Item 1. Business.

Alcoa is the world's largest integrated aluminum company, producing and selling primary aluminum and semi-fabricated and finished aluminum products. Alcoa is also the world's largest producer of alumina. The Company produces and sells alumina- based chemicals, a variety of other finished products and compo- nents and systems. The Company's products are used primarily by packaging, transportation (including aerospace, automotive, rail and shipping), building and industrial customers world- wide. Alcoa has operating and sales locations in 28 countries.

Alcoa serves a variety of customers in a number of markets. Consolidated revenues from these markets were:

                                           (dollars in millions)
Revenues by Market                         1995     1994    1993
                                           ----     ----    ----

   Packaging                            $  3,797   $2,830  $2,606
   Transportation                          2,232    1,671   1,397
   Distributor and Other                   1,988    1,570   1,274
   Alumina and Chemicals                   1,705    1,494   1,437
   Building and Construction               1,531    1,391   1,299
   Aluminum Ingot                          1,247      948   1,042

     Total Sales and Operating Revenues  $12,500   $9,904  $9,055

Segment and geographic area financial information is presented in Note P to the Financial Statements.

Major Operations

Most aluminum facilities located in the United States are owned by the parent company. Alcoa of Australia Limited (AofA), Alcoa Aluminio S.A. (Aluminio) in Brazil and Alcoa Fujikura Ltd. (AFL) are the three largest operating subsi- diaries.

AofA operates integrated aluminum facilities in Australia, including mining, refining, smelting and fabricating opera- tions. More than half of AofA's 1995 revenues were derived from alumina, and the balance was derived principally from primary aluminum, rigid container sheet and gold.

Alcoa Brazil Holdings Company holds Alcoa's 59% interest in Aluminio, an integrated aluminum producer in Brazil. Aluminio operates mining, refining, smelting, fabricating and closures facilities at various locations in Brazil. Approximately 28% of Aluminio's 1995 unconsolidated revenues was derived from primary aluminum, and exports accounted for approximately one-fourth of its revenues.

AFL, owned 51% by Alcoa and 49% by Fujikura Ltd. of Japan, produces and markets automotive electrical distribution systems, as well as fiber optic products and systems for selected electric utilities, telecommunications, cable televi- sion and datacom markets.

Alumina and Chemicals Restructuring

In December 1994, Alcoa and WMC Limited of Melbourne, Australia (WMC) (formerly Western Mining Corporation Holdings Limited) restructured and combined their respective worldwide bauxite, alumina and alumina-based chemicals businesses and investments into a group of companies (Alcoa World Alumina) owned 60% by Alcoa. The restructuring and combination of cer- tain businesses and investments in Brazil between Alcoa, WMC and third party investors in Aluminio were concluded late in the first quarter of 1995. See Note C to the Financial Statements.

Alcoa World Alumina is a series of affiliated operating entities and assets which includes the following:

1. 99.25% ownership interest in AofA, including its aluminum smelting and fabricating operations;

2. Alcoa's operations at Point Comfort, Texas (refining); bauxite mining in Guinea, Africa (through an interest in Halco (Mining) Inc.); Jamaica (mining and refining); Suriname (mining, refining and smelting); and the U.S. Virgin Islands (refining);

3. Alcoa's bauxite and alumina shipping operations;

4. Alcoa's alumina-based chemicals businesses in Australia, Germany, India, Japan, the Netherlands, Singapore and U.S.; and

5. An interest in the Alumar alumina refinery at Sao Luis, Brazil (Alumar Refinery) and in Mineracao Rio do Norte S.A. (MRN) (mining).

A five-member strategic council, with three members appointed by Alcoa and two by WMC, provides counsel and direc- tion to Alcoa World Alumina. Alcoa provides operating manage- ment for all of the affiliated operating entities.

Competition

The markets for most aluminum products are highly competi- tive. Price, quality and service are the principal competitive factors in most of these markets. Where aluminum products compete with other materials, the diverse characteristics of aluminum are also a significant factor, particularly its light weight and recyclability. The competitive conditions are discussed later for each of the Company's major product classes.

The Company continues to examine all aspects of its opera- tions and activities and redesign them where necessary to enhance effectiveness and achieve cost reductions. Alcoa believes that its competitive position is enhanced by its improved processes, extensive facilities and willingness and ability to commit capital where necessary to meet growth in important markets and by the capability of its employees. Research and development, and an increased emphasis on full utilization of technology, have led to improved product quality and production techniques, new product development and cost control.

The dissolution of the former Soviet Union and the lack of a mechanism to successfully integrate its economy with market economies significantly contributed to a global oversupply of aluminum in recent years. Prior to 1991, former Soviet alumi- num producers primarily served internal markets which weakened substantially after the collapse of the Soviet Union, and aluminum produced at former Soviet smelters began to be exported. These exports caused an imbalance in demand and supply and resulted in severe downward pressure on aluminum prices.

In January 1994, an accord was reached among the govern- ments of six major primary aluminum-producing nations (Australia, Canada, the European Union, Norway, Russia and the U.S.) to address the global aluminum supply situation. Under the accord, the Russian industry would reduce its annual alumi- num exports for up to two years, the EU would refrain from renewing import quotas on Russian ingot when the quotas expired in early 1994, and certain of the participating governments would create a fund to assist in the modernization of the Russian industry.

By year-end 1994, Alcoa indefinitely curtailed 450,000 metric tons (mt) per year of its total worldwide smelting pro- duction. This capacity remains idled.

Risk Factors

In addition to risks inherent in Alcoa's worldwide opera- tions, Alcoa is exposed generally to financial, market, politi- cal and economic risks.

Commodity Risks

Alcoa is a leading global producer of aluminum ingot and aluminum fabricated products. Aluminum ingot is an interna- tionally priced, sourced and traded commodity. The principal trading market for ingot is the London Metal Exchange (LME). Alcoa participates in this market by buying and selling forward portions of its aluminum requirements and output.

Alcoa divides its operations into four regions: U.S., Pacific, Other Americas and Europe. AofA in the Pacific region, and Aluminio in the Other Americas, are generally in net long metal positions. From time to time, they may sell production forward. In the European region there are no smelting operations controlled by Alcoa, and accordingly, this region is net short and may purchase forward positions from time to time. At the present time, forward purchase and sales activity within these three regions is not material.

In the U.S., and for export, Alcoa enters into long-term contracts with a number of its fabricated products customers. At December 31, 1995, and 1994, such contracts approximated 2,483,000 mt and 1,500,000 mt, respectively, of fabricated products over the next several years. Alcoa may enter into similar arrangements in the future.

As a hedge against the economic risk of higher prices for metal needs associated with these long-term contracts, Alcoa entered into long positions, principally using futures and option contracts. At December 31, 1995 and 1994, these con- tracts totaled approximately 1,210,000 mt and 1,400,000 mt, respectively. The contracts limit the unfavorable effect of price increases on metal purchases and likewise limit the favorable effect from price declines. The futures and option contracts are with creditworthy counterparties and are further supported by cash, treasury bills or irrevocable letters of credit issued by carefully chosen banks.

For financial accounting purposes, the gains and losses on the hedging contracts are reflected in earnings concurrent with the hedged costs. The cash flows from these contracts are classified in a manner consistent with the underlying nature of the transactions.

Alcoa intends to close out the hedging contracts at the time it purchases the metal from third parties, thus creating the right economic match both in time and price. The deferred gains on the closed hedging contracts of $466 million at December 31, 1995 are expected to offset the increase in the price of the purchased metal.

The expiration dates of the call options and the delivery dates of the futures contracts do not always coincide exactly with the dates on which Alcoa is required to purchase metal to meet its contractual commitments with customers. Accordingly, some of the futures and option positions will be rolled forward. This may result in significant cash inflows if the hedging con- tracts 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, Alcoa had 461,000 mt of LME contracts out- standing at year-end 1995 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 aftertax charge to earnings of $38 million in 1995.

Alcoa also purchases certain other commodities, such as gas and copper, for its operations and enters into contracts to eliminate volatility in the prices of such products. None of these contracts are material. For additional information on financial instruments, see Note Q.

Financial Risk

Since Alcoa participates in the global marketplace, it is subject to significant exposure from fluctuations in foreign currencies. As a matter of company policy, Alcoa enters into foreign currency exchange contracts, including forwards and options, to manage its transactional exposure to changes in currency exchange rates.

Alcoa also attempts to maintain a reasonable balance between fixed and floating rate debt, using interest rate swaps where appropriate 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 straight- forward. They are primarily entered into for the purpose of removing uncertainty and volatility, and principally cover underlying exposures.

Alcoa's commodity and derivative activities are subject to the management, direction and control of the Strategic Risk Management Committee (SRMC). It is composed of the Chief Execu- tive Officer, the Vice Chairman, the Chief Financial Officer and other officers and employees as 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 Alcoa's derivatives activities and programs.

For further information on Alcoa's hedging and derivatives activities, see Notes A, I and Q to the Financial Statements, which are incorporated herein by reference.

Segments

Alcoa's operations consist of three segments: Alumina and Chemicals, Aluminum Processing, and Nonaluminum Products. Discussion of Alcoa's operations and properties by its three segments follows.

Alumina and Chemicals Segment

The Alumina and Chemicals segment includes the production and sale of bauxite, alumina, alumina (industrial) chemicals and transportation services.

Bauxite

Bauxite, aluminum's principal raw material, is refined into alumina through a chemical process and is then smelted into primary aluminum. Most of the bauxite mined and alumina produced by the Company, except by AofA, is further processed by the Company into aluminum. All of the Company's bauxite interests are now included in Alcoa World Alumina with the exception of Alcoa's bauxite mines in Arkansas, Aluminio's bauxite mines in Pocos de Caldas, Brazil and an 8.6% interest in MRN, which is also held by Aluminio.

The Company has long-term contracts to purchase bauxite mined by a partially-owned entity in the Republic of Guinea. These agreements expire after 2011. This bauxite services most of the requirements of the Point Comfort, Texas alumina refinery. Suriname Aluminum Company, L.L.C. (Suralco) mines bauxite in Suriname under rights which expire after the year 2000. Suralco also holds a 26% minority interest in a bauxite mining joint venture managed by the majority owner, an affiliate of Gencor Limited of South Africa (Gencor). Bauxite from both mining operations serves Suralco's share of the refinery in Suriname referred to below.

AofA's bauxite mineral leases expire in 2003. Renewal options allow AofA to extend the leases until 2045. The natural gas requirements of the refineries are supplied primarily under a contract with the parties comprising the North West Shelf Gas Joint Venture. The contract expires in 2005 and imposes minimum purchase requirements.

Bauxite mining rights in Jamaica expire after the year 2020. These rights are owned by the joint venture with the government of Jamaica referred to in the next section.

Alumina

Alumina is sold principally from operations in Australia, Jamaica and Suriname. Approximately 38% of the Company's alumina production in 1995 was sold to third parties. Most of the alumina supply contracts are negotiated on the basis of agreed volumes over a multi-year time period to assure a con- tinuous supply of alumina to the smelters which receive the alumina. Most alumina is sold under contracts where prices are negotiated periodically or are based on formulas related to aluminum ingot market prices or to production costs. Alumina demand and supply are generally in balance.

AofA is the world's largest and one of the lowest-cost producers of alumina. Its three alumina plants, located in Kwinana, Pinjarra and Wagerup in Western Australia, have in the aggregate an annual rated capacity of approximately 6.4 million mt. Most of AofA's alumina is sold under supply contracts to a number of customers worldwide.

Suralco owns 55% of the 1.6 million mt per year alumina refinery in Paranam, Suriname and operates the plant. An affiliate of Gencor holds the remaining 45%.

An Alcoa subsidiary and a corporation owned by the govern- ment of Jamaica are equal participants in a joint venture, managed by the subsidiary, that owns an alumina refinery in Clarendon Parish, Jamaica. Annual alumina capacity at the Clarendon refinery will be increased from 800,000 to approxi- mately 1,000,000 mt in the next several years.

Aluminio is the operator of the Alumar Consortium (Alumar), a cost-sharing and production-sharing venture which owns a large refining and smelting project near the northern coastal city of Sao Luis, Brazil. The Alumar Refinery has an annual capacity of approximately 1,000,000 mt and is owned 35.1% by Aluminio, 36% by an affiliate of Gencor, 18.9% by Abalco S.A. (owned 60% by Alcoa and 40% by WMC) and 10% by an affiliate of Alcan Aluminium Limited (Alcan). A majority of the alumina production is consumed at the smelter.

Aluminio holds an 8.6% interest and Abalco S.A. holds a 4.6% interest in MRN, a mining company which is jointly owned by affiliates of Alcan, Companhia Brasileira de Aluminio, Companhia Vale do Rio Doce, Gencor, Norsk Hydro and Reynolds Metals Company. Aluminio purchases bauxite from MRN under a long-term supply contract.

At Pocos de Caldas, Brazil, Aluminio mines bauxite and operates a refinery which produces alumina, primarily for its nearby smelter.

In July 1995, Alcoa Alumina & Chemicals, L.L.C., through a majority owned entity, St. Croix Alumina, L.L.C., acquired a 600,000 mt per year alumina refinery located on St. Croix, U.S. Virgin Islands from Virgin Islands Alumina Corporation, a sub- sidiary of Glencore International AG.

Industrial Chemicals

The Company sells industrial chemicals to customers in a broad spectrum of markets for use in refractories, ceramics, abrasives, chemicals processing and other specialty applica- tions.

A variety of industrial chemicals, principally alumina- based chemicals, are produced or processed at plants located in Mobile, Alabama; Bauxite, Arkansas; Ft. Meade, Florida; Dalton, Georgia; Lake Charles, Port Allen and Vidalia, Louisiana; Leetsdale, Pennsylvania; Nashville, Tennessee; Point Comfort, Texas; Kwinana and Rockingham, Australia; Pocos de Caldas and Salto, Brazil; Ludwigshafen, Germany; Iwakuni and Naoetsu, Japan; Moerdijk and Rotterdam, the Netherlands; and Singapore. Aluminum fluoride, used in aluminum smelting, is produced from fluorspar at Point Comfort and from hydrofluosilicic acid at Ft. Meade. With the exception of the plants located in Pocos de Caldas and Salto, all of these facilities are now part of Alcoa World Alumina.

The Company and The Associated Cement Companies Ltd. of Bombay, India have formed a joint venture to import, process and market tabular alumina and alumina-based chemicals for the refractory and ceramic industries in India. The venture com- pleted construction of its processing plant in India in 1995.

In June 1995, the Company acquired Discovery Industries, Inc., a privately-held producer of alumina-based chemicals in Port Allen, Louisiana.

Aluminum Processing Segment

The Aluminum Processing segment comprises the production and sale of molten metal, ingot, and aluminum products that are flat-rolled, engineered or finished. Also included are power, transportation and other services.

Revenues and shipments for the principal classes of pro- ducts in the aluminum processing segment are as follows:

                                (dollars in millions)
                               1995     1994      1993
                               ----     ----      ----

Revenues:
  Aluminum ingot              $1,197  $   920    $1,042
  Flat-rolled products         4,177    3,201     2,974
  Engineered products          2,303    1,882     1,528
  Other aluminum products        357      474       430
                               -----    -----     -----
Total                         $8,034   $6,477    $5,974
                               =====    =====     =====

                                  (mt in thousands)
Shipments:
  Aluminum ingot                 673      655       841
  Flat-rolled products         1,380    1,381     1,271
  Engineered products            454      433       379
  Other aluminum products         75       82        89
                               -----    -----     -----
Total                          2,582    2,551     2,580
                               =====    =====     =====

Aluminum Ingot

The Company smelts primary aluminum from alumina obtained principally from the alumina refineries discussed earlier. Smelters are located at Warrick, Indiana; Massena, New York; Badin, North Carolina; Alcoa, Tennessee; Rockdale, Texas; Wenatchee, Washington; Point Henry and Portland, Australia; Pocos de Caldas and Sao Luis, Brazil; and Paranam, Suriname. The Company's smelting operations in Australia and Suriname have been included in Alcoa World Alumina. Alcoa's consoli- dated annual rated primary aluminum capacity is approximately 1.9 million mt. When operating at capacity, the Company's smelters more than satisfy the primary aluminum requirements of the Company's fabricating operations. Purchases of aluminum scrap (principally used beverage cans), supplemented by pur- chases of ingot when necessary, satisfy any additional aluminum requirements. Most of the Company's primary aluminum produc- tion in 1995 was delivered to other Alcoa operations for alloying and/or further fabricating.

The Company utilizes electric power, natural gas and other forms of energy in its refining, smelting and processing opera- tions. Aluminum is produced from alumina by an electrolytic process requiring large amounts of electric power. Electric power accounts over time for approximately 25% of the Company's primary aluminum costs. Alcoa generates approximately 40% of the power used at its smelters worldwide. Most firm power purchase contracts tie prices to aluminum prices or to prices based on various indices.

The joint venture smelter at Portland, Victoria, with an annual rated capacity of 320,000 mt, is owned 45% by AofA, 25% by the State of Victoria, 10% by the First National Resources Trust, 10% by the China International Trust and Investment Cor- poration, and 10% by Marubeni Aluminium Australia Pty., Ltd. (Portland Smelter Participants). A subsidiary of AofA operates the smelter. Each Portland Smelter Participant is required to contribute to the cost of operations and construction in pro- portion to its interests in the venture and is entitled to its proportionate share of the output. Alumina is supplied by AofA. The Portland site can accommodate additional smelting capacity.

Currently, approximately 36% of the power for the Point Henry smelter is generated by AofA using its extensive brown coal deposits. The balance of the power, and power for the Portland, Victoria smelter, is available under contracts with the State Electricity Commission of Victoria which expire in

2014 and 2016, respectively. Power prices are tied by formula to aluminum prices. The State Government of Victoria has announced its desire to renegotiate the power contracts for the Point Henry and Portland smelters, but, after discussions, ter- minated the negotiations and advised that the existing base contracts will be honored. Informal discussions are continuing on clarifying various aspects of power supply to the smelters.

The Alumar Consortium aluminum smelter at Sao Luis, Brazil has an annual rated capacity of 328,000 mt. Aluminio receives about 54% of the primary aluminum production.

Electric power for Alumar's Sao Luis smelter is purchased from the government-controlled power grid in Brazil at a small discount from the applicable industrial tariff price and is protected by a cap based on the LME price of aluminum. Aluminio's Pocos de Caldas smelter purchased firm and inter- ruptible power from the government-controlled electric utility under a contract which expired January 1, 1996. Aluminio is negotiating with the utility for a renewal of that contract. Pending completion of a new contract, Aluminio is purchasing power from the utility at the applicable common tariff price.

Over 50% of the power requirements for Alcoa's U.S. smelters is generated by the Company, and the remainder is purchased from others under long-term contracts. Less than 15% of the self-generated power results from the Company's entitle- ment to a fixed percentage of the output from a hydroelectric power facility located in the northwestern United States.

The Company generates substantially all of the power used at its Warrick smelter using coal reserves near the smelter that should satisfy requirements through year-end 1997. The Company is negotiating a coal supply contract to meet the needs of the smelter through 2006. Lignite is used to generate power for the Rockdale, Texas smelter. Company-owned generating units supply about half of the total requirements and the balance is purchased from a dedicated power plant under a con- tract which expires not earlier than 2013.

In connection with the electric power generated for the aluminum smelters at Alcoa, Tennessee and Badin, North Carolina, two subsidiaries of the Company own and operate hydroelectric facilities subject to Federal Energy Regulatory Commission licenses effective until 2005 and 2008, respectively. For the Tennessee plant, the Company also purchases firm and interrup- tible power from Tennessee Valley Authority under a contract which expires in 2000. For the Badin plant, the Company pur- chases additional power under an evergreen contract providing for specified periods of notice before termination by either party.

The purchased power contract for the Massena smelter expires not earlier than 2003 but may be terminated by the Company with one year's notice.

Alcoa has two principal power contracts for its Wenatchee smelter. The contract for the power output entitlement referred to above expires in 2011. The contract with Bonne- ville Power Administration expires in 2001 and includes 25% interruptible power. Power restrictions may occur when pre- cipitation is below normal. Beginning in 1995, a portion of the power supplied under the entitlement contract was replaced by power purchased from the local public utility district. Additional power also may be purchased from the district.

Although not included in the revenues by market or revenues and shipments tables above or in the rated primary aluminum capacity figure above, the Company reports equity earnings from its interest in two primary aluminum smelters in Norway. Elkem Aluminium ANS, 50% owned by Norsk Alcoa A/S, a subsidiary, is a partnership that owns and operates the smelters.

In November 1995, Alcoa signed an agreement to acquire the principal operating assets of Alumix S.p.A., Italy's state- owned integrated aluminum producer. Alcoa will acquire two primary aluminum smelters, at Portovesme and Fusina, with combined annual capacity of 170,000 mt; a rolling mill at Fusina with annual capacity of 140,000 mt; four aluminum extru- sion plants (at Bolzano, Fossanova, Feltre and Iglesias) with combined annual capacity of 70,000 mt; and an extrusion die shop, six metal distribution centers, three administrative centers and sales offices in France, Germany, Spain and the United Kingdom. The acquisition is expected to close before mid-year 1996.

Flat-Rolled Products

The Company's flat-rolled products serve three principal markets: light gauge sheet products serve principally the packaging market, and sheet and plate products serve princi- pally the transportation and building and construction markets.

Alcoa employs its own sales force for most products sold in the packaging market. Most of the packaging revenues in 1995 were derived from rigid container sheet (RCS) sold to can companies for production of beverage and food cans and can ends. The number of RCS customers in the U.S. is relatively small, and the number of can companies has been shrinking. Use of aluminum beverage cans continues to increase, particularly in Asia, Europe and South America, where per capita consump- tion remains relatively low. Aluminum foil and packaging sheet (other than RCS) are sold principally in the packaging markets.

Aluminum's diverse characteristics, particularly its light weight and recyclability, are significant factors in packaging markets where alternatives such as steel, plastic and glass are competitive materials. Leadership in the packaging markets is maintained by improving processes and facilities, as well as by providing research and technical support to customers.

Light gauge aluminum sheet and foil products are manufac- tured at several locations. RCS is produced at Warrick, Indiana; Alcoa, Tennessee; Point Henry, Australia; Yennora, Australia (a joint venture facility acquired in January 1996); Moka, Japan (a joint venture facility); and Swansea, Wales. Light gauge sheet and foil are produced at Lebanon, Pennsyl- vania; Shanghai, China; and Yennora, Australia. Foil conver- sion activity at the Davenport, Iowa plant will be repositioned to the Lebanon facility by mid-year 1996. Light gauge sheet, foil products and laminated evaporator panels are manufactured by Aluminio at Recife, Brazil.

Used aluminum beverage cans are an important source of metal for RCS. The cost of used beverage cans continued to increase during the first half of 1995, then drifted lower during the second half of the year. Recycling aluminum con- serves raw materials, reduces litter and saves energy - about 95% of the energy needed to produce aluminum from bauxite. Also, recycling capacity costs much less than new primary aluminum capacity. Can recycling or remelt facilities are located at or near Alcoa's Warrick, Indiana and Alcoa, Tennessee plants.

In early 1995 the Company and Shanghai Aluminum Fabrica- tion Plant (SAFP) formed a joint venture company to acquire and operate SAFP's existing aluminum foil and foil laminate produc- tion facility in Shanghai, China. The joint venture company, which commenced operations in May 1995, is owned 60% by Alcoa and 40% by SAFP. The facility currently produces approximately 8,500 mt of aluminum foil per year. It is anticipated that through the use of technology developed by Aluminio and the addition of a second caster, annual output will increase to approximately 18,000 mt within five years.

The Company has joint ventures with Kobe Steel, Ltd. (Kobe) in Australia and Japan that serve the packaging markets. KSL Alcoa Aluminum Company, Ltd. (KAAL) manufactures and sells RCS in

Japan and other Asian countries. The Company holds a 50% interest in KAAL. In connection with this joint venture, Alcoa entered into a long-term metal contract with Kobe.

KAAL Australia Pty. Limited (KAAL/Australia) was formed in December 1995 to acquire Comalco Limited's rolled products operations at Yennora, Australia. KAAL/Australia will manufac- ture and sell aluminum sheet and foil for the Australian market, as well as RCS for Australian and Asian markets. The Company also holds a 50% interest in KAAL/Australia. Negotiations relating to the acquisition of the AofA rolling mill at Point Henry by KAAL/Australia or an affiliate are proceeding.

Sheet and plate products serve aerospace, automotive, lithographic, railroad, ship-building, building and construc- tion, defense and other industrial and consumer markets. The Company maintains its own sales forces for most of these products. Differentiation of material properties, price and service are significant competitive factors. Aluminum's diverse characteristics are important in these markets, where competitive materials include steel and plastics for automotive and building applications; magnesium, titanium, composites and plastics for aerospace and defense applications; and wood and vinyl in building and construction applications.

The Company's largest sheet and plate plant is located at Davenport, Iowa. It produces products requiring special alloying, heat treating and other processing, some of which are unique or proprietary. The Company serves European sheet and plate markets through a distribution center in Paal, Belgium.

The Company substantially has completed a plant in Hutchinson, Kansas for further processing and just-in-time stocking of aluminum sheet products for the aerospace market.

Alcoa continues to develop alloys and products for aero- space applications, such as new aluminum alloys for application in the Boeing 777 aircraft. A research and development effort also has resulted in the commercial development of a series of aluminum and aluminum-lithium alloys which offer significant weight savings over traditional materials for aerospace and defense applications.

The Company and Kobe also have two joint venture companies, one in the U.S. and one in Japan, to serve the transportation industry. The initial emphasis of these companies is on expanding the use of aluminum sheet products in passenger cars and light trucks.

The Company has a 50.1% interest in Alcoa-Kofem Kft., a Hungarian subsidiary. The government-owned Hungarian Aluminium Industrial Corporation holds the remaining equity interest. The subsidiary produces common alloy flat and coiled sheet, soft alloy extrusions and end products for the building, con- struction, food and agricultural markets in central and western Europe. Alcoa is providing technological and operational expertise to Alcoa-Kofem Kft.

Engineered Products

Engineered products principally include extrusion and tube, wire, rod and bar, forgings, castings, aluminum building products, aluminum memory disk blanks and other products which are sold in a wide range of markets, but principally in the transportation market.

Aluminum extrusions and tube are produced principally at five U.S. locations. The Chandler, Arizona plant produces hard alloy extrusions, tube and forge stock; the Lafayette, Indiana plant produces a broad range of hard alloy extrusions and tube; the Baltimore, Maryland plant produces large press extrusions; and plants at Tifton, Georgia and Delhi, Louisiana produce common alloy extrusions. In 1994, the Company announced the shutdown of the hard alloy extrusion and tube and forgings facilities at its Vernon, California plant. This plant continues to produce cast aluminum plate. In August

1995, Alcoa announced that it will invest approximately $12 million over the next two years in new machinery and equip- ment for the cast aluminum plate operations.

Alcoa and VAW Aluminium AG (VAW) have a joint venture that produces and markets high-strength aluminum extrusions, rod and bar to serve principally European transportation and defense markets. An Alcoa subsidiary owns 60% and VAW owns 40% of the venture, which is called Alcoa VAW Hannover Presswerk GmbH & Co. KG and is located in Hannover, Germany.

Aluminum extruded products are manufactured by a subsidiary of Alcoa Latin American Holdings Corporation in Argentina and at several Aluminio locations in Brazil. In early March 1996, Aluminio acquired the extrusion assets of an Alcan affiliate in Brazil. These assets include four plants and eight extrusion presses. The transaction will be submitted to the Brazilian antitrust authorities for review and approval.

Alcoa Nederland Holding B.V. (ANH) and its subsidiaries produce extrusions, common alloy sheet products and a variety of finished products for the building industry, such as alumi- num windows, doors and aluminum ceiling systems, as well as products for the agricultural industry such as automated green- house systems.

The Company also produces extrusions in Hungary, Spain and the United Kingdom.

Mechanical-grade redraw rod, wire and cold-finished rod and bar are produced at Massena, New York and are sold to dis- tributors and customers for a variety of applications in the building and transportation markets.

Aluminum forgings are produced at Cleveland, Ohio and Bologne, France. These forgings are sold principally in the aerospace, defense and transportation markets. Forged alumi- num wheels for truck, bus and automotive markets are produced at Cleveland, Ohio.

During the third quarter of 1995, Alcoa announced plans to build a plant in Szekesfehervar, Hungary to manufacture forged aluminum truck wheels for the European market. The plant also may manufacture wheels for export to Asian, South American and other geographic markets where European-type wheels are used. The plant is scheduled to commence operations in early 1997.

Alcoa Automotive Structures GmbH produces aluminum compo- nents and sub-assemblies for aluminum automotive spaceframes. Aluminum spaceframes represent a significant departure from the traditional method and material used to manufacture primary auto body structures. In 1993 Alcoa completed construction and began operating a unique multi-million dollar plant in Soest, Germany to supply aluminum spaceframe products to its first customer, Audi AG. In 1994 Audi began marketing its new A8 luxury sedan, the first automobile to utilize a complete aluminum spaceframe body structure. The aluminum body struc- ture of the A8 is a result of a cooperation between Alcoa and Audi that began in 1981 and is constructed from components and sub-assemblies that are or will be produced by Alcoa. Audi has announced that the A8 will go on sale in the United States in the fall of 1996.

Alcoa continues to cooperate with several automobile manu- facturers in Europe, North America and Japan to develop new automotive applications for aluminum products. For example, Chrysler Corporation's Plymouth Prowler, a new roadster, is scheduled to enter initial, low-volume production in January 1997. Carrying 900 pounds of aluminum (or approximately one- third of its weight), the Prowler will utilize an all aluminum frame and body as well as aluminum for brake rotors and suspen- sion components. Alcoa will provide the car's frame as well as aluminum sheet stock to be stamped into body panels and bumper assemblies.

Alcoa has constructed and begun production at a plant in Northwood, Ohio, near Toledo, which will manufacture aluminum structural assemblies for the automotive industry.

During the first quarter of 1995 the Company formed a joint venture with a subsidiary of CMI International, Inc. to produce cast and forged aluminum automotive parts. The Company holds a 50% interest in the venture called A-CMI.

In September 1995, A-CMI announced plans to build its first European manufacturing plant in Lista, Norway. The plant will develop and produce cast aluminum chassis, suspension, brake and powertrain components and systems. The plant repre- sents a total investment of approximately $40 million and will be built in close proximity to an Elkem Aluminium ANS smelter which will deliver molten aluminum to the plant. This facility will commence production in mid-1997.

In August 1995, the Company acquired DBM Industries, Ltd., of Montreal, Canada, a designer and builder of specialized die- casting machines. The acquisition provides Alcoa with the capability to manufacture die-cast aluminum parts and custom die-casting machines.

Aluminio produces aluminum truck and van bodies in Sao Paulo, Brazil and aluminum electrical cables at its Pocos de Caldas plant.

Alcoa Building Products produces and markets residential aluminum siding and other aluminum building products. These products are sold principally to wholesale distributors.

Other Aluminum Products

Alcoa produces aluminum closures for bottles at Richmond, Indiana; Worms, Germany; Nogi and Ichikawa, Japan; and near Barcelona, Spain.

The Company also sells aluminum scrap and produces and markets aluminum paste, particles, flakes, atomized powder, and is engaged in the production of high purity aluminum.

Nonaluminum Products Segment

The Nonaluminum Products segment includes the production and sale of electrical, ceramic, plastic, and composite materials products, manufacturing equipment, gold, magnesium products, and steel and titanium forgings.

AFL produces and markets automotive electrical distribu- tion systems (EDS), as well as fiber optic products and systems for selected electric utilities, telecommunications, cable television and datacom markets. AFL is the only EDS supplier that has been awarded the Total Quality Excellence (TQE) Award by Ford Motor Company. All AFL automotive operations also have the Q1 rating from Ford. AFL now is supplying EDS to Subaru of America, Inc. (in the U.S.), Auto Alliance, Inc. (Mazda-Ford joint venture), Kenworth, Peterbilt, Mack and Navistar. AFL has a 90% interest in Michels GmbH & Co. KG, a manufacturer of EDS for automobiles, appliances and farm equipment with three plants in Germany and five plants in Hungary. AFL's Stribel group of companies are European manufacturers of electro- mechanical and electronic components for the European automo- tive market.

In July 1995, AFL acquired the operations of Electro-Wire Products, Inc. Electro-Wire Products also manufactured EDS for autos, trucks and farm equipment. Combining these two busi- nesses created a worldwide enterprise that is the largest supplier of EDS to Ford Motor Company's worldwide operations. The combined enterprise also is the largest supplier of EDS to the heavy truck industry.

In the first half of 1996, AFL and Aluminio will manufac- ture and sell EDS in Brazil through a joint venture.

Alcoa Electronic Packaging, Inc. (AEP) produces ceramic packages used to hold integrated circuits for electronic equip- ment. In early December 1995, AEP was notified by its major customer, Intel, that no new orders would be forthcoming. Alcoa is exploring all options available at this time. The book value of AEP's net assets at year-end 1995 was $69 million.

Alcoa produces plastic closures for bottles at Crawfords- ville, Indiana; Olive Branch, Mississippi; Buenos Aires, Argen- tina; Sao Paulo, Brazil; Santiago, Chile; Tianjin, China; Bogota, Colombia; Szekesfehervar, Hungary; Nogi, Japan; Saltillo, Mexico; and near Barcelona, Spain. The Company also operates a plastic closures decorating facility and polye- thylene (PET) injection and blow molding facilities at Lima, Peru. Aluminio produces PET pre-forms and finished PET bottles at several plant and customer sites in Brazil and Argentina. Projects to manufacture pre-forms and bottles also are in development in China.

Alcoa Zepf, L.L.C., a joint venture company owned 60% by the Company and 40% by Zepf Technologies USA Inc., manufactures rapid changeover and quick-change bottle control parts for the beverage industry. Alcoa also participates in a joint venture with Al Zayani Investments W.L.L. of Bahrain, known as Gulf Closures W.L.L., that manufactures plastic closures for markets in the Middle East. Alcoa's worldwide closures businesses are coordinated from Indianapolis, Indiana. The use of plastic closures has surpassed that of aluminum closures for beverage containers in the U.S. and is gaining momentum in other countries.

Alcoa Composites, Inc. principally designs and manufac- tures composite parts and structures for aerospace and trans- portation applications.

The Company manufactures packaging equipment and machinery, principally for producing and decorating metal cans and can ends. In addition, the Company manufactures lines of equipment for producing plastic closures and for applying plastic or aluminum closures to beverage containers. Effective at the end of February 1996, Alcoa divested its minority interest in a company which sells food packaging machinery that fills and seals metal and multi-layered polymer and paper containers.

Facilities to recover gold from AofA's mining leases in Western Australia were constructed, and mined gold was first poured, in 1988. Production has been declining since 1990.

Magnesium produced by Northwest Alloys, Inc. in Addy, Washington (NWA) from minerals in the area owned by NWA is used by Alcoa and sold to third parties. Alcoa uses magnesium for certain aluminum alloys. Recycling is also a source of aluminum-magnesium alloys. Responding to world magnesium market conditions, NWA maintained high levels of magnesium production during 1995.

Large press steel, titanium and special Inconel super-alloy forgings are produced at Cleveland, Ohio. Titanium and steel forgings are produced at Bologne, France. These products are sold principally in aerospace and commercial markets.

Aluminio produces copper electrical cables at its Pocos de Caldas and Guarulhos, Brazil plants. It also owns and operates a chain of retail construction materials outlets in Brazil.

Alcoa Building Products' principal products for building and construction markets are vinyl siding and accessories and plastic injected molded shutters and architectural accessories. Other nonaluminum building products include vinyl windows by Alcoa Vinyl Windows, vinyl window lineals by Dayton Techno- logies, and wood windows and patio doors by Caradco.

Norcold manufactures recreational vehicle refrigerators, and Stolle Products Division owns a 36% interest in a joint venture, established in January 1996, that manufactures auto parts and appliance control panels.

A wholly owned subsidiary owns and develops a luxury resi- dential community in South Carolina. Another subsidiary recently completed its involvement in the development of a residential community in Florida.

Research and Development

The Company, a technological leader in the aluminum industry, engages in research and development (R&D) programs which include basic and applied research and process and pro- duct development. The research activities are conducted principally at Alcoa Technical Center, near Pittsburgh, Penn- sylvania. Several subsidiaries and divisions conduct their own R&D programs, as do many plants. Expenditures for such activities were $141 million in 1995, $126 million in 1994 and $130 million in 1993. Substantially all R&D activities are funded by the Company and its various units.

Environmental

Alcoa's Environmental Policy confirms its commitment to operate worldwide in a manner which protects the environment and the health of employees and of the citizens of the com- munities where the Company has an impact.

The Company engages in a continuing effort to develop and implement modern technology and policies to meet environmental objectives. Approximately $54 million was spent during 1995 for new or expanded facilities for environmental control. Capital expenditures for such facilities will approximate $55 million in 1996. The costs of operating these facilities are not included in these figures. Remediation expenses being incurred by the Company are continuing and expected to increase at many of its facilities. See Environmental Matters on page 26 in the Annual Report to Shareholders, and Item 3 - "Legal Proceedings" below.

Alcoa's operations, like those of others in manufacturing industries, have in recent years become subject to increasingly stringent legislation and regulations intended to protect human health and the environment. This trend is expected to continue. Compliance with new laws, regulations or policies could require substantial expenditures by the Company in addition to those referenced above.

Environmental and health requirements also may affect the manufacture or marketing of certain products produced by the Company. For example, legislation imposing deposits on beverage containers, including aluminum cans, has been passed in a number of states in the U.S. and is being considered elsewhere. U.S. Federal and state regulations, such as U.S. Food and Drug Administration regulations and California Proposition 65, affect the manufacture of products for use in food, beverage or medical applications and can have worldwide implications. The Coalition of Northeastern Governors (CONEG) model law (as enacted by several states) governing the use or presence of certain materials has been passed in some states and impacts the manu- facture of certain packages or packaging components. A directive on packaging waste with a provision similar to the CONEG legislation has been passed by the Commission of the European Union. International laws governing delivery and format of product safety information may impose requirements (e.g., labeling) on other Alcoa products.

Environmental laws and regulations are important both to the Company and to the communities where it operates. The Company supports the use of sound scientific research and rea listic risk criteria to analyze environmental and human health effects and to develop effective laws and regulations in all

countries where it operates. The Company also relies on internal standards that are applied worldwide to ensure that its facilities operate with minimal adverse environmental impacts, even where no regulatory requirements exist. Alcoa recognizes that recycling and waste minimization offer real solutions to many environmental problems, and it continues vigorously to pursue efforts in these areas.

Employees

The Company employed approximately 72,000 people world- wide at year-end 1995. Negotiation of new labor agreements covering the majority of the Company's U.S. production workers will begin in the spring of 1996.

Wages for employees in Australia are covered by agreements which are negotiated under guidelines established by a national industrial relations authority.

Wages for both hourly and salaried employees in Brazil are negotiated annually in compliance with government guidelines. Each Aluminio location, however, has established a separate compensation package for its employees which includes real wage increases and certain employee welfare plans.