-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJI1wcUOZGM1P2O4HHr+xjEV8eQOfM+TT8UsaxIekJqcsZSu2/ZVzntANzr01O3C xOP4VPmVVdfpfFYilPuX4g== 0000950147-97-000155.txt : 19970318 0000950147-97-000155.hdr.sgml : 19970318 ACCESSION NUMBER: 0000950147-97-000155 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHELPS DODGE CORP CENTRAL INDEX KEY: 0000078066 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY SMELTING & REFINING OF NONFERROUS METALS [3330] IRS NUMBER: 131808503 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00082 FILM NUMBER: 97557501 BUSINESS ADDRESS: STREET 1: 2600 NORTH CENTRAL AVE CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6022348100 MAIL ADDRESS: STREET 1: 2600 NORTH CENTRAL AVENUE CITY: PHOENIX STATE: AZ ZIP: 85004-3089 10-K405 1 ANNUAL REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 1-82 PHELPS DODGE CORPORATION (a New York corporation) 13-1808503 (I.R.S. Employer Identification No.) 2600 N. Central Avenue, Phoenix, AZ 85004-3089 Registrant's telephone number: (602) 234-8100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Shares, $6.25 par value per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of Common Shares of the issuer held by nonaffiliates at March 6, 1997, was approximately $4,646,956,000. Number of Common Shares outstanding at March 6, 1997: 64,429,200 shares. Documents Incorporated by Reference: Document Location in 10-K -------- ---------------- Proxy Statement for 1997 Annual Meeting Part III ================================================================================ PHELPS DODGE CORPORATION Annual Report on Form 10-K For the Year Ended December 31, 1996 Table of Contents ----------------- Part I. Items 1. and 2. Business and Properties Phelps Dodge Mining Company Properties, Facilities and Production Copper Operations Phelps Dodge Copper Production Data, by Source Phelps Dodge Metal Production and Deliveries Phelps Dodge Smelters and Refinery - Production Other Mining Operations and Investments Exploration & Development Ore Reserves Ownership of Real Property Sales and Competition Prices, Supply and Consumption Costs Energy Supplies Environmental and Other Regulatory Matters Labor Matters Phelps Dodge Industries Operations Ownership of Real Property Competition and Markets Raw Materials Energy Supplies Environmental Matters Labor Matters Research and Development Other Environmental Matters Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Executive Officers of Phelps Dodge Corporation Part II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis Management's Discussion and Analysis Results of Phelps Dodge Mining Company Results of Phelps Dodge Industries Other Matters Relating to the Statement of Consolidated Operations Changes in Financial Condition; Capitalization Capital Outlays Inflation Dividends and Market Price Ranges Quarterly Financial Data Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Report of Independent Accountants on Financial Statement Schedule Report of Management Report of Independent Accountants Statement of Consolidated Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Common Shareholders' Equity Notes to Consolidated Financial Statements Financial Data by Business Segment Financial Data by Geographic Area Item 9. Disagreements on Accounting and Financial Disclosure Part III. Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Part IV. Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K Valuation and Qualifying Accounts and Reserves Signatures PHELPS DODGE CORPORATION 1996 Annual Report on Form 10-K Part I Items 1. and 2. Business and Properties - ---------------------------------------- Phelps Dodge Corporation, incorporated under the laws of New York in 1885, is among the world's largest producers of copper. In 1996, the Corporation produced 770,400 tons of copper for its own account from its worldwide mining operations and an additional 162,900 tons of copper for the accounts of minority interest owners. Gold, silver, molybdenum, copper chemicals and sulfuric acid are also produced as by-products of the Corporation's copper operations. Production of copper for the Corporation's own account from its U.S. operations constituted more than 25 percent of the copper mined in the United States in 1996. Much of the Corporation's U.S. copper production, after electrowinning or smelting and refining, together with additional copper purchased from others, is used by the Corporation to produce continuous-cast copper rod, the basic feed for the electrical wire and cable industry. The Corporation is the world's largest producer of copper rod. Phelps Dodge's international mining interests include Candelaria, its major copper mine in Chile that commenced operations in October 1994, and other operations and investments in Chile, Peru and South Africa. These operations produce a variety of metals and minerals including copper, gold, fluorspar, silver, lead and zinc. Phelps Dodge also explores for metals and minerals throughout the world. The Corporation also manufactures engineered products principally for the transportation, energy and telecommunications sectors worldwide through a group of industrial companies. Specialty chemicals are produced through Columbian Chemicals Company which is among the world's largest producers of carbon black, a reinforcing agent in natural and synthetic rubber that increases the service life of tires, hoses, belting and other products, for the rubber industry. It also produces specialty carbon black for other industrial applications such as pigments for printing, coatings, plastics and other non-rubber applications. Accuride Corporation is the largest North American manufacturer of steel wheels and rims for medium and heavy trucks, trailers and buses. The Corporation produces wire and cable products and specialty conductors at U.S. and international operations through Phelps Dodge Magnet Wire Company and Phelps Dodge International Corporation. Phelps Dodge Magnet Wire Company, the world's largest manufacturer of magnet wire, produces magnet wire and other copper products for sale principally to original equipment manufacturers for use in electrical motors, generators, transformers and other products. Phelps Dodge International Corporation manufactures telecommunication and energy cables and specialty conductors. The discussion of the business and properties of the Corporation contained below in Items 1 and 2 of this report is based on the Corporation's two business segments: (i) Phelps Dodge Mining Company and (ii) Phelps Dodge Industries. These are more fully described in Note 20 to the Consolidated Financial Statements which also sets forth financial information about such segments. (i) The Phelps Dodge Mining Company segment includes the Corporation's worldwide copper operations from mining through rod production, marketing and sales, other mining operations and investments, and worldwide mineral exploration and development programs. (ii) The Phelps Dodge Industries segment includes the Corporation's specialty chemicals operations, its wheel and rim business, and its wire and cable operations. Information about sales and earnings of international operations of the Corporation is also included in Note 20 to the Consolidated Financial Statements. Unless the context otherwise requires, "Corporation" and "Phelps Dodge" as used in this report mean Phelps Dodge Corporation and its consolidated subsidiaries. In addition, all references to tons are to short tons and references to ounces are to troy ounces. The number of persons employed by the Corporation on December 31, 1996, was 16,033. PHELPS DODGE MINING COMPANY - --------------------------- Phelps Dodge Mining Company is an international business comprising a group of companies involved in vertically integrated copper operations including mining, concentrating, electrowinning, smelting and refining, rod production, marketing and sales, and related activities. Copper is sold primarily to others as rod, cathode or concentrates, and as rod to the Phelps Dodge Industries segment. In addition, Phelps Dodge Mining Company at times smelts and refines copper and produces copper rod for others on a toll basis. Phelps Dodge Mining Company also produces gold, silver, molybdenum and copper chemicals as byproducts, and sulfuric acid from its air quality control facilities. This segment also includes the Corporation's other mining operations and investments (including fluorspar, silver, lead and zinc operations) and its worldwide mineral exploration and development programs. Properties, Facilities and Production - ------------------------------------- Copper Operations ----------------- Phelps Dodge produces copper concentrates from open-pit mines and concentrators located in Morenci, Arizona; Santa Rita, New Mexico; and near Copiapo, Chile. The Corporation also produces copper concentrates from two underground mines and a concentrator located near Copiapo through Compania Contractual Minera Ojos del Salado (Ojos del Salado), a wholly owned Chilean subsidiary of Phelps Dodge Corporation. Minor amounts of copper precipitates, which like concentrates must be smelted and then electrolytically refined, are produced at various locations. In addition, the Corporation produces electrowon copper cathode at solution extraction/electrowinning (SX/EW) operations in Morenci, Arizona; Santa Rita, New Mexico; and Tyrone, New Mexico. The Morenci complex in southeastern Arizona comprises an open-pit mine, two concentrators, three solution extraction facilities and two electrowinning tankhouses, one of which is the largest in the world. The Corporation owns an 85 percent undivided interest in the Morenci complex; the remaining 15 percent interest is owned by Sumitomo Metal Mining Arizona, Inc. (Sumitomo), a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. Phelps Dodge is the operator of the Morenci properties. Sumitomo takes in kind its share of Morenci production. The Morenci complex is the largest copper producing operation in North America. Litigation concerning the allocation of available water supplies, land use and other legal proceedings could adversely affect the water supplies for the Morenci operation and other prospective producing properties of the Corporation in Arizona. See "Legal Proceedings" for information concerning the status of these proceedings. The open-pit copper mine, concentrator and SX/EW facility in Santa Rita, New Mexico, and a smelter in Hurley, New Mexico, are owned by Chino Mines Company (Chino), a general partnership in which the Corporation holds a two-thirds partnership interest. Heisei Minerals Corporation (Heisei), a subsidiary of Mitsubishi Corporation and Mitsubishi Materials Corporation, owns the remaining one-third interest in Chino. Each partner purchases its proportionate share of Chino's copper production each month. Phelps Dodge manages the Chino operations. Candelaria, Phelps Dodge's newest mine, is located near Copiapo in the Atacama Desert of northern Chile. Phelps Dodge Mining Company completed construction and commenced operations at Candelaria in October 1994, and achieved full production in 1995. The project presently consists of an open-pit mine, concentrator, port and associated facilities. Phelps Dodge owns an 80 percent interest in Compania Contractual Minera Candelaria (Candelaria) through PD Candelaria, Inc., a wholly owned subsidiary of the Corporation, with a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation owning the remaining 20 percent interest. On May 1, 1996, the Corporation announced plans to expand concentrator throughput at Candelaria. At full capacity, the $337 million expansion will result in annual copper production of 400 million to 450 million pounds during the first few years of the post-expansion mine life; the average ore grade is expected to drop, with a corresponding decrease in production, in subsequent years. The expansion will include increased mining activity, the installation of a second semi-autogenous (SAG) mill line and new and expanded concentrating facilities, and the addition of more than 200 employees. Construction began in the third quarter of 1996, with new production scheduled to commence by mid-1998. As a result of the expansion, the estimated mine life of Candelaria will be reduced from 35 years of production to 19 years. The Tyrone mine-for-leach operation near Silver City, New Mexico, is wholly owned by Phelps Dodge Corporation. The SX/EW plant at Tyrone is owned and operated by Burro Chief Copper Company (Burro Chief), a wholly owned subsidiary of the Corporation. Burro Chief also operates the SX/EW plant at Santa Rita. Phelps Dodge is the leading producer of copper using the SX/EW process. In 1996, the Corporation produced a total of 408,000 tons of cathode copper at its SX/EW facilities, compared with 364,200 tons in 1995 and 325,800 tons in 1994. The SX/EW method is a cost-effective process of extracting copper from certain types of ores. As used by the Corporation in conjunction with its conventional concentrating, smelting and refining, SX/EW is a major factor in its continuing efforts to maintain internationally competitive costs. Total annual capacity of electrowon copper cathode production is currently 250,000 tons at the Morenci complex, 65,000 tons at the Santa Rita plant and 75,000 tons at the Burro Chief plant near Tyrone. The Corporation expects to operate the Burro Chief plant for at least the next 10 years. Exploration continues in an effort to identify further resources. The Corporation owns and operates a smelter in Hidalgo County, New Mexico, and, through Chino Mines Company, owns a two-thirds interest in the Chino smelter in Hurley, New Mexico. Phelps Dodge smelts virtually all of its share of its U.S. concentrate production and occasionally some concentrate production from Candelaria, and serves as a custom smelter for other mining companies. It also refines its share of its anode copper production. In addition, the Corporation purchases concentrates to keep its smelters operating at efficient levels. Such purchases are expected to continue whenever the smelting capacity of the Hidalgo and Chino smelters exceeds Phelps Dodge Mining Company's share of its concentrate production. The Corporation's refinery in El Paso, Texas, is one of the world's largest copper refineries. During 1996, the refinery operated at capacity producing just over 450,000 tons of electrolytic copper. This capacity is sufficient to refine all copper produced by the Corporation for its account at its two operating smelters as well as anodes refined for other customers on a toll basis. The El Paso refinery also produces gold, silver and copper sulfate and recovers small amounts of selenium, platinum and palladium as by-products of the copper refining process. Phelps Dodge is the world's largest producer of continuous-cast copper rod, the basic feed for the electrical wire and cable industry. Most of the Corporation's refined copper, and additional copper purchased by the Corporation, is converted into rod at its continuous-cast copper rod facilities in El Paso, Texas, and Norwich, Connecticut. The two plants have a collective annual capacity to convert more than 700,000 tons of refined copper into rod and other refined copper products. During 1996, combined production of rod and other refined copper products from the two plants was 711,400 tons. The following tables give the Corporation's worldwide copper production by source for the years 1992 through 1996; aggregate production and delivery (sales) data for copper, gold, silver, molybdenum and sulfuric acid from these sources for the same years; annual average copper prices; and production from the Corporation's smelters and refinery. Major changes in operations during the five-year period included (1) increases in capacity in 1992 and 1995 of the SX/EW facilities at Morenci and the 1992 expansion of the Burro Chief plant at Tyrone; (2) indefinite suspension of concentrator operations at Tyrone in February 1992; (3) at Morenci, completion of the Northwest Extension in 1992 and the startup of the Southside project in 1995; (4) expansion of Chino's SX/EW plant at Santa Rita in April 1993; (5) severe flooding problems at Ojos del Salado's Santos mine in 1993 that resulted in reduced production of copper concentrate; (6) the sale of the Corporation's interest in the Santa Gertrudis gold mine in the 1994 second quarter; and (7) commencement of operations at Candelaria in the 1994 fourth quarter and achievement of full production in 1995. - -------------------------------------------------------------------------------- PHELPS DODGE COPPER PRODUCTION DATA, BY SOURCE - ---------------------------------------------- (thousand tons) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- MATERIAL MINED (a) Morenci 297,688 261,264 240,700 219,032 203,456 Tyrone 102,936 83,935 62,067 49,387 32,407 Chino 122,939 115,821 105,057 108,568 103,081 Candelaria 83,962 72,068 17,842 - - Ojos del Salado 1,628 1,855 1,712 1,438 1,564 ------- ------- ------- ------- ------- Total material mined 609,153 534,943 427,378 378,425 340,508 Less minority participants' shares 102,421 92,211 74,692 69,044 64,878 ------- ------- ------- ------- ------- Net Phelps Dodge share 506,732 442,732 352,686 309,381 275,630 ======= ======= ======= ======= ======= MILL ORE MINED Morenci 47,136 44,284 45,240 46,990 46,562 Tyrone - - - - 1,293 Chino 20,061 17,026 17,811 17,436 17,160 Candelaria 11,603 11,439 2,685 - - Ojos del Salado 1,506 1,596 1,536 1,314 1,513 ------- ------- ------- ------- ------- Total mill ore mined 80,306 74,345 67,272 65,740 66,528 Less minority participants' shares 16,078 14,606 13,260 12,861 12,704 ------- ------- ------- ------- ------- Net Phelps Dodge share 64,228 59,739 54,012 52,879 53,824 ======= ======= ======= ======= ======= GRADE OF ORE MINED - PERCENT COPPER Morenci 0.70 0.64 0.65 0.67 0.67 Tyrone - - - - 0.69 Chino 0.67 0.76 0.69 0.73 0.68 Candelaria 1.40 1.88 1.27 - - Ojos del Salado 1.57 1.40 1.38 1.43 1.77 RECOVERABLE COPPER (b) Morenci: Concentrate 247.1 211.6 217.3 233.3 226.5 Electrowon 262.5 225.7 190.1 170.8 162.8 Tyrone: Concentrate and precipitate 3.7 4.3 4.2 6.0 8.5 Electrowon 76.0 70.4 68.9 73.5 70.2 Chino: Concentrate and precipitate 99.0 100.6 92.7 95.6 94.9 Electrowon 69.5 68.1 66.8 63.9 57.3 Candelaria: Concentrate 150.8 165.7 31.0 - - Ojos del Salado: Concentrate 21.3 19.6 18.6 16.7 24.4 Bisbee precipitate and miscellaneous 3.4 1.6 3.6 1.6 1.4 ------- ------- ------- ------- ------- Total recoverable copper 933.3 867.6 693.2 661.4 646.0 Less minority participants' shares 162.9 154.9 120.4 113.7 109.0 ------- ------- ------- ------- ------- Net Phelps Dodge share 770.4 712.7 572.8 547.7 537.0 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PHELPS DODGE METAL PRODUCTION AND DELIVERIES (b) - ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- COPPER (THOUSAND TONS) Total production 933.3 867.6 693.2 661.4 646.0 Less minority participants' shares 162.9 154.9 120.4 113.7 109.0 ------- ------- ------- ------- ------- Net Phelps Dodge share 770.4 712.7 572.8 547.7 537.0 ======= ======= ======= ======= ======= Deliveries (c) 771.6 696.6 560.6 543.9 537.7 ======= ======= ======= ======= ======= GOLD (THOUSAND OUNCES) (d) Total production 129 151 93 85 105 Less partners' shares 26 31 28 29 38 ------- ------- ------- ------- ------- Net Phelps Dodge share 103 120 65 56 67 ======= ======= ======= ======= ======= Deliveries (c) 125 125 47 54 59 ======= ======= ======= ======= ======= SILVER (THOUSAND OUNCES) (d) Total production 2,636 2,739 1,627 1,387 1,403 Less partners' shares 564 545 360 273 315 ------- ------- ------- ------- ------- Net Phelps Dodge share 2,072 2,194 1,267 1,114 1,088 ======= ======= ======= ======= ======= Deliveries (c) 2,359 1,985 1,039 1,085 1,083 ======= ======= ======= ======= ======= MOLYBDENUM (THOUSAND POUNDS) Total production 2,427 2,024 969 1,200 1,729 Less minority participants' shares 501 507 226 394 528 ------- ------- ------- ------- ------- Net Phelps Dodge share 1,926 1,517 743 806 1,201 ======= ======= ======= ======= ======= Deliveries 2,141 1,328 698 905 1,129 ======= ======= ======= ======= ======= SULFURIC ACID (THOUSAND TONS) (e) Total production 1,235.3 1,252.6 1,276.7 1,379.4 1,230.0 Less minority participant's share 191.8 181.3 191.5 193.9 184.4 ------- ------- ------- ------- ------- Net Phelps Dodge share 1,043.5 1,071.3 1,085.2 1,185.5 1,045.6 ======= ======= ======= ======= ======= Deliveries 464.0 554.3 685.2 718.4 733.7 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- COMEX COPPER PRICE (f) $ 1.06 1.35 1.07 0.85 1.03 - -------------------------------------------------------------------------------- PHELPS DODGE SMELTERS AND REFINERY - PRODUCTION - ----------------------------------------------- Smelters (g) Total copper (thousand tons) 428.8 422.5 411.7 376.7 329.2 Less minority participant's share 62.9 58.6 60.0 51.0 49.3 ------- ------- ------- ------- ------- Net Phelps Dodge share 365.9 363.9 351.7 325.7 279.9 ======= ======= ======= ======= ======= Refinery (h) Copper (thousand tons) 450.1 453.0 453.8 432.4 388.1 Gold (thousand ounces) 114.4 145.4 118.0 85.8 78.8 Silver (thousand ounces) 3,142.5 3,441.5 2,672.3 3,144.7 2,377.0 - -------------------------------------------------------------------------------- Footnotes to the preceding tables: (a) Includes material mined for leach operations. (b) Includes smelter production from custom receipts and fluxes as well as tolling gains or losses. (c) Excludes sales of purchased copper, silver and gold. (d) Includes the Santa Gertrudis gold project, which was operated by Phelps Dodge from 1991 through the 1994 second quarter. (e) Sulfuric acid production results from smelter air quality control operations; deliveries do not include internal usage. (f) New York Commodity Exchange annual average spot price per pound - cathodes. (g) Includes production from purchased concentrates and copper smelted for others on toll. (h) Includes production from purchased material and copper refined for others on toll. - ---------------------------------------------------------------------------- Other Mining Operations and Investments --------------------------------------- Phelps Dodge Mining (Pty.) Limited, a wholly owned subsidiary of Phelps Dodge Corporation, operates the Witkop fluorspar mine and mill in the western Transvaal, South Africa. The operation produces acid-grade fluorspar concentrates for customers in South Africa, the United States, Europe, Australia and Asia. During 1996, the plant expanded its metallurgical-grade flotation capacity, increasing metallurgical-grade production by 15,000 metric tons annually. Black Mountain Mineral Development Company (Pty.) Limited operates a lead-silver-zinc-copper mine and concentrator in the Cape Province of South Africa. The operation is owned 44.6 percent by Phelps Dodge and 55.4 percent by the Gold Fields of South Africa group, who manages the operation. Phelps Dodge accounts for its investment in Black Mountain on the equity basis. Phelps Dodge received $6.0 million, $5.7 million and $2.9 million in dividend payments from Black Mountain in 1996, 1995 and 1994, respectively. The 1994 dividend was the first received by the Corporation from Black Mountain since 1991. Phelps Dodge owns a 13.9 percent interest in Southern Peru Copper Corporation (SPCC), which operates two copper mines, two concentrators, an SX/EW facility, a smelter and a refinery in Peru. The Corporation's interest in SPCC decreased from the 16.25 percent it held at the end of 1994 as a result of an exchange offering of SPCC common shares consummated in 1996. SPCC's other shareholders are ASARCO Incorporated with a 54.1 percent interest and the Cerro Trading Company with a 17.8 percent interest. The common stock held by Phelps Dodge, ASARCO and Cerro Trading Company is closely held and is not registered for trading. The remaining 14.2 percent interest is publicly held. SPCC's results are not included in Phelps Dodge's earnings because the Corporation accounts for its investment in SPCC on the cost basis. During 1996, Phelps Dodge received dividend payments of $16.4 million from SPCC, compared with $13.6 million in 1995 and $3.5 million in 1994. Exploration & Development - ------------------------- Phelps Dodge Exploration Corporation's primary objectives are to increase copper reserves through discoveries, acquisitions and joint ventures and, where appropriate, to diversify into other metals, minerals and geographic areas. Phelps Dodge Exploration Corporation operates offices in Australia, Canada, Chile, Indonesia, Mexico, Peru, the Philippines, South Africa, Thailand, the United States and Zambia. During 1996, a new office was established in Brazil. The 1996 exploration program continued to place emphasis on the search for and delineation of large scale copper, gold and other base metal deposits. Phelps Dodge expended $70.7 million on worldwide exploration during 1996, compared with $60.3 million in 1995 and $40.0 million in 1994. Approximately 47 percent of the 1996 expenditures occurred in the United States, compared with 32 percent in 1995 and 55 percent in 1994. The balance of exploration expenditures was spent principally in Chile, Canada, Peru, Mexico, Australasia and Zambia. During 1996, continuing exploration efforts at existing Phelps Dodge copper operations outlined significant additional copper resources. In the Morenci area, exploration and definition drilling continued during the year at the Garfield deposit. The Garfield resource currently is estimated to contain approximately 1 billion tons of leach material at a grade of 0.27 percent copper. Other developments in Arizona included the completion of a resource and feasibility study that evaluated the re-opening of the Ajo property that discontinued operations in 1985. Studies incorporating the use of current technologies for a new concentrator facility indicate that the property may have significant economic potential. This 150 million ton sulfide resource contains 1.5 billion pounds of copper. In New Mexico, additional mine-for-leach ore reserves were delineated in the Tyrone area during 1996. The leachable material is both oxide and sulfide copper mineral and is estimated to total 300 million tons at 0.32 percent copper. A feasibility study and environmental permitting were initiated to advance development of the Dos Pobres deposit in the Safford District in eastern Arizona. The Dos Pobres deposit contains a total of 285 million tons of leach material with a grade of 0.39 percent copper. Additionally, the Dos Pobres deposit contains 330 million tons of concentrator material with a grade of 0.65 percent copper. Project permitting continued at the Seven-Up Pete joint venture's McDonald gold project near Lincoln, Montana, with the regulatory review process expected to be complete in 1998. Phelps Dodge Corporation owns a 72.25 percent interest in the Seven-Up Pete joint venture and Canyon Resources Corporation of Golden, Colorado, holds the remaining 27.75 percent interest. Internationally, Phelps Dodge Exploration Corporation is examining mine-for-leach opportunities in Peru and is earning its way into a 55 percent interest at the Cerro Lindo project in that country (through exploration expenditures) where a geologic resource of approximately 60 million tons of massive sulfide grading 1.5 percent copper and 2 percent zinc has been identified. Phelps Dodge continues to evaluate the Piedras Verdes property in Sonora, Mexico. In Zambia, the Corporation continues to evaluate the Lumwana region. Ore Reserves - ------------ Ore reserves at each of Phelps Dodge's active copper operations and at Dos Pobres have been estimated as follows: - -------------------------------------------------------------------------------- Estimated at December 31, 1996 ------------------------------ Milling Leaching Reserves Reserves Phelps ----------------- ----------------- Dodge Million % Million % Interest Tons Copper Tons Copper (%) ---- ------ ---- ------ ----- Morenci 406.9 0.68 1,364.2 0.27 85.0 Chino 389.1 0.62 560.5 0.30 66.7 Tyrone - - 413.3 0.34 100.0 Candelaria * 441.4 0.95 - - 80.0 Dos Pobres 330.0 0.65 285.0 0.39 100.0 Ojos del Salado * 13.4 1.30 - - 100.0 - ---------------- * The Candelaria and Ojos del Salado deposits also contained, respectively, 0.006 ounces and 0.008 ounces of gold per ton in 1996 and 0.007 ounces and 0.008 ounces of gold per ton, respectively, in 1995. Estimated at December 31, 1995 ------------------------------ Milling Leaching Reserves Reserves Phelps ---------------- ---------------- Dodge Million % Million % Interest Tons Copper Tons Copper (%) ---- ------ ---- ------ ----- Morenci 430.5 0.72 1,094.5 0.31 85.0 Chino 297.5 0.67 662.6 0.24 66.7 Tyrone - - 170.6 0.36 100.0 Candelaria * 384.4 1.07 - - 80.0 Dos Pobres 330.0 0.65 285.0 0.39 100.0 Ojos del Salado * 13.7 1.32 - - 100.0 - ---------------- * The Candelaria and Ojos del Salado deposits also contained, respectively, 0.006 ounces and 0.008 ounces of gold per ton in 1996 and 0.007 ounces and 0.008 ounces of gold per ton, respectively, in 1995. - -------------------------------------------------------------------------------- The Corporation's estimated share of aggregate ore reserves at the above named properties at December 31 is as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Milling reserves (billion tons) 1.3 1.2 1.0 0.9 1.0 Leaching reserves (billion tons) 2.2 1.8 1.7 1.2 1.0 Commercially recoverable copper (million tons) 12.1 12.3 10.6 10.1 10.5 - -------------------------------------------------------------------------------- Ore reserves at each of Phelps Dodge's other mining operations and investments at year-end 1996 are estimated as follows: - -------------------------------------------------------------------------------- Ore Phelps Reserves Silver % Dodge Million Ounces % % % Calcium Int. Tons Per Ton Copper Lead Zinc Fluoride (%) ------ -------- ------ ---- ---- ------- ---- Black Mountain Broken Hill deposit 10.1 2.4 0.53 5.9 2.9 - 44.60 Southern Peru Copper Corporation * 1,731.9 - 0.68 - - - 13.90 Phelps Dodge Mining Limited 20.0 - - - - 17.30 100.00 - ---------------- * Southern Peru Copper Corporation deposits also contain approximately 665 million tons of leach material at a grade of 0.22 percent copper. - -------------------------------------------------------------------------------- Ore reserves are those estimated quantities of ore that, under conditions anticipated by the Corporation, may be profitably mined and processed for extraction of their constituent values. Estimates of the Corporation's reserves are based upon the Corporation's engineering evaluations of assay values derived from samplings of drill holes and other openings. In the Corporation's opinion, the sites for such samplings are spaced sufficiently close and the geologic characteristics of the deposits are sufficiently well defined to render the estimates reliable. Stated tonnages and grades of ore do not reflect waste dilution in mining or losses in processing. Leaching reserves include copper estimated to be recoverable from leach reserves remaining to be mined at Morenci, Chino, Tyrone and Dos Pobres. Commercially recoverable copper includes copper estimated to be recoverable from milling and leaching reserves and from existing stockpiles of leach material at Morenci, Chino, Tyrone and Dos Pobres. The Corporation holds various other properties containing mineral deposits that it believes could be brought into production should market conditions warrant. Permitting and significant capital expenditures would be required before operations could commence at these properties. The deposits are estimated to contain the following mineralization as of December 31, 1996: - -------------------------------------------------------------------------------- Sulfide Material Leach Material Phelps ---------------- -------------- Gold Dodge Million % Million % Ounces Interest Location Tons Copper Tons Copper Per Ton (%) -------- ----- ------ ----- ------ ------- --- Ajo Arizona 150 0.56 - - - 100.00 Cochise Arizona - - 210 0.40 - 100.00 Copper Basin Arizona 70 0.53 - - - 100.00 Coronado Arizona 180 0.69 310 0.29 - 85.00 Garfield Arizona - - 1,000 0.27 - 85.00 Lone Star Arizona - - 1,600 0.38 - 100.00 Sanchez Arizona - - 230 0.29 - 100.00 San Juan Arizona - - 270 0.28 - 100.00 Western Copper Arizona 530 0.55 500 0.31 - 85.00 McDonald Montana - - 205 - 0.025 72.25 Piedras Verdes Mexico - - 150 0.41 - 70.00 Black Mountain * South Africa 20 - - - - 44.60 - ------------------ * The Black Mountain deposit contains an estimated 6.3 percent lead, 1.16 percent zinc, 0.71 percent copper and 1.81 ounces of silver per ton. - -------------------------------------------------------------------------------- Ownership of Real Property - -------------------------- The Corporation owns substantially all the lands on which its copper mines, concentrators, SX/EW facilities, smelters, refinery and rod mills are located and holds the rest under lease. The Chino Mines partnership owns substantially all the lands on which its copper mine, concentrator, SX/EW facility and smelter are located and holds the rest under lease. Sales and Competition - --------------------- A majority of Phelps Dodge's copper, and additional copper purchased by the Corporation, is cast into rod. Rod sales to outside wire and cable manufacturers constituted approximately 56 percent of Phelps Dodge Mining Company's sales in 1996. Phelps Dodge also sells its copper as concentrate and cathode. Sales of rod and cathode are made directly to wire and cable fabricators and brass mills under contracts principally of a one-year duration. Phelps Dodge rod also is used by the Corporation's magnet wire, bare wire and specialty conductor operations. The Corporation sells its copper rod and cathode on the basis of premiums, which are announced from time to time by the Corporation, over New York Commodity Exchange (COMEX) prices. It also sells copper concentrates based on the prices on the COMEX or the London Metal Exchange (LME). From time to time, Phelps Dodge engages in hedging programs designed to enable the Corporation to realize current average prices for metal delivered or committed to be delivered. Other price protection arrangements also may be entered into from time to time, depending on market circumstances, to ensure a minimum price for a portion of the Corporation's expected future mine production (see Management's Discussion and Analysis and Notes 1 and 19 to the Consolidated Financial Statements for a further discussion of such arrangements). Most of the refined copper sold by Phelps Dodge is incorporated into electrical wire and cable products worldwide for use in the construction, electric utility, communications and transportation industries. It is also used in industrial machinery and equipment, consumer products and a variety of other electrical and electronic applications. In the sale of copper as rod, cathode and concentrates, the Corporation competes, directly or indirectly, with many other sellers, including at least four other U.S. primary producers, as well as numerous foreign producers, metal merchants, custom refiners and scrap dealers. Some major producers outside the United States have cost advantages resulting from richer ore grades, lower labor costs and in some cases a lack of strict regulatory requirements. The Corporation believes that its ongoing programs to contain costs and improve productivity in its copper operations have significantly narrowed these cost advantages and have placed the Corporation in a favorable competitive position with respect to a number of its international competitors. The Corporation's copper also competes with other materials, such as aluminum, plastics, stainless steel and fiber optics, that can be substituted for copper in certain applications. The Corporation's principal methods of competing include pricing, product quality, customer service and dependability of supply. Prices, Supply and Consumption - ------------------------------ Copper is an internationally traded commodity, and its prices are effectively determined by the two major metals exchanges -- the New York Commodity Exchange (COMEX) and the London Metal Exchange (LME). The prices on these exchanges generally reflect the worldwide balance of copper supply and demand, but are also influenced significantly from time to time by speculative actions and by currency exchange values. A slowing world economy and higher exports from formerly socialist countries resulted in a modest surplus in 1992. As a result, the COMEX price decreased in 1992 resulting in an annual average price per pound of $1.03. Excess inventories caused average copper prices to decline to 85 cents per pound in 1993. In 1994, excess inventories that accumulated after 1992 were liquidated as copper consumption increased reflecting solid economic growth in the United States, the beginning of an economic recovery in Europe and continued strong demand from the Pacific Rim region, excluding Japan. As a result, the 1994 annual average price per pound increased to $1.07. In 1995, the price of copper as reported on COMEX averaged $1.35 per pound of copper cathode, 28 cents more than the 1994 average price. The price increase was attributable to the strong growth in demand during 1994, which reduced copper inventories to low levels in 1995. In 1996, the COMEX copper price averaged $1.06 per pound of copper cathode, 29 cents less than the 1995 average price. The decrease was attributable primarily to the market's reaction to more than $2 billion in losses from unauthorized transactions by a Japanese company's copper trader. The price also was influenced by false rumors regarding excess inventories of copper in the market. While the market anticipated a copper supply increase in 1996, worldwide copper inventories remained in the low four-week level, consistent with 1995 levels. The stability was due to continued growth in copper consumption, slightly reduced output of smelters and lack of available scrap, which forced brass mills to purchase cathode as a substitute. Western world copper consumption increased by more than 3 percent. The ongoing economic expansion in the United States fueled strong demand in all copper consuming sectors. In Europe, growth was flat when compared to 1995 due to depressed economic conditions. While Japan emerged from a recession, the country continued to export its manufacturing capabilities resulting in weak copper consumption growth. Strong fundamental growth continued throughout Southeast Asia, while China imported large quantities of copper to increase strategic inventories. Costs - ----- Unit production costs of copper in 1996 were slightly higher than in 1995, principally as a result of increased depreciation charges from recent capital projects, increased mining expenses and costs associated with a maintenance overhaul at the Hidalgo smelter. Unit production costs of copper generally continued to reflect high levels of production, ongoing cost containment programs and increasing amounts of copper obtained through the SX/EW process, including the start-up of the Southside SX/EW project at the Morenci mine in the 1995 third quarter, at favorable incremental costs. Energy Supplies - --------------- The principal sources of energy for the Corporation's copper operations are natural gas, petroleum products, waste heat generated in the smelting processes and electricity purchased from public utilities. Each of the Corporation's mine power plants and smelters uses natural gas as its primary fuel, and each is capable of being converted to use oil as a substitute fuel. The Corporation has experienced no difficulty in recent years in obtaining adequate fuel to maintain production. Environmental and Other Regulatory Matters - ------------------------------------------ Federal and state environmental laws and regulations affect many aspects of the Corporation's mining operations. The federal Clean Air Act of 1970, as amended (the Clean Air Act), and regulations thereunder to date have had the most significant impact, particularly on the Corporation's smelters. The "solid wastes" of the Corporation's copper operations may be subject to regulation under the federal Resource Conservation and Recovery Act (RCRA) and related state laws and, to the extent these wastes affect surface waters, under the federal Clean Water Act and relevant state water quality laws. Formerly, mining wastes were exempted from the federal "hazardous waste" regulations under RCRA. As a result of subsequent actions by the Environmental Protection Agency (EPA), all "extraction" and "beneficiation" wastes and 20 mineral "processing" wastes retain the exemption, and are to be regulated as "solid waste," rather than as "hazardous waste," under RCRA Subtitle C. Only three of the 20 exempt "processing" wastes are copper "processing" wastes. Therefore, the generation and management of any other mineral smelting or refining waste could be subject to "hazardous waste" regulation if the waste exhibits a hazardous waste characteristic or if EPA specifically designates it as a "listed hazardous waste." The Corporation has taken steps to address the potential regulation as "hazardous waste" of any of its wastes which no longer meet the definition of exempt mineral "processing" wastes. RCRA Subtitle D rules governing mineral "extraction" and "beneficiation" wastes and "processing" wastes that are exempt from RCRA Subtitle C have not yet been promulgated by EPA, Arizona or New Mexico. As stated in its proposal and reproposal of Phase IV Supplemental Land Disposal Restriction (LDR) rules, EPA is considering restricting the Subtitle C exemption for mineral "extraction," "beneficiation," and "processing" waste. EPA may seek to impose "hazardous waste" regulation on "processing" waste that is stored or treated before it is recycled, and EPA is re-examining the scope of the current exemption, apparently as part of its negotiations to settle a lawsuit brought by environmental groups over the Phase IV LDRs. Any limitation on the scope of the exemption could impact or increase the costs of operations. The new regulations have not been proposed and the Corporation cannot estimate the impact of such future "solid waste" or "hazardous waste" rules on its operations. The Corporation's copper operations are also subject to federal and state laws and regulations protecting both surface water and groundwater quality. The Corporation possesses, has applied for, or is in the process of applying for the necessary permits or other governmental approvals presently required under these rules and regulations. At the Hidalgo smelter at Playas, New Mexico, in accordance with the discharge plan approved by the New Mexico Environment Department (NMED), the Corporation continues to monitor and report to NMED regarding groundwater quality in the vicinity of the smelter's compacted, clay-lined evaporation pond. The Corporation is continuing its efforts to assess the effect on groundwater quality from operation of the evaporation pond and will continue to investigate and implement appropriate technologies and contingency plans to mitigate any adverse effect. The Corporation had also agreed during the term of an earlier discharge plan to cease discharging acidic solutions to the evaporation pond as presently constructed, to neutralize or remove the acidic solutions present in the evaporation pond, and to commence a groundwater remediation program for any existing contamination. Accordingly, a neutralization facility, a series of lined impoundments, and a series of pumpback wells have been installed and are operated to begin remediation of groundwater adversely affected by past operation of the evaporation pond and to prevent future contamination. Effective September 27, 1989, Arizona adopted regulations for its aquifer protection permit (APP) program, which replaced the then existing Arizona groundwater quality protection permit regulations. Several of the Corporation's properties continue to operate pursuant to the transition provisions for existing facilities under the APP regulations. The APP regulations require permits for new facilities, activities and structures for mining, concentrating and smelting. The APP may require mitigation and discharge reduction or elimination. APP applications for existing facilities operating pursuant to the APP transition provisions are not required until requested by the State or unless a major modification at the facility alters the existing discharge characteristics. The Corporation has applied for and received an APP for a closed tailing pile in Clarkdale, Arizona. The Corporation also has conducted groundwater studies and submitted APP applications for several of its other properties and facilities, including the Morenci mine and certain facilities at the Copper Queen branch. The Corporation will continue to prepare and submit APP applications for its remaining existing properties and facilities, as well as for any new properties or facilities. It is not known what the APP requirements for all existing and new facilities will be and, therefore, it is not possible to estimate such costs. The Corporation is likely to continue to have to make expenditures to comply with the APP program and regulations. On December 23, 1994, Chino Mines Company (CMC), which is two-thirds owned by Phelps Dodge Corporation and is located near Silver City, New Mexico, entered into an Administrative Order on Consent (AOC) with the New Mexico Environment Department that will require CMC to study the environmental impacts and potential health risks associated with portions of the CMC property affected by historical mining operations. Phelps Dodge acquired CMC at the end of 1986. Those studies began in 1995 and, until completed, it will not be possible to determine the nature, extent, cost, and timing of remedial work which will be required under the AOC, although remedial work is expected to be required. In 1993 and 1994, the New Mexico and Arizona legislatures, respectively, passed laws requiring the reclamation of mined lands in those states. The New Mexico Mining Commission adopted rules for the New Mexico program during 1994, and the Corporation's operations began submitting the required permit applications in December 1994. The Arizona State Mine Inspector adopted rules for the Arizona program in January 1997, and the Corporation's operations are expected to begin submitting the required reclamation plans in March 1997. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. At this time, it is not possible to quantify the impact of the new laws and regulations on the Corporation. The 1990 Amendments to the federal Clean Air Act require EPA to develop and implement many new requirements, and they allow states to establish new programs to implement some of the new requirements, such as the requirements for operating permits under Title V of the 1990 Amendments and hazardous air pollutants under Title III of the 1990 Amendments. Because EPA has not yet adopted or implemented all of the changes required by Congress, the air quality laws will continue to expand and change in coming years as EPA develops new requirements and then implements them or allows the states to implement them. Nevertheless, most states have made or are in the process of making certain required changes to their laws regarding Title V. In response to these new laws, several of the Corporation's subsidiaries already have submitted or are in the process of preparing applications for Title V operating permits. These programs will likely increase the Corporation's regulatory obligations and compliance costs. These costs could include implementation of maximum achievable control technology for any of the Corporation's facilities that is determined to be a major source of federal hazardous air pollutants. Until more of the implementing regulations are adopted, and more experience with the new programs is gained, it is not possible to determine the impact of the new requirements on the Corporation. The Corporation estimates that its share of capital expenditures for programs to comply with applicable environmental laws and regulations that affect its mining operations will total approximately $34 million in 1997 and from $25 million to $30 million in 1998; $21 million was spent on such programs in 1996. The Corporation also anticipates making significant capital and other expenditures beyond 1998 for continued compliance with such laws and regulations. In light of the frequent changes in such laws and regulations and the uncertainty inherent in this area, the Corporation is unable to estimate accurately the total amount of such expenditures over the longer term, but it may be substantial. (See the discussion of "OTHER ENVIRONMENTAL MATTERS.") In 1995, legislation was introduced in both the U.S. House of Representatives and the U.S. Senate to amend the Mining Law of 1872. None of the bills was enacted into law. Also, mining law amendments were added to the 1996 budget reconciliation bill, which was vetoed by the President. Among other things, the amendments contained in the 1996 bill would have imposed a 5 percent net proceeds royalty on minerals extracted from federal lands, required payment of fair market value for patenting federal lands, and required that patented lands used for non-mining purposes revert to the federal government. Several of these same concepts likely will be pursued legislatively in 1997. The Secretary of the Interior also recently ordered the Bureau of Land Management (BLM) to form a task force to review BLM's hardrock mining surface management regulations and propose revisions to expand environmental and reclamation requirements, among other things. While the effect of such changes on Phelps Dodge's current operations and other currently owned mineral resources on private lands would be minimal, passage of mining law amendments and/or adoption of revisions to the hardrock mining surface management regulations, as described above, would result in additional expenses in the development and operation of new mines on federal lands. The Corporation is also subject to federal and state laws and regulations pertaining to plant and mine safety and health conditions, including the Occupational Safety and Health Act of 1970 and the Mine Safety and Health Act of 1977. In particular, present and proposed regulations govern worker exposure to a number of substances and conditions present in work environments, including dust, mist, fumes, heat and noise. The Corporation has made and is likely to continue to have to make expenditures to comply with such legislation and regulations. Phelps Dodge does not expect that the additional capital and operating costs associated with achieving compliance with the various environmental, health and safety laws and regulations will adversely affect its competitive position relative to other U.S. copper producers, which are subject to comparable requirements. However, because copper is an internationally traded commodity, these costs could significantly affect the Corporation in its efforts to compete globally with those foreign producers that are not subject to such stringent requirements. Labor Matters - ------------- Employees in Phelps Dodge Mining Company's Arizona operations, El Paso refinery, Tyrone, Hidalgo smelter, Burro Chief Copper Company and Norwich rod mill, and certain employees at Chino are not represented by any unions. The collective bargaining agreements covering approximately 625 employees at Phelps Dodge Mining Company's Chino operations in New Mexico expired on June 30, 1996. As of March 6, 1997, employees who were covered by the agreements have continued to work without a contract. The labor contract at the El Paso rod mill expires on May 29, 1998. PHELPS DODGE INDUSTRIES - ----------------------- Phelps Dodge Industries is a business segment comprising a group of companies that manufacture engineered products principally for the transportation, energy and telecommunications sectors worldwide. Its operations are characterized by products with significant market share, internationally competitive cost and quality, and specialized engineering capabilities. This business segment includes the Corporation's specialty chemicals operations through Columbian Chemicals Company and its subsidiaries (Columbian Chemicals); its wheel and rim operations through Accuride Corporation and its subsidiaries (Accuride); and its U.S. and international wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates. Operations - ---------- Columbian Chemicals, headquartered in Atlanta, Georgia, is an international producer and marketer of carbon blacks. The company produces a full range of rubber and industrial carbon blacks in 11 plants worldwide, with approximately one-half of its production in North America and the other half at facilities in the United Kingdom, Germany, Italy, Spain, Hungary (owned 60 percent by Columbian Chemicals), and the Philippines (owned 88.2 percent by Columbian Chemicals). Columbian's rubber carbon blacks improve the tread wear and durability of tires, and extend the service life of many rubber products such as belts and hoses. The company's industrial carbon blacks are used in such diverse applications as pigmentation of coatings, inks and plastics; ultraviolet stabilization of plastics; and as conductive insulation for wire and cable. The Hungarian plant began production in December 1993. It is owned by Columbian Tiszai Carbon Ltd. which in turn is owned 60 percent by Columbian Chemicals and 40 percent by Tiszai Vegyi Kombinat Rt., the largest petrochemical company in Hungary. The plant in Santander, Spain, was acquired in 1994 from Repsol Quimica S.A. and is wholly owned by the Corporation. The company also maintains sales offices in 10 countries and makes use of distributors worldwide. One of the company's carbon black plants in Germany, the Hamburg plant, was closed in 1994 as a result of its high cost structure and environmental restrictions. In addition, the company sold its U.S. synthetic iron oxide plant (MAPICO) during the 1995 first quarter. This operation was peripheral to Columbian's core business. Extensive research, development and engineering are performed by Columbian at four locations. The company's Technology Center at Swartz, Louisiana, is responsible for studies specific to both industrial and rubber applications of carbon black. Carbon black product and process development at the Technology Center is supported by development work at the company's North Bend, Louisiana, and Hamilton, Ontario, plants. The European Central Laboratory at Avonmouth, United Kingdom, provides technical support for Columbian's European operations. Columbian Chemicals also licenses rubber carbon technology to other carbon black manufacturing companies in various countries. Accuride Corporation, headquartered in Henderson, Kentucky, manufactures and markets wheels and rims for commercial trucks, trailers and buses. Accuride produces a wide range of steel tubeless and tube-type disc wheels and demountable rims for the mounting systems of medium and heavy duty trucks, trailers and buses, as well as wheels for commercial light trucks. The company also offers a line of forged aluminum wheels for medium and heavy duty trucks, trailers and buses. This broad product line is sold at the North American original equipment manufacturer level and is marketed through a U.S. and international distribution network. Accuride operates a manufacturing facility and a design and test center in Henderson, Kentucky; a manufacturing facility in London, Ontario, Canada; and a customer service center in Taylor, Michigan. In addition, Accuride and The Goodyear Tire and Rubber Company of Akron, Ohio, each own 50 percent of AOT Inc., a commercial tire and wheel assembly facility located in Springfield, Ohio, that services two plants of Navistar International Transportation Corporation. On September 18, 1996, Accuride and Kaiser Aluminum and Chemical Corporation (Kaiser) announced their intent to form a joint venture company to produce aluminum wheels for the commercial transportation industry. Accuride and Kaiser would each own 50 percent of the new company. Phelps Dodge Magnet Wire Company, headquartered in Fort Wayne, Indiana, is an international producer of magnet wire, the insulated conductor used in most electrical systems. Its products are manufactured in the United States at plants in Fort Wayne, Indiana; Hopkinsville, Kentucky; Laurinburg, North Carolina; and El Paso, Texas. The plant in North Carolina was added in March 1994 when Phelps Dodge Magnet Wire Company acquired certain assets of a fine-gauge magnet wire manufacturing plant from Rea Magnet Wire Company, Inc. (Rea). The plant in Texas was also added in March 1994 with the acquisition of certain assets of Texas Magnet Wire Company, a joint venture of Rea and Fujikura International, Inc. Phelps Dodge Magnet Wire Company also manufactures its products at a plant in Mureck, Austria. The Austrian operation, Phelps Dodge Eldra, GmbH, is a joint venture with Eldra Elektrodraht-Erzeugung GmbH, a leading European magnet wire manufacturer. Phelps Dodge owns a 51 percent interest in the venture; Eldra Elektrodraht-Erzeugung GmbH owns the remaining 49 percent. In addition, the company and Sumitomo Electric Industries, Ltd. each own a 50 percent interest in SPD Magnet Wire Company, a joint venture that operates a magnet wire plant in Edmonton, Kentucky. These plants draw and insulate copper and aluminum wire which is sold as magnet wire to original equipment manufacturers for use in electric motors, generators, transformers, televisions, automobiles and a variety of small electrical appliances. Magnet wire is also sold to electrical equipment repair shops and smaller original equipment manufactures through a network of distributors. On August 7, 1996, the Corporation announced plans to construct a magnet wire manufacturing plant in Monterrey, Mexico. Construction of the $42 million project began in 1996 with commercial production expected in early 1998. The Corporation has interests in companies that are primarily involved in the manufacture of telecommunication and energy cables and specialty conductors for international markets through U.S. operations and joint venture associations in 14 other countries. The Corporation's interests in these companies are managed by Phelps Dodge International Corporation, a wholly owned subsidiary headquartered in Coral Gables, Florida, which also provides management, marketing assistance, technical support, and engineering and purchasing services to these companies. In order to supply the increasing demand for copper rod in certain countries, five of the Corporation's international wire and cable companies have continuous-cast copper rod facilities. The Corporation has majority interests in companies operating in 10 countries -- Chile, China, Costa Rica, Ecuador, El Salvador, Honduras, Panama, Thailand, Venezuela and Zambia. In Zambia, the Corporation increased its effective ownership interest in Metal Fabricators of Zambia Limited (ZAMEFA) from 20 percent to 51 percent. The Corporation has minority interests in companies located in Hong Kong, Thailand, China and the Philippines, accounted for on the equity basis, and in companies located in Greece and India, accounted for on the cost basis. Phelps Dodge International Corporation also manages U.S. operations that manufacture and market specialty high-performance conductors for the aerospace, automotive, biomedical, computer and consumer electronics markets. The principal products are highly engineered conductors of copper and copper alloy wire electroplated with silver, tin or nickel for sophisticated, specialty product niches. These manufacturing operations consist of plants located in Inman, South Carolina; Trenton, Georgia; and Elizabeth, Fairfield, Montville and West Caldwell, New Jersey. The plants in Fairfield, Montville and West Caldwell, New Jersey, were added in May 1996 when Phelps Dodge acquired Nesor Alloy Corporation. See Note 20 to the Consolidated Financial Statements for information concerning Phelps Dodge Industries' sales by its specialty chemicals, wheel and rim, and wire and cable operations. Ownership of Real Property - -------------------------- Phelps Dodge Industries owns most of its plants and the land on which they located. The exceptions are the land and buildings of Accuride in Henderson, Phelps Dodge Magnet Wire in Austria and Nesor at Fairfield and Montville, which are leased. Additionally, the land on which six international plants are located is leased. Competition and Markets - ----------------------- The principal competitive factors in the various markets in which Phelps Dodge Industries competes are price, product quality, customer service, dependability of supply, delivery lead time, breadth of product line and research and development. Columbian Chemicals is among the world's largest producers of carbon black. Approximately 90 percent of the carbon black produced is used in rubber applications, 75 percent of which is used in the tire industry. The major tire manufacturers in the United States and Western Europe account for a substantial portion of Columbian Chemicals' carbon black sales. In addition, Columbian Chemicals maintains a strong competitive position in mechanical rubber goods markets based on its commitment to quality and service. The Corporation is not aware of any product that could be substituted for carbon black to a significant extent in any of its principal applications. Including Columbian Chemicals, there are a total of six carbon black producers in the United States, two in Canada and three major producers in Western Europe. The carbon black industry is highly competitive, particularly in the U.S. rubber black market. The company has expanded its production and marketing position by entry into the emerging market in Central Europe through the start up of operations of Columbian Tiszai Carbon Ltd. in Hungary in late 1993, and further enhanced its presence in international markets through the acquisition of a carbon black plant in Spain in late 1994. The Corporation believes that Accuride is the largest producer of rim and wheel products for commercial trucks, trailers and buses in North America. Accuride's sales are primarily in the United States, where a majority of the truck, trailer and bus manufacturers are located, and in Canada. The demand for its products fluctuates with the level of original equipment truck, trailer and bus manufacturing activity. In the last five years, Accuride's 10 largest customers have accounted for approximately 70 percent of its total sales. Accuride principally competes with three U.S. companies. With the 1994 acquisition of plants in El Paso, Texas, and Laurinburg, North Carolina, and the new plant being constructed in Monterrey, Mexico, the Corporation believes that Phelps Dodge Magnet Wire Company will continue its position as the world's largest manufacturer of magnet wire. It principally competes with four U.S. manufacturers. The company also has expanded its production and marketing position by acquiring a majority interest in a magnet wire manufacturing company in Austria. The Corporation, through Phelps Dodge International Corporation, also manufactures magnet wire at affiliate companies in Venezuela, Thailand, Zambia and the Philippines. The Corporation's international telecommunication and energy cable companies sell a majority of their products to contractors, distributors, and public and private utilities. Their products are used in lighting, power distribution, telecommunications and other electrical applications. The Corporation's specialty high-performance conductors are primarily sold to intermediators (insulators, assemblers, subcontractors and distributors). More than half of these products are ultimately sold to commercial and military aerospace companies for use in airframes, avionics, space electronics, radar systems and ground control electronics. Specialty high-performance conductors are also used in appliances, instrumentation, computers, telecommunications, military electronics, medical equipment and other products. The Corporation has one primary U.S. competitor in the specialty conductor market; however, in those few markets where it competes for high volume products, it faces competition from several U.S. fabricators. Raw Materials - ------------- Carbon black primarily is produced from heavy residual oil, a by-product of the crude oil refining process. Columbian Chemicals purchases substantially all of its feedstock on a spot basis at prices that fluctuate with world oil prices. The cost of feedstock is a significant factor in the cost of carbon black. To achieve satisfactory financial results during periods of increasing oil prices, Columbian Chemicals must be able to pass through to customers any increase in its feedstock costs. Accuride manufactures a majority of its products from either flat roll or section steel, except for certain finished aluminum products manufactured to its specifications and designs by Kaiser. A joint venture company that Accuride and Kaiser intend to form to produce aluminum wheels, when formed, would replace the current manufacturing agreement between the two companies. The principal raw materials used by Phelps Dodge Magnet Wire Company's manufacturing operations are copper, aluminum and various electrical insulating materials. The principal raw materials used by the Corporation's international telecommunication and energy cable companies are copper, copper alloy, aluminum, copper-clad steel and various electrical insulating materials. The specialty conductor product line is usually plated with silver, nickel or tin. With the exception of copper needed in specialty conductors, a majority of the materials used by these companies is purchased from others. Phelps Dodge Magnet Wire Company acquires most of its copper from the Corporation. Phelps Dodge Industries purchases its residual oil feedstock and other raw materials from various other suppliers. It does not believe that the loss of any one supplier would have a material adverse effect on its financial conditions or on the results of its operations. Energy Supplies - --------------- Phelps Dodge Industries' operations generally use purchased electricity and natural gas as their principal sources of energy. Phelps Dodge Magnet Wire Company's principal manufacturing equipment that uses natural gas is also equipped to burn alternative fuels. Environmental Matters - --------------------- Environmental laws and regulations affect many aspects of the Corporation's industrial operations. Phelps Dodge Industries estimates that its capital expenditures for programs to comply with applicable environmental laws and regulations will total approximately $18 million in 1997 and from $10 million to $15 million in 1998; $16 million was spent on these programs in 1996. The Corporation also anticipates making significant capital and other expenditures beyond 1998 for continued compliance with such laws and regulations. In light of the frequent changes in such laws and regulations and the uncertainty inherent in this area, the Corporation is unable to estimate accurately the total amount of such expenditures over the longer term, but it may be substantial. (See the discussion of "OTHER ENVIRONMENTAL MATTERS.") Labor Matters - ------------- Phelps Dodge Industries has labor agreements covering most of its U.S. and international plants. Accuride had a three-year labor agreement covering approximately 690 employees at its London, Ontario, Canada, plant that expired on January 21, 1997. All employees covered by the expired agreement began an immediate strike, and as of March 6, 1997, that strike continued. Accuride has maintained operations with its salaried workforce and continues to supply its customers. Accuride also has a three-year labor agreement covering approximately 400 employees that will expire on February 20, 1998, at its Henderson, Kentucky, plant. The collective bargaining agreement covering approximately 360 employees at Phelps Dodge Magnet Wire Company's Hopkinsville, Kentucky, plant expired on October 11, 1996. As of March 6, 1997, employees who were covered by the agreement have continued to work without a contract. Phelps Dodge International's plant in Elizabeth, New Jersey, has a three-year agreement covering approximately 60 employees that expires on July 31, 1997. RESEARCH AND DEVELOPMENT - ------------------------ The Corporation conducts research and development programs relating to technology for exploration for minerals, recovery of metals from ores, concentrates and solutions, smelting and refining of copper, metal processing and product development. It also conducts research and development programs related to its carbon black products through its Columbian Chemicals subsidiary, its wheel and rim products through its Accuride subsidiary, its wire insulating processes and materials through Phelps Dodge Magnet Wire Company, and conductor materials and processes through Phelps Dodge International Corporation. Expenditures for all of these research and development programs, together with contributions to industry and government-supported programs, totaled $16.5 million in 1996, compared with $15.8 million in 1995 and $15.9 million in 1994. OTHER ENVIRONMENTAL MATTERS - --------------------------- The Corporation is subject to federal, state and local environmental laws, rules and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986. Under Superfund, the Environmental Protection Agency (EPA) has identified approximately 35,000 sites throughout the United States for review, ranking and possible inclusion on the National Priorities List (NPL) for possible response. Among the sites identified, EPA has included 13 sites owned by the Corporation. The Corporation believes that most, if not all, of its sites so identified will not qualify for listing on the NPL. In addition, the Corporation may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by the Corporation. The Corporation has received notice that it is a potentially responsible party from EPA and/or individual states under CERCLA or a state equivalent and is participating in environmental assessment and remediation activity at 37 sites. For further information about these proceedings, see Item 3. Legal Proceedings, Part III. At December 31, 1996, the Corporation had reserves of $117.0 million for remediation of certain of the sites referred to above and other environmental costs in accordance with its policy to record liabilities for environmental expenditures when it is probable that obligations have been incurred and the costs reasonably can be estimated. The Corporation's estimates of these costs are based upon currently available facts, existing technology, and presently enacted laws and regulations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The amounts of these liabilities are very difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of sites not owned by the Corporation, the unknown extent of the Corporation's probable liability in proportion to the probable liability of other parties. Moreover, the Corporation has other probable environmental liabilities that in its judgment cannot reasonably be estimated, and losses attributable to remediation costs are reasonably possible at other sites. The Corporation cannot now estimate the total additional loss it may incur for such environmental liabilities, but such loss could be substantial. The possibility of recovery of some of the environmental remediation costs from insurance companies or other parties exists; however, the Corporation does not recognize these recoveries in its financial statements until they become probable. The Corporation's operations are subject to myriad environmental laws and regulations in jurisdictions both in the United States and in other countries in which it does business. For further discussion of these laws and regulations, please see "Environmental and Other Regulatory Matters" and "Environmental Matters." The estimates given in those discussions of the capital expenditures for programs to comply with applicable environmental laws and regulations in 1997 and 1998, and the expenditures for those programs in 1996, are separate from the reserves and estimates described above. The Environmental, Health and Safety Committee of the Board of Directors, comprising four non-employee directors, was established in 1991. The Committee met three times in 1996 to review, among other things, the Corporation's policies with respect to environmental, health and safety matters, and the adequacy of management's programs for implementing those policies. The Committee reports on such reviews and makes recommendations with respect to those policies to the Board of Directors and to management. Item 3. Legal Proceedings - -------------------------- I. The Corporation is participating, either directly as a party or as a member of certain trade associations, in several legal challenges to air quality rules or guidance documents issued by EPA. This litigation primarily involves the establishment or amendment of national ambient air quality standards, the requirements for the construction or major modification of major sources of criteria pollutants, Title V operating permits, and the status of fugitive emissions under the Title V and federal hazardous air pollutants programs. In August 1983, EPA proposed regulations (48 Fed. Reg. 38,742) which, if adopted, would have substantially implemented a February 1982 settlement agreement dealing with fugitive emissions, but on October 26, 1984, EPA promulgated final regulations inconsistent with the August 1983 proposal. In December 1984, the Corporation, the American Mining Congress and several mining and energy development companies filed a petition (No. 84-1609) in the U.S. Court of Appeals for the District of Columbia for review of the October 26, 1984, regulations, asserting that the terms of the settlement agreement, to which they were party, had not been carried out. The court stayed the petition pending the outcome of further EPA rulemakings. The further EPA rulemakings were also challenged by the American Mining Congress and others in federal court actions filed in 1989 and 1993. The U.S. Court of Appeals for the District of Columbia Circuit decided two of the appeals in 1995. In National Mining Association v. EPA, 59 F.3d 1351 (D.C. Cir. 1995), the court agreed with EPA that, under the federal hazardous air pollutants program, collocated facilities should be considered as part of the same emitting "source" and fugitive emissions must be counted when determining whether a source is a "major source." The court agreed with the industry petitioners that a source could avoid "major source" status by using effective air pollution controls, even if the controls are not "federally enforceable." In Chemical Manufacturers Association et al. v. EPA, No. 89-1514, Slip op. (D.C. Cir. 1995), the court agreed with the industry petitioners and vacated and remanded EPA's rules which did not allow facilities to consider air pollution controls when determining whether a permit is needed for new or increased emissions of criteria pollutants, unless the controls were "federally enforceable." In response, EPA has asserted that its rules nevertheless remain in effect and that it may cure the defect in the rules merely by issuing written guidance in the near future. The industry petitioners have requested the court to enforce its original mandate against the agency. The effect of these decisions on the Corporation's facilities will vary on a case-by-case basis. They will have no effect on some facilities; they may cause some facilities to be regulated as "major sources" under one or more federal programs; and they may allow some sources to avoid regulation as "major sources" by using air pollution controls that are enforceable under federal, state or local laws. II. Reference is made to Part I, Items 1 and 2 of this report for information regarding proceedings that pertain to water used by the Corporation's Morenci, Arizona, operations. A. The following state water rights adjudication proceedings are pending in Arizona Superior Court: 1. In re the General Adjudication of All Rights to Use Water in the Little Colorado River System and Source, No. 6417 (Superior Court of Arizona, Apache County). (a) Petition was filed by the Corporation on or about February 17, 1978, and process has been served on all potential claimants. Virtually all statements of claimant have been filed. (b) The principal parties, in addition to the Corporation, are the State of Arizona, the Navajo Tribe of Indians, the Hopi Indian Tribe, the San Juan Southern Paiute group of Indians and the United States on its own behalf and on behalf of those Indian tribes. In this adjudication and in the adjudications reported in items 2.(a), (b) and (c) below, the United States and the Indian tribes seek to have determined and quantified their rights to use water arising under federal law on the basis that, when the Indian reservations and other federal reservations were established by the United States, water was reserved from appropriation under state law for the use of those reservations. (c) This proceeding could affect, among other things, the Corporation's rights to impound water in Show Low Lake and Blue Ridge Reservoir and to transport this water into the Salt River and Verde River watersheds for exchange with the Salt River Valley Water Users' Association. The Corporation has filed statements of claimant for these and other water claims. This litigation is stayed pending the outcome of current settlement negotiations. The Court has not set a final schedule of cases to go to trial, should the litigation resume. 2. In re the General Adjudication of All Rights to Use Water in the Gila River System and Source, Nos. W-1 (Salt River), W-2 (Verde River), W-3 (Gila River) and W-4 (San Pedro River) (Superior Court of Arizona, Maricopa County). As a result of consolidation proceedings, this action now includes general adjudication proceedings with respect to the following three principal river systems and sources: (a) The Gila River System and Source Adjudication: (i) Petition was filed by the Corporation on February 17, 1978. Process has been served on water claimants in the upper and lower reaches of the watershed and virtually all statements of claimant have been filed. (ii) The principal parties, in addition to the Corporation, are the Gila Valley Irrigation District, the San Carlos Irrigation and Drainage District, the State of Arizona, the San Carlos Apache Tribe, the Gila River Indian Community and the United States on its own behalf and on behalf of the tribe and the community. (iii) This proceeding could affect, among other things, the Corporation's claim to the approximately 3,000 acre-feet of water that it diverts annually from Eagle Creek, Chase Creek or the San Francisco River and its claims to percolating groundwater that is pumped from wells located north of its Morenci Branch operations in the Mud Springs and Bee Canyon areas and in the vicinity of the New Cornelia Branch at Ajo. The Corporation has filed statements of claimant with respect to waters that it diverts from these sources. (iv) By a letter agreement dated September 7, 1990, the Corporation and the San Carlos Apache Tribe agreed upon principles to settle the water claims of that Tribe and other land use issues involving the Tribe's reservation. Since that time, comprehensive settlement agreements among the Tribe, the Corporation and other parties have been under negotiation. In the more recent phases of the settlement negotiations, the Tribe has sought terms that the Corporation believes are unacceptable and inconsistent with the principles set forth in the September 7, 1990, letter agreement. The Tribe has also notified the Corporation to make preparations to stop using the reservation for water transportation by July 1997, at the latest. The Corporation obtains water for its Morenci complex from several sources, including through the operation of a pump station on reservation lands adjacent to the Black River, and uses the natural channel of Eagle Creek, which is partially located on the reservation, to transport water from Black River and certain other sources to its Morenci complex. The Corporation believes that it holds valid rights of way and easements and has other legal rights sufficient to allow for the continued operation of the Black River pump station on reservation lands and for the use of Eagle Creek. However, if the Corporation were to lose the use of the Black River pump station, and was unable to transport water using the natural channel of Eagle Creek, that might adversely affect production at the Morenci complex depending upon the availability of alternative sources of water. The parties are continuing to discuss all of these matters. The federal legislation authorizing settlement of the Tribe's water rights claims with the Corporation and the other parties to the proceeding has been extended for a six-month period expiring June 30, 1997. (b) The Salt River System and Source Adjudication: (i) Petition was filed by the Salt River Valley Water Users' Association on or about April 25, 1974. Process has been served, and statements of claimant have been filed by virtually all claimants. (ii) Principal parties, in addition to the Corporation, include the petitioner, the State of Arizona and the United States, on its own behalf and on behalf of various Indian tribes and communities including the White Mountain Apache Tribe, the San Carlos Apache Tribe, the Fort McDowell Mohave-Apache Indian Community, the Salt River Pima-Maricopa Indian Community and the Gila River Indian Community. (iii) The Corporation has filed a statement of claimant to assert its interest in the water exchange agreement with the Salt River Valley Water Users' Association by virtue of which it diverts from the Black River water claimed by the Association and repays the Association with water impounded in Show Low Lake and Blue Ridge Reservoir on the Little Colorado River Watershed, and to assert its interest in "water credits" to which the Corporation is entitled as a result of its construction of the Horseshoe Dam on the Verde River. (iv) The Salt River Pima-Maricopa Indian Community, Salt River Valley Water Users' Association, the principal Salt River Valley Cities, the State of Arizona and others have negotiated a settlement as among themselves for the Verde and Salt River system. The settlement has been approved by Congress, the President and the Arizona Superior Court. Under the settlement, the Salt River Pima-Maricopa Indian Community waived all water claims it has against all other water claimants (including the Corporation) in Arizona. (v) Active proceedings with respect to other claimants have not yet commenced in this adjudication. (c) The Verde River System and Source Adjudication: (i) Petition was filed by the Salt River Valley Water Users' Association on or about February 24, 1976, and process has been served. Virtually all statements of claimant have been filed. (ii) The principal parties, in addition to the Corporation, are the petitioner, the Fort McDowell Mohave-Apache Indian Community, the Payson Community of Yavapai Apache Indians, the Salt River Pima-Maricopa Indian Community, the Gila River Indian Community, the United States on its own behalf and on behalf of those Indian communities, and the State of Arizona. (iii) This proceeding could affect, among other things, the Corporation's Horseshoe Dam "water credits" with the Salt River Valley Water Users' Association resulting from its construction of the Horseshoe Dam on the Verde River. (See the Black River water exchange referred to in Paragraph II.A. 2.(b)(iii) above.) The Corporation has filed statements of claimant with respect to Horseshoe Dam and water claims associated with the former operations of the United Verde Branch. (iv) The Fort McDowell Mohave-Apache Indian Community, Salt River Valley Water Users' Association, the principal Salt River Valley Cities, the State of Arizona and others have negotiated a settlement as among themselves for the Verde River system. This settlement has been approved by Congress, the President and the Arizona Superior Court. Under this settlement, the Fort McDowell Mohave-Apache Indian Community waived all water claims it has against all other water claimants (including the Corporation) in Arizona. B. The following proceedings involving water rights adjudication are pending in the U.S. District Court for the District of Arizona: 1. On June 29, 1988, the Gila River Indian Community filed a complaint-in-intervention in United States v. Gila Valley Irrigation District, et al., Globe Equity No. 59 (D. Ariz.). The underlying action was initiated by the United States in October 1925 to determine conflicting claims to water rights in certain portions of the Gila River watershed. Although the Corporation was named and served as a defendant in that action, it was dismissed without prejudice as a defendant in March 1935. In June 1935, the Court entered a decree setting forth the water rights of numerous parties, but not those of the Corporation. The Court retained, and still has, jurisdiction of the case. The complaint-in-intervention does not name the Corporation as a defendant; however, it does name the Gila Valley Irrigation District as a defendant. Therefore, the complaint-in-intervention could affect the approximately 3,000 acre-feet of water that the Corporation diverts annually from Eagle Creek, Chase Creek or the San Francisco River pursuant to the agreement between the Corporation and the Gila Valley Irrigation District. 2. On December 30, 1982, the Gila River Indian Community initiated an action styled Gila River Indian Community v. Gila Valley Irrigation District, et al., No. CIA 82-2185 (D. Ariz.), complaining about allegedly improper uses by approximately 17,000 named defendants of "water from within the Gila River watershed." The Corporation was named as a defendant in the complaint, but it has not yet been served with process. The complaint seeks an injunction restraining future uses of water that interfere with the alleged prior rights of the Gila River Indian Community, as well as compensatory and punitive damages in an unspecified amount. 3. Prior to December 1982, various Indian tribes filed several suits in the U.S. District Court for the District of Arizona claiming prior and paramount rights to use waters which are presently being used by many water users, including the Corporation, and claiming damages for prior use in derogation of their allegedly paramount rights. These federal proceedings have been stayed pending final adjudication in the state courts. III. Claims under CERCLA and related state acts involving the Corporation have been raised with respect to the remediation of 37 waste disposal and other sites. Most are sites where the Corporation has received information requests or other indications that the Corporation may be a Potentially Responsible Party (PRP) under CERCLA. CERCLA is intended to expedite the remediation of hazardous substances without regard to fault. Responsible parties for each site include present and former owners, operators, transporters, and generators of the substances at the site. Liability is strict, joint and several. Because of the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of allocating the remediation costs among them, the uncertainty as to the most desirable remediation techniques and amount of remediation costs, and the time period during which such costs may be incurred, the Corporation is unable to reasonably estimate the full cost of compliance with CERCLA or equivalent state statutes. With respect to these 37 sites, and with the exception of the Laurel Hill site in Maspeth, New York, where a reserve of $10.0 million has been established, based on currently available information, which in many cases is preliminary and incomplete, the Corporation has no reason to believe that its ultimate responsibility for remediation costs will exceed $2.0 million at any site and believes most will be substantially under $0.1 million. While additional costs to the Corporation are reasonably possible, that cost, excepting Laurel Hill, is not expected to exceed $10.0 million. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted during the fourth quarter of 1996 to a vote of security holders, through the solicitation of proxies or otherwise. Executive Officers of Phelps Dodge Corporation - ---------------------------------------------- The executive officers of Phelps Dodge Corporation are elected to serve at the pleasure of its Board of Directors. As of March 1, 1997, the executive officers of Phelps Dodge Corporation were as follows: Age at Officer of the Name 3/1/97 Position Corporation since ---- ------ -------- ----------------- Douglas C. Yearley 61 Chairman of the Board, President and Chief Executive Officer 1981 J. Steven Whisler 42 Senior Vice President 1987 Manuel J. Iraola 48 Senior Vice President 1995 Ramiro G. Peru 41 Senior Vice President for Organizational Development and Information Technology 1995 Thomas M. St. Clair 61 Senior Vice President and Chief Financial Officer 1989 Except as stated below, all of the above have been officers of Phelps Dodge Corporation for the past five years. Mr. Iraola was elected Senior Vice President in January 1995. Prior to his election, Mr. Iraola was President of Phelps Dodge International Corporation, the largest Phelps Dodge Industries' company, a position he held since 1992. Prior to that time, he was Senior Vice President and Chief Financial Officer of Columbian Chemicals Company, acquired by Phelps Dodge in 1986. Mr. Peru was elected Senior Vice President for Organizational Development and Information Technology in January 1997. Prior to his election, Mr. Peru was Vice President and Treasurer of Phelps Dodge Corporation, a position he held since 1995. Prior to that time, he was Vice President of Phelps Dodge Mining Company. Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - ---------------------------------------------------------------------------- The information called for by Item 5 appears in Management's Discussion and Analysis in this report. Item 6. Selected Financial Data - -------------------------------- (In millions except per share amounts) 1996 1995 1994 (a) 1993 1992 (b/c) ---- ---- -------- ---- ---------- Sales and other operating revenues $ 3,786.6 4,185.4 3,289.2 2,595.9 2,579.3 Income before cumulative effect of accounting changes $ 461.8 746.6 271.0 187.9 301.6 Per common share $ 6.97 10.65 3.81 2.66 4.28 Cumulative effect of accounting changes $ - - - - (79.9) Per common share $ - - - - (1.13) Net income $ 461.8 746.6 271.0 187.9 221.7 Per common share $ 6.97 10.65 3.81 2.66 3.15 Total assets $ 4,816.4 4,645.9 4,133.8 3,720.9 3,441.2 Long-term debt $ 554.6 613.1 622.3 547.3 373.8 Dividends per common share $ 1.95 1.80 1.69 1.65 1.61 (a) Reported 1994 net income of $271.0 million ($3.81 per common share) includes income of $362.7 million ($5.10 per common share) less non-recurring after-tax charges in the fourth quarter totaling $91.7 million ($1.29 per common share) reflecting additional provisions for estimated future costs associated with environmental matters and estimated losses on the disposition of certain operating facilities. (b) 1992 includes a non-taxable gain of $36.4 million (52 cents per common share) on a subsidiary's stock issuance from two Sumitomo companies' acquisition of a 20 percent interest in the Candelaria copper project in Chile. (c) Includes one-time, after-tax charges in 1992 for the adoption of new accounting methods for postretirement and postemployment benefits (SFAS No. 106 and SFAS No. 112) and income taxes (SFAS No. 109). Note: See Management's Discussion and Analysis for a discussion of the effect on the Corporation's results of material changes in the price the Corporation receives for copper or in its unit production costs. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------- Phelps Dodge reported 1996 consolidated net income of $461.8 million, or $6.97 per common share. This amount compares with 1995 net income of $746.6 million, or $10.65 per common share. The 1996 amount includes an after-tax charge of approximately $10.7 million, or 16 cents per share, resulting from a 1996 fourth quarter reclamation provision and interest charges related to a Court ordered rescission of a 1986 sale of property. The 1995 amount includes an after-tax gain of $16.6 million, or 24 cents per share, from the sale of Columbian Chemicals Company's MAPICO division. The Corporation reported 1994 income of $362.7 million, or $5.10 per common share, less non-recurring after-tax charges in the fourth quarter of $91.7 million, or $1.29 per common share, that reduced reported 1994 net income to $271.0 million, or $3.81 per common share. The 1994 non-recurring charges primarily reflected additional provisions for estimated future costs associated with environmental matters and for estimated losses on the disposition of certain operating facilities. Note 2 to the Consolidated Financial Statements contains further information to which reference should be made for a fuller understanding of the 1994 non-recurring charges. The Corporation's consolidated financial results for the last three years are summarized below (in millions except per common share amounts): - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Sales and other operating revenues $ 3,786.6 4,185.4 3,289.2 Operating income $ 712.9 1,100.5 400.4 Net income $ 461.8 746.6 271.0 Net income per common share $ 6.97 10.65 3.81 - -------------------------------------------------------------------------------- A significant factor influencing the Corporation's 1996 results was the lower price of copper, the Corporation's principal product. The New York Commodity Exchange (COMEX) spot price per pound of copper cathode, upon which the Corporation bases its selling price, averaged $1.06 in 1996, compared with $1.35 in 1995 and $1.07 in 1994. The COMEX price averaged $1.09 per pound for the first two months of 1997, and closed at $1.16 on March 6, 1997. Any material change in the price the Corporation receives for copper, or in its unit production costs, has a significant effect on the Corporation's results. The Corporation's present share of annual production is approximately 1.5 billion pounds of copper. Accordingly, each 1 cent per pound change in the average annual copper price received by the Corporation, or in average annual unit production costs, causes a variation in annual operating income before taxes of approximately $15 million. Depending on market circumstances, the Corporation may periodically purchase or sell various copper option contracts to mitigate the risk of adverse price fluctuations on a portion of its expected future mine production. With respect to 1996 production, the Corporation had contracts that provided a combination of minimum and maximum quarterly average London Metal Exchange (LME) prices for 185 million pounds of third quarter copper production that resulted in payments of $3.1 million to Phelps Dodge. Similar contracts ensuring minimum prices for 790 million pounds of 1996 copper production expired without payment to Phelps Dodge. During the 1996 third quarter, the Corporation sold copper price protection contracts that covered 94 million pounds of anticipated production in the fourth quarter of 1996 and 85 million pounds of anticipated production in the first quarter of 1997. This resulted in immediate cash payments to the Corporation of $15.6 million. Consequently, $8.8 million for 1996 fourth quarter contracts was recognized in income during the fourth quarter and $6.8 million for 1997 first quarter contracts was deferred and will be recognized in income during the 1997 first quarter. During 1995, the Corporation had contracts that provided minimum quarterly average LME prices of 80 cents per pound for approximately 640 million pounds of copper that expired on December 31, 1995, without payment to Phelps Dodge. In addition, the Corporation had contracts that provided minimum (approximately 95 cents) and maximum (approximately $1.33) LME prices per pound for approximately 650 million pounds of copper. These contracts expired on December 31, 1995, with Phelps Dodge making payments totaling $1.3 million to the financial institutions involved. During 1994, contracts that provided the Corporation with minimum average LME copper prices of 75 cents per pound for about 244 million pounds of production expired without payment to Phelps Dodge. With respect to 1997 production, as of March 6, 1997, the Corporation had net positions in place with several financial institutions that provide for a minimum first quarter average price of 90 cents per pound for 85 million pounds of copper cathode. These minimum prices are based on the quarterly average LME price. If average quarterly LME prices fall below the minimum prices, the financial institutions will be obligated to pay Phelps Dodge the difference. The Corporation's objective and practice is to sell its copper at a price based on the COMEX average price in the month of shipment. However, a few customers request a firm price as of a specified date prior to or during the month of shipment. In such transactions, the Corporation usually hedges such sales commitments by entering into copper futures and copper swap contracts that approximate the shipment quantities and periods. The copper futures contracts are then liquidated during the month of shipment which generally results in the realization of the COMEX average monthly price for copper shipped. This liquidation process involves the use of offsetting futures contracts. Therefore, the notional value, which represents the absolute sum of all outstanding copper futures contracts, is not an accurate measurement of risk to the Corporation from the use of such derivative financial instruments. Swap contracts are settled at the COMEX average monthly price in the month copper is shipped. At December 31, 1996, the Corporation had futures and swap hedge contracts in place for approximately 149 million pounds of copper with an approximate net value of $143 million and an aggregate notional value of approximately $156 million. The Corporation had deferred unrecognized gains of $2.3 million on its futures and swap contracts at December 31, 1996. With respect to 1995, at year end the Corporation had futures and swap hedge contracts in place for approximately 104 million pounds of copper with an approximate net value of $125 million and an aggregate notional value of approximately $125 million. At December 31, 1995, the Corporation had deferred unrecognized losses on its futures and swap contracts of $2.4 million as the offsetting customer transactions had not matured. The Corporation periodically enters into forward exchange and currency option contracts to hedge certain recorded transactions, firm commitments and other anticipated foreign currency transactions. The Corporation does not hold these financial instruments for trading purposes. The objective of the Corporation's foreign currency hedging activities is to protect the Corporation from the risk that the eventual equivalent dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. During 1996, recorded, committed and anticipated foreign currency transactions that the Corporation had hedged did not exceed $166 million and totaled $141 million at year end. The Corporation did not have any deferred unrecognized gains or losses on its foreign exchange contracts at December 31, 1996, or December 31, 1995. Notes 1 and 19 to the Consolidated Financial Statements contain further information to which reference should be made for a fuller understanding of the Corporation's policy for hedging foreign currency transactions. Consolidated 1996 revenues were $3,786.6 million, compared with $4,185.4 million in 1995. The 1996 decrease was a result of lower average copper prices and lower sales volumes of wheels and rims. The decrease was partially offset by higher sales volumes of copper, carbon black and wire and cable products. The increase in consolidated revenues from $3,289.2 million in 1994 to $4,185.4 million in 1995 resulted from higher average copper prices, increased volumes of copper sold from mine production, and higher prices and sales volumes for carbon black, wheels and rims, and wire and cable products. Phelps Dodge's results for 1996, 1995 and 1994 can be meaningfully compared by separate reference to its reporting segments, Phelps Dodge Mining Company and Phelps Dodge Industries. Phelps Dodge Mining Company includes the Corporation's worldwide copper operations from mining through rod production, marketing and sales, other mining operations and investments, and worldwide mineral exploration and development programs. Phelps Dodge Industries includes the Corporation's specialty chemicals operations, its wheel and rim business, and its wire and cable operations. Within each such segment, significant events and transactions have occurred which, as indicated in the separate discussions presented below, are material to an understanding of the particular year's results and to a comparison with results of the other periods. Note 20 to the Consolidated Financial Statements contains further information to which reference should be made for a fuller understanding of the following discussion and analysis. Statistics on reserves and production can be found in Part I, Items 1 and 2 of this report. RESULTS OF PHELPS DODGE MINING COMPANY Phelps Dodge Mining Company is an international business comprising a group of companies involved in vertically integrated copper operations including mining, concentrating, electrowinning, smelting and refining, rod production, marketing and sales, and related activities. Copper is sold primarily to others as rod, cathode or concentrates, and as rod to the Phelps Dodge Industries segment. In addition, Phelps Dodge Mining Company at times smelts and refines copper and produces copper rod for others on a toll basis. Phelps Dodge Mining Company also produces gold, silver, molybdenum and copper chemicals as byproducts, and sulfuric acid from its air quality control facilities. This segment also includes the Corporation's other mining operations and investments (including fluorspar, silver, lead and zinc operations) and its worldwide mineral exploration and development programs. - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Copper (from own mines - thousand tons) * Production 770.4 712.7 572.8 Deliveries 771.6 696.6 560.6 COMEX average spot copper price per pound - cathodes $ 1.06 1.35 1.07 (millions of dollars) Sales and other operating revenues $ 2,091.1 2,488.7 1,820.7 Operating income $ 526.6 896.8 326.4 - ---------------- * The Corporation's worldwide copper production and deliveries shown in the above table exclude the amounts attributable to (i) the 15 percent undivided interest in the Morenci, Arizona, copper mining complex held by Sumitomo Metal Mining Arizona, Inc. (Sumitomo), (ii) the one-third partnership interest in Chino Mines Company in New Mexico held by Heisei Minerals Corporation (Heisei), and (iii) the 20 percent interest in Candelaria held by SMMA Candelaria, Inc., a jointly owned indirect subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. Excluded production amounts for 1996, 1995 and 1994 were 76,500 tons, 65,600 tons and 61,000 tons produced at Morenci for the account of Sumitomo, 56,200 tons, 56,200 tons and 53,200 tons produced at Chino for the account of Heisei and 30,200 tons, 33,100 tons and 6,200 tons at Candelaria for the account of Sumitomo. - -------------------------------------------------------------------------------- Phelps Dodge Mining Company reported 1996 operating income of $526.6 million which included a pre-tax charge of $10.0 million resulting from a fourth quarter reclamation provision related to a Court ordered rescission of a 1986 sale of property. This compares with 1995 operating income of $896.8 million. Earnings in 1994 of $420.8 million were reduced to $326.4 million after reflecting $94.4 million of fourth quarter non-recurring pre-tax charges applicable to its operations. The decrease in 1996 operating income reflected lower average copper prices, partially offset by higher volumes of copper sold from mine production. The increase in operating earnings in 1995 compared with 1994 resulted from higher average copper prices and higher volumes of copper sold from mine production, especially from Candelaria which commenced operation in the 1994 fourth quarter. Unit production costs of copper in 1996 were slightly higher than in 1995, principally as a result of increased depreciation charges from recent capital projects, increased mining expenses and costs associated with a maintenance overhaul at the Hidalgo smelter. Unit production costs of copper generally continued to reflect high levels of production, ongoing cost containment programs and increasing amounts of copper obtained through the solution extraction/electrowinning (SX/EW) process, including the start-up of the Southside SX/EW project at the Morenci mine in the 1995 third quarter, at favorable incremental costs. The Candelaria mine is located near Copiapo in the Atacama Desert of northern Chile. Phelps Dodge Mining Company completed construction and commenced operations at Candelaria in October 1994, and achieved full production in 1995. Phelps Dodge owns an 80 percent interest in Candelaria and a jointly owned indirect subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation owns a 20 percent interest. The project consists of an open-pit mine, concentrator, port and associated facilities. On May 1, 1996, the Corporation announced plans to expand concentrator throughput at Candelaria. At full capacity, the $337 million expansion (the Corporation's share will be $270 million with the remainder provided by its co-participant) will result in annual copper production of 400 million to 450 million pounds during the first few years of the post-expansion mine life; the average ore grade is expected to drop, with a corresponding decrease in production, in subsequent years. The expansion will include increased mining activity, the installation of a second semi-autogenous (SAG) mill line and new and expanded concentrating facilities, and the addition of more than 200 employees. Construction began in the third quarter of 1996 with new production scheduled to come on line by mid-1998. As a result of the expansion, the estimated mine life of Candelaria will be reduced from 35 years of production to 19 years. During the third quarter of 1995, Phelps Dodge Mining Company completed construction and commenced operations at its $200 million Southside project (the Corporation's share was $170 million with the remainder provided by its co-participant) at its Morenci mine in southeastern Arizona. This project has increased Phelps Dodge's share of annual electrowon copper production capacity by approximately 130 million pounds. The expansion involved the development of the Southside ore deposit adjacent to the existing open-pit mine at Morenci. The expansion included the construction of an electrowinning tankhouse, the expansion of existing solution extraction plants, the upgrading of infrastructure systems and the addition of mining equipment. Copper unit production costs generally have been stable for the three-year period ended December 31, 1996, primarily as a result of high levels of production of low-cost cathode copper at SX/EW plants in Morenci, Arizona; Tyrone, New Mexico; and Santa Rita, New Mexico. In 1996, the Corporation produced a total of 408,000 tons of cathode copper at its SX/EW facilities, compared with 364,200 tons in 1995 and 325,800 tons in 1994. The SX/EW method is a cost-effective process of extracting copper from certain types of ores. As used by the Corporation in conjunction with its conventional concentrating, smelting and refining, SX/EW is a major factor in its continuing efforts to maintain internationally competitive costs. The Corporation expects to operate the Burro Chief SX/EW plant near Tyrone, New Mexico, for at least the next 10 years. Exploration continues in an effort to identify further mineral resources. The Corporation has additional sources of copper that could be placed in production should market circumstances warrant. Permitting and significant capital expenditures would be required, however, to develop such additional production capacity. In 1996, operations outside the United States provided 8 percent of Phelps Dodge Mining Company's sales, compared with 10 percent in 1995 and 5 percent in 1994. During the year, operations outside the United States contributed 8 percent of the segment's operating income, compared with 19 percent in 1995 and less than 1 percent in 1994. In December 1996, the United States District Court of the Eastern District of New York ruled that the 1986 sale of property in Maspeth, New York, by the Corporation to the United States Postal Service is to be rescinded. The Court ordered the Corporation to return the $14.8 million originally paid by the Postal Service for the property and to pay interest on the sales price for a portion of the time since that sale. The Corporation has not yet determined whether to appeal the Court's decision, but as a precaution, the Corporation recorded interest charges of $5.9 million and reclamation reserves of $10.0 million in the 1996 fourth quarter. This reclamation provision was estimated based on the Corporation's experience at other Corporate-owned properties. The collective bargaining agreements covering approximately 625 employees at Phelps Dodge Mining Company's Chino operations in New Mexico expired on June 30, 1996. As of March 6, 1997, employees who were covered by the agreements have continued to work without a contract. By a letter agreement dated September 7, 1990, the Corporation and the San Carlos Apache Tribe agreed upon principles to settle the water claims of that Tribe and other land use issues involving the Tribe's reservation. Since that time, comprehensive settlement agreements among the Tribe, the Corporation and other parties have been under negotiation. In the more recent phases of the settlement negotiations, the Tribe has sought terms that the Corporation believes are unacceptable and inconsistent with the principles set forth in the September 7, 1990, letter agreement. The Tribe has also notified the Corporation to make preparations to stop using the reservation for water transportation by July 1997, at the latest. The Corporation obtains water for its Morenci complex from several sources, including through the operation of a pump station on reservation lands adjacent to the Black River, and uses the natural channel of Eagle Creek, which is partially located on the reservation, to transport water from Black River and certain other sources to its Morenci complex. The Corporation believes that it holds valid rights of way and easements and has other legal rights sufficient to allow for the continued operation of the Black River pump station on reservation lands and for the use of Eagle Creek. However, if the Corporation were to lose the use of the Black River pump station, and was unable to transport water using the natural channel of Eagle Creek, that might adversely affect production at the Morenci complex depending upon the availability of alternative sources of water. The parties are continuing to discuss all of these matters. The federal legislation authorizing settlement of the Tribe's water rights claims with the Corporation and the other parties to the proceeding has been extended for a six-month period expiring June 30, 1997. RESULTS OF PHELPS DODGE INDUSTRIES Phelps Dodge Industries is a business segment comprising a group of companies that manufacture engineered products principally for the transportation, energy and telecommunications sectors worldwide. Its operations are characterized by products with significant market share, internationally competitive cost and quality, and specialized engineering capabilities. This business segment includes the Corporation's specialty chemicals operations through Columbian Chemicals Company and its subsidiaries (Columbian Chemicals or Columbian); its wheel and rim operations through Accuride Corporation and its subsidiaries (Accuride); and its wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates. - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- (millions of dollars) Sales and other operating revenues: Specialty chemicals $ 437.0 420.8 335.0 Wheels and Rims 307.8 357.8 333.6 Wire and Cable 950.7 918.1 799.9 ------- ------- ------- $ 1,695.5 1,696.7 1,468.5 ======= ======= ======= Operating income: Specialty chemicals $ 79.8 103.9 20.0 Wheels and rims 41.4 45.6 42.3 Wire and cable 104.6 93.8 43.8 ------- ------- ------- $ 225.8 243.3 106.1 ======= ======= ======= - -------------------------------------------------------------------------------- Phelps Dodge Industries reported 1996 operating income of $225.8 million, compared with operating income in 1995 that was $216.5 million before a pre-tax gain of $26.8 million from the sale of Columbian Chemicals Company's synthetic iron oxide division (MAPICO). Increased 1996 operating income primarily reflected the benefits of manufacturing cost reduction programs instituted during 1995, higher sales volumes in the wire and cable business, and continued strength in the specialty chemicals business. Earnings increases in 1995 over 1994 primarily reflected the strength of the specialty chemicals business which saw higher average worldwide prices and higher sales volumes both in the United States and Europe, especially from new operations in Hungary and Spain. Increased 1995 operating income also reflected higher prices and sales volumes in the wire and cable businesses and in the wheel and rim business (which experienced a decline in sales volumes in the 1995 fourth quarter that continued into 1996). Operating income in 1994 of $150.7 million was reduced to $106.1 million by $44.6 million of 1994 fourth quarter non-recurring pre-tax charges applicable to its facilities. Columbian Chemicals' 1996 earnings were higher than in 1995 (excluding the $26.8 million pre-tax gain from the sale of MAPICO) as a result of increased carbon black sales and production volumes. North American volumes continued to grow in both the basic rubber black and industrial black product lines. Only limited growth was achieved in the European rubber market; however, significant growth continued in the European specialty market. Raw material costs increased throughout the year resulting in tighter margins. Major capital projects to expand existing North American and European facilities are under way and resulted in a record level of annual capital investment. Several major expansion projects are expected to be completed during 1997. Columbian Chemicals' 1995 earnings were higher than 1994 primarily because of higher sales in both North America, as overall capacity continued to tighten in the industry, and Europe. Margins in North America were favorably affected by high operating rates and improved prices in 1995. Columbian's 1994 earnings were offset in part by a non-recurring pre-tax provision of approximately $9 million for the closure of its plant in Hamburg, Germany, as a result of that plant's high cost structure and environmental restrictions. This charge was included in the 1994 fourth quarter reserve discussed in Note 2 to the Consolidated Financial Statements. Columbian's newer operations include a carbon black plant in Santander, Spain, acquired in December 1994 for approximately $25 million from Repsol Quimica S.A. The acquisition of this plant has increased the presence of Phelps Dodge Industries in the European market and extends the ability of Columbian Chemicals to serve customers in Spain and Portugal. Accuride's 1996 earnings fell below 1995 earnings primarily due to an 18 percent drop in overall sales volumes, partially offset by higher prices. North American demand for heavy trucks and trailers were the major contributors to the drop in sales volumes. Demand for specialty products, such as light wheels for smaller trucks and sport utility vehicles, increased partially offsetting the effects of the downturn in the heavy truck and trailer markets. Accuride's 1995 earnings exceeded its 1994 earnings principally as a result of higher sales volumes and prices. In 1994, earnings reflected increased sales volume of wheels, rims and components in response to strong demand. Accuride had a three-year labor agreement covering approximately 690 employees at its London, Ontario, Canada, plant that expired on January 21, 1997. All employees covered by the expired agreement began an immediate strike, and as of March 6, 1997, that strike continued. Accuride has maintained operations with its salaried workforce and continues to supply its customers. On September 18, 1996, Accuride and Kaiser Aluminum and Chemical Corporation (Kaiser) announced their intent to form a joint venture company to produce aluminum wheels for the commercial transportation industry. Accuride and Kaiser would each own 50 percent of the new company. The joint venture is expected to be finalized by the end of the first quarter of 1997. This venture would replace the current arrangement under which Kaiser manufactured finished aluminum wheels for Accuride. Earnings in the wire and cable business increased in 1996 over 1995 as a result of higher magnet wire sales volumes and margins in North America, favorable results of aluminum tolling in Thailand and the 1996 second quarter acquisition of Nesor Alloy Corporation, a leading manufacturer of high performance conductors for the general electronics and aerospace industries. New customers were attracted in North America by the Phelps Dodge Magnet Wire Company expansion of its El Paso plant and the announcement of its new plant under construction in Monterrey, Mexico. European demand for magnet wire products also was strong in the latter half of 1996 after a slow start. The increase in earnings in 1996 came about despite the continuation of economic difficulties in Venezuela. Wire and cable earnings increases in 1995 over 1994 generally reflected higher sales volumes and improved margins. Earnings for the U.S. specialty conductor business improved in 1995 as manufacturing cost reduction programs and an administrative reorganization began to take effect. Earnings in the wire and cable business in 1994 reflected economic difficulties in Venezuela and economic slowdowns in Mexico and Chile. These conditions resulted in additional costs associated with complying with strict foreign exchange controls instituted in 1994 by the Venezuelan government, and a pre-tax loss of $7.0 million on the sale of the Corporation's 40 percent interest in its Mexican associate company CONELEC S.A. de C.V. Earnings in 1994 also reflected a pre-tax provision of $20.0 million for the impairment of value of the Corporation's U.S. specialty conductor operations. The loss on the sale of CONELEC and the provision for impairment of value of the specialty conductor business are included in the 1994 fourth quarter reserve discussed in Note 2 to the Consolidated Financial Statements. The effect of these charges on earnings was offset in part by higher sales volumes, particularly in the North American magnet wire market and the telephone cable market in Thailand, and improved margins for magnet wire in North America where demand in the housing, automotive and major home appliance industries allowed Phelps Dodge Magnet Wire Company to operate at full capacity throughout the year. Sales volumes in 1994 also benefited from the acquisition in March of two U.S. magnet wire facilities. In May 1996, Phelps Dodge acquired Nesor Alloy Corporation, for approximately $35 million. In addition, Phelps Dodge increased its ownership interest in Metal Fabricators of Zambia Limited (ZAMEFA) from 20 percent to 51 percent. The Corporation's interest in these companies is managed by Phelps Dodge International Corporation, a wholly owned subsidiary. On August 7, 1996, the Corporation announced plans to construct a magnet wire manufacturing plant in Monterrey, Mexico. Construction of the $42.0 million project began in 1996 with commercial production expected in early 1998. In response to demand by Japanese-owned companies located in North America, SPD Magnet Wire Company, a joint venture of Phelps Dodge Magnet Wire Company and Sumitomo Electric Industries, Ltd., each owning a 50 percent interest, expanded its plant in Edmonton, Kentucky. The capacity of this facility has increased by 75 percent after new equipment was installed in late 1995 through early 1996. In March 1994, Phelps Dodge Magnet Wire Company acquired for approximately $52 million certain assets of a plant that manufactures fine-gauge magnet wire in Laurinburg, North Carolina, from Rea Magnet Wire Company, Inc. (Rea), and certain assets of a magnet wire manufacturing plant in El Paso, Texas, from Texas Magnet Wire Company, an affiliate of Rea and Fujikura International, Inc. The El Paso facility was expanded in 1996 doubling its previous capacity. The capacity of the Laurinbug facility is also expected to double upon completion in 1999 of a current plant expansion program. In 1996, operations outside the United States provided 50 percent of Phelps Dodge Industries' sales, compared with 51 percent in 1995 and 48 percent in 1994. During the year, operations outside the United States contributed 57 percent of the segment's operating income, compared with 53 percent in 1995 (after excluding from U.S. earnings the $26.8 million pre-tax gain on the sale of Columbian Chemicals' MAPICO division) and 52 percent in 1994. OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS The Corporation's 1996 exploration and research and development expense was $83.9 million, compared with $73.2 million in 1995 and $53.0 million in 1994. The increase in 1996 primarily resulted from increased exploration expenditures at the Corporation's U.S. mining operations. The 1994 to 1995 increase primarily resulted from increased spending for exploration in South and Central America. The Corporation reported net interest expense in 1996 of $66.1 million, compared with $62.0 million in 1995 and $36.6 million in 1994. Increased 1996 interest expenses principally resulted from a $5.9 million interest charge resulting from the 1996 Court ordered rescission of a 1986 sale of property. Increased 1995 net interest expense principally resulted from the cessation of capitalization of interest costs for the Candelaria project in Chile reflecting the substantial completion of construction and development in the 1994 fourth quarter. The 1995 increase also reflected interest expense on second half 1994 borrowings at Candelaria, and interest expense on increased short-term borrowings at the Corporation's international wire and cable operations to finance working capital requirements. Included in the 1996 and 1995 amounts were foreign currency exchange gains of $8.0 million and $8.1 million, respectively, reflecting the remeasurement of Venezuelan local currency debt after major devaluations of the Bolivar. The Corporation's 1996 miscellaneous income, net of miscellaneous expense, was $40.7 million, compared with $37.2 million in 1995 and $11.3 million in 1994. The increase in 1996 primarily resulted from an increase of $2.8 million in dividends received from the Corporation's 13.9 percent minority interest in Southern Peru Copper Corporation. The increase from 1994 to 1995 primarily resulted from higher interest income earned on cash and short-term investments. Miscellaneous income in 1995 also included an increase of $10.1 million in dividends received from Southern Peru Copper Corporation. For the year ended December 31, 1996, the Corporation recorded a provision for taxes of $220.0 million (an effective rate of approximately 32.0 percent). This compares with a 1995 provision for taxes of $322.7 million (an effective rate of approximately 30.0 percent) and a 1994 provision of $104.7 million (an effective rate of approximately 27.9 percent). The 1996 effective rate was higher than 1995 primarily due to the effect of a change in the income mix between U.S. and international operations. The 1995 effective rate was higher than in 1994 primarily as a result of a decrease in the U.S. tax benefit for percentage depletion. Despite higher average realized copper prices in 1995, the benefit from the Corporation's allowable deduction for percentage depletion decreased from 1994 due to the first full year of operating results at Candelaria which are not subject to percentage depletion. (See Note 6 to the Consolidated Financial Statements for a reconciliation of the Corporation's effective tax rates to statutory rates.) The Corporation's federal income tax returns for the years 1992, 1993 and 1994 are currently under examination. The Corporation has received substantial proposed adjustments from the Internal Revenue Service relating to the Corporation's federal income tax liability for the years 1990 and 1991 and has filed a protest with the appropriate authorities. These years are currently under consideration by the appeals division of the Internal Revenue Service. Management believes that it has made adequate provision so that final resolution of the issues involved, including application of those determinations to subsequent open years, will not have a material adverse effect on the consolidated financial condition or results of operations of the Corporation. However, settlement of these issues could involve material tax and interest payments with respect to the open years, a substantial part of which would involve timing differences. The Corporation does not agree with these proposed adjustments and expects either to substantially settle them with the Internal Revenue Service or litigate the issues involved. Under current financial accounting standards, any significant year-to-year movement in the rate of interest on long-term, high-quality corporate bonds necessitates a change in the discount rate used to calculate the actuarial present value of the Corporation's accumulated pension and other postretirement benefit obligations. The Corporation maintained its discount rate at 7.25 percent at December 31, 1996, as a result of long-term interest rates staying at essentially the same rate as in 1995. Better-than-expected returns on plan assets during 1996 increased the excess of plan assets over pension liabilities at December 31, 1996. Other estimated postretirement benefit obligations of the Corporation decreased by $6 million as a result of a decrease in the assumed annual rate of increase in the per capita cost of covered health care benefits over the next 12 years averaging 0.6 percent per year. For a further discussion of these issues, see Notes 15 and 16 to the Consolidated Financial Statements. CHANGES IN FINANCIAL CONDITION; CAPITALIZATION At the end of 1996, the Corporation had cash and short-term investments of $470.1 million, compared with $608.5 million at the beginning of the year. The Corporation's operating activities provided $837.5 million of cash during the year which was used along with a portion of existing cash balances to fund its investing activities, dividend payments on its common stock and purchases of its common stock. Investing activities during 1996 included capital expenditures of $513.0 million, compared with $404.9 million in 1995 and $355.0 million in 1994. The 1996 capital expenditures included $76 million for the expansion of Candelaria. Investing activities in 1996 also included approximately $35 million for the acquisition of Nesor. The 1995 capital expenditures included $40 million for certain mining properties owned by Azco Mining, Inc. and its subsidiaries, comprising the Sanchez property in southeastern Arizona and a 70 percent interest in the Piedras Verdes property in Mexico. Investing activities in 1995 also included cash proceeds of $45.0 million from the divestiture of Columbian Chemicals Company's synthetic iron oxide facility (MAPICO). Investments in subsidiaries in 1994 included the acquisition of two U.S. magnet wire facilities for approximately $52 million and the acquisition of a carbon black plant in Spain for approximately $25 million. Investing activities in 1994 also included cash proceeds of $15.0 million from the divestiture of the Corporation's 40 percent interest in its Mexican associate company, CONELEC S.A. de C.V., and $8.0 million from the issuance of shares to a minority investor in the Corporation's majority-owned affiliate in Venezuela. The Corporation expects capital outlays in 1997 to be approximately $500 million for Phelps Dodge Mining Company (including approximately $175 million for the Candelaria expansion project) and approximately $200 million for Phelps Dodge Industries. These capital outlays will be funded from cash reserves, operating cash flow and from borrowings. The $3.0 million increase in dividend payments on the Corporation's common shares, from $125.6 million in 1995 to $128.6 million in 1996, principally resulted from an 11 percent increase in the quarterly dividend rate in the 1996 second quarter (from 45 cents per common share to 50 cents per common share), partially offset by the effect of the reduced number of common shares outstanding. The Corporation purchased 4,297,300 of its common shares in 1996 at a total cost of $273.2 million. There were 64,711,000 common shares outstanding on December 31, 1996. On March 6, 1996, the Corporation announced that its current share purchase authorization had been increased from 5 million shares (buy back program authorized on March 7, 1995) to a total of 10 million shares. Through March 6, 1997, the Corporation purchased a total of 7,393,400 of its common shares under the program, leaving an additional 2,606,600 shares authorized for purchase. The Corporation will continue to make purchases in the open market as circumstances warrant, and will also consider purchasing shares in privately negotiated transactions. The Corporation's total debt was $659.3 million at December 31, 1996, compared with $696.5 million at the end of 1995. Total debt decreased primarily as a result of the prepayment of Candelaria's Chilean peso-denominated debt (see below). The ratio of total debt to total capitalization was 18.8 percent at the end of 1996, compared with 20.2 percent at the end of 1995. During the 1995 second quarter, the Corporation's majority-owned subsidiary, Compania Contractual Minera Candelaria (CCMC), satisfied all operating, financial, construction and legal tests and conditions as set forth in the completion agreement associated with the $290.0 million project financing of its Candelaria mine in Chile. Borrowings under these debt facilities are now non-recourse to Phelps Dodge. Financing agreements for the $290 million debt were executed during 1993. The debt carries a 13-year maturity, and comprises $200 million of floating rate dollar-denominated debt, $60 million of fixed rate dollar-denominated debt, and $30 million of floating rate debt denominated in Chilean pesos. This floating rate peso-denominated debt was prepaid in December 1996 at a cost of $37.6 million including exchange losses and prepayment penalties. The agreements provide for a nine and one-half year repayment period, starting in 1997. As the Corporation consolidates its interest in majority-owned mining joint ventures using the proportional consolidation method, only 80 percent of this debt and related financing charges have been reflected in the Corporation's consolidated financial statements. The Corporation also caused CCMC to enter into an interest rate protection agreement with certain financial institutions to limit the effect of increases in the cost of the $200 million of floating rate dollar debt. Under the terms of the agreement, the project will receive payments from these institutions if the six-month London Interbank Offered Rate (LIBOR) exceeds 9 percent prior to December 31, 2001, and 11 percent during the two subsequent years ending December 31, 2003. In the 1997 first quarter, CCMC entered into agreements with certain lenders to provide up to $185 million of floating rate dollar-denominated debt financing for the expansion of the Candelaria mine. At the same time, CCMC entered into an agreement with a lender to provide $30 million of floating rate dollar-denominated debt financing to refinance the Chilean peso debt that was prepaid in December 1996. All of these borrowings will be non-recourse to Phelps Dodge, which will reflect only 80 percent of any borrowings and related financing charges under these agreements in its consolidated financial statements. The agreements provide for a 10-year repayment period starting in 1998. During 1993, the Corporation's 60-percent-owned Hungarian subsidiary, Columbian Tiszai Carbon Ltd. (CTC), borrowed $33.5 million under facilities from the Overseas Private Investment Corporation (OPIC) and the European Bank for Reconstruction and Development (EBRD) to finance construction of a carbon black manufacturing plant. Both facilities are without recourse to Columbian Chemicals Company since the satisfaction of completion agreements with the two lenders in 1996. In the 1997 first quarter, CTC refinanced the loans with local banks at more advantageous interest rates and better terms. These new facilities are without recourse to Columbian Chemicals Company. During 1994, the Corporation issued $81.1 million of tax-exempt, unsecured 5.45 percent obligations due in 2009. The proceeds from the issue were used to retire the Corporation's 5.75 percent to 6.25 percent Series A and B notes due in the years 1994 through 2004. An existing revolving credit agreement between the Corporation and several lenders was amended on June 4, 1996. The agreement, as amended and restated, permits borrowings of up to $500 million from time to time until its scheduled maturity on June 4, 2001. The agreement allows for two one-year renewals beyond the scheduled maturity date if the Corporation requests and receives approval from at least two-thirds of the lenders involved. Interest is payable at a fluctuating rate based on the agent bank's prime rate or a fixed rate, based on the Eurodollar Interbank Offered Rate or at fixed rates offered independently by the several lenders, for maturities of from seven to 360 days. This agreement provides for a facility fee of eight basis points (0.08 percent) on total commitments. The agreement requires the Corporation to maintain a minimum consolidated tangible net worth of $1.1 billion and limits indebtedness to 50 percent of total consolidated capitalization. There were no borrowings under this agreement at either December 31, 1996, or December 31, 1995. The Corporation had other lines of credit totaling $100.0 million at December 31, 1996, and December 31, 1995. These facilities are subject to agreement as to availability, terms and amount. There were no borrowings outstanding under these lines of credit at either December 31, 1996, or December 31, 1995. The Corporation had $66.5 million in short-term borrowings, all by its international operations, at December 31, 1996, compared with $66.6 million at December 31, 1995. The weighted average interest rate on this debt at December 31, 1996, and December 31, 1995, was 15.3 percent and 18.5 percent, respectively. Accuride Canada Inc. has a revolving credit facility that permits borrowings of up to U.S. $25.0 million. Interest on these borrowings is payable at a fluctuating rate based on the agent bank's Base Rate Canada, or a fixed rate based on LIBOR, for maturities of one week to six months. This facility, which is subject to renewal annually, provides for a standby fee of one-eighth of 1 percent of the $25.0 million. There were no borrowings outstanding under this facility at either December 31, 1996, or December 31, 1995. The current portion of the Corporation's long-term debt, scheduled for payment in 1997, is $38.2 million including $14.0 million for its international manufacturing operations and $24.2 million primarily for its international mining operations. During 1996, decreases in current assets (exclusive of cash and short-term investments and adjustments for foreign currency exchange rate changes) together with increases in current liabilities (exclusive of current debt and adjustments for foreign currency exchange rate changes) resulted in a $64.0 million decrease in net working capital. This decrease in net working capital resulted principally from a $10.7 million decrease in prepaid expenses, a $38.3 million increase in accounts payable and a $10.0 million increase in accrued expenses. The $10.7 million decrease in prepaid expenses was primarily the result of decreases in hedging and deferred income for 1997 first quarter copper price protection contracts that were sold during the 1996 third quarter. The $38.3 million increase in accounts payable was attributable to timing of raw materials and equipment purchases. The accrued expense increase was primarily a result of accruals for contractor expenses for the Candelaria expansion project. During 1995, increases in current assets (exclusive of cash and short-term investments and adjustments for foreign currency exchange rate changes) together with decreases in current liabilities (exclusive of current debt and adjustments for foreign currency exchange rate changes) resulted in an $84.2 million increase in net working capital. This increase principally resulted from a $55.5 million decrease in accounts payable, a $29.5 million decrease in accrued income taxes, a $15.8 million increase in inventories and an $11.9 million increase in supplies, partially offset by a $36.8 million increase in accrued expenses. The $55.5 million decrease in accounts payable primarily resulted from lower copper concentrate purchase requirements by Phelps Dodge Mining Company's smelter operations and the timing of raw material purchases by the Phelps Dodge Industries businesses. The $29.5 million decrease in accrued income taxes was principally the result of approximately $22 million in additional federal income taxes paid in the first quarter of 1995 with the Corporation's 1994 income tax return. The $15.8 million increase in inventories was attributable to higher inventories of copper at Phelps Dodge Mining Company, partially offset by lower inventories at Accuride. The $11.9 million increase in supplies was the result of increases at Candelaria and Accuride. The $36.8 million increase in accrued expenses primarily resulted from higher accruals for copper conversion and freight charges and accruals for certain costs associated with higher copper prices at Phelps Dodge Mining Company (higher conversion and freight accruals are due to the higher copper inventory balances at the end of 1995), and an increase in the current portion of Corporate-wide pension liabilities due to an increase in expected plan funding in 1996 resulting from certain provisions of the recently enacted General Agreement on Tariffs and Trade (GATT). The Corporation is subject to federal, state and local environmental laws, rules and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986. Under Superfund, the Environmental Protection Agency (EPA) has identified approximately 35,000 sites throughout the United States for review, ranking and possible inclusion on the National Priorities List (NPL) for possible response. Among the sites identified, EPA has included 13 sites owned by the Corporation. The Corporation believes that most, if not all, of its sites so identified will not qualify for listing on the NPL. In addition, the Corporation may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by the Corporation. The Corporation has received notice that it is a potentially responsible party from EPA and/or individual states under CERCLA or a state equivalent and is participating in environmental assessment and remediation activity at 37 sites. For further information about these proceedings, see Item 3. Legal Proceedings, Part III. The 1990 Amendments to the federal Clean Air Act require EPA to develop and implement many new requirements, and they allow states to establish new programs to implement some of the new requirements, such as the requirements for operating permits under Title V of the 1990 Amendments and hazardous air pollutants under Title III of the 1990 Amendments. Because EPA has not yet adopted or implemented all of the changes required by Congress, the air quality laws will continue to expand and change in coming years as EPA develops new requirements and then implements them or allows the states to implement them. Nevertheless, most states have made or are in the process of making certain required changes to their laws regarding Title V. In response to these new laws, several of the Corporation's subsidiaries already have submitted or are in the process of preparing applications for Title V operating permits. These programs will likely increase the Corporation's regulatory obligations and compliance costs. These costs could include implementation of maximum achievable control technology for any of the Corporation's facilities that is determined to be a major source of federal hazardous air pollutants. Until more of the implementing regulations are adopted, and more experience with the new programs is gained, it is not possible to determine the impact of the new requirements on the Corporation. At December 31, 1996, the Corporation had reserves of $117.0 million for remediation of certain of the sites referred to above and other environmental costs in accordance with its policy to record liabilities for environmental expenditures when it is probable that obligations have been incurred and the costs reasonably can be estimated. The Corporation's estimates of these costs are based upon currently available facts, existing technology, and presently enacted laws and regulations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The amounts of the Corporation's liabilities for remedial activities are very difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of sites not owned by the Corporation, the unknown extent of the Corporation's probable liability in proportion to the probable liability of other parties. The Corporation has probable environmental liabilities that in its judgment cannot reasonably be estimated, and losses attributable to remediation costs are reasonably possible at other sites. The Corporation cannot now estimate the total additional loss it may incur for such environmental liabilities, but such loss could be substantial. The possibility of recovery of some of the environmental remediation costs from insurance companies or other parties exists; however, the Corporation does not recognize these recoveries in its financial statements until they become probable. The Corporation's operations are subject to myriad environmental laws and regulations in jurisdictions both in the United States and in other countries in which it does business. For further discussion of these laws and regulations, please see "Environmental and Other Regulatory Matters" and "Environmental Matters" in Part I, Items 1 and 2 of this report. The estimates given in those discussions of the capital expenditures for programs to comply with applicable environmental laws and regulations in 1997 and 1998, and the expenditures for those programs in 1996, are separate from the reserves and estimates described above. On December 23, 1994, Chino Mines Company (CMC), which is two-thirds owned by Phelps Dodge Corporation and is located near Silver City, New Mexico, entered into an Administrative Order on Consent (AOC) with the New Mexico Environment Department that will require CMC to study the environmental impacts and potential health risks associated with portions of the CMC property affected by historical mining operations. Phelps Dodge acquired CMC at the end of 1986. Those studies began in 1995 and, until completed, it will not be possible to determine the nature, extent, cost, and timing of remedial work which will be required under the AOC, although remedial work is expected to be required. In 1993 and 1994, the New Mexico and Arizona legislatures, respectively, passed laws requiring the reclamation of mined lands in those states. The New Mexico Mining Commission adopted rules for the New Mexico program during 1994, and the Corporation's operations began submitting the required permit applications in December 1994. The Arizona State Mine Inspector adopted rules for the Arizona program in January 1997, and the Corporation's operations are expected to begin submitting the required reclamation plans in March 1997. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. At this time, it is not possible to quantify the impact of the new laws and regulations on the Corporation. In 1995, legislation was introduced in both the U.S. House of Representatives and the U.S. Senate to amend the Mining Law of 1872. None of the bills was enacted into law. Also, mining law amendments were added to the 1996 budget reconciliation bill, which was vetoed by the President. Among other things, the amendments contained in the 1996 bill would have imposed a 5 percent net proceeds royalty on minerals extracted from federal lands, required payment of fair market value for patenting federal lands, and required that patented lands used for non-mining purposes revert to the federal government. Several of these same concepts likely will be pursued legislatively in 1997. The Secretary of the Interior also recently ordered the Bureau of Land Management (BLM) to form a task force to review BLM's hardrock mining surface management regulations and propose revisions to expand environmental and reclamation requirements, among other things. While the effect of such changes on Phelps Dodge's current operations and other currently owned mineral resources on private lands would be minimal, passage of the amendments would result in additional expenses in the development and operation of new mines on federal lands. CAPITAL OUTLAYS The Corporation's capital outlays in each of the past three years are set forth in the following table. These capital outlays are exclusive of capitalized interest and the portions of the expenditures at Morenci, Chino and Candelaria payable by minority interest holders. - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- (millions of dollars) Phelps Dodge Mining Company: Southside project (Morenci mine) $ 5.8 112.6 49.6 Azco acquisition - 40.2 - Candelaria 89.5 15.1 137.9 Other 234.9 153.7 111.7 ------- ------- ------- 330.2 321.6 299.2 Phelps Dodge Industries 179.6 82.3 55.1 Corporate and other 3.2 1.0 0.7 ------- ------- ------- $ 513.0 404.9 355.0 ======= ======= ======= - -------------------------------------------------------------------------------- INFLATION During the last three years, the principal impact of general inflation upon the financial results of the Corporation has been on unit production costs, especially supply costs, at the Corporation's mining and industrial operations. In considering the impact of changing prices on the financial results of the Corporation, it is important to recognize that the selling price of the Corporation's principal product, copper, does not necessarily parallel the rate of inflation or deflation. DIVIDENDS AND MARKET PRICE RANGES Phelps Dodge's common shares are listed on the New York Stock Exchange, the principal market on which they are traded. At March 6, 1997, there were 10,999 holders of record of the Corporation's common shares. The Corporation paid quarterly dividends of 41.25 cents on each common share for the first three quarters of 1994. In the 1994 fourth quarter, the quarterly dividend was increased 9 percent to 45 cents on each common share and continued at that rate until the 1996 second quarter when the quarterly dividend was increased by 11 percent to 50 cents on each common share. The table below sets forth the high, low and closing prices per common share (composite quotation) in the periods indicated. - -------------------------------------------------------------------------------- Market Price Ranges * High Low Close ---- ---- ---- 1996: First Quarter $ 69.88 56.25 69.00 Second Quarter 77.63 61.13 62.25 Third Quarter 64.88 54.63 64.13 Fourth Quarter 74.25 61.38 67.50 1995: First Quarter $ 63.00 51.88 56.88 Second Quarter 60.25 52.50 59.00 Third Quarter 70.50 58.50 62.75 Fourth Quarter 69.50 59.75 62.25 1994: First Quarter $ 59.50 47.63 52.25 Second Quarter 60.88 50.50 57.00 Third Quarter 65.00 55.88 62.00 Fourth Quarter 64.00 54.38 61.88 - --------------- * The market price ranges reflect actual share prices as reported for each day's trading. - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (In millions except per common share amounts) - -------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996 (a) Sales and other operating revenues $ 1,004.7 957.7 853.6 970.6 Operating income 229.8 195.5 126.7 160.9 Net income 153.1 126.3 80.2 102.2 Net income per common share 2.26 1.90 1.22 1.57 1995 (b) Sales and other operating revenues $ 1,033.5 1,024.2 1,076.7 1,051.0 Operating income 271.3 239.1 311.4 278.7 Net income 185.3 159.5 211.8 190.0 Net income per common share 2.61 2.28 3.03 2.73 - --------------- (a) Operating income in the 1996 fourth quarter included a $10.0 million pre-tax charge resulting from a reclamation provision related to the Court ordered rescission of a 1986 sale of property. The loss on this rescission, including related interest, was $10.7 million after taxes, or 16 cents per common share. (b) Operating income in the 1995 first quarter included a $26.8 million pre-tax gain from the sale of Columbian Chemicals Company's MAPICO division. MAPICO produced synthetic iron oxides at a plant in St. Louis, Missouri, and was peripheral to Columbian's core business. The gain on the sale of these assets was $16.6 million after taxes, or 24 cents per common share. - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The consolidated balance sheet at December 31, 1996 and 1995, and the related consolidated statements of income, of cash flows and of common shareholders' equity for each of the three years in the period ended December 31, 1996, and notes thereto, together with the report thereon of Price Waterhouse LLP dated January 15, 1997, follow. The additional financial data referred to below should be read in conjunction with these financial statements. Schedules not included with these additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. The individual financial statements of the Corporation have been omitted because the Corporation is primarily an operating company and all subsidiaries included in the consolidated financial statements, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the Corporation or its consolidated subsidiaries in amounts which together exceed 5 percent of total consolidated assets at December 31, 1996. Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons accounted for by the equity method, other than those for which summarized financial information is provided in Note 3 to the Consolidated Financial Statements, have been omitted because, if considered in the aggregate, such subsidiaries and 50 percent or less owned affiliates would not constitute a significant subsidiary. ADDITIONAL FINANCIAL DATA Financial statement schedule for the years ended December 31, 1996, 1995 and 1994: VIII - Valuation and qualifying accounts and reserves. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Phelps Dodge Corporation Our audits of the consolidated financial statements referred to in our report dated January 15, 1997 appearing in this Form 10-K also included an audit of the Financial Statement Schedule listed in the foregoing index titled "Additional Financial Data." In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Phoenix, Arizona January 15, 1997 REPORT OF MANAGEMENT The management of Phelps Dodge Corporation is responsible for preparing the consolidated financial statements presented in this annual report and for their integrity and objectivity. The statements have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances, and include amounts that are based on management's best estimates and judgments. Management also has prepared the other information in this annual report and is responsible for its accuracy and consistency with the financial statements. Management maintains a system of internal controls, including internal accounting controls, which in management's opinion provides reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. The system includes formal policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. The system also includes the careful selection and training of qualified personnel, an organization that provides a segregation of responsibilities and a program of internal audits that independently assesses the effectiveness of internal controls and recommends possible improvements. The Audit Committee, currently consisting of five non-employee directors, meets at least three times a year to review, among other matters, internal control conditions and internal and external audit plans and results. It meets periodically with senior officers, internal auditors and independent accountants to review the adequacy and reliability of the Corporation's accounting, financial reporting and internal controls. The consolidated financial statements have also been audited by Price Waterhouse LLP, our independent accountants, whose appointment was ratified by the shareholders. The Price Waterhouse LLP examination included a study and evaluation of internal accounting controls to establish a basis for reliance thereon in determining the nature, extent and timing of audit tests applied in the examination of the financial statements. Management also recognizes its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Corporation's code of business ethics and policies, which is distributed throughout the Corporation. The code of conduct addresses, among other things, the necessity of ensuring open communication within the Corporation; potential conflicts of interest; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Phelps Dodge Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of common shareholders' equity present fairly, in all material respects, the financial position of Phelps Dodge Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Phoenix, Arizona January 15, 1997 STATEMENT OF CONSOLIDATED INCOME - -------------------------------- (In thousands except per share data) 1996 1995 1994 ---- ---- ---- SALES AND OTHER OPERATING REVENUES $ 3,786,600 4,185,400 3,289,200 --------- --------- --------- OPERATING COSTS AND EXPENSES Cost of products sold 2,604,400 2,691,400 2,375,700 Depreciation, depletion and amortization 249,500 223,500 195,300 Selling and general administrative expense 125,900 123,600 107,100 Exploration and research expense 83,900 73,200 53,000 Provision for environmental costs, reclamation costs, and (gains) losses on asset dispositions 10,000 (26,800) 157,700 --------- --------- --------- 3,073,700 3,084,900 2,888,800 --------- --------- --------- OPERATING INCOME 712,900 1,100,500 400,400 Interest expense (68,000) (65,100) (57,300) Capitalized interest 1,900 3,100 20,700 Miscellaneous income and expense, net 40,700 37,200 11,300 --------- --------- --------- INCOME BEFORE TAXES, MINORITY INTERESTS AND EQUITY IN NET EARNINGS OF AFFILIATED COMPANIES 687,500 1,075,700 375,100 Provision for taxes (220,000) (322,700) (104,700) Minority interests in consolidated subsidiaries (16,200) (12,900) (8,000) Equity in net earnings of affiliated companies 10,500 6,500 8,600 --------- --------- --------- NET INCOME $ 461,800 746,600 271,000 ========= ========= ========= EARNINGS PER SHARE $ 6.97 10.65 3.81 AVERAGE NUMBER OF SHARES OUTSTANDING 66,300 70,100 71,100 See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEET - -------------------------- (In thousands except per share values) December December 31, 31, 1996 1995 ---- ---- ASSETS Current assets: Cash and short-term investments, at cost $ 470,100 608,500 Accounts receivable, less allowance for doubtful accounts (1996 - $14,200; 1995 - $12,000) 489,100 483,700 Inventories 293,000 281,500 Supplies 117,000 121,400 Prepaid expenses 6,100 15,500 Deferred income taxes 46,200 44,600 --------- --------- Current assets 1,421,500 1,555,200 Investments and long-term accounts receivable 86,400 79,000 Property, plant and equipment, net 3,020,500 2,728,700 Other assets and deferred charges 288,000 283,000 --------- --------- $ 4,816,400 4,645,900 ========= ========= LIABILITIES Current liabilities: Short-term debt $ 66,500 66,600 Current portion of long-term debt 38,200 16,800 Accounts payable and accrued expenses 564,900 504,800 Income taxes 16,300 16,800 --------- --------- Current liabilities 685,900 605,000 Long-term debt 554,600 613,100 Deferred income taxes 424,900 358,100 Other liabilities and deferred credits 309,600 318,700 --------- --------- 1,975,000 1,894,900 --------- --------- COMMITMENTS AND CONTINGENCIES (SEE NOTES 17 AND 18) MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 85,500 73,300 --------- --------- COMMON SHAREHOLDERS' EQUITY Common shares, par value $6.25; 100,000 shares authorized; 64,711 outstanding (1995 - 68,593) after deducting 10,478 shares (1995 - 6,595) held in treasury 404,400 428,700 Retained earnings 2,465,000 2,360,100 Cumulative translation adjustments (98,800) (93,900) Other (14,700) (17,200) --------- --------- 2,755,900 2,677,700 --------- --------- $ 4,816,400 4,645,900 ========= ========= See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------ (In thousands) 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Net income $ 461,800 746,600 271,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 249,500 223,500 195,300 Deferred income taxes 61,900 107,600 (28,300) Equity earnings net of dividends received (3,800) (400) (4,400) Provision for environmental costs and asset dispositions - - 140,200 Changes in current assets and liabilities: (Increase) decrease in accounts receivable (6,200) (2,300) (138,600) (Increase) decrease in inventories 3,600 (15,800) (35,400) (Increase) decrease in supplies 3,800 (11,900) 1,600 (Increase) decrease in prepaid expenses 10,700 100 (3,400) (Increase) decrease in deferred income taxes (1,800) (6,000) (3,200) Increase (decrease) in interest payable 5,900 (100) 500 Increase (decrease) in other accounts payable 38,300 (55,500) 88,200 Increase (decrease) in income taxes (300) (29,500) 32,200 Increase (decrease) in other accrued expenses 10,000 36,800 22,100 (Gains) losses on asset dispositions - (26,800) 17,500 Other adjustments, net 4,100 (7,300) (12,700) --------- --------- --------- Net cash provided by operating activities 837,500 959,000 542,600 --------- --------- --------- INVESTING ACTIVITIES Capital outlays (513,000) (404,900) (355,000) Capitalized interest (1,900) (3,100) (20,700) Investment in subsidiaries (47,400) (300) (77,300) Proceeds from asset sales 5,000 40,900 19,300 Other - - 7,200 --------- --------- --------- Net cash used in investing activities (557,300) (367,400) (426,500) --------- --------- --------- FINANCING ACTIVITIES Increase in debt 16,100 30,800 185,600 Payment of debt (54,100) (22,800) (137,100) Common dividends (128,600) (125,600) (119,200) Purchase of common shares (273,200) (162,700) (3,900) Debt issue costs - - (7,500) Other 21,200 10,300 (2,900) --------- --------- --------- Net cash used in financing activities (418,600) (270,000) (85,000) --------- --------- --------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (138,400) 321,600 31,100 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 608,500 286,900 255,800 --------- --------- --------- CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 470,100 608,500 286,900 ========= ========= ========= See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (In thousands)
Common Shares Cumulative ------------- Capital in Translation Common Number At Par Excess of Retained Adjustments Shareholders' of Shares Value Par Value Earnings and Other Equity --------- ----- --------- -------- --------- ------ BALANCE AT DECEMBER 31, 1993 70,531 $440,800 $83,100 $1,618,500 ($120,300) $2,022,100 Stock options exercised 216 1,400 700 2,100 Tax benefit from stock options 3,900 3,900 Common shares purchased (76) (500) (3,400) (3,900) Restricted shares issued, net 14 100 700 700 1,500 Restricted shares terminated (13) (100) (500) 600 - Net income 271,000 271,000 Dividends on common shares (119,200) (119,200) Translation adjustment 7,400 7,400 Additional pension liability 3,000 3,000 Other (300) (300) ------ -------- --------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 1994 70,672 441,700 84,500 1,770,300 (108,900) 2,187,600 Stock options exercised 455 2,800 10,000 12,800 Tax benefit from stock options 6,100 6,100 Common shares purchased (2,761) (17,300) (114,200) (31,200) (162,700) Restricted shares issued, net 186 1,200 11,200 (10,800) 1,600 Employee stock bonus award 41 300 2,400 2,700 Net income 746,600 746,600 Dividends on common shares (125,600) (125,600) Translation adjustment (100) (100) Additional pension liability 8,000 8,000 Other 700 700 ------ -------- --------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 1995 68,593 428,700 - 2,360,100 (111,100) 2,677,700 Stock options exercised 408 2,600 12,000 14,600 Tax benefit from stock options 5,500 5,500 Common shares purchased (4,297) (26,900) (246,300) (273,200) Restricted shares issued, net 7 - 500 1,200 1,700 Net income 461,800 461,800 Dividends on common shares (128,600) (128,600) Translation adjustment (4,900) (4,900) Additional pension liability 1,000 1,000 Other 300 300 ------ -------- --------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 1996 64,711 $404,400 $ - $2,465,000 ($113,500) $2,755,900 ====== ======== ========= =========== ========== =========== See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (Dollar amounts in tables stated in thousands except as noted) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation. The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. Interests in mining joint ventures in which the Corporation owns more than 50 percent are reported using the proportional consolidation method. Interests in other majority-owned subsidiaries are reported using the full consolidation method; the consolidated financial statements include 100 percent of the assets and liabilities of these subsidiaries and the ownership interests of minority participants are recorded as "Minority interests in consolidated subsidiaries." All material intercompany balances and transactions are eliminated. Investments in unconsolidated companies owned 20 percent or more are recorded on an equity basis. Investments in companies less than 20 percent owned are carried at cost. Management's Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation. Except as noted below, the assets and liabilities of foreign subsidiaries are translated at current exchange rates while revenues and expenses are translated at average rates in effect for the period. The related translation gains and losses are included in a separate component of common shareholders' equity. For the translation of the financial statements of certain foreign subsidiaries dealing predominantly in U.S. dollars and for those affiliates operating in highly inflationary economies, assets and liabilities receivable or payable in cash are translated at current exchange rates, and inventories and other non-monetary assets and liabilities are translated at historical rates. Gains and losses resulting from translation of such financial statements are included in operating results, as are gains and losses incurred on foreign currency transactions. Statement of Cash Flows. For the purpose of preparing the Consolidated Statement of Cash Flows, the Corporation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventories and Supplies. Inventories and supplies are stated at the lower of cost or market. Cost for substantially all inventories is determined by the last-in, first-out method (LIFO). Cost for substantially all supplies is determined by a moving-average method. Property, Plant and Equipment. Property, plant and equipment are carried at cost. Cost of significant assets includes capitalized interest incurred during the construction and development period. Expenditures for replacements and betterments are capitalized; maintenance and repair expenditures are charged to operations as incurred. The principal depreciation method used for mining, smelting and refining operations is the units of production method applied on a group basis. Buildings, machinery and equipment for other operations are depreciated using the straight-line method over estimated lives of five to 40 years, or the estimated life of the operation if shorter. Upon disposal of assets depreciated on a group basis, cost less salvage is charged to accumulated depreciation. Values for mining properties represent mainly acquisition costs or pre-1932 engineering valuations. Depletion of mines is computed on the basis of an overall unit rate applied to the pounds of principal products sold from mine production. Mine exploration costs and development costs to maintain production of operating mines are charged to operations as incurred. Mine development expenditures at new mines and major development expenditures at operating mines that are expected to benefit future production are capitalized and amortized on the units of production method over the estimated commercially recoverable minerals. Environmental Expenditures. Environmental expenditures are expensed or capitalized depending upon their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs reasonably can be estimated. The Corporation's estimates of these costs are based upon currently available facts, existing technology, and presently enacted laws and regulations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The possibility of recovery of some of these costs from insurance companies or other parties exists; however, the Corporation does not recognize these recoveries in its financial statements until they become probable. Goodwill. Included in "Other assets and deferred charges" are costs in excess of the net assets of businesses acquired. These amounts are amortized on a straight-line basis over periods of 15 to 40 years. The Corporation evaluates for impairment its long-term assets to be held and used and its identifiable intangible assets when events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable. Long-term assets to be disposed of are carried at the lower of cost or fair value less the costs of disposal. Hedging Programs. The Corporation does not acquire, hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are used to manage well-defined commodity price and foreign exchange risks. Depending on market circumstances, the Corporation may periodically purchase or sell various copper option contracts to mitigate the risk of adverse price fluctuations on a portion of its copper production. Any net premiums paid on purchased option contracts that guarantee a minimum price over a specified period are initially recorded as prepaid assets and then amortized on a straight-line basis over the hedge protection period. Gains and losses from option contracts that effectively establish price ranges for future production are recognized in income at the maturity of the option contract. Any premiums received on the sale of option contracts are recorded as accrued expenses until the maturity of the option contract when the premium received is recorded as income. The Corporation's objective and practice is to sell its copper at a price based on the New York Commodity Exchange (COMEX) average price in the month of shipment. However, a few customers request a firm price as of a specified date prior to or during the month of shipment. In such transactions, the Corporation usually hedges such sales commitments by entering into copper futures and copper swap contracts that approximate the shipment quantities and periods. The copper futures contracts are then liquidated during the month of shipment which generally results in the realization of the COMEX average monthly price for copper shipped. Swap contracts are settled at the COMEX average monthly price in the month copper is shipped. Gains and losses on copper futures and copper swap contracts are recognized in income when the underlying exposure is recognized or when a previous firm commitment is no longer expected to occur. The Corporation periodically enters into forward exchange and currency option contracts to hedge certain recorded transactions, firm commitments and other anticipated transactions denominated in foreign currencies. The objective of the Corporation's foreign currency hedging program is to protect the Corporation from the risk that the eventual equivalent dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. The carrying value of premiums paid on currency option contracts and unrecognized gains and losses on forward exchange contracts are recorded as prepaid assets, while recognized gains and losses are recorded as miscellaneous income or expense items. Gains and losses on option contracts that qualify as hedges are recognized in income when the underlying hedged transaction is recognized or when a previously anticipated transaction is no longer expected to occur. Changes in market value of forward exchange contracts and certain option contracts protecting anticipated transactions are recognized in the period incurred. The Corporation may enter into interest rate hedging agreements to limit the effect of increases in the interest rates on floating rate debt. The costs associated with such agreements are amortized to interest expense over the term of the agreement. Stock Compensation. The Corporation elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" in 1995. In accordance with the provisions of SFAS No. 123, the Corporation applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. Note 14 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share for 1996, 1995 and 1994 if the Corporation had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123. Income Taxes. In addition to charging income for taxes actually paid or payable, the provision for taxes reflects deferred income taxes resulting from changes in temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Pension Plans. The Corporation has trusteed, non-contributory pension plans covering substantially all of its U.S. employees and in some cases employees of international subsidiaries. The benefits are based on, in the case of certain plans, final average salary and years of service and, in the case of other plans, a fixed amount for each year of service. The Corporation's funding policy provides that payments to the pension trusts shall be at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 for U.S. plans or, in the case of international subsidiaries, the minimum legal requirements in that particular country. Additional payments may also be provided by the Corporation from time to time. Postretirement Benefits Other Than Pensions. The Corporation has several postretirement health care and life insurance benefit plans covering most of its U.S. employees and in some cases employees of international subsidiaries. Postretirement benefits vary among plans and many plans require contributions from employees. The Corporation accounts for these benefits on an accrual basis. The Corporation's funding policy provides that payments shall be at least equal to its cash basis obligation, plus additional amounts that may be approved by the Corporation from time to time. Postemployment Benefits. The Corporation has certain postemployment benefit plans covering most of its U.S. employees and in some cases employees of international subsidiaries. The benefit plans may provide severance, disability, supplemental health care, life insurance or other welfare benefits. The Corporation accounts for these benefits on an accrual basis. The Corporation's funding policy provides that payments shall be at least equal to its cash basis obligation, plus additional amounts that may be approved by the Corporation from time to time. Earnings per Share. Earnings per share amounts are computed based on the weighted average number of shares actually outstanding during the period plus the shares that would be outstanding assuming the exercise of dilutive stock options, which are considered to be common stock equivalents. The number of equivalent shares that would be issued from the exercise of stock options is computed using the treasury stock method. Note 14 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported earnings per share for 1996, 1995 and 1994 if the Corporation had elected to recognize compensation cost in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." Reclassification. For comparative purposes, certain prior year amounts have been reclassified to conform with the current year presentation. 2. PROVISION FOR ENVIRONMENTAL COSTS AND ASSET DISPOSITIONS In December 1996, the United States District Court of the Eastern District of New York ruled that the 1986 sale of property in Maspeth, New York, by the Corporation to the United States Postal Service is to be rescinded. The Court ordered the Corporation to return the $14.8 million originally paid by the Postal Service for the property and to pay interest on the sales price for a portion of the time since that sale. The Corporation has not yet determined whether to appeal the Court's decision, but as a precaution, the Corporation recorded interest charges of $5.9 million and reclamation reserves of $10.0 million in the 1996 fourth quarter. This reclamation provision was estimated based on the Corporation's experience at other Corporate-owned properties. During the 1995 first quarter, the Corporation recognized a $26.8 million gain before taxes from the sale of Columbian Chemicals Company's synthetic iron oxide facility in St. Louis, Missouri (MAPICO). This gain increased net income by $16.6 million, or 24 cents per common share, after taxes. MAPICO was peripheral to Columbian's core business. In the 1994 fourth quarter, the Corporation recorded non-recurring pre-tax charges of $140.2 million reflecting additional provisions of $98.7 million before taxes for estimated future costs associated with environmental matters primarily in Phelps Dodge Mining Company and $41.5 million before taxes for estimated losses, primarily in Phelps Dodge Industries, on the disposition of certain operating facilities. These charges reduced net income by $91.7 million, or $1.29 per common share, after taxes. The pre-tax charge of $98.7 million for estimated future costs associated with environmental matters comprised $88.9 million applicable to Phelps Dodge Mining Company, $8.6 million applicable to Phelps Dodge Industries and $1.2 million applicable to Corporate and other. As a result of these 1994 environmental charges and balances remaining from previously provided charges for environmental costs, the Corporation's reserves for such costs totaled $117.0 million and $144.1 million at December 31, 1996, and December 31, 1995, respectively (see Note 1 to the Consolidated Financial Statements for further information concerning the Corporation's policy for recording environmental obligations). The pre-tax charge of $41.5 million associated with the disposition of certain operating facilities included $36.0 million for Phelps Dodge Industries and $5.5 million for Phelps Dodge Mining Company issues. The portion of the charge attributable to Phelps Dodge Industries comprised a provision of $20.0 million for the impairment of value of Hudson International Conductors, a loss of $7.0 million on the sale of the Corporation's 40 percent interest in its Mexican associate company, CONELEC S.A. de C.V., and a provision of $9.0 million for the closure of Columbian Chemicals Company's plant in Hamburg, Germany. Also included in the provision for environmental costs and asset dispositions for the full year 1994 was a second quarter provision for the sale of Phelps Dodge Mining Company's interest in its Santa Gertrudis gold property in Mexico and its Olinghouse gold property in Nevada. The combined net loss on the sale of these interests was $17.5 million before taxes. This charge reduced net income by $11.2 million, or 16 cents per common share, after taxes. 3. EQUITY EARNINGS AND INVESTMENTS AND LONG-TERM RECEIVABLES Equity earnings (losses) were as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- International wire and cable manufacturers $ 2,600 1,000 1,700 Black Mountain 6,600 4,500 6,000 Santa Gertrudis - - (600) Other 1,300 1,000 1,500 ------- ------- ------- $ 10,500 6,500 8,600 ======= ======= ======= - ------------------------------------------------------------------------------- Dividends were received as follows: - ------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Equity investments: International wire and cable manufacturers $ 300 300 1,400 Black Mountain 6,000 5,700 2,900 Other 500 100 - ------- ------- ------- $ 6,800 6,100 4,300 ======= ======= ======= Cost basis investments: Southern Peru Copper Corporation $ 16,400 13,600 3,500 Other 300 300 400 ------- ------- ------- $ 16,700 13,900 3,900 ======= ======= ======= - ------------------------------------------------------------------------------- Investments and long-term receivables were as follows: - ------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Equity basis: International wire and cable manufacturers $ 20,300 18,200 18,500 Black Mountain 9,100 11,300 12,800 Other 16,000 12,200 11,100 Cost basis: Southern Peru Copper Corporation 13,200 13,200 13,200 Other 27,800 24,100 26,400 ------- ------- ------- $ 86,400 79,000 82,000 ======= ======= ======= - ------------------------------------------------------------------------------- Retained earnings of the Corporation include undistributed earnings of equity investments of (in millions): 1996 - $62.8; 1995 - $59.0; 1994 - $58.6. Condensed financial information for companies in which the Corporation has equity basis investments together with majority-owned foreign subsidiaries previously accounted for on an equity basis is as follows: - ------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Sales $ 764,100 771,200 637,200 Net income 56,000 42,000 46,000 - ------------------------------------------------------------------------------- Net current assets $ 85,600 66,600 63,300 Fixed assets, net 290,800 259,100 249,500 Long-term debt (54,500) (40,500) (39,000) Other assets and liabilities, net (8,000) (3,900) (2,500) -------- -------- -------- Net assets $ 313,900 281,300 271,300 ======== ======== ======== - ------------------------------------------------------------------------------- 4. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED The Corporation reported net interest expense in 1996 of $66.1 million, compared with $62.0 million in 1995 and $36.6 million in 1994. Reported net interest expense increased in 1996 despite a $37.2 million decrease in debt primarily due to a $5.9 million interest charge resulting from the 1996 Court ordered rescission of a 1986 sale of property. Increased 1995 net interest expense principally resulted from the cessation of capitalization of interest costs for the Candelaria project in Chile reflecting the substantial completion of construction and development in the 1994 fourth quarter. Included in the 1996 and 1995 interest expense were foreign currency exchange gains of $8.0 million and $8.1 million, respectively, reflecting the remeasurement of Venezuelan local currency debt after major devaluations of the Bolivar. 5. MISCELLANEOUS INCOME AND EXPENSE, NET Interest income totaled $34.3 million in 1996, principally from the Corporation's short-term investments, compared with $31.5 million and $11.0 million in 1995 and 1994, respectively. Miscellaneous income in 1996 also included pre-tax dividends of $16.4 million on its 13.9 percent minority interest in Southern Peru Copper Corporation, compared with $13.6 million and $3.5 million in 1995 and 1994, respectively. Losses from changes in currency exchange rates, especially in Venezuela and Chile, amounted to $11.7 million in 1996, compared with losses of $10.2 million and $6.3 million in 1995 and 1994, respectively. 6. INCOME TAXES The Corporation reports its income taxes using an asset and liability approach for financial accounting and reporting of income taxes. Changes in tax rates and laws are reflected in income from operations in the period such changes are enacted. In addition, balance sheet classification of deferred income taxes is determined by the balance sheet classification of the asset or liability to which the temporary difference is related. Geographic sources of income before taxes, minority interests and equity in net earnings of affiliated companies for the years ended December 31 were as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- United States $ 536,100 816,200 298,900 Foreign 151,400 259,500 76,200 --------- --------- --------- $ 687,500 1,075,700 375,100 ========= ========= ========= - -------------------------------------------------------------------------------- The provisions for income taxes for the years ended December 31 were as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Currently payable: Federal $ 99,000 157,800 94,000 State 16,100 23,900 14,000 Foreign 43,000 38,100 25,000 -------- -------- -------- 158,100 219,800 133,000 -------- -------- -------- Deferred: Federal 45,200 78,400 (27,100) State 6,400 400 (2,500) Foreign 10,300 24,100 1,300 -------- -------- -------- 61,900 102,900 (28,300) -------- -------- -------- $ 220,000 322,700 104,700 ======== ======== ======== - -------------------------------------------------------------------------------- A reconciliation of the U.S. statutory tax rate to the Corporation's effective tax rate is as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Statutory tax rate 35.0 % 35.0 35.0 Depletion (7.0) (5.3) (10.6) State and local income taxes 2.1 1.5 2.0 Effective international tax rate 0.9 (1.9) (0.5) Other items, net 1.0 0.7 2.0 ----- ----- ----- Effective tax rate 32.0 % 30.0 27.9 ===== ===== ===== - -------------------------------------------------------------------------------- The Corporation paid federal, state, local and foreign income taxes of approximately $160 million in 1996, compared with approximately $247 million in 1995 and approximately $114 million in 1994. As of December 31, 1996, the Corporation had alternative minimum tax credits of approximately $78 million available for carryforward for federal income tax purposes. These credits can be carried forward indefinitely, but may only be used to the extent the regular tax exceeds the alternative minimum tax. The Corporation also has alternative minimum foreign tax credit carryforwards for federal income tax purposes of approximately $27 million, which begin to expire in 1997. The Corporation's federal income tax returns for the years 1992, 1993 and 1994 are currently under examination. The Corporation has received substantial proposed adjustments from the Internal Revenue Service relating to the Corporation's federal income tax liability for the years 1990 and 1991 and has filed a protest with the appropriate authorities. These years are currently under consideration by the appeals division of the Internal Revenue Service. Management believes that it has made adequate provision so that final resolution of the issues involved, including application of those determinations to subsequent open years, will not have a material adverse effect on the consolidated financial condition or results of operations of the Corporation. However, settlement of these issues could involve material tax and interest payments with respect to the open years, a substantial part of which would involve timing differences. The Corporation does not agree with these proposed adjustments and expects either to substantially settle them with the Internal Revenue Service or litigate the issues involved. Deferred income tax assets and (liabilities) comprised the following at December 31: - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Minimum tax credits $ 78,400 86,700 Postretirement and postemployment benefits 58,000 52,500 Reserves 69,700 89,600 Mining costs 45,000 33,100 Inventories 4,800 1,400 Other 4,400 6,400 --------- --------- Deferred tax assets 260,300 269,700 --------- --------- Depreciation (596,100) (540,600) Mining properties (8,900) (9,300) Exploration and mine development costs (3,700) (8,300) Pensions (30,300) (25,000) --------- --------- Deferred tax liabilities (639,000) (583,200) --------- --------- $ (378,700) (313,500) ========= ========= - -------------------------------------------------------------------------------- Income taxes have not been provided on the Corporation's share ($452 million) of undistributed earnings of those manufacturing and mining interests abroad over which the Corporation has sufficient influence to control the distribution of such earnings and has determined that such earnings have been reinvested indefinitely. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Corporation or a U.S. affiliate, or if the Corporation should sell its stock in the subsidiaries. It is estimated that repatriation of these foreign earnings would generate additional foreign tax withholding and U.S. tax, net of foreign tax credit, in the amounts of $70 million and $40 million, respectively. 7. INVENTORIES AND SUPPLIES Inventories at December 31 were as follows (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Metals and other raw materials $ 194.1 200.4 Work in process 19.2 14.6 Finished manufactured goods 75.2 61.4 Other 4.5 5.1 ------- ------- $ 293.0 281.5 ======= ======= - -------------------------------------------------------------------------------- Inventories valued by the last-in, first-out method would have been greater if valued at current costs by approximately $117 million and $115 million at December 31, 1996 and 1995, respectively. Supplies in the amount of $117.0 million and $121.4 million at December 31, 1996 and 1995, respectively, are stated net of a reserve for obsolescence of $8.9 million and $10.5 million, respectively. 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 comprised the following (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Buildings, machinery and equipment $ 4,669.7 4,296.2 Mining properties 173.1 173.2 Capitalized mine development 290.4 284.8 Land and water rights 72.7 66.6 ------- ------- 5,205.9 4,820.8 Less accumulated depreciation, depletion and amortization 2,185.4 2,092.1 ------- ------- $ 3,020.5 2,728.7 ======= ======= - -------------------------------------------------------------------------------- The net increases in property, plant and equipment of $291.8 million in 1996 and $162.3 million in 1995 are summarized below (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Balance at beginning of year $ 2,728.7 2,566.4 ------- ------- Capital expenditures 513.0 404.9 Depreciation, depletion and amortization (243.7) (218.7) Property, plant and equipment of acquired companies 37.2 - Asset sales, currency translation adjustments and other (14.7) (23.9) ------- ------- 291.8 162.3 ------- ------- Balance at end of year $ 3,020.5 2,728.7 ======= ======= - -------------------------------------------------------------------------------- 9. OTHER ASSETS AND DEFERRED CHARGES Other assets and deferred charges at December 31 were as follows (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Goodwill, less accumulated amortization (1996 - $39.4; 1995 - $34.5) $ 130.6 120.8 Employee benefit plans 105.2 108.8 Debt issue costs 25.6 29.2 Intangible pension asset 20.5 18.0 Other intangible assets 4.0 4.0 Other 2.1 2.2 ------- ------- $ 288.0 283.0 ======= ======= - -------------------------------------------------------------------------------- 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 were as follows (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Accounts payable $ 292.1 247.5 Employee benefit plans 31.5 55.8 Insurance and loss reserves 11.8 12.3 Salaries, wages and other compensation 48.3 36.5 Environmental reserves 43.6 51.1 Smelting, refining and freight 20.9 25.9 Other accrued taxes 16.1 17.6 Candelaria expansion 15.3 - Shutdown, relocation and restructuring 10.3 7.1 Interest * 17.5 13.6 Returnable containers 3.6 3.3 Other 53.9 34.1 ------- ------- $ 564.9 504.8 ======= ======= - --------------- * Interest paid by the Corporation in 1996 was $67.2 million, compared with $70.4 million in 1995 and $58.5 million in 1994. - -------------------------------------------------------------------------------- 11. OTHER LIABILITIES AND DEFERRED CREDITS Other liabilities and deferred credits at December 31 were as follows (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Postretirement and postemployment benefit plans $ 157.5 148.8 Other employee benefit plans 41.5 39.9 Environmental reserves 71.8 92.1 Shutdown, relocation and restructuring 5.4 11.2 Insurance and loss reserves 22.5 20.7 Other 10.9 6.0 ------- ------- $ 309.6 318.7 ======= ======= - -------------------------------------------------------------------------------- 12. LONG-TERM DEBT AND OTHER FINANCING Long-term debt at December 31 is summarized below (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- 7.75% Notes due 2002 $ 100.0 100.0 7.96% Notes due 1998-2000 50.0 50.0 Air Quality Control Obligations: 5.45% Notes due 2009 81.1 81.1 6.50% Installment sale obligations due 2013 90.0 90.0 Candelaria 208.0 237.4 Ojos del Salado 6.0 8.0 Columbian Tiszai Carbon Ltd. 25.0 30.0 Columbian Carbon Spain, S.A. 10.9 14.1 Phelps Dodge International Corporation 17.8 13.3 Other 4.0 6.0 ------- ------- Long-term debt including current portion 592.8 629.9 Less current portion 38.2 16.8 ------- ------- Long-term debt excluding current portion $ 554.6 613.1 ======= ======= - -------------------------------------------------------------------------------- Annual maturities of debt outstanding at December 31, 1996, are as follows (in millions): 1997 - $38.2; 1998 - $49.5; 1999 - $56.9; 2000 - $48.1; 2001 - $30.3. An existing revolving credit agreement between the Corporation and several lenders was amended on June 4, 1996. The agreement, as amended and restated, permits borrowings of up to $500 million from time to time until its scheduled maturity on June 4, 2001. The agreement allows for two one-year renewals beyond the scheduled maturity date if the Corporation requests and receives approval from at least two-thirds of the lenders involved. Interest is payable at a fluctuating rate based on the agent bank's prime rate or a fixed rate, based on the Eurodollar Interbank Offered Rate or at fixed rates offered independently by the several lenders, for maturities of from seven to 360 days. This agreement provides for a facility fee of eight basis points (0.08 percent) on total commitments. The agreement requires the Corporation to maintain a minimum consolidated tangible net worth of $1.1 billion and limits indebtedness to 50 percent of total consolidated capitalization. There were no borrowings under this agreement at either December 31, 1996, or December 31, 1995. Accuride Canada Inc. has a revolving credit facility that permits borrowings of up to U.S. $25.0 million. Interest on these borrowings is payable at a fluctuating rate based on the agent bank's Base Rate Canada, or a fixed rate based on the London Interbank Offered Rate (LIBOR), for maturities of one week to six months. This facility, which is subject to renewal annually, provides for a standby fee of one-eighth of 1 percent of the $25.0 million. There were no borrowings outstanding under this facility at either December 31, 1996, or December 31, 1995. The Corporation had other lines of credit totaling $100.0 million at December 31, 1996, and at December 31, 1995. These facilities are subject to agreement as to availability, terms and amount. There were no borrowings outstanding under these lines of credit at either December 31, 1996, or December 31, 1995. The Corporation had $66.5 million in short-term borrowings, all by its international operations, at December 31, 1996, compared with $66.6 million at December 31, 1995. The weighted average interest rate on this debt at December 31, 1996, and December 31, 1995, was 15.3 percent and 18.5 percent, respectively. The Corporation's 80-percent-owned Compania Contractual Minera Candelaria (CCMC) subsidiary borrowed $290 million under its project financing agreements to finance construction of the Candelaria copper project in Chile. Under the proportional consolidation method, the Corporation reflects 80 percent of this amount in its financial statements. These borrowings became non-recourse to the Corporation subsequent to the satisfaction of certain completion tests during the second quarter of 1995. This $290 million of 13-year financing comprises $200 million of floating rate dollar-denominated debt (with a rate based on the six-month LIBOR) and $60 million of fixed rate dollar-denominated debt, with a nine and one-half year repayment period that starts in 1997. The remaining $30 million of 13-year financing, representing floating rate debt denominated in Chilean pesos, was prepaid in December 1996 at a cost of $37.6 million including exchange losses and prepayment penalties. The Corporation also caused CCMC to enter into an interest rate protection agreement with certain financial institutions to limit the effect of increases in the cost of the $200 million of floating rate dollar-denominated debt. Under the terms of the agreement, the project will receive payments from these institutions if the six-month LIBOR exceeds 9 percent prior to December 31, 2001, and 11 percent during the two subsequent years ending December 31, 2003. The Corporation's 60-percent-owned Hungarian subsidiary, Columbian Tiszai Carbon Ltd., borrowed $33.5 million under facilities from the Overseas Private Investment Corporation (OPIC) and the European Bank for Reconstruction and Development (EBRD) to finance construction of a carbon black manufacturing plant. Both facilities became non-recourse to Columbian Chemicals Company subsequent to the satisfaction of certain completion tests during the first quarter of 1996. The OPIC facility is a $24.5 million fixed rate dollar borrowing bearing interest rates of between 8.01 percent and 9.15 percent, and the EBRD $9 million loan is a fixed rate dollar borrowing bearing an interest rate of 8.30 percent. The balances due on these borrowings mature in the years 1997 through 2001. 13. SHAREHOLDERS' EQUITY On March 6, 1996, the Corporation announced that its current share purchase authorization program had been increased from 5 million shares to 10 million shares. During 1996, the Corporation purchased 4,297,300 of its common shares at a total cost of $273.2 million. There were 64,711,000 shares outstanding on December 31, 1996. During 1995, the Corporation purchased 2,760,600 of its common shares at a total cost of $163 million. These purchases included 2,675,600 shares under a 5 million share buy-back program authorized on March 7, 1995, and 85,000 shares under a superseded program. These purchased shares were restored to the treasury. The Corporation has 6,000,000 authorized preferred shares with a par value of $1.00 each; no shares were outstanding at either December 31, 1996, or December 31, 1995. In 1988, the Corporation adopted a Preferred Share Purchase Rights Plan and declared a dividend of one right on each of its common shares. In certain circumstances, if a person or group of persons acquires or tenders for 20 percent or more of the Corporation's outstanding common shares, these rights vest and entitle the holder to certain share purchase rights. Until 10 days after vesting, the rights may be modified or redeemed by the Board of Directors. 14. STOCK OPTION PLANS; RESTRICTED STOCK Executives and other key employees have been granted options to purchase common shares under stock option plans adopted in 1979, 1987 and 1993. In each case, the option price equals the fair market value of the common shares on the day of the grant and an option's maximum term is 10 years. Options granted vest ratably over a three-year period. The options include limited stock appreciation rights under which an optionee has the right, in the event common shares are purchased pursuant to a third party tender offer or in the event a merger or similar transaction in which the Corporation shall not survive as a publicly held corporation is approved by the Corporation's shareholders, to relinquish the option and to receive from the Corporation an amount per share equal to the excess of the price payable for a common share in such offer or transaction over the option price per share. The Corporation elected the adoption of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," in 1995. In accordance with the provisions of SFAS No. 123, the Corporation applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Corporation had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below (in millions except per share amounts): - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Net income - as reported $ 461.8 746.6 271.0 Net income - pro forma 456.2 741.6 266.8 Earnings per share - as reported 6.97 10.65 3.81 Earnings per share - pro forma 6.89 10.60 3.76 - -------------------------------------------------------------------------------- The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with the following assumptions: 1996 1995 ------ ------ Expected dividend yield 3.32% 3.34% Expected stock price volatility 24.0% 22.1% Risk-free interest rate 5.7% 6.0% Expected life of options 3 years 3 years The weighted average fair value of options granted during 1996 was $12.68 per share, compared with $11.04 in 1995. The 1993 plan provides (and the 1987 plan provided) for "reload" option grants to executives and other key employees. If an optionee exercises an option under the 1993 or 1987 plan with already-owned shares of the Corporation, the optionee receives a reload option that restores the option opportunity on a number of common shares equal to the number of shares used to exercise the original option. A reload option has the same terms as the original option except that it has an exercise price per share equal to the fair market value of a common share on the date the reload option is granted and is exercisable six months after the date of grant. The 1993 plan provides (and the 1987 plan provided) for the issuance to executives and other key employees, without any payment by them, of common shares subject to certain restrictions (Restricted Stock). The 1993 plan limits the award of Restricted Stock to 1,000,000 shares. Under a stock option plan adopted in 1989, options to purchase common shares have been granted to directors who have not been employees of the Corporation or its subsidiaries for one year or are not eligible to participate in any plan of the Corporation or its subsidiaries entitling participants to acquire stock, stock options or stock appreciation rights. In 1996, the Corporation suspended the 1989 Directors Stock Option Plan (1989 Plan), thereby eliminating the annual grant of options to directors. The 1989 Plan was replaced with the 1997 Directors Stock Unit Plan which provides to each non-employee director an annual grant of stock units having a value equivalent to the Corporation's common shares. At December 31, 1996, options for 354,360 shares, 40,938 shares and 1,384,580 shares were exercisable under the 1987 plan, the 1989 plan and the 1993 plan, respectively, at average prices of $45.18, $41.93 and $57.99 per share. In addition, 227,700 shares of Restricted Stock issued under the 1993 plan were outstanding at December 31, 1996. Also at December 31, 1996, 2,049,541 shares were available for option grants (including 748,758 shares as restricted stock awards) under the 1993 plan (plus an additional 488,032 shares that may be issued as reload options) and 83,219 shares were available for option grants under the 1989 plan. These amounts are subject to future adjustment. No further options may be granted under the 1987 plan. There were no options outstanding under the 1979 plan as of December 31, 1996, or December 31, 1995. Changes during 1994, 1995 and 1996 in options outstanding for the combined plans were as follows: - -------------------------------------------------------------------------------- Average option Shares price per share ------ ---------------- Outstanding at December 31, 1993 2,379,561 $ 40.88 Granted 961,087 58.35 Exercised (479,660) 37.32 Expired or terminated (28,802) 44.34 --------- Outstanding at December 31, 1994 2,832,186 47.38 Granted 953,838 66.37 Exercised (635,881) 38.19 Expired or terminated (110,345) 51.03 --------- Outstanding at December 31, 1995 3,039,798 55.13 Granted 810,551 71.49 Exercised (552,973) 45.19 Expired or terminated (98,182) 62.71 --------- Outstanding at December 31, 1996 * 3,199,194 60.76 ========= - --------------- * Exercise prices for options outstanding at December 31, 1996, range from a minimum of approximately $21 per share to a maximum of approximately $76 per share. The average remaining maximum term of options outstanding is approximately eight years. - -------------------------------------------------------------------------------- Changes during 1994, 1995 and 1996 in Restricted Stock were as follows: - -------------------------------------------------------------------------------- Shares ------ Outstanding at December 31, 1993 100,200 Granted 14,226 Terminated (13,000) Released (33,400) --------- Outstanding at December 31, 1994 68,026 Granted 186,516 Released (28,617) --------- Outstanding at December 31, 1995 225,925 Granted 17,000 Terminated (4,500) Released (10,725) --------- Outstanding at December 31, 1996 227,700 ========= - -------------------------------------------------------------------------------- 15. PENSION PLANS The Corporation has several non-contributory employee defined benefit pension plans covering substantially all U.S. employees (the U.S. pension plans). Employees covered under the salaried defined benefit pension plans are eligible to participate upon the completion of one year of service, and benefits are based upon final average salary and years of service. Employees covered under the remaining plans are generally eligible to participate at the time of employment, and benefits are generally based on a fixed amount for each year of service. Employees are vested in the plans after five years of service. The Corporation also maintains pension plans for certain employees of international subsidiaries following the legal requirements in those countries. In a number of these plans, the plan assets exceed the accumulated benefit obligations (overfunded plans) and in the remainder of the plans, the accumulated benefit obligations exceed the plan assets (underfunded plans). The status of employee pension benefit plans at December 31 is summarized below (in millions): - -------------------------------------------------------------------------------- Overfunded Underfunded Plans Plans ------------- ------------ 1996 1995 1996 1995 ---- ---- ---- ---- Actuarial present value of projected benefit obligation, based on employment service to date and current salary levels: Vested employees $ 507 335 41 194 Non-vested employees 34 18 6 17 ----- ----- ----- ----- Accumulated benefit obligation 541 353 47 211 Additional amounts related to projected salary increases 43 39 6 5 ----- ----- ----- ----- Total projected benefit obligation 584 392 53 216 Plan assets at fair value 681 448 22 178 ----- ----- ----- ----- Projected pension benefit obligation in excess of (less than) plan assets (97) (56) 31 38 Unamortized net asset (liability) existing at January 1, 1985 5 10 - (3) Unrecognized prior service cost (22) (14) (5) (15) Unrecognized net gain (loss) from actuarial experience 23 (12) (9) (11) ----- ----- ----- ----- Accrued (prepaid) pension cost $ (91) (72) 17 9 ===== ===== ===== ===== - -------------------------------------------------------------------------------- The Corporation's pension plans were valued between November 1, 1994, and January 1, 1995, and between November 1, 1995, and January 1, 1996. The obligations were projected to and the assets were valued as of the end of 1995 and 1996. Of its 13 U.S. pension plans at December 31, 1996, nine were overfunded while four were underfunded. Effective November 30, 1996, 10 U.S. salaried and non-bargained hourly pension plans were consolidated into one plan. In addition, pension plans were added in 1996 as a result of the acquisition of Nesor Alloy Corporation. Of the Corporation's 21 U.S. pension plans at December 31, 1995, eight were overfunded while 13 were underfunded. The majority of plan assets are invested in a diversified portfolio of stocks, bonds and cash or cash equivalents. A small portion of the plan assets is invested in pooled real estate and other private corporate investment funds. The components of net periodic pension cost were as follows (in millions): - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Benefits earned during the year $ 14.2 11.2 12.6 Interest accrued on projected benefit obligation 43.4 42.9 40.1 Return on assets - actual (108.4) (119.6) (0.4) - unrecognized gain (loss) 51.8 66.6 (51.2) Net amortization 1.5 1.0 1.2 ------- ------- ------- Net periodic pension cost for the year $ 2.5 2.1 2.3 ======= ======= ======= - -------------------------------------------------------------------------------- Assumptions used to develop the net periodic pension cost included a 7.25 percent discount rate in 1996, compared with discount rates of 8.5 percent and 7.25 percent in 1995 and 1994, respectively. An expected long-term rate of return on assets of 9.5 percent and a rate of increase in compensation levels of 4 percent were used for 1996, 1995 and 1994. For the valuation of pension obligations, the discount rate at the end of 1996 was 7.25 percent, equivalent to the discount rate at the end of 1995 and decreased from 8.5 percent at the end of 1994. The Corporation recognizes a minimum liability in its financial statements for its underfunded plans. "Other liabilities and deferred credits" at December 31, 1996, included $10 million relating to this minimum liability, compared with $26 million at December 31, 1995. This amount was offset by a $4 million intangible asset, a $4 million reduction in "Common Shareholders' Equity" and a $2 million deferred tax benefit at December 31, 1996, compared with an $18 million intangible asset, a $5 million reduction in "Common Shareholders' Equity" and a $3 million deferred tax benefit at December 31, 1995. The Corporation intends to fund at least the minimum amount required under the Employee Retirement Income Security Act of 1974 for U.S. plans or, in the case of international subsidiaries, the minimum legal requirements in that particular country. The excess of amounts accrued over minimum funding requirements, together with such excess amounts accrued in prior years, have been included in "Other liabilities and deferred credits." The anticipated funding for the current year is included in "Accounts payable and accrued expenses." 16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation records its obligation for postretirement medical and life insurance benefits on the accrual basis. One of the principal requirements of the method is that the expected cost of providing such postretirement benefits be accrued during the years employees render the necessary service. Substantially all of the Corporation's U.S. employees who retire from active service on or after normal retirement age of 65 are eligible for life insurance benefits. The Corporation also provides postretirement life insurance for employees of international subsidiaries in some cases. Life insurance benefits also are available under certain early retirement programs or pursuant to the terms of certain collective bargaining agreements. The majority of the costs of such benefits were paid out of a previously established fund maintained by an insurance company; however, a portion was paid through an insurance contract. Health care insurance benefits also are provided for many employees retiring from active service. The coverage is provided on a non-contributory basis for certain groups of employees and on a contributory basis for other groups. The majority of these benefits are paid by the Corporation. The status of employee postretirement benefit plans at December 31 is summarized below (in millions): - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Accumulated Postretirement Benefit Obligation: Retirees $ 74 80 Fully eligible active plan participants 14 10 Other active plan participants 64 61 ------- ------- Total accumulated postretirement benefit obligation 152 151 Plan assets at fair value 11 11 ------- ------- Accumulated postretirement benefit obligation in excess of plan assets 141 140 Unrecognized prior service cost 7 7 Unrecognized net gain (loss) from actuarial experience (1) (10) ------- ------- Accrued postretirement benefit cost $ 147 137 ======= ======= - -------------------------------------------------------------------------------- The components of net periodic postretirement benefit cost were as follows (in millions): - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Benefits attributed to service during the year $ 4 4 4 Interest cost on accumulated postretirement benefit obligation 10 11 10 Return on assets - actual (1) (1) (1) Net amortization - (1) (1) ------- ------- ------- Net periodic postretirement benefit cost for the year $ 13 13 12 ======= ======= ======= - -------------------------------------------------------------------------------- For 1996 measurement purposes, annual rates of increase in the per capita cost of covered health care benefits were assumed to average 8 percent for 1997 decreasing gradually to 5.3 percent by 2008 and remaining at that level thereafter. For 1995 measurement purposes, annual rates of increase in the per capita cost of covered health care benefits were assumed to average 9 percent for 1996 decreasing gradually to 5.3 percent by 2010 and remaining at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by approximately $12.4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by approximately $1 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent for 1996, the same as that used for 1995. The expected long-term rate of return on plan assets was 8 percent for both years. Assumptions used to develop net periodic postretirement benefit cost included a 7.25 percent discount rate in 1996, a decrease from 8.5 percent in 1995 and equivalent to the 7.25 percent discount rate used in 1994. 17. COMMITMENTS Rent expense for the years 1996, 1995 and 1994 was (in millions): $15.6, $18.8 and $23.5, respectively. Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year totaled $53.0 million at December 31, 1996. These commitments for future periods are as follows (in millions): 1997 - $12.6; 1998 - $10.3; 1999 - $9.1; 2000 - $6.0; 2001 - $5.3; 2002 and thereafter - $9.7. The Corporation enters into price protection arrangements from time to time, depending on market circumstances, to ensure a minimum price for a portion of its expected future mine production. See Note 19 to the Consolidated Financial Statements to which reference should be made for a fuller understanding of these arrangements with respect to expected 1997 production. On December 31, 1996, the Corporation's share of outstanding commitments was approximately $72 million to construction contractors and equipment manufacturers for the expansion of the Candelaria copper mining complex in northern Chile. 18. CONTINGENCIES The Corporation is from time to time involved in various legal proceedings of a character normally incident to its past and present businesses. Management does not believe that the outcome of these proceedings will have a material adverse effect on the financial condition or results of operations of the Corporation on a consolidated basis. The Corporation is subject to federal, state and local environmental laws, rules and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986. Under Superfund, the Environmental Protection Agency (EPA) has identified approximately 35,000 sites throughout the United States for review, ranking and possible inclusion on the National Priorities List (NPL) for possible response. Among the sites identified, EPA has included 13 sites owned by the Corporation. The Corporation believes that most, if not all, of its sites so identified will not qualify for listing on the NPL. In addition, the Corporation may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by the Corporation. The Corporation has received notice that it is a potentially responsible party from EPA and/or individual states under CERCLA or a state equivalent and is participating in environmental assessment and remediation activity at 37 sites. The amounts of the Corporation's liabilities for remedial activities are very difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of sites not owned by the Corporation, the unknown extent of the Corporation's probable liability in proportion to the probable liability of other parties. The Corporation has probable environmental liabilities that in its judgment cannot reasonably be estimated, and losses attributable to remediation costs are reasonably possible at other sites. The Corporation cannot now estimate the total additional loss it may incur for such environmental liabilities, but such loss could be substantial (see Notes 1 and 2 to the Consolidated Financial Statements for further information concerning the Corporation's environmental obligations). In 1993 and 1994, the New Mexico and Arizona legislatures, respectively, passed laws requiring the reclamation of mined lands in those states. The New Mexico Mining Commission adopted rules for the New Mexico program during 1994, and the Corporation's operations began submitting the required permit applications in December 1994. The Arizona State Mine Inspector has adopted rules for the Arizona program in January 1997, and the Corporation's operations are expected to begin submitting the required reclamation plans in March 1997. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. At this time, it is not possible to quantify the impact of the new laws and regulations on the Corporation. By a letter agreement dated September 7, 1990, the Corporation and the San Carlos Apache Tribe agreed upon principles to settle the water claims of that Tribe and other land use issues involving the Tribe's reservation. Since that time, comprehensive settlement agreements among the Tribe, the Corporation and other parties have been under negotiation. In the more recent phases of the settlement negotiations, the Tribe has sought terms that the Corporation believes are unacceptable and inconsistent with the principles set forth in the September 7, 1990, letter agreement. The Tribe has also notified the Corporation to make preparations to stop using the reservation for water transportation by July 1997, at the latest. The Corporation obtains water for its Morenci complex from several sources, including through the operation of a pump station on reservation lands adjacent to the Black River, and uses the natural channel of Eagle Creek, which is partially located on the reservation, to transport water from Black River and certain other sources to its Morenci complex. The Corporation believes that it holds valid rights of way and easements and has other legal rights sufficient to allow for the continued operation of the Black River pump station on reservation lands and for the use of Eagle Creek. However, if the Corporation were to lose the use of the Black River pump station, and was unable to transport water using the natural channel of Eagle Creek, that might adversely affect production at the Morenci complex depending upon the availability of alternative sources of water. The parties are continuing to discuss all of these matters. The federal legislation authorizing settlement of the Tribe's water rights claims with the Corporation and the other parties to the proceeding has been extended for a six-month period expiring June 30, 1997. 19. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation does not acquire, hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are used to manage well-defined commodity price, foreign exchange and, to a lesser extent, interest rate risks, that arise out of the Corporation's core business activities. The fair values of the Corporation's derivative financial instruments are based on quoted market prices for similar financial instruments. A summary of derivative financial instruments held by the Corporation is as follows: COPPER PRICE PROTECTION AGREEMENTS - Depending on market conditions, the Corporation may periodically purchase or sell various copper option contracts to mitigate the risk of adverse price fluctuations on a portion of its expected future mine production. With respect to 1996 production, the Corporation had contracts that provided a combination of minimum and maximum quarterly average London Metal Exchange (LME) prices for approximately 185 million pounds of third quarter copper production that resulted in payments of $3.1 million to Phelps Dodge. In addition, the Corporation had contracts that provided a combination of minimum and maximum LME prices per pound for approximately 790 million pounds of copper that expired without payment to Phelps Dodge. During the 1996 third quarter, the Corporation sold copper price protection contracts that covered 94 million pounds of anticipated production in the fourth quarter of 1996 and 85 million pounds of anticipated production in the first quarter of 1997. This resulted in immediate cash payments to the Corporation of $15.6 million. Consequently, $8.8 million for 1996 fourth quarter contracts was recognized in income during the fourth quarter and $6.8 million for 1997 first quarter contracts was deferred and will be recognized in income during the 1997 first quarter. With respect to 1995 production, the Corporation had contracts that provided minimum quarterly average LME prices of 80 cents per pound for approximately 640 million pounds of copper. These contracts expired without payment to Phelps Dodge. In addition, the Corporation had contracts in 1995 that provided minimum (approximately 95 cents) and maximum (approximately $1.33) LME prices per pound for approximately 650 million pounds of copper. These contracts expired on December 31, 1995, and the Corporation made payments totaling $1.3 million to the financial institutions involved. During 1994, contracts that provided the Corporation with minimum average LME copper prices of 75 cents per pound for about 244 million pounds of production expired without payment to Phelps Dodge. With respect to 1997 production, the Corporation has entered into contracts with several financial institutions that provide for a minimum 1997 first quarter average price of 90 cents per pound for a net position of approximately 85 million pounds of copper cathode. COPPER FUTURES CONTRACTS - The Corporation's objective and practice is to sell its copper at a price based on the New York Commodity Exchange (COMEX) average price in the month of shipment. However, a few customers request a firm price as of a specified date prior to or during the month of shipment. In such transactions, the Corporation usually hedges such sales commitments by entering into copper futures and copper swap contracts that approximate the shipment quantities and periods. The copper futures contracts are then liquidated during the month of shipment which generally results in realization of the COMEX average monthly price for copper shipped. The liquidation process involves the use of offsetting futures contracts. Therefore, the notional value, which represents the absolute sum of all outstanding copper futures contracts, is not an accurate measurement of risk to the Corporation from the use of such derivative financial instruments. Swap contracts are settled at the COMEX average monthly price in the month copper is shipped. At December 31, 1996, the Corporation had futures and swap hedge contracts in place for approximately 149 million pounds of copper with an approximate net value of $143 million and an aggregate notional value of approximately $156 million. The copper futures and swap contracts acquired by the Corporation at year end had maturities of two years or less. The Corporation had deferred unrecognized gains of $2.3 million on its futures and swap contracts at December 31, 1996. With respect to 1995, at year end the Corporation had futures and swap hedge contracts in place for approximately 104 million pounds of copper at an approximate net value of $125 million and an aggregate notional value of approximately $125 million. At December 31, 1995, the Corporation had deferred unrecognized losses on its futures and swap contracts of $2.4 million as the offsetting customer transactions had not matured. FOREIGN EXCHANGE CONTRACTS - The Corporation periodically enters into forward exchange and currency option contracts to hedge certain recorded transactions, firm commitments and other anticipated transactions denominated in foreign currencies. The objective of the Corporation's foreign currency hedging activities is to protect the Corporation from the risk that the eventual equivalent dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. In hedging a transaction, the Corporation's foreign exchange hedging strategy may, from time to time, involve the use of a number of offsetting currency contracts to minimize the cost of the underlying hedge. Thus, the notional value, which represents the arithmetic sum of all outstanding foreign currency hedging instruments, is not a measurement of risk to the Corporation from the use of derivative financial instruments. At December 31, 1996, the Corporation had protection in place for approximately $141 million of recorded, committed and anticipated foreign currency transactions through the use of forward contracts and currency options with a matching aggregate notional value. The forward contracts and currency options acquired by the Corporation have maturities of less than one year. The Corporation did not have any deferred unrecognized gains or losses on its foreign exchange contracts at December 31, 1996, or December 31, 1995. INTEREST RATE PROTECTION AGREEMENT - The Corporation has caused its 80-percent-owned Candelaria copper project in Chile to enter into an interest rate protection agreement with certain financial institutions to limit the effect of increases in the interest rate on $200 million of floating rate dollar-denominated debt. Under the terms of the agreement, the project will receive payments from these institutions if the six-month London Interbank Offered Rate (LIBOR) exceeds 9 percent prior to December 31, 2001, and 11 percent during the two subsequent years ending December 31, 2003. CREDIT RISK - The Corporation is exposed to credit loss in the event of nonperformance by counterparties to its price protection, foreign exchange and interest rate protection agreements. To minimize the risk of credit loss, the Corporation deals only with highly rated financial institutions and monitors the credit worthiness of these institutions on a continuing basis. The Corporation does not anticipate nonperformance by any of these counterparties. The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value are as follows: Cash and short-term investments -- the carrying amount is a reasonable estimate of the fair value because of the short maturity of those instruments. Investments and long-term receivables -- the fair values of some investments are estimated based on quoted market prices for those or similar investments. The fair values of other types of instruments are estimated by discounting the future cash flows using the current rates at which similar instruments would be made with similar credit ratings and for the same remaining maturities. Long-term debt -- the fair value of substantially all of the Corporation's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current notes offered to the Corporation for debt of the same remaining maturities. Standby letters of credit and financial guarantees -- the fair values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Corporation, including certain subsidiaries, have various guarantees and letters of credit totaling $86.2 million. There is no market for these guarantees or standby letters of credit and they were issued without explicit cost. Therefore, it is not practicable to establish their fair value. The estimated fair values of the Corporation's financial instruments as of December 31, 1996, were as follows (in millions): - -------------------------------------------------------------------------------- Carrying Fair Amount Value -------- ----- Cash and short-term investments $ 470.1 470.1 Copper option contracts - assets (liabilities) (5.1) 0.3 Investments and long-term receivables (including amounts due within one year) for which it is practicable to estimate fair value * 37.5 188.6 Long-term debt (including amounts due within one year) 592.8 613.4 Interest rate protection agreements - assets 2.5 1.0 Foreign currency exchange contracts - assets (liabilities) (0.6) (0.7) - ----------- * The Corporation's largest cost basis investment is its minority interest in Southern Peru Copper Corporation (SPCC), which is carried at a book value of $13.2 million. Phelps Dodge's interest in SPCC was reduced from 16.25 percent to 13.9 percent through an exchange offering of SPCC common shares consummated in 1996. Based on the New York Stock Exchange closing market price of those SPCC shares as of December 31, 1996, the estimated fair value of the Corporation's investment in SPCC is approximately $163 million. Phelps Dodge's ownership interest in SPCC is represented by its share of a class of SPCC common stock which is currently not registered for trading on any public exchange. - -------------------------------------------------------------------------------- 20. BUSINESS SEGMENT DATA The Corporation's business consists of two segments, Phelps Dodge Mining Company and Phelps Dodge Industries. The principal activities of each segment are described below, and the accompanying tables present results of operations and other financial information by segment and by significant geographic area. Phelps Dodge Mining Company is an international business comprising a group of companies involved in vertically integrated copper operations including mining, concentrating, electrowinning, smelting and refining, rod production, marketing and sales, and related activities. Copper is sold primarily to others as rod, cathode or concentrates, and as rod to the Phelps Dodge Industries segment. In addition, Phelps Dodge Mining Company at times smelts and refines copper and produces copper rod for others on a toll basis, and produces gold, silver, molybdenum and copper chemicals as byproducts, and sulfuric acid from its air quality control facilities. This segment also includes the Corporation's other mining operations and investments (including fluorspar, silver, lead and zinc operations) and its worldwide mineral exploration and development programs. Phelps Dodge Industries is a business segment comprising a group of companies that manufacture engineered products principally for the transportation, energy and telecommunications sectors worldwide. Its operations are characterized by products with significant market share, internationally competitive cost and quality, and specialized engineering capabilities. This business segment includes the Corporation's specialty chemicals operations through Columbian Chemicals Company and its subsidiaries; its wheel and rim operations through Accuride Corporation and its subsidiaries; and its wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates. The Corporation's total 1996 sales included exports of $60.2 million from U.S. operations to unaffiliated foreign customers, compared with $93.7 million in 1995 and $76.2 million in 1994. Intersegment sales reflect the transfer of copper from Phelps Dodge Mining Company to Phelps Dodge Industries at the same prices charged to outside customers. The following tables give a summary of financial data by business segment and geographic area for the years 1994 through 1996. Major unusual items during the three-year period included (i) a 1996 pre-tax provision of $10.0 million included in Phelps Dodge Mining Company's operating income resulting from a reclamation provision related to the Court ordered rescission of a 1986 sale of property, (ii) a 1995 pre-tax gain of $26.8 million included in Phelps Dodge Industries' operating income from the sale by its carbon black operations of a synthetic iron oxide facility, (iii) a 1994 pre-tax charge of $94.4 million to Phelps Dodge Mining Company's operating income for costs associated with environmental matters and asset dispositions, and (iv) a 1994 pre-tax charge of $44.6 million to Phelps Dodge Industries' operating income for costs associated with environmental matters and asset dispositions, including $17.6 million for carbon black facilities and $27.0 million for wire and cable and specialty conductor facilities. (See Note 2 to the Consolidated Financial Statements for a further discussion of these issues.) FINANCIAL DATA BY BUSINESS SEGMENT (In millions)
- ------------------------------------------------------------------------------------------------------- Phelps Dodge Industries Phelps -------------------------------- Dodge Specialty Wheels Wire Corporate Mining Chemicals & Rims & Cable Total & Other Total ------ ------ ------ ------- ----- ------- ----- 1996 Sales and other operating revenues: Unaffiliated customers $ 2,091.1 437.0 307.8 950.7 1,695.5 - 3,786.6 Intersegment 265.8 - - 0.5 0.5 - 266.3 Operating income (loss) 526.6 79.8 41.4 104.6 225.8 (39.5) 712.9 Identifiable assets at December 31 2,938.2 476.0 285.4 802.9 1,564.3 313.9 4,816.4 Depreciation, depletion and amortization 150.7 34.3 20.1 42.8 97.2 1.6 249.5 Capital outlays 330.2 72.2 9.6 97.8 179.6 3.2 513.0 Equity earnings 6.9 0.1 0.1 3.4 3.6 - 10.5 - ------------------------------------------------------------------------------------------------------- 1995 Sales and other operating revenues: Unaffiliated customers $ 2,488.7 420.8 357.8 918.1 1,696.7 - 4,185.4 Intersegment 275.0 - - 0.6 0.6 - 275.6 Operating income (loss) 896.8 103.9 45.6 93.8 243.3 (39.6) 1,100.5 Identifiable assets at December 31 2,839.2 424.0 299.5 632.0 1,355.5 451.2 4,645.9 Depreciation, depletion and amortization 134.0 33.2 21.1 33.9 88.2 1.3 223.5 Capital outlays 321.6 22.6 6.9 52.8 82.3 1.0 404.9 Equity earnings 4.5 - 0.3 1.7 2.0 - 6.5 - ------------------------------------------------------------------------------------------------------- 1994 Sales and other operating revenues: Unaffiliated customers $ 1,820.7 335.0 333.6 799.9 1,468.5 - 3,289.2 Intersegment 218.5 - - 1.7 1.7 - 220.2 Operating income (loss) 326.4 20.0 42.3 43.8 106.1 (32.1) 400.4 Identifiable assets at December 31 2,450.2 439.9 341.8 621.5 1,403.2 280.4 4,133.8 Depreciation, depletion and amortization 105.1 34.1 20.5 34.5 89.1 1.1 195.3 Capital outlays 299.2 19.6 6.4 29.1 55.1 0.7 355.0 Equity earnings 5.6 0.3 0.3 2.4 3.0 - 8.6 - -------------------------------------------------------------------------------------------------------
FINANCIAL DATA BY GEOGRAPHIC AREA (In millions) - ---------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- SALES AND OTHER OPERATING REVENUES: Unaffiliated customers United States $ 2,773.5 3,072.6 2,485.9 Latin America 414.6 537.3 346.7 Other 598.5 575.5 456.6 ---------- ---------- ---------- $ 3,786.6 4,185.4 3,289.2 ========== ========== ========== Intergeographic areas * United States $ 11.9 13.1 19.3 Latin America 14.9 23.7 - Other 43.5 47.9 54.4 ---------- ---------- ---------- $ 70.3 84.7 73.7 ========== ========== ========== OPERATING INCOME: United States $ 544.9 810.4 337.2 Latin America 64.5 196.8 30.0 Other 103.5 93.3 33.2 ---------- ---------- ---------- $ 712.9 1,100.5 400.4 ========== ========== ========== IDENTIFIABLE ASSETS AT DECEMBER 31: United States $ 3,196.2 3,157.1 2,789.0 Latin America 1,000.1 931.3 798.2 Other 620.1 557.5 546.6 ---------- ---------- ---------- $ 4,816.4 4,645.9 4,133.8 ========== ========== ========== - ----------- * Intracompany sales from the geographic area referenced to the other geographic areas listed. - -------------------------------------------------------------------------------- Item 9. Disagreements on Accounting and Financial Disclosure - ------------------------------------------------------------- None. Part III Items 10, 11, 12 and 13. - ------------------------ The information called for by Part III (Items 10, 11, 12 and 13) is incorporated herein by reference from the material included under the captions "Election of Directors," "Beneficial Ownership of Securities," "Executive Compensation" and "Other Matters" in Phelps Dodge Corporation's definitive proxy statement (to be filed pursuant to Regulation 14A) for its Annual Meeting of Shareholders to be held May 7, 1997 (the 1997 Proxy Statement), except that the information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I of this report. The 1997 Proxy Statement is being prepared and will be filed with the Securities and Exchange Commission and furnished to shareholders on or about April 1, 1997. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------- (a) 1. Financial Statements. 2. Financial Statement Schedule. 3. Exhibits: 3.1 Restated Certificate of Incorporation of the Corporation, effective June 16, 1987 (incorporated by reference to Exhibit 3.1 to the Corporation's Form 10-Q for the quarter ended June 30, 1987 (SEC File No. 1-82)). Certificate of Amendment of such Restated Certificate of Incorporation, effective August 4, 1988, and Certificate of Amendment of such Restated Certificate of Incorporation, effective August 9, 1988 (incorporated by reference to Exhibits 3.1 and 3.2 to the Corporation's Form 10-Q for the quarter ended September 30, 1988 (SEC File No. 1-82)). Complete composite copy of the Certificate of Incorporation of the Corporation as amended to date (incorporated by reference to Exhibit 3.1 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)). 3.2 By-Laws of the Corporation, as amended effective March 5, 1997 (SEC File No. 1-82). 4.1 Reference is made to Exhibits 3.1 and 3.2 above. 4.3 Rights Agreement, dated as of July 29, 1988 and Amended and Restated as of December 6, 1989, between the Corporation and Chase Bank (formerly Chemical Bank), which includes the form of Certificate of Amendment setting forth the terms of the Junior Participating Cumulative Preferred Shares, par value $1.00 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 1 to the Corporation's Current Report on Form 8-K filed on December 7, 1989 (SEC File No. 1-82)). Note: Certain instruments with respect to long-term debt of the Corporation have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission. 10. Management contracts and compensatory plans and agreements. 10.1 The Corporation's 1987 Stock Option and Restricted Stock Plan (the 1987 Plan), as amended to and including June 3, 1992, and form of Stock Option Agreement and form of Reload Option Agreement, both as modified through June 3, 1992 (incorporated by reference to Exhibit 10.2 of the Corporation's Form 10-Q for the quarter ended June 30, 1992 (SEC File No. 1-82)). Form of Restricted Stock letter under the 1987 Plan (incorporated by reference to Exhibit 10.1 to the Corporation's 1990 10-K (SEC File No. 1-82)) and the amendment thereto dated June 25, 1992 (incorporated by reference to Exhibit 10.2 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)). 10.2 The Corporation's 1989 Directors Stock Option Plan (the 1989 Directors Plan), as amended to and including June 3, 1992, suspended effective November 6, 1996 (incorporated by reference to Exhibit 10.3 to the Corporation's Form 10-Q for the quarter ended June 30, 1992 (SEC File No. 1-82)). Form of Stock Option Agreement under the 1989 Directors Plan (incorporated by reference to the Corporation's Registration Statement on Form S-8 (Reg. No. 33-34363)). 10.3 The Corporation's 1993 Stock Option and Restricted Stock Plan (the 1993 Plan), as amended through December 1, 1993, and form of Restricted Stock letter under the 1993 Plan (incorporated by reference to Exhibit 10.4 to the Corporation's 1993 Form 10-K (SEC File No. 1-82)). Form of Stock Option Agreement and form of Reload Option Agreement, both as amended through November 2, 1994, under the 1993 Plan (incorporated by reference to Exhibit 10.3 to the Corporation's 1994 Form 10-K (SEC File No. 1-82)). Note: Omitted from filing pursuant to the Instruction to Item 601(b) (10) are actual Stock Option Agreements between the Corporation and certain officers, under the 1987 Plan and the 1993 Plan, and certain Directors, under the 1989 Directors Plan, which contain substantially similar provisions to Exhibits 10.1, 10.2 and 10.3 above. 10.4 Description of the Corporation's Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the Corporation's 1993 Form 10-K (SEC File No. 1-82)). 10.5 Deferred Compensation Plan for the Directors of the Corporation, amended and restated as of December 4, 1996 (SEC File No. 1-82). 10.6 Form of Change-of-Control Agreement between the Corporation and certain executives, including all of the current executive officers to be listed in the summary compensation table to the 1997 Proxy Statement (incorporated by reference to Exhibit 10.7 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)). 10.7 Form of Severance Agreement between the Corporation and certain executives, including all of the current executive officers to be listed in the summary compensation table to the 1997 Proxy Statement (incorporated by reference to Exhibit 10.11 to the Corporation's 1988 Form 10-K (SEC File No. 1-82)). 10.8 The Corporation's Retirement Plan for Directors, effective January 1, 1988 (incorporated by reference to Exhibit 10.13 to the Corporation's 1987 Form 10-K (SEC File No. 1-82)). 10.9 The Corporation's Comprehensive Executive Nonqualified Retirement and Savings Plan (the Nonqualified Plan), as amended November 7, 1990 (incorporated by reference to Exhibit 10.14 to the Corporation's 1990 Form 10-K (SEC File No. 1-82)). Amendment, effective January 1, 1991, to the Nonqualified Plan (incorporated by reference to Exhibit 10.2 to the Corporation's Form 10-Q for the quarter ended June 30, 1991 (SEC File No. 1-82)). Four amendments, one effective as of January 1, 1991, one effective as of November 15, 1993 (both incorporated by reference to Exhibit 10.13 of the Corporation's 1993 Form 10-K (SEC File No. 1-82)), one effective as of September 7, 1994 (incorporated by reference to Exhibit 10.11 of the Corporation's 1994 Form 10-K (SEC File No. 1-82)), and one effective June 7, 1995 (incorporated by reference to Exhibit 10.11 of the Corporation's Form 10-Q for the quarter ended June 30, 1995 (SEC File No. 1-82)). 10.10 The Corporation's 1997 Directors Stock Unit Plan effective January 1, 1997 (SEC File No. 1-82). 12 Statement re computation of ratios of total debt to total capitalization. 21 List of Subsidiaries and Investments. 23 Consent of Price Waterhouse LLP. 24 Powers of Attorney executed by certain officers and directors who signed this Annual Report on Form 10-K. Note: Shareholders may obtain copies of Exhibits by making written request to the Secretary of the Corporation and paying copying costs of 10 cents per page, plus postage. (b) Reports on Form 8-K: No current Reports on Form 8-K were filed by the Corporation during the quarter ended December 31, 1996. Schedule VIII PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - -------------------------------------------------------------------------------- (In thousands) Additions ----------------- Balance at Charged to Balance beginning costs and Deduc- at end of period expenses Other tions of period --------- -------- ----- ----- --------- Reserve deducted in balance sheet from the asset to which applicable: Accounts Receivable: December 31, 1996 $ 12,000 4,300 (200) 1,900 14,200 December 31, 1995 11,800 2,000 (800) 1,000 12,000 December 31, 1994 12,200 1,900 - 2,300 11,800 Supplies: December 31, 1996 $ 10,500 1,300 100 3,000 8,900 December 31, 1995 14,000 600 200 4,300 10,500 December 31, 1994 12,700 700 3,100 2,500 14,000 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHELPS DODGE CORPORATION (Registrant) March 17, 1997 By: Thomas M. St. Clair -------------------- Thomas M. St. Clair Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Chairman of the Board, President, Chief Executive Officer and Director Douglas C. Yearley (Principal Executive Officer) March 17, 1997 - ------------------- Douglas C. Yearley Senior Vice President and Chief Financial Officer Thomas M. St. Clair (Principal Financial Officer) March 17, 1997 - ------------------- Thomas M. St. Clair Vice President and Controller Gregory W. Stevens (Principal Accounting Officer) March 17, 1997 - ------------------- Gregory W. Stevens Robert N. Burt, Paul W. Douglas, ) William A. Franke, Paul Hazen, Marie L. Knowles ) Robert D. Krebs, Southwood J. Morcott, ) March 17, 1997 Gordon R. Parker, J. Steven Whisler, Directors ) By: Thomas M. St. Clair ------------------- Thomas M. St. Clair Attorney-in-fact EX-3.2 2 BY-LAWS OF THE CORPORATION Exhibit 3.2 Amended Effective March 5, 1997 B Y - L A W S PHELPS DODGE CORPORATION ARTICLE I. NAME, LOCATION and CORPORATE SEAL Sec. 1. The name of this Corporation is PHELPS DODGE CORPORATION. Sec. 2. The principal office of the Company shall be in the City of Phoenix, County of Maricopa, State of Arizona. The Company shall also have such other offices, either within or without the United States, and may transact its business at such other places, as the Board of Directors may appoint. Sec. 3. The corporate seal of the Company shall have inscribed thereon the name of the corporation, and the year of its creation. It shall be of the form impressed upon the margin hereof. It shall be in charge of the Secretary. A duplicate of the seal may be kept and used by the Treasurer or by any Assistant Secretary or Assistant Treasurer, when so ordered by the Board of Directors. (Imprint of corporate seal) ARTICLE II. SHAREHOLDERS Sec. 1. Annual Meeting. The annual meeting of shareholders shall be held at 12:00 noon on the first Wednesday in May of each year, or at such other time on that day or at such time on such other day as the Board of Directors shall from time to time determine, at the principal office of the Company in the City of Phoenix, County of Maricopa, State of Arizona, or at such other place within or without the State of New York as the Board of Directors shall from time to time determine, for the purpose of electing Directors and for the transaction of such other business as may properly be brought before the meeting. The Secretary shall cause to be sent by first class mail not less than ten nor more than fifty days before the date of such meeting, a notice thereof addressed to each shareholder of record entitled to vote at such meeting at his or her address as it appears on the books of the Company. Notice may also be sent by third class mail not less than twenty-four nor more than fifty days before the date of such meeting. Any previously scheduled annual meeting of shareholders may be postponed by resolution of the Board of Directors upon public announcement of the postponement on or prior to the date previously scheduled for such annual meeting of shareholders. Sec. 2. Special Meetings. Special meetings of the shareholders may be held at the principal office of the Company in the City of Phoenix, County of Maricopa, State of Arizona, or at such other place within or without the State of New York as the Board of Directors or the Chairman of the Board shall from time to time determine, and may be called by vote of a majority of the Board of Directors, or by the Chairman of the Board. Special meetings of the shareholders, or of the holders of a particular class or series of shares, shall also be called when required by the Certificate of Incorporation at the times and in the manner therein set forth. Notice of the time, place and purposes of any such special meeting shall be served personally or sent by first class mail to each shareholder of record entitled to vote at such meeting, not less than ten nor more than fifty days before the date of such meeting, at his or her address as it appears on the books of the Company. Notice may also be sent by third class mail not less than twenty-four nor more than fifty days before the date of such meeting. A written waiver of notice of any meeting may be made by any shareholder. Any previously scheduled special meeting of the shareholders may be postponed by resolution of the Board of Directors upon public announcement of the postponement on or prior to the date previously scheduled for such special meeting of shareholders. Sec. 3. Quorum. At any meeting of shareholders, unless otherwise provided by law or by the Certificate of Incorporation, the holders of shares (of any class) aggregating a majority of the total number of shares of all classes of the Company then issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum, provided that, unless otherwise provided by law or by the Certificate of Incorporation, when a specified item of business is required to be voted on by any one or more of a particular class or series of shares, voting as a separate class, the holders of a majority of the shares so eligible to vote as a separate class shall constitute a quorum for the transaction of such specified item of business. The shareholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient shareholders to constitute the remaining shareholders less than a quorum. Whether or not a quorum is present at a meeting, the person presiding at the meeting or the holders of a majority of the shares of all classes of the Company entitled to vote at the meeting so present or represented may adjourn the meeting from time to time. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. Sec. 4. Chairman and Secretary. Meetings of shareholders shall be presided over by the Chairman of the Board or, if he is not present, by the President or, if neither of them is present, by a Vice Chairman, or if none of them is present, by a Vice President or, if neither the Chairman of the Board, the President, a Vice Chairman nor a Vice President is present, by a person to be chosen at the meeting. The Secretary of the Company shall act as Secretary at all meetings of the shareholders, but in the absence of the Secretary the presiding officer may appoint any person to act as Secretary of the meeting. Sec. 5. Voting. Except as otherwise provided by law or by the Certificate of Incorporation, each shareholder entitled to vote at a meeting of shareholders shall be entitled to one vote, in person or by proxy, for each share having voting power held by him or her on the record date for such meeting, as appears on the books of the Company. Only the person in whose name shares stand on the books of the Company at the time of closing of the transfer books for such meeting shall be entitled to vote, in person or by proxy, the shares so standing in his or her name. The Board of Directors shall have the power and authority to fix a day not less than ten nor more than fifty days prior to the day of holding any meeting of shareholders, as the day as of which shareholders entitled to notice of and to vote at such meeting shall be determined; and all persons who are holders of record of shares with voting rights on such day, and no others, shall be entitled to notice of and to vote at such meeting. Sec. 6. Inspectors of Election. The Board of Directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. Thereafter each inspector shall have at such meeting all of the powers and duties provided by law. Sec. 7. Business Conducted at Meetings. At an annual meeting of shareholders, only such business may be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting business must be (a) specified in the notice of meeting (including any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder of the Company who was a shareholder of record at the time of giving of notice provided for in this Section 7, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 7. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal office of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that the date of the annual meeting is scheduled for a day other than the first Wednesday in May in such year and less than 70 days' notice or prior public announcement of the new date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the new date of the annual meeting was mailed or such public announcement was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address of the shareholder proposing such business, as they appear on the Company's books, and of the beneficial owner, if any, on whose behalf such notice is being given, (c) the class and number of shares of the Company which are owned beneficially and of record by such shareholder and by such beneficial owner, and (d) any material interest in such business of such shareholder or of such beneficial owner. At a special meeting of shareholders, only such business may be conducted as shall have been properly brought before the meeting. To be properly brought before a special meeting, business must be related to the purpose or purposes set forth in the notice of the meeting (including any supplement thereto) given by or at the direction of the Board of Directors or the Chairman of the Board. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 7. The chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 7, and if the chairman should so determine, he or she shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted. In addition to the provisions of this Section 7, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these By-Laws shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act") and to put before such meeting any proposals so included in the Company's proxy statement at his or her request. Sec. 8. Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in this Section 8 shall be eligible for election as Directors at any meeting of shareholders held for the election of Directors (an "Election Meeting"). Nominations of persons for election to the Board of Directors of the Company may be made at an Election Meeting by or at the direction of the Board of Directors or by a shareholder of the Company who was a shareholder of record at the time of giving of notice provided for in this Section 8, who is entitled to vote for the election of Directors at such Election Meeting and who complies with the notice procedures set forth in this Section 8. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal office of the Company not less than 60 days nor more than 90 days prior to such Election Meeting; provided, however, that in the event the date of the Election Meeting is scheduled for a day other than the first Wednesday in May and less than 70 days' notice or prior public announcement of the date of such Election Meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of such Election Meeting was mailed or such public announcement was made. Notwithstanding anything in the foregoing sentence to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Company at such Election Meeting is increased or there is a vacancy to be filled at such Election Meeting in a class of Directors whose terms do not expire at such Election Meeting and there is no public announcement at least 70 days prior to such Election Meeting naming all of the nominees for Director or specifying the size of the increased Board of Directors or the number of Directors to be elected, a shareholder's notice required by this Section 8 shall also be considered timely, but only with respect to nominees for any positions created by such increase or vacancy, if it shall be delivered to or mailed and received at the principal office of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Company which are owned beneficially by such person and (iv) any other information concerning such person that is required to be disclosed in connection with the solicitation of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (b) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made, (i) the name and address of such shareholder, as they appear on the Company's books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such shareholder and by such beneficial owner. At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Company that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Company unless nominated in accordance with the procedures set forth in this Section 8. In the event that a person is validly designated as a nominee in accordance with the foregoing and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the provisions of this Section 8, and if the chairman should so determine, he or she shall declare to the meeting that the defective nomination shall be disregarded. In addition to the provisions of this Section 8, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Sec. 9. Public Announcement. For purposes of this Article II, "public announcement" shall mean disclosure in a communication sent by first class mail to shareholders, in a press release reported by the Dow Jones News Service, Reuters Information Services, Inc., Associated Press or comparable national news service or in a document filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. ARTICLE III. DIRECTORS Sec. 1. Number; Classification of Board; Newly Created Directorships and Vacancies. The business of the Company shall be managed under the direction of its Board of Directors, which shall consist of not less than nine nor more than fifteen Directors, provided that whenever the holders of any one or more series of Preferred Shares of the Company become entitled to elect one or more Directors to the Board of Directors in accordance with any applicable provisions of the Certificate of Incorporation, such maximum number of Directors shall be increased automatically by the number of Directors such holders are so entitled to elect. Such increase shall remain in effect until the right of such holders to elect such Director or Directors shall cease and until the Director or Directors elected by such holders shall no longer hold office. The exact number of Directors within the foregoing minimum and maximum limitations shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board. Except as otherwise provided in any applicable provisions of the Certificate of Incorporation relating to Preferred Shares of the Company, the Directors shall be divided into three classes, designated Class I, Class II and Class III. All classes shall be as nearly equal in number as possible. The terms of office of the Directors initially classified shall be as follows: at the 1988 annual meeting of shareholders, Class I Directors shall be elected for a one-year term expiring at the 1989 annual meeting of shareholders, Class II Directors for a two-year term expiring at the 1990 annual meeting of shareholders, and Class III Directors for a three-year term expiring at the 1991 annual meeting of shareholders. At each annual meeting of shareholders after the 1988 annual meeting, Directors so classified who are elected to replace those whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting. Each Director so classified shall hold office until the expiration of his term and until his successor has been elected and qualified. Except as otherwise provided in any applicable provisions of the Certificate of Incorporation relating to Preferred Shares of the Company, (a) newly created directorships resulting from an increase in the number of Directors and vacancies occurring on the Board of Directors for any reason may be filled by vote of the Directors (including a majority of Directors then in office if less than a quorum exists), and (b) if the number of Directors is changed, (i) any newly created directorships or any decrease in directorships shall be apportioned by the Board among the classes so as to make all classes as nearly equal as possible, and (ii) when the number of Directors is increased by the Board and any newly created directorships are filled by the Board, there shall be no classification of the additional Directors until the next annual meeting of shareholders. Any Director elected by the Board to fill a newly created directorship or a vacancy shall hold office until the next annual meeting of shareholders and until his successor, classified in accordance with these By-Laws, has been elected and qualified. No decrease in the number of Directors constituting the Board shall shorten the term of any incumbent Director. Sec. 2. Quorum. One-third, but in any event not fewer than five (5) members of the Board of Directors, shall constitute a quorum for transacting business at all meetings. In the event of a quorum not being present, a lesser number may adjourn the meeting to a time not more than twenty (20) days later. Sec. 3. Place of Meetings. The Directors may hold their meetings either within or without the State of New York. Sec. 4. Meetings. Regular and special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, any Vice Chairman, the President, any Executive Vice President or Senior Vice President, or any member of the Executive Committee of the Board and shall be held at such time and place as the notice of the meeting shall specify. Notice of any such meeting shall be given to each Director (a) personally (either orally or in writing) not less than 12 hours in advance of such meeting, (b) by telex or similar method of communication dispatched to his usual place of business not less than 24 hours in advance of such meeting, or (c) by mail or telegram dispatched to his address on file at the Company for such purpose not less than two days in advance of such meeting. Such notice shall be given by the Secretary or, if the Secretary is not available, by the individual calling the meeting and, in the case of special meetings, shall also specify the object of the meeting. At any such meeting held without notice at which every member of the Board shall be present or shall waive notice in writing before or after the meeting, any business may be transacted which might have been transacted if notice of the meeting had been duly given. Regular meetings may also be held at such times and places as the Board may designate from time to time, and no notice shall be required for any such regular meeting when held as so designated. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Sec. 5. Removal. Any officer elected or appointed by the Board of Directors, may be removed at any time by the affirmative vote of a majority of the whole Board. Sec. 6. Compensation. Each Director of the Company who is neither an officer or employee of the Company or of a subsidiary of the Company nor a Chairman of a Committee of the Board of Directors of the Company shall receive an annual retainer of Twenty-Five Thousand Dollars ($25,000). Each Director of the Company who is not an officer or employee of the Company or of a subsidiary of the Company and who is a Chairman of a Committee of the Board of Directors of the Company shall receive an annual retainer of Twenty-Eight Thousand Dollars ($28,000). In addition, each Director of the Company who is not an officer or employee of the Company or of a subsidiary of the Company shall receive: (i) a fee of One Thousand Dollars ($1,000) per meeting for attendance at any regular or special meeting of the Board or as a member or by invitation at any regular or special meeting of any Committee of the Board and (ii) a fee of One Thousand Dollars ($1,000) for each day (prorated for part of a day) that such Director renders service to the Company in excess of that required by such Director's usual responsibilities either as a member of the Board of Directors of the Company or as a member of a Committee thereof. Sec. 7. Indemnification--Third Party and Derivative Actions. (a) The Company shall indemnify any person made, or threatened to be made, a party to an action or proceeding other than one by or in the right of the Company to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any Director or officer of the Company served in any capacity at the request of the Company, by reason of the fact that he, his testator or intestate, is or was a Director or officer of the Company, or is or was serving such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and expenses (including attorneys' fees) incurred in connection with such action or proceeding, or any appeal therein, provided that no indemnification may be made to or on behalf of such person if (i) his acts were committed in bad faith or were the result of his active and deliberate dishonesty and were material to such action or proceeding or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. (b) The Company shall indemnify any person made, or threatened to be made, a party to an action by or in the right of the Company to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a Director or officer of the Company, or is or was serving at the request of the Company as a Director or officer of any other corporation of any type or kind, domestic or foreign, or of any partnership, joint venture, trust, employee benefit plan or other enterprise, against judgments, amounts paid in settlement and expenses (including attorneys' fees) incurred in connection with such action, or any appeal therein, provided that no indemnification may be made to or on behalf of such person if (i) his acts were committed in bad faith or were the result of his active and deliberate dishonesty and were material to such action or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. (c) For the purpose of this Section 7, the Company shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the Company also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be considered fines. (d) The termination of any civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such Director or officer has not met the standard of conduct set forth in this Section 7. However, no Director or officer shall be entitled to indemnification under this Section 7 if a judgment or other final adjudication adverse to the Director or officer establishes (i) that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or (ii) that he personally gained in fact a financial profit or other advantage to which he was not legally entitled. Sec. 8. Payment of Indemnification; Repayment. (a) A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in Section 7 of this Article shall be entitled to indemnification as authorized in such Section. (b) Except as provided in Section 8(a), any indemnification under Section 7 of this Article, unless ordered by a court, shall be made by the Company only if authorized in the specific case: (1) by the Board of Directors acting by a quorum consisting of Directors who are not parties to the action or proceeding giving rise to the indemnity claim upon a finding that the Director or officer has met the standard of conduct set forth in Section 7 of this Article; or (2) if a quorum under the foregoing clause (1) is not obtainable or, even if obtainable, a quorum of disinterested Directors so directs: (i) by the Board of Directors upon the opinion in writing of independent legal counsel (i.e., a reputable lawyer or law firm not under regular retainer from the Company or any subsidiary corporation) that indemnification is proper in the circumstances because the standard of conduct set forth in Section 7 of this Article has been met by such Director or officer, or (ii) by the holders of the Common Shares of the Company upon a finding that the Director or officer has met such standard of conduct. (c) Expenses incurred by a Director or officer in defending a civil or criminal action or proceeding shall be paid by the Company in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such Director or officer to repay such amount in case he is ultimately found, in accordance with this Article, not to be entitled to indemnification or, where indemnity is granted, to the extent the expenses so paid exceed the indemnification to which he is entitled. (d) Any indemnification of a Director or officer of the Company under Section 7 of this Article, or advance of expenses under Section 8(c) of this Article, shall be made promptly, and in any event within 60 days, upon the written request of the Director or officer. Sec. 9. Enforcement; Defenses. The right to indemnification or advances as granted by this Article shall be enforceable by the Director or officer in any court of competent jurisdiction if the Company denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Company. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of expenses under Section 8(c) of this Article where the required undertaking, if any, has been received by the Company) that the claimant has not met the standard of conduct set forth in Section 7 of this Article, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, its independent legal counsel, and the holders of its Common Shares), to have made a determination that indemnification of the claimant is proper in the circumstances nor the fact that there has been an actual determination by the Company (including its Board of Directors, its independent legal counsel, and the holders of its Common Shares) that indemnification of the claimant is not proper in the circumstances, shall be a defense to the action or create a presumption that the claimant is not entitled to indemnification. Sec. 10. Contract; Savings Clause; Preservation of Other Rights. (a) The foregoing indemnification provisions shall be deemed to be a contract between the Company and each Director and officer who serves in such capacity at any time while these provisions as well as the relevant provisions of the New York Business Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a contract right may not be modified retroactively without the consent of such Director or officer. (b) If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify each Director or officer of the Company against judgments, fines, amounts paid in settlement and expenses (including attorneys' fees) incurred in connection with any actual or threatened action or proceeding, whether civil or criminal, including an actual or threatened action by or in the right of the Company, or any appeal therein, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and to the full extent permitted by applicable law. (c) The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of shareholders or Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. The Company is hereby authorized to provide further indemnification if it deems it advisable by resolution of shareholders or Directors or by agreement. Sec. 11. Indemnification of Persons Not Directors or Officers of the Company. The Company may, by resolution adopted by the Board of Directors of the Company, indemnify any person not a Director or officer of the Company, who is made, or threatened to be made, a party to an action or proceeding, whether civil or criminal, by reason of the fact that he, his testator or intestate, is or was an employee or other agent of the Company, against judgments, fines, amounts paid in settlement and expenses (including attorneys' fees) incurred in connection with such action or proceeding, or any appeal therein, provided that no indemnification may be made to or on behalf of such person if (i) his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to such action or proceeding, or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES Sec. 1. The Board of Directors shall, by an affirmative vote of a majority of the whole Board, appoint from the Directors an Executive Committee not more than nine and not less than three, of which one-third (but not less than two) shall constitute a quorum. Should it be impracticable at any time, due to absence or illness of members or other cause, to obtain a quorum of the members so appointed for any desired meeting, the Secretary, or, if the Secretary is not available, the member calling the meeting, may call upon any other Director or Directors, not members of such Executive Committee but who have been designated by the Board as alternate members of the Executive Committee, to make up a quorum for that particular meeting, which other Director or Directors shall for the time being be members of said Executive Committee, and the acts and proceedings of the Committee as so constituted for such meeting shall have the same force and effect as the acts and proceedings of meetings where a quorum of the regular committee is in attendance. The Board of Directors may from among their number also, by a similar vote, appoint any other committees. The Board of Directors shall fill vacancies in the Executive Committee by election from Directors; and at all times it shall be the duty of the Board of Directors to keep the membership of the Executive Committee up to the required number. Any member of the Executive Committee who shall cease to be a Director shall ipso facto cease to be a member of the Committee. All action by the Executive Committee, or by other committees appointed by the Board of Directors, shall be reported to said Board at its meeting next succeeding such action, and, except to the extent stated in the second sentence of the first paragraph of Section 2 of this Article, shall be subject to revision, alteration, or approval by the Board of Directors. The Executive and other committees shall each fix its own rules of procedure and arrange its own place of meeting; but in every case (except in the case of the Executive Committee) a majority of such committee shall be necessary to constitute a quorum, and in every case (except in the case of the Executive Committee) the affirmative vote of a majority of the members of each of such committees shall be necessary for its adoption of any resolution. Any one or more members of the Executive or any other committee may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Meetings of the Executive Committee shall be held whenever called by the Chairman of the Board, any Vice Chairman, the President, any Executive Vice President or Senior Vice President or any member of that Committee, and shall be held at such time and place as the notice of the meeting shall specify. Notice of any such meeting shall be given to each member of the Committee (a) personally (either orally or in writing) not less than 12 hours in advance of such meeting, (b) by telex or similar method of communication dispatched to his usual place of business not less than 24 hours in advance of such meeting, or (c) by mail or telegram dispatched to his address on file at the Company for such purpose not less than two days in advance of such meeting. Such notice shall be given by the Secretary or, if the Secretary is not available, by the individual calling the meeting and shall also specify the object of the meeting. The Executive Committee shall keep regular minutes and cause them to be recorded in a book to be kept in the principal office of the Company for that purpose. Sec. 2. Powers of Committees. The Executive Committee shall, whenever the Board of Directors is not in session, direct the management of the affairs of the Company in all cases in which specific directions to the contrary shall not have been given, or specific action of the Board of Directors is required by law. Notwithstanding anything to the contrary stated in the fifth paragraph of Section 1 of this Article, the rights of third persons acquired in reliance on an Executive Committee resolution prior to receiving notice of action by the Board of Directors shall not be prejudiced by action by the Board of Directors. Other committees appointed by the Board of Directors shall have such powers as the Board may delegate by resolution. Sec. 3. Compensation. The members of the Executive Committee and the members of any other committee appointed by the Board of Directors shall receive such compensation for their services as from time to time shall be fixed by the Board of Directors. ARTICLE V. OFFICERS AND THEIR DUTIES Sec. 1. Officers. The officers of the Company shall be: Chairman of the Board of Directors, President, Treasurer, Secretary, and Controller, and such Vice Chairmen, such Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), and such Assistant Vice Presidents, Assistant Treasurers, Assistant Secretaries, and Assistant Controllers as the Board of Directors in its discretion may elect or appoint. No officer other than the Chairman of the Board need be a member of the Board of Directors. Any number of offices may be held by the same person, except that the same person shall not be (i) Treasurer and Controller or (ii) Chairman of the Board or President and Secretary. Officers shall be elected annually at the first meeting of the Board of Directors following the annual meeting of shareholders, subject to the power of the Board of Directors to fill vacancies at any time. All officers shall serve at the pleasure of the Board of Directors and may be removed as provided in Article III, Section 5 of these By-Laws. Sec. 2. Chairman of the Board. The Chairman of the Board of Directors shall be the chief executive officer of the Company and shall be responsible to the Board of Directors for the administration and operations of the Company. He shall preside at all meetings of the Board of Directors and at all meetings of shareholders. By virtue of his office he shall be a member of the Executive Committee of the Board of Directors and shall preside at meetings of the Executive Committee. He shall have such other powers and perform such other duties as from time to time may be assigned to him by, and shall be responsible solely to, the Board of Directors. He may sign, with the Treasurer, all promissory notes of the Company and any guarantees of the Company in respect of borrowed money, and, with the Secretary when the corporate seal is to be affixed, all share certificates, bonds, mortgages and other contracts of the Company. Sec. 2-A. Vice Chairmen. Each Vice Chairman shall have such powers and perform such duties as from time to time may be assigned to him by the Board of Directors or the Chairman of the Board. Any Vice Chairman may sign, with the Treasurer, all promissory notes of the Company and any guarantees of the Company in respect of borrowed money, and, with the Secretary when the corporate seal is to be affixed, all share certificates, bonds, mortgages, and other contracts of the Company. Sec. 3. President. The President shall have such powers and perform such duties as from time to time may be assigned to him by the Board of Directors or by the Chairman of the Board. He may sign, with the Treasurer, all promissory notes of the Company and any guarantees of the Company in respect of borrowed money, and, with the Secretary when the corporate seal is to be affixed, all share certificates, bonds, mortgages, and other contracts of the Company. Sec. 3-A. Vice Presidents. Each Vice President shall have such powers and perform such duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, any Vice Chairman, or the President. Any Vice President may sign, with the Treasurer, all promissory notes of the Company and any guarantees of the Company in respect of borrowed money, and, with the Secretary when the corporate seal is to be affixed, all share certificates, bonds, mortgages, and other contracts of the Company. Sec. 4. Assistant Vice Presidents. The Board of Directors may elect or appoint one or more Assistant Vice Presidents, each of whom shall have such powers and perform such duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President, or any Vice President. Sec. 5. Secretary. The Secretary shall keep a record of all proceedings of the Board of Directors, and of all meetings of the shareholders, and of the Executive Committee and of all other committees, in books provided for that purpose, and he shall attend to giving and serving all notices of the Company. The Secretary shall keep in safe custody the seal of the Company and he shall affix such seal on all share certificates, bonds, mortgages, and other contracts of the Company executed under such seal. He shall have charge of the records of shareholders of the Company, including transfer books, and share ledgers, and such other books and papers as the Board of Directors shall direct, and in general shall perform all the duties incident to the office of Secretary. Sec. 6. Assistant Secretaries. The Board of Directors may appoint one or more Assistant Secretaries, who shall have power to sign, with the Chairman of the Board, any Vice Chairman, the President, or any Vice President, share certificates of the Company. In the absence of the Secretary, the Assistant Secretaries shall be vested with the powers of, and any one of them may perform the duties of, the Secretary. Each Assistant Secretary shall perform such other duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President, or any Vice President. Sec. 7. Treasurer. The Treasurer shall have in his charge all the funds and securities of the Company. When necessary or proper, he, or such other officer or officers of the Company as may be so duly authorized by the Board of Directors, shall endorse on behalf of the Company for collection checks, notes or other obligations and shall deposit the same to the credit of the Company in such bank or banks or depositories as the Board of Directors may designate or as may be designated by persons authorized by the Board of Directors to make such designations. He, or such other officers or employees of the Company or any of its subsidiaries, acting individually unless otherwise provided, as may from time to time be designated by the Board of Directors or be designated in writing by any officer or officers of the Company duly authorized by the Board of Directors to make such designations, shall sign all receipts and vouchers for payments made to the Company, and shall sign all checks, drafts or bills of exchange, provided that the Board of Directors from time to time may designate other persons as authorized signatories of the Company or authorize other persons to make such designations on behalf of the Company. The Treasurer jointly with the Chairman of the Board, any Vice Chairman, the President, or any Vice President shall sign all promissory notes of the Company and any guarantees of the Company in respect of borrowed money, and shall pay out and dispose of the same under the direction of the Board; he shall keep a complete set of books, showing the financial transactions of the Company, and shall exhibit his books to any Director upon application at the office of the Company, during business hours; he shall make such reports as the Board of Directors or the Executive Committee may from time to time request; and he shall perform all acts incidental to the office of Treasurer, subject, nevertheless, to the control of the Board of Directors. He shall give such bonds for the faithful discharge of his duties as Treasurer as the Board of Directors may require. Sec. 8. Assistant Treasurers. The Board of Directors may appoint one or more Assistant Treasurers. In the absence of the Treasurer, the Assistant Treasurers shall be vested with the powers of, and any one of them may perform the duties of, the Treasurer. Each Assistant Treasurer shall perform such other duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President, or any Vice President. Sec. 9. Controller. The Controller shall have supervision and direction of all accounts of the Company, and shall see that the system of accounts is duly enforced and maintained. There shall be kept in his office a general set of books containing a complete set of all the business transactions of the Company, and he shall, as often as necessary, make an examination of the accounts of any officer, agent or employee entrusted with the handling or care of money of the Company. It shall be the duty of the Controller to know that all money belonging to the Company, collected from any source by any officer, agent or employee, is properly accounted for and promptly paid into the treasury, and that all accounts of the Company are properly and promptly settled. It shall be the duty of the Controller to know that all bonds required of officers, agents and employees for the faithful performance of their duties are given. Such bonds shall be transmitted to the Controller for safe custody and shall be released only upon a complete and satisfactory settlement of the accounts covered by them, unless otherwise ordered by the Board. Sec. 10. Additional Officers; Division Officers. In addition to the above officers, the Board of Directors may also appoint one or more general counsel and one or more auditors and such other officers as they may deem wise and advisable for the best interests of the Company, who shall perform such duties as from time to time may be assigned to them by the Board of Directors. If the Board of Directors establishes divisions of the Corporation, the Board may also establish such division offices and appoint such division officers as the Board deems appropriate. Such division officers shall have such powers and perform such duties as from time to time may be assigned to them by the Board of Directors. The Board of Directors shall fix salaries for all officers of the Company, or may delegate, to any committee of the Board or to the Chairman of the Board, the power to fix salaries of officers of the Company in cases where the Board deems it appropriate to so delegate. Sec. 11. Voting upon Stocks. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President or any Vice President shall have full power and authority on behalf of the Company to attend, act and vote, or in the name of the Company to execute proxies appointing any person or persons to attend, act and vote on behalf of the Company, at any meeting of stockholders of any corporation in which the Company may hold stock, and at any such meeting such officer or person or persons appointed in any such proxy, as the case may be, shall possess and may exercise on behalf of the Company any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may by resolution from time to time confer like powers upon any other person or persons. Sec. 12. Sales of Stock. Neither the corporation of Phelps Dodge Corporation nor any subsidiary company by it controlled, shall speculate in the stock either of Phelps Dodge Corporation or of any subsidiary company, or shall buy or sell same except in the regular course of legitimate business of such company or for the purpose of retirement and this provision shall be unalterable save by the vote of the holders of a majority of the stock of the company voting thereon at a meeting called, as provided by these By-Laws. ARTICLE VI. SHARE CERTIFICATES AND TRANSFERS Sec. 1. Certificates for Shares. The Board of Directors shall prepare, in form according to law, and approve, certificates evidencing shares of the Company. No certificate shall be valid unless it is signed by the Chairman of the Board, any Vice Chairman, the President or any Vice President; and also by the Secretary or an Assistant Secretary. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Company itself or its employee. Sec. 2. Transfer of Shares. Shares of the Company shall be transferred only on the books of the Company by the holder thereof in person or by his or her attorney duly authorized thereto in writing, and by cancellation and surrender of certificates for a like number of shares. ARTICLE VII. AMENDMENTS These By-Laws, with the exception of Section 12 of Article V, may be amended or repealed by a vote of a majority of all the Directors at any regular or special meeting of the Board. ARTICLE VIII. The Company expressly elects not to be governed by the provisions currently designated as Article 2, Chapter 23, Title 10 of the Arizona Revised Statutes. EX-10.5 3 DEFERRED COMPENSATION PLAN Exhibit 10.5 Deferred Compensation Plan for the Directors of Phelps Dodge Corporation Amended and Restated as of December 4, 1996 ------------------------------------------- 1. Eligibility - -------------------- Each member of the Board of Directors of Phelps Dodge Corporation (the "Corporation") who is not also an officer or employee of the Corporation (a "Director") is eligible to participate in the Deferred Compensation Plan for the Directors of Phelps Dodge Corporation (the "Plan"). The Secretary of the Corporation shall provide a copy of the Plan to each Director together with a form of letter which may be used, if the Director so elects, to notify the Corporation of his or her election to participate in the Plan. 2. Participation - ---------------------- (a) Deferral Election. Prior to December 31st of any year, a Director may elect to defer receipt of all or any part of his or her annual retainer and/or meeting fees (the amount elected to be deferred being herein referred to as "Fees") for the calendar year following the year in which such election is made, and to have such amounts credited, in whole or in part, to a memorandum account credited with a fixed annual return (the "Interest Account") and/or a memorandum account deemed to be invested in notional Common Shares of the Corporation (the "Stock Account"). Any person who shall become a Director during any calendar year may elect, not later than the 30th day after his or her term begins, to defer payment of all or any part of his or her annual retainer and/or meeting fees payable for the portion of such calendar year following such election. (b) Form and Duration of Deferral Election. A deferral election shall be made by written notice filed with the Secretary of the Corporation. Such election shall continue in effect (including with respect to compensation payable for subsequent calendar years) unless and until the Director revokes or modifies such election by written notice filed with the Secretary of the Corporation. Any such revocation or modification of a deferral election shall become effective as of the end of the calendar year in which such notice is given and only with respect to compensation payable for services as a Director thereafter. Amounts credited to the Director's Interest Account and/or Stock Account (collectively, the "Accounts") prior to the effective date of any such revocation or modification of a deferral election shall not be affected by such revocation or modification and shall be distributed only in accordance with the otherwise applicable terms of the Plan. (c) Renewal. A Director who has revoked an election to participate in the Plan may file a new election to defer fees payable for services to be rendered in the calendar year following the year in which such election is filed. 3. Director's Accounts - ----------------------------- (a) Establishment of Accounts. The Corporation shall maintain an Interest Account and a Stock Account for each Director who has elected to participate in the Plan, and shall make additions to and subtractions from such Accounts as provided in this Plan. (b) Interest Account. Fees allocated to the Interest Account pursuant to this Section 3 shall be credited to the Interest Account as of the date such Fees would have been paid to the Director. In the case of a transfer of any amount from the Stock Account to the Interest Account, the amount to be credited to the Interest Account shall be determined pursuant to Section 4(e) below. Any amounts credited to the Interest Account shall be credited with interest annually on December 31 of each calendar year, except that in the event a Director dies while the balance in such Director's Interest Account is a positive number, interest shall be credited on such balance as of the end of the calendar month in which the Director dies. The amount to be credited as interest pursuant to the preceding sentence with respect to amounts credited to the Interest Account on January 1 of the then current calendar year shall be equal to the product of such amounts and the Applicable Interest Rate (as defined below). With respect to each amount credited to the Interest Account after January 1 of the then current calendar year, the amount to be credited as interest pursuant to this Section 3(b) shall be equal to (i) the product of such amount and the Applicable Interest Rate times (ii) a fraction, the numerator of which is the number of days in such calendar year during which such amount is credited to the Interest Account and the denominator of which is 365. Effective January 1, 1993, the Applicable Interest Rate shall mean the percentage equal to the prime rate of interest in effect at The Chase Manhattan Bank (or any successor thereto) on the first business day of the then current calendar year (the "Annual Rate"), except that, in the case of an interest calculation being made as of the end of the month in which a Director dies, the Applicable Interest Rate shall equal the product of (i) the Annual Rate and (ii) a fraction, the numerator of which is the number of full calendar months during such year which have been completed on or prior to such date and the denominator of which is 12. (Prior to January 1, 1993, interest shall be calculated and credited as provided in the Plan as previously in effect.) (c) Stock Account. Any Fees allocated to the Stock Account pursuant to this Section 3 shall be deemed to be invested in a number of notional Common Shares of the Corporation (the "Units") equal to the quotient of (i) the dollar amount of such Fees divided by (ii) the Market Value Per Share (as defined below) on the date the Fees then being allocated to the Stock Account would otherwise have been paid to the Director. In the case of a transfer of any amount from the Interest Account to the Stock Account, the amount being transferred shall be deemed to be invested in a number of Units equal to the quotient of (i) the dollar amount of such transfer divided by (ii) the Market Value Per Share on the effective date of such transfer. Fractional Units shall be credited, but shall be rounded to the nearest hundredth percentile, with amounts equal to or greater than .005 rounded up and amounts less than .005 rounded down. The Market Value Per Share on any date shall mean the average of the high and low prices per share for a Common Share of the Corporation as reported on the Consolidated Tape of the New York Stock Exchange on such date. If such date is not a business day or if no sale occurs on such date, Market Value Per Share shall be determined, in the manner described above, as of the first preceding business day on which a sale occurs. Whenever a dividend other than a dividend payable in the form of the Corporation's Common Shares is declared with respect to the Corporation's Common Shares, the number of Units in the Director's Stock Account shall be increased by the number of Units determined by dividing (i) the product of (A) the number of Units in the Director's Stock Account on the related dividend record date and (B) the amount of any cash dividend declared by the Corporation on a Common Share (or, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Market Value Per Share on the related dividend payment date. In the case of any dividend declared on the Corporation's Common Shares which is payable in Common Shares, the Director's Stock Account shall be increased by the number of Units equal to the product of (i) the number of Units credited to the Director's Stock Account on the related dividend record date and (ii) the number of shares of Common Shares (including any fraction thereof) distributable as a dividend on a Common Share. In the event of any change in the number or kind of outstanding Common Shares by reason of any recapitalization, reorganization, merger, consolidation, stock split or any similar change affecting the Common Shares, other than a stock dividend as provided above, the Board of Directors shall make an appropriate adjustment in the number of Units credited to the Director's Stock Account. (d) Investment Elections for Deferred Fees. At the time a Director elects to defer Fees pursuant to Section 2(a), the Director shall designate in writing the portion of such Director's Fees, stated as a whole percentage, to be credited to the Interest Account and the portion to be credited to the Stock Account. Any Fees to be credited to either Account shall be rounded to the nearest whole cent, with amounts equal to or greater than $.005 rounded up and amounts below $.005 rounded down. If a Director fails to notify the Secretary as to how to allocate the Fees between the two Accounts, 100% of such Fees shall be credited to the Interest Account. By written notice to the Secretary of the Corporation delivered not later than the last day of any calendar quarter, a Director may change the manner in which Fees payable with respect to services to be rendered after the end of such calendar quarter are allocated among the Accounts. (e) Transfers between Accounts. At any time, and from time to time, a Director may elect to make transfers between Accounts (with respect to all or a portion of his or her existing Account balances) by written notice to the Secretary of the Corporation. Any such transfer shall take effect as of the date such notice is received. 4. Distribution from Accounts - ------------------------------ (a) Form of Distribution Election. At the time a Director makes a deferral election pursuant to Section 2(a), the Director shall also file with the Secretary of the Corporation a written election (a "Distribution Election") with respect to (i) the timing and manner of distribution of the aggregate amount, if any, credited to the Interest Account and the value of any Units to be credited to the Stock Account and (ii) the form of the distribution from the Stock Account. A Distribution Election shall specify that a distribution from the Director's Accounts shall: (A) commence on the first business day of any calendar year following the calendar year in which such Fees are deferred, but not later than the calendar year of the electing Director's 75th birthday; (B) be in one lump sum payment or in such number of annual installments (not to exceed ten) as the Director may designate; and (C) with respect to the portion of the distribution to be made from the Stock Account, be payable in cash or in Common Shares of the Corporation. (b) Amendment of Distribution Election. A Director may at any time, and from time to time, change the Distribution Election applicable to his or her Accounts. Notwithstanding the foregoing, no election to change the method and/or timing of any distribution with respect to the Director's Accounts shall be effective unless (i) it is made in writing and received by the Secretary of the Corporation prior to the time at which the Director ceases to be a Director of the Corporation and (ii) at least one full calendar year elapses between (A) the date as of which such election is so filed and (B) (I) the date as of which a distribution would otherwise have commenced and (II) the date as which such distribution will commence under such election. Such timing restrictions shall not apply to a Director's election to change the form of payment with respect to the portion of the distribution from his or her Stock Account. (c) Payment of Plan Distributions. Any distribution hereunder, whether in the form of a lump sum payment or installments, shall commence in accordance with the Distribution Election made by the Director in accordance with Section 4(a) or 4(b). If a Director fails to specify a commencement date for a distribution in accordance with Section 4(a) or 4(b), such distribution shall commence on the first business day of the calendar year immediately following the year in which the Director ceases to be a Director of the Corporation. If a Director fails to specify in accordance with Section 4(a) or 4(b) that a distribution shall be made in a lump sum payment or a number of installments, such distribution shall be made in a lump sum payment. If a Director fails to specify, in accordance with Section 4(a) or 4(b), the form of payment for the portion of the distribution from the Stock Account, such portion shall be payable in cash. In the case of any distribution being made in annual installments, each installment after the first installment shall be paid on the first business day of each calendar year following the year in which such first installment is paid until the entire amount subject to such installment Distribution Election shall have been paid. (d) Valuation of Units on Transfer or Distribution. Any transfer or cash distribution from the Director's Stock Account, whether to the Interest Account or to the Director or his or her beneficiary and whether part of a lump sum distribution or an installment payment, shall be determined by multiplying the number of Units then subject to distribution by the Market Value Per Share on the date prior to the date as of which distribution is to be made. In the event of a distribution from the Director's Stock Account to be paid in Common Shares, the number of Common Shares payable shall be equal to the number of whole Units subject to such distribution. Any fractional Units will be settled in cash based on the Market Value Per Share on the date prior to the date as of which distribution is to be made. (e) Interest Account Installment Payments. Where a Director receives the balance of his or her Accounts in annual installments, the amount of each installment from the Interest Account shall be equal to the product of (i) the balance credited to such Interest Account on the date of such payment and (ii) a fraction, the numerator of which is one (1) and the denominator of which is the total number of installments remaining to be paid at that time. (f) Stock Account Installment Payments. Where a Director receives the balance of his or her Accounts in annual installments, the number of Units subject to such distribution shall be equal to the product of (i) the number of Units in the Stock Account on the date of such distribution and (ii) a fraction, the numerator of which is one (1) and the denominator of which is the total number of installments remaining to be paid at that time. 5. Distribution on Death - ------------------------- If a Director shall die before payment of all amounts credited to the Director's Accounts has been completed, the total unpaid balance then credited to such Director's Accounts shall be paid to the Director's designated beneficiaries or estate in a single lump sum payment in cash within 30 days after the Secretary of the Corporation receives notice of the Director's death. 6. Designation of a Beneficiary - -------------------------------- A Director may designate a beneficiary or beneficiaries (which may be an entity other than a natural person) to receive any payments to be made upon the Director's death pursuant to Section 5. At any time, and from time to time, any such designation may be changed or canceled by the Director without the consent of any beneficiary. Any such designation, change or cancellation must be made by written notice filed with the Secretary of the Corporation. If a Director designates more than one beneficiary, any payments to such beneficiaries made pursuant to Section 5 shall be made in equal shares unless the Director has designated otherwise, in which case the payments shall be made in the shares designated by the Director. If no beneficiary has been named by a Director, payment shall be made to the Director's estate. 7. Amendment and Termination - ----------------------------- The Board of Directors may at any time amend or terminate the Plan; provided no such amendment or termination shall impair the rights of a Director with respect to amounts then credited to his Accounts under the Plan. 8. Miscellaneous - ----------------- (a) Unfunded Plan. The Corporation shall not be obligated to fund its liabilities under the Plan, the separate memorandum Accounts established for each Director electing deferment shall not constitute trusts, and a Director shall have no claim against the Corporation or its assets other than as an unsecured general creditor. (b) No Rights as Shareholder. A Director shall have no rights as a shareholder of the Corporation with respect to any Units credited to the Stock Account pursuant to the Plan unless and until Common Shares are delivered pursuant to Section 4 above. (c) Nonalienation. The right of a Director to receive a distribution of the value of such Director's Accounts payable pursuant to the Plan shall not be subject to assignment or alienation. EX-10.10 4 1997 DIRECTORS STOCK UNIT PLAN Exhibit 10.10 Phelps Dodge Corporation 1997 Directors Stock Unit Plan ------------------------------ Section 1. Purpose - ------------------- The Plan is intended to attract, retain and motivate the best qualified directors for the benefit of the Corporation and its shareholders and to provide such directors an economic interest in Common Shares (the "Common Shares") thereby enhancing a long-term mutuality of interest between such directors and shareholders. Section 2. Definitions - ----------------------- When used in this Plan, the following terms shall have the definitions set forth in this Section: "Board" shall mean the Board of Directors of the Corporation. "Change in Control" shall mean (i) the occurrence of any merger, consolidation, sale of assets, liquidation or reorganization (other than a merger, consolidation or combination in which the Corporation is the continuing corporation and which does not result in its outstanding stock being converted into or exchanged for different securities, cash or other property, or any combination thereof) which has been approved by Corporation's stockholders holding at least 50% of the voting stock, or (ii) the first purchase of Common Shares pursuant to a tender or exchange offer (other than an offer by the Corporation any of its subsidiaries, any employee benefit plan maintained by the Corporation, or any of its subsidiaries). "Committee" shall mean the Committee on Directors of the Board. "Common Shares" shall mean the Common Shares of the Corporation. "Corporation" shall mean Phelps Dodge Corporation. "Director" shall mean any member of the Board regardless of whether an Eligible Director. "Disability" shall mean the inability of an Eligible Director to perform his or her duties for a period of at least 180 days due to mental or physical infirmity, as determined by the Corporation's policies. "Eligible Director" shall mean a Director who is not an employee of the Corporation or any Subsidiary. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the average of high and low prices of a Common Share on the New York Stock Exchange on the date of determination or, if no sale of Common Shares is recorded on such date, then on the next preceding day on which there was such a sale. "Grant" shall mean a grant of Units under Section 4. "Subsidiary" shall mean any entity of which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such entity. "Termination" shall mean any termination (whether voluntary or involuntary) of an Eligible Director's service as a Director. "Unit" shall mean a contractual obligation of the Corporation to deliver a Common Share or pay cash based on the Fair Market Value of a Common Share to an Eligible Director or the beneficiary or estate of such Eligible Director as provided herein. Section 3. Units - ----------------- (a) Unit Awards. On each January 1 during the term of the Plan, each Eligible Director serving as a Director on such date who has been a Director continuously since the prior November 15 shall be awarded 300 Units. (b) Delivery of Common Shares. Subject to the satisfaction of the vesting requirements set forth in Section 4 and except as provided in (c) and (d) below, all Common Shares that are subject to Units credited to an Eligible Director shall be delivered to such Eligible Director and transferred on the books of the Company as of the effective date of such Director's Termination. (c) Payment Upon Death. In the event of the death of an Eligible Director prior to full satisfaction of the Eligible Director's rights with respect to his or her Units, the Corporation shall pay to the beneficiary designated by the Eligible Director on a form provided by the Corporation, or, in the absence of such designation, to the Eligible Director's estate, cash in an aggregate amount equal to the product of (i) the number of Units standing to such Eligible Director's credit at the time of Termination multiplied by (ii) the Fair Market Value of the date of Termination. (d) Change in Control. Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Corporation shall pay an Eligible Director (or, in the event of the death of an Eligible Director following a Change in Control, the beneficiary or estate determined pursuant to (c) above), not later than 30 days after the Change in Control occurs, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of the Change in Control multiplied by (ii) the Fair Market Value on the date of the Change in Control. (e) Satisfaction of Corporation's Obligation. Upon the delivery of a Common Share (or the payment of cash with respect to a whole or fractional Common Share) pursuant to the Plan, the corresponding Unit (or fraction thereof) shall be canceled and be of no further force or effect. (f) Dividend Equivalents. Whenever a dividend other than a dividend payable in the form of the Corporation's Common Shares is declared with respect to the Corporation's Common Shares, the number of Units credited to an Eligible Director shall be increased by the number of Units determined by dividing (i) the product of (A) the number of Units standing to such Eligible Director's credit on the related dividend record date and (B) the amount of any cash dividend declared by the Corporation on a Common Share (or, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payment date. In the case of any dividend declared on the Corporation's Common Shares which is payable in Common Shares, each Eligible Director shall be credited with an additional number of Units equal to the product of (i) the number of Units standing to such Eligible Director's credit on the related dividend record date and (ii) the number of Common Shares (including any fraction thereof) distributable as a dividend on a Common Share. Section 4. Vesting - ------------------- (a) Vesting Schedule. One half of the Units awarded each year pursuant to Section 3 (150 Units) will be vested as of the date of Grant. The remainder of the Units awarded each year (150 Units) will vest on the day after the Annual Meeting of Shareholders for such year provided that, the Eligible Director is serving as a Director on such date. Except as otherwise provided in (b) below, any unvested Units credited to an Eligible Director as of such Eligible Director's Termination shall be immediately canceled. (b) Vesting upon Change in Control, Death or Disability. In the event of a Change in Control, or an Eligible Director's Termination as a result of death or Disability, all Units credited to an Eligible Director pursuant to this Plan shall be immediately vested. Section 5. Adjustment for Corporate Transactions - ------------------------------------------------- In the event that any recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares at a price substantially below fair market value, or other similar event affects the Common Shares such that an adjustment is required to preserve, or to prevent enlargement of, the benefits or potential benefits made available under the Plan, then the Board shall adjust the number and kind of shares which thereafter may be awarded under the Plan and the number of Units to be granted annually to each Eligible Director under the Plan. Section 6. Administration - -------------------------- The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to determine the terms and provisions of the awards made pursuant to the Plan and to make all other determinations necessary or advisable for the administration of the Plan provided, however, that the Plan shall be administered such that the transactions contemplated hereunder will continue to qualify for the exemptive relief available under Rule 16b-3 of the Exchange Act. Section 7. Amendment and Termination - ------------------------------------- The Board may suspend, revise, amend or discontinue the Plan at any time; provided that, no such action may materially and adversely affect any rights of an Eligible Director under any Grant made pursuant to the Plan without such Director's consent. Unless the Board otherwise specifies at the time of such termination, a termination of the Plan will not result in a distribution with respect to the Units then credited to an Eligible Director under the Plan. Section 8. Effective Date of the Plan - -------------------------------------- The Plan shall be effective as of January 1, 1997, and shall terminate as of December 31, 2006, unless extended by the Board or terminated at an earlier date pursuant to Section 7 of the Plan. Section 9. Governing Law - ------------------------- The Plan shall be construed in all respects under the laws of the State of New York. Section 10. General Provisions - ------------------------------ (a) Nontransferable Grants. Grants made under the Plan may not be assigned or transferred, in whole or in part, either directly or by operation of law (except in the event of an Eligible Director's death by will or applicable laws of descent and distribution), including, but not by way of limitation, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Eligible Director in the Plan shall be subject to any obligation or liability of such Eligible Director. (b) No Right to Serve as a Director. The Plan shall not impose any obligations on the Corporation to retain any Eligible Director as a Director nor shall it impose any obligation on the part of any Eligible Director to remain as a Director of the Corporation. (c) No Right to Particular Assets. Nothing contained in the Plan and no action taken pursuant to the Plan shall create or be construed to create a trust of any kind or any fiduciary relationship between the Corporation and any Eligible Director, the executor, administrator or other personal representative or designated beneficiary of such Eligible Director, or any other persons. Any reserves that may be established by the Corporation in connection with Units granted under the Plan shall continue to be treated as the assets of the Corporation for Federal income tax purposes and remain subject to the claims of the Corporation's creditors. To the extent that any Eligible Director or the executor, administrator, or other personal representative of such Eligible Director, acquires a right to receive any payment from the Corporation pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Corporation. (d) No Rights as Shareholder. An Eligible Director shall have no rights as a shareholder of the Corporation with respect to any Units granted pursuant to the Plan unless and until Common Shares are delivered pursuant to Section 3 above. (e) Limitations on Liability. Neither the establishment of the Plan nor any modifications thereof nor the creation of any account under the Plan nor the payment of any benefits shall be construed as giving to any participant or other person any legal or equitable right against the Corporation (or any person connected therewith) except as provided by law or any Plan provision. In no event shall the Corporation or any person connected therewith be liable to any person for the failure of any participant or other person to be entitled to any particular tax consequences with respect to the Plan or any contribution thereto or any distributions therefrom. (f) Non-Exclusivity. The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable. (g) No Limit on Corporate Action. The existence of the Plan and the Units granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Corporation to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Corporation or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding. (h) Listing of Common Shares and Related Matters. If at any time the Board shall determine in its discretion that the listing, registration or qualification of the Common Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the delivery of Common Shares under the Plan, no Common Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board. (i) Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provision had not been included. (j) Incapacity. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge any liability or obligation of the Board, the Corporation and all other parties with respect thereto. (k) Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. EX-12 5 COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION PHELPS DODGE CORPORATION AND SUBSIDIARIES Exhibit 12 COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION (Dollars in thousands) December 31, ------------------------------------- 1996 1995 1994 ---- ---- ---- Short-term debt $ 66,500 66,600 49,300 Current portion of long-term debt 38,200 16,800 25,300 Long-term debt 554,600 613,100 622,300 --------- --------- --------- Total debt 659,300 696,500 696,900 Minority interest in subsidiaries 85,500 73,300 65,300 Common shareholders' equity 2,755,900 2,677,700 2,187,600 --------- --------- --------- Total capitalization $ 3,500,700 3,447,500 2,949,800 ========= ========= ========= Ratio of total debt to total capitalization 18.8% 20.2% 23.6% ========= ========= ========= EX-21 6 LIST OF SUBSIDIARIES AND INVESTMENTS PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES Exhibit 21 LIST OF SUBSIDIARIES AND INVESTMENTS - -------------------------------------------------------------------------------- Registrant: Phelps Dodge Corporation (New York). The Registrant has no parent. Registrant's percent of voting power ------------ CONSOLIDATED SUBSIDIARIES: Accuride Canada Inc. (Ontario) 100.0 Accuride Corporation (Delaware) 100.0 Aislamientos Plasticos, C.A. (Venezuela) 80.1 Alambres y Cables de Panama, S.A. (Panama) 78.1 Alambres y Cables Venezolanos, C.A. (Venezuela) 80.1 Burro Chief Copper Company (Delaware) 100.0 Cables Electricos Ecuatorianos, C.A. (Ecuador) 67.1 Cahosa, S.A. (Panama) 78.1 Cobre Cerrillos Sociedad Anonima (Chile) 90.0 Cocesa Ingenieria y Construccion, S.A. (Chile) 63.0 Columbian Carbon Deutschland GmbH (Germany) 100.0 Columbian Carbon Europa S.r.l. (Italy) 100.0 Columbian Carbon International (France) S.A. (France) 100.0 Columbian Carbon Philippines, Inc. (Philippines) 88.2 Columbian Carbon Spain, S.A. (Spain) 100.0 Columbian Chemicals Canada Ltd. (Ontario) 100.0 Columbian Chemicals Company (Delaware) 100.0 Columbian Chemicals Europa GmbH (Germany) 100.0 Columbian International Chemicals Corporation (Delaware) 100.0 Columbian International Trading Company (Delaware) 100.0 Columbian Technology Company (Delaware) 100.0 Columbian Tiszai Carbon Ltd. (Hungary) 60.0 Columbian (U.K.) Limited (United Kingdom) 100.0 Compania Contractual Minera Candelaria (Chile) 80.0 Compania Contractual Minera Ojos del Salado (Chile) 100.0 Conductores y Aluminio C.A. (Venezuela) 80.1 CONDUCEN, S.A. (Costa Rica) 75.4 Conductores Electricos de Centro America, Sociedad Anonima (El Salvador) 57.6 Dodge & James Insurance Company, Ltd. (Bermuda) 100.0 Electroconductores de Honduras, S.A. de C.V. (Honduras) 60.5 Elektrodraht Mureck, Phelps Dodge Eldra GmbH (Austria) 51.0 Hudson Wire Company dba Hudson International Conductors (New York) 100.0 Industria de Conductores Electricos, C.A. (Venezuela) 80.1 Metals Fabricators of Zambia Limited (Zambia) 51.0 Nesor Alloy Corporation (New Jersey) 100.0 PD Candelaria, Inc. (Delaware) 100.0 PD Ojos del Salado, Inc. (Delaware) 100.0 Phelps Dodge Chino, Inc. (Delaware) 100.0 Phelps Dodge Industries GmbH (Austria) 98.0 Phelps Dodge Industries, Inc. (Delaware) 100.0 Phelps Dodge International Corporation (Delaware) 100.0 Phelps Dodge Mining (Pty) Limited (South Africa) 100.0 Phelps Dodge Mining Services, Inc. (Delaware) 100.0 Phelps Dodge Morenci, Inc. (Delaware) 100.0 Phelps Dodge Overseas Capital Corporation (Delaware) 100.0 Phelps Dodge Refining Corporation (New York) 100.0 Phelps Dodge Thailand Limited (Thailand) 55.5 Phelps Dodge Wire and Cable Holdings de Mexico, S.A. de C.V. (Mexico) 100.0 Phelps Dodge Yantai China Holdings, Inc. (China) 66.7 Sevalco Limited (United Kingdom) 100.0 Seven-Up Pete Joint Venture (an Arizona partnership) 72.3 INVESTMENTS CARRIED ON AN EQUITY BASIS: AOT Inc. (Delaware) 50.0 Black Mountain Mineral Development Company (Proprietary) Limited (South Africa) (Parent - the Gold Fields of South Africa group controls 55.4% of the voting stock) 44.6 Columbian Carbon Japan Ltd. (Japan) 50.0 Keystone Electric Wire and Cable Company Limited (Hong Kong) 20.0 PDTL Trading Company Limited (Thailand) 40.0 Phelps Dodge Philippines, Inc. (Philippines) 40.0 SPD Magnet Wire Company (Delaware) 50.0 Summarized financial information is provided for these and other companies (see Note 3 to the Consolidated Financial Statements of the Corporation contained in this Form 10-K) pursuant to Article 3 - General Instructions as to Financial Statements. Omitted from this listing are subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-44380) and in the Registration Statements on Form S-8 (Nos. 33-26442, 33-6141, 33-26443, 33-29144, 33-19012, 2-67317, 33-34363, 33-34362 and 33-62648) of Phelps Dodge Corporation of our report dated January 15, 1997 appearing in this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Form 10-K. PRICE WATERHOUSE LLP Phoenix, Arizona March 14, 1997 EX-24 8 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of January, 1997. Robert N. Burt ------------------------------ Robert N. Burt POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 8th day of January, 1997. Paul W. Douglas ------------------------------ Paul W. Douglas POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 8th day of January, 1997. William A. Franke --------------------------- William A. Franke POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of January, 1997. Paul Hazen ----------------------------- Paul Hazen POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of January, 1997. Marie L. Knowles ------------------------------ Marie L. Knowles POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 9th day of January, 1997. Robert D. Krebs ------------------------------ Robert D. Krebs POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of January, 1997. Southwood J. Morcott ------------------------------ Southwood J. Morcott POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of January, 1997. Gordon R. Parker ------------------------------ Gordon R. Parker POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 11th day of January, 1997. J. Steven Whisler ------------------------------ J. Steven Whisler POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas C. Yearley, Thomas M. St. Clair and Robert C. Swan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities: Annual Report For the Year Ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1996 of Phelps Dodge Corporation on Form 10-K ("1996 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1996 Form 10-K; (2) to file such 1996 Form 10-K (and any and all such amendments) with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and (3) to take such other action as may be deemed necessary or appropriate in connection with such 1996 Form 10-K; as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents of any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 10th day of January, 1997. Douglas C. Yearley ------------------------------ Douglas C. Yearley EX-27 9 ART. 5 FDS FOR 1996 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 470,100 0 503,300 14,200 293,000 1,421,500 5,205,900 2,185,400 4,816,400 685,900 554,600 0 0 404,400 2,351,500 4,816,400 3,786,600 3,786,600 2,604,400 2,604,400 343,400 0 66,100 687,500 220,000 461,800 0 0 0 461,800 6.97 6.97
-----END PRIVACY-ENHANCED MESSAGE-----