Alcoa 1999 Annual Report Download - page 50

L. 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 contin-
gencies. 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.
Aluminio is currently party to a hydroelectric construction project
in Brazil. Total estimated construction costs are $500, of which the
company’s share is 24%. In the event that other participants in this
project fail to fufill their financial responsibilities, Aluminio may be
liable for its pro rata share of the deficiency.
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 $190
in 2000, $182 in 2001, $179 in 2002, $176 in 2003, $176 in 2004
and $2,222 thereafter. Expenditures under these contracts totaled
$179in1999,$171in1998and$219in1997.
M. Earnings Per Share
Basic earnings per common share (EPS) amounts are computed by
dividing earnings after the deduction of preferred stock dividends
by the average number of common shares outstanding. Diluted EPS
amounts assume the issuance of common stock for all potentially
dilutive securities outstanding. See Note N for additional
information.
The details of basic and diluted earnings per common share follow.
1999 1998 1997
Net income $1,054 $ 853 $ 805
Less: preferred stock dividends 222
Income available to common
stockholders $1,052 $ 851 $ 803
Average shares outstanding— basic 366.9 349.1 344.5
Effect of dilutive securities:
Shares issuable upon exercise
of dilutive outstanding
stock options 6.7 2.5 3.3
Average shares outstanding— diluted 373.6 351.6 347.8
Basic EPS $ 2.87 $ 2.44 $ 2.33
Diluted EPS 2.82 2.42 2.31
N. Preferred and Common Stock
Preferred Stock. Alcoa has two classes of preferred stock. Serial
preferred stock has 557,740 shares authorized, with a par value of
$100 per share and an annual $3.75 cumulative dividend preference
per share. Class B serial preferred stock has 10 million shares
authorized (none issued) and a par value of $1 per share.
Common Stock. There are 600 million shares authorized at a par
value of $1 per share. As of December 31, 1999, 40,833,662 shares
of common stock were reserved for issuance under the long-term
stock incentive plan.
Stock options under the company’s stock incentive plan have been
and may be granted, generally at not less than market prices on
the dates of grant, except for the 25 cents per-share options issued
as a payout of earned performance share awards. The stock option
program includes a reload or stock continuation ownership feature.
Stock options granted have a maximum term of 10 years. Vesting
occurs one year from the date of grant and six months for options
granted under the reload feature.
Alcoa’s net income and earnings per share would have been
reduced to the pro forma amounts shown below if compensation cost
hadbeendeterminedbasedonthefairvalueatthegrantdates.
1999 1998 1997
Net income:
As reported $1,054 $853 $805
Pro forma 912 815 756
Basic earnings per share:
As reported 2.87 2.44 2.33
Pro forma 2.48 2.33 2.19
Diluted earnings per share:
As reported 2.82 2.42 2.31
Pro forma 2.44 2.31 2.17
The weighted average fair value of options granted was $10.69 per
sharein1999,$5.73persharein1998and$5.90persharein1997.
The fair value of each option is estimated on the date of grant or
subsequent reload using the Black-Scholes pricing model with the
following assumptions:
1999 1998 1997
Average risk-free interest rate 5.0% 5.2% 6.1%
Expected dividend yield 1.4 2.1 1.3
Expected volatility 37.0 25.0 25.0
Expected life (years):
New option grants 2.5 2.5 2.5
Reload option grants 1.5 1.5 1.0