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The following is an excerpt from a 10-K SEC Filing, filed by HOWMET INTERNATIONAL INC on 3/29/2000.
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HOWMET INTERNATIONAL INC - 10-K - 20000329 - BUSINESS

ITEM 1 -- BUSINESS

Howmet International Inc. is a Delaware corporation organized in 1995 (referred to hereinafter together with its subsidiaries as the "Company" or "Howmet"). Through its principal operating subsidiary, Howmet Corporation, founded in 1926, the Company is the largest manufacturer in the world of investment cast turbine engine components for jet aircraft and industrial gas turbines ("IGT") as original equipment and spare parts. The Company uses investment casting techniques to produce high-performance, highly reliable superalloy and titanium components to the exacting specifications of the major aerospace and IGT engine manufacturers. Through Howmet Corporation's Aluminum Casting (formerly Cercast) subsidiaries, the Company is also the world's largest producer of aluminum investment castings, which it produces principally for the commercial aerospace and defense electronics industries.

Howmet Corporation operates in one business segment, investment castings. Financial information with respect to geographic regions is included in Note 15 of "Notes to Consolidated Financial Statements" on page F-21 - F-22 hereof.

The Company was formed in 1995 under the name Blade Acquisition Corp. ("Blade") as a joint venture between Cordant Technologies Inc., then known as Thiokol Corporation ("Cordant"), which at that time owned 49% of the Company's Common Stock, and Carlyle-Blade Acquisition Partners, L.P. ("Carlyle-Blade Partners"), which owned 51% of the Company's Common Stock. The Company was formed to purchase Howmet Corporation and the Cercast companies ("Cercast") from a subsidiary of Pechiney, S.A. The acquisition of Howmet Corporation and Cercast was accomplished on December 13, 1995 through the purchase of the capital stock of Pechiney Corporation, Howmet Corporation's parent holding company, and the capital stock of Cercast (the "Acquisition"). The Cercast companies then became subsidiaries of Howmet Corporation, and Pechiney Corporation's name was changed to Howmet Holdings Corporation ("Holdings").

On December 2, 1997, Cordant acquired 13 million shares of the Company's Common Stock from Carlyle-Blade Partners, increasing its ownership interest in the Company to 62%. This was done concurrently with a public offering of stock of the Company by Carlyle-Blade Partners, pursuant to which public stockholders acquired a 15.35% interest in the Company and Carlyle-Blade Partners' interest was reduced to 22.65%. On February 8, 1999, Cordant acquired all of Carlyle- Blade Partners' remaining shares of the Company's Common Stock and now holds 84.6% of the currently outstanding Common Stock.

POSSIBLE OWNERSHIP CHANGES

On November 12, 1999, Cordant made a proposal to acquire all of the outstanding shares of Common Stock of the Company not currently owned by Cordant for a price of $17.00 per share in cash, and the proposal was referred to the Independent Directors Committee of the Company's Board of Directors (the "Committee"). On March 10, 2000, Cordant informed the Committee that it was willing to increase its offer to $18.75 per share, but following further discussions no agreement was reached. On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an agreement under which Alcoa agreed to acquire Cordant. Alcoa has advised the Company that it intends to enter into discussions with the Committee to pursue the acquisition of the outstanding publicly held shares of the Company's stock. See "Control by and Relationship with Cordant" in "Cautionary Statement," page 8.

PRODUCTS

The Company uses the investment casting process to manufacture superalloy, titanium and aluminum components for aerospace engine and airframe applications and IGT applications for customers worldwide. Sales to the aerospace market were $733.7 million, $802.5 million, and

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$739.9 million in 1999, 1998, and 1997 respectively. Sales to the IGT market were $677.4 million, $476.1 million, and $402.5 million respectively in those years. These products are manufactured to precise specifications provided by customers.

HOWMET
PRODUCTS             SUMMARY DESCRIPTION AND APPLICATION
--------             -----------------------------------
Blades               High  temperature   superalloy  rotating  turbine  engine
                     components. Blades act as airfoils, which are driven by the
                     hot gas flow.

Vanes                High temperature superalloy non-rotating  turbine  engine
                     components.  Vanes are the fixed airfoils which direct the
                     gas flow.

IGT shroud blocks    Vane holders that provide a seal to fix each vane in
                     position.

Turbine rotors       Integrated cast rotating wheels of blades primarily for use
                     in smaller engines. Rotors incorporate numerous blades in a
                     single part.

Nozzle rings         Integrated cast non-rotating rings of vanes primarily for
                     use in smaller engines. Nozzle rings are like vanes but are
                     manufactured as a single integral component.

Compressor stators   Integrated cast non-rotating rings of compressor vanes for
                     use  in  small  and  large  engines.  Compressor  stators
                     incorporate numerous vanes in a single part.

Frames               Large diameter thin-wall cases  used  to  support  their
                     respective sections  of  turbine engines   such  as  fans,
                     compressors and turbines.

Bearing housings     Large diameter, heavy structural supports for bearings.

Airframe components  Titanium and aluminum structures for commercial and
                     military  aircraft, including  door  frames,  flap  tracks,
                     nacelles, longerons, wing tips, and nose and tail cones.

Electronics
packaging            Aluminum boxes with card slots and cooling fins for
                     electronic avionics packages.

Electro-optical
system housings      Heads-up display, gimbal and other housings.

Engine parts         Gear boxes, front frames, and blocker doors for small
                     engines.

Other aircraft
parts                Aircraft fuel pump,  a/c blower,  oil tank and  surge tank
                     components.

JOINT VENTURES

Howmet Corporation currently is participating in two joint ventures, one in Japan with Komatsu Ltd. and the other in the United States with a subsidiary of United Technologies Corporation. The Japanese joint venture, Komatsu-Howmet Ltd. ("KHL"), was established in 1972 and manufactures investment cast components for IGT and aerospace customers, primarily in Japan. Howmet Corporation currently holds an 81% interest in KHL and has an option to purchase Komatsu's remaining interest in this venture. On December 20, 1999 the Company announced that it intends to acquire Komatsu's remaining interest, with the acquisition expected to be completed in the second quarter of 2000. The joint venture with United Technologies Corporation, Sprayform Technologies International, L.L.C. ("Sprayform"), was organized in 1997 to develop and commercialize the Spraycast-X(R) technology. Through this technology atomized metal is sprayed onto a rotating mandrel to form products such as cases and rings. Howmet Corporation currently holds a 51% interest in Sprayform.

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RAW MATERIALS

The Company's raw materials include a number of metals and minerals, including titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium, among others. The Company has multiple sources of supply for most of these materials and has not experienced any significant supply interruption in the past twenty years. Prices of these materials, however, can be volatile, and the Company engages in advance purchases of some of these materials under certain market conditions, and passes certain price fluctuations through to customers pursuant to its long-term agreements. The Company ordinarily does not otherwise attempt to hedge the price risk of its raw materials. See "Availability and Cost of Raw Materials" in "Cautionary Statement", page 8.

PATENTS

The Company has 75 outstanding United States patents, 8 of which will expire within five years and 12 more of which will expire within ten years. The Company has also obtained certain technical licenses and developed other proprietary information. The Company believes that these proprietary rights, including modifications and applications of the directional solidification and single crystal casting processes, provide it with a competitive advantage. To protect its proprietary information, the Company requires its employees to sign confidentiality agreements, reminds employees of this confidentiality obligation upon their departure from the Company, and builds much of its own specialized equipment, such as casting furnaces, to prevent competitors from learning about Howmet's newly developed processes.

Competitors in the Company's business also hold patents and other forms of proprietary information, and there is active technical competition in that business. No assurance can be given that one company or another will not obtain a significant advantage from time to time in one aspect of the industry's technology or another.

MAJOR CUSTOMERS

The Company is the leading supplier of precision investment cast components to the producers of aircraft and industrial gas turbine engines. Most of the turbine engine market is characterized by a limited number of large manufacturers of engines. The Company's top ten customers represented approximately 76% of the Company's net sales in 1999. The Company's principal customers are The General Electric Company, principally through its aircraft engine (GEAE) and power systems (GEPS) groups, ABB Power Generation Ltd., and United Technologies Corporation, principally through its Pratt & Whitney aircraft operations (Pratt & Whitney Division and Pratt & Whitney Canada). Sales to these customers represented 24%, 13% and 10%, respectively, of the Company's 1999 net sales. The Company's other principal aerospace engine customers (none of which represented more than 10% of 1999 net sales) include Honeywell International Inc. (through its acquisition of AlliedSignal Inc.), FiatAvio, S.p.A., Rolls-Royce PLC (and its Rolls-Royce Allison subsidiary), Walbar (a division of Coltec Industries Inc.), and The Boeing Company. The Company's other principal IGT customers (none of which represented more than 10% of 1998 net sales) include Siemens Westinghouse Power Corporation, Mitsubishi Heavy Industries Ltd., and Solar Turbines Incorporated.

Orders for components are primarily awarded through a competitive bidding process. Contractual relationships with the Company's principal customers vary. More than one-half of the Company's casting business is derived from multi-year contracts, typically three years in length. Under these contracts, the Company's customers agree to order from the Company, and the Company agrees to supply, specified percentages of customer requirements for certain parts at specific pricing over the life of the contracts. The customers are not required to order fixed numbers of parts, although pricing may be subject to certain threshold quantities. Some of these contracts include provisions requiring specified price reductions over the term of the contract, based on lower production costs as programs mature, shared benefits from other cost reductions resulting from joint production decisions, and negotiated reductions. The Company typically renegotiates these contracts during the

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last year of the contract period, and during the process, customers frequently solicit bids from the Company's competitors. See "Customer Base", "Competition" and "Pricing Pressures" in "Cautionary Statement", pages 6-8.

BACKLOG

The Company's backlog of orders as of December 31, 1999 and December 31, 1998 was $765 million and $877 million, respectively. Because of the short lead and delivery times often involved, backlog may not be a significant indicator of the Company's future performance.

RESEARCH AND DEVELOPMENT

The Company has made a substantial investment in research and development to establish technology leadership in the investment casting industry. The Company believes it has significant opportunities for growth by developing new products and new applications, which offer its customers improved quality, greater performance and significant cost savings. These products include turbogenerator components, airframe structural components manufactured using metal mold processes, new thermal barrier coatings and titanium aluminide airframe castings.

A portion of the Company's total research and development budget comes from the Company's customers, which regularly retain the Company for specific projects. The Company also provides research and development services by contract to governmental agencies. Its research center staff includes 75 degreed engineers and scientists. The Company's research and development expenses for the years ended December 31, 1999, 1998 and 1997 were $19.9 million, $20.2 million and $17.6 million, respectively. The amount spent during the same periods for customer-sponsored research and development (including U.S. government funded) was $12.9 million, $15.3 million and $15.8 million, respectively.

COMPETITION

The Company believes it has a majority market share in the overall worldwide aerospace and IGT turbine engine airfoil investment casting market. Precision Castparts Corp. ("PCC"), a publicly held company based in Portland, Oregon, is the Company's primary competitor. The Company believes that the Company and PCC account for most of the total aerospace turbine engine and IGT investment casting production, except for captive foundries owned by three customers. The Company competes with PCC and other smaller participants primarily on the basis of technological sophistication, quality, price, service and delivery time for orders from large, well-capitalized customers with significant market power. Certain of the Company's customers, principally in Europe, have their own investment casting foundries, which produce parts similar to those manufactured by the Company. The Company knows of no plans by its major customers to establish new captive facilities, nor any significant expansion plans by those customers that have such foundries now. See "Competition" in "Cautionary Statement," page 7.

The Company's aluminum casting operations compete with a large number of smaller competitors, also on the basis of price, quality and service.

See "Major Customers", page 3, for discussion of competition in the contract award process.

ENVIRONMENTAL MATTERS

The Company is subject to comprehensive and changing environmental laws, which are discussed more fully in "Environmental Laws" in "Cautionary Statement", page 9.

In connection with the Acquisition, Pechiney, S.A. indemnified the Company for environmental liabilities relating to Howmet Corporation stemming from events occurring or conditions existing on or prior to the Acquisition, to the extent that such liabilities exceed a cumulative $6 million. This

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threshold has not yet been reached. This indemnification applies to all of the environmental matters discussed in the next two paragraphs. It is probable that changes in any of the accrued liabilities discussed in the next two paragraphs will result in an equal change in the amount of the receivable from Pechiney, S.A. pursuant to this indemnification.

The Company has received test results indicating levels of polychlorinated biphenyls ("PCBs") at its Dover, New Jersey facility which will require remediation. These levels have been reported to the New Jersey Department of Environmental Protection (the "NJDEP"), and the Company is preparing a work plan to define the risk and to test possible clean-up options. The statement of work must be approved by the NJDEP pursuant to an Administrative Consent Order entered into between the Company and the NJDEP on May 20, 1991 regarding clean- up of the site. Various remedies are possible and could involve expenditures ranging from $3 million to $22 million or more. The Company has recorded a $3 million long-term liability as of December 31, 1999 and $2 million as of December 31, 1998 for this matter. The indemnification discussed above applies to the costs associated with this matter.

Besides the above-mentioned remediation work required at the Company's Dover, New Jersey plant, liabilities exist for clean-up costs associated with hazardous materials at seven other on-site and off-site locations. The Company has been or may be named a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws at these locations. At December 31, 1999, $4 million of accrued environmental liabilities are included in the consolidated balance sheet for these seven sites. The December 31, 1998 consolidated balance sheet includes $4.2 million of accrued liabilities for nine such sites. The indemnification discussed above applies to these costs.

In addition to the above environmental matters, and unrelated to Howmet Corporation, Howmet Holdings Corporation ("Holdings") and Pechiney, S.A. are jointly and severally liable for environmental contamination and related costs associated with certain discontinued mining operations owned and/or operated by a predecessor-in-interest until the early 1960's. These liabilities include approximately $7 million in remaining remediation and natural resource damage liabilities at the Blackbird Mine site in Idaho and a minimum of $10 million in investigation and remediation costs at the Holden Mine site in Washington. Pechiney, S.A. has agreed to indemnify the Company for such liabilities in full. In connection with these environmental matters, the Company recorded a $17 million liability and an equal $17 million receivable from Pechiney, S.A. as of December 31, 1999 and $26 million for both the liability and receivable as of December 31, 1998. Pechiney, S.A. is currently funding all amounts related to these liabilities.

Estimated environmental costs are not expected to impact materially the financial position or the results of the Company's operations in future periods. However, environmental clean-ups are protracted in length and environmental costs in future periods are subject to changes in environmental remediation regulations. Any costs which are not covered by the Pechiney, S.A. indemnifications and which are in excess of amounts currently accrued will be charged to operations in the periods in which they occur.

The Company believes that Pechiney, S.A. will honor its indemnification obligations described in the preceding paragraphs. In the event that Pechiney, S.A. does not honor its obligations, the Company would likely be responsible for the foregoing environmental matters and the cost of addressing those matters could be material.

EMPLOYEES

As of December 31, 1999, the Company had approximately 11,500 employees.

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CAUTIONARY STATEMENT
FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

The Company wishes to inform its investors of the following important factors that in some cases have affected, and in the future could affect, the Company's results of operations, and that could cause the Company's future results of operations, financial condition or liquidity to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Such statements include those relating to pricing, competition effects, market structure, contracting practices, developmental projects, and environmental conditions, among others. The words "expect," "project," "estimate," "predict," "anticipate," "believes," "plans," "intends," and similar expressions are also intended to identify forward-looking statements.

Disclosure of these factors is intended to permit the Company to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Many of these factors have been discussed in prior SEC filings by the Company or by Howmet Corporation.

Although the Company has attempted to list comprehensively these important cautionary factors, the Company wishes to caution investors that other factors may prove to be important in affecting the Company's results of operations, financial condition and liquidity. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

INDUSTRY ECONOMIC CONDITIONS AND CYCLICALITY

The Company currently derives approximately forty per cent of its revenue from the commercial aerospace industry. This is a cyclical business. Although 1999 was a record year for aircraft deliveries, orders that year were substantially below those in each of the prior three years. The Company's sales to commercial original equipment manufacturers ("OEMs") lead the market by approximately nine months. Hence, the Company's component sales have been adversely affected due to decreased aircraft production rates for 2000. Any developments in the commercial aerospace market resulting in a reduction in air travel, the rate of aircraft engine deliveries, or customer or airline part inventory adjustments in the future could materially adversely affect the Company's financial condition and results of operations. Such developments could include cancellations or deferrals of scheduled deliveries, substantial increases in aircraft fuel costs or international political factors.

The Company's revenues from its industrial gas turbine ("IGT") castings are subject to changes in global electric power demand and the availability and cost of natural gas used to fuel these machines. Changing economic and political conditions in the United States and in other countries could also delay delivery of IGT engines, which could have a material adverse effect on the Company's operations.

CUSTOMER BASE

A substantial portion of the Company's business is conducted with a small number of large aerospace and industrial gas turbine customers, including The General Electric Company through its aircraft engine and power systems groups, ABB Power Generation Ltd., and United Technologies Corporation's Pratt & Whitney aircraft operations. The Company's top ten customers in the aggregate accounted for approximately 76% of 1999 net sales. More than one-half of the Company's business is derived from multi-year contracts with its customers, which typically last three years and generally give the Company the right and obligation to fill a specified percentage of the customer's requirements but generally do not provide the Company with any minimum order commitments. The Company usually renegotiates these contracts during the last year of the contract period, and, during

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the renegotiation process, customers frequently solicit bids from the Company's competitors. Some of the contracts require specified price reductions over the term of the contract based on lower production costs as programs mature, shared benefits from other cost reductions resulting from joint production decisions, and negotiated reductions.

Military and defense contractor sales comprised approximately 14% of the Company's 1999 sales. United States defense spending in markets served by the Company has declined since the 1980's. If reductions in defense budgets or military aircraft procurement continue, these reductions could adversely affect the Company's results of operations. Furthermore, in the event of failure to comply with the federal statutes and regulations relating to these sales, a proceeding, including one relating to the matters described below, could result in fines, penalties, compensatory and treble damages, the cancellation or suspension of payments under one or more U.S. government contracts, debarment, or ineligibility for future contracts or subcontracts funded in whole or in part with federal funds.

Starting in late 1998, the Company discovered certain product testing and specification non-compliance issues at the Montreal (Canada) and Bethlehem (Pennsylvania) operations of its Howmet Aluminum Casting subsidiaries. In 1999, the Company discovered several additional instances of other testing and specification non-compliance at its Hillsboro (Texas) aluminum casting facility and at the Montreal and Bethlehem operations. The Company has notified customers and the appropriate government agencies and has substantially completed correction of these issues. The Company knows of no in-service problems associated with any of these issues. In addition, Howmet Aluminum Casting has been, and expects to continue for some time to be, late in delivery of products to certain customers, resulting in lower sales. However, delivery performance in 2000 is expected to improve significantly.

The Defense Criminal Investigative Service (the "DCIS"), in conjunction with other agents from the Defense Department and NASA, has undertaken an investigation with respect to certain of the foregoing matters at the Montreal and Bethlehem facilities. The DCIS has informed the Company that the investigation concerns possible violations of the False Claims Act and the False Statements Act, as well as possible criminal penalties. The Company is unable to determine definitively what, if any, civil or criminal penalties might be imposed as a result of the investigation.

All customer claims relating to the foregoing matters either have been resolved or, in the Company's judgment, will be resolved within existing reserves.

The Company believes that additional cost for the foregoing matters beyond amounts accrued, if any, would not have a material adverse effect on the Company's financial position, cash flow, or annual operating results. However, additional cost when and if accrued may have a material adverse impact on the quarter in which it may be accrued.

On August 6, 1999, the Company entered into an Administrative Agreement with the U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999 relating to certain of the foregoing matters. The Administrative Agreement permitted the affected facilities to resume accepting new U.S. government contracts and subcontracts.

COMPETITION

The Company competes against Precision Castparts Corp. ("PCC"), its principal competitor, and other investment casting manufacturers. Competition in investment casting is based primarily on technological sophistication, quality, price, service and delivery for orders from large, well-capitalized customers with significant market power. The Company believes that it and PCC account for most of the total aerospace turbine engine and IGT component casting production, except for captive foundries owned by three customers. Because competition is based to a significant extent on technological capabilities and innovations, there can be no assurance that PCC or any of the

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Company's other competitors will not develop products and/or processes that would give them a competitive advantage in the Company's markets.

PRICING PRESSURES

The Company has experienced pressure from all of its major customers for price reductions. This pressure is the result of the competitive environment in which the Company's OEM customers are operating in the selling of their engines in the worldwide market. Because winning an initial order by an OEM generally provides it with a long-term profitable market for sales of spare parts, fierce competition exists for these orders and has resulted in reduced prices which OEMs receive in the market. Pressure for reduced prices is then exerted by OEMs on their suppliers. The future profitability of the Company will depend upon, among other things, its ability to continue to reduce its per unit costs and maintain a cost structure that will enable it to remain cost-competitive.

AVAILABILITY AND COST OF RAW MATERIALS

Raw materials used by the Company include a number of metals and minerals, including titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium, among others. Prices of these materials can be volatile, and the Company engages in advance purchases of some of these materials under certain market conditions, and passes certain price fluctuations through to customers pursuant to its long-term agreements. The Company ordinarily does not otherwise attempt to hedge the price risk of its raw materials. For some of the supplies and raw materials it purchases, including certain metals, the Company has no fixed price contracts or arrangements. Commercial deposits of certain metals, such as cobalt, nickel, titanium and molybdenum, which are required for the alloys used in the Company's precision castings, are found in only a few parts of the world, and for certain materials only single sources are readily available. The availability and prices of these metals and other materials may be influenced by private or governmental cartels, changes in world politics, unstable governments in exporting nations, production interruptions, inflation and other factors. Although the Company has not experienced significant shortages of its supplies and raw materials in the past twenty years, there can be no assurance that such shortages will not occur in the future. Any such shortages or price fluctuations could have a material adverse effect on the Company.

CONTROL BY AND RELATIONSHIP WITH CORDANT

Cordant Technologies Inc. ("Cordant") beneficially owns 84.6% of the outstanding Common Stock of the Company. Accordingly, subject to the Corporate Agreement referred to below, Cordant is able to control the election of the Company's Board of Directors and exercise a controlling influence over the business and affairs of the Company (including any determinations with respect to mergers or other business combinations involving the Company, the acquisition or disposition of assets by the Company, the incurrence of indebtedness by the Company, the issuance of any additional Common Stock or other equity securities of the Company, the repurchase or redemption of Common Stock of the Company and the payment of dividends with respect to the Common Stock), and will be able to do so as long as it continues to own more than 50% of the voting power of the Company's capital stock. Similarly, Cordant has the power to determine matters submitted to a vote of the Company's stockholders without the consent of the Company's other stockholders, has the power to prevent or cause a change in control of the Company and could take other actions that might be favorable to Cordant.

Cordant has entered into a Corporate Agreement with the Company relating to the terms under which Cordant may acquire additional shares of the Company's Common Stock. See "Arrangements Among the Company and Cordant - Corporate Agreement," page 23.

On November 12, 1999, Cordant made a proposal to acquire all of the outstanding shares of Common Stock of the Company not currently owned by Cordant ( the "Publicly Held Shares") for a price of $17.00 per share in cash, and the proposal was referred to the Independent Directors

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Committee of the Company's Board of Directors (the "Committee"). On March 10, 2000, Cordant informed the Committee that it was willing to increase its offer to $18.75 per share, but following further discussions no agreement was reached. On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an agreement under which Alcoa agreed to acquire Cordant. Alcoa has advised the Company that it intends to enter into discussions with the Committee to pursue the acquisition of the Publicly Held Shares of the Company. Such an acquisition would be subject to the Corporate Agreement referred to above.

POTENTIAL CONFLICTS OF INTEREST ARISING FROM CORDANT RELATIONSHIP

As a result of Cordant's ownership of Common Stock of the Company and its intercompany agreements with the Company or otherwise, various conflicts of interest between the Company and Cordant could arise. The Company and Cordant have entered into an intercompany services agreement with respect to services to be provided by Cordant to the Company. Under the agreement, the Company generally pays Cordant its cost plus a fee, as determined by Cordant from time to time on a basis consistent with past practice. This arrangement is designed to control administrative costs and avoid duplication of administrative functions. The Company paid Cordant $1,875,000 to cover both its costs and fees for the year ended December 31, 1999. Under the arrangement, Cordant also bills the Company directly, with no "mark-up," for some services provided by third parties.

Ownership interests of directors or officers of the Company in Common Stock of Cordant, if any, or service as a director or officer of both the Company and Cordant could create or appear to create potential conflicts of interest when directors and officers are faced with decisions that could have different implications for the Company and Cordant. The Restated Certificate of Incorporation of the Company includes certain provisions relating to the allocation of business opportunities that may be suitable for both the Company and Cordant. In addition, under Delaware corporate law, officers, directors and controlling stockholders of the Company have certain fiduciary duties to the Company's stockholders.

ENVIRONMENTAL LAWS

The Company is subject to comprehensive and changing federal, state, local and international laws, regulations and ordinances (together, "Environmental Laws") governing activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. Environmental Laws also impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances and materials, including liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA," the federal "Superfund" statute), and similar state statutes for the investigation and remediation of environmental contamination at properties owned and/or operated by the Company and at off-site locations where it has arranged for the disposal of hazardous substances. The Company is involved from time to time in legal proceedings involving remediation of environmental contamination from past or present operations, as well as compliance with environmental requirements applicable to ongoing operations. There can be no assurance that material costs or liabilities will not be incurred in connection with any such proceedings, claims or compliance requirements or in connection with currently unknown environmental liabilities.

If it is determined that the Company is not in compliance with current Environmental Laws, the Company could be subject to penalties. The amount of any such penalties could be material. In addition, the Company uses solvents, waxes, metals, caustics, acids, oils and other hazardous substances, and as is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or from an off-site disposal facility attributable to the Company, the Company may be held liable and may be required to pay the cost of remedying the condition. The amount of any such liability could be material.

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The Company's facilities have made, and will continue to make, expenditures to comply with current and future Environmental Laws. The Company anticipates that it could incur additional capital and operating costs in the future to comply with existing Environmental Laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental programs, the Company cannot at this time reasonably estimate the cost for compliance with these additional requirements. The amount of any such compliance costs could be material.

Certain potential sources of liability under the Environmental Laws, as well as other information relating to environmental matters, including rights of the Company to indemnification for substantial portions of these potential liabilities, are described under "Business - Environmental Matters", pages 4-5.

FOREIGN CURRENCY HEDGING

The Company maintains a policy of hedging foreign currency transactions and economic exposures for foreign currency denominated obligations. The Company does not hedge against net asset values for its foreign investments attributed to its foreign subsidiaries valued in local currencies. To the extent the Company's foreign revenue base grows and net asset base expands as a result of increased foreign business activity, the Company's exposure to adverse foreign currency rate movement increases. The Company's foreign currency risk exposure is also subject to the stability of the foreign currency of the country where the Company maintains foreign operations or does business. The Company seeks to minimize the impact of adverse foreign currency rate movements through its hedging policy. The success of the hedging policy in preventing an adverse financial result on operations in any accounting period cannot be assured.

YEAR 2000 COMPLIANCE

The Company has not experienced any disruption in operations as a result of computer software issues associated with the Year 2000. Only a few minor problems have been discovered so far, and all of them have been addressed. There can be no guarantee that the systems of other companies on which Howmet's systems rely will continue to operate successfully. This could have an adverse effect on the Howmet systems. However, at this point, the Company has not been made aware of material problems. The Company has not experienced any failures within its supply chain.

The estimated cost at completion for all phases of the Company's Year 2000 project is $16.2 million. An estimated $6.7 million (41%) of this expense is for information systems labor and miscellaneous project costs; these costs are being expensed as routine information systems maintenance as incurred over the three-year duration of the project. Another $6.9 million (43%) is for software purchase and implementation costs for applications that were installed as scheduled or, on an expedited basis, for Year 2000 purposes. An additional $2.6 million (16%) is for infrastructure upgrades or replacement.

Approximately $15.9 million (98%) had been expended as of December 31, 1999; the Company expects to spend $0.3 million (2%) in 2000.

EURO CONVERSION

The Company implemented a strategy during 1999, which would allow it to operate in a Euro environment during the transition period, January 1, 1999 through December 31, 2001, and after full Euro conversion, effective July 1, 2002. To date the Company has not experienced and does not anticipate any material impact from the Euro conversion on its operations, its competitive position or its computer software plans. Also, the Company does not expect any significant changes to its currency hedging program and does not expect any significant increases in its foreign exchange exposure.

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BROKERAGE PARTNERS