. Netherlands
Norsk Alcoa A/S Norway
Alcoa of Australia Limited Australia
A.F.P. Pty. Limited Australia
Hedges Gold Pty. Ltd. Australia
Alcoa of Australia (Asia) Limited Hong Kong
Alcoa Russia, Inc. Delaware
Asian-American Packaging Systems Co., Ltd. China
Kobe Alcoa Transportation Products, Ltd. Japan
Unified Accord SDN. BHD. Malaysia
<FN>
* Registered to do business in California, Florida, Georgia,
Louisiana, North Carolina, Pennsylvania and Texas under the name
of Alcoa Industrial Chemicals.
**Registered to do business in Ohio under the name of Mastic.
</TABLE>
<TABLE>
<CAPTION>
State or
country of
Name organization
<S> <C>
Alcoa Laudel, Inc. Delaware
Alcoa Manufacturing (G.B.) Limited England
Alcoa Properties, Inc. Delaware
Alcoa South Carolina, Inc. Delaware
Alcoa Recycling Company, Inc. Delaware
Alcoa Securities Corporation Delaware
Alcoa Automotive Structures, Inc. Delaware
Alcoa Brite Products, Inc. Delaware
Alcoa Fujikura Ltd. Delaware
Stribel GmbH Germany
Michels GmbH Germany
Alcoa Kobe Transportation Products, Inc. Delaware
Alcoa Nederland Finance B.V. Netherlands
Alcoa Automotive Structures GmbH Germany
Alcoa Chemie GmbH Germany
Alcoa Deutschland GmbH Germany
Alcoa Extrusions Hannover GmbH & Co. KG Germany
Alcoa Chemie Nederland B.V. Netherlands
Alcoa Moerdijk B.V. Netherlands
Alcoa Packaging Machinery, Inc. Delaware
ASC Alumina, Inc. Delaware
B & C Research, Inc. Ohio
Halethorpe Extrusions, Inc. Delaware
H-C Industries de Mexico, S.A. de C.V. Mexico
Northwest Alloys, Inc. Delaware
Pimalco, Inc. Arizona
Three Rivers Insurance Company Vermont
Tifton Aluminum Company, Inc. Delaware
Alcoa (Shanghai) Aluminum Products Company Limited China
Capsulas Metalicas, S.A. Spain
Gulf Closures W.L.L. Bahrain
Shibazaki Seisakusho Limited Japan
Tapoco, Inc. Tennessee
Yadkin, Inc. North Carolina
</TABLE>
The names of certain subsidiaries and equity entities which,
considered in the aggregate, would not constitute a significant
subsidiary, have been omitted from the above list.
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Aluminum Company of America on Form
S-8 (Registration Nos. 33-22346, 33-24846, 33-49109, 33-60305,
333-00033 and 333-27903) and Form S-3 (Registration Nos.
33-60045 and 33-64353) of our reports dated January 8, 1998,
except for Note V, for which the date is February 6, 1998, on
our audits of the consolidated financial statements and
financial statement schedule of Aluminum Company of America and
consolidated subsidiaries as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31,
1997, which reports are incorporated by reference or included
in this Form 10-K.
/s/Coopers & Lybrand L.L.P
COOPERS & LYBRAND L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
March 9, 1998
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned
Directors of Aluminum Company of America (the "Company") hereby
constitute and appoint RICHARD B. KELSON, ROBERT G. WENNEMER,
EARNEST J. EDWARDS and DENIS A. DEMBLOWSKI, or any of them,
their true and lawful attorneys and agents to do any and all
acts and things and execute any and all instruments which said
attorneys and agents, or any of them, may deem necessary or
advisable or may be required to enable the Company to comply
with the Securities Exchange Act of 1934, as amended, and any
rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the
registration under said Act of the Company's Annual Report on
Form 10-K for 1997, including specifically, but without limiting
the generality of the foregoing, power and authority to sign the
name of the undersigned Directors of the Company to the
Company's Annual Report on Form 10-K for 1997 to be filed with
the Securities and Exchange Commission and to any instruments or
documents filed as part of or in connection with any such Form
10-K; and the undersigned hereby ratify and confirm all that
said attorneys and agents, or any of them, shall do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have subscribed these
presents on the date set opposite their names below.
/s/Kenneth W. Dam January 9, 1998
Kenneth W. Dam
/s/Joesph T. Gorman January 9, 1998
Joesph T. Gorman
/s/Judith M. Gueron January 9, 1998
Judith M. Gueron
/s/Sir Ronald Hampel January 9, 1998
Sir Ronald Hampel
/s/John P. Mulroney January 9, 1998
John P. Mulroney
/s/Sir Arvi Parbo January 9, 1998
Sir Arvi Parbo
/s/Henry B. Schacht January 9, 1998
Henry B. Schacht
/s/Forrest N. Shumway January 9, 1998
Forrest N. Shumway
/s/Franklin A. Thomas January 9, 1998
Franklin A. Thomas
/s/Marina v.N. Whitman January 9, 1998
Marina v.N. Whitman
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 800,800
<SECURITIES> 105,600
<RECEIVABLES> 1,581,200
<ALLOWANCES> 36,600
<INVENTORY> 1,312,600
<CURRENT-ASSETS> 4,416,900
<PP&E> 15,254,000
<DEPRECIATION> 8,587,500
<TOTAL-ASSETS> 13,070,600
<CURRENT-LIABILITIES> 2,452,500
<BONDS> 1,604,400
178,900
0
<COMMON> 55,800
<OTHER-SE> 4,184,700
<TOTAL-LIABILITY-AND-EQUITY> 13,070,600
<SALES> 13,319,200
<TOTAL-REVENUES> 13,481,700
<CGS> 10,155,800
<TOTAL-COSTS> 10,155,800
<OTHER-EXPENSES> 734,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,900
<INCOME-PRETAX> 1,601,700
<INCOME-TAX> 528,700
<INCOME-CONTINUING> 805,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805,100
<EPS-PRIMARY> 4.66
<EPS-DILUTED> 4.62
</TABLE>
