FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999 Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 412-553-3042
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
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
As of July 21, 1999, 366,666,479 shares of common stock, par
value $1.00, of the Registrant were outstanding.
A07-15910
-1-
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
June 30 December 31
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents (includes cash of $109.6 in
1999 and $131.1 in 1998) $ 242.7 $ 342.2
Short-term investments 63.7 39.4
Receivables from customers, less allowances:
1999-$60.7; 1998-$61.4 2,105.9 2,163.2
Other receivables 154.2 171.0
Inventories (B) 1,631.1 1,880.5
Deferred income taxes 197.2 198.0
Prepaid expenses and other current assets 239.7 230.8
--------- ---------
Total current assets 4,634.5 5,025.1
--------- ---------
Properties, plants and equipment, at cost 18,535.2 18,224.5
Less, accumulated depreciation, depletion and
amortization 9,391.9 9,091.0
--------- ---------
Net properties, plants and equipment 9,143.3 9,133.5
Goodwill, net of accumulated amortization of $206.1 in --------- ---------
1999 and $179.3 in 1998 1,371.7 1,414.1
Other assets 1,948.9 1,889.8
--------- ---------
Total assets $17,098.4 $17,462.5
========= =========
LIABILITIES
Current liabilities:
Short-term borrowings $ 428.5 $ 431.0
Accounts payable, trade 1,095.1 1,044.3
Accrued compensation and retirement costs 530.9 553.2
Taxes, including taxes on income 320.2 431.3
Other current liabilities 468.3 627.4
Long-term debt due within one year 134.6 181.1
--------- ---------
Total current liabilities 2,977.6 3,268.3
--------- ---------
Long-term debt, less amount due within one year (C) 2,807.6 2,877.0
Accrued postretirement benefits 1,768.4 1,840.1
Other noncurrent liabilities and deferred credits 1,627.2 1,587.1
Deferred income taxes 339.6 358.1
--------- ---------
Total liabilities 9,520.4 9,930.6
--------- ---------
MINORITY INTERESTS 1,486.6 1,476.0
--------- ---------
CONTINGENT LIABILITIES (D) - -
SHAREHOLDERS' EQUITY
Preferred stock 55.8 55.8
Common stock 394.7 394.7
Additional capital 1,670.1 1,675.9
Retained earnings 5,607.3 5,305.1
Treasury stock, at cost (1,190.1) (1,028.7)
Accumulated other comprehensive loss (E) (446.4) (346.9)
--------- ---------
Total shareholders' equity 6,091.4 6,055.9
--------- ---------
Total liabilities and shareholders' equity $17,098.4 $17,462.5
========= =========
The accompanying notes are an integral part of the financial
statements.
</TABLE>
-2-
<TABLE>
<CAPTION>
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Second quarter Six months
ended ended
June 30 June 30
--------- ---------
1999 1998 1999 1998
REVENUES ---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $4,032.7 $3,587.0 $8,017.4 $7,032.1
Other income 42.8 18.3 39.2 46.4
------- ------- ------- -------
4,075.5 3,605.3 8,056.6 7,078.5
------- ------- ------- -------
COSTS AND EXPENSES
Cost of goods sold 3,140.4 2,787.5 6,268.0 5,434.9
Selling, general administrative and other
expenses 202.9 156.7 394.5 313.4
Research and development expenses 30.4 27.9 57.8 52.4
Provision for depreciation, depletion and
amortization 220.7 186.1 439.4 370.9
Interest expense 49.5 41.8 102.1 81.0
------- ------- ------- -------
3,643.9 3,200.0 7,261.8 6,252.6
------- ------- ------- -------
EARNINGS
Income before taxes on income 431.6 405.3 794.8 825.9
Provision for taxes on income (F) 138.1 135.8 254.3 276.7
------- ------- ------- -------
Income from operations 293.5 269.5 540.5 549.2
Less: Minority interests' share (53.5) (62.4) (79.4) (132.2)
------- ------- ------- -------
NET INCOME $ 240.0 $ 207.1 $ 461.1 $ 417.0
======= ======= ======= =======
EARNINGS PER SHARE (G)
Basic $ .65 $ .62 $ 1.25 $ 1.25
======= ======= ======= =======
Diluted $ .64 $ .62 $ 1.23 $ 1.24
======= ======= ======= =======
Dividends paid per common share $ .20125 $ .1875 $ .4025 $ .375
======= ======= ======= =======
The accompanying notes are an integral part of the financial
statements.
</TABLE>
-3-
<TABLE>
<CAPTION>
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Six months ended
June 30
-------
1999 1998
--------- ---------
<S> <C> <C>
CASH FROM OPERATIONS
Net income $ 461.1 $ 417.0
Adjustments to reconcile net income to cash from
operations:
Depreciation, depletion and amortization 431.4 377.5
Increase (reduction) in deferred income taxes (10.1) (1.0)
Equity income before additional taxes, net of dividends (7.3) (1.5)
Book value of asset disposals 9.5 18.4
Minority interests 79.4 132.2
Other (1.3) 1.2
Changes in assets and liabilities, excluding the effects
of acquisitions and divestitures:
Reduction (increase) in receivables 43.0 (132.4)
Reduction in inventories 233.7 87.0
Reduction in prepaid expenses and other current assets 11.6 23.5
Reduction in accounts payable and accrued expenses (141.6) (23.3)
Reduction in taxes, including taxes on income (64.7) (9.0)
(Reduction) increase in deferred hedging gains (45.3) 6.1
Net change in noncurrent assets and liabilities (87.5) 25.3
-------- --------
CASH FROM OPERATIONS 911.9 921.0
-------- --------
FINANCING ACTIVITIES
Net changes in short-term borrowings (7.6) (40.8)
Common stock issued and treasury stock sold 427.3 23.8
Repurchase of common stock (603.3) (293.5)
Dividends paid to shareholders (148.6) (126.0)
Dividends paid and return of capital to minority interests (61.9) (117.1)
Net change in commercial paper (70.3) 643.8
Additions to long-term debt 216.4 815.3
Payments on long-term debt (282.6) (97.8)
-------- --------
CASH (USED FOR) FROM FINANCING ACTIVITIES (530.6) 807.7
-------- --------
INVESTING ACTIVITIES
Capital expenditures (387.7) (366.5)
Acquisitions, net of cash acquired (15.9) (1,352.7)
Proceeds from the sale of assets 30.9 -
Additions to investments (68.1) (37.9)
Net change in short-term investments (24.2) 30.9
Changes in minority interests (4.5) 39.8
Other (6.8) (8.1)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (476.3) (1,694.5)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4.5) (.8)
-------- --------
CHANGES IN CASH
Net change in cash and cash equivalents (99.5) 33.4
Cash and cash equivalents at beginning of year 342.2 800.8
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 242.7 $ 834.2
======== ========
The accompanying notes are an integral part of the financial
statements.
</TABLE>
-4-
Notes to Condensed Consolidated Financial Statements
(in millions)
A. Common Stock Split - On January 8, 1999, the board of
directors declared a two-for-one common stock split, which was
distributed on February 25, 1999 to shareholders of record at
the close of business on February 8, 1999. In this report, all
per-share amounts and number of shares have been restated to
reflect the stock split.
B. Inventories
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
-------------- -------------
<S> <C> <C>
Finished goods $ 394.3 $ 418.2
Work in process 552.1 591.7
Bauxite and alumina 297.2 346.5
Purchased raw materials 232.0 361.1
Operating supplies 155.5 163.0
------- -------
$1,631.1 $1,880.5
======= =======
</TABLE>
Approximately 56% of total inventories at June 30, 1999
were valued on a LIFO basis. If valued on an average cost
basis, total inventories would have been $705.6 and $702.8
higher at June 30, 1999 and December 31, 1998, respectively.
C. Long-Term Debt - In 1998, Alcoa issued $300 of thirty-year
6.75% bonds due 2028, $250 of 6.5% term debt due in 2018 and
$200 of 6.125% term debt due in 2005. Alcoa also issued $1,100
of commercial paper, a portion of which has since been repaid.
The proceeds from these borrowings were used to fund
acquisitions and for general corporate purposes.
D. 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.
Alcoa Aluminio (Aluminio) is currently party to a
hydroelectric construction project in Brazil. Total
estimated construction costs are $600, of which the
company's share is 24%. In the event that other
participants in this project fail to fulfill their financial
responsibilities, Aluminio may be liable for its pro rata
share of the deficiency.
Alcoa of Australia (AofA) is party to a number of
natural gas and electricity contracts that expire between
2001 and 2022. Under these take-or-pay contracts, AofA is
obligated to pay for a minimum amount of natural gas or
electricity even if these commodities are not required for
operations. Commitments related to these contracts total
$163 in 1999, $166 in 2000, $162 in 2001, $158 in 2002, $156
in 2003 and $2,125 thereafter. Expenditures under these
contracts totaled $171 in 1998.
E. Comprehensive Income
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $240.0 $207.1 $461.1 $417.0
Other comprehensive loss (10.6) (32.5) (99.5) (46.6)
----- ----- ----- -----
Comprehensive income $229.4 $174.6 $361.6 $370.4
===== ===== ===== =====
</TABLE>
-5-
F. Income Taxes - The income tax provision for the period is
based on the effective tax rate expected to be applicable for
the full year. The 1999 second quarter rate of 32% differs
from the statutory rate primarily because of lower taxes on
foreign income.
G. Earnings Per Share - Basic earnings per share (EPS) amounts
are computed by dividing earnings applicable to common
shareholders by the average number of common shares
outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding.
Anti-dilutive outstanding stock options have been excluded from
the diluted EPS calculation. The detail of basic and diluted
EPS follow:
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $240.0 $207.1 $461.1 $417.0
Less: Preferred stock dividends .5 .5 1.0 1.0
----- ----- ----- -----
Income available to common $239.5 $206.6 $460.1 $416.0
stockholders
Weighted average shares outstanding 367.1 332.2 367.1 334.0
Basic EPS $ .65 $ .62 $ 1.25 $ 1.25
====== ====== ====== ======
Effect of dilutive securities:
Add: Shares issuable upon exercise
of outstanding stock options 4.2 2.0 6.9 2.0
Diluted shares outstanding 371.3 334.2 374.0 336.0
Diluted EPS $ .64 $ .62 $ 1.23 $ 1.24
====== ====== ====== ======
</TABLE>
H. Acquisitions - In February 1998, Alcoa acquired Inespal,
S.A. of Madrid, Spain. Alcoa paid approximately $150 in cash
and assumed $260 of debt and liabilities in exchange for
substantially all of Inespal's businesses. The acquisition
included an alumina refinery, three aluminum smelters, three
aluminum rolling facilities, two extrusion plants and an
administrative center.
In July 1998, Alcoa completed its acquisition of Alumax
Inc. (Alumax) for a total consideration of approximately
$3,800. The purchase price consisted of cash of approximately
$1,500, stock of approximately $1,300 and assumed debt of
approximately $1,000. Alumax operates a number of
manufacturing facilities in 22 states, Canada, Western Europe
and Mexico.
Alcoa's acquisitions have been accounted for using the
purchase method. The purchase price has been allocated to the
assets acquired and liabilities assumed based on their
estimated fair market values. Any excess purchase price over
the fair market value of the net assets acquired has been
recorded as goodwill.
The following presents pro forma information assuming that the
acquisition of 100% of Alumax by Alcoa had occurred at the
beginning of 1998. Adjustments that have been included to
arrive at the pro forma totals primarily include those related
to acquisition financing, the amortization of goodwill, the
elimination of transactions between Alcoa and Alumax and
additional depreciation related to the increase in basis that
resulted from the transaction. Tax effects from the pro forma
adjustments noted above also have been included at the 35%
statutory rate.
<TABLE>
<CAPTION>
Six months
ended
June 30, 1998
-------------
<S> <C>
Sales $8,477.4
Net income 455.6
Basic earnings per share 1.23
Diluted earnings per share 1.22
</TABLE>
-6-
The pro forma results are not necessarily indicative of what
actually would have occurred if the transaction had been in
effect for the entire periods presented, are not intended to be
a projection of future results and do not reflect any cost
savings that might be achieved from the combined operations.
I. Recently Issued Accounting Standards - In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities."
The standard requires that entities value all derivative
instruments at fair value and record the instruments on the
balance sheet. The standard also significantly changes the
requirements for hedge accounting. In June 1999, the FASB
approved a delay in the effective date of this standard until
January 2001. The Company believes that the adoption of the
standard will have a material impact on its financial statements.
Upon adoption, Alcoa's aluminum, foreign exchange and interest
rate derivative contracts, as well as certain underlying
exposures, will be recorded on the balance sheet at fair value.
Management is currently assessing the details of the standard and
is preparing a plan of implementation.
J. Reclassifications - Certain amounts have been reclassified to
conform to current year presentation.
K. Segment Information - Alcoa is primarily a producer of
aluminum products. Its segments are organized by product on a
worldwide basis. Alcoa's management reporting system evaluates
performance based on a number of factors; however, the primary
measure of performance is the after-tax operating income (ATOI)
of each segment. Nonoperating items such as interest income,
interest expense, foreign exchange gains/losses and minority
interest are excluded from segment profit. In addition, certain
expenses such as corporate general administrative expenses,
depreciation and amortization on corporate assets and certain
special items are not included in segment results.
Alcoa's products are used primarily by transportation (including
aerospace, automotive, rail and shipping), packaging, building
and construction, and industrial customers worldwide. Alcoa's
reportable segments include Alumina and chemicals, Primary
metals, Flat-rolled products and Engineered products. Businesses
that do not fall into these categories are listed as Other. The
following details sales and ATOI for each reportable segment for
the three-month and six-month periods ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Second quarter ended Alumina and Primary Flat-rolled Engineered
June 30, 1999 chemicals metals products products Other Total
<S> <C> <C> <C> <C> <C> <C>
Sales:
Third-party sales $455.8 $ 518.6 $1,257.6 $939.3 $861.1 $4,032.4
Intersegment sales 220.7 675.4 10.9 3.4 - 910.4
----- ------- ------- ----- ----- -------
Total sales $676.5 $1,194.0 $1,268.5 $942.7 $861.1 $4,942.8
===== ======= ======= ===== ===== =======
After-tax operating
income $ 61.7 $ 96.5 $ 72.3 $ 60.5 $ 70.2 $ 361.2
Second quarter ended
June 30, 1998
Sales:
Third-party sales $484.7 $ 467.8 $1,177.3 $612.7 $842.5 $3,585.0
Intersegment sales 185.8 555.2 14.9 2.6 - 758.5
----- ------- ------- ----- ----- -------
Total sales $670.5 $1,023.0 $1,192.2 $615.3 $842.5 $4,343.5
===== ======= ======= ===== ===== =======
After-tax operating
income $ 92.5 $ 74.3 $ 81.2 $ 40.8 $ 48.5 $ 337.3
</TABLE>
-7-
<TABLE>
<CAPTION>
Second quarter ended Alumina and Primary Flat-rolled Engineered
June 30, 1999 chemicals metals products products Other Total
<S> <C> <C> <C> <C> <C> <C>
Sales:
Third-party sales $ 876.1 $1,052.3 $2,527.2 $1,881.6 $1,673.9 $8,011.1
Intersegment sales 451.9 1,338.3 25.5 6.9 - 1,822.6
------- ------- ------- ------- ------- -------
Total sales $1,328.0 $2,390.6 $2,552.7 $1,888.5 $1,673.9 $9,833.7
======= ======= ======= ======= ======= =======
After-tax operating
income $ 121.4 $ 161.9 $ 137.5 $ 105.8 $ 97.8 $ 624.4
Six months ended
June 30, 1998
Sales:
Third-party sales $ 996.1 $ 879.0 $2,299.8 $1,163.2 $1,690.1 $7,028.2
Intersegment sales 331.8 1,027.3 31.3 5.1 - 1,395.5
------- ------- ------- ------- ------- -------
Total sales $1,327.9 $1,906.3 $2,331.1 $1,168.3 $1,690.1 $8,423.7
======= ======= ======= ======= ======= =======
After-tax operating
income $ 191.4 $ 158.0 $ 163.0 $ 80.6 $ 87.6 $ 680.6
</TABLE>
The following table reconciles Alcoa's measure of segment profit
to consolidated net income.
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total after-tax operating income $361.2 $337.3 $624.4 $680.6
Elimination of intersegment (profit) loss (9.7) (8.0) (19.1) (12.0)
Unallocated amounts (net of tax):
Interest income 8.4 17.6 13.2 38.1
Interest expense (32.2) (27.2) (66.3) (52.7)
Minority interest (53.5) (62.4) (79.4) (132.2)
Mark-to-market gains (losses) 6.3 (21.1) 6.0 (40.9)
Corporate expense (41.2) (35.0) (76.9) (78.5)
Other (1) .7 5.9 59.2 14.6
------ ------ ------ ------
Consolidated net income $240.0 $207.1 $461.1 $417.0
====== ====== ====== ======
<FN>
(1) Other is comprised of differences between segment and corporate taxes, the
results of internal hedging contracts between corporate and the segments,
external hedging gains and losses, LIFO charges and credits and other
miscellaneous items.
</TABLE>
L. Foreign Currency - Effective July 1, 1999, the Brazilian Real
became the functional currency for translating the financial
statements of Alcoa's 59%-owned Brazilian subsidiary, Alcoa
Aluminio. Economic factors and circumstances related to
Aluminio's operations have changed significantly since the
devaluation of the Real in the 1999 first quarter. Under SFAS
52, Foreign Currency Translation, the change in these facts and
circumstances requires a change to Aluminio's functional
currency.
As a result of the change, at July 1, 1999, Alcoa's shareholders'
equity and minority interests accounts were reduced by $156 and
$108, respectively. These amounts were driven principally by a
reduction in fixed assets.
One of the factors affecting the change in Aluminio's functional
currency was Alcoa's recent purchase of approximately $185 of
Aluminio's 7.5% secured export notes. The repurchase of these
notes is consistent with Alcoa's recent policy change regarding
the manner in which large subsidiaries are capitalized, and will
result in lower overall financing costs to the company.
-8-
- -------------------
In the opinion of the Company, the financial statements
and summarized financial data in this Form 10-Q report
include all adjustments, including those of a normal
recurring nature, necessary to fairly state the results
for the periods. This Form 10-Q report should be read
in conjunction with the Company's annual report on Form
10-K for the year ended December 31, 1998.
The financial information required in this Form 10-Q by
Rule 10-01 of Regulation S-X has been subject to a
review by PricewaterhouseCoopers LLP, the Company's
independent certified public accountants, as described
in their report on page 10.
-9-
Independent Accountant's Review Report
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
We have reviewed the unaudited condensed consolidated
balance sheet of Alcoa and subsidiaries as of June 30,
1999, the unaudited condensed statements of consolidated
income for the three-month and six-month periods ended
June 30, 1999 and 1998, and the unaudited condensed
statement of consolidated cash flows for the six-month
periods ended June 30, 1999 and 1998, which are included
in Alcoa's Form 10-Q for the period ended June 30, 1999.
These financial statements are the responsibility of
Alcoa's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed
consolidated financial statements referred to above for
them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with
generally accepted auditing standards, the consolidated
balance sheet of Alcoa and subsidiaries as of December 31,
1998, and the related statements of consolidated income,
shareholders' equity, and cash flows for the year then
ended (not presented herein). In our report dated
January 8, 1999, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
July 7, 1999
-10-
Management's Discussion and Analysis of the
Results of Operations and Financial Condition
(dollars in millions, except share amounts and ingot prices;
shipments in thousands of metric tons (mt))
<TABLE>
<CAPTION>
Results of Operations
Principal income and operating data follow.
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $4,032.7 $3,587.0 $8,017.4 $7,032.1
Net income 240.0 207.1 461.1 417.0
Basic earnings per common share .65 .62 1.25 1.25
Diluted earnings per common share .64 .62 1.23 1.24
Shipments of aluminum products 1,117 866 2,249 1,644
Shipments of alumina 1,836 1,888 3,500 3,811
Alcoa's average realized ingot price .64 .67 .63 .70
</TABLE>
Earnings Summary
Alcoa reported 1999 second quarter net income of $240.0, a 16%
increase from the 1998 second quarter. The increase was due
primarily to higher shipments, which were fueled by acquisitions,
partly offset by lower prices. Cost reductions partly offset the
impact of lower prices on margins. For the year-to-date period,
net income rose 11% to $461.1. Again, higher shipments and lower
operating costs, partly offset by lower overall prices, generated
the increase.
Revenues in the 1999 quarter rose 12% to $4 billion, and
increased 14% from the 1998 six-month period to $8 billion. The
increase in revenues for both periods was due to higher aluminum
shipments, offset in part by lower overall aluminum prices.
Alumina shipments fell 8% from the 1998 six-month period as
shipments to Alumax, which were classified as third-party sales
before the acquisition, are now intersegment shipments.
Annualized return on shareholders' equity was 14.8% for the 1999
quarter, compared with 18.3% in the 1998 quarter. The decline is
due to higher shareholders' equity balances in 1999, resulting
primarily from the Alumax acquisition in 1998, partially offset
by higher earnings.
Segment Information
I. Alumina and Chemicals
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Third-party alumina shipments 1,836 1,888 3,500 3,811
Third-party sales $455.8 $484.7 $ 876.1 $996.1
Intersegment sales 220.7 185.8 451.9 331.8
----- ----- ----- -----
Total sales $676.5 $670.5 $1,328.0 $1,327.9
===== ===== ======= =======
After-tax operating income $ 61.7 $ 92.5 $ 121.4 $ 191.4
</TABLE>
This segment's activities include the mining of bauxite, which is
then refined into alumina. The alumina is sold to internal and
external customers worldwide or is processed into industrial
chemical products. A majority of the third-party sales from this
segment are derived from alumina. While total sales were nearly
unchanged, third-party sales for this segment decreased 12% from
the 1998 six-month period, while intersegment sales rose 36%
during the same period. The primary reason for the drop in third-
party sales and the increase in intersegment sales is the Alumax
acquisition. Prior to the acquisition, Alumax was an alumina
customer of Alcoa. Accordingly, shipments to Alumax smelters
were recorded as third-party sales. These same sales are
-11-
now recorded as intersegment. Without the effects of the Alumax
acquisition, third-party alumina shipments were up 9% for the six-
month period. In addition, third-party realized prices for
alumina fell 5% from the 1998 year-to-date period.
After-tax operating income for this segment fell 33% to $61.7 for
the 1999 second quarter, and 37% to $121.4 for the six-month
period. The decline is primarily due to lower internal and third-
party prices, partly offset by improved cost performance. On a
quarter-to-quarter basis, lower prices and slightly higher
operating costs drove the decline.
II. Primary Metals
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Third-party aluminum shipments 354 311 724 561
Third-party sales $ 518.6 $ 467.8 $1,052.3 $ 879.0
Intersegment sales 675.4 555.2 1,338.3 1,027.3
------- ------- ------- -------
Total sales $1,194.0 $1,023.0 $2,390.6 $1,906.3
======= ======= ======= =======
After-tax operating income $ 96.5 $ 74.3 $ 161.9 $ 158.0
</TABLE>
This segment's primary focus is Alcoa's worldwide smelter system.
Primary metals receives alumina from the alumina and chemicals
segment and produces aluminum ingot to be used by a variety of
Alcoa's other segments, as well as sold to outside customers.
The sale of ingot represents over 90% of this segment's third-
party sales. Third-party ingot revenues rose 18% from the 1998
six-month period as a 30% increase in shipments, primarily from
acquired companies and Brazil, more than offset a decline in
prices.
Intersegment sales rose 30% in the 1999 year-to-date period as
the addition of Alumax's fabrication operations resulted in
higher internal demand for metal. Alcoa's average realized third-
party price for ingot fell 4% from the 1998 second quarter to 64
cents per pound, reflecting the decline in market prices over the
last year.
Primary metals ATOI rose $3.9 to $161.9 for the first six months
of 1999. The increase in ATOI is attributable to higher volumes
and improved cost performance, which were nearly offset by a 10%
decline in realized prices. For the 1999 quarter, ATOI rose
$22.2 or 30%. The increase is a result of higher volumes, partly
offset by the above-mentioned 4% decline in realized prices. In
addition, improved results from Brazil had a positive impact on
ATOI in the 1999 second quarter.
III. Flat-Rolled Products
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Third-party aluminum shipments 496 417 983 802
Third-party sales $1,257.6 $1,177.3 $2,527.8 $2,299.8
Intersegment sales 10.9 14.9 25.5 31.3
------- ------- ------- -------
Total sales $1,268.5 $1,192.2 $2,552.7 $2,331.1
======= ======= ======= =======
After-tax operating income $ 72.3 $ 81.2 $ 137.5 $ 163.0
</TABLE>
This segment's principal business is the production and sale of
aluminum sheet, plate and foil. This segment includes rigid
container sheet(RCS), which is used to produce aluminum beverage
cans and mill products used in the transportation and distributor
markets. Approximately one-half of the third-party sales from
this segment are derived from mill products and one-third are
-12-
from RCS. Third-party flat-rolled product's sales rose 10% from
the 1998 year-to-date period. The increase was due to a 23%
increase in shipments, which were driven by acquisitions, partly
offset by lower prices.
Third-party sales of RCS were down 10% as shipments were flat and
prices fell over the 1998 six-month period. Quarter to quarter,
revenues fell 14% as prices slipped 10%. Mill product's revenues
rose 32% from the 1998 six-month period as shipments, driven by
acquisitions, increased 64%. For the 1999 quarter, revenues were
up 30% as shipments rose 63%. Realized prices for mill products
in 1999 have declined over 1998 as a result of a lower value-
added mix, due principally to the Alumax acquisition.
ATOI for this segment fell 16% to $137.5 for the 1999 six-month
period. RCS generated the majority of the decline, as lower
selling prices had a negative impact on margins. Mill product's
ATOI rose over the year-to-year period, as higher volumes, aided
by acquisitions, offset the impact of lower prices and a less
profitable mix.
IV. Engineered products
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Third-party aluminum shipments 249 128 507 249
Third-party sales $939.3 $612.7 $1,881.6 $1,163.2
Intersegment sales 3.4 2.6 6.9 5.1
----- ----- ------- -------
Total sales $942.7 $615.3 $1,888.5 $1,168.3
===== ===== ======= =======
After-tax operating income $ 60.5 $ 40.8 $ 105.8 $ 80.6
</TABLE>
This segment includes hard and soft alloy extrusions, aluminum
forgings and wire, rod and bar. These products serve the
transportation, construction and distributor markets. Revenues
from third-party sales of engineered products increased 53% from
the 1998 second quarter, as acquisitions fueled a 95% increase in
shipments.
Approximately 80% of the revenues from this segment are derived
from the sale of extrusions. Third-party sales of soft
extrusions were up 137% from the 1998 year on a 166% increase in
shipments. The large increase in shipments was primarily due to
the Alumax acquisition, which nearly doubled Alcoa's existing
soft alloy business. Hard alloy revenues fell 20% as shipments
were down 17%.
Revenues from the sale of forged aluminum wheels increased 23% in
the 1999 six-month period, as a 26% increase in shipments offset
a decline in prices. Sales of other forged products fell 8% on a
similar decline in shipments.
Segment ATOI increased 31% to $105.8 in the 1999 year-to-date
period. Higher shipments of soft alloy extrusions partly offset
by lower hard alloy margins generated the increase. Lower
operating costs also contributed to the improvement in ATOI.
V. Other
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Third-party aluminum shipments 18 10 35 32
Third-party sales $861.1 $842.5 $1,673.9 $1,690.1
After-tax operating income $ 70.2 $ 48.5 $ 97.8 $ 87.6
</TABLE>
-13-
This segment includes Alcoa Fujikura Ltd. (AFL), which produces
electrical components for the automotive industry as well as
telecommunications products. In addition, Alcoa's aluminum and
plastic closures operations and residential building products
operations are included in this group.
Revenues for this segment were $861 in the 1999 second quarter,
up 2% from the 1998 quarter. AFL, which generates approximately
half of the revenues reported in this segment, experienced a 5%
increase in revenues as higher volumes offset lower prices. In
addition, revenues from the sale of plastic closures increased
14% from the 1998 quarter. More than offsetting these revenue
gains were lower revenues from Alcoa Aluminio's packaging
operations, which were negatively impacted by the recent currency
devaluation and economic conditions in Brazil.
ATOI for this segment in the 1999 second quarter was $70.2, up
45% from 1998. Improved results at AFL and from closure
operations, which were both helped by cost improvements,
generated the increase. Year-to-date, improved results from
these same businesses were partly offset by losses from packaging
operations in Brazil.
Costs and Other
Cost of Goods Sold - Cost of goods sold increased $352.9, or 13%,
from the 1998 second quarter. The increase reflects higher
volumes, which were aided by acquisitions, partially offset by
lower material costs and improved cost performance. Cost of
goods sold as a percentage of sales in the 1999 second quarter
was 77.9% versus 77.7% in the 1998 quarter. The higher ratio in
1999 is primarily due to lower metal prices, partly offset by
cost performance. On a year-to-date basis, this percentage was
up .9% from 1998 to 78.2%, again due to lower metal prices partly
offset by cost improvements.
Selling and General Administrative Expenses - Selling, general
and administrative (SG&A) expenses were up $46.2, or 29%, from
the 1999 second quarter and $81.1, or 26%, on a year-to-date
basis. These increases were due to acquisitions; on a pre-
acquisition basis these costs were nearly unchanged. SG&A as a
percentage of revenue rose to 5.0% in the 1999 second quarter,
compared with 4.4% in the 1998 period. The increase was due to
the acquisition-related increase in SG&A noted above along with
lower metal prices that reduced revenues. Alcoa's objective is
to maintain SG&A costs below 5.0% of revenues.
Interest Expense - Interest expense totaled $49.5 in the 1999
second quarter, an increase of 18% over the comparable 1998
period. The increase is due to the issuance of debt in 1998 to
fund acquisitions. These borrowings include $300 of thirty-year
6.75% bonds due 2028, $250 of 6.5% term debt due in 2018 and
$200 of 6.125% term debt due in 2005. Alcoa also issued $1,100
of commercial paper in 1998, a portion of which has since been
repaid.
Income Taxes - The income tax provision for the period is based
on the effective tax rate expected to be applicable for the full
year. The 1999 second quarter rate of 32% differs from the
statutory rate primarily because of lower taxes on foreign
income.
Other Income - Other income rose to $42.8 in the 1999 second
quarter from $18.3 in the comparable 1998 period. The increase
was due to income from marking-to-market aluminum commodity
contracts versus losses in the 1998 quarter. Offsetting this
gain was a decline in interest income due to lower cash and short-
term investment balances. On a year-to-date basis other income
fell $7.2 to $39.2. The decline was the result of lower equity
and interest income and higher foreign currency losses, partly
offset by mark-to-market gains in the 1999 period versus losses
in 1998.
Foreign Currency - Effective July 1, 1999, the Brazilian Real
became the functional currency for translating the financial
statements of Alcoa's 59%-owned Brazilian subsidiary, Alcoa
Aluminio. Economic factors and circumstances related to
Aluminio's operations have changed significantly since the
devaluation of the Real in the 1999 first quarter. Under SFAS 52,
-14-
Foreign Currency Translation, the change in these facts and
circumstances requires a change to Aluminio's functional
currency.
As a result of the change, at July 1, 1999, Alcoa's shareholders'
equity and minority interests accounts were reduced by $156 and
$108, respectively. These amounts were driven principally by a
reduction in fixed assets.
One of the factors affecting the change in Aluminio's functional
currency was Alcoa's recent purchase of approximately $185 of
Aluminio's 7.5% secured export notes. The repurchase of these
notes is consistent with Alcoa's recent policy change regarding
the manner in which large subsidiaries are capitalized, and will
result in lower overall financing costs to the company.
Minority Interests - Minority interests' share of income from
operations fell 40% from the 1998 year-to-date period to $79.4.
The decrease is due primarily to lower earnings from Aluminio,
which was negatively impacted by the Brazilian currency
devaluation and resulting economic events in the 1999 first
quarter. In addition, lower earnings at Alcoa World Alumina also
contributed to the decline.
Risk Factors
In addition to the risks inherent in its operations, Alcoa is
exposed to financial, market, political and economic risks. The
following discussion, which provides additional detail regarding
Alcoa's exposure to the risks of changing commodity prices,
foreign exchange rates and interest rates, includes forward-
looking statements that involve risk and uncertainties. Actual
results could differ materially from those projected in these
forward-looking statements.
Commodity Price Risks - Alcoa is a leading global producer of
aluminum ingot and aluminum fabricated products. As a condition
of sale, customers often require Alcoa to commit to fixed-price
contracts that sometimes extend a number of years into the
future. Customers will likely require Alcoa to enter into
similar arrangements in the future. These contracts expose Alcoa
to the risk of fluctuating aluminum prices between the time the
order is accepted and the time the order ships.
In the U.S., Alcoa is net metal short and is subject to the
risk of higher aluminum prices for the anticipated metal
purchases required to fulfill the long-term customer contracts
noted above. To hedge this risk, 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 June
30, 1999 and 1998, these contracts totaled approximately 548,000
and 452,000 mt, respectively. These contracts act to fix the
purchase price for these metal purchase requirements, thereby
reducing Alcoa's risk to rising metal prices.
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.
The expiration dates of the options and the delivery dates
of the futures contracts noted above 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 had
75,000 mt and 157,000 mt of futures and options contracts
outstanding at June 30, 1999 and 1998, 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 an after-tax
credit (charge) to earnings of $6.3 and $(19.8) at June 30, 1999
and 1998, respectively.
-15-
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.
Financial Risk - 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 sometimes used to limit the risk of fluctuating
exchange rates. In addition, Alcoa also 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.
Risk Management - All of the aluminum and other commodity
contracts, as well as the various types of financial instruments,
are straightforward and 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). SRMC 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.
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.
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. Therefore, it is not
possible to determine the outcomes or to estimate with any
degree of accuracy the ranges of potential costs for certain
matters. For example, there are issues related to the
Massena, New York, and Pt. Comfort, Texas sites that allege
natural resource damage or off-site contaminated sediments,
where investigations are ongoing. The following discussion
provides additional details regarding the current status of
these two sites.
MASSENA/GRASSE RIVER. Sediments and fish in the Grasse
River adjacent to Alcoa's Massena, New York plant site
contain varying levels of polychlorinated biphenyl (PCB).
Alcoa has been identified by the U.S. Environmental
Protection Agency (EPA) as potentially responsible for this
contamination and, since 1989, has been conducting
investigations and studies of the river under order from the
EPA issued under the Comprehensive Environmental Response,
Compensation and Liability Act.
During 1998, Alcoa continued to perform studies and
investigations on the Grasse River. In addition, Alcoa
proposed to submit the report of remedial alternatives to EPA
in phases, as additional information is obtained from these
ongoing studies and investigations. In October 1998, Alcoa
submitted the first of these phased reports, consisting of a
summary of results of certain river and sediment studies
performed over the past several years. Based on these
studies, Alcoa has proposed to EPA that pilot scale tests be
performed to assess the feasibility of performing certain
sediment covering techniques. The costs of these pilot scale
tests have been fully reserved. The results of these tests
and other related field pilot studies should permit the
development of the remaining phases of the remedial
alternative report. Alcoa is awaiting EPA approval for these
pilot tests.
-16-
Based on the above, the costs to complete a remedy
related to this site currently cannot be estimated since they
will depend on the remedial method chosen. Alcoa is also
aware of a natural resource damage claim that may be asserted
by certain federal, state and tribal natural resource
trustees at this location.
PT. COMFORT/LAVACA BAY. In 1990, Alcoa began
discussions with certain state and federal natural resource
trustees concerning alleged releases of mercury from its Pt.
Comfort, Texas facility into the adjacent Lavaca Bay. In
March 1994, EPA listed the "Alcoa (Point Comfort)/Lavaca Bay
Site" on the National Priorities List and, shortly
thereafter, Alcoa and EPA entered into an administrative
order on consent under which Alcoa is obligated to conduct
certain remedial investigations and feasibility studies. In
accordance with this order, Alcoa recently submitted a draft
remedial investigation and a draft baseline risk assessment
to EPA. Alcoa expects to submit a draft feasibility study
during 1999. In addition, Alcoa recently commenced
construction of the EPA-approved project to fortify an
offshore dredge disposal island. The probable and estimable
costs of these actions are fully reserved. Additional costs
to complete a remedy currently cannot be estimated since they
will depend on the extent of remediation required, if any,
the remedial method chosen and the time frame to complete any
remediation activity. Since the order with EPA, Alcoa and
the natural resource trustees have continued efforts to
understand natural resource injury and ascertain appropriate
restoration alternatives. That process is expected to be
completed within the next 12 to 24 months.
Based on the above, it is possible that results of
operations in a particular period could be materially
affected by certain of these matters. However, based on facts
currently available, management believes that the disposition
of these matters will not have a materially adverse effect on
the financial position or liquidity of the company.
Alcoa's remediation reserve balance at the end of the
1999 second quarter was $194.2 (of which $62.3 was classified
as a current liability) and reflects the most probable costs
to remediate identified environmental conditions for which
costs can be reasonably estimated. About 21% of the reserve
relates to Alcoa's Massena, New York plant site, and 15%
relates to Alcoa's Pt. Comfort, Texas plant site.
Remediation expenses charged to the reserve during the 1999
second quarter were $12.5. These 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.
Liquidity and Capital Resources
Cash from Operations
Cash from operations during the 1999 year-to-date period totaled
$911.9, compared with $921.0 in the 1998 period. The decrease
reflects a lower level of noncurrent assets and liabilities and a
decrease in minority interests' share of income. Partially
offsetting these items were lower working capital requirements
along with higher net income.
Financing Activities
Financing activities used $530.6 of cash in the 1999 year-to-date
period, compared with $807.7 of cash generated in the 1998
period. The primary reason for the difference was Alcoa's
issuance of debt in the 1998 period, which was used primarily to
fund acquisitions. In the 1999 year-to-date period, Alcoa used
$603.3 to repurchase 11,891,034 shares of the Company's common
stock, versus $293.5 used in the 1998 period. These repurchases
were partially offset by $427.3 and $23.8 in the 1999 and 1998
periods, respectively, of stock issued for employee stock option
plans. In July 1999, Alcoa announced that the board of directors
had authorized the repurchase of 20 million shares of Alcoa
common stock. This action replaces a similar authorization
approved by the board in January 1999. Approximately 12 million
shares were repurchased under the prior authorization.
-17-
Dividends paid to shareholders were $148.6 in the 1999 six-month
period, an increase of $22.6 over the 1998 period. The increase
was primarily due to Alcoa's variable dividend program, which
paid out 40.25 cents in the first half of 1999. This compares
with 37.5 cents per share in the 1998 six-month period.
Investing Activities
Investing activities in 1998 used $1,694.5 of cash, $1,218.2 more
than the 1999 requirement of $476.3. Capital expenditures were
the majority of the 1999 spending, totaling $387.7, up 6% from
1998 levels.
Acquisitions represented the bulk of investing activities in the
1998 period. These include Alcoa's purchase of 51% of the
outstanding stock of Alumax in the 1998 second quarter and
Alcoa's purchase of Inespal in the 1998 first quarter. Alcoa
purchased the remaining 49% of Alumax in the 1998 third quarter.
During the 1999 period, Alcoa acquired the bright products
business of Pechiney's Rhenalu rolling plant located near
Toulouse, France and Reynolds' aluminum extrusion plant in
Irurzun, Spain.
Year 2000 issue
Alcoa, like other businesses, is facing the Year 2000 issue. The
Year 2000 issue arises from the past practice of utilizing two
digits (as opposed to four) to represent the year in some
computer programs and software. If uncorrected, this could
result in computational errors as dates are compared across the
century boundary.
As a basic materials supplier, the vast majority of the products
produced and sold by Alcoa are unaffected by Year 2000 issues in
use or operation since they contain no microprocessors. Alcoa is
addressing the Year 2000 issue through a formal program that
reports to the Company's chief information and financial
officers. Alcoa's methodology encompasses four phases:
Awareness/Inventory; Assessment; Remediation and Compliance
Testing. Ongoing leadership is provided by a Global Program
Office, which is directly linked into Alcoa's business units and
resource units, including the acquired Alumax facilities. The
Global Program Office provides processes and tools to the
business units and monitors progress through systematic reporting
and on-site verification reviews in cooperation with the
Company's internal auditors. Progress is reported regularly to
the Company's senior executives and to the Audit Committee of
Alcoa's board of directors.
Internally, computer and microprocessor based systems such as
mainframe, mini-computer and personal computer systems and the
software they utilize have been assessed. Operational support,
process control, facilities, infrastructure and mechanical
systems are being addressed as well. These systems assist in the
control of Alcoa's operations by performing such functions as
maintaining manufacturing parameters, monitoring environmental
conditions and assisting with facilities management and security.
Many of these systems rely on software or contain embedded
electronic components that could be affected by Year 2000
compliance issues. Since many of these systems are common across
operating locations, information sharing and efficiencies have
been realized in the Year 2000 efforts. Priority for any
required remediation efforts has been assigned based on the
criticality of the system or business process affected. As of
June 30, 1999, the remediation phase had been completed for 98%
of Alcoa's critical components with 96% of all critical
components having completed compliance testing. It is presently
expected that compliance testing will be completed for 99% of
critical systems by the end of the third quarter.
Alcoa relies on numerous third parties for a wide variety of
goods and services, including raw materials, telecommunications
and utilities such as water and electricity. Many of the
Company's operating locations would be adversely affected if
these supplies and services were curtailed as a result of a
supplier's Year 2000 noncompliance. Alcoa has surveyed its
vendors and suppliers using questionnaires and, based on the
response and significance to the Company's operations, is
conducting follow-up activities with critical and important
suppliers. If Alcoa concludes that a third party presents a
-18-
substantial risk of a Year 2000 based business disruption, an
effort will be made to resolve the issue. If necessary, a new
vendor or supplier will be qualified and secured. Communication
with these third parties regarding Year 2000 issues is a
continuing process.
Alcoa and certain of its trading partners utilize electronic data
interchange (EDI) to effect business communications. The
Company's EDI system software has been upgraded to support
transactions in a Year 2000 compliant format. Migration of EDI
transactions to this new format will occur as Alcoa and its EDI
trading partners, on a case-by-case basis, modify existing EDI
transaction formats. Some Alcoa customers have indicated that
they will not modify EDI transaction sets but will rely on other
techniques to achieve Year 2000 capability. Alcoa does not
expect Year 2000-related disruptions to occur in these
situations.
Based on current information, Alcoa believes that the most likely
worst case scenario to result from a Year 2000 failure by Alcoa,
its suppliers or customers would be a short-term reduction in
manufacturing capability at one or more of Alcoa's operations and
a temporary limitation on Alcoa's ability to deliver products to
customers. Based on internal efforts and formal communications
with third parties, Alcoa does not believe that Year 2000 issues
are likely to result in significant operational problems or will
have a material adverse impact on its consolidated financial
position, operations or cash flow. Nonetheless, failures of
suppliers, third-party vendors or customers resulting from Year
2000 issues could result in a short-term material adverse effect.
In order to minimize operational effects, Alcoa is utilizing a
structured contingency planning process throughout the company to
identify and analyze Year 2000 operational risks. Risk
assessments are documented and reported to the Year 2000 Global
Program Office. The specific risk scenarios are reviewed by
operational management and detailed contingency plans are
developed for the areas of greatest risk. It is expected that
detailed contingency planning will be completed by the end of the
third quarter.
Alcoa's Year 2000 program utilizes on-site verification of Year
2000 efforts at its various operating locations. Using audit-
like techniques, the Year 2000 Global Program Office and the
Company's internal auditors verify that business and resource
units have followed the prescribed processes and methodologies
and also samples local Year 2000 readiness. Each of Alcoa's
business units will receive at least one verification audit
during 1999 with more than eighty-five reviews planned.
For the 1999 six-month period, Alcoa incurred approximately $18.0
million of direct costs in connection with its Year 2000 program.
These costs include external consulting costs and the cost of
hardware and software replaced as a result of Year 2000 issues.
Total direct costs for 1999 are estimated to be between $35 and
$50.
-19-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, in March 1998, Region V of the EPA
referred various alleged environmental violations at Alcoa's
Warrick Operations to the civil division of the U.S. Department
of Justice (DOJ). The alleged violations stem from an April 1997
multi-media environmental inspection of Warrick Operations by the
EPA relating to water permit exceedances as reported on monthly
discharge monitoring reports, wastewater toxicity issues and
alleged opacity violations. Alcoa and the DOJ have entered into
a series of tolling agreements to suspend the statute of
limitations related to the alleged violations in this matter.
While the parties have reached an agreement in principle, details
of the settlement and a consent agreement have yet to be
finalized.
As previously reported, in October 1998, Region V of the EPA
referred various alleged environmental violations at Alcoa's
Lafayette Operations to the civil division of the DOJ. The
alleged violations relate to water permit exceedances as reported
on monthly discharge monitoring reports. Alcoa and the DOJ
entered into a tolling agreement to suspend the statute of
limitations related to the alleged violations in order to
facilitate settlement discussions with the DOJ and EPA. The
parties have been unable to reach settlement on this matter. On
June 11, 1999, the DOJ and EPA filed a complaint against Alcoa in
the United States District Court for the Northern District of
Indiana.
In March 1999, two search warrants were executed by various
federal and state agencies on the Alcoa Port Allen Works of
Discovery Aluminas, Inc., a subsidiary, in Port Allen, Louisiana.
Also in March, Discovery Aluminas, Inc. was served with a grand
jury subpoena that required the production to a federal grand
jury of certain company records relating to alleged environmental
issues involving wastewater discharges and management of solid or
hazardous wastes at the plant. In April 1999, the Port Allen
plant manager was indicted for a single count of violating the
Clean Water Act. Alcoa is cooperating with the investigation and
is engaged in discussions to resolve the situation.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of Alcoa shareholders held on May 7, 1999,
Alain J. P. Belda was elected a director of Alcoa to serve for a
two-year term, and Joseph T. Gorman, Sir Ronald Hampel and Marina
v.N. Whitman were reelected to serve for three-year terms. Votes
cast for Mr. Belda were 292,353,336 and votes withheld were
2,026,329; votes cast for Mr. Gorman were 292,653,209 and votes
withheld were 1,726,456; votes cast for Sir Ronald Hampel were
292,630,878 and votes withheld were 1,748,787; votes cast for Mr.
Mulroney were 292,657,653 and votes withheld were 1,722,012; and
votes cast for Dr. Whitman were 292,609,208 and votes withheld
were 1,770,457.
Also at that annual meeting, a proposal to approve the Alcoa
Stock Incentive Plan was adopted. Total votes cast for the Alcoa
Stock Incentive Plan were 254,906,831, votes cast against were
38,128,578 and there were 1,344,256 abstentions. Abstentions are
not counted for voting purposes under Pennsylvania law, the
jurisdiction of Alcoa's incorporation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10(g)(1) Deferred Fee Plan for Directors, as amended July 9,
1999.
10(p)(1) Alcoa Stock Incentive Plan, as amended May 6,
1999.
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited
financial information
27. Financial Data Schedule
(b) No reports on form 8-K were filed by Alcoa during the
quarter covered by this report.
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SIGNATURES
Pursuant to the requirements 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.
Alcoa Inc.
July 22, 1999 By /s/ RICHARD B. KELSON
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
July 22, 1999 By /s/ EARNEST J. EDWARDS
Date Earnest J. Edwards
Senior Vice President and
Controller
(Chief Accounting Officer)
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EXHIBITS
Page
10(g)(1) Deferred Fee Plan for Directors, as amended
July 9, 1999.
10(p)(1) Alcoa Stock Incentive Plan, as amended
May 6, 1999.
12. Computation of Ratio of Earnings to Fixed
Charges 23
15. Independent Accountants' letter regarding 24
unaudited financial information
27. Financial Data Schedule
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EXHIBIT 10(g)(1)
ALCOA INC.
DEFERRED FEE PLAN FOR DIRECTORS
(Amended July 9, 1999)
Article I
INTRODUCTION
Alcoa Inc. (the "Company") has established this Deferred
Fee Plan for Directors (the "Plan") to provide non-employee
Directors with an opportunity to defer receipt of cash fees to be
earned for services rendered as a Director, generally until after
termination of service as a Director.
Article II
DEFINITIONS
2.1 Definitions. The following definitions apply unless
the context clearly indicates otherwise:
(a) Alcoa Stock Option shall mean the Investment
Option established hereunder with reference to the
Alcoa Stock fund under the Savings Plan.
(b) Beneficiary means the person or persons designated
by a Participant under Section 4.1 to receive any
amount payable under Section 5.3.
(c) Board of Directors means the Board of Directors of
the Company.
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(d) Committee means the Inside Director Committee of
the Board.
(e) Credits means amounts credited to a Participant's
Deferred Fee Account, with all Investment Option
units valued by reference to the comparable fund
offered under the Company's principal savings plan
for salaried employees ("Savings Plan").
(f) Deferred Fee Account means a bookkeeping account
established by the Company in the name of a Director
with respect to amounts deferred hereunder.
(g) Director means a non-employee member of the Board
of Directors. Any Director who is a director or
chairman of the board of directors of a subsidiary or
affiliate of the Company shall not, by virtue
thereof, be deemed to be an employee of the Company
or such subsidiary or affiliate for purposes of
eligibility under this Plan.
(h) Fees means all cash amounts payable to a Director
for services rendered as a Director and which are
specifically designated as fees, including, but not
limited to, annual and/or quarterly retainer fees,
fees (if any) paid for attending meetings of the
Board of Directors or any committee thereof and any
per diem fees.
(i) Investment Option means the respective options
established hereunder with reference to the
comparable funds under the Savings Plan, except as
otherwise determined by the Committee for any fund
added to the Savings Plan after January 1, 1993.
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(j) Participant means a person who has elected to
participate in the Plan.
(k) Secretary means the Secretary of the Company.
(l) Unforeseeable Emergency means a severe financial
hardship resulting from extraordinary and
unforeseeable circumstances arising as a result of
one or more recent events beyond the control of the
Participant, which cannot be eliminated by other
reasonably available resources of the Participant.
Article III
DEFERRAL OF COMPENSATION
3.1 Amount of Deferral. A Director may elect to defer
receipt of all Fees, or of all Fees of one or more types, or a
specified portion (in 10% increments) of either of the foregoing,
otherwise payable to him or her.
3.2 Manner of Electing Deferral. A Director may elect, or
modify a prior election, to defer the receipt of all or certain
Fees by giving written notice to the Secretary on a form provided
by the Company.
3.3 Time of Election of Deferral; Revocation. An election
to defer Fees shall be made prior to the beginning of the
calendar quarter in which the Fees will be earned; provided,
however, that an election made within 30 days after a person
first becomes a Director shall be effective for Fees earned after
such election is made. An election shall continue in effect
until the end of the Participant's service as a Director or until
the
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Secretary is notified in writing of a cancellation or
modification of the election pursuant to this Section 3.3,
whichever shall occur first; provided, however, that unless and
then only to the extent that the Committee, in its sole
discretion, determines that an Unforeseeable Emergency exists,
the election deferring receipt of payment may not be canceled or
modified except with regard to Fees to be earned in the
quarter(s) beginning after the date the election is so canceled
or modified.
3.4 Deferring Fees. A Participant shall designate the
portion of his or her deferred Fees to be invested in one or more
of the Investment Options. Beginning January 1, 1996, all Fees
deferred by a Participant in any calendar year shall be invested
in the Alcoa Stock Option until one-half of the amount of the
annual retainer fee to which such Participant is entitled for
such year has been so invested. Thereafter, designations of
other Investment Options by a Participant may be made or shall be
given effect. A Participant's deferred Fees shall be credited to
the designated Investment Option(s) at the end of the month in
which such deferred Fees would have been payable to such
Participant but for an election to defer receipt of those Fees,
except that the retainer fees shall be credited as of the first
day of January, April, July and October of the year in which they
are earned. Such Fees shall be credited to a Participant's
Deferred Fee Account as Credits for "units" in the Participant's
Deferred Fee Account. As of any specified date the value per
unit shall be deemed to be the value determined for the
comparable fund under the Savings Plan.
3.5 Transfers. A Participant may elect to designate a
different Investment Option for all or any portion of the Credits
for units in the various Investment Options in his or her
Deferred Fee Account, except that Credits for units in the Alcoa
Stock Option may not be transferred to any other Investment
Option while the Participant is a Director. Beginning six months
after termination of Board service and prior to a complete
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distribution of the Participant's account, the Participant may
transfer Credits for units in the Alcoa Stock Option to other
Investment Options to the same extent and frequency as a
participant in the Savings Plan. A written election for transfer
on a form provided by the Company must be received by the
Secretary prior to 4:00 p.m. Eastern Time the business day when
it is to become effective. Such election shall be subject to
reasonable administrative minimums, and any restrictions
recommended by counsel to assure that the Alcoa Stock Option does
not become subject to Section 16 of the Securities Exchange Act
of 1934 and/or to assure compliance with the provisions thereof.
3.6 Method of Payment.
(a) All payments with respect to a Participant's
Deferred Fee Account shall be made in cash, and no
Participant shall have the right to demand payment
in shares of Company stock or in any other medium.
(b) Payments shall be made in a lump sum or, at the
election of the Participant, in annual or quarterly
installments. The date of the first such payment
shall not be later than the first day of the first
calendar quarter subsequent to the Participant's
attainment of age 70 in which the Participant shall
not be serving as a Director.
(c) An election to receive installment payments in
lieu of a lump sum must be made at least one year
before the Participant's service as a Director
terminates.
3.7 Election for pre-1990. Any Participant who deferred
Fees payable for any year prior to 1990 shall be permitted to
elect to designate one or more of the current
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Investment Options for all (but not less than all) of the amount
credited to his Deferred Fee Account. The election must be
received by the Secretary prior to the effective date fixed by
the Committee and is subject to the approval of the Committee.
Through the date such election becomes effective (if any) his
Deferred Fee Account will earn interest as provided in the Plan
prior to the 1989 amendments.
3.8 Transition Provision for 1992. The blackout period
from November 2, 1992 through January 1, 1993 and the mapping of
Credits from the old to the new Investment Options shall be
administered under the Plan in the same fashion as for the
Savings Plan, except as otherwise determined by the Committee.
Article IV
BENEFICIARIES
4.1 Designation of Beneficiary. Each Participant may
designate from time to time any person or persons, natural or
otherwise, as his Beneficiary or Beneficiaries to whom the
amounts credited to his or her Deferred Fee Account are to be
paid if he or she dies before all such amounts have been paid to
the Participant. Each Beneficiary designation shall be made on a
form prescribed by the Company and shall be effective only when
filed with the Secretary during the Participant's lifetime. Each
Beneficiary designation filed with the Secretary shall revoke all
Beneficiary designations previously made. The revocation of a
Beneficiary designation shall not require the consent of any
Beneficiary. In the absence of an effective Beneficiary
designation or if payment can be made to no Beneficiary, payment
shall be made to the Participant's estate.
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Article V
PAYMENTS
5.1 Payment of Deferred Fees. No payment may be made from
a Director's Deferred Fee Account except as provided in this
Article, unless and then only to the extent that an Unforeseeable
Emergency exists as determined by the Committee in its sole
discretion. In the latter case the Committee shall determine
when and to what extent Credits in a Participant's Deferred Fee
Account may be paid to such Participant prior to or after
termination as a Director.
5.2. Payment Upon Termination as Director. The value
of a Participant's Deferred Fee Account shall be payable in cash
in a lump sum on or about the first day of the calendar quarter
succeeding the quarter in which the Participant's service as a
Director is terminated, or, if elected in advance under Section
3.6 hereof, in a lump sum or annual or quarterly installments
beginning as specified in the election. If installments are
elected, the amount of each payment shall be a fraction of the
value of the Participant's Deferred Fee Account on the last day
of the calendar quarter preceding payment, the numerator of which
is one and the denominator of which is the total number of
installments elected minus the number of installments previously
paid. Such installment payments shall be made on or about the
first day of each succeeding year or quarterly period until said
Account is exhausted, except as provided in Section 5.1 or
Section 5.3.
5.3 Payment Upon Participant's Death. If a Participant
dies with any amount credited to his or her Deferred Fee Account,
the value of said Account shall be paid in a single payment(s) to
the Beneficiary(ies) or estate, as the case may be, on or about the
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first day of the calendar quarter next following the date of
death or such later date as shall have been selected by the
Participant with the consent of the Committee.
Article VI
MISCELLANEOUS
6.1 Participant's Rights Unsecured. The right of any
Participant to receive payments from his or her Deferred Fee
Account shall be a claim against the general assets of the
Company as an unsecured general creditor. The Company may, in
its absolute discretion, establish one or more trusts or reserves
which may be funded by reference to amounts of Credits standing
in Participants' Deferred Fee Accounts hereunder or otherwise.
6.2 Non-assignability. The right of any Participant or
Beneficiary to the payment of Credits in a Deferred Fee Account
shall not be assigned, transferred, pledged or encumbered and
shall not be subject in any manner to alienation or anticipation.
6.3 Administration and Interpretation. The Plan shall be
administered by the Committee which shall have authority to adopt
rules and regulations for carrying out the Plan and to interpret,
construe and implement its provisions. Decisions of the
Committee shall be final and binding. Routine administration may
be delegated by the Committee.
6.4 Amendment and Termination. The Plan may be amended,
modified or terminated at any time by the Board of Directors. No
amendment, modification or termination shall, without the consent
of a Participant, adversely affect such Participant's
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rights with respect to amounts theretofore credited to his or her
Deferred Fee Account or earlier effect the payment of Fees already
deferred.
6.5 Notices. All notices to the Company under the Plan
shall be in writing and shall be given to the Secretary or to an
agent or other person designated by the Secretary.
6.6 Governing Law. This Plan shall be construed in
accordance with and governed by the laws of the Commonwealth of
Pennsylvania, excluding any choice of law provisions which may
indicate the application of the laws of another jurisdiction.
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EXHIBIT 10(p)(1)
Alcoa Stock Incentive Plan
[Alcoa logo]
-1-
ALCOA STOCK INCENTIVE PLAN
SECTION 1. PURPOSE. The purposes of the Alcoa Stock
Incentive Plan are to encourage selected employees of the Company
and its Subsidiaries to acquire a proprietary and vested interest
in the long-term growth and financial success of the Company, to
generate an increased incentive to promote its well-being and
profitability, to link the interests of such employees to the
long-term interests of shareholders and to enhance the ability of
the Company and its Subsidiaries to attract and retain
individuals of exceptional managerial, technical and professional
talent upon whom, in large measure, the sustained progress,
growth and profitability of the Company depend.
SECTION 2. DEFINITIONS. As used in the Plan, the following
terms have the meanings set forth below:
"Award" means any Option, Stock Appreciation Right,
Contingent Stock Award, Performance Share, Performance Unit,
Other Stock Unit Award, or any other right, interest, or option
relating to Shares or other property granted pursuant to the
provisions of the Plan.
"Award Agreement" means any written agreement, contract, or
other instrument or document evidencing any Award granted by the
Committee hereunder, which may, but need not, be executed or
acknowledged by both the Company and the Participant.
"Beneficial Owner" means beneficial owner as defined in
Rule 13d-3 under the Exchange Act.
"Board" means the Board of Directors of the Company.
"Change in Control" means the first to occur of any of the
following events:
(a) An Entity, other than a trustee or other fiduciary
of securities held under an employee benefit plan of the
Company or any of its Subsidiaries, is or becomes a
Beneficial Owner, directly or indirectly, of stock of the
Company representing 20% or more of the total voting power
of the Company's then outstanding stock and securities;
provided, however, that for purposes of this subsection (a),
the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company,
(ii) any acquisition by the Company, (iii) any acquisition
by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation
pursuant to a transaction that complies with clauses (i) or
(ii) of subsection (c) of this definition;
(b) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board"), cease for any reason to
constitute a majority thereof; provided,
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however, that any individual becoming a director whose
election, or nomination for election by the Company's
shareholders, was approved by a vote of at least 75% of the
directors then comprising the Incumbent Board shall be
considered as though such individual was a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with
respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by
or on behalf of an Entity other than the Board;
(c) there is consummated a merger, consolidation or
other corporate transaction, other than (i) a merger,
consolidation or transaction that would result in the voting
securities of the Company outstanding immediately prior to
such merger, consolidation or transaction continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving Entity or
any parent thereof) at least 55% of the combined voting
power of the stock and securities of the Company or such
surviving Entity or any parent thereof outstanding
immediately after such merger, consolidation or transaction,
or (ii) a merger, consolidation or transaction effected to
implement a recapitalization of the Company (or similar
transaction) in which no Entity is or becomes the Beneficial
Owner, directly or indirectly, of stock and securities of
the Company representing more than 20% of the combined
voting power of the Company's then outstanding stock and
securities;
(d) the sale or disposition by the Company of all or
substantially all of the Company's assets other than a sale
or disposition by the Company of all or substantially all of
the assets to an Entity at least 55% of the combined voting
power of the stock and securities of which is owned by
Persons in substantially the same proportions as their
ownership of the Company's voting stock immediately prior to
such sale; or
(e) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company.
"Change in Control Price" means the higher of (a) the
highest reported sales price, regular way, of a Share in any
transaction reported on the New York Stock Exchange Composite
Tape or other national exchange on which Shares are listed or on
NASDAQ during the 60-day period prior to and including the date
of a Change in Control or (b) if the Change in Control is the
result of a tender or exchange offer or a merger, consolidation
or other corporate transaction, the highest price per Share paid
in such tender or exchange offer or corporate transaction. To
the extent that the consideration paid in any such transaction
described above consists all or in part of securities or other
non-cash consideration, the value of such securities or other non-
cash consideration shall be determined in the sole discretion of
the Board.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
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"Committee" means the Compensation Committee of the Board, or
any successor to such committee, or a subcommittee thereof,
composed of no fewer than two directors, each of whom is a Non-
Employee Director and an "outside director" within the meaning of
Section 162(m) of the Code, or any successor provision thereto.
"Company" means Alcoa Inc., a Pennsylvania corporation.
"Contingent Stock" means any Share issued with the
contingency or restriction that the holder may not sell,
transfer, pledge or assign such Share and with such other
contingencies or restrictions as the Committee, in its sole
discretion, may impose (including, without limitation, any
contingency or restriction on the right to vote such Share and
the right to receive any cash dividends), which contingencies and
restrictions may lapse separately or in combination, at such time
or times, in installments or otherwise, as the Committee may deem
appropriate.
"Contingent Stock Award" means an award of Contingent Stock
under Section 8 hereof.
"Covered Employee" means a "covered employee" within the
meaning of Section 162(m)(3) of the Code, or any successor
provision thereto.
"Employee" means any employee of the Company or of any
Subsidiary.
"Entity" means any individual, entity, person (within the
meaning of Section 3(a)(9) of the Exchange Act) or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act),
other than (a) any employee plan established by the Company,
(b) any affiliate (as defined in Rule 12b-2 promulgated under the
Exchange Act) of the Company, (c) an underwriter temporarily
holding securities pursuant to an offering of such securities, or
(d) a corporation owned, directly or indirectly, by shareholders
of the Company in substantially the same proportions as their
ownership of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means, with respect to any property, the
market value of such property determined by such methods or
procedures as shall be established from time to time by the
Committee.
"Non-Employee Director" has the meaning set forth in Rule 16b-
3(b)(3) under the Exchange Act, or any successor definition
adopted by the Securities and Exchange Commission.
"Option" means any right granted to a Participant under the
Plan allowing such Participant to purchase Shares at such price
or prices and during such period or periods as the Committee
shall determine. All Options granted under the Plan are intended
to be nonqualified stock options for purposes of the Code.
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"Other Stock Unit Award" means any right granted to a
Participant by the Committee pursuant to Section 10 hereof.
"Participant" means an Employee who is selected by the
Committee to receive an Award under the Plan.
"Performance Award" means any Award of Performance Shares or
Performance Units pursuant to Section 9 hereof.
"Performance Period" means that period established by the
Committee at the time any Performance Award is granted or at any
time thereafter during which any performance goals specified by
the Committee with respect to such Award are to be measured. A
Performance Period may not be less than one year.
"Performance Share" means any grant pursuant to Section 9
hereof of a unit valued by reference to a designated number of
Shares, which value may be paid to the Participant by delivery of
such property as the Committee shall determine, including,
without limitation, cash, Shares or any combination thereof, upon
achievement of such performance goals during the Performance
Period as the Committee shall establish at the time of such grant
or thereafter.
"Performance Unit" means any grant pursuant to Section 9
hereof of a unit valued by reference to a designated amount of
property other than Shares, which value may be paid to the
Participant by delivery of such property as the Committee shall
determine, including, without limitation, cash, Shares or any
combination thereof, upon achievement of such performance goals
during the Performance Period as the Committee shall establish at
the time of such grant or thereafter.
"Person" means any individual, corporation, partnership,
association, joint stock company, trust, unincorporated
organization or government or political subdivision thereof.
"Plan" means this Alcoa Stock Incentive Plan.
"Prior Plan" means the Company's Long Term Stock Incentive
Plan.
"Reload Option" means an Option described in Section 6(e) of
the Plan, granted in connection with the exercise of an option
under the Prior Plan or an Award under the Plan (an "antecedent
award"). As a condition to the grant of a Reload Option, a
Participant must elect at the time of exercise of the antecedent
award that a designated portion, as determined by the Committee,
of the Shares issued upon exercise of the antecedent award shall
be restricted in terms of transfer for such period of time as the
Committee may determine at the time of grant of the Reload Option
or at a later date.
"Shares" means the shares of common stock of the Company,
$1.00 par value.
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"Stock Appreciation Right" means any right granted to a
Participant pursuant to Section 7 hereof to receive, upon
exercise by the Participant, the excess of (a) the Fair Market
Value of one Share on the date of exercise or, if the Committee
shall so determine, at any time during a specified period before
the date of exercise over (b) the grant price of the right on the
date of grant, or if granted in connection with an outstanding
Option on the date of grant of the related Option, as specified
by the Committee in its sole discretion, which, except in the
case of Substitute Awards or in connection with an adjustment
provided in Section 4(g), shall not be less than the Fair Market
Value of one Share on such date of grant of the right or the
related Option, as the case may be. Any payment by the Company
in respect of such right may be made in cash, Shares, other
property or any combination thereof, as the Committee, in its
sole discretion, shall determine.
"Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50 percent or more
of the total combined voting power of all classes of stock in
such corporation, and any corporation, partnership, joint
venture, limited liability company or other business entity as to
which the Company possesses a significant ownership interest,
directly or indirectly, as determined by the Committee.
"Substitute Awards" means Awards granted or Shares issued by
the Company in assumption of, or in substitution or exchange for,
awards previously granted, or the right or obligation to make
future awards, by a company acquired by the Company or any of its
Subsidiaries or with which the Company or any of its Subsidiaries
combines.
SECTION 3. ADMINISTRATION. The Plan shall be administered
by the Committee. The Committee shall have full power and
authority, subject to such orders or resolutions not inconsistent
with the provisions of the Plan as may from time to time be
adopted by the Board, to: (i) select the Employees of the Company
and its Subsidiaries to whom Awards may from time to time be
granted hereunder; (ii) determine the type or types of Award to
be granted to each Participant hereunder; (iii) determine the
number of Shares to be covered by each Award granted hereunder;
(iv) determine the terms and conditions, not inconsistent with
the provisions of the Plan, of any Award granted hereunder;
(v) determine whether, to what extent and under what
circumstances Awards may be settled in cash, Shares or other
property or canceled or suspended; (vi) determine whether, to
what extent and under what circumstances cash, Shares and other
property and other amounts payable with respect to an Award under
this Plan shall be deferred either automatically or at the
election of the Participant; (vii) interpret and administer the
Plan and any instrument or agreement entered into under the Plan;
(viii) establish such rules and regulations and appoint such
agents as it shall deem appropriate for the proper administration
of the Plan; and (ix) make any other determination and take any
other action that the Committee deems necessary or desirable for
administration of the Plan. Decisions of the Committee shall be
final, conclusive and binding upon all persons, including the
Company, any Participant, any shareholder and any Employee.
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SECTION 4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the adjustment provisions of Section 4(g)
below and the provisions of Section 4(b) through (f), up to 14
million Shares may be issued under the Plan.
(b) In addition to the Shares authorized by Section 4(a),
the following Shares may be issued under the Plan:
(i) Shares that were authorized to be issued under the
Prior Plan, but that are not issued under that plan because of
the cancellation, termination or expiration of awards under the
Prior Plan shall be available for issuance under this Plan.
(ii) If a Participant tenders, or has withheld, Shares
in payment of all or part of the option price under a stock
option granted under the Plan or the Prior Plan, or in
satisfaction of withholding tax obligations thereunder, the
Shares tendered by the Participant or so withheld shall become
available for issuance under the Plan.
(iii) If Shares that are the issued under the Plan
are subsequently forfeited in accordance with the terms of the
Award or an Award Agreement, the forfeited Shares shall become
available for issuance under the Plan.
(iv) If the Company repurchases any Shares and, in
connection therewith, the Board designates that any or all of the
repurchased Shares shall be available for issuance under the
Plan, those repurchased Shares allocated to the Plan shall become
available for issuance under the Plan.
(c) Subject to the adjustment provisions of Section 4(g),
not more than one million Shares shall be issued under Awards
other than Options and Stock Appreciation Rights.
(d) If an Award may be paid only in Shares or in either
cash or Shares, the Shares shall be deemed to be issued hereunder
only when and to the extent that payment is actually made in
Shares. However, the Committee may authorize a cash payment
under an Award in lieu of Shares if there are insufficient Shares
available for issuance under the Plan.
(e) Any Shares issued hereunder may consist, in whole or in
part, of authorized and unissued shares, treasury shares or
shares purchased in the open market or otherwise.
(f) Shares issued or granted in connection with Substitute
Awards shall not reduce the Shares available for issuance under
the Plan or to a Participant in any calendar year.
(g) In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split,
reverse stock split, spin-off or similar transaction or other
change in corporate structure affecting the Shares, such
adjustments and other substitutions shall be made to the Plan and
to Awards as the Committee in its sole discretion deems equitable
or appropriate, including, without limitation, such adjustments
in the aggregate number, class and kind of
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securities that may be delivered under the Plan, in the aggregate
or to any one Participant, in the number, class, kind and option
or exercise price of securities subject to outstanding Options,
Stock Appreciation Rights or other Awards granted under the Plan,
and in the number, class and kind of securities subject to Awards
granted under the Plan (including, if the Committee deems
appropriate, the substitution of similar options to purchase the
shares of, or other awards denominated in the shares of, another
company) as the Committee may determine to be appropriate in its
sole discretion; provided that the number of Shares subject to
any Award shall always be a whole number.
SECTION 5. ELIGIBILITY. Any Employee shall be eligible to
be selected as a Participant.
SECTION 6. STOCK OPTIONS. Options may be granted hereunder
to Participants either alone or in addition to other Awards
granted under the Plan. Any Option granted under the Plan may be
evidenced by an Award Agreement in such form as the Committee
from time to time approves. Any such Option shall be subject to
the terms and conditions required by this Section 6 and to such
additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee may deem appropriate in
each case.
(a) Option Price. The purchase price per Share purchasable
under an Option shall be determined by the Committee in its sole
discretion; provided that, except in connection with an
adjustment provided for in Section 4(g), such purchase price
shall not be less than the Fair Market Value of the Share on the
date of the grant of the Option.
(b) Option Period. The term of each Option shall be fixed
by the Committee in its sole discretion, not to exceed ten years
from the date the Option is granted.
(c) Exercisability. Options shall be exercisable at such
time or times as determined by the Committee at or subsequent to
grant.
(d) Method Of Exercise. Subject to the other provisions of
the Plan, any Option may be exercised by the Participant in whole
or in part at such time or times, and the Participant may make
payment of the option price in such form or forms, including,
without limitation, payment by delivery of cash, Shares or other
consideration (including, where permitted by law and the
Committee, Awards) having a Fair Market Value on the exercise
date equal to the total option price, or by any combination of
cash, Shares and other consideration as the Committee may specify
in the applicable Award Agreement.
(e) Reload Options. The Committee shall have the authority
to specify, either at the time of grant of an Option or at a
later date, that upon exercise of all or a portion of that Option
a Reload Option shall be granted under specified conditions. A
Reload Option entitles the Participant to purchase Shares (i)
that are covered by an antecedent award at the time of its
exercise, but are not issued upon such exercise, or (ii) whose
aggregate grant price equals the purchase price of the exercised
antecedent award and any related tax withholdings. The grant
price per Share of the Reload Option shall be the Fair Market
Value per Share at the time of
-8-
grant. The duration of a Reload Option shall not extend beyond
the expiration date of the antecedent award. The specific terms
and conditions applicable to Reload 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
such Options.
(f) Transferability of Options. Notwithstanding the
provisions of Section 14(a) of the Plan, at the discretion of the
Committee and in accordance with rules it establishes from time
to time, Participants may be permitted to transfer some or all of
their Options to one or more immediate family members.
SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights may be granted hereunder to Participants either alone or
in addition to other Awards granted under the Plan and may, but
need not, relate to a specific Option granted under Section 6.
The provisions of Stock Appreciation Rights need not be the same
with respect to each recipient. Any Stock Appreciation Right
related to an Option may be granted at the same time such Option
is granted or at any time thereafter before exercise or
expiration of such Option. In the case of any Stock Appreciation
Right related to any Option, the Stock Appreciation Right or
applicable portion thereof shall terminate and no longer be
exercisable upon the termination or exercise of the related
Option, except that a Stock Appreciation Right granted with
respect to less than the full number of Shares covered by a
related Option shall not be reduced until the exercise or
termination of the related Option exceeds the number of Shares
not covered by the Stock Appreciation Right. Any Option related
to any Stock Appreciation Right shall no longer be exercisable to
the extent the related Stock Appreciation Right has been
exercised. The Committee may impose such conditions or
restrictions on the exercise of any Stock Appreciation Right as
it shall deem appropriate.
SECTION 8. CONTINGENT STOCK
(a) Issuance. A Contingent Stock Award shall be subject to
contingencies or restrictions imposed by the Committee during a
period of time specified by the Committee (the "Contingency
Period"). Contingent Stock Awards may be issued hereunder to
Participants, for no cash consideration or for such minimum
consideration as may be required by applicable law, either alone
or in addition to other Awards granted under the Plan. The
provisions of Contingent Stock Awards need not be the same with
respect to each recipient.
(b) Registration. Any Contingent Stock issued hereunder
may be evidenced in such manner as the Committee in its sole
discretion shall deem appropriate, including, without limitation,
book-entry registration or issuance of a stock certificate or
certificates. In the event any stock certificate is issued in
respect of shares of Contingent Stock awarded under the Plan,
such certificate shall be registered in the name of the
Participant and shall bear an appropriate legend referring to the
terms, conditions, contingencies and restrictions applicable to
such Award.
(c) Forfeiture. Except as otherwise determined by the
Committee at the time of grant or thereafter, upon termination of
employment for any reason during the Contingency Period, all
-9-
Shares of Contingent Stock still subject to contingency or
restriction shall be forfeited by the Participant and reacquired
by the Company. Noncontingent Shares, evidenced in such manner
as the Committee shall deem appropriate, shall be issued to the
Participant promptly after the Contingency Period, as determined
or modified by the Committee, shall expire.
(d) Minimum Vesting Condition. The minimum Contingency
Period applicable to any Contingent Stock Award that is not
subject to performance conditions restricting transfer shall be
three (3) years from the date of grant; provided, however, that a
Contingency Period of less than three (3) years may be approved
for such Awards with respect to up to 100,000 Shares under the
Plan.
SECTION 9. PERFORMANCE AWARDS. Performance Awards may be
granted hereunder to Participants, for no cash consideration or
for such minimum consideration as may be required by applicable
law, either alone or in addition to other Awards granted under
the Plan. The performance criteria to be achieved during any
Performance Period and the length of the Performance Period shall
be determined by the Committee upon the grant of each Performance
Award. Except as provided in Section 11, Performance Awards will
be paid only after the end of the relevant Performance Period.
Performance Awards may be paid in cash, Shares, other property or
any combination thereof in the sole discretion of the Committee
at the time of payment. The performance levels to be achieved
for each Performance Period and the amount of the Award to be
paid shall be conclusively determined by the Committee.
Performance Awards may be paid in a lump sum or in installments
following the close of the Performance Period or, in accordance
with procedures established by the Committee, on a deferred
basis.
SECTION 10. OTHER STOCK UNIT AWARDS.
(a) Other Awards of Shares and other Awards that are valued
in whole or in part by reference to, or are otherwise based on,
Shares or other property ("Other Stock Unit Awards") may be
granted hereunder to Participants, either alone or in addition to
other Awards granted under the Plan. Other Stock Unit Awards may
be paid in Shares, cash or any other form of property as the
Committee shall determine. Subject to the provisions of the
Plan, the Committee shall have sole and complete authority to
determine the Employees of the Company and its Subsidiaries to
whom, and the time or times at which, such Awards shall be made,
the number of Shares to be granted pursuant to such Awards and
all other conditions of the Awards. The provisions of Other
Stock Unit Awards need not be the same with respect to each
recipient.
(b) Subject to the provisions of this Plan and any
applicable Award Agreement, Awards and Shares subject to Awards
granted under this Section 10, may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date on
which the Shares are issued, or, if later, the date on which any
applicable contingency, restriction, performance or deferral
period lapses. For any Award or Shares subject to any Award
granted under this Section 10 the transferability of which is
conditioned only on the passage of time, such restriction period
shall be a minimum of three (3) years. Shares (including
securities
-10-
convertible into Shares) subject to Awards granted under this
Section 10 may be issued for no cash consideration or for such
minimum consideration as may be required by applicable law.
Shares (including securities convertible into Shares) purchased
pursuant to a purchase right granted under this Section 10
thereafter shall be purchased for such consideration as the
Committee shall in its sole discretion determine, which shall
not be less than the Fair Market Value of such Shares or other
securities as of the date such purchase right is granted.
SECTION 11. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. Notwithstanding any other provision
of the Plan to the contrary, unless the Committee shall determine
otherwise at the time of grant with respect to a particular
Award, in the event of a Change in Control:
(i) any Options and Stock Appreciation Rights
outstanding as of the date such Change in Control is determined
to have occurred, and which are not then exercisable and vested,
shall become fully exercisable and vested to the full extent of
the original grant;
(ii) the contingencies, restrictions and deferral
limitations applicable to any Contingent Stock shall lapse, and
such Contingent Stock shall become free of all contingencies,
restrictions and limitations and become fully vested and
transferable to the full extent of the original grant;
(iii) all Performance Awards shall be considered to
be earned and payable pro rata and shall be immediately settled
or distributed. The pro rata portion of a Performance Award
shall be calculated by multiplying the number of Shares or other
property underlying the Performance Award by a fraction, the
numerator of which is the number of days from the beginning of
the applicable Performance Period to the date of the Change in
Control and the denominator of which is the number of days
originally determined by the Committee as the term of the
applicable Performance Period. Any deferral, contingency or
other restriction applicable to such Performance Awards shall
lapse.
(iv) the contingencies, restrictions and deferral
limitations and other conditions applicable to any Other Stock
Unit Awards or any other Awards shall lapse, and such Other Stock
Unit Awards or such other Awards shall become free of all
contingencies, restrictions, limitations or conditions and become
fully vested and transferable to the full extent of the original
grant; and
(v) the restrictions applicable to any Shares received
in connection with the grant of a Reload Option shall lapse and
such Shares shall be freely and fully transferable.
(b) Change In Control Settlement. Notwithstanding any
other provision of the Plan, during the 60-day period from and
after a Change in Control (the "Change in Control Election
Period"), a Participant holding an Option or Stock Appreciation
Right shall have the right, whether or not the Option or Stock
Appreciation Right is fully exercisable and in lieu of the
payment of the purchase price for the Shares being purchased
under the Option or Stock Appreciation Right and by giving notice
to the Company, to elect (within the Change in Control Election
Period) to surrender all or part of the Option or Stock
Appreciation Right to the
-11-
Company and to receive cash, within 30 days of such notice, in
an amount equal to the amount by which the Change in Control
Price per Share on the date of such election shall exceed the
purchase price per Share under the Option or Stock Appreciation
Right multiplied by the number of Shares granted under the
Option or Stock Appreciation right as to which the right granted
under this Section 11(b) shall have been exercised.
(c) Alternate Settlement. Notwithstanding any other
provision of this Plan, if any right granted pursuant to this
Plan would make a Change in Control transaction ineligible for
pooling-of-interests accounting under APB No. l6 (or any
successor standard), that (after giving effect to any other
actions taken to cause such transaction to be eligible for such
pooling-of-interests accounting treatment) but for the nature of
such right would otherwise be eligible for such accounting
treatment, the Committee shall have the ability to substitute for
the cash payable pursuant to such right Shares with a Fair Market
Value equal to the cash that would otherwise be payable pursuant
thereto.
(d) Other Forms of Settlement. The foregoing provisions of
this Section 11 shall not preclude other forms of settlement of
outstanding Awards in the event of a Change in Control, including
a conversion or exchange of Awards for awards or securities of
any person that is a party to or initiates the Change in Control
transaction; provided that no Participant shall be required to
accept any such substituted or exchanged award or security
without such Participant's written consent.
SECTION 12. CODE SECTION 162(m) PROVISIONS.
(a) Notwithstanding any other provision of this Plan, if
the Committee determines at the time Contingent Stock, a
Performance Award or an Other Stock Unit Award is granted to a
Participant that such Participant is, or is likely to be as of
the end of the tax year in which the Company would claim a tax
deduction in connection with such Award, a Covered Employee, then
the Committee may provide that this Section 12 is applicable to
such Award.
(b) If an Award is subject to this Section 12, then the
lapsing of contingencies or restrictions thereon and the
distribution of cash, Shares or other property pursuant thereto,
as applicable, shall be subject to the achievement of one or more
objective performance goals established by the Committee, which
shall be based on the attainment of specified levels of one or
any combination of the following: cumulative net income or
cumulative net income per share during the performance period;
return on sales; return on assets; return on shareholders'
equity; cash flow; economic value added; cumulative operating
income; total shareholders' return; cost reductions; or
achievement of environment, health & safety goals of the Company
or the Subsidiary or business unit of the Company for or within
which the Participant is primarily employed. Such performance
goals shall be set by the Committee within the time period
prescribed by, and shall otherwise comply with the requirements
of Section 162(m) of the Code, or any successor provision
thereto, and the regulations thereunder.
(c) Notwithstanding any provision of this Plan other than
Section 11, with respect to any Award that is subject to this
Section 12, the Committee may adjust downwards, but not
-12-
upwards, the amount payable pursuant to such Award, and the
Committee may not waive the achievement of the applicable
performance goals.
(d) The Committee shall have the power to impose such other
restrictions on Awards subject to this Section 12 as it may deem
necessary or appropriate to ensure that such Awards satisfy all
requirements for "performance-based compensation" within the
meaning of Section 162(m)(4)(C) of the Code, or any successor
provision thereto.
(e) Notwithstanding any provision of this Plan other than
Section 4(g), no Participant may be granted Options and/or Stock
Appreciation Rights in any calendar year with respect to more
than two million (2,000,000) Shares or Contingent Stock Awards or
Performance Share Awards covering more than 25,000 Shares. The
maximum dollar value payable with respect to Performance Units
and/or Other Stock Unit Awards that are valued with reference to
property other than Shares and granted to any Participant in any
one calendar year is $2,000,000.
SECTION 13. AMENDMENTS AND TERMINATION. The Board may
amend, alter, suspend, discontinue or terminate the Plan or any
portion thereof at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be
made without (i) shareholder approval (x) if such approval is
necessary to qualify for or comply with any tax or regulatory
requirement for which or with which the Board deems it necessary
or desirable to qualify or comply or (y) if a proposed amendment
or alteration would materially increase the benefits accruing to
Participants, materially increase the maximum number of shares
which may be issued under the Plan or materially modify the
Plan's eligibility requirements or(ii) the consent of the
affected Participant, if such action would impair the rights of
such Participant under any outstanding Award. Notwithstanding
anything to the contrary herein, the Committee may amend the Plan
in such manner as may be necessary so as to have the Plan conform
to local rules and regulations in any jurisdiction outside the
United States.
The Committee may amend the terms of any Award theretofore
granted, prospectively or retroactively, but no such amendment
shall impair the rights of any Participant without his or her
consent. Notwithstanding any provision of this Plan, the
Committee may not amend the terms of any Option to reduce the
option price.
SECTION 14. GENERAL PROVISIONS.
(a) Nontransferability of Awards. Unless the Committee
determines otherwise at the time the Award is granted or
thereafter and except for transfers of Options permitted by
Section 6(f) of the Plan: (i) no Award, and no Shares subject to
Awards described in Section 10 which have not been issued or as
to which any applicable contingency, restriction, performance or
deferral period has not lapsed, may be sold, assigned,
transferred, pledged or otherwise encumbered, except by will or
by the laws of descent and distribution; provided that, if so
determined by the Committee, a Participant may, in the manner
established by the Committee, designate a beneficiary to exercise
the rights of the Participant with respect to any Award upon the
death of the Participant, and (ii) each Award shall be
exercisable, during the Participant's
-13-
lifetime, only by the Participant or, if permissible under
applicable law, by the Participant's guardian or legal
representative.
(b) Award Term. The term of each Award shall be for such
period of months or years from the date of its grant as may be
determined by the Committee.
(c) Award Entitlement. No Employee or Participant shall
have any claim to be granted any Award under the Plan and there
is no obligation for uniformity of treatment of Employees or
Participants under the Plan.
(d) Requirement of an Award Agreement. The prospective
recipient of any Award under the Plan shall not, with respect to
such Award, be deemed to have become a Participant, or to have
any rights with respect to such Award, until and unless such
recipient shall have executed an agreement or other instrument
evidencing the Award and delivered a copy thereof to the Company
and otherwise complied with the then applicable terms and
conditions.
(e) Award Adjustments. Except as provided in Section 12,
the Committee shall be authorized to make adjustments in
Performance Award criteria or in the terms and conditions of
other Awards in recognition of unusual or nonrecurring events
affecting the Company or its financial statements or changes in
applicable laws, regulations or accounting principles. The
Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award in the
manner and to the extent it shall deem desirable to carry it into
effect.
(f) Committee Right to Cancel. The Committee shall have
full power and authority to determine whether, to what extent and
under what circumstances any Award shall be canceled or
suspended. In particular, but without limitation, all
outstanding Awards to any Participant shall be canceled if the
Participant, without the consent of the Committee, while employed
by the Company or after termination of such employment, becomes
associated with, employed by, renders services to or owns any
interest in (other than any nonsubstantial interest, as
determined by the Committee) any business that is in competition
with the Company or with any business in which the Company has a
substantial interest as determined by the Committee or otherwise
takes any action that in the judgment of the Committee is not in
the best interests of the Company.
(g) Stock Certificate Legends. All certificates for Shares
delivered under the Plan pursuant to any Award shall be subject
to such stock transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and
other requirements of the Securities and Exchange Commission, any
stock exchange upon which the Shares are then listed and any
applicable Federal or state securities law, and the Committee may
cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
(h) Compliance with Securities Laws. No Award granted
hereunder shall be construed as an offer to sell securities of
the Company, and no such offer shall be outstanding, unless and
until the Committee in its sole discretion has determined that
any such offer, if made, would be in compliance with all
applicable requirements of the U.S. Federal securities laws and
any other laws to which such offer, if made, would be subject.
-14-
(i) Award Deferrals; Dividends. The Committee shall be
authorized to establish procedures pursuant to which the payment
of any Award may be deferred. Subject to the provisions of the
Plan and any Award Agreement, the recipient of an Award
(including, without limitation, any deferred Award) may, if so
determined by the Committee, be entitled to receive, currently or
on a deferred basis, cash dividends, or cash payments in amounts
equivalent to cash dividends on Shares ("Dividend Equivalents"),
with respect to the number of Shares covered by the Award, as
determined by the Committee, in its sole discretion, and the
Committee may provide that such amounts (if any) shall be deemed
to have been reinvested in additional Shares or otherwise
reinvested.
(j) Consideration for Awards. Except as otherwise required
in any applicable Award Agreement or by the terms of the Plan,
recipients of Awards under the Plan shall not be required to make
any payment or provide consideration other than the rendering of
services.
(k) Delegation of Authority by Committee. The Committee
may delegate to one or more executive officers (as that term is
defined in Rule 3b-7 under the Exchange Act) or a committee of
executive officers the right to grant Awards to Employees who are
not executive officers or directors of the Company and to cancel
or suspend Awards to Employees who are not executive officers or
directors of the Company.
(l) Withholding Taxes. The Company shall be authorized to
withhold from any Award granted or payment due under the Plan the
amount of withholding taxes due in respect of an Award or payment
hereunder and to take such other action as may be necessary in
the opinion of the Company to satisfy all obligations for the
payment of such taxes. The Committee shall be authorized to
establish procedures for election by Participants to satisfy such
obligations for the payment of such taxes by delivery of or
transfer of Shares to the Company or by directing the Company to
retain Shares otherwise deliverable in connection with the Award.
(m) Other Compensatory Arrangements. Nothing contained in
this Plan shall prevent the Board from adopting other or
additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may
be either generally applicable or applicable only in specific
cases.
(n) Governing Law. The validity, construction, and effect
of the Plan and any rules and regulations relating to the Plan
shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania and applicable Federal law.
(o) Severability. If any provision of this Plan is or
becomes or is deemed invalid, illegal or unenforceable in any
jurisdiction, or would disqualify the Plan or any Award under any
law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws or if
it cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent of
the Plan, it shall be stricken and the remainder of the Plan
shall remain in full force and effect.
-15-
(p) Awards to NonU.S. Employees. Awards may be granted to
Employees who are foreign nationals or employed outside the
United States, or both, on such terms and conditions different
from those applicable to Awards to Employees employed in the
United States as may, in the judgment of the Committee, be
necessary or desirable in order to recognize differences in local
law or tax policy. The Committee also may impose conditions on
the exercise or vesting of Awards in order to minimize the
Company's obligation with respect to tax equalization for
Employees on assignments outside their home countries.
(q) Repricing Prohibited. The repricing of Options or
Stock Appreciation Right Awards under the Plan is expressly
prohibited. "Repricing" means the grant of a new Option, Stock
Appreciation Right or other Award in consideration of the
exchange, cancellation or forfeiture of an Award that has a
higher grant price than the new Award or the amendment of an
outstanding Award to reduce the grant price; provided, that the
grant of a Substitute Award shall not be considered to be
repricing.
SECTION 15. TERM OF PLAN. The Plan shall be effective as of
June 1, 1999. No Award shall be granted pursuant to the Plan
after May 31, 2009, but any Award theretofore granted may extend
beyond that date.
SECTION 16. TERMINATION OF PRIOR PLAN. No stock options or
other awards may be granted under the Prior Plan after May 31,
1999, but all such awards theretofore granted shall extend for
the full stated terms thereof.
-16-
EXHIBIT 12
<TABLE>
<CAPTION>
Computation of Ratio of Earnings to Fixed Charges
For the six months ended June 30, 1999
(in millions, except ratio)
1999
----
<S> <C>
Earnings:
Income before taxes on income $ 794.8
Minority interests' share of earnings of majority-
owned subsidiaries without fixed charges -
Equity income (15.5)
Fixed charges 127.0
Proportionate share of income of 50%-owned
persons 15.4
Distributed income of less than 50%-owned persons -
Amortization of capitalized interest 8.3
--------
Total earnings $ 930.0
Fixed Charges:
Interest expense:
Consolidated $ 102.1
Proportionate share of 50%-owned persons 1.2
--------
103.3
--------
Amount representative of the interest factor in rents:
Consolidated 23.1
Proportionate share of 50%-owned persons .6
--------
23.7
--------
Fixed charges added to earnings 127.0
--------
Interest capitalized:
Consolidated 5.6
Proportionate share of 50%-owned persons -
--------
5.6
--------
Preferred stock dividend requirements of
majority-owned subsidiaries -
--------
Total fixed charges $ 132.6
========
Ratio of earnings to fixed charges 7.0
========
</TABLE>
-23-
EXHIBIT 15
July 7, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Alcoa Inc.
1. Form S-8 (Registration Nos.33-24846 and 333-00033)
Alcoa Savings Plan for Salaried Employees; Alcoa
Fujikura Ltd. Salaried 401(k) Savings Plan
2. Form S-8 (Registration Nos.33-22346, 33-49109,
33-60305, 333-27903, 333-62663 and 333-79575)
Long Term Stock Incentive Plan; Alumax Inc. Long
Term Incentive and Employee Equity Ownership
Plans; Alcoa Stock Incentive Plan
3. Form S-3 (Registration No. 33-60045) and
Form S-3 (Registration No. 33-64353) and
Form S-3 (Registration No. 333-59381)
Debt Securities and Warrants to Purchase Debt
Securities, Preferred Stock and Common Stock
of the Company and Trust Preferred Securities
of Alcoa Trust I
4. Form S-4 (Registration No. 333-58227)
Registration of Alcoa common stock, par value
$1.00 per share
Ladies and gentlemen:
We are aware that our report dated July 7, 1999,
accompanying interim financial information of Alcoa
Inc. (Alcoa) and subsidiaries for the three-month and
six-month periods ended June 30, 1999 and 1998, is
incorporated by reference in the registration
statements referred to above. Pursuant to Rule 436 (c)
under the Securities Act of 1933, this report should
not be considered as part of a registration statement
prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 242,700
<SECURITIES> 63,700
<RECEIVABLES> 2,105,900
<ALLOWANCES> 60,700
<INVENTORY> 1,631,100
<CURRENT-ASSETS> 4,634,500
<PP&E> 18,535,200
<DEPRECIATION> 9,391,900
<TOTAL-ASSETS> 17,098,400
<CURRENT-LIABILITIES> 2,977,600
<BONDS> 2,942,200
0
55,800
<COMMON> 394,700
<OTHER-SE> 5,640,900
<TOTAL-LIABILITY-AND-EQUITY> 17,098,400
<SALES> 8,017,400
<TOTAL-REVENUES> 8,056,600
<CGS> 6,268,000
<TOTAL-COSTS> 6,268,000
<OTHER-EXPENSES> 439,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,100
<INCOME-PRETAX> 794,800
<INCOME-TAX> 254,300
<INCOME-CONTINUING> 540,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 461,100
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.23
</TABLE>
