-----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, VTHQzCyzlIYWq+3UsKGIfnXXa/iMhAlrXICgWfjUBF1NJ7tp4jRfuFNHisHZwn3D o14juTImFw/aPPQPl0IuFw== 0000950147-98-000194.txt : 19980318 0000950147-98-000194.hdr.sgml : 19980318 ACCESSION NUMBER: 0000950147-98-000194 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980317 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: SEC FILE NUMBER: 001-00082 FILM NUMBER: 98567263 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, 1997 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, 1998, was approximately $3,820,233,000. Number of Common Shares outstanding at March 6, 1998: 58,660,000 shares. Documents Incorporated by Reference: Document Location in 10-K -------- ---------------- Proxy Statement for 1998 Annual Meeting Part III ================================================================================ PHELPS DODGE CORPORATION Annual Report on Form 10-K For the Year Ended December 31, 1997 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 1997 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 1997, the Corporation produced 812,100 tons of copper for its own account from its worldwide mining operations and an additional 172,000 tons of copper for the accounts of minority interest owners. Gold, silver, molybdenum, copper chemicals and sulfuric acid are also produced as byproducts of the Corporation's copper operations. Production of copper for the Corporation's own account from its U.S. operations constituted approximately 30 percent of the copper mined in the United States in 1997. 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 global energy, telecommunications, transportation and specialty chemicals sectors 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. 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. Effective January 1, 1998, Phelps Dodge sold Accuride Corporation and its subsidiaries (Accuride), its division that manufactures steel and aluminum wheels and rims for medium and heavy trucks, trailers and buses, to an affiliate of Kohlberg Kravis Roberts and Co. (KKR) and the existing management of Accuride. Under terms of the sale agreement, Phelps Dodge will retain a 10 percent interest in Accuride (see Note 2 to the Consolidated Financial Statements for a further discussion of this sale). 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 21 to the Consolidated Financial Statements of this report, 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) Through 1997, the Phelps Dodge Industries segment included the Corporation's specialty chemicals operations, its wire and cable operations, and its recently sold wheel and rim operations. Information about sales and earnings of international operations of the Corporation is also included in Note 21 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 people employed by the Corporation on December 31, 1997, was 15,869 including 1,480 at Accuride Corporation. 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. The Corporation produces electrowon copper cathode at open-pit mine-for-leach and solution extraction/electrowinning (SX/EW) operations in Tyrone, New Mexico. In addition, the Corporation produces electrowon copper cathode at SX/EW operations in Morenci, Arizona and Santa Rita, New Mexico. The Morenci complex in southeastern Arizona comprises an open-pit mine, two concentrators, three solution extraction facilities and two electrowinning tankhouses. 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 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. 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. The project presently consists of an open-pit copper 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. That expansion was completed in the 1997 fourth quarter at a total cost of $305 million, and is expected to bring Candelaria's average annual production to approximately 380 million pounds. This results in an average annual increase in production for the Corporation of 130 million pounds. The expansion included increased mining activity, the installation of a second semi-autogenous (SAG) mill line, new and expanded concentrating facilities, and the addition of more than 200 employees. As a result of the expansion, the estimated mine life of Candelaria is expected to 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 1997, the Corporation produced a total of 418,000 tons of cathode copper at its SX/EW facilities, compared with 408,000 tons in 1996 and 364,200 tons in 1995. 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 270,000 tons at the Morenci complex, 75,000 tons at the Santa Rita plant and 75,000 tons at the Burro Chief plant near Tyrone. On February 3, 1998, the Corporation announced the acquisition of Cobre Mining Company Inc. (Cobre) for approximately $115 million including acquisition costs. The Corporation assumed Cobre's outstanding debt of approximately $14 million. The acquisition was at a price of $3.85 per common share for substantially all of Cobre's 27 million common shares, including shares issuable upon the exercise of outstanding warrants and options. The primary assets of Cobre include the Continental Mine, which comprises an open-pit copper mine, two underground copper mines, two mills, and the surrounding 11,000 acres of land located in southwestern New Mexico adjacent to the Corporation's Chino operations. Cobre's reported mill ore reserves at year-end 1996 were 48 million tons averaging more than 1 percent copper. 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 1997, the refinery operated at capacity producing just over 455,000 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 byproducts 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 750,000 tons of refined copper into rod and other refined copper products. During 1997, combined production of rod and other refined copper products from the two plants was 747,000 tons. The following tables give the Corporation's worldwide copper production by source for the years 1993 through 1997; 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) an increase in capacity in 1995 of the SX/EW facilities at Morenci; (2) the startup of the Southside project in 1995 at Morenci; (3) expansion of Chino's SX/EW plant at Santa Rita in 1993 and 1997; (4) severe flooding problems at Ojos del Salado's Santos mine in 1993 that resulted in reduced production of copper concentrate; (5) the sale of the Corporation's interest in the Santa Gertrudis gold mine in the 1994 second quarter; (6) commencement of operations at Candelaria in the 1994 fourth quarter and achievement of full production in 1995; and (7) expansion of Candelaria concentrator operations in 1997. - -------------------------------------------------------------------------------- PHELPS DODGE COPPER PRODUCTION DATA, BY SOURCE - ---------------------------------------------- (thousand tons)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- MATERIAL MINED (a) Morenci 291,698 297,688 261,264 240,700 219,032 Tyrone 107,896 102,936 83,935 62,067 49,387 Chino 121,639 122,939 115,821 105,057 108,568 Candelaria 90,045 83,962 72,068 17,842 -- Ojos del Salado 1,713 1,628 1,855 1,712 1,438 ------- ------- ------- ------- ------- Total material mined 612,991 609,153 534,943 427,378 378,425 Less minority participants' shares 102,305 102,421 92,211 74,692 69,044 ------- ------- ------- ------- ------- Net Phelps Dodge share 510,686 506,732 442,732 352,686 309,381 ======= ======= ======= ======= ======= MILL ORE MINED Morenci 50,951 47,136 44,284 45,240 46,990 Chino 18,413 20,061 17,026 17,811 17,436 Candelaria 13,055 11,603 11,439 2,685 -- Ojos del Salado 1,551 1,506 1,596 1,536 1,314 ------- ------- ------- ------- ------- Total mill ore mined 83,970 80,306 74,345 67,272 65,740 Less minority participants' shares 16,392 16,078 14,606 13,260 12,861 ------- ------- ------- ------- ------- Net Phelps Dodge share 67,578 64,228 59,739 54,012 52,879 ======= ======= ======= ======= ======= GRADE OF ORE MINED - PERCENT COPPER Morenci 0.72 0.70 0.64 0.65 0.67 Chino 0.69 0.67 0.76 0.69 0.73 Candelaria 1.45 1.40 1.88 1.27 -- Ojos del Salado 1.54 1.57 1.40 1.38 1.43 RECOVERABLE COPPER (b) Morenci: Concentrate 269.9 247.1 211.6 217.3 233.3 Electrowon 272.3 262.5 225.7 190.1 170.8 Tyrone: Precipitate 2.6 3.7 4.3 4.2 6.0 Electrowon 76.6 76.0 70.4 68.9 73.5 Chino: Concentrate and precipitate 99.9 99.0 100.6 92.7 95.6 Electrowon 69.1 69.5 68.1 66.8 63.9 Candelaria: Concentrate 171.7 150.8 165.7 31.0 -- Ojos del Salado: Concentrate 21.1 21.3 19.6 18.6 16.7 Bisbee precipitate and miscellaneous 0.9 3.4 1.6 3.6 1.6 ------- ------- ------- ------- ------- Total recoverable copper 984.1 933.3 867.6 693.2 661.4 Less minority participants' shares 172.0 162.9 154.9 120.4 113.7 ------- ------- ------- ------- ------- Net Phelps Dodge share 812.1 770.4 712.7 572.8 547.7 ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- PHELPS DODGE METAL PRODUCTION AND DELIVERIES (b) - ------------------------------------------------
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- COPPER (THOUSAND TONS) Total production 984.1 933.3 867.6 693.2 661.4 Less minority participants' shares 172.0 162.9 154.9 120.4 113.7 ------- ------- ------- ------- ------- Net Phelps Dodge share 812.1 770.4 712.7 572.8 547.7 ======= ======= ======= ======= ======= Deliveries (c) 812.8 771.6 696.6 560.6 543.9 ======= ======= ======= ======= ======= GOLD (THOUSAND OUNCES) (d) Total production 139 129 151 93 85 Less minority participants' shares 30 26 31 28 29 ------- ------- ------- ------- ------- Net Phelps Dodge share 109 103 120 65 56 ======= ======= ======= ======= ======= Deliveries (c) 113 125 125 47 54 ======= ======= ======= ======= ======= SILVER (THOUSAND OUNCES) (d) Total production 3,254 2,636 2,739 1,627 1,387 Less minority participants' shares 677 564 545 360 273 ------- ------- ------- ------- ------- Net Phelps Dodge share 2,577 2,072 2,194 1,267 1,114 ======= ======= ======= ======= ======= Deliveries (c) 2,637 2,359 1,985 1,039 1,085 ======= ======= ======= ======= ======= MOLYBDENUM (THOUSAND POUNDS) Total production 2,121 2,427 2,024 969 1,200 Less minority participants' shares 472 501 507 226 394 ------- ------- ------- ------- ------- Net Phelps Dodge share 1,649 1,926 1,517 743 806 ======= ======= ======= ======= ======= Deliveries 1,272 2,141 1,328 698 905 ======= ======= ======= ======= ======= SULFURIC ACID (THOUSAND TONS) (e) Total production 1,263.4 1,235.3 1,252.6 1,276.7 1,379.4 Less minority participant's share 210.5 191.8 181.3 191.5 193.9 ------- ------- ------- ------- ------- Net Phelps Dodge share 1,052.9 1,043.5 1,071.3 1,085.2 1,185.5 ======= ======= ======= ======= ======= Deliveries 383.5 464.0 554.3 685.2 718.4 ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- COMEX COPPER PRICE (f) $1.04 1.06 1.35 1.07 0.85 - -------------------------------------------------------------------------------- PHELPS DODGE SMELTERS, REFINERY AND ROD PRODUCTION - -------------------------------------------------- Smelters (g) Total copper (thousand tons) 419.1 428.8 422.5 411.7 376.7 Less minority participant's share 64.5 62.9 58.6 60.0 51.0 ------- ------- ------- ------- ------- Net Phelps Dodge share 354.6 365.9 363.9 351.7 325.7 ======= ======= ======= ======= ======= Refinery (h) Copper (thousand tons) 455.3 450.1 453.0 453.8 432.4 Gold (thousand ounces) 107.9 114.4 145.4 118.0 85.8 Silver (thousand ounces) 2,843.0 3,142.5 3,441.5 2,672.3 3,144.7 Rod (i) (thousand tons) 747.0 711.4 654.2 683.5 621.6 - --------------------------------------------------------------------------------
Footnotes to preceding production 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 a toll basis. (h) Includes production from purchased material and copper refined for others on a toll basis. (i) Includes rod, wire and other shapes. - -------------------------------------------------------------------------------- Other Mining Operations and Investments --------------------------------------- Phelps Dodge Mining (Pty.) Limited, a wholly owned subsidiary of Phelps Dodge Corporation, operates the Witkop open-pit fluorspar mine and a 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. Phelps Dodge Mining (Pty.) Limited produced a total of 97,800 metric tons of acid-grade fluorspar in 1997. Also, during 1997, the plant achieved a record safety performance level by completing 26 consecutive months without a recordable safety incident. Black Mountain Mineral Development Company (Pty.) Limited operates an underground lead-silver-zinc-copper mine and a 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 $3.4 million, $6.0 million and $5.7 million in dividend payments from Black Mountain in 1997, 1996 and 1995, respectively. Phelps Dodge owns a 13.9 percent interest in Southern Peru Copper Corporation (SPCC), which operates two open-pit copper mines, two concentrators, an SX/EW facility, a smelter and a refinery in Peru. SPCC's other principal 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 1997, Phelps Dodge received dividend payments of $14.1 million from SPCC, compared with $16.4 million in 1996 and $13.6 million in 1995. On May 6, 1997, Phelps Dodge acquired an indirect 40 percent voting interest, representing an indirect 26.67 percent economic interest, in a leading Peruvian zinc mining company, Compania San Ignacio de Morococha S.A. (SIMSA) and its San Vicente mine. SIMSA's other shareholder with voting shares is the Jesus Arias family. The underground mine produces approximately 130 million pounds of zinc annually. Phelps Dodge accounts for its investment in SIMSA on the equity basis. 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 in 26 countries with an emphasis in Australia, Brazil, Canada, Chile, CIS, Eritrea, eastern Europe, India, Indonesia, Madagascar, Mexico, Peru, the Philippines, the United States and Zambia. During 1997, a new office was established in Austria. The 1997 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 $74.1 million on worldwide exploration during 1997, compared with $70.7 million in 1996 and $60.3 million in 1995. Approximately 33 percent of the 1997 expenditures occurred in the United States with 23 percent being spent at our mine sites. This compared with 47 percent in 1996 (33 percent at mine sites) and 32 percent in 1995 (20 percent at mining sites). The balance of exploration expenditures was spent principally in Australasia, Brazil, Canada, Chile, Mexico, Peru and Madagascar. During 1997, 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 Coronado deposit where an estimated 180 million tons of sulfide material with an average grade of 0.69 percent copper and 310 million tons of leach material with an average grade of 0.29 percent copper have been delineated and added to reserves. Additionally, approximately 140 million tons of leach material with an average grade of 0.25 percent copper have been identified as a potential resource in the American Mountain area of the Morenci mining complex. Other developments in Arizona included the completion of a resource and feasibility study that evaluated the re-opening of the Ajo property. On May 7, 1997, the Corporation announced plans to resume production at its Ajo copper mine in southern Arizona where mining operations have been suspended since 1984. A $238 million modernization of the facility is anticipated to begin pending completion of environmental permitting and market conditions. When operating at full capacity, Ajo is expected to add 135 million pounds of copper to the Corporation's annual production. Studies incorporating the use of current technologies for a new concentrator facility have indicated that Ajo would reopen with a reserve of 150 million tons of 0.56 percent copper. In New Mexico during 1997, additional mine-for-leach ore reserves were delineated in the Tyrone area where exploration activities identified an estimated 78 million tons of sulfide and oxide leach material with an average grade of 0.34 percent copper. A feasibility study and environmental permitting is in progress 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. Internationally, Phelps Dodge Exploration Corporation announced the discovery of a potentially significant nickel/cobalt deposit in central Madagascar. Detailed drilling in the district, which is located approximately 80 kilometers east of the capital city of Antananarivo, combined with historic exploration in the area, indicates an overall resource of approximately 168 million metric tons of ore at a grade of 1.11 percent nickel and 0.10 percent cobalt. A detailed feasibility study and environmental assessment of the project are under way. The Kafue Consortium, of which Phelps Dodge is a part, submitted a bid in 1997 to acquire the Nkana and Nchanga division of Zambia Consolidated Copper Mines Limited under the Zambian privatization program. The submitted proposal, if accepted, would result in a new company with the following ownership composition: Phelps Dodge - 26 percent, AVMIN Limited - 26 percent, Noranda Mining and Exploration Inc. - 26 percent, and Commonwealth Development Corporation - 10 percent. Zambia Consolidated Copper Mines Limited, the present owner, would retain a 12 percent interest in the new company. Phelps Dodge is completing a pre-feasibility study on its 70 percent owned Piedras Verdes property in Sonora, Mexico, and, during 1997, an additional 160 million tons of leach material at 0.33 percent copper was delineated. On September 25, 1997, the Corporation sold its 72.25 percent interest in the Seven-Up Pete Joint Venture's McDonald gold project near Lincoln, Montana, and other associated properties, to CR Montana Corporation and Canyon Resources Corporation, the parent of CR Montana. Ore Reserves - ------------ Ore reserves at each of Phelps Dodge's active copper operations and at Dos Pobres and Ajo have been estimated as follows: - --------------------------------------------------------------------------------
Estimated at December 31, 1997 ------------------------------ Milling Leaching Reserves Reserves Phelps ------------------ ------------------- Dodge Million % Million % Interest Tons Copper Tons Copper (%) ------- ------ ------- ------ -------- Morenci 543.3 0.68 1,628.1 0.26 85.0 Chino 368.9 0.62 520.8 0.30 66.7 Tyrone - - 455.0 0.34 100.0 Candelaria* 475.8 0.88 - - 80.0 Dos Pobres 330.0 0.65 285.0 0.39 100.0 Ajo 150.0 0.56 - - 100.0 Ojos del Salado* 19.7 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 1997. 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 Ajo 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. - --------------------------------------------------------------------------------
The Corporation's estimated share of aggregate ore reserves at the above named properties at December 31 is as follows: - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Milling reserves (billion tons) 1.6 1.3 1.2 1.0 0.9 Leaching reserves (billion tons) 2.5 2.2 1.8 1.7 1.2 Commercially recoverable copper (million tons) 13.7 12.1 12.3 10.6 10.1 - --------------------------------------------------------------------------------
Ore reserves at each of Phelps Dodge's other mining operations and investments at year-end 1997 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 8.9 2.3 0.52 5.7 2.9 - 44.60 Southern Peru Copper Corporation * 1,735.5 - 0.67 - - - 13.90 Phelps Dodge Mining Limited 18.9 - - - - 17.44 100.00 - ---------------- * Southern Peru Copper Corporation deposits also contain approximately 680 million tons of leach material at a grade of 0.21 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, 1997: - --------------------------------------------------------------------------------
Sulfide Material Leach Material Phelps ---------------- ----------------- Dodge Million % Million % Interest Location Tons Copper Tons Copper (%) -------- ------- ------ ------- ------ -------- American Mountain Arizona - - 140 0.25 85.00 Cochise Arizona - - 210 0.40 100.00 Copper Basin Arizona 70 0.53 - - 100.00 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 Piedras Verdes Mexico - - 310 0.37 70.00 Southern Peru Copper Corporation Peru 370 0.62 - - 13.90 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 1.61 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. The Chino Mines partnership leases insignificant amounts of real property under a variety of terms. This leased real property is not critical to Chino operations. 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 55 percent of Phelps Dodge Mining Company's sales in 1997. 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 20 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. 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 that 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 principal copper trader. While the market anticipated a copper supply increase in 1996, worldwide copper inventories remained at the 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 economic expansion in the United States fueled strong demand in all copper consuming sectors. In Europe, growth was flat compared to 1995, while Japan emerged from a recession. Strong fundamental growth continued in Southeast Asia in 1996, and China imported large quantities of copper to increase strategic inventories. In 1997, the COMEX copper price averaged $1.04 per pound of copper cathode, 2 cents less than the 1996 average price. The bullish market of 1996 continued into early 1997, driven by a buoyant North American economy, excellent growth in the copper rod and brass mill markets in the United States, and the beginning of an economic recovery in Europe. Copper inventories increased steadily during the third quarter of 1997, however, driving prices down. In late 1997, concern about excess future supply from expansions at existing copper operations and the start-up of new mining projects, combined with market volatility as a result of the collapse of several Southeast Asian economies, caused dramatic decreases in the price of copper. Consumption in the region dropped sharply and, at the same time, Asian copper users liquidated existing inventories. By the close of the year, copper prices had plummeted to a four-year low. Costs - ----- Unit production costs of copper in 1997 were slightly higher than in 1996, principally as a result of increased depreciation charges from recent capital projects, production disruptions at the Hidalgo smelter, increased mining expenses and the December failure of the ore conveyor system at Morenci. Unit production costs of copper generally continued to reflect high levels of production, ongoing cost containment programs and increased amounts of copper obtained through the SX/EW process. 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 - ------------------------------------------ The Corporation's operations in the United States are subject to stringent federal, state and local laws and regulations relating to improving or maintaining environmental quality. Global operations are also subject to varied environmental protection laws. The federal Clean Air Act, as amended (the Clean Air Act), and regulations thereunder to date have had a significant impact, particularly on the Corporation's smelters. Costs associated with environmental compliance have increased over time, and are generally expected to continue to rise in the future. However, improving environmental performance is a continuing objective of the Corporation. Good progress has been made to meet the challenge of increasingly complex environmental regulations, particularly those environmental regulations affecting the mining industry. 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. In 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 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 submit all required APP applications for its remaining 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 (Chino), 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 Chino to study the environmental impacts and potential health risks associated with portions of the Chino property affected by historical mining operations. Phelps Dodge acquired Chino at the end of 1986. Those studies began in 1995 and, until the studies are 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 began submitting the required reclamation plans in 1997. Reclamation is an ongoing activity and the Corporation recognizes estimated reclamation costs using a units of production basis calculation. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. 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. 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 full 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 $32 million in 1998 and from $15 million to $20 million in 1999; $24 million was spent on such programs in 1997. The Corporation also anticipates making significant capital and other expenditures beyond 1999 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 continue to be pursued legislatively in the future. The Secretary of the Interior also 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 the Corporation'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. The Corporation 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 materially 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 not subject to such stringent requirements. Labor Matters - ------------- Employees in Phelps Dodge Mining Company's Arizona operations, El Paso refinery and rod mill, 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, 1998, employees who were covered by the agreements continued to work without a contract. PHELPS DODGE INDUSTRIES - ----------------------- Phelps Dodge Industries is a business segment comprising a group of companies that manufacture engineered products principally for the global energy, telecommunications, transportation and specialty chemicals sectors. 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 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; and, until it was sold effective January 1, 1998, its wheel and rim operations through Accuride Corporation and its subsidiaries (Accuride) (see Note 2 to the Consolidated Financial Statements for a further discussion of this sale). 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 company also maintains sales offices in 10 countries and makes use of distributors worldwide. 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. Phelps Dodge Magnet Wire Company, headquartered in Fort Wayne, Indiana, is an international producer of magnet wire, the insulated conductor used in most electrical motors. Its products are manufactured in the United States at plants in Fort Wayne, Indiana; Hopkinsville, Kentucky; Laurinburg, North Carolina; and El Paso, Texas. 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, which began in 1996, is nearing completion and commercial production is expected in the first quarter of 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 15 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. 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 11 countries -- Brazil, Chile, China, Costa Rica, Ecuador, El Salvador, Honduras, Panama, Thailand, Venezuela and Zambia. In December 1997, Phelps Dodge International Corporation acquired for $72 million a 60 percent interest in the copper and aluminum wire and cable manufacturing business, Alcoa Aluminio, S.A., of Brazil. Additionally, Phelps Dodge International Corporation inaugurated a copper and aluminum power cable manufacturing facility in November 1997, Phelps Dodge Yantai Cable Company (PDYCC), in the People's Republic of China. PDYCC is a joint venture in which Phelps Dodge owns 66.67 percent of a holding company that has a 60 percent interest in PDYCC. The Corporation also 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. Accuride Corporation, headquartered in Henderson, Kentucky, manufactures and markets wheels and rims for commercial trucks, trailers and buses. 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 Kaiser Aluminum and Chemicals Corporation each own 50 percent of AKW Inc., an aluminum wheel production facility in Erie, Pennsylvania. 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. Accuride also owns a 51 percent interest in a joint venture that was established in 1997 in Mexico (Accuride de Mexico S.A. de C. V.). The remaining interest is owned by Industria Automotriz S.A. de C.V. In January 1998, Phelps Dodge sold Accuride Corporation and its subsidiaries to an affiliate of KKR and the management of Accuride. (See Note 2 to the Consolidated Financial Statements for a further discussion of this sale.) See Note 21 to the Consolidated Financial Statements of this report for information concerning Phelps Dodge Industries' sales by its specialty chemicals, wire and cable, and wheel and rim operations. Ownership of Real Property - -------------------------- Phelps Dodge Industries owns most of its plants and the land on which they are located. The exceptions are the land and buildings of Phelps Dodge Magnet Wire in Austria and Nesor at Fairfield and Montville, New Jersey, which are leased. Additionally, the land on which six international plants are located is leased. This land is not a material portion of the overall operations of Phelps Dodge Industries. 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, two-thirds 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. 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 Corporation has a majority interest in a magnet wire manufacturing company in Austria and, 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 two primary U.S. competitors and competes with three importers 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 byproduct 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. The principal raw materials used by Phelps Dodge Magnet Wire Company's manufacturing operations are copper, aluminum and various chemical and resins used in the manufacture of 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 $12 million in 1998 and from $8 million to $10 million in 1999; $11 million was spent on these programs in 1997. The Corporation also anticipates making significant capital and other expenditures beyond 1999 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. 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, 1998, employees who were covered by the agreement have continued to work without a contract. Columbian Chemicals' plant in the Philippines has a five-year agreement covering approximately 50 employees, with an opener after three years for economic issues, that expired on January 31, 1998. Negotiations are currently under way. Columbian's plant in Hamilton, Ontario, Canada, has a three-year agreement covering approximately 60 employees that expires on September 30, 1998, and its plant in Hickok, Kansas, has a three-year agreement covering 33 employees that expires on December 15, 1998. Phelps Dodge International's plant in West Caldwell, New Jersey, has a three-year agreement covering approximately 340 employees that expires on September 30, 1998. 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 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 $17.7 million in 1997, compared with $16.5 million in 1996 and $15.8 million in 1995. 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 (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 40 sites. For further information about these proceedings, see Item 3. Legal Proceedings, Part III. At December 31, 1997, the Corporation had reserves of $122.4 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 currently 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 1998 and 1999, and the expenditures for those programs in 1997, are separate from the reserves and estimates described above. The Environmental, Health and Safety Committee of the Board of Directors comprises four non-employee directors. The Committee met three times in 1997 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 monitoring requirements for Title V facilities. EPA is expected to attempt to resolve the Title V and major source appeals by issuing regulatory clarifications in 1998. The other matters are proceeding through the appellate process. In December of 1997 in National Mining Association v. Browner, Federal District Court for the District of Colorado 97-N-2665, the National Mining Association challenged the final rule promulgated by EPA on May 1, 1997, expanding the application of the Toxics Release Inventory reporting program under the Emergency Planning and Community Right-to-Know Act of 1986 to include metal mining operations. That litigation is pending. 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 Nation, the Hopi Indian Tribe, the San Juan Southern Paiute Tribe 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. Negotiations between the Tribe, the Corporation and other parties continued on the comprehensive settlement and other necessary agreements for several years. In 1997, additional disputes arose between Phelps Dodge and the Tribe. On May 12, 1997, the Tribe filed suit against the Corporation in San Carlos Apache Tribal Court, seeking eviction of the Corporation from the Tribe's Reservation and claiming substantial compensatory and punitive damages, among other relief. In May 1997, Phelps Dodge and the Tribe reached an agreement, and subsequently federal legislation (Pub. L. No. 105-18, Section 5003, 111 stat. 158, 181-87), was adopted which mandated dismissal of the tribal court suit. The legislation prescribes arrangements intended to ensure a future supply of water for the Morenci mining complex in exchange for certain payments by the Corporation. The legislation does not address any potential claims by the Tribe relating to the Corporation's historical occupancy and operation of its facilities on the Tribe's reservation but does require that any such claims be brought, if at all, exclusively in federal district court. By order dated October 13, 1997, the tribal court dismissed the lawsuit with prejudice, as contemplated by the legislation. (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. Prior to January 1, 1983, 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 state court adjudication. III. Claims under CERCLA and related state acts involving the Corporation have been raised with respect to the remediation of 40 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 40 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 1997 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, 1998, the executive officers of Phelps Dodge Corporation were as follows:
Age at Officer of the Name 3/1/98 Position Corporation since ---- ------ -------- ----------------- Douglas C. Yearley 62 Chairman of the Board and Chief Executive Officer 1981 J. Steven Whisler 43 President and Chief Operating Officer 1987 Manuel J. Iraola 49 Senior Vice President 1995 Ramiro G. Peru 42 Senior Vice President for Organizational Development and Information Technology 1995 Thomas M. St. Clair 62 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)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Sales and other operating revenues $ 3,914.3 3,786.6 4,185.4 3,289.2 2,595.9 Net income (a) $ 408.5 461.8 746.6 271.0 187.9 Per common share - basic (b) $ 6.68 7.02 10.72 3.84 2.67 Per common share - diluted (b) $ 6.63 6.98 10.66 3.82 2.66 Total assets $ 4,965.2 4,816.4 4,645.9 4,133.8 3,720.9 Long-term debt $ 857.1 554.6 613.1 622.3 547.3 Dividends per common share $ 2.00 1.95 1.80 1.69 1.65 (a) For a further discussion of earnings, please see Management's Discussion and Analysis. (b) In 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." For comparative purposes, all prior period earnings per common share computations have been restated to reflect the effect of SFAS No. 128. 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 1997 consolidated earnings of $440.1 million, or $7.14 per common share, before non-recurring, after-tax charges of $31.6 million, or 51 cents per common share, which reflected provisions for estimated future costs associated with environmental matters and an early-retirement program primarily at Phelps Dodge Mining Company (all references to per share earnings or charges are based on diluted earnings per share as discussed below). This compares with 1996 earnings of $472.5 million, or $7.14 per common share, before a 1996 fourth quarter non-recurring, after-tax charge of approximately $10.7 million, or 16 cents per common share, resulting from a reclamation provision and interest charges related to a Court-ordered rescission of a 1986 sale of property. Net income after non-recurring charges was $408.5 million, or $6.63 per common share, for the year 1997 and $461.8 million, or $6.98 per common share, for the year 1996. Note 3 to the Consolidated Financial Statements contains further information to which reference should be made for a fuller understanding of the 1997 and 1996 non-recurring charges. The Corporation reported 1995 earnings of $730.0 million, or $10.42 per common share, before an after-tax gain of $16.6 million, or 24 cents per share, from the sale of Columbian Chemicals Company's MAPICO division that increased reported 1995 net income to $746.6 million or $10.66 per common share. The Corporation's consolidated financial results for the last three years are summarized below (in millions except per common share amounts): - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Sales and other operating revenues $ 3,914.3 3,786.6 4,185.4 Operating income $ 611.0 712.9 1,100.5 Net income $ 408.5 461.8 746.6 Net income per common share - basic $ 6.68 7.02 10.72 Net income per common share - diluted $ 6.63 6.98 10.66 - --------------------------------------------------------------------------------
In 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 requires disclosure of basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. For comparative purposes, all prior period earnings per share computations have been restated to reflect the effect of SFAS No. 128. A significant factor influencing the Corporation's 1997 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 $1.04 in 1997, compared with $1.06 in 1996 and $1.35 in 1995. The COMEX price averaged 76 cents per pound for the first two months of 1998, and closed at 79 cents on March 6, 1998. 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 share of current annual production is approximately 1.8 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 $18 million. Consolidated 1997 revenues were $3,914.3 million, compared with $3,786.6 million in 1996. The 1997 increase was a result of higher sales volumes of copper, and increased sales of steel wheels and wire and cable products. The increase was partially offset by lower average copper prices and the effect of weaker European currencies at Columbian Chemicals Company. The decrease in consolidated revenues from $4,185.4 million in 1995 to $3,786.6 million in 1996 resulted from 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. Anticipated lower copper prices and the effect of the current economic disruptions in Asia are expected to reduce the Corporation's operating cash flow in 1998 and could slow the Corporation's growth initiatives currently under way. Copper is an internationally traded commodity, and its prices are effectively determined by the two major metals exchanges -- the 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 rates. Because of the market risk arising from the volatility of copper prices on the COMEX and the LME, the Corporation's objective and practice is to sell its copper cathode and rod at a price based on the COMEX average price in the month of shipment, and its copper concentrates at the LME average price in the month of settlement with its customers. The Corporation records copper concentrate sales on a provisional basis on the date of shipment and adjusts the sales on a monthly basis to reflect the latest LME price. A final adjustment is made upon settlement with customers. For cathode and rod sales, 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 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. The combined net effect of a firm price customer contract and the related futures transactions is for the Corporation to realize an amount based on the COMEX average price during the month of shipment. Swap contracts are settled at the COMEX average monthly price in the month copper is shipped. At December 31, 1997, the Corporation had futures and swap hedge contracts in place for approximately 140 million pounds of copper with an approximate net value of $130 million and an aggregate notional principal value of approximately $146 million. The Corporation had deferred unrealized losses of $18.7 million on its futures and swap contracts at December 31, 1997, as the offsetting customer transactions had not matured. With respect to 1996, at year end 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 hedging losses on its futures and swap contracts of $2.4 million, again offset by unmatured customer contracts. All of the Corporation's copper futures and swap contracts are held for hedging, rather than trading, purposes. The Corporation has performed a sensitivity analysis to estimate its exposure to market risk arising from copper price fluctuations using the net futures positions. As discussed above, the futures contracts are liquidated by way of offset (i.e., by taking opposite futures positions) and, 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 copper futures contracts. With respect to copper futures contracts at the end of 1997, in the event of a hypothetical 10 percent unfavorable change in copper prices, the Corporation would incur a loss of approximately $11.1 million (in addition to the deferred unrealized loss of $18.7 million discussed above). However, any such additional loss would be substantially offset by a corresponding gain on the related customer contracts being hedged with futures contracts. Depending on market circumstances, the Corporation may periodically purchase or sell various copper price protection contracts for a portion of its expected future mine production to reduce the risk of adverse price changes. The Corporation had no copper price protection contracts as of the end of 1997 and currently has no copper price protection contracts in place with respect to 1998 production. During the first quarter of 1997, the Corporation had net positions in place with several financial institutions that provided for a minimum quarterly average price of 90 cents per pound for 85 million pounds of copper cathode. These contracts expired without payment to Phelps Dodge. With respect to 1996 production, the Corporation had contracts that provided a combination of minimum and maximum quarterly average 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 production in the fourth quarter of 1996 and 85 million pounds of 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 1996 fourth quarter and $6.8 million for 1997 first quarter contracts was 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. The Corporation is exposed to changes in foreign exchange rates as a result of conducting its normal business operations in various countries and in various foreign currencies. In order to minimize such exposures, the Corporation periodically enters into forward exchange and currency option contracts to hedge such 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 reduce the Corporation's overall exposure to adverse changes in currency exchange rate movements resulting from transactions denominated in foreign currencies. At December 31, 1997, the Corporation had protection in place for approximately $158 million of recorded and anticipated foreign currency transactions through the use of currency options and forward contracts with a matching notional value. During 1996, the Corporation had foreign currency protection in place for an aggregate notional principal and hedged amount of approximately $141 million. The Corporation did not have any material deferred unrecognized gains or losses on its foreign exchange contracts for the year-end periods 1995 through 1997. The Corporation's primary foreign currency hedges involved the Chilean peso, Canadian dollar and the Thai baht. The Corporation has performed a sensitivity analysis to estimate its exposure to market risk with respect to its forward exchange contracts at the end of 1997. In the event of a hypothetical 10 percent unfavorable change in prevailing market exchange rates, the Corporation would incur a potential loss of approximately $11.3 million. Any such loss from the Corporation's forward exchange contracts would be substantially offset by corresponding gains on the underlying transactions being hedged. Notes 1 and 20 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. From time to time, the Corporation takes advantage of opportunities to obtain attractively priced debt through the use of structured transactions involving currency swaps. The Corporation does not hold these financial instruments for trading purposes. At year-end 1997, the Corporation's majority-owned Phelps Dodge Thailand Ltd. cable manufacturing plant in Thailand had entered into currency swap agreements that effectively converted floating rate U.S. dollar loans to fixed rate Thai baht loans. At December 31, 1997, the Corporation had currency swap contracts in place for an aggregate notional principal and hedged amount of approximately $15 million. The Corporation has performed a sensitivity analysis to estimate its exposure to market risk at year-end 1997. With respect to the currency swap portion of these structured transactions, a hypothetical decrease in the prevailing interest rate of 1 percent (or 100 basis points) would be immaterial, and a 10 percent unfavorable change in prevailing market exchange rates would cause Phelps Dodge Thailand Ltd. to incur a higher cost of approximately $1.5 million over the life of the debt than it would have incurred had the exposure not been hedged. The Corporation is exposed to interest rate increases primarily from the floating rate debt of its 80 percent-owned Candelaria copper mine in Chile. Consequently, the Corporation periodically enters into interest rate swap contracts to hedge such recorded transactions, firm commitments and other anticipated transactions. The Corporation does not hold these financial instruments for trading purposes. The Corporation caused Candelaria to enter into interest rate swaps converting its floating rate dollar-denominated debt to a fixed rate for the life of the debt which extends through the year 2008. Under the terms of the floating rate debt agreement, the Candelaria borrowings are scheduled to vary from period to period during the life of the debt. As a result, the notional value of the interest rate swap contract has been established at varying amounts throughout the life of the swap. The Corporation has performed a sensitivity analysis to estimate its exposure to market risk at year-end 1997. With respect to the interest rate swap, in the event of a hypothetical decrease in the prevailing interest rate of 1 percent (or 100 basis points), the Corporation would incur higher interest expense of approximately $12.3 million over the life of Candelaria's debt than it would have incurred had the exposure not been hedged. Phelps Dodge's results for 1997, 1996 and 1995 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. Through December 31, 1997, Phelps Dodge Industries included the Corporation's specialty chemicals operations, its wire and cable operations and its wheel and rim business. Effective January 1, 1998, Phelps Dodge sold its wheel and rim business, Accuride Corporation and its subsidiaries, to an affiliate of Kohlberg Kravis Roberts and Co., and the existing management of Accuride. Under terms of the sale agreement, Phelps Dodge retained a 10 percent interest in Accuride. (See Note 2 to the Consolidated Financial Statements for a further discussion of this sale.) 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 21 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. - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Copper (from own mines - thousand tons) * Production 812.1 770.4 712.7 Deliveries 812.8 771.6 696.6 COMEX average spot copper price per pound - cathodes $ 1.04 1.06 1.35 (millions of dollars) Sales and other operating revenues $ 2,173.3 2,091.1 2,488.7 Operating income $ 457.2 526.6 896.8 - ---------------- * 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 in Chile held by SMMA Candelaria, Inc., a jointly owned indirect subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. Excluded production amounts for 1997, 1996 and 1995 were 81,300 tons, 76,500 tons and 65,600 tons produced at Morenci for the account of Sumitomo, 56,300 tons, 56,200 tons and 56,200 tons produced at Chino for the account of Heisei and 34,400 tons, 30,200 tons and 33,100 tons at Candelaria for the account of Sumitomo. - --------------------------------------------------------------------------------
Phelps Dodge Mining Company reported 1997 operating income of $497.7 million before $40.5 million of non-recurring, pre-tax charges comprising $18.0 million of estimated future costs associated with environmental matters, $18.7 million for an early-retirement program and $3.8 million for other non-recurring charges. This compares with 1996 operating income of $536.6 million before $10.0 million of non-recurring, pre-tax charges resulting from a fourth quarter reclamation provision related to a Court-ordered rescission of a 1986 sale of property, and 1995 operating income of $896.8 million. The decrease in 1997 operating income reflected higher copper production costs and lower copper prices, partially offset by higher volumes of copper sold from mine production. The decrease in 1996 operating income, compared with 1995, resulted from lower average copper prices, partially offset by higher volumes of copper sold from mine production. Unit production costs of copper in 1997 were impacted adversely by the failure of a section of the ore conveyor system at the Morenci, Arizona, copper facility that occurred in late December, reduced throughput at the Hidalgo Smelter resulting from 27 days of lost production due to boiler leaks and 150 days of reduced capacity due to converter problems, and increased exploration expense associated with advanced project development work. The Morenci ore conveyor system was repaired and fully operational in late January 1998. Unit production costs of copper in 1996 were slightly higher than in 1995, principally as a result of increased depreciation charges from capital projects, increased mining expenses and costs associated with a maintenance overhaul at the Hidalgo smelter. Copper unit production costs generally have been stable for the three-year period ended December 31, 1997, primarily as a result of ongoing cost containment programs and 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 1997, the Corporation produced a total of 418,000 tons of cathode copper at its SX/EW facilities, compared with 408,000 tons in 1996 and 364,200 tons in 1995. 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 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. In the 1997 fourth quarter, the expansion of the Candelaria operation, including increased mining activity, the installation of a second semi-autogenous (SAG) mill line and new and expanded concentrating facilities, was completed eight months ahead of schedule and more than $45 million below the budgeted cost. At full capacity, the $305 million expansion (the Corporation's share was $244 million with the remainder provided by its co-participant) will result in average annual copper production of approximately 380 million pounds, increasing the Corporation's share of copper production at Candelaria by nearly 130 million pounds annually and boosting the Corporation's worldwide copper production by 9 percent. As a result of the expansion, the estimated mine life of Candelaria is expected to 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. The Corporation announced on May 7, 1997, that it plans to resume production at its Ajo copper mining operation in southern Arizona where mining operations have been suspended since 1984. An open pit and much of the needed infrastructure already exist at the operation. A $238 million modernization of the facility is anticipated to begin pending completion of environmental permitting and market conditions. When operating at full capacity, Ajo will add 135 million pounds of copper to the Corporation's annual production and will employ 400 people. On February 3, 1998, the Corporation announced the acquisition of Cobre Mining Company Inc. (Cobre) for approximately $115 million including acquisition costs. The Corporation assumed Cobre's outstanding debt of approximately $14 million. The acquisition was at a price of $3.85 per common share for substantially all of Cobre's 27 million common shares, including shares issuable upon the exercise of outstanding warrants and options. The primary assets of Cobre include the Continental Mine, which comprises an open-pit copper mine, two underground copper mines, two mills, and the surrounding 11,000 acres of land located in southwestern New Mexico adjacent to the Corporation's Chino operations. Cobre's reported mill ore reserves at year end 1996 were 48 million tons averaging more than 1 percent copper. 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. On May 6, 1997, the Corporation acquired an indirect 40 percent voting interest, representing an indirect 26.67 percent economic interest, in a leading Peruvian zinc mining company, Compania San Ignacio de Morococha S.A. (SIMSA) and its San Vicente mine. SIMSA's other shareholder with voting shares is the Jesus Arias family. The underground mine produces approximately 130 million pounds of zinc annually. Phelps Dodge Mining Company announced on January 7, 1998, the discovery of a potentially significant nickel/cobalt deposit in central Madagascar. Detailed drilling in the district, which is located approximately 80 kilometers east of the capital city of Antananarivo, combined with historic exploration in the area, indicates an overall resource of approximately 168 million metric tons of ore at a grade of 1.11 percent nickel and 0.10 percent cobalt. A detailed feasibility study and environmental assessment of the project are under way. On September 25, 1997, the Corporation announced it had sold its 72.25 percent interest in the McDonald gold project and other associated properties to CR Montana Corporation and Canyon Resources Corporation, the parent of CR Montana. The terms of the transaction included the immediate payment of $5 million with an additional payment to Phelps Dodge of between $95 million and $145 million when permitting for the project is completed or construction is commenced. The final amount of the $150 million total purchase price will be based, if necessary, on quarterly production payments. In 1997, operations outside the United States provided 9 percent of Phelps Dodge Mining Company's sales, compared with 8 percent in 1996 and 10 percent in 1995. During the year, operations outside the United States contributed 9 percent of the segment's operating income, compared with 8 percent in 1996 and 19 percent in 1995. 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 was 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. In August 1997, the Corporation returned $14.8 million to the Postal Service for the Maspeth property and paid $6.6 million of interest to the Postal Service. 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, 1998, 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. Negotiations between the Tribe, the Corporation and other parties continued on the comprehensive settlement and other necessary agreements for several years. In 1997, additional disputes arose between Phelps Dodge and the Tribe. On May 12, 1997, the Tribe filed suit against the Corporation in San Carlos Apache Tribal Court, seeking eviction of the Corporation from the Tribe's Reservation and claiming substantial compensatory and punitive damages, among other relief. In May 1997, Phelps Dodge and the Tribe reached an agreement, and subsequently federal legislation (Pub. L. No. 105-18, Section 5003, 111 stat. 158, 181-87), was adopted which mandated dismissal of the tribal court suit. The legislation prescribes arrangements intended to ensure a future supply of water for the Morenci mining complex in exchange for certain payments by the Corporation. The legislation does not address any potential claims by the Tribe relating to the Corporation's historical occupancy and operation of its facilities on the Tribe's Reservation but does require that any such claims be brought, if at all, exclusively in federal district court. By order dated October 13, 1997, the tribal court dismissed the lawsuit with prejudice, as contemplated by the legislation. RESULTS OF PHELPS DODGE INDUSTRIES Phelps Dodge Industries is a business segment comprising a group of companies that manufacture engineered products principally for the global energy, telecommunications, transportation and specialty chemicals sectors. 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 wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates, and its recently sold wheel and rim operations through Accuride Corporation and its subsidiaries (Accuride). Effective January 1, 1998, the Corporation sold its Accuride subsidiary to an affiliate of Kohlberg Kravis Roberts and Co. (KKR) and the existing management of Accuride. Under the terms of the sale agreement, Phelps Dodge will retain a 10 percent interest in Accuride. (See Note 2 to the Consolidated Financial Statements for a further discussion of this sale.) - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- (millions of dollars) Sales and other operating revenues: Specialty chemicals $ 429.5 437.0 420.8 Wheels and rims 333.0 307.8 357.8 Wire and cable 978.5 950.7 918.1 -------- -------- -------- $1,741.0 1,695.5 1,696.7 ======== ======== ======== Operating income: Specialty chemicals $ 74.3 79.8 103.9 Wheels and rims 48.7 41.4 45.6 Wire and cable 81.9 104.6 93.8 -------- -------- -------- $ 204.9 225.8 243.3 ======== ======== ======== - --------------------------------------------------------------------------------
Phelps Dodge Industries reported 1997 operating income of $204.9 million, compared with 1996 operating income of $225.8 million. Decreased 1997 earnings reflected the economic difficulties in Asia, generally weaker currencies in the European market and the effects of a first quarter strike at the Corporation's Canadian wheel and rim plant, and were partially offset by continued strength in the U.S. wheel and rim market. Operating income in 1995 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 operating income in 1996 compared with 1995 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. Columbian Chemicals' 1997 earnings were lower than those in 1996 as a result of lower sales volumes in Europe, partially offset by higher sales and production volumes in North America. Exports from the U.K. were adversely affected by its strong currency, while weaker currencies in continental Europe raised the effective price of dollar-denominated feedstock. Also affecting Europe were weak demand and competitive import pressures which deferred an increase in selling prices until the end of the year. In North America, several major expansion projects completed during 1997 allowed Columbian Chemicals to meet the strong demand for carbon black. 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 were ongoing in 1996 and resulted in a record level of annual capital investment. Accuride had record earnings in 1997 despite a 53-day strike that began January 21, 1997, and ended March 15, 1997, at its Canadian plant. Strong industry demand and higher sales resulted in a 24 percent increase in steel wheel sales volumes over 1996. Accuride's 1996 earnings fell below 1995 earnings primarily due to an 18 percent drop in overall sales volumes, partially offset by higher prices. Reduced North American demand for heavy trucks and trailers was the major contributor to the drop in sales volumes. Demand increased for specialty products, such as light wheels for smaller trucks and sport utility vehicles, partially offsetting the effects of the downturn in the heavy truck and trailer markets. During 1997, Accuride was restructured to enhance its value. On May 1, Accuride and Kaiser Aluminum and Chemical Corporation (Kaiser) formed a joint venture company, Accuride Kaiser Wheel Inc. (AKW), to produce aluminum wheels for the commercial transportation industry. Accuride and Kaiser each own 50 percent of the new company. This venture replaced the previous arrangement under which Kaiser manufactured finished aluminum wheels for Accuride. In October, Accuride purchased a vacant plant in Columbia, Tennessee, in order to establish a greenfield operation to produce steel cladded light wheels. Expansion in the light-wheel market is expected to enhance Accuride's defense of its strong position in heavy wheels, to partially counter the impact of the cyclical nature of the heavy vehicle market on earnings and to improve Accuride's status as a full-line supplier. In November, Accuride's joint venture with Industria Automotriz, S.A. (IaSa) officially commenced business to produce steel wheels in Monterrey, Mexico. Under the joint venture agreement, Accuride will hold a 51 percent majority interest in the new business which initially will be derived from IaSa's existing wheel assets. Accuride's primary objectives in this venture are to expand its North American manufacturing base into Mexico in order to profitably serve its current customers who are expanding there and to capitalize on an emerging and growing maquiladora marketplace. These value enhancing steps contributed to the successful sale of Accuride to KKR in early 1998. Lower 1997 earnings in the wire and cable business resulted from adverse economic conditions in Asia. The Asian currency crisis and its associated economic slowdown resulted in 1997 operating income from the region that was 55 percent lower than 1996. Partially offsetting the lower operating income in Asia was a 44 percent increase in operating income from Central America and a 21 percent increase in operating income from North America. The increase in Central American operating income was the result of a stronger market presence in the building wire and aluminum power cables market. In North America, sales of specialty conductors to the commercial aerospace market and magnet wire sales were boosted by a robust U.S. economy. 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 expansion of Phelps Dodge Magnet Wire Company's 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 due to the strict foreign exchange controls instituted in 1994 by the Venezuelan government. In December 1997, the Corporation acquired for $72 million a 60 percent interest in the copper and aluminum wire and cable manufacturing business of Alcoa Aluminio, S.A., of Brazil. Its product line is focused on energy transmission and distribution, with dominance in aluminum conductors and solid participation in the copper wire and cable business. Phelps Dodge International Corporation, a wholly owned subsidiary, will manage and operate this joint venture. In November 1997, the Corporation announced the inauguration of Phelps Dodge Yantai Cable Company's (PDYCC) manufacturing facility in China. PDYCC is a joint venture consisting of several investors including Phelps Dodge Corporation. Phelps Dodge owns 66.67 percent of a holding company that has a 60 percent interest in PDYCC. The $18 million modern facility will produce annually approximately 7,000 metric tons of copper and aluminum medium- and high-voltage insulated power cables, mostly for underground installation, replacing traditional overhead power lines in China's high-density cities. Phelps Dodge International Corporation will manage and operate this joint venture for the Corporation. 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. In August 1996, the Corporation announced plans to construct a magnet wire manufacturing plant in Monterrey, Mexico. Construction of the $42 million project, which began in 1996, is nearing completion and commercial production is expected in the first quarter of 1998. In 1997, operations outside the United States provided 49 percent of Phelps Dodge Industries' sales, compared with 50 percent in 1996 and 51 percent in 1995. During the year, operations outside the United States contributed 43 percent of the segment's operating income, compared with 57 percent in 1996 and 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). OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS The Corporation's 1997 depreciation, depletion and amortization expense was $283.7 million, compared with $249.5 million in 1996 and $223.5 million in 1995. The 14 percent increase in 1997 resulted from increased mine production and depreciation rates for both U.S. and international mining operations, and the recent completion of several expansion projects within Phelps Dodge Industries. (Please refer to Note 1 to the Consolidated Financial Statements for a discussion of depreciation methods.) The 12 percent increase in 1996 over 1995 reflected increased mine production and depreciation rates at the U.S. mining operations and the effect of acquisitions by Phelps Dodge Industries. The Corporation's 1997 selling and general administrative expense was $141.8 million, compared with $125.9 million in 1996 and $123.6 million in 1995. The 13 percent increase in 1997 reflected the effect of acquisitions by the international wire and cable group and an increase in unallocated Corporate expenses for information processing, training and development, incentive plans and other general administrative expenses. The Corporation's 1997 exploration and research and development expense was $87.8 million, compared with $83.9 million in 1996 and $73.2 million in 1995. The increase in 1997 primarily resulted from increased exploration expenditures in Africa and Mexico. The 1995 to 1996 increase primarily resulted from increased exploration expenditures at the Corporation's U.S. mining operations. The Corporation reported net interest expense in 1997 of $62.5 million, compared with $66.1 million in 1996 and $62.0 million in 1995. 1997 net interest expense decreased principally as a result of capitalization of interest costs for the Candelaria expansion project in Chile. The 1996 increase principally resulted from a $5.9 million interest charge resulting from the 1996 Court-ordered rescission of a 1986 sale of property. 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 1997 miscellaneous income, net of miscellaneous expense, was $33.4 million, compared with $40.7 million in 1996 and $37.2 million in 1995. The decrease in 1997 primarily resulted from decreased interest income and less dividend income from the Corporation's 13.9 percent minority interest in Southern Peru Copper Corporation, partially offset by a $6.0 million pre-tax, non-cash gain from the exchange of shares from a cost basis investment in a wire and cable business located in Greece. The increase from 1995 to 1996 primarily resulted from an increase of $2.8 million in dividends received from Southern Peru Copper Corporation. For the year ended December 31, 1997, the Corporation recorded a provision for taxes of $180.4 million (an effective rate of approximately 31.0 percent). This compares with a 1996 provision for taxes of $220.0 million (an effective rate of approximately 32.0 percent) and a 1995 provision of $322.7 million (an effective rate of approximately 30.0 percent). The 1997 effective rate was lower than the 1996 rate primarily due to the increase in the U.S. tax benefit for percentage depletion. Despite a slight decrease in average realized copper prices in 1997, the benefit from the Corporation's allowable deduction for percentage depletion increased from 1996 due to a more favorable mix of income subject to percentage depletion. The 1996 effective rate was higher than the 1995 rate primarily due to the effect of a change in the income mix between U.S. and international operations. (See Note 7 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 proposed assessments 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. 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 an 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, 1997. Better than expected returns on plan assets during 1997 increased the excess of plan assets over pension liabilities at December 31, 1997. (For a further discussion of these issues, see Notes 16 and 17 to the Consolidated Financial Statements.) The Corporation is in the process of reviewing its computer-based systems and the year 2000 computer application design issues utilizing both internal and external resources to identify, correct or reprogram, and test its systems to ensure year 2000 compliance. The Corporation is in the process of implementing the required changes to its internal computer systems. The Corporation continues to evaluate the estimated costs associated with these efforts based on actual experience and does not expect the future costs of resolving its internal year 2000 problems to exceed $10 million. However, no assurance can be given that the Corporation's computer systems will be year 2000 compliant in a timely manner or that the Corporation will not incur significant additional expenses pursuing year 2000 compliance. Even if the Corporation's systems are year 2000 compliant, there can be no assurance that the Corporation will not be adversely affected by the failure of vendors, customers, service providers, shippers or other third-party providers to become year 2000 compliant. In an effort to evaluate and reduce its exposure in this area, the Corporation has inquired of its vendors and other providers about their progress in identifying and addressing problems that their computer systems may face in correctly processing date information related to the year 2000. However, despite the Corporation's efforts to date, there can be no assurance that the year 2000 problem will not have a material adverse effect on the Corporation in the future. CHANGES IN FINANCIAL CONDITION; CAPITALIZATION At the end of 1997, the Corporation had cash and cash equivalents of $157.9 million, compared with $470.1 million at the beginning of the year. The Corporation's operating activities provided $764.6 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. During 1997, decreases in current assets (exclusive of cash and cash equivalents and adjustments for foreign currency exchange rate changes) exceeded decreases in current liabilities (exclusive of current debt and adjustments for foreign currency exchange rate changes) resulting in a $16.8 million decrease in net working capital. This decrease in net working capital resulted principally from a $36.5 million decrease in accounts receivable and a $21.1 million increase in accounts payable, partially offset by a $13.4 million decrease in accrued income taxes and a $12.0 million decrease in other accrued expenses. The $36.5 million decrease in accounts receivable was primarily the result of lower copper sales prices which were partially offset by higher copper sales volumes and higher sales volumes of wheels and rims. The $21.1 million increase in accounts payable principally resulted from the timing of raw material and equipment purchases. The $13.4 million decrease in accrued income taxes was principally the result of higher tax payments in 1997. The decrease in other accrued expenses was primarily due to the completion of the expansion project at Candelaria and a reduction in the current portion of environmental reserves. 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. Investing activities during 1997 included capital expenditures of $661.6 million, compared with $513.0 million in 1996 and $404.9 million in 1995. Capital expenditures included $156.1 million for the expansion of Candelaria in 1997 and $76 million in 1996. Investments in 1997 included the acquisition of a copper and aluminum wire and cable manufacturing business in Brazil for $72.0 million, the acquisition of an indirect 40 percent voting interest in a Peruvian zinc mining company, Compania San Ignacio de Morococha S.A. (SIMSA) for $15.0 million, $22.6 million for an investment in a joint venture formed by Accuride Corporation and Kaiser Aluminum and Chemical Corporation to produce aluminum wheels for the commercial transportation industry, and $14.8 million for the Laurel Hill property as a result of the 1996 Court-ordered rescission of the 1986 sale of the property. Investing activities in 1996 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 reflected cash proceeds of $45.0 million from the divestiture of Columbian Chemicals Company's synthetic iron oxide facility (MAPICO). The Corporation expects capital expenditures and investments in 1998 to be approximately $350 million for Phelps Dodge Mining Company and approximately $150 million for Phelps Dodge Industries. These capital expenditures and investments will be funded from cash reserves, operating cash flow and from borrowings. On May 7, 1997, the Corporation announced that its board of directors had authorized the purchase of up to an additional 6 million of its common shares, approximately 10 percent of its then outstanding shares. This authorization followed a 5 million share purchase program that was initiated in 1995 and extended to 10 million shares in 1996. Under that program, 9.9 million shares were purchased by the Corporation. The Corporation purchased 6,554,000 of its common shares in 1997 at a total cost of $511.5 million, including 3,606,000 shares at a cost of $292.9 million under the new 6 million share authorization. There were 58,634,000 common shares outstanding on December 31, 1997. The Corporation may continue to make purchases in the open market as circumstances warrant, and will also consider purchasing shares in privately negotiated transactions. The $5.9 million decrease in dividend payments on the Corporation's common shares, from $128.6 million in 1996 to $122.7 million in 1997, reflected the decreased number of common shares outstanding due to the share purchase program. The dividend was $2.00 per common share in 1997 versus $1.95 per common share in 1996. The Corporation's total debt was $1,003.3 million at December 31, 1997, compared with $659.3 million at the end of 1996. Total debt increased primarily as a result of non-recourse project financing for the expansion of the Candelaria mine, and the November 5, 1997, issuance of $100 million of 6.375 percent seven-year notes and $150 million of 7.125 percent 30-year debentures. The ratio of total debt to total capitalization was 27.7 percent at the end of 1997, compared with 18.8 percent at the end of 1996. During the 1995 second quarter, the Corporation's majority-owned subsidiary, Compania Contractual Minera Candelaria (Candelaria), satisfied all operating, financial, construction and legal tests and conditions as set forth in the completion agreement associated with the $290 million project financing of its Candelaria mine in Chile. As a result, borrowings under these debt facilities are non-recourse to Phelps Dodge. Financing agreements for the $290 million debt were executed during 1993. The debt 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. The floating rate peso-denominated debt was prepaid in December 1996 at a cost of $37.6 million including exchange losses and prepayment penalties; this debt was replaced during the second quarter of 1997 when Candelaria borrowed $30 million of 12-year, floating rate dollar-denominated debt. The 1993 financing 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. During 1997, Candelaria borrowed $72 million of a $150 million, 12-year dollar-denominated facility arranged in order to partially finance the $305 million expansion of the Candelaria mine. Both of the 1997 facilities are based on floating rates tied to six-month London Interbank Offered Rate (LIBOR) and are non-recourse to the Corporation. The Corporation also caused Candelaria to sell the 9 percent and 11 percent interest rate caps purchased in 1993 that were intended to limit the effect of increases in the cost of the $200 million of floating rate dollar debt. In turn, the Corporation caused Candelaria to enter into interest rate swaps with certain financial institutions to effectively convert all of Candelaria's floating rate dollar debt to 7.84 percent, fixed rate dollar debt for the life of the debt. The obligations under the interest rate swaps are non-recourse to the Corporation. An existing revolving credit agreement between the Corporation and several lenders was amended on June 25, 1997. The agreement, as amended and restated, permits borrowings of up to $1 billion from time to time until its scheduled maturity on June 25, 2002. The agreement allows for two one-year renewals beyond the scheduled maturity date if the Corporation requests and receives approval from those lenders representing at least two-thirds of the commitments provided by the facility. In the event of such approval, total commitments under the facility would depend upon the willingness of other lenders to assume the commitments of those lenders electing not to participate in the renewal. Interest is payable at a fluctuating rate based on the agent bank's prime rate, or a fixed rate, based on the LIBOR, or at fixed rates offered independently by the several lenders, for maturities of between seven and 360 days. This agreement provides for a facility fee of six and one-half basis points (0.065 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, 1997, or December 31, 1996. The Corporation established a commercial paper program on August 15, 1997, under a private placement agency agreement between the Corporation and two placement agents. The agreement permits the Corporation to issue up to $1 billion of short-term promissory notes (generally known as commercial paper) at any one time. Commercial paper may bear interest or be sold at a discount, as mutually agreed by the Corporation and the placement agents at the time of each issuance. The Corporation's commercial paper rating requires that issuances of commercial paper be backed by an undrawn line of credit; the revolving credit agreement described above provides such support. There were no borrowings under the commercial paper program at December 31, 1997. The Corporation had other lines of credit totaling $100.0 million at December 31, 1997, and December 31, 1996. 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, 1997, or December 31, 1996. The Corporation had $91.4 million in short-term borrowings, all by its international operations, at December 31, 1997, compared with $66.5 million at December 31, 1996. The increase in short-term borrowings principally was a result of borrowings at Accuride's new Mexican operations (Accuride de Mexico). The weighted average interest rate on total short-term borrowings at December 31, 1997, and December 31, 1996, was 13.0 percent and 15.3 percent, respectively. On November 5, 1997, the Corporation issued $100 million of 6.375 percent notes maturing on November 1, 2004, and $150 million of 7.125 percent debentures maturing on November 1, 2027, under an Indenture dated as of September 22, 1997, between the Corporation and The Chase Manhattan Bank, as Trustee. Interest on these securities is payable semi-annually on May 1 and November 1 of each year. The notes are not redeemable prior to maturity and are not entitled to any sinking fund. The debentures are redeemable, in whole or in part, at the option of the Corporation, at a redemption price equal to the greater of (i) 100 percent of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a rate equal to the sum of the yield of a United States Treasury security having a comparable maturity to the remaining term of the debentures plus 10 basis points. The debentures are not entitled to any sinking fund. The Corporation applied most of the proceeds from the sale of the offered securities to repay outstanding commercial paper, which had been issued for general corporate purposes. The current portion of the Corporation's long-term debt, scheduled for payment in 1998, is $54.8 million including $12.6 million for its international manufacturing operations, $27.2 million primarily for its international mining operations and $15.0 million for Corporate debt repayments. 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 from individual states under CERCLA or a state equivalent and is participating in environmental assessment and remediation activity at 40 sites. The Corporation does not consider the number of CERCLA sites or comparable state sites at which it has been notified as being involved to be a relevant measure of exposure. Although the liability of a potentially responsible party (PRP), and in many cases its equivalent under state law, may be joint and several, the Corporation is usually one of many companies cited as a PRP at these sites and has, to date, been successful in sharing cleanup costs with other financially sound companies. 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, 1997, the Corporation had reserves of $122.4 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. Moreover, 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 currently 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 1998 and 1999, and the expenditures for those programs in 1997, are separate from the reserves and estimates described previously. On December 23, 1994, Chino Mines Company (Chino), 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 Chino to study the environmental impacts and potential health risks associated with portions of the Chino property affected by historical mining operations. Phelps Dodge acquired Chino at the end of 1986. Those studies began in 1995 and, until the studies are 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 began submitting the required reclamation plans in March 1997. Reclamation is an ongoing activity and the Corporation currently recognizes estimated reclamation costs using a units of production basis calculation. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. 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 1998. The Secretary of the Interior also 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. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) Nos. 130, "Reporting Comprehensive Income," and 131, "Disclosures about Segments of an Enterprise and Related Information." The statements will have no effect on the Corporation's results of operations, financial position, capital resources or liquidity. 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. - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- (millions of dollars) Phelps Dodge Mining Company: Southside project (Morenci mine) $ - 5.8 112.6 Azco acquisition - - 40.2 Candelaria 161.7 89.5 15.1 Other 293.6 234.9 153.7 ------ ------ ------ 455.3 330.2 321.6 ------ ------ ------ Phelps Dodge Industries: Specialty chemicals 75.7 72.2 22.6 Wheels and rims 24.0 9.6 6.9 Wire and cable 102.5 97.8 52.8 ------ ------ ------ 202.2 179.6 82.3 ------ ------ ------ Corporate and other 4.1 3.2 1.0 ------ ------ ------ $661.6 513.0 404.9 ====== ====== ====== - --------------------------------------------------------------------------------
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, 1998, there were 10,538 holders of record of the Corporation's common shares. The Corporation paid quarterly dividends of 45 cents on each common share for each quarter in 1995 and for the first quarter of 1996. In the 1996 second quarter, the quarterly dividend was increased by 11 percent to 50 cents on each common share and continued at that rate throughout 1997. The following table sets forth the high, low and closing prices per common share (composite quotation) in the periods indicated. - -------------------------------------------------------------------------------- Market Price Ranges*
High Low Close ----- ----- ----- 1997 First Quarter $ 79.00 68.00 73.13 Second Quarter 89.63 70.25 85.19 Third Quarter 87.94 75.06 77.63 Fourth Quarter 79.81 59.88 62.25 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 - --------------- * 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 ------- ------- ------- ------- 1997 Sales and other operating revenues $ 1,021.7 1,065.0 961.7 865.9 Operating income 206.0 190.7 150.0 64.3 Net income 137.5 134.8 104.2 32.0 Net income per common share - basic (a) 2.14 2.18 1.74 0.55 Net income per common share - diluted (a) 2.13 2.16 1.72 0.54 1996 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 - basic (a) 2.28 1.91 1.23 1.58 Net income per common share - diluted (a) 2.26 1.90 1.22 1.57 - --------------- (a) In 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." For comparative purposes, all prior period earnings per common share computations have been restated to reflect the effect of SFAS No. 128. - --------------------------------------------------------------------------------
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, 1997 and 1996, 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, 1997, and notes thereto, together with the report thereon of Price Waterhouse LLP dated January 15, 1998, except as to Note 2, which is as of February 3, 1998, 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, 1997. Separate financial statements of subsidiaries not consolidated and investments accounted for by the equity method, other than those for which summarized financial information is provided in Note 4 to the Consolidated Financial Statements, have been omitted because, if considered in the aggregate, such subsidiaries and investments would not constitute a significant subsidiary. ADDITIONAL FINANCIAL DATA Financial statement schedule for the years ended December 31, 1997, 1996 and 1995: 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, 1998, except as to Note 2, which is as of February 3, 1998, of 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, 1998 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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, 1998, except as to Note 2, which is as of February 3, 1998. STATEMENT OF CONSOLIDATED INCOME - -------------------------------- (In thousands except per share data)
For the years ended December 31, 1997 1996 1995 ---- ---- ---- SALES AND OTHER OPERATING REVENUES $ 3,914,300 3,786,600 4,185,400 ----------- ----------- ----------- OPERATING COSTS AND EXPENSES Cost of products sold 2,744,100 2,604,400 2,691,400 Depreciation, depletion and amortization 283,700 249,500 223,500 Selling and general administrative expense 141,800 125,900 123,600 Exploration and research expense 87,800 83,900 73,200 Provision for environmental costs, asset dispositions and other non-recurring charges 45,900 10,000 (26,800) ----------- ----------- ----------- 3,303,300 3,073,700 3,084,900 ----------- ----------- ----------- OPERATING INCOME 611,000 712,900 1,100,500 Interest expense (74,200) (68,000) (65,100) Capitalized interest 11,700 1,900 3,100 Miscellaneous income and expense, net 33,400 40,700 37,200 ----------- ----------- ----------- INCOME BEFORE TAXES, MINORITY INTERESTS AND EQUITY IN NET EARNINGS OF AFFILIATED COMPANIES 581,900 687,500 1,075,700 Provision for taxes on income (180,400) (220,000) (322,700) Minority interests in consolidated subsidiaries (4,700) (16,200) (12,900) Equity in net earnings of affiliated companies 11,700 10,500 6,500 ----------- ----------- ----------- NET INCOME $ 408,500 461,800 746,600 =========== =========== =========== BASIC EARNINGS PER SHARE $ 6.68 7.02 10.72 DILUTED EARNINGS PER SHARE $ 6.63 6.98 10.66 AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 61,100 65,800 69,700 AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 61,600 66,200 70,000 See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET - -------------------------- (In thousands except per share values)
December December 31, 31, 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 157,900 470,100 Accounts receivable, less allowance for doubtful accounts (1997 - $13,800; 1996 - $14,200) 420,500 489,100 Inventories 297,800 293,000 Supplies 115,100 117,000 Prepaid expenses 7,800 6,100 Deferred income taxes 52,000 46,200 ----------- ----------- Current assets 1,051,100 1,421,500 Investments and long-term accounts receivable 131,800 86,400 Property, plant and equipment, net 3,445,100 3,020,500 Other assets and deferred charges 337,200 288,000 ----------- ----------- $ 4,965,200 4,816,400 =========== =========== LIABILITIES Current liabilities: Short-term debt $ 91,400 66,500 Current portion of long-term debt 54,800 38,200 Accounts payable and accrued expenses 553,200 564,900 Income taxes 1,700 16,300 ----------- ----------- Current liabilities 701,100 685,900 Long-term debt 857,100 554,600 Deferred income taxes 439,200 424,900 Other liabilities and deferred credits 344,100 309,600 ----------- ----------- 2,341,500 1,975,000 ----------- ----------- COMMITMENTS AND CONTINGENCIES (SEE NOTES 18 AND 19) MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 113,300 85,500 ----------- ----------- COMMON SHAREHOLDERS' EQUITY Common shares, par value $6.25; 100,000 shares authorized; 58,634 outstanding (1996 - 64,711) after deducting 16,554 shares (1996 - 10,478) held in treasury 366,500 404,400 Retained earnings 2,301,000 2,465,000 Cumulative translation adjustments (143,900) (98,800) Other (13,200) (14,700) ----------- ----------- 2,510,400 2,755,900 ----------- ----------- $ 4,965,200 4,816,400 =========== =========== See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------ (In thousands)
For the years ended December 31, 1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net income $ 408,500 461,800 746,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 283,700 249,500 223,500 Deferred income taxes 40,700 61,900 107,600 Equity earnings net of dividends received (6,500) (3,800) (400) Changes in current assets and liabilities: (Increase) decrease in accounts receivable 36,500 (6,200) (2,300) (Increase) decrease in inventories (6,200) 3,600 (15,800) (Increase) decrease in supplies (100) 3,800 (11,900) (Increase) decrease in prepaid expenses (2,300) 10,700 100 (Increase) decrease in deferred income taxes (5,800) (1,800) (6,000) Increase (decrease) in interest payable (1,000) 5,900 (100) Increase (decrease) in other accounts payable 21,100 38,300 (55,500) Increase (decrease) in income taxes (13,400) (300) (29,500) Increase (decrease) in other accrued expenses (12,000) 10,000 36,800 Non-recurring and other adjustments, net 21,400 4,100 (34,100) --------- --------- --------- Net cash provided by operating activities 764,600 837,500 959,000 --------- --------- --------- INVESTING ACTIVITIES Capital outlays (661,600) (513,000) (404,900) Capitalized interest (11,700) (1,900) (3,100) Investment in subsidiaries (127,600) (47,400) (300) Proceeds from asset dispositions and other 7,100 5,000 40,900 --------- --------- --------- Net cash used in investing activities (793,800) (557,300) (367,400) --------- --------- --------- FINANCING ACTIVITIES Increase in debt 418,400 16,100 30,800 Payment of debt (66,900) (54,100) (22,800) Common dividends (122,700) (128,600) (125,600) Purchase of common shares (511,500) (273,200) (162,700) Other, net (300) 21,200 10,300 --------- --------- --------- Net cash used in financing activities (283,000) (418,600) (270,000) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (312,200) (138,400) 321,600 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 470,100 608,500 286,900 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 157,900 470,100 608,500 ========= ========= ========= 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, 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 Stock options exercised 463 2,900 11,400 14,300 Tax benefit from stock options 8,400 8,400 Common shares purchased (6,554) (40,900) (470,600) (511,500) Restricted shares issued, net 14 100 1,000 1,300 2,400 Net income 408,500 408,500 Dividends on common shares (122,700) (122,700) Translation adjustment (45,200) (45,200) Additional pension liability 1,000 1,000 Other (700) (700) ------ -------- --------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1997 58,634 $366,500 $ - $2,301,000 ($157,100) $2,510,400 ====== ======== ========= ========== ========= ========== 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, and for which the Corporation does not exercise significant control, 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. Mine Closure Costs. Reclamation is an ongoing activity and the Corporation is currently recognizing estimated reclamation costs on a units of production basis. 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, foreign exchange and interest rate risks. 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 rates. Because of the market risk arising from the volatility of copper prices on the COMEX and the LME, the Corporation's objective is to sell its copper cathodes and rod at a price based on the COMEX average price in the month of shipment, and its copper concentrate at the LME average price in the month of settlement with its customers. The Corporation records copper concentrate sales on a provisional basis on the date of shipment and adjusts the sales on a monthly basis to reflect the latest LME price. A final adjustment is made upon settlement with customers. For its copper cathode and rod sales, 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 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. Depending on market circumstances, the Corporation may periodically purchase or sell various copper option contracts to reduce the risk of adverse price changes 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 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 reduce the Corporation's overall exposure to adverse changes in currency exchange rate movements resulting from transactions denominated in foreign currencies. 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 protecting anticipated transactions are recognized in the period incurred. The Corporation periodically enters into currency swap contracts to hedge certain recorded transactions. The Corporation does not hold these financial instruments for trading purposes. The Corporation's currency swap agreements are employed in structured transactions whose purpose is to take advantage of opportunities to obtain attractively priced foreign currency debt. Hedging gains and losses are deferred and included as part of the basis of the underlying exposure with hedge premiums amortized over the life of the contract. 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. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Corporation applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. Note 15 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share for 1997, 1996 and 1995 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. In 1997, the Corporation adopted SFAS No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. For comparative purposes, all prior period earnings per share computations have been restated to reflect the effect of SFAS No. 128. - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- BASIC EARNINGS PER SHARE COMPUTATION Numerator: Net income $408,500 461,800 746,600 -------- -------- -------- Denominator: Average common shares outstanding 61,100 65,800 69,700 -------- -------- -------- Basic earnings per share $ 6.68 7.02 10.72 ======== ======== ======== DILUTED EARNINGS PER SHARE COMPUTATION Numerator: Net income $408,500 461,800 746,600 -------- -------- -------- Denominator: Average common shares outstanding 61,100 65,800 69,700 Average employee stock options 300 200 200 Average restricted stock issued to employees 200 200 100 -------- -------- -------- Total average common shares outstanding 61,600 66,200 70,000 -------- -------- -------- Diluted earnings per share $ 6.63 6.98 10.66 ======== ======== ======== - --------------- Stock options to purchase 131,895, 962,032 and 254,606 shares of common stock which were outstanding during 1997, 1996 and 1995, respectively, at option prices greater than the average fair market value during each respective year of $76.45, $64.36 and $59.77 were not included in the computation of diluted earnings per share. - --------------------------------------------------------------------------------
New Accounting Standards. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements become effective for fiscal periods beginning after December 15, 1997. The Corporation is evaluating the effects these statements will have on its financial reporting and disclosures. The statements will have no effect on the Corporation's results of operations, financial position, capital resources or liquidity. The Corporation plans to adopt these statements in 1998. Reclassification. For comparative purposes, certain prior year amounts have been reclassified to conform with the current year presentation. 2. SUBSEQUENT EVENTS In January 1998, the Corporation sold Accuride Corporation and its subsidiaries, its wheel and rim manufacturing business, to an affiliate of Kohlberg Kravis Roberts and Co. (KKR) and the existing management of Accuride. The Corporation retained a 10 percent interest in Accuride. Under the terms of the sales agreement, the Corporation received proceeds of $453.2 million from KKR resulting in a pre-tax gain of approximately $187.3 million ($123.6 million after-tax, or $2.11 per common share). On February 3, 1998, the Corporation announced the acquisition of Cobre Mining Company Inc. (Cobre) for approximately $115 million including acquisition costs. The Corporation assumed Cobre's outstanding debt of approximately $14 million. The acquisition was at a price of $3.85 per common share for substantially all of Cobre's 27 million common shares, including shares issuable upon the exercise of outstanding warrants and options. The primary assets of Cobre include the Continental Mine, which comprises an open-pit copper mine, two underground copper mines, two mills, and the surrounding 11,000 acres of land located in southwestern New Mexico adjacent to the Corporation's Chino operations. 3. PROVISION FOR ENVIRONMENTAL COSTS AND OTHER NON-RECURRING CHARGES During 1997, the Corporation recorded non-recurring, pre-tax charges of $45.9 million primarily in Phelps Dodge Mining Company. These charges reflect additional provisions of $23.0 million for estimated future costs associated with environmental matters, $19.1 million for a voluntary early-retirement program and $3.8 million for estimated losses on the disposition of certain facilities. These charges reduced net income by $31.6 million, or 51 cents per common share, after taxes. The pre-tax charge of $23.0 million for estimated future costs associated with environmental matters comprised $18.0 million applicable to Phelps Dodge Mining Company and $5.0 million of unallocated Corporate charges. The Corporation's reserves for such costs totaled $122.4 million at December 31, 1997, compared with $117.0 million at December 31, 1996. (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 $19.1 million associated with the voluntary early-retirement program included $18.7 million for Phelps Dodge Mining Company and $0.4 million of unallocated Corporate charges. The pre-tax charge of $3.8 million is for losses recognized in the 1997 third quarter when the Corporation sold its 72.25 percent interest in the McDonald gold project in Montana and other associated properties to CR Montana Corporation and Canyon Resources Corporation, the parent of CR Montana. The sale included the immediate payment of $5.0 million to the Corporation. Under the sales agreement, the Corporation would receive an additional payment of between $95.0 million and $145.0 million upon commencement of construction or issuance of permits necessary for the project. This final component of the purchase price would be based, if necessary, on quarterly production payments. 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 was 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. In 1996, the Corporation recorded $10.0 million in reclamation reserves and $5.9 million in accrued interest related to this property. In August 1997, the Corporation returned $14.8 million to the Postal Service for the Maspeth property and paid $6.6 million of interest to the Postal Service. 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. 4. EQUITY EARNINGS AND INVESTMENTS AND LONG-TERM RECEIVABLES Equity earnings were as follows: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- International wire and cable manufacturers $ 3,900 2,600 1,000 Black Mountain 3,700 6,600 4,500 Other 4,100 1,300 1,000 ------- ------- ------- $11,700 10,500 6,500 ======= ======= ======= - --------------------------------------------------------------------------------
Dividends were received as follows: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Equity investments: International wire and cable manufacturers $ 300 300 300 Black Mountain 3,400 6,000 5,700 SIMSA 800 -- -- Other 600 500 100 ------- ------- ------- $ 5,100 6,800 6,100 ======= ======= ======= Cost basis investments: Southern Peru Copper Corporation $14,100 16,400 13,600 Other 100 300 300 ------- ------- ------- $14,200 16,700 13,900 ======= ======= ======= - --------------------------------------------------------------------------------
Investments and long-term receivables were as follows: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Equity basis: International wire and cable manufacturers $ 18,600 20,300 18,200 Black Mountain 8,800 9,000 11,300 Accuride Kaiser Wheel Inc. 22,600 -- -- SIMSA 14,500 -- -- Other 16,500 16,100 12,200 Cost basis: Southern Peru Copper Corporation 13,200 13,200 13,200 Other 37,600 27,800 24,100 -------- -------- -------- $131,800 86,400 79,000 ======== ======== ======== - --------------------------------------------------------------------------------
Retained earnings of the Corporation include undistributed earnings of equity investments of (in millions): 1997 - $69.3; 1996 - $62.8; 1995 - $59.0. 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: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Sales $ 868,700 764,100 771,200 Net income 40,100 56,000 42,000 - -------------------------------------------------------------------------------- Net current assets $ 84,500 85,600 66,600 Fixed assets, net 368,600 290,800 259,100 Long-term debt (42,400) (54,500) (40,500) Other assets and liabilities, net 41,100 (8,000) (3,900) --------- --------- --------- Net assets $ 451,800 313,900 281,300 ========= ========= ========= - --------------------------------------------------------------------------------
5. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED The Corporation reported net interest expense in 1997 of $62.5 million, compared with $66.1 million in 1996 and $62.0 million in 1995. Net interest expense decreased in 1997 despite a $344.0 million increase in debt due to an increase in the capitalization of interest costs of $9.8 million primarily as a result of the Candelaria expansion project in Chile. 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 (see Note 3). Included in 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. 6. MISCELLANEOUS INCOME AND EXPENSE, NET Interest income totaled $22.3 million in 1997, principally from the Corporation's short-term investments, compared with $34.3 million and $31.5 million in 1996 and 1995, respectively. Miscellaneous income in 1997 also included a $6.0 million pre-tax, non-cash gain from the exchange of shares of a cost basis investment in a wire and cable business located in Greece and pre-tax dividends of $14.1 million on its 13.9 percent minority interest in Southern Peru Copper Corporation, compared with $16.4 million and $13.6 million in 1996 and 1995, respectively. Losses from changes in currency exchange rates, principally in Thailand and Chile, amounted to $9.6 million in 1997, compared with losses of $11.7 million and $10.2 million in 1996 and 1995, respectively. 7. 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: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- United States $ 468,600 536,100 816,200 Foreign 113,300 151,400 259,500 --------- --------- --------- $ 581,900 687,500 1,075,700 ========= ========= ========= - --------------------------------------------------------------------------------
The provision for income taxes for the years ended December 31 were as follows: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Currently payable: Federal $ 89,900 99,000 157,800 State 15,000 16,100 23,900 Foreign 34,800 43,000 38,100 -------- -------- -------- 139,700 158,100 219,800 -------- -------- -------- Deferred: Federal 22,400 45,200 78,400 State 6,000 6,400 400 Foreign 12,300 10,300 24,100 -------- -------- -------- 40,700 61,900 102,900 -------- -------- -------- $180,400 220,000 322,700 ======== ======== ======== - --------------------------------------------------------------------------------
A reconciliation of the U.S. statutory tax rate to the Corporation's effective tax rate is as follows: - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Statutory tax rate 35.0% 35.0 35.0 Depletion (7.5) (7.0) (5.3) State and local income taxes 2.3 2.1 1.5 Effective international tax rate 1.0 0.9 (1.9) Other items, net 0.2 1.0 0.7 ---- ---- ---- Effective tax rate 31.0% 32.0 30.0 ==== ==== ==== - --------------------------------------------------------------------------------
The Corporation paid federal, state, local and foreign income taxes of approximately $173 million in 1997, compared with approximately $160 million in 1996 and approximately $247 million in 1995. As of December 31, 1997, the Corporation had alternative minimum tax credits of approximately $85 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; $4.5 million will expire in 1998. The Corporation's federal income tax returns for the years 1992, 1993 and 1994 are currently under examination. The Corporation has received proposed assessments from the Internal Revenue Service (IRS) 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 IRS. 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 an 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 IRS or litigate the issues involved. Deferred income tax assets and (liabilities) comprised the following at December 31: - --------------------------------------------------------------------------------
1997 1996 ---- ---- Minimum tax credits $ 85,200 78,400 Postretirement and postemployment benefits 60,000 58,000 Reserves 81,200 69,700 Mining costs 56,600 45,000 Inventories 4,700 4,800 Other 5,200 4,400 --------- --------- Deferred tax assets 292,900 260,300 --------- --------- Depreciation (640,600) (596,100) Mining properties (6,000) (8,900) Exploration and mine development costs (3,600) (3,700) Pensions (29,900) (30,300) --------- --------- Deferred tax liabilities (680,100) (639,000) --------- --------- $(387,200) (378,700) ========= ========= - --------------------------------------------------------------------------------
Income taxes have not been provided on the Corporation's share ($462 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 lent 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 withholdings and U.S. tax, net of foreign tax credit, in the amounts of $82 million and $47 million, respectively. 8. INVENTORIES AND SUPPLIES Inventories at December 31 were as follows (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Metals and other raw materials $191.8 194.1 Work in process 24.7 19.2 Finished manufactured goods 77.3 75.2 Other 4.0 4.5 ------ ------ $297.8 293.0 ====== ====== - --------------------------------------------------------------------------------
Inventories valued by the last-in, first-out method would have been greater if valued at current costs by approximately $109 million and $117 million at December 31, 1997 and 1996, respectively. Supplies in the amount of $115.1 million and $117.0 million at December 31, 1997 and 1996, respectively, are stated net of a reserve for obsolescence of $8.7 million and $8.9 million, respectively. 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 comprised the following (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Buildings, machinery and equipment $5,265.9 4,669.7 Mining properties 166.4 173.1 Capitalized mine development 312.3 290.4 Land and water rights 91.5 72.7 -------- -------- 5,836.1 5,205.9 Less accumulated depreciation, depletion and amortization 2,391.0 2,185.4 -------- -------- $3,445.1 3,020.5 ======== ======== - --------------------------------------------------------------------------------
The net increases in property, plant and equipment of $424.6 million in 1997 and $291.8 million in 1996 are summarized below (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Balance at beginning of year $3,020.5 2,728.7 -------- -------- Capital expenditures 661.6 513.0 Depreciation, depletion and amortization (277.3) (243.7) Property, plant and equipment of acquired companies 57.2 37.2 Asset sales, currency translation adjustments and other (16.9) (14.7) -------- -------- 424.6 291.8 -------- -------- Balance at end of year $3,445.1 3,020.5 ======== ======== - --------------------------------------------------------------------------------
10. OTHER ASSETS AND DEFERRED CHARGES Other assets and deferred charges at December 31 were as follows (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Goodwill, less accumulated amortization (1997 - $45.2; 1996 - $39.4) $178.0 130.6 Employee benefit plans 122.9 121.7 Debt issue costs 29.0 25.6 Intangible pension asset 2.0 4.0 Other intangible assets 3.6 4.0 Other 1.7 2.1 ------ ------ $337.2 288.0 ====== ====== - --------------------------------------------------------------------------------
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 were as follows (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Accounts payable $297.7 292.1 Employee benefit plans 26.3 31.5 Insurance and loss reserves 13.8 11.8 Salaries, wages and other compensation 47.1 48.3 Environmental reserves 38.2 43.6 Smelting, refining and freight 23.0 20.9 Other accrued taxes 15.7 16.1 Candelaria expansion 0.8 15.3 Shutdown, relocation and restructuring 7.7 10.3 Interest * 16.3 17.5 Returnable containers 7.0 3.6 Other 59.6 53.9 ------ ------ $553.2 564.9 ====== ====== - --------------- * Interest paid by the Corporation in 1997 was $72.6 million, compared with $67.2 million in 1996 and $70.4 million in 1995. - --------------------------------------------------------------------------------
12. OTHER LIABILITIES AND DEFERRED CREDITS Other liabilities and deferred credits at December 31 were as follows (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Postretirement and postemployment benefit plans $168.9 157.5 Other employee benefit plans 56.9 41.5 Environmental reserves 84.2 71.8 Shutdown, relocation and restructuring 4.4 5.4 Insurance and loss reserves 23.0 22.5 Other 6.7 10.9 ------ ------ $344.1 309.6 ====== ====== - --------------------------------------------------------------------------------
13. LONG-TERM DEBT AND OTHER FINANCING Long-term debt at December 31 is summarized below (in millions): - --------------------------------------------------------------------------------
1997 1996 ---- ---- 6.375% Notes due 2004 $ 100.0 - 7.125% Debentures due 2027 150.0 - 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 Chilean Mining Operations 271.6 214.0 Columbian Tiszai Carbon Ltd. (Hungary) 16.0 25.0 Columbian Carbon Spain, S.A. 7.6 10.9 Sevalco (United Kingdom) 11.2 - Columbian Chemicals Canada 7.0 - Phelps Dodge International Corporation 25.1 17.8 Other 2.3 4.0 ------- ------- Long-term debt including current portion 911.9 592.8 Less current portion 54.8 38.2 ------- ------- Long-term debt excluding current portion $ 857.1 554.6 ======= ======= - --------------------------------------------------------------------------------
Annual maturities of debt outstanding at December 31, 1997, are as follows (in millions): 1998 - $54.8; 1999 - $65.3; 2000 - $55.1; 2001 - $39.7; 2002 - $147.8. An existing revolving credit agreement between the Corporation and several lenders was amended on June 25, 1997. The agreement, as amended and restated, permits borrowings of up to $1 billion from time to time until its scheduled maturity on June 25, 2002. The agreement allows for two one-year renewals beyond the scheduled maturity date if the Corporation requests and receives approval from those lenders representing at least two-thirds of the commitments provided by the facility. In the event of such approval, total commitments under the facility would depend upon the willingness of other lenders to assume the commitments of those lenders electing not to participate in the renewal. Interest is payable at a fluctuating rate based on the agent bank's prime rate or at a fixed rate, based on the London Interbank Offered Rate (LIBOR) or at fixed rates offered independently by the several lenders, for maturities of between seven and 360 days. This agreement provides for a facility fee of six and one-half basis points (0.065 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, 1997, or December 31, 1996. The Corporation established a commercial paper program on August 15, 1997, under a private placement agency agreement between the Corporation and two placement agents. The agreement permits the Corporation to issue up to $1 billion of short-term promissory notes (generally known as commercial paper) at any one time. Commercial paper may bear interest or be sold at a discount, as mutually agreed by the Corporation and the placement agents at the time of each issuance. The Corporation's commercial paper rating requires that issuances of commercial paper be backed by an undrawn line of credit; the revolving credit agreement described above provides such support. There were no borrowings under the commercial paper program at December 31, 1997. The Corporation had other lines of credit totaling $100.0 million at December 31, 1997, and at December 31, 1996. 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, 1997, or December 31, 1996. The Corporation had $91.4 million in short-term borrowings, all by its international operations, at December 31, 1997, compared with $66.5 million at December 31, 1996. The increase in short-term borrowings principally was a result of borrowings at Accuride's new Mexican operations (Accuride de Mexico). The weighted average interest rate on total short-term borrowings at December 31, 1997, and December 31, 1996, was 13.0 percent and 15.3 percent, respectively. On November 5, 1997, the Corporation issued $100 million of 6.375 percent notes maturing on November 1, 2004, and $150 million of 7.125 percent debentures maturing on November 1, 2027, under an Indenture dated as of September 22, 1997, between the Corporation and The Chase Manhattan Bank, as Trustee. Interest on these securities is payable semi-annually on May 1 and November 1 of each year. The notes are not redeemable prior to maturity and are not entitled to any sinking fund. The debentures are redeemable, in whole or in part, at the option of the Corporation, at a redemption price equal to the greater of (i) 100 percent of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a rate equal to the sum of the yield of a United States Treasury security having a comparable maturity to the remaining term of the debentures plus 10 basis points. The debentures are not entitled to any sinking fund. The Corporation applied most of the proceeds from the sale of the offered securities to repay outstanding commercial paper, which had been issued for general corporate purposes. The Corporation's 80 percent-owned Compania Contractual Minera Candelaria (Candelaria) 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 started 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; this debt was replaced during the second quarter of 1997 when Candelaria borrowed $30 million of 12-year, dollar-denominated debt. In addition, during 1997 Candelaria borrowed $72 million of a $150 million, 12-year dollar-denominated facility arranged in order to partially finance Candelaria's $305 million expansion project. Both of the 1997 facilities are based on floating rates tied to six-month LIBOR and are non-recourse to the Corporation. The Corporation also caused Candelaria to sell the 9 percent and 11 percent interest rate caps purchased in 1993 that were intended to limit the effect of increases in the cost of Candelaria's floating rate debt. In turn, the Corporation caused Candelaria to enter into interest rate swaps with certain financial institutions to effectively convert all of Candelaria's floating rate debt to 7.84 percent, fixed rate debt for the life of the debt. The obligations under the interest rate swaps are non-recourse to the Corporation. 14. SHAREHOLDERS' EQUITY On May 7, 1997, the Corporation announced an additional share purchase program of up to 6 million of its common shares. This authorization follows a 5 million share purchase program that was initiated in 1995 and extended to 10 million shares in 1996. Under that program 9,920,800 shares were purchased by the Corporation. During 1997, the Corporation purchased 6,554,000 of its common shares at a total cost of $511.5 million, including 3,606,000 shares at a cost of $292.9 million under the new 6 million share authorization. There were 58,634,000 shares outstanding on December 31, 1997. During 1996, the Corporation purchased 4,297,300 of its common shares at a total cost of $273.2 million. 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, 1997, or December 31, 1996. The Corporation has in place a Preferred Share Purchase Rights Plan. The Preferred Share Purchase Rights Plan contains provisions to protect stockholders in the event of unsolicited offers or attempts to acquire the Corporation, including acquisitions in the open market of shares constituting control without offering fair value to all stockholders and other coercive or unfair takeover tactics that could impair the Board of Directors' ability to represent the stockholders' interests fully. 15. 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 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, 1997, options for 139,416 shares, 48,208 shares and 1,719,158 shares were exercisable under the 1987 plan, the 1989 plan and the 1993 plan, respectively, at average prices of $44.22, $45.22 and $65.68 per share. In addition, 242,150 shares of Restricted Stock issued under the 1993 plan were outstanding at December 31, 1997. Also at December 31, 1997, 1,263,782 shares were available for option grants (including 734,308 shares as restricted stock awards) under the 1993 plan. These amounts are subject to future adjustment as described in the plan agreement. No further options may be granted under the 1987 or 1989 plans. There were no options outstanding under the 1979 plan as of December 31, 1997, December 31, 1996, or December 31, 1995. Changes during 1995, 1996 and 1997 in options outstanding for the combined plans were as follows: - --------------------------------------------------------------------------------
Average option Shares price per share ------ --------------- 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 Granted 1,110,431 69.33 Exercised (827,243) 52.30 Expired or terminated (47,891) 69.63 --------- Outstanding at December 31, 1997 * 3,434,491 65.44 ========= - --------------- * Exercise prices for options outstanding at December 31, 1997, range from a minimum of approximately $21 per share to a maximum of approximately $89 per share. The average remaining maximum term of options outstanding is approximately eight years. - --------------------------------------------------------------------------------
Changes during 1995, 1996 and 1997 in Restricted Stock were as follows: - --------------------------------------------------------------------------------
Shares ------ 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 Granted 15,250 Terminated (800) -------- Outstanding at December 31, 1997 242,150 ======== - --------------------------------------------------------------------------------
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," 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): - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Net income - as reported $ 408.5 461.8 746.6 Net income - pro forma 402.4 456.2 741.6 Earnings per share - as reported (diluted) 6.63 6.98 10.66 Earnings per share - pro forma (diluted) 6.54 6.89 10.60 - --------------------------------------------------------------------------------
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:
1997 1996 1995 ---- ---- ---- Expected dividend yield 3.02% 3.32% 3.34% Expected stock price volatility 23.0% 24.0% 22.1% Risk-free interest rate 5.8% 5.7% 6.0% Expected life of options 3 years 3 years 3 years
The weighted average fair value of options granted during 1997 was $10.62 per share, compared with $12.68 in 1996 and $11.04 in 1995. 16. 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 either at the time of employment or after one year of service, 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. 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 Corporation also maintains pension plans for certain employees of international subsidiaries following the legal requirements in those countries. The status of employee pension benefit plans at December 31 is summarized below (in millions): - --------------------------------------------------------------------------------
Overfunded Underfunded Plans Plans ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Actuarial present value of projected benefit obligation, based on employment service to date and current salary levels: Vested employees $ 561 507 27 41 Non-vested employees 45 34 2 6 ----- ----- ----- ----- Accumulated benefit obligation 606 541 29 47 Additional amounts related to projected salary increases 59 43 5 6 ----- ----- ----- ----- Total projected benefit obligation 665 584 34 53 Plan assets at fair value 774 681 4 22 ----- ----- ----- ----- Projected pension benefit obligation in excess of (less than) plan assets (109) (97) 30 31 Unamortized net asset (liability) existing at January 1, 1985 3 5 (1) - Unrecognized prior service cost (42) (22) (2) (5) Unrecognized net gain (loss) from actuarial experience 66 23 (7) (9) ----- ----- ----- ----- Accrued (prepaid) pension cost $ (82) (91) 20 17 ===== ===== ===== ===== - --------------------------------------------------------------------------------
The Corporation's pension plans were valued between December 1, 1995, and January 1, 1996, and between December 1, 1996, and January 1, 1997. The obligations were projected to and the assets were valued as of the end of 1996 and 1997. Of its ten U.S. pension plans at December 31, 1997, eight were overfunded while two were underfunded. Effective November 30, 1997, two non-bargained hourly pension plans were merged into an existing plan, and one salaried plan of an acquired company was terminated and participants were provided future benefits under an existing Corporate plan. Of the Corporation's 13 U.S. pension plans at December 31, 1996, nine were overfunded while four 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): - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Benefits earned during the year $ 17.5 14.2 11.2 Interest accrued on projected benefit obligation 46.8 43.4 42.9 Return on assets - actual (117.3) (108.4) (119.6) - unrecognized gain 56.3 51.8 66.6 Net amortization 3.0 1.5 1.0 ------ ------ ------ Net periodic pension cost for the year $ 6.3 2.5 2.1 ====== ====== ====== - --------------------------------------------------------------------------------
Assumptions used to develop the net periodic pension cost included a 7.25 percent discount rate in 1997 and 1996, compared with 8.5 percent in 1995. 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 1997, 1996 and 1995. For the valuation of pension obligations, the discount rate at the end of 1997 was 7.25 percent, equivalent to the discount rate at the end of 1996 and 1995. The Corporation recognizes a minimum liability in its financial statements for its underfunded plans. "Other liabilities and deferred credits" at December 31, 1997, included $7 million relating to this minimum liability, compared with $10 million at December 31, 1996. This amount was offset by a $2 million intangible asset, a $3 million reduction in "Common Shareholders' Equity" and a $2 million deferred tax benefit at December 31, 1997, compared with a $4 million intangible asset, a $4 million reduction in "Common Shareholders' Equity" and a $2 million deferred tax benefit at December 31, 1996. 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." 17. 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): - --------------------------------------------------------------------------------
1997 1996 ---- ---- Accumulated Postretirement Benefit Obligation: Retirees $ 76 74 Fully eligible active plan participants 12 14 Other active plan participants 74 64 ---- ---- Total accumulated postretirement benefit obligation 162 152 Plan assets at fair value 10 11 ---- ---- Accumulated postretirement benefit obligation in excess of plan assets 152 141 Unrecognized prior service cost 4 7 Unrecognized net gain (loss) from actuarial experience 4 (1) ---- ---- Accrued postretirement benefit cost $160 147 ==== ==== - --------------------------------------------------------------------------------
The components of net periodic postretirement benefit cost were as follows (in millions): - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- Benefits attributed to service during the year $ 4 4 4 Interest cost on accumulated postretirement benefit obligation 11 10 11 Return on assets - actual (1) (1) (1) Net amortization - - (1) ---- ---- ---- Net periodic postretirement benefit cost for the year $ 14 13 13 ==== ==== ==== - --------------------------------------------------------------------------------
For 1997 measurement purposes, annual rates of increase in the per capita cost of covered health care benefits were assumed to average 7.6 percent for 1998 decreasing gradually to 5.3 percent by 2008 and remaining at that level thereafter. 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. 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, 1997, by approximately $11.3 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 1997, the same as that used for 1996. Assumptions used to develop net periodic postretirement benefit cost included a 7.25 percent discount rate in 1997, equivalent to the 7.25 percent discount rate used in 1996 and a decrease from 8.5 percent in 1995. The expected long-term rate of return on plan assets was 8 percent for both 1997 and 1996. 18. COMMITMENTS Rent expense for the years 1997, 1996 and 1995 was (in millions): $18.6, $15.6 and $18.8, respectively. Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year totaled $47.4 million at December 31, 1997. These commitments for future periods are as follows (in millions): 1998 - $12.0; 1999 - $10.6; 2000 - $6.5; 2001 - $5.3; 2002 - $1.2; 2003 and thereafter - $11.7. 19. 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 (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 40 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 currently estimate the total additional loss it may incur for such environmental liabilities, but such loss could be substantial. (See Notes 1 and 3 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 adopted rules for the Arizona program in January 1997, and the Corporation's operations began submitting the required reclamation plans in 1997. Reclamation is an ongoing activity and the Corporation is currently recognizing estimated reclamation costs using a units of production basis calculation. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. 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. Negotiations between the Tribe, the Corporation and other parties continued on the comprehensive settlement and other necessary agreements for several years. In 1997, additional disputes arose between Phelps Dodge and the Tribe. On May 12, 1997, the Tribe filed suit against the Corporation in San Carlos Apache Tribal Court, seeking eviction of the Corporation from the Tribe's Reservation and claiming substantial compensatory and punitive damages, among other relief. In May 1997, Phelps Dodge and the Tribe reached an agreement, and subsequently federal legislation (Pub. L. No. 105-18, Section 5003, 111 stat. 158, 181-87), was adopted which mandated dismissal of the tribal court suit. The legislation prescribes arrangements intended to ensure a future supply of water for the Morenci mining complex in exchange for certain payments by the Corporation. The legislation does not address any potential claims by the Tribe relating to the Corporation's historical occupancy and operation of its facilities on the Tribe's Reservation but does require that any such claims be brought, if at all, exclusively in federal district court. By order dated October 13, 1997, the tribal court dismissed the lawsuit with prejudice, as contemplated by the legislation. On September 25, 1997, the Corporation announced it had sold its 72.25 percent interest in the McDonald gold project and other associated properties to CR Montana Corporation and Canyon Resources Corporation, the parent of CR Montana. The terms of the transaction included the immediate payment of $5 million with an additional payment to Phelps Dodge of between $95 million and $145 million when permitting for the project is completed or construction is commenced. The final amount of the $150 million total purchase price will be based, if necessary, on quarterly production payments. 20. 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, as summarized in the table at the end of this note, are based on quoted market prices for similar financial instruments. A summary of derivative financial instruments held by the Corporation is as follows: COPPER FUTURES CONTRACTS - Because of the market risk arising from the volatility of copper prices on the COMEX and the LME, the Corporation's objective and practice is to sell its copper cathodes and rod at a price based on the COMEX average price in the month of shipment, and its copper concentrates at the LME average price in the month of settlement with its customers. The Corporation records copper concentrate sales on a provisional basis on the date of shipment and adjusts the sales on a monthly basis to reflect the latest LME price. A final adjustment is made upon settlement with customers. For cathode and rod sales, 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 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 combined net effect of a firm price customer contract and the related futures transactions is for the Corporation to realize an amount based on the COMEX average price during the month of shipment. Swap contracts are settled at the COMEX average monthly price in the month copper is shipped. At December 31, 1997, the Corporation had futures and swap hedge contracts in place for approximately 140 million pounds of copper with an approximate net value of $130 million and an aggregate notional value of approximately $146 million. The copper futures and swap contracts acquired by the Corporation at year end had maturities of 18 months or less. The Corporation had deferred unrealized losses of $18.7 million on its futures and swap contracts at December 31, 1997. With respect to 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 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. COPPER PRICE PROTECTION AGREEMENTS - Depending on market conditions, the Corporation may periodically purchase or sell various copper option contracts to reduce the risk of adverse price changes on a portion of its expected future mine production. With respect to 1998 production, the Corporation has not entered into any option contracts. For 1997 production, the Corporation had hedge contracts that provided for a minimum first quarter average price of 90 cents per pound for a net position of approximately 85 million pounds of copper that expired without payment to Phelps Dodge. There were no copper price protection contracts as of the end of 1997. During 1996, the Corporation sold copper price protection contracts that covered 94 million pounds of production in the 1996 fourth quarter and 85 million pounds of production in the 1997 first quarter. This resulted in immediate cash payments to the Corporation of $15.6 million. Consequently, $8.8 million was recognized in income in the 1996 fourth quarter and $6.8 million was deferred and recognized in income during the 1997 first quarter. With respect to 1996 production, the Corporation had contracts that provided a combination of minimum and maximum quarterly average 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. 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. 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 reduce the Corporation's overall exposure to adverse changes in currency exchange rate movements resulting from transactions denominated in foreign currencies. 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, 1997, the Corporation had protection in place for approximately $158 million of recorded and anticipated foreign currency transactions through the use of currency options and forward contracts with a matching notional value. The currency option and forward contracts acquired by the Corporation have maturities of less than one year. The Corporation did not have any material deferred unrecognized gains or losses on its foreign exchange contracts for the year-end periods 1995 through 1997. With respect to 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. CURRENCY SWAP CONTRACTS - During 1997, the Corporation entered into currency swap contracts to hedge certain recorded transactions. The Corporation did not hold these financial instruments for trading purposes. The Corporation's currency swap agreements are employed in structured transactions whose purpose is to take advantage of opportunities to obtain attractively priced foreign currency debt. At year end, the Corporation's majority-owned Phelps Dodge Thailand Ltd. cable manufacturing plant in Thailand had entered into currency swap agreements that effectively converted floating rate U.S. dollar loans to fixed rate Thai baht loans. At December 31, 1997, the Corporation had currency swap contracts in place for approximately $15 million of currency swap contracts. The currency swap contracts acquired by the Corporation have maturities of 19 months or less. INTEREST RATE SWAP AGREEMENT - The Corporation caused its 80 percent-owned Candelaria copper mine in Chile to enter into an interest rate swap converting $280.8 million of floating rate dollar-denominated debt to an average fixed rate of 7.84 percent for the life of the debt which extends through the year 2008. Under the terms of the floating rate debt agreement, Candelaria's borrowings are expected to vary from period to period during the life of the debt. As a result, the notional value of the interest rate swap contract has been established at varying amounts throughout the life of the swap. CREDIT RISK - The Corporation is exposed to credit loss in the event of nonperformance by counterparties to its commodity price, 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 routine 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 cash equivalents -- 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. Financial hedge instruments -- the fair values of financial hedge instruments are based on quotes from brokers or calculations using market prices for those or similar instruments. 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 $89.2 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 carrying amounts and estimated fair values of the Corporation's financial instruments as of December 31, 1997, were as follows (in millions): - --------------------------------------------------------------------------------
Carrying Fair Amount Value -------- ------- Cash and short-term investments $157.9 157.9 Currency swap agreements - assets - 3.7 Investments and long-term receivables (including amounts due within one year) for which it is practicable to estimate fair value * 51.4 186.5 Long-term debt (including amounts due within one year) 911.9 834.2 Interest rate swap agreements - assets - (10.8) Foreign currency exchange contracts - assets (liabilities) (3.0) 0.2 - ----------- * 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, 1997, the estimated fair value of the Corporation's investment in SPCC is approximately $149 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. - --------------------------------------------------------------------------------
21. 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 global energy, telecommunications, transportation and specialty chemicals sectors. 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 wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates; and until it was sold effective January 1, 1998, its wheel and rim operations through Accuride Corporation and its subsidiaries. The Corporation's total 1997 sales included exports of $89.3 million from U.S. operations to unaffiliated foreign customers, compared with $60.2 million in 1996 and $93.7 million in 1995. 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 1995 through 1997. Major unusual items during the three-year period included (i) a 1997 pre-tax provision of $40.5 million included in Phelps Dodge Mining Company's operating income for costs associated with a voluntary early-retirement program, environmental matters and other, (ii) a 1997 pre-tax provision of $5.4 million included in Corporate and Other's operating income for costs associated with environmental matters and a voluntary early-retirement program, (iii) 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, and (iv) 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. (See Note 3 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 ------ --------- ------ ------- ----- ------- ----- 1997 Sales and other operating revenues: Unaffiliated customers $2,173.3 429.5 333.0 978.5 1,741.0 - 3,914.3 Intersegment 288.4 - - 2.6 2.6 - 291.0 Operating income (loss) 457.2 74.3 48.7 81.9 204.9 (51.1) 611.0 Identifiable assets at December 31 3,083.4 502.8 356.7 896.8 1,756.3 125.5 4,965.2 Depreciation, depletion and amortization 172.4 37.2 20.7 51.4 109.3 2.0 283.7 Capital outlays 455.4 75.7 24.0 102.5 202.2 4.0 661.6 Equity earnings 4.5 (0.1) 2.7 4.6 7.2 - 11.7 - --------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------
FINANCIAL DATA BY GEOGRAPHIC AREA (In millions) - --------------------------------------------------------------------------------
1997 1996 1995 ---- ---- ---- SALES AND OTHER OPERATING REVENUES: Unaffiliated customers United States $2,870.9 2,773.5 3,072.6 Latin America 464.8 414.6 537.3 Other 578.6 598.5 575.5 -------- -------- -------- $3,914.3 3,786.6 4,185.4 ======== ======== ======== Intergeographic areas * United States $ 26.4 11.9 13.1 Latin America -- 14.9 23.7 Other 39.7 43.5 47.9 -------- -------- -------- $ 66.1 70.3 84.7 ======== ======== ======== OPERATING INCOME: United States $ 483.5 544.9 810.4 Latin America 75.7 64.5 196.8 Other 51.8 103.5 93.3 -------- -------- -------- $ 611.0 712.9 1,100.5 ======== ======== ======== IDENTIFIABLE ASSETS AT DECEMBER 31: United States $3,184.7 3,196.2 3,157.1 Latin America 1,232.1 1,000.1 931.3 Other 548.4 620.1 557.5 -------- -------- -------- $4,965.2 4,816.4 4,645.9 ======== ======== ======== - ----------- * 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 6, 1998 (the 1998 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 1998 Proxy Statement is being prepared and will be filed with the Securities and Exchange Commission and furnished to shareholders on or about April 1, 1998. 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 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)) and Certificate of Amendment of such Restated Certificate of Incorporation, effective June 19, 1997 (incorporated by reference to Exhibit 3.1 to the Corporation's Form 10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)). 3.2 By-Laws of the Corporation, as amended effective May 7, 1997 (incorporated by reference to Exhibit 3.2 to the Corporation's Form 10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)). 4.1 Reference is made to Exhibits 3.1 and 3.2 above. 4.2 Second Amended and Restated Credit Agreement, dated as of June 25, 1997, among the Corporation, several banks and other lending institutions, and The Chase Manhattan Bank, as administrative agent (incorporated by reference to Exhibit 4.2 to the Corporation's Form 10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)). 4.3 Rights Agreement, dated as of February 5, 1998 between the Corporation and The Chase Manhattan Bank (which replaces the Rights Agreement dated as of July 29, 1988 as amended and restated as of December 6, 1989, the rights issued thereunder having been redeemed by the Corporation), 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 and in the Corporation's Form 8-A, both filed on February 6, 1998 (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. 4.4 Form of Indenture, dated as of September 22, 1997, between the Corporation and The Chase Manhattan Bank, as Trustee (incorporated by reference to the Corporation's Registration Statement and Post-Effective Amendment No. 1 on Form S-3 (Registration Nos. 333-36415 and 33-44380)) filed with the Securities and Exchange Commission on September 25, 1997 (incorporated by reference to Exhibit 4.3 to the Corporation's Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)). 4.5 Form of 6.375 percent Note, due November 1, 2004, of the Corporation issued on November 5, 1997, pursuant to the Indenture, dated as of September 22, 1997, between the Corporation and The Chase Manhattan Bank, as Trustee (incorporated by reference to the Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 1997 and Exhibit 4.4 of Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)). 4.6 Form of 7.125 percent Debenture, due November 1, 2027, of the Corporation issued on November 5, 1997, pursuant to the Indenture, dated as of September 22, 1997, between the Corporation and The Chase Manhattan Bank, as Trustee (incorporated by reference to the Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 1997 and Exhibit 4.5 of the Corporation's Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)). 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)). Amendment to 1993 Plan effective May 7, 1997 (incorporated by reference to Exhibit 10.15 to the Corporation's Form 10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)). Amended and restated form of Stock Option Agreement, amended through February 5, 1997 (SEC File No. 1-82). Form of Reload Option Agreement, 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 June 25, 1997, effective September 30, 1997 (incorporated by reference to Exhibit 10.5 to the Corporation's Form 10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)). 10.6 Amended and restated 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 1998 Proxy Statement (SEC File No. 1-82). 10.7 Amended and restated 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 1998 Proxy Statement (SEC File No. 1-82). 10.8 The Corporation's Retirement Plan for Directors, effective January 1, 1988, terminated for active directors effective December 31, 1997 (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 Supplemental Retirement Plan (which amends, restates and re-names the provisions of the Corporation's Comprehensive Executive Nonqualified Retirement and Savings Plan other than the supplemental savings provisions of such plan), effective (except as otherwise noted therein) as of January 1, 1997 (SEC File No. 1-82). 10.10 The Corporation's Supplemental Savings Plan (which amends, restates, and replaces the supplemental savings provisions of the Corporation's Comprehensive Executive Nonqualified Retirement and Savings Plan), effective (except as otherwise noted therein) as of January 1, 1997 (SEC File No. 1-82). 10.11 The Corporation's Directors Stock Unit Plan effective January 1, 1997 (incorporated by reference to Exhibit 10.10 to the Corporation's 1996 Form 10-K (SEC File No. 1-82)) as amended and restated, effective January 1, 1998 (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: The Corporation filed a Current Report on Form 8-K on November 3, 1997, with respect to the issuance of debt securities pursuant to an Indenture, dated as of September 22, 1997, between the Corporation and The Chase Manhattan Bank, as Trustee. 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, 1997 $14,200 1,500 (600) 1,300 13,800 December 31, 1996 12,000 4,300 (200) 1,900 14,200 December 31, 1995 11,800 2,000 (800) 1,000 12,000 Supplies: December 31, 1997 $ 8,900 600 200 1,000 8,700 December 31, 1996 10,500 1,300 100 3,000 8,900 December 31, 1995 14,000 600 200 4,300 10,500
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, 1998 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, Chief Executive Officer and Director Douglas C. Yearley (Principal Executive Officer) March 17, 1998 - ------------------- Douglas C. Yearley Senior Vice President and Chief Financial Officer Thomas M. St. Clair (Principal Financial Officer) March 17, 1998 - ------------------- Thomas M. St. Clair Vice President and Controller Gregory W. Stevens (Principal Accounting Officer) March 17, 1998 - ------------------- Gregory W. Stevens Robert N. Burt, Paul W. Douglas, William A. Franke, ) Paul Hazen, Manuel J. Iraola, Marie L. Knowles, ) Robert D. Krebs, Southwood J. Morcott, ) March 17, 1998 Gordon R. Parker, J. Steven Whisler, Directors ) By: Thomas M. St. Clair ------------------- Thomas M. St. Clair Attorney-in-fact EX-10.3 2 STOCK OPTION AGREEMENT Exhibit 10.3 STOCK OPTION AGREEMENT (1993 Stock Option Plan) STOCK OPTION AGREEMENT, dated _________________, between PHELPS DODGE CORPORATION, a New York corporation (the "Corporation"), and ____________________________ (the "Employee"). The Compensation and Management Development Committee of the Board of Directors of the Corporation (such Committee, and any successor committee appointed by the Board of Directors of the Corporation to administer the Corporation's 1993 Stock Option and Restricted Stock Plan (the "Plan"), is hereinafter referred to as the "Committee") has granted to the Employee (a) an option under the Plan to purchase Common Shares of the Corporation and (b) limited stock appreciation rights on the terms set forth below. To evidence the option and limited stock appreciation rights so granted, and to set forth their terms and conditions as provided in the Plan, the Corporation and the Employee hereby agree as follows: 1. Confirmation of Grant of Option and Rights; Option Price. The Corporation hereby evidences and confirms its grant to the Employee of (i) an option (the "Option") to purchase ______ of the Corporation's Common Shares at an option price of $______ per share and (ii) limited stock appreciation rights (the "Rights") appertaining to the Option which, if exercisable pursuant to Section 2, shall enable the Employee to elect, in the manner described in Section 6 hereof, to relinquish the Option with respect to any or all of the Common Shares as to which the Option is exercisable at such time for a cash payment from the Corporation. The amount of cash payable upon the exercise of any Rights shall be equal to the excess of (x) the product of (A) the price paid or payable for a Common Share of the Corporation in the transaction described in Section 2(b) below (a "Transaction") which causes the Rights to become exercisable multiplied by (B) the number of Common Shares with respect to which the Employee shall have made such election, over (y) the purchase price for that number of Common Shares. (In the event that the price paid or payable with respect to such a Transaction is in a consideration other than cash or in an amount not readily determinable at such time, such price shall be determined by the Committee). The Option and the Rights granted hereby shall be subject to the provisions of the Plan. 2. Term for Exercise. (a) The Option shall become exercisable, subject to the provisions of this Section 2 and Sections 3 and 4 hereof, in installments of __________ Common Shares on the first anniversary of the date of grant of the Option, _____________ Common Shares on the second anniversary and _____________ Common Shares on the third anniversary. Unless an earlier expiration date is specified by this Agreement (or, if applicable, in Supplement A), the Option and the Rights shall expire at 5:00 P.M., Arizona Mountain time (such time shall hereinafter be referred to as the "End of Business"), on the day after the tenth anniversary of the date on which the Option was granted (the "Termination Date"). (b) Without limiting the generality of the foregoing, in the event: (i) the Corporation's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Corporation or by law) of the voting stock of the Corporation approve any merger, consolidation, sale of assets, liquidation or reorganization in which the Corporation will not survive as a publicly owned corporation (such approval hereinafter referred to as a "Merger Approval"); or (ii) any of the Corporation's Common Shares are purchased pursuant to a tender or exchange offer other than an offer by the Corporation, any Subsidiary of the Corporation (as defined in the Plan and hereinafter referred to as a "Subsidiary"), or any employee benefit plan maintained by the Corporation or a Subsidiary (such purchase hereinafter referred to as a "Tender Purchase"); then the Option and the Rights shall become exercisable during the period beginning on the date of the Merger Approval or Tender Purchase, as the case may be, and ending on the thirtieth day following such date (but in no event shall the Option or the Rights become exercisable under this paragraph earlier than six months from the date on which the Option was granted (the "Grant Date")). If any Rights or any portion of the Option shall be exercised, the Rights or the Option shall thereafter remain exercisable, according to their terms, only with respect to the number of Common Shares as to which the Rights or the Option, as the case may be, would otherwise be exercisable less the number of Common Shares with respect to which the Rights and the Option have previously been exercised. 3. Who May Exercise. During the Employee's lifetime the Option and the Rights may be exercised only by him. If the Employee dies while in the employ of the Corporation or one of its Subsidiaries, the Option and, if exercisable under Section 2, the Rights may be exercised for the full number of Common Shares specified in Section 1 hereof less the number of Common Shares for or respect to which the Option and the Rights have previously been exercised, by the Employee's estate, personal representative or beneficiary who acquired the right to exercise the Option and the Rights by will or by the laws of descent and distribution, at any time prior to the End of Business on the earlier of the Termination Date or the fifth anniversary of the Employee's death. If the Employee dies while he is no longer employed by the Corporation or a Subsidiary, his Options and, if exercisable under Section 2, the Rights may be exercised for the full number of Common Shares as to which he could have exercised them on the date of his death, by his estate, personal representative or beneficiary who acquired the right to exercise the Option and the Rights by will or by the laws of descent and distribution, at any time prior to the termination date provided by Section 4 thereof. Following the End of Business on the earlier of such Termination Date, the fifth anniversary of the Employee's death or the termination date provided by Section 4, as the case may be, the Option and Rights shall expire. 4. Exercise after Termination of Employment. If the Employee shall cease to be employed by the Corporation or a Subsidiary other than by reason of death, Disability (as defined below), Retirement (as defined in the Plan) or the Employee's termination for Cause (as defined in the Plan), the Option shall remain exercisable, to the extent exercisable on the date of such termination, until the End of Business on the earlier of the Termination Date or the date which is one month after the day his employment ends. If the Employee's employment shall terminate due to Disability or Retirement, the Option shall remain exercisable, to the extent exercisable on the date of the Employee's termination of employment, until the End of Business on the earlier of the Termination Date or the fifth anniversary of the date of such termination of employment; provided, however, that, in the event the Employee's employment with the Corporation terminates not earlier than six months from the Grant Date as a result of the Employee's Disability or Retirement, immediately prior to the End of Business on the date the Employee's employment terminates the Option shall become exercisable for the purchase of the full number of Common Shares specified in Section 1 of the Agreement less the number of Common Shares with respect to which the Option and the Rights have previously been exercised. Disability means the inability of a Participant to perform his duties for a period of at least 180 days due to mental or physical infirmity, as determined pursuant to the Corporation's policies. If the Employee's employment is terminated for Cause, all Options granted to the Employee which are then outstanding shall be forfeited as of the effective time of such termination but in no event later than the End of Business on such termination date. Any portion of the Option or the Rights which is not exercisable on the date the Employee's employment terminates for any reason other than death, Disability, Approved Retirement shall expire at the End of Business on such termination date. Any portion of the Option which did not expire on the date the Employee's employment terminates and which is not exercised within the period established under this Section 4 shall expire following the End of Business on the last day on which the Option could have been exercised. Following termination of the Employee's employment for any reason (including death), the Rights (i) shall remain outstanding with respect to that number of Common Shares as to which the Option is exercisable, (ii) will become exercisable pursuant to Section 2 as to that number of Common Shares as to which the Option is then exercisable if a Transaction occurs while the Option remains exercisable and (iii) shall expire at the same time as the Option expires. 5. Restrictions on Exercise. The Option and Rights may be exercised only with respect to full Common Shares. No fractional shares shall be issued. The Option (and, if applicable, the Rights) may not be exercised in whole or part: (a) if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of options shall not have been secured; or (b) unless the Common Shares subject to the Option shall be effectively listed on the New York Stock Exchange and registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which listing and registration may be upon official notice of issuance of such Common Shares. The Corporation may require that, as a condition to any exercise of the Option, the Employee represent to the Corporation in writing that he is acquiring the Common Shares subject to such exercise for his own account for investment only and not with a view to the distribution thereof. 6. Manner of Exercise. To the extent the Option and the Rights shall be exercisable in accordance with the terms hereof, and subject to such administrative regulations as the Committee may have adopted: (a) The Option may be exercised in whole or from time to time in part by written notice to the Committee, (i) identifying the Option by Grant Date, the option price and whether or not the Agreement includes Supplement A, (ii) specifying the number of Common Shares with respect to which the Option is being exercised, and (iii) accompanied by full payment of the option price for such Common Shares (1) in United States dollars by personal check or cash, including an assignment of the right to receive cash proceeds of the sale of Common Shares subject to the Option, (2) in Common Shares of the Corporation owned by the Employee for at least three months prior to the day of exercise, represented by certificates duly endorsed to the Corporation or its nominee with any requisite transfer tax stamps attached, the market value of which shall be equal to the option price for the Common Shares with respect to which the Option is being exercised, or (3) in a combination of (1) and (2) above. The market value of any Common Shares delivered pursuant to the immediately preceding sentence shall be the mean of the high and low prices of such Common Shares on the Consolidated Trading Tape on the day of exercise or, if there was no such sale on such day, on the day next preceding the day of exercise on which there was a sale. (b) Rights may be exercised when exercisable under Section 2 in whole or in part by written notice to the Committee, (i) identifying the Rights by Grant Date and option price, and (ii) specifying the number of Common Shares with respect to which such Rights are being exercised. For valuation purposes, the day of exercise of the Option or the Rights shall be deemed to be the day on which notice, addressed to the Committee, either to exercise the Option in whole or in part by the payment of Common Shares (together with duly endorsed certificates as provided above and any other required payment) or to exercise the Rights is received at the Corporation's principal office, except that if such notice (together with certificates and other payment if required) is received on a Saturday or Sunday or on a holiday observed by the Corporation's principal office, or after the End of Business on any other day, the day of exercise shall be deemed to be the next business day. "Written notice" shall include, without limitation, notice by telegram, telex, cable or telecopy facsimile. In the event that the Option or the Rights shall be exercised by a person other than the Employee in accordance with the provisions of Section 3 hereof, such person shall furnish the Corporation with evidence satisfactory to it of his or her right to exercise the same and of payment or provision for payment of any estate, transfer, inheritance or death taxes payable with respect to the Option or the Rights or with respect to any related Common Shares or payment. The Corporation may require the Employee or other person exercising the Option or the Rights to furnish or execute such documents as the Corporation shall deem necessary to evidence such exercise, to determine whether registration is then required under the Securities Act of 1933, as amended, or to comply with or satisfy the requirements of the Exchange Act, or any other law. 7. Nonassignability. Unless the Committee shall otherwise so specify by a supplement to this Agreement approved in connection with the award hereof or at any subsequent time, neither the Option nor the Rights are assignable or transferable except by will or by the laws of descent and distribution to the extent contemplated by Section 3 hereof. At the request of the Employee, Common Shares purchased on exercise of the Option may be issued or transferred in the name of the Employee and another person jointly with the right of survivorship. 8. Rights as Stockholder. The Employee shall have no rights as a stockholder with respect to any Common Shares covered by the Option until the issuance of a certificate or certificates to him for such Common Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 9. Capital Adjustments. The number and price of the Common Shares covered by the Option shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Corporation's Common Shares or any recapitalization of the Corporation. To the extent deemed equitable and appropriate by the Committee, subject to any required action by the stockholders of the Corporation, in any merger, consolidation, reorganization, liquidation, dissolution, or other similar transaction, the Option shall pertain to the securities and other property, if any, which a holder of the number of Common Shares covered by the Option would have been entitled to receive in connection with such event. 10. Withholding. (a) The Corporation's obligation to deliver Common Shares upon the exercise of the Option shall be subject to payment by the Employee of any amount required to be withheld with respect to such exercise pursuant to any applicable federal, state or local tax withholding requirements. The Corporation shall withhold from any cash payable in connection with the exercise of any Rights any amount required to be withheld pursuant to any applicable federal, state or local tax withholding requirement (including, without limitation, FICA). (b) Unless this Agreement includes Supplement A (making it an incentive stock option), the Employee may elect to satisfy all or any part of his federal, state and local tax obligations (including, without limitation, FICA) with respect to such exercise by having the Corporation withhold from any Common Shares otherwise deliverable to him in connection with the exercise of the Option a number of Common Shares, or by delivering Common Shares already owned by the Employee, having a market value equal in amount to the obligations to be so satisfied. The market value of Common Shares withheld or delivered shall be the mean of the high and low prices of such Common Shares on the Consolidated Trading Tape on the day of exercise or, if there was no such sale on such day, on the next preceding day on which there was a sale. 11. Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York. 12. Supplements. Attached hereto are the following supplements: [Supplement A -- Incentive Stock Option] Supplement B -- Change of Control Supplement D -- Reload Option Any such supplements so attached are incorporated herein and constitute a part of this Agreement as though set forth in full herein. Additional supplements may be added to this Agreement at a later date by the Committee; provided however that if any such additional supplement adversely affects the rights of the Employee under this Agreement, such supplement shall not be or become effective unless and until the Employee consents to its addition in writing. All capitalized terms used in such supplements without definition shall have the meaning determined under this Agreement. IN WITNESS WHEREOF, the Corporation and the Employee have duly executed this Agreement as of the date set forth above. PHELPS DODGE CORPORATION By___________________________ Vice President _____________________________ Employee Supplement A [Incentive Stock Option -- 1993 Stock Option Plan] Supplement A to the Stock Option Agreement (the "Agreement") dated __________________ between Phelps Dodge Corporation (the "Corporation") and ___________________ (the "Employee"). 1. Term of the Option. Each incentive stock option shall expire on the tenth anniversary of the date of its grant. 2. Disposition of Shares. If the Employee disposes of any Common Shares received upon exercise of the Option within two years after the Option was granted to him or within one year after the Common Shares were transferred to him upon exercise of the Option, whether by sale, gift, or otherwise, the Employee shall notify the Secretary of the Corporation of the number of such Common Shares disposed of, the date on which disposed of, the manner of disposition and the amount, if any, realized upon such disposition, and shall promptly pay to the Corporation the amount, if any, that the Corporation specifies in a written notice to the Employee as required to be withheld with respect to such exercise and disposition pursuant to any applicable federal, state or local tax withholding requirements. 3. Interpretation of Agreement. The Option is intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. Supplement B [Change of Control -- 1993 Stock Option Plan] Supplement B to the Stock Option Agreement (the "Agreement") dated _____________________, between Phelps Dodge Corporation (the "Corporation") and __________________ (the "Employee"). 1. Additional Trigger Event For Exercisability. In addition to the provisions of Section 2 of the Agreement, in the event the Employee's employment with the Corporation or any Subsidiary terminates by reason of a Qualifying Termination (as defined below) not earlier than six months from the date on which the Option was granted and within two years after a Change of Control (as defined below) of the Corporation, the Option shall become exercisable, no later than the date of such termination, for the purchase of the full number of Common Shares specified in Section 1 of the Agreement. For the purpose of this Supplement: (a) A "Change of Control" shall be deemed to have taken place at the time (i) when any "person" or "group" of persons (as such terms are used in Section 13 and 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Corporation or any employee benefit plan sponsored by the Corporation, becomes the "beneficial owner" (as such term is used in Section 13 of the Exchange Act) of 25% or more of the total number of the Corporation's Common Shares at the time outstanding; (ii) of any Merger Approval (as defined in the Agreement); or (iii) when, as the result of a tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of the foregoing transactions, the persons who were directors of the Corporation immediately before such transaction shall cease to constitute a majority of the Board of Directors of the Corporation or of any successor to the Corporation. (b) A "Qualifying Termination" means a termination of the Employee's employment with the Corporation or any Subsidiary (under circumstances where the Employee is no longer employed by the Corporation or any Subsidiary) for any reason other than (i) death; (ii) disability; (iii) willful misconduct in the performance of the Employee's duties as an employee which results in a material adverse effect on the Corporation's business or reputation; (iv) Retirement; or (v) a termination by the Employee unless (1) such termination occurs more than 180 days following the time when a Change of Control takes place and such Change of Control has not been approved by a resolution adopted by the Board of Directors of the Corporation as constituted immediately prior to such Change of Control or (2) the Employee terminates his employment for one or more of the following reasons (and the Employee has not agreed thereto in writing): (x) the assignment to the Employee of any duties inconsistent, in a way significantly adverse to the Employee, with his positions, duties, responsibilities and status with the Corporation and its Subsidiaries immediately prior to such Change of Control, or a significant reduction in the duties and responsibilities held by the Employee immediately prior to such Change of Control; a change in the Employee's reporting responsibilities, titles or offices as in effect immediately prior to such Change of Control; or any removal of the Employee from or any failure to re-elect the Employee to any position with the Corporation or any Subsidiary that the Employee held immediately prior to such Change of Control except in connection with the Employee's promotion or the termination of his employment for any of the reasons specified in paragraphs (i) through (iv) above; or (y) a reduction by the Corporation in the Employee's base salary as in effect immediately prior to such Change of Control; the failure by the Corporation to continue in effect any employee benefit plan or compensation plan in which the Employee is participating immediately prior to such Change of Control unless the Employee is permitted to participate in other plans providing him with substantially comparable benefits; or the taking of any action by the Corporation which would adversely affect the Employee's participation in or materially reduce his benefits under such plan; or (z) the Corporation's requiring the Employee to be based anywhere other than his location immediately prior to such Change of Control; or the Corporation's requiring the Employee to travel on the Corporation's business to an extent substantially more burdensome than his travel obligations immediately prior to such Change of Control. Supplement D [Reload Option -- 1993 Plan] Supplement D to the Stock Option Agreement (the "Agreement") dated ___________________ between Phelps Dodge Corporation (the "Corporation") and ____________________ (the "Employee"). 1. Issuance of Reload Option. In the event that the Employee exercises this Option (a) at least six months prior to the expiration date of this Option, (b) while still employed by the Corporation or a Subsidiary, (c) prior to the expiration date of the Plan using, in whole or in part, and (d) prior to any determination by the Committee to terminate the right of the Employee (including, without limitation, by terminating such rights for all employees or all employees of a class of employees which includes the Employee) to receive upon the exercise of this Option an additional Option in accordance with the terms of this Supplement, using, in whole or in part, Common Shares owned by the Employee for at least three months prior to the day of exercise (the "Exercise Date"), the Employee shall be granted a new option (the "Reload Option") under the Plan on the Exercise Date for the number of Common Shares of the Corporation equal to the number of Common Shares exchanged by the Employee to exercise this Option. No Reload Option shall be granted if the Exercise Date is (a) within six months of the expiration date of the Option, (b) a date when the Employee is not employed by the Corporation or a Subsidiary, (c) after the expiration date of the Plan or (d) after the date, if any, the Committee decides to terminate the right of the Employee (including, without limitation, by terminating such rights as to all employees or all employees of a class of employees which includes the Employee) to receive upon the exercise of this Option an additional Option in accordance with the terms of this Supplement. 2. Terms of Reload Option. The Reload Option shall be exercisable on the same terms and conditions as apply to the Option as set forth in this Agreement (including, without limitation, the terms and conditions providing to the Employee certain additional benefits in the event of a Change of Control, as defined in Supplement B hereto), except that (a) the Reload Option shall become exercisable in full on the day which is six months after the Exercise Date, (b) the option price per share shall be the fair market value of a Common Share on the Exercise Date, which shall be the mean of the high and low prices of a Common Share on the Consolidated Trading Tape on that day, or, if no sale of Common Shares is recorded on such tape on that day, then on the next preceding day on which there was such a sale and (c) the expiration date of the Reload Option shall be the date of expiration of the Option under this Agreement. The Corporation may issue a new agreement to evidence the Reload Option and, if it does, that agreement shall supersede this Agreement in all respects insofar as the Reload Option is concerned. EX-10.6 3 CHANGE OF CONTROL AGREEMENT Exhibit 10.6 October 27, 1997 Name Company Address City, State Dear : Change of Control Agreement Phelps Dodge Corporation (the "Corporation") considers the maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Corporation and its shareholders. The Corporation recognizes that, as is the case with many publicly held corporations, the continuing possibility of an unsolicited tender offer or other takeover bid for the Corporation is unsettling to you and other senior executives of the Corporation and its principal subsidiaries and may result in the departure or distraction of management personnel to the detriment of the Corporation and its shareholders. The Board of Directors of the Corporation and the Compensation and Management Development Committee (the "Committee") of the Board have previously determined that it is in the best interests of the Corporation and its shareholders for the Corporation to minimize these concerns by entering into an agreement (your "Change of Control Agreement") which would provide you with severance benefits in the event your employment with the Corporation terminates under certain limited circumstances. These arrangements are being made to help assure a continuing dedication by you to your duties to the Corporation notwithstanding the occurrence of a tender offer or other takeover bid. In particular, the Board and the Committee believe it important, should the Corporation receive proposals from third parties with respect to its future, to enable you, without being influenced by the uncertainties of your own situation, to assess and advise the Board whether such proposals would be in the best interests of the Corporation and its shareholders and to take such other action regarding such proposals as the Board might determine to be appropriate. The Board and the Committee also wish to demonstrate to executives of the Corporation and its subsidiaries that the Corporation is concerned with the welfare of its executives and intends to see that loyal executives are treated fairly. In view of the foregoing, in order to induce you to remain in the employ of the Corporation or one of its principal subsidiaries and in further consideration of your continued employment with the Corporation, the Corporation and you agree to a Change of Control Agreement as follows: 1. Termination Benefits In the event your employment with the Corporation or any subsidiary of the Corporation terminates by reason of a "Qualifying Termination" (as "Qualifying Termination" is defined below) within two years after a "Change of Control" of the Corporation (as "Change of Control" is defined below), subject to the "Cap" described in Section 6, you shall receive the following benefits: (a) Termination Payments. The Corporation will pay you as termination compensation within ten days after your employment with the Corporation terminates a lump sum amount equal to the sum of: (i) three times the highest annual base salary (not including any bonuses under the Corporation's Annual Incentive Compensation Plan or Long-Term Performance Plan) paid or payable by the Corporation or any subsidiary of the Corporation to you for the three calendar years ending with the year your employment with the Corporation terminates; plus (ii) three times the sum of the bonuses or incentive compensation actually paid or payable to you under the Corporation's Annual Incentive Compensation Plan for services performed during the two calendar years preceding the calendar year in which the Change of Control occurs divided by two; less (iii) any severance, termination, or other cash compensation payable to you under your Severance Agreement with the Corporation or pursuant to any severance policy, plan, or program sponsored by the Corporation or any subsidiary of the Corporation. For purposes of calculating your incentive compensation payment under clause (ii) of the preceding paragraph, any bonus or incentive compensation will be allocated to the calendar year for which it is earned rather than the calendar year in which it is paid. In addition, the total bonuses or incentive compensation paid or payable to you for services performed during the two calendar years preceding the calendar year of the Change of Control will be divided by two even if you were not employed by the Corporation or any subsidiary of the Corporation, or were not eligible to participate in the Annual Incentive Compensation Plan, during one of those years. If the Annual Incentive Compensation Plan is replaced by another incentive compensation or bonus program, the amounts actually paid or payable to you under the replacement program will be used for purposes of the first sentence of this paragraph (a). (b) Benefits Continuation. You will continue to receive life, disability, accident and group health and dental insurance benefits substantially similar to those which you were receiving immediately prior to your termination of employment until the earlier of (i) the end of the period of 36 months following your termination of employment or (ii) the day on which you become eligible to receive any health care benefits under any plan or program of any other employer. The 36 month period referred to in the preceding sentence shall be reduced by the number of months, if any, for which you are entitled to receive continued benefits under your Severance Agreement with the Corporation or pursuant to any severance policy, plan, or program sponsored by the Corporation or any subsidiary of the Corporation. The benefits provided pursuant to this Section shall be provided on substantially the same terms and conditions as they were provided prior to the Change of Control, except that the full cost of such benefits shall be paid by the Corporation. If you later retire and become entitled to retiree coverage, the retiree coverage in effect prior to the Change of Control will replace the active employee coverage in effect prior to the Change of Control, but the Corporation will bear the full cost of the retiree coverage during the period mentioned above. Your right to receive continued coverage under the Corporation's group health plans pursuant to Section 601 et seq. of the Employee Retirement Income Security Act of 1974, as it may be amended or replaced from time to time, shall commence following the expiration of your right to receive continued benefits under this Agreement. As noted above, your right to receive all forms of benefits under this Section is terminated as soon as you become eligible to receive any health care benefits from any other employer. 2. Other Benefits; Loans (a) Incentive Compensation Plan. Generally, your participation in the Corporation's Annual Incentive Compensation Plan, and any right you may have to receive a bonus thereunder for the year in which your employment with the Corporation or any subsidiary of the Corporation terminates or any prior year (in addition to any amount you receive based on your prior bonuses or incentive compensation pursuant to Section 1(a) shall be governed by the terms of that Plan. If you were a participant in the Corporation's Annual Incentive Compensation Plan at any time during the calendar year in which a Change in Control occurs, however, you will receive at least a pro rated incentive compensation payment for the year in which the Change of Control occurs. Your pro rated incentive compensation payment will be calculated in two steps. The first step will be to calculate the incentive compensation to which you would be entitled under the Annual Incentive Compensation Plan, calculated on the basis of the following assumptions: (i) the annual performance period ends on the date of the Change of Control; (ii) the financial performance of the Corporation or any of its subsidiaries for the relevant performance period will be equal to the financial performance measured as of the date of the Change of Control, annualized; and (iii) you satisfy all individual subjective performance goals or measures set for you under the Annual Incentive Compensation Plan at the "target" performance level. The second step will be to multiply the amount determined pursuant to the first step by a fraction, the numerator of which is the number of days that have elapsed in the calendar year prior to the day of the Change of Control and the denominator of which is 365. (b) Retirement and Savings Plans. Any participation by you in, and any terminating distributions and vested rights under, the Phelps Dodge Retirement Plan, the Phelps Dodge Savings and Deferred Profit Sharing Plan for Salaried Employees, or any other retirement or savings plan sponsored by the Corporation, regardless of whether such plan qualifies for favorable tax treatment, shall be governed by the terms of those respective plans. (c) Loans. Any indebtedness owed by you to the Corporation or any subsidiary of the Corporation on account of advances or loans shall become due and payable and may be deducted from the payment referred to in Section 1. 3. Confidentiality In the event your employment with the Corporation or any subsidiary of the Corporation terminates under the circumstances specified in Section 1, you shall retain in confidence any confidential information known to you concerning the Corporation and its subsidiaries and their businesses so long as such information is not publicly disclosed. 4. Change of Control Defined For purposes of this Agreement, a "Change of Control" shall be deemed to have taken place at the time: (a) when any "person" or "group" of persons (as such terms are used in Section 13 of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act")), other than the Corporation or any employee benefit plan sponsored by the Corporation, becomes the "beneficial owner" (as such term is used in Section 13 of the Exchange Act) of 25% or more of the total number of the Corporation's common shares at the time outstanding; or (b) of the approval by the vote of the Corporation's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Corporation or by law) of the voting stock of the Corporation of any merger, consolidation, sale of assets, liquidation or reorganization in which the Corporation will not survive as a publicly owned corporation; or (c) when the individuals who, at the beginning of any period of two years or less, constituted the Board of Directors of the Corporation cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 5. Qualifying Termination Defined (a) Qualifying Termination. For purposes of this Agreement, the term "Qualifying Termination" means a termination of your employment with the Corporation or any subsidiary of the Corporation (under circumstances where you are no longer employed by the Corporation or any such subsidiary) for any reason other than (i) death, (ii) Disability, (iii) Cause, (iv) retirement at or after your Normal Retirement Date, or (v) by you for Good Reason. (b) Cause. "Cause" means willful misconduct in the performance of your duties as an employee which results in a material detriment to the Corporation, and it subsidiaries, taken as a whole. (c) Disability. For purposes of this Agreement, the term "Disability" shall have the meaning given to that term in the Phelps Dodge Retirement Plan. (d) Good Reason. For purposes of this Agreement, the term "Good Reason" means that you have terminated your employment with the Corporation and all subsidiaries of the Corporation under any of the following circumstances: (i) such termination occurs more than 180 days following the time when a Change of Control takes place and such Change of Control has not been approved by a resolution adopted by the Board of Directors of the Corporation as constituted immediately prior to such Change of Control; or (ii) you terminate your employment on account of one or more of the following events (and you have not agreed to such event in writing): (x) the assignment to you of any duties inconsistent, in a way materially adverse to you, with your positions, duties, responsibilities and status with the Corporation and its subsidiaries immediately prior to a Change of Control, or a material reduction in the duties and responsibilities you held immediately prior to such Change of Control; or a change in your reporting responsibilities, titles or offices as in effect immediately prior to such Change of Control or any removal of you from or any failure to re-elect you to any position with the Corporation or any subsidiary that you held immediately prior to such Change of Control except in connection with your promotion or the termination of your employment due to death, Disability, retirement on or after your Normal Retirement Date, or Cause; or (y) a reduction by the Corporation or any subsidiary of the Corporation in your base salary as in effect immediately prior to such Change of Control; the failure by the Corporation or any such subsidiary to continue in effect any employee benefit plan or compensation plan in which you are participating immediately prior to such Change of Control unless you are permitted to participate in other plans providing you with substantially comparable benefits; or the taking of any action by the Corporation or any such subsidiary which would adversely affect your participation in or materially reduce your benefits under any such plan; or (z) the Corporation's or any such subsidiary's requiring you to be based anywhere other than your location immediately prior to such Change of Control or a location within 50 miles of your location immediately prior to such Change of Control; or the Corporation's or any such subsidiary's requiring you to travel on the Corporation's business to an extent substantially more burdensome than your travel obligations immediately prior to such Change of Control. (e) Normal Retirement Date. For purposes of this Agreement, the term "Normal Retirement Date" means the date on which you satisfy the requirements for normal retirement benefits under the Phelps Dodge Retirement Plan. (f) Employment by Successors. For purposes of this Agreement, employment by a successor of the Corporation, or a successor of any subsidiary of the Corporation, that has assumed this Agreement pursuant to Section 10 shall be considered to be employment by the Corporation or one of its subsidiaries. As a result, if you are employed by such a successor following a Change of Control, you will not be entitled to receive the benefits provided by Section 1 unless your employment with the successor is subsequently terminated in a Qualifying Termination. Solely for purposes of applying the provisions of Section 1 and the definitions set forth in Section 5, the successor shall be deemed to be a subsidiary of the Corporation. 6. Cap on Payments (a) General Rules. The Internal Revenue Code (the "Code") places significant tax burdens on you and the Corporation if the total payments made to you due to a Change of Control exceed prescribed limits. For example, if your "Base Period Income" (as defined below) is $100,000, your limit or "Cap" is $299,999. If your "Total Payments" exceed the Cap by even $1.00, you are subject to an excise tax under Section 4999 of the Code of 20% of all amounts paid to you in excess of $100,000. In other words, if your Cap is $299,999, you will not be subject to an excise tax if you receive exactly $299,999. If you receive $300,000, you will be subject to an excise tax of $40,000 (20% of $200,000). In order to avoid this excise tax and the related adverse tax consequences for the Corporation, by signing this Agreement, you will be agreeing that, subject to the exception noted below, the present value of your Total Payments will not exceed an amount equal to your Cap. (b) Special Definitions. For purposes of this Section, the following specialized terms will have the following meanings: (i) "Base Period Income". "Base Period Income" is an amount equal to your "annualized includable compensation" for the "base period" as defined in Sections 280G(d)(1) and (2) of the Code and the regulations adopted thereunder. Generally, your "annualized includable compensation" is the average of your annual taxable income from the Corporation for the "base period", which is the five calendar years prior to the year in which the Change of Control occurs. These concepts are complicated and technical and all of the rules set forth in the applicable regulations apply for purposes of this Agreement. (ii) "Cap" or "280G Cap". "Cap" or "280G Cap" shall mean an amount equal to 2.99 times your "Base Period Income". This is the maximum amount which you may receive without becoming subject to the excise tax imposed by Section 4999 of the Code or which the Corporation may pay without loss of deduction under Section 280G of the Code. (iii) "Total Payments". The "Total Payments" include any "payments in the nature of compensation" (as defined in Section 280G of the Code and the regulations adopted thereunder), made pursuant to this Agreement or otherwise, to or for your benefit, the receipt of which is contingent on a Change of Control and to which Section 280G of the Code applies. (c) Calculating the Cap. If the Corporation believes that these rules will result in a reduction of the payments to which you are entitled under this Agreement, it will so notify you as soon as possible. The Corporation will then, at its expense, retain a "Consultant" (which shall be a law firm, a certified public accounting firm, and/or a firm of recognized executive compensation consultants) to provide an opinion or opinions concerning whether your Total Payments exceed the limit discussed above. The Corporation will select the Consultant. At a minimum, the opinions required by this Section must set forth the amount of your Base Period Income, the present value of the Total Payments and the amount and present value of any excess parachute payments. If the opinions state that there would be an excess parachute payment, your payments under this Agreement will be reduced to the extent necessary to eliminate the excess. You will be allowed to choose the payment that should be reduced or eliminated, but the payment you choose to reduce or eliminate must be a payment determined by such Consultant to be includable in Total Payments. You will make your decision in writing and deliver it to the Corporation within 30 days of your receipt of such opinions. If you fail to so notify the Corporation, it will decide which payments to reduce or eliminate. If the Consultant selected to provide the opinions referred to above so requests in connection with the opinion required by this Section, a firm of recognized executive compensation consultants selected by the Corporation shall provide an opinion, upon which such Consultant may rely, as to the reasonableness of any item of compensation as reasonable compensation for services rendered before or after the Change of Control. If the Corporation believes that your Total Payments will exceed the limitations of this Section, it will nonetheless make payments to you, at the times stated above, in the maximum amount that it believes may be paid without exceeding such limitations. The balance, if any, will then be paid after the opinions called for above have been received. If the amount paid to you by the Corporation is ultimately determined, pursuant to the opinion referred to above or by the Internal Revenue Service, to have exceeded the limitation of this Section, the excess will be treated as a loan to you by the Corporation and shall be repayable on the 90th day following demand by the Corporation, together with interest at the lowest "applicable federal rate" provided in Section 1274(d) of the Code. If it is ultimately determined, pursuant to the opinion referred to above or by the Internal Revenue Service, that a greater payment should have been made to you, the Corporation shall pay you the amount of the deficiency, together with interest thereon from the date such amount should have been paid to the date of such payment, at the rate set forth above, so that you will have received or be entitled to receive the maximum amount to which you are entitled under this Agreement. (d) Effect of Repeal. In the event that the provisions of Sections 280G and 4999 of the Code are repealed without succession, this Section shall be of no further force or effect. (e) Exception. The Consultant selected pursuant to Section 6(c) will calculate your "Uncapped Benefit" and your "Capped Benefit". The limitations of Section 6(a) will not apply to you if your Uncapped Benefit is at least 120% of your Capped Benefit. For this purpose, your "Uncapped Benefit" is the amount to which you will be entitled pursuant to Sections 1(a) and 1(b), as applicable, without regard to the limitations of Section 6(a). Your "Capped Benefit" is the amount to which you will be entitled pursuant to Sections 1(a) and 1(b), as applicable, after the application of the limitations of Section 6(a). 7. Tax Gross-Up (a) Gross-Up Payment. If the Cap imposed by Section 6(a) does not apply to you because of the exception provided by Section 6(e), the Corporation will provide you with a "Gross-Up Payment" if an excise tax is imposed on you pursuant to Section 4999 of the Code. Except as otherwise noted below, this Gross-Up Payment will consist of a single lump sum payment in an amount such that after payment by you of the "total presumed federal and state taxes" and the excise taxes imposed by Section 4999 of the Code on the Gross-Up Payment (and any interest or penalties actually imposed), you retain an amount of the Gross-Up Payment equal to the remaining excise taxes imposed by Section 4999 of the Code on your Total Payments (calculated before the Gross-Up Payment). For purposes of calculating your Gross-Up Payment, your actual federal and state income taxes will not be used. Instead, we will use your "total presumed federal and state taxes." For purposes of this Agreement, your "total presumed federal and state taxes" shall be conclusively calculated using a combined tax rate equal to the sum of the maximum marginal federal and applicable state income tax rates and the hospital insurance (or "HI") portion of F.I.C.A. Based on the rates in effect for 1996 for an Arizona resident, the "total presumed federal and state tax rate" is 46.65% (39.6% federal income tax rate plus 5.6% Arizona state income tax rate plus 1.45% HI tax rate). The state tax rate for your principal place of residence will be used and no adjustments will be made for the deduction of state taxes on the federal return, any deduction of federal taxes on a state return, the loss of itemized deductions or exemptions, or for any other purpose. (b) Calculations. All determinations concerning whether a Gross-Up Payment is required pursuant to paragraph (a) and the amount of any Gross-Up Payment (as well as any assumptions to be used in making such determinations) shall be made by the Consultant selected pursuant to Section 6(c). The Consultant shall provide you and the Corporation with a written notice of the amount of the excise taxes that you are required to pay and the amount of the Gross-Up Payment. The notice from the Consultant shall include any necessary calculations in support of its conclusions. All fees and expenses of the Consultant shall be borne by the Corporation. Any Gross-Up Payment shall be made by the Corporation within fifteen days after the mailing of such notice. As a general rule, the Consultant's determination shall be binding on you and the Corporation. The application of the excise tax rules of Section 4999, however, is complex and uncertain and, as a result, the Internal Revenue Service may disagree with the Consultant concerning the amount, if any, of the excise taxes that are due. If the Internal Revenue Service determines that excise taxes are due, or that the amount of the excise taxes that are due is greater than the amount determined by the Consultant, the Gross-Up Payment will be recalculated by the Consultant to reflect the actual excise taxes that you are required to pay (and any related interest and penalties). Any deficiency will then be paid to you by the Corporation within fifteen days of the receipt of the revised calculations from the Consultant. If the Internal Revenue Service determines that the amount of excise taxes that you paid exceeds the amount due, you shall return the excess to the Corporation (along with any interest paid to you on the overpayment) immediately upon receipt from the Internal Revenue Service or other taxing authority. The Corporation has the right to challenge any excise tax determinations made by the Internal Revenue Service. If the Corporation agrees to indemnify you from any taxes, interest and penalties that may be imposed upon you (including any taxes, interest and penalties on the amounts paid pursuant to the Corporation's indemnification agreement), you must cooperate fully with the Corporation in connection with any such challenge. The Corporation shall bear all costs associated with the challenge of any determination made by the Internal Revenue Service and the Corporation shall control all such challenges. The additional Gross-Up Payments called for by the preceding paragraph shall not be made until the Corporation has either exhausted its (or your) rights to challenge the determination or indicated that it intends to concede or settle the excise tax determination. You must notify the Corporation in writing of any claim or determination by the Internal Revenue Service that, if upheld, would result in the payment of excise taxes in amounts different from the amount initially specified by the Consultant. Such notice shall be given as soon as possible but in no event later than 15 days following your receipt of notice of the Internal Revenue Service's position. (c) Discretionary Gross-Ups. The Corporation also may provide you with a tax gross-up covering income and/or excise taxes in other situations, but the Corporation is not obligated to do so and may only do so pursuant to a resolution duly adopted by the Board of Directors or the Committee. The payment of a tax gross-up to any other executive or employee of the Corporation shall not entitle you to receive a tax gross-up. Similarly, the payment of a tax gross-up to you in certain circumstances or with respect to certain payments or benefits shall not entitle you to a tax gross-up in other circumstances or with respect to other payments or benefits. 8. Term of Agreement This Agreement is effective immediately and will continue in effect until the later of (a) December 31, 2002 or (b) two years following a Change of Control that occurs prior to December 31, 2002. 9. Termination Notice and Procedure. Any termination of your employment by the Corporation or you shall be communicated by written notice of termination, all in accordance with the following procedures: (a) The notice of termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances alleged to provide a basis for termination. (b) If the Corporation notifies you of your termination for Cause and you in good faith notify the Corporation that a dispute exists concerning such termination within the 15 day period following your receipt of such notice, you may elect to continue your employment during such dispute. If it is thereafter determined that Cause did exist, your termination date shall be the earlier of (i) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to the arbitration provisions set out below or (ii) the date of your death. If it is determined that Cause did not exist, your employment shall continue as if the Corporation had not delivered its notice of termination. (c) If the Corporation notifies you of your termination by reason of Disability and you in good faith notify the Corporation that a dispute exists concerning such termination within the 15-day period following your receipt of such notice, you also may elect to continue your employment during such dispute. The dispute relating to the existence of a Disability shall be resolved by the opinion of the licensed physician selected by the Corporation; provided, however, that if you do not accept the opinion of the licensed physician selected by the Corporation, the dispute shall be resolved by the opinion of a licensed physician who shall be selected by you; provided further, however, that if the Corporation does not accept the opinion of the licensed physician selected by you, the dispute shall be finally resolved by the opinion of a licensed physician selected by the licensed physicians selected by the Corporation and you, respectively. If it is thereafter determined that a Disability did exist, your termination date shall be the earlier of (i) the date on which the dispute is resolved or (ii) the date of your death. If it is determined that a Disability did not exist, your employment shall continue as if the Corporation had not delivered its notice of termination. (d) If you in good faith notify the Corporation of your termination for Good Reason and the Corporation notifies you that a dispute exists concerning the termination within the 15 day period following the Corporation's receipt of such notice, you may elect to continue your employment during such dispute. If it is thereafter determined that Good Reason did exist, your termination date shall be the earlier of (i) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to the arbitration provisions set out below, (ii) the date of your death, or (iii) one day prior to the second anniversary of a Change of Control, and your payments hereunder shall reflect events occurring after you delivered notice of termination. If it is determined that Good Reason did not exist, your employment shall continue after such determination as if you had not delivered the notice of termination asserting Good Reason. (e) If you do not elect to continue employment pending resolution of a dispute regarding a notice of termination, and it is finally determined that the reason for termination set forth in such notice of termination did not exist, if such notice was delivered by you, you shall be deemed to have voluntarily terminated your employment other than for Good Reason and if delivered by the Corporation, the Corporation will be deemed to have terminated you other than by reason of your death, Disability, retirement on or after your Normal Retirement Date or Cause. (f) For purposes of this Agreement, a transfer from the Corporation to one of its subsidiaries or a transfer from a subsidiary to the Corporation or another subsidiary shall not be treated as a termination of employment. (g) If you elect to continue your employment pending the resolution of a dispute pursuant to Sections 9(b), (c), or (d), the Corporation, in its discretion, may place you on a paid administrative leave until the dispute is resolved. 10. Assumption by Successors The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation or any of its subsidiaries to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation or any subsidiary would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason following a Change of Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed your termination date. 11. Miscellaneous (a) Arbitration; Related Expenses. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration held in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Corporation shall pay on a current basis all legal expenses (including attorney's fees) incurred by you in connection with such arbitration and the entering of such award if you prevail, or substantially prevail, in such proceeding. (b) Replacement of Earlier Agreement. This Agreement replaces and supersedes the agreement previously entered into between you and the Corporation regarding the payment of compensation or benefits following a Change of Control, which earlier agreement was scheduled to expire later this year. This Agreement does not replace or supersede your Severance Agreement with the Corporation or any provision in any stock option or restricted stock plan or agreement or any plan or program to provide retirement or savings benefits. (c) Employment at Will. This Agreement shall neither obligate the Corporation or any subsidiary of the Corporation to continue you in its employ (or to employ you in any particular office or to perform any specified responsibility) nor obligate you to continue in the employ of the Corporation or any subsidiary of the Corporation. (d) Successors. This Agreement shall be binding upon and inure to the benefit of you, your estate and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by you. (e) Governing Law. This agreement shall be governed by the laws of the State of New York. (f) Severability. If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. (g) Amendment or Waiver. Except as otherwise provided in Section 11(j) of this Agreement, no provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and such officer as may be designated by the Board of Directors of the Corporation or a duly authorized Committee thereof. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other condition or provision at any time. (h) No Duty to Mitigate. For purposes of receiving payments under this Agreement, you are not under any duty to mitigate the damages resulting from your termination of employment. As a result, you will receive the payments and other benefits provided by this Agreement regardless of whether you search for or obtain other work. As provided in Section 1(b), however, your right to receive continued life, disability, accident and group health and dental insurance benefits will terminate if you become eligible to receive any health care benefits under any other plan or program of any subsequent employer. (i) Funding. The Corporation shall establish a trust to provide for the funding of the Corporation's obligations under this and similar agreements with other executives. The trustee of the trust shall be chosen by the Corporation or any individual or committee to whom the Corporation delegates that responsibility, but the trustee must be a national or state bank or trust company. Prior to the day on which a Change of Control occurs, the Corporation shall transfer to the trustee of the trust an amount equal to the Corporation's total potential liability to you pursuant to Sections 1(a), 2(a) and 7. Such amount shall be determined by the Corporation acting in good faith. If it is discovered at any time that the amount initially transferred is less than the total amount called for by the preceding sentence, the shortfall shall be transferred to the trustee immediately upon the discovery of such error. Under the terms of the trust, the trustee shall be obligated to pay to you the amount to which you are entitled pursuant to Sections 1(a), 2(a), 7 and 11(a) unless such amounts are paid in a timely manner by the Corporation or its successors. The other terms and provisions of the trust agreement shall be determined by the Corporation and the trustee. (j) Effect of Change of Law. If at any time during the term of this Agreement any federal or state law or regulation is adopted or modified in any way that will increase the cost of this Agreement to the Corporation, the Corporation reserves the right to unilaterally modify any provision of the Agreement in any manner which it deems appropriate to eliminate the cost increase to the Corporation, including but not limited to eliminating the offending provision or provisions in their entirety. If you are in agreement with the foregoing, please so indicate by signing and returning to the Corporation the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement between you and the Corporation. Very truly yours, PHELPS DODGE CORPORATION By_________________________ Vice President Agreed_________________________ Date_______________________ EX-10.7 4 SEVERANCE AGREEMENT Exhibit 10.7 October 27, 1997 Dear : Severance Agreement Phelps Dodge Corporation (the "Corporation") realizes that every employee has worried about the possible loss of his job. For a senior executive, the limited number of comparable positions that are likely to be available should the executive's employment be involuntarily terminated adds to this concern. While the Corporation does not expect that you would be involuntarily terminated, it wants to assure you that if, after one full year of service, your employment is involuntarily terminated under the circumstances described below you would receive a meaningful severance benefit. For that reason, in consideration of your continued employment with the Corporation, the Corporation agrees with you as follows: 1. Severance Payment. If, after you have completed one full year of continuous service, the Corporation terminates your employment other than for Cause or on account of Mandatory Retirement (as such terms are defined below) or you voluntarily terminate your employment on account of Good Reason (as defined below), the Corporation will pay you in a single lump sum within 10 business days following the date your employment terminates an amount equal to the higher of your annual base salary in effect (i) on the date your employment terminates or (ii) if applicable, immediately prior to the occurrence of an action or event which results in your having Good Reason to terminate your employment. 2. Outplacement Services. If you are entitled to receive the basic benefit under this Agreement, the Corporation will pay an additional amount up to a maximum of 15% of the amount payable under paragraph 1 to provide you with outplacement services from any agency of your choice which is reasonably acceptable to the Corporation. 3. Benefits Continuation. If you are entitled to receive the basic benefit under this Agreement, the Corporation will pay the cost of any continuation coverage available to you under the Corporation's group health plans for the lesser of 12 months or the period during which you (and any of your dependents) are eligible for such coverage pursuant to Section 601 et seq. of the Employee Retirement Income Security Act of 1974, as amended (the "Continued Coverage Period"). The Continued Coverage Period begins, generally, on the day your employment terminates. If the Corporation has agreed to continue your coverage pursuant to any other written agreement, however, the Continued Coverage Period will not begin until your coverage terminates pursuant to that agreement. During the period beginning on your termination of employment and ending on the last day of the Continued Coverage Period, the Corporation shall also reimburse you for any premiums you pay to continue any life or disability insurance coverage that the Corporation maintained for your benefit prior to the date your employment with the Corporation terminated. 4. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: (a) "Cause" shall mean (i) any willful violation or any gross neglect of your duties and responsibilities which results in a material detriment to the Corporation and its subsidiaries, taken as a whole, or (ii) any repeated willful violations or gross neglect of your duties and responsibilities, regardless of whether such violations result in a material detriment to the Corporation and its subsidiaries, taken as a whole, after the Corporation provides you with notice of such violations. (b) "Good Reason" shall mean the occurrence of any of the following events, unless you shall have given your written consent to the occurrence of such event: (i) a material reduction in your base salary unrelated to the financial results or financial position of the Corporation; or (ii) a material reduction in your position, duties and responsibilities. Notwithstanding the foregoing, no termination of employment will be treated as being on account of Good Reason unless you provide the Corporation with a written notice of your termination, setting forth the basis for asserting a Good Reason termination, within 90 days of the occurrence of the event giving rise to a Good Reason termination. (c) "Mandatory Retirement" shall mean your retirement at age 65 or later at the direction of the Company, provided that such involuntary retirement shall not violate the Age Discrimination in Employment Act of 1967, as amended, or any other applicable Federal or state law. 5. Cause and Voluntary Termination. No benefits shall be payable under this Agreement in the event that the Corporation terminates your employment for Cause or on account of Mandatory Retirement or you terminate your employment without Good Reason (including your voluntary early or normal retirement). 6. Other Severance Benefits. Except as otherwise specifically provided in any other plan, policy or agreement primarily intended to provide severance benefits, the Corporation's sole obligation to you on account of a termination of your employment is for the benefits, if any, payable under this Agreement. Without limiting the foregoing, nothing in this Agreement shall be construed to limit, reduce or restrict any right or entitlement you may have under the terms of any employee benefit plan, policy or arrangement which is not primarily intended to provide severance benefits. 7. Employment at Will. This Agreement shall neither obligate the Corporation or any subsidiary of the Corporation to continue you in its employ (or to employ you in any particular office or to perform any specified responsibility) nor obligate you to continue in the employ of the Corporation or any subsidiary of the Corporation. 8. Successors. This Agreement shall be binding upon and inure to the benefit of you, your estate and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by you. 9. Governing Law. This Agreement shall be governed by the laws of the State of New York. 10. No Duty to Mitigate. For purposes of receiving payments under this Agreement, you are not under any duty to mitigate the damages resulting from your termination of employment. As a result, you will receive the payment and the benefits provided by Sections 1, 2 and 3 regardless of whether you search for or obtain other work. Under the law, though, your Continued Coverage Period for purposes of Section 3 may terminate when you become eligible for certain other health care coverage. If you are in agreement with the foregoing, please so indicate by signing and returning to the Corporation the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement between you and the Corporation. Very truly yours, PHELPS DODGE CORPORATION By________________________ Vice President Agreed: _________________________ _______________________ Date EX-10.9 5 SUPPLEMENTAL RETIREMENT PLAN Exhibit 10.9 PHELPS DODGE CORPORATION SUPPLEMENTAL RETIREMENT PLAN SUPPLEMENTAL RETIREMENT PLAN TABLE OF CONTENTS ARTICLE I - PREAMBLE ARTICLE II - DEFINITIONS 2.1 DEFINITIONS 2.2 CONSTRUCTION ARTICLE III - ELIGIBILITY 3.1 SELECTION OF PARTICIPANTS 3.2 PARTICIPATION ELECTIONS 3.3 REVISED ELECTIONS 3.4 DISCONTINUANCE OF PARTICIPATION 3.5 ADOPTION BY AFFILIATES ARTICLE IV - ELIGIBILITY FOR BENEFITS 4.1 NORMAL RETIREMENT 4.2 EARLY RETIREMENT 4.3 LATE RETIREMENT 4.4 SPECIAL EARLY RETIREMENT 4.5 DISABILITY 4.6 TERMINATION OF EMPLOYMENT 4.7 TRANSFER 4.8 DEATH BEFORE RETIREMENT 4.9 DEATH AFTER RETIREMENT 4.10 SPECIAL VESTING PROVISION APPLICABLE ON SALE OF ACCURIDE ARTICLE V - DETERMINATION OF BENEFITS 5.1 NORMAL RETIREMENT BENEFIT 5.2 EARLY RETIREMENT BENEFIT 5.3 LATE RETIREMENT BENEFIT 5.4 SPECIAL EARLY RETIREMENT BENEFIT 5.5 DISABLED EMPLOYEE BENEFIT 5.6 DEFERRED VESTED RETIREMENT BENEFIT 5.7 SURVIVING SPOUSE BENEFIT--DEATH BEFORE RETIREMENT 5.8 REDUCTION FOR OTHER BENEFITS ARTICLE VI - PAYMENT OF BENEFITS 6.1 COMMENCEMENT OF BENEFITS 6.2 FORMS OF BENEFIT PAYMENTS 6.3 SPOUSAL CONSENT 6.4 BENEFICIARY DESIGNATIONS 6.5 IN-SERVICE PAYMENT OF BENEFITS ARTICLE VII - ADMINISTRATION OF THE PLAN 7.1 ADOPTION OF TRUST 7.2 POWERS OF THE PLAN ADMINISTRATOR 7.3 CREATION OF COMMITTEE 7.4 CHAIRMAN AND SECRETARY 7.5 APPOINTMENT OF AGENTS 7.6 MAJORITY VOTE AND EXECUTION OF INSTRUMENTS 7.7 ALLOCATION OF RESPONSIBILITIES 7.8 CONFLICT OF INTEREST 7.9 ACTION TAKEN BY COMPANY 7.10 DELEGATIONS OF AUTHORITY 7.11 INDEMNIFICATION ARTICLE VII - CLAIMS REVIEW PROCEDURE 8.1 CLAIMS 8.2 APPEALS ARTICLE IX - LIMITATION ON ASSIGNMENT; PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE; CORRECTIONS 9.1 ANTI-ALIENATION CLAUSE 9.2 PERMITTED ARRANGEMENTS 9.3 PAYMENT TO MINOR OR INCOMPETENT 9.4 UNDERPAYMENT OR OVERPAYMENT OF BENEFITS ARTICLE X - AMENDMENT, MERGER AND TERMINATION 10.1 AMENDMENT 10.2 MERGER OR CONSOLIDATION OF COMPANY 10.3 TERMINATION OF PLAN OR DISCONTINUANCE OF CONTRIBUTIONS ARTICLE XI - CHANGE OF CONTROL PROVISIONS 11.1 ADDITIONAL SERVICE CREDIT 11.2 70/80 RETIREMENT BENEFIT 11.3 PLAN ADMINISTRATOR DISCRETION 11.4 SPECIAL LUMP SUM OPTION ARTICLE XII - GENERAL PROVISIONS 12.1 LIMITATION ON PARTICIPANTS' RIGHTS 12.2 STATUS OF PARTICIPANTS AS UNSECURED CREDITORS 12.3 STATUS OF TRUST FUND 12.4 CANCELLATION OR REDUCTION OF BENEFITS 12.5 UNIFORM ADMINISTRATION 12.6 HEIRS AND SUCCESSORS Appendix A PHELPS DODGE CORPORATION SUPPLEMENTAL RETIREMENT PLAN ARTICLE I PREAMBLE Phelps Dodge Corporation (the "Company"), a corporation organized and existing under the laws of the State of New York, previously adopted the Comprehensive Executive Non-qualified Retirement and Savings Plan of Phelps Dodge Corporation (the "Comprehensive Plan"). The Comprehensive Plan consisted, primarily, of supplemental executive retirement provisions and supplemental savings provisions. The Company now has decided to split the Comprehensive Plan into two separate plans and to replace the supplemental savings provisions of the Comprehensive Plan with a separate plan known as the Phelps Dodge Corporation Supplemental Savings Plan (the "SSP"). The Company has restated the remaining provisions of the Comprehensive Plan by the adoption of this Plan document and changed the name of the Comprehensive Plan to the Phelps Dodge Corporation Supplemental Retirement Plan (the "Plan"). This amended and restated Plan document is effective, generally, as of January 1, 1997 (the "Effective Date"), but special effective dates are prescribed for purposes of particular provisions, as noted below. As of the Effective Date, all benefits previously accrued under the Comprehensive Plan (other than benefits accrued under the supplemental savings provisions) shall be governed by the terms and provisions of this Plan document. The purpose of this Plan is to provide a select group of management or highly compensated employees of the Company and certain of its affiliates with supplemental retirement benefits. As a result, the Plan shall be considered to be a "top hat plan", exempt from many of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). This Plan is not intended to "qualify" for favorable tax treatment pursuant to Section 401(a) of the Internal Revenue Code of 1986 (the "Code") or any successor section or statute. ARTICLE II DEFINITIONS 2.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not begin a sentence, the word or phrase shall generally be a term defined in this Section 2.1 or in the Preamble. The following words and phrases used in the Plan with the initial letter capitalized shall have the meanings set forth in this Section 2.1, unless a clearly different meaning is required by the context in which the word or phrase is used: (a) "Act" means the Employee Retirement Income Security Act of 1974, as amended. (b) "Actuarial Equivalent" means an amount which is of equivalent actuarial value. The mortality tables, interest rates and other factors (such as contingent annuity factors) that apply to salaried employees of the Company pursuant to the Retirement Plan, as most recently adopted for such purpose by the Plan Administrator, shall be utilized in making Actuarial Equivalency determinations for purposes of this Plan. (c) "Affiliate" means (1) a corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as is the Company, (2) any other trade of business (whether or not incorporated) controlling, controlled by, or under common control with the Company (within the meaning of Section 414(c) of the Code), and (3) any other corporation, partnership, or other organization which is a member of an affiliated service group (within the meaning of Section 414(m) of the Code) with the Company or which is otherwise required to be aggregated with the Company pursuant to Section 414(o) of the Code. (d) "AICP" means the Phelps Dodge Annual Incentive Compensation Plan, as in effect and amended from time to time. (e) "Board" means the Board of Directors of the Company. (f) "Change of Control" For purposes of this Agreement, a "Change of Control" shall be deemed to have taken place at the time (a) when any "person" or "group" of persons (as such terms are used in Section 13 of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act")), other than the Corporation or any employee benefit plan sponsored by the Corporation, becomes the "beneficial owner" (as such term is used in Section 13 of the Exchange Act) of 25% or more of the total number of the Corporation's common shares at the time outstanding; or (b) of the approval by the vote of the Corporation's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Corporation or by law) of the voting stock of the Corporation of any merger, consolidation, sale of assets, liquidation or reorganization in which the Corporation will not survive as a publicly owned corporation; or (c) when the individuals who, at the beginning of any period of two years or less, constituted the Board of Directors of the Corporation cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Disability" For purposes of this Plan, a Participant shall be conclusively presumed to be under Disability only during the period of time that the Participant qualifies to receive, without considering any offsets, long term disability payments under his Employer's Long Term Disability Insurance Plan. (i) "Early Retirement Date" means the first day of the calendar month next following the later of a Participant's attainment of age 55 and completion of ten years of Service. (j) "Employee" means any individual classified by his Employer as a common law employee of the Employer. For this purpose, the classification that is relevant is the classification in which such individual is placed by the Employer for purposes of this Plan and the classification of such individual for any other purpose (e.g., employment tax or withholding purposes) shall be irrelevant. If an individual is characterized as a common law employee of the Employer by a governmental agency or court but not by the Employer, such individual shall be treated as an employee who has not been designated for participation in this Plan pursuant to Section 3.1. (k) "Employer" means the Company and any Affiliate which has elected to participate in the Plan with the approval of the Senior Management Team, as provided in Section 3.5. (l) "Final Average Incentive Compensation" means the amount achieved by dividing the sum of the Incentive Compensation awards to a Participant for the five consecutive years in the last 10 years immediately preceding the date of his retirement, death, Disability, termination or of a Change of Control which produces the highest total by five. (m) "Final Average Monthly Salary" means, as of any date, the average of a participant's "monthly salary" for the 36 consecutive calendar months during the most recent 120 calendar months of employment preceding such date which will produce the highest average. For this purpose, a Participant's "monthly salary" is a Participant's basic compensation, exclusive of any extra earnings for overtime, special remuneration or other similar payments, paid or accrued to the Participant for any one month during a Plan Year. Effective December 1, 1988, "monthly salary" shall include any Salary Pre-Tax Deferral Contributions under the Phelps Dodge Savings Plan. Effective October 1, 1995, "monthly salary" shall include, in the Plan Year of payment, bonuses paid to a Participant under PD Partners. If a Participant has not been employed by an Employer for at least 36 consecutive months, Final Average Monthly Salary shall mean the average of the Participant's monthly salary during such lesser number of months of employment. (n) "Final Average Pay" means the sum of Final Average Monthly Salary (converted to an annual basis) and Final Average Incentive Compensation. (o) "Late Retirement Date" means the first day of any calendar month following a Participant's Normal Retirement Date as of which the Participant retires. (p) "LTD Plan" means the Company's Long Term Disability Insurance Plan (or any other similar plan sponsored by an Employer to provide disability benefits) as in effect from time to time. (q) "Normal Retirement Age" means the day on which occurs the later of (i) the date on which a Participant attains age 65 or (ii) the earlier of (A) the fifth anniversary of the date on which the Participant's participation in the Retirement Plan (or any predecessor plan) commenced or (B) the date on which the Participant is credited with five years of Service. (r) "Normal Retirement Date" means the first day of the month coinciding with or next following a Participant's Normal Retirement Age. (s) "Participant" means any employee of the Company or any of its Affiliates who is entitled to participate and who is chosen for participation pursuant to Section 3.1. (t) "Plan Administrator" means the committee designated by the Company to carry out its responsibilities under the Plan as set forth in Section 7.3. (u) "Plan Year" means the 12 month period beginning on each January 1 and ending on each December 31. (v) "Retirement Plan" means the Phelps Dodge Corporation Retirement Plan. (w) "Senior Management Team" means the group of officers that make up the Senior Management Team of the Company. (x) "Service" means, generally, a Participant's periods of employment with the Employers calculated in accordance with the provisions of the Retirement Plan that are applicable to the Participant. Notwithstanding the provisions of the Retirement Plan, a Participant's periods of employment with an Affiliate (including particularly Accuride Corporation, Columbian Chemicals Company and Hudson International Conductors) during the period prior to the date such Affiliate became a member of the Company's controlled group for purposes of Section 414 of the Code shall be disregarded for purposes of benefit accrual (e.g., the calculation of the amount of the Participant's benefit) but not for purposes of determining the Participant's eligibility for a particular type of benefit. Effective for Participants terminating employment on or after September 1, 1997 who were not on or after such date employed by Accuride Corporation, a Participant's periods of employment with an Affiliate other than Nesor during the period prior to the date such Affiliate became a member of the Company's controlled group for purposes of Section 414 of the Code shall be considered for all purposes under the Plan, including for purposes of benefit accrual (e.g., the calculation of the amount of the Participant's benefit). The preceding sentence does not apply to individuals employed by Accuride Corporation on or after September 1, 1997. (y) "Spouse" means the spouse of a Participant who is legally married to the Participant on the date on which a benefit under the Plan becomes payable to or on behalf of the Participant. (z) "Trust Agreement" means that certain trust agreement established pursuant to the Plan between the Company and the Trustee or any trust agreement hereafter established, the provisions of which are incorporated herein by reference. (aa) "Trustee" means the Trustee under the Trust Agreement. (bb) "Trust Fund" means all assets of whatsoever kind or nature held from time to time by the Trustee pursuant to the Trust Agreement, without distinction as to income and principal and without regard to source (i.e., contributions, earnings or forfeitures). 2.2 CONSTRUCTION. The masculine gender, where appearing in the Plan, shall include the feminine gender (and vice versa), and the singular shall include the plural, unless the context clearly indicates to the contrary. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of this Plan. If any provision of this Plan is determined to be for any reason invalid or unenforceable, the remaining provisions shall continue in full force and effect. All of the provisions of this Plan shall be construed and enforced in accordance with the laws of the State of Arizona, to the extent that such laws are not preempted by the Act. ARTICLE III ELIGIBILITY 3.1 SELECTION OF PARTICIPANTS. (a) General. For purposes of Title I of ERISA, the Plan is intended to be an unfunded plan of deferred compensation covering a select group of management or highly compensated employees. As a result, participation in the Plan shall be limited to Employees who are properly included in one or both of these categories. From such group, the Plan Administrator shall select Employees for participation in the Plan. The Plan Administrator's selections shall be made in its discretion and shall be final and binding for all purposes under this Plan. (b) Participants. Any Employee who was participating in the Plan prior to the Effective Date shall continue to be eligible to participate in the Plan for the 1997 Plan Year. Effective as of January 1, 1998, an Employee must be in AICP Grade 4 or above to participate in the Plan. If an Employee who participated in the Plan prior to January 1, 1998 is in an AICP Grade below Grade 4 or is not eligible to participate in the AICP, the Employee may continue to participate after January 1, 1998, unless the Plan Administrator excludes the Employee from further participation pursuant to Sections 3.1(c) or 3.4. (c) Limitation of Participation. The Plan Administrator, in the exercise of its discretion, may exclude an Employee who otherwise meets the requirements of Section 3.1(b) from participation in the Plan if it concludes that the exclusion of that Employee is necessary in order to satisfy the requirements of Section 3.1(a). In addition, the Plan Administrator, in the exercise of its discretion, may exclude Employees who are foreign nationals from participation in the Plan. (d) Termination of Participation. A Participant shall cease to participate in the Plan upon either his exclusion from participation by the Plan Administrator or upon his termination of employment with the sponsoring Employers, except that if he has met the eligibility conditions for an immediate or deferred vested retirement benefit, he shall remain a Participant for purposes of receiving that benefit at the appropriate time. 3.2 PARTICIPATION ELECTIONS. Each Participant shall make an election to participate in the Plan on such form or forms and at such time as the Plan Administrator shall require. Subject to the spousal consent requirements of Section 6.3, in the election the Participant shall select the form in which distributions are to be made to the Participant and whether distributions of the Participant's deferred vested retirement benefit or early retirement benefit are to commence immediately following the Participant's termination of employment or whether they are to be postponed until a specified date not later than the Participant's 65th birthday. A deferred vested retirement benefit may not commence prior to the Participant's attainment of age 65 unless the Participant completed at least ten years of Service prior to his termination of Service, in which case the deferred vested retirement benefit may commence at any time following the Participant's attainment of age 55. The election form also may set forth such other information as the Plan Administrator shall require. 3.3 REVISED ELECTIONS. Subject to the spousal consent requirements of Section 6.3, a Participant may file a new election form in order to change an election made in a previously filed election form. If the new election form changes the method of distribution of the Participant's benefits, or the timing of the commencement of distributions, the new election will be honored only if the new election form is filed at least two years prior to the Participant's termination of employment. 3.4 DISCONTINUANCE OF PARTICIPATION. Once an individual is designated as a Participant, he will continue as such for all future Plan Years unless and until he terminates employment under circumstances that do not entitle him to receive a benefit in the future or the Plan Administrator specifically acts to discontinue his participation. The Plan Administrator may discontinue a Participant's participation in the Plan at any time for any or no reason. If a Participant's participation is discontinued by the Plan Administrator, he will no longer be eligible to accrue additional benefits and the amount of his benefit, and his eligibility to receive a particular type of benefit, will be determined as of the date of the suspension. The Participant will not be entitled to receive a distribution, however, until the occurrence of one of the events listed in Article IV, unless the Plan Administrator, in the exercise of its discretion, directs that a distribution be made as of an earlier date, in which case the Participant's benefits shall be distributed in one lump sum payment that is the Actuarial Equivalent of the Participant's accrued benefit, calculated on the same basis as if the Participant's employment had been terminated. 3.5 ADOPTION BY AFFILIATES. Any Affiliate of the Company may adopt this Plan with the approval of the Plan Administrator. An Affiliate will be deemed to have adopted this Plan if any of its employees are Participants in the Plan or file an election to participate with the consent of the Affiliate. At the request of the Plan Administrator, the Affiliate also shall evidence its adoption of the Plan by an appropriate resolution of its Board of Directors or in such other manner as may be authorized by the Plan Administrator. By adopting this Plan, the Affiliate shall be deemed to have agreed to make the contributions necessary to pay the benefits accrued by its Participants, agreed to comply with all of the other terms and provisions of this Plan, delegated to the Plan Administrator the power and responsibility to administer this Plan with respect to the Affiliate's Employees, and delegated to the Company the full power to amend or terminate this Plan with respect to the Affiliate's Employees. 3.6 CHANGE IN AFFILIATE STATUS. If an Affiliate that has adopted this Plan ceases to be an Affiliate of the Company, that Affiliate shall no longer be an Employer and all Participants employed by that Affiliate on the date the Affiliate ceases to be an Affiliate shall be deemed to have terminated employment on such date. ARTICLE IV ELIGIBILITY FOR BENEFITS 4.1 NORMAL RETIREMENT. A Participant who retires on his Normal Retirement Date shall receive a retirement benefit as provided in Section 5.1. 4.2 EARLY RETIREMENT. (a) 55 and 10 Early Retirement. A Participant whose employment terminates on or after his Early Retirement Date shall receive an early retirement benefit as provided in Section 5.2 commencing on the first day of any month designated by him, but not later than his Normal Retirement Date. (b) 60 and 30 Early Retirement. A Participant who retires prior to his Normal Retirement Date and who has both attained age 60 and completed 30 years of Service on his retirement date will receive an early retirement benefit, commencing on that date, without reduction on account of his age at retirement. 4.3 LATE RETIREMENT. Upon his Late Retirement Date, a Participant shall be entitled to receive a late retirement benefit calculated in accordance with Section 5.3. 4.4 SPECIAL EARLY RETIREMENT. A participant shall be entitled to receive a special early retirement benefit as provided in Section 5.4 if he satisfies the special early retirement eligibility criteria set forth in Section 3.3 of the Retirement Plan. For purposes of determining whether a Participant is entitled to receive a special early retirement benefit under this Section 4.4, the provisions of Section 3.3(d) of the Retirement Plan regarding the exclusion of certain otherwise eligible participants from a special early retirement program shall be disregarded. 4.5 DISABILITY. (a) Continued Accrual. A Participant who is suffering from a Disability and receives benefits under the LTD Plan shall for all purposes of this Plan be deemed to remain in employment during the period for which he receives such benefits under the same employment conditions that prevailed prior to his Disability and at the Final Average Pay applicable for the Plan Year during which his Disability was incurred. (b) Recovery. In the event that the Participant recovers from Disability, or ceases to receive benefits under the LTD Plan, and returns to the Service of an Employer, he shall thereafter become eligible for benefits under the same terms and conditions as if he had not been a Disabled Participant. If such a Participant who recovers from Disability or ceases to receive benefits under the LTD Plan does not return to Service with the Employer, his employment shall be deemed to have terminated as of the date of such recovery or cessation and, if eligible, he shall become entitled to a deferred vested retirement benefit, early retirement benefit or normal retirement benefit, as the case may be. (c) Special Situations. For purposes of this Section 4.5, a Participant who is Disabled but is not covered under the LTD Plan shall be eligible for the benefits of this Section if, in the judgment of the Plan Administrator, he would be eligible to receive benefits under the LTD Plan if he were so covered. 4.6 TERMINATION OF EMPLOYMENT. If a Participant's employment with all Employers is terminated, voluntarily or otherwise, for reasons other than death, Disability, or retirement, after the Participant has completed at least five years of Service, he will be entitled to a deferred vested retirement benefit. The deferred vested retirement benefit shall be determined in accordance with Section 5.6 and will commence on the first day of the month following the Participant's 65th birthday. If the Participant has completed at least ten years of Service prior to his termination of employment, the deferred vested retirement benefit may commence on the first day of any month following the Participant's 55th birthday if the Participant so elects in accordance with Sections 6.1, 3.2 and 3.3. If a Participant's employment is terminated for reasons other than death, Disability, or retirement and at the time of the termination the Participant has not completed five years of Service, the benefit accrued by the Participant prior to the termination shall be forfeited. For this purpose, "retirement" means the termination of employment after a Participant has attained his Early or Normal Retirement Date. 4.7 TRANSFER. In the case of a Participant who is transferred to employment with an Affiliate or other employer which is not an Employer under this Plan, or who is transferred to nonsalaried status, upon subsequent termination or retirement from the Service of the Company, or his death before such termination or retirement, his eligibility for an immediate or deferred vested retirement benefit hereunder shall be determined as if such transfer had not occurred, but the amount of any such benefit shall be determined as of the date of transfer. The Plan Administrator, in the exercise of its discretion, may elect to pay such a Participant the Actuarial Equivalent lump sum value of his benefit at any time following the transfer in lieu of the deferred vested benefit. 4.8 DEATH BEFORE RETIREMENT. If a Participant who has been married for at least one year dies (i) while in employment with an Employer after completing five years of Service or his age and Service total at least 65 or (ii) following termination of employment if the Participant was entitled to a benefit under Section 4.6 and benefit payments have not yet commenced, the Participant's Spouse shall receive an annuity, payable for life, in accordance with Section 5.7. A Participant shall be deemed to have died while in employment if immediately before his death he was Disabled for purposes of Section 4.5. No death benefits are payable upon the death of an unmarried Participant or a Participant who has been married for less than one year on the date of death. 4.9 DEATH AFTER RETIREMENT. If a Participant dies after retirement, or after commencement of payment of a deferred vested retirement benefit, further payments, if any, under the Plan will be made in accordance with the method of payment applicable under ARTICLE VI. 4.10 SPECIAL VESTING PROVISION APPLICABLE ON SALE OF ACCURIDE. Participants who are employed by Accuride Corporation as of the date that Accuride ceases to be an Affiliate for purposes of this Plan shall be fully vested and shall be eligible to receive a deferred vested retirement benefit regardless of whether they have completed five years of Service. ARTICLE V DETERMINATION OF BENEFITS 5.1 NORMAL RETIREMENT BENEFIT. (a) General. Subject to the offsets noted below, the normal retirement benefit to which a Participant will be entitled if he retires on his Normal Retirement Date shall equal the monthly normal retirement benefit to which the Participant would be entitled under the Retirement Plan if (i) in the case of any Participant other than an Employee of Accuride Corporation, he were covered by the Benefit Structure (as such term is defined in the Retirement Plan) applicable to the Company's salaried employees; (ii) in the case of any Participant who is an Employee of Accuride Corporation, he were covered by the Benefit Structure under the Retirement Plan that is applicable to Accuride employees; (iii) the limitations included in the Retirement Plan to comply with the provisions of Section 401(a)(17) of the Code (which limits the amount of compensation that may be taken into account for purposes of the Plan) were not applicable; (iv) the limitations included in the Retirement Plan to comply with the provisions of Section 415 of the Code (which limits the amount of a Participant's benefit) were not applicable; and (v) the amounts deferred by the Participant under the SSP were taken into account in calculating the Participant's "Monthly Salary" for purposes of the Retirement Plan. The benefit so determined shall be reduced by the "Retirement Plan Offset", which is the monthly normal retirement benefit to which the Participant is actually entitled under the Retirement Plan. The benefit so determined also shall be reduced by the "Non-Qualified Plan Offset", which is the monthly benefit to which the Participant is entitled as of his Normal Retirement Date under any other defined benefit plan or arrangement sponsored by an Employer (a "Non-Qualified Plan") other than a plan or arrangement that expressly provides that its purpose is to supplement the benefits provided by this Plan and the Retirement Plan. If the Participant is covered by a Benefit Structure of the Retirement Plan or by a Non-Qualified Plan pursuant to which the normal retirement benefit is expressed in a normal form other than a single life annuity for the life of the Participant, the Participant's benefit shall be converted to an Actuarially Equivalent single life annuity for purposes of calculating the Retirement Plan Offset and the Non-Qualified Plan Offset. (b) Effective Date. The provisions of Section 5.1(a) only apply to a Participant who terminates employment on or after September 1, 1997. The normal retirement benefits of a Participant who terminated employment prior to September 1, 1997 shall be determined in accordance with the provisions of the Comprehensive Plan as in effect prior to the adoption of this amended and restated Plan document. 5.2 EARLY RETIREMENT BENEFIT. A Participant's early retirement benefit will be calculated in the same fashion as his normal retirement benefit but on the basis of the Service and compensation earned by the Participant as of his actual date of retirement. The early retirement benefit so calculated shall be reduced in the same fashion as early retirement benefits are reduced for individuals covered by the Retirement Plan Benefit Structure applicable to salaried employees of the Company. If early retirement benefits under this Plan and early retirement benefits under the Retirement Plan (or any Non-Qualified Plan with respect to which the Non-Qualified Plan Offset provisions apply pursuant to Section 5.1) do not start on the same day, the Participant's benefit under this Plan shall be reduced by the benefit the Participant would have received under the Retirement Plan (or the Non-Qualified Plan) if benefits under such plan or plans had commenced on the same day that benefits commence under this Plan. 5.3 LATE RETIREMENT BENEFIT. A Participant's late retirement benefit will be calculated in the same fashion as his normal retirement benefit but on the basis of the Service and compensation earned by the Participant as of his actual date of retirement. If late retirement benefits under this Plan and late retirement benefits under the Retirement Plan (or any Non-Qualified Plan with respect to the Non-Qualified Plan Offset provisions of Section 5.1 apply) do not start on the same day, the Participant's benefit under this Plan shall be reduced by the benefit the Participant would have received under the Retirement Plan (or the Non-Qualified Plan) if benefits under such plan or plans had commenced on the same day that benefits commence under this Plan. 5.4 SPECIAL EARLY RETIREMENT BENEFIT. Subject to the offsets noted below, the special early retirement benefit to which a Participant will be entitled shall equal the monthly special early retirement benefit (including any supplements) to which the Participant would be entitled under the Retirement Plan, calculated using all of the assumptions set forth in clauses (i) through (iv) of the first sentence of Section 5.1(a) and disregarding the limitation set forth in Section 3.3(d) of the Retirement Plan which is designed to avoid discrimination in favor of "highly compensated employees" in the Retirement Plan. The benefit so determined shall be reduced by the "Retirement Plan Offset" and the "Non-Qualified Plan Offset" described in Section 5.1(a). 5.5 DISABLED EMPLOYEE BENEFIT. A Participant who is suffering from a Disability and meets the requirements of Section 4.5 shall become entitled at his Normal Retirement Date to a benefit determined in accordance with Section 5.1. A Participant who has recovered from Disability or has ceased to receive benefits under the LTD Plan, and who does not return to the Service of the Employers, may be entitled to a deferred vested retirement benefit determined in accordance with Section 5.6 or to an early retirement benefit determined in accordance with Section 5.2, as applicable. 5.6 DEFERRED VESTED RETIREMENT BENEFIT. A Participant's annual deferred vested retirement benefit will be calculated as of the date of termination under Section 3.6 or Section 4.6, the date of a Change of Control under ARTICLE XI, or the date of transfer under Section 4.7, as applicable. A Participant's deferred vested retirement benefit shall be reduced for the commencement of payments prior to the Participant's Normal Retirement Date in the same fashion as an early retirement benefit is reduced for each full month by which the date when payment commences precedes the Participant's Normal Retirement Date. 5.7 SURVIVING SPOUSE BENEFIT--DEATH BEFORE RETIREMENT. Subject to the reductions noted below, the annual amount of the annuity payable to a surviving Spouse pursuant to Section 4.8 shall equal the annuity to which the Spouse would be entitled under the Retirement Plan if the Participant's "accrued benefit" (as that term is used in the Retirement Plan) under the Retirement Plan was calculated using the assumptions set forth in clauses (i) through (iv) of the first sentence of Section 5.1(a). The amount so determined shall be reduced by the annuity to which the Spouse is actually entitled under the Retirement Plan or any Non-Qualified Plan (as such term is defined in Section 5.1(a)). The reductions referred to in the preceding sentence shall be adjusted in the same fashion as the "Retirement Plan Offset" and "Non-Qualified Plan Offset" are adjusted pursuant to Section 5.1(a). The payments to the Spouse shall commence as soon as possible following the Participant's death. 5.8 REDUCTION FOR OTHER BENEFITS. The amount of the Participant's annual benefit payable or determined in accordance with the foregoing provisions of this Article shall be reduced by the amount of the excess, if any, of the sum of the annual benefits to which the Participant is entitled under this Plan, the Retirement Plan, any individual agreements between the Participant and the Company, and his Social Security Benefit. ARTICLE VI PAYMENT OF BENEFITS 6.1 COMMENCEMENT OF BENEFITS. (a) General. Unless otherwise provided, benefit payments shall commence at the time elected by the Participant in his initial election form (or a revised election form that has been in effect for the requisite period of time specified in Section 3.3). (b) Special Payment Provision Applicable on Sale of Affiliate. Participants who are employed by an Affiliate as of the date that the Affiliate ceases to be an Affiliate for purposes of this Plan shall begin receiving benefit payments as soon as possible following such date, regardless of any elections previously made. 6.2 FORMS OF BENEFIT PAYMENTS. (a) General. Unless otherwise provided, the form in which benefit payments shall be made will be selected by the Participant in his initial election form (or in a revised election form that has been in effect for the requisite period of time specified in Section 3.3). (b) Available Options. The forms of payment that a Participant may select are the following: (1) Straight Life Annuity Option. With this option, benefits will be payable for the Participant's life, with no amount payable after his death. (2) Contingent Annuitant Option. With this option, a modified amount will be payable during the Participant's life and after his death an amount equal to 50%, 66-2/3%, 75%, or 100% of this modified amount will be payable during the life of, and to, the Beneficiary named by the Participant when he elected the option. (3) Ten Year Term Certain Annuity Option. With this option, a modified amount will be payable during the Participant's life and for at least ten years. If the Participant does not receive at least ten years of payments, the balance will be paid to the Beneficiary named by the Participant when he elected the option. This option may not be selected by any Participant on or after January 1, 1998. (4) Lump Sum Option. With this option, a lump sum payment equal to the Actuarial Equivalent value of the amount otherwise payable to the Participant as a single life annuity will be paid to the Participant. This option is only available to a Participant who has attained the age of at least 65 at the time of his termination of employment with the Employers, and is subject to the prior approval of the Plan Administrator. (5) Other. Any other form of payment approved by the Plan Administrator in writing, including, but limited to, the payment of benefits in installments with interest. (c) Default Option. If a Participant does not select an option pursuant to Section 6.2(a), or the Participant's Spouse does not consent to the option selected by the Participant if and to the extent required by Section 6.3, the Participant's benefit will be paid in the form of a contingent annuity pursuant to which 50% of the amount paid to the Participant during the Participant's life is continued to the Participant's Spouse following the Participant's death. (d) Amount of Payments. The amount of the payments calculated pursuant to Article V are based on the assumption that payments are made in the form of a single life annuity for the life of the Participant alone. If payments are made in any other form, they will be adjusted to their Actuarial Equivalent. (e) Limitation on Payments. The Plan Administrator shall have the discretion to defer any payment under this section to a later calendar year if such payment, when combined with all other payments received during the year that are subject to the limitations on deductibility under Section 162(m) of the Code, exceeds those limitations. Such deferred amounts shall be paid in the next succeeding calendar year in which the payment of such amounts, when combined with any other payments subject to the Section 162(m) limitations received during the year, will not exceed those limitations. 6.3 SPOUSAL CONSENT. If a Participant is married at the time an election form, or a revised election form, is filed, an election to receive payments in any form other than a 50% or greater contingent annuitant option with the Spouse as the sole contingent annuitant shall be ineffective unless the Participant's Spouse consents to the election on a form prescribed by or acceptable to the Plan Administrator for that purpose. 6.4 BENEFICIARY DESIGNATIONS. Each Participant who elects a method of payment under Section 6.2 pursuant to which amounts may be payable following the Participant's death shall have the right to designate, on forms supplied by and delivered to the Plan Administrator, a beneficiary or beneficiaries. If the Participant is married at the time the beneficiary designation is filed, the designation will be ineffective unless the designation names the Spouse as the beneficiary or the Participant's Spouse consents to the designation in accordance with Section 6.3. Subject to the spousal consent requirements noted in the preceding sentence, and the provisions of Section 3.3, each Participant may change his beneficiary designation from time to time in the manner described above by filing a revised election form. 6.5 IN-SERVICE PAYMENT OF BENEFITS. No in-service payments of amounts credited under the Plan shall be permitted. ARTICLE VII ADMINISTRATION OF THE PLAN 7.1 ADOPTION OF TRUST. The Company shall enter into a Trust Agreement with the Trustee, which Trust Agreement shall form a part of this Plan and is hereby incorporated herein by reference. 7.2 POWERS OF THE PLAN ADMINISTRATOR. (a) General Powers of Plan Administrator. The Plan Administrator shall have the power and discretion to perform the administrative duties described in this Plan or required for proper administration of the Plan and shall have all powers necessary to enable it to properly carry out such duties. Without limiting the generality of the foregoing, the Plan Administrator shall have the power and discretion to construe and interpret this Plan, to hear and resolve claims relating to the Plan and to decide all questions and disputes arising under the Plan. The Plan Administrator shall determine, in its discretion, the Service credited to the Participants, the status and rights of a Participant, and the identity of the Beneficiary or Beneficiaries entitled to receive any benefits payable on account of the death of a Participant. (b) Participation. The Plan Administrator also shall have the discretion to exclude Employees from participation in the Plan and to discontinue a Participant's participation in the Plan. (c) Distributions. All benefit disbursements by the Trustee shall be made upon the instructions of the Plan Administrator. (d) Decisions Conclusive. The decisions of the Plan Administrator upon all matters within the scope of its authority shall be binding and conclusive upon all persons. (e) Reporting. The Plan Administrator shall file all reports and forms lawfully required to be filed by the Plan Administrator and shall distribute any forms, reports or statements to be distributed to Participants and others. (f) Investments. The Plan Administrator shall keep itself advised with respect to the investment of the Trust Fund and shall report to the Company regarding the investment and reinvestment of the Trust Fund not less frequently than annually. 7.3 CREATION OF COMMITTEE. A committee shall perform the Company's duties as Plan Administrator. The committee shall consist of at least two members, and they shall hold office during the pleasure of the Board of Directors. Unless and until the Company appoints other individuals to serve on this committee, the committee members shall be the members of the Company's Benefits Administration Committee as they may change from time to time. The committee members shall serve without compensation but shall be reimbursed for all expenses by the Company. The committee shall conduct itself in accordance with the provisions of this Article. The members of the committee may resign with 30 days notice in writing to the Company and may be removed immediately at any time by written notice from the Company. 7.4 CHAIRMAN AND SECRETARY. The committee shall elect a chairman from among its members and shall select a secretary who is not required to be a member of the committee and who may be authorized to execute any document or documents on behalf of the committee. The secretary of the committee or his designee shall record all acts and determinations of the committee and shall preserve and retain custody of all such records, together with such other documents as may be necessary for the administration of this Plan or as may be required by law. 7.5 APPOINTMENT OF AGENTS. The committee may appoint such other agents, who need not be members of the committee, as it may deem necessary for the effective performance of its duties, whether ministerial or discretionary, as the committee may deem expedient or appropriate. The compensation of any agents who are not employees of the Company shall be fixed by the committee within any limitations set by the Board of Directors. 7.6 MAJORITY VOTE AND EXECUTION OF INSTRUMENTS. In all matters, questions and decisions, the action of the committee shall be determined by a majority vote of its members. They may meet informally or take any ordinary action without the necessity of meeting as a group. All instruments executed by the committee shall be executed by a majority of its members or by any member of the committee designated to act on its behalf. 7.7 ALLOCATION OF RESPONSIBILITIES. The committee may allocate responsibilities among its members or designate other persons to act on its behalf. Any allocation or designation, however, must be set forth in writing and must be retained in the permanent records of the committee. 7.8 CONFLICT OF INTEREST. No member of the committee who is a Participant shall take any part in any action in connection with his participation as an individual. Such action shall be voted or decided by the remaining members of the committee. 7.9 ACTION TAKEN BY COMPANY. Any action to be taken by the Company shall be taken by resolution adopted by the Board of Directors; provided, however, that by resolution the Board of Directors may delegate to any committee of the Board, any committee of officers or other employees, or any officer of the Company the authority to take any actions hereunder. 7.10 DELEGATIONS OF AUTHORITY. All delegations of responsibility set forth in this document regarding the determination of benefits and the interpretation of the terms of the Plan confer discretionary authority upon the Plan Administrator. 7.11 INDEMNIFICATION. To the extent permitted by law, the Company shall and does hereby jointly and severally indemnify and agree to hold harmless the employees, officers and directors of it and its Affiliates who serve in fiduciary or other capacities with respect to the Plan from all loss, damage, or liability, joint or several, including payment of expenses in connection with defense against any such claim, for their acts, omissions and conduct, and for the acts, omissions or conduct of their duly appointed agents, which acts, omissions or conduct constitute or are alleged to constitute a breach of such individual's fiduciary or other responsibilities under the Act or any other law, except for those acts, omissions, or conduct resulting from his own willful misconduct, willful failure to act, or gross negligence; provided, however, that if any party would otherwise be entitled to indemnification hereunder in respect of any liability and such party shall be insured against loss as a result of such liability by any insurance contract or contracts, such party shall be entitled to indemnification hereunder only to the extent by which the amount of such liability shall exceed the amount thereof payable under such insurance contract or contracts. ARTICLE VIII CLAIMS REVIEW PROCEDURE 8.1 CLAIMS. (a) Filing of Claim. A Participant or Beneficiary entitled to benefits need not file a written claim to receive benefits. If a Participant, Beneficiary or any other person is dissatisfied with the determination of his benefits, eligibility, participation or any other right or interest under this Plan, such person may file a written statement setting forth the basis of the claim with the Plan Administrator in a manner prescribed by the Plan Administrator. In connection with the determination of a claim, or in connection with review of a denied claim, the claimant may examine this Plan and any other pertinent documents generally available to Participants relating to the claim and may submit comments in writing. (b) Notice of Decision. A written notice of the disposition of any such claim shall be furnished to the claimant within 60 days after the claim is filed with the Plan Administrator, provided that the Plan Administrator may have an additional period to decide the claim if it advises the claimant in writing of the need for an extension and the date on which it expects to decide the claim. The notice of disposition of a claim shall refer, if appropriate, to pertinent provisions of this Plan, shall set forth in writing the reasons for denial of the claim if the claim is denied (including references to any pertinent provisions of this Plan), and where appropriate shall explain how the claimant can perfect the claim. 8.2 APPEALS. (a) Review. If the claim is denied, in whole or in part, the claimant shall also be notified in writing that a review procedure is available. Thereafter, within 90 days after receiving the written notice of the Plan Administrator's disposition of the claim, the claimant may request in writing, and shall be entitled to, a review meeting with the Plan Administrator to present reasons why the claim should be allowed. The claimant shall be entitled to be represented by counsel at the review meeting. The claimant also may submit a written statement of his claim and the reasons for granting the claim. Such statement may be submitted in addition to, or in lieu of, the review meeting with the Plan Administrator. The Plan Administrator shall have the right to request of and receive from a claimant such additional information, documents or other evidence as the Plan Administrator may reasonably require. If the claimant does not request a review meeting within 90 days after receiving written notice of the Plan Administrator's disposition of the claim, the claimant shall be deemed to have accepted the Plan Administrator's written disposition, unless the claimant shall have been physically or mentally incapacitated so as to be unable to request review within the 90 day period. (b) Decision Following Review. A decision on review shall be rendered in writing by the Plan Administrator ordinarily not later than 60 days after review, and a written copy of such decision shall be delivered to the claimant. If special circumstances require an extension of the ordinary period, the Plan Administrator shall so notify the claimant. In any event, if a claim is not determined within 120 days after submission for review, it shall be deemed to be denied (c) Decisions Final; Procedures Mandatory. To the extent permitted by law, a decision on review by the Plan Administrator shall be binding and conclusive upon all persons whomsoever. To the extent permitted by law, completion of the claims procedures described in this Article shall be a mandatory precondition that must be complied with prior to commencement of a legal or equitable action in connection with the Plan by a person claiming rights under the Plan or by another person claiming rights through such a person. The Plan Administrator may, in its sole discretion, waive these procedures as a mandatory precondition to such an action. ARTICLE IX LIMITATION ON ASSIGNMENT; PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE; CORRECTIONS 9.1 ANTI-ALIENATION CLAUSE. No benefit which shall be payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of the same shall be void. No benefit shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for or against any person, except to the extent as may be required by law. 9.2 PERMITTED ARRANGEMENTS. Section 9.1 shall not preclude arrangements for the withholding of taxes from benefit payments, arrangements for the recovery of benefit overpayments, or arrangements for direct deposit of benefit payments to an account in a bank, savings and loan association or credit union (provided that such arrangement is not part of an arrangement constituting an assignment or alienation). 9.3 PAYMENT TO MINOR OR INCOMPETENT. Whenever any benefit which shall be payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined by the Plan Administrator to be incompetent by qualified medical advice, the Plan Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of the minor or incompetent, or to cause the same to be paid to the minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of the minor or incompetent if one has been appointed or to cause the same to be used for the benefit of the minor or incompetent. 9.4 UNDERPAYMENT OR OVERPAYMENT OF BENEFITS. In the event that, through mistake or computational error, benefits are underpaid or overpaid, there shall be no liability for any more than the correct amount of benefits under the Plan. Overpayments may be deducted from future payments under the Plan and underpayments may be added to future payments under the Plan. In lieu of receiving reduced benefits under the Plan, a Participant or Beneficiary may elect to make a lump sum repayment of any overpayment. ARTICLE X AMENDMENT, MERGER AND TERMINATION 10.1 AMENDMENT. The Company shall have the right at any time, by an instrument in writing duly executed, acknowledged and delivered to the Plan Administrator, to modify, alter or amend this Plan, in whole or in part, prospectively or retroactively; provided, however, that the duties and liabilities of the Plan Administrator and the Trustee hereunder shall not be substantially increased without its written consent; and provided further that the amendment shall not reduce any Participant's interest in the Plan, calculated as of the date on which the amendment is adopted. 10.2 MERGER OR CONSOLIDATION OF COMPANY. The Plan shall not be automatically terminated by the Company's acquisition by or merger into any other employer, but the Plan shall be continued after such acquisition or merger if the successor employer elects and agrees to continue the Plan. All rights to amend, modify, suspend, or terminate the Plan shall be transferred to the successor employer, effective as of the date of the merger. If an Employer other than the Company is acquired by or merged into any organization other than an Affiliate, the Plan shall be terminated as to the acquired Employer unless the Company and the acquirer agree otherwise in writing. 10.3 TERMINATION OF PLAN OR DISCONTINUANCE OF CONTRIBUTIONS. It is the expectation of the Company and each of the Employers that this Plan will be continued indefinitely. However, continuance of the Plan is not assumed as a contractual obligation of the Company or any other Employer, and the right is reserved at any time to terminate this Plan or to reduce, temporarily suspend or discontinue contributions hereunder. If the Plan is terminated or contributions are reduced, temporarily suspended, or discontinued with respect to all Employers or any one or more Employers, the benefits of the affected Participants will continue to be held pursuant to the Plan until the date or dates on which such benefits would have become distributable had the Plan not been terminated or had contributions not been reduced, temporarily suspended, or discontinued. In the exercise of its discretion, however, the Plan Administrator may direct that the benefits of any Participant affected by the termination of the Plan as to all Employers or a particular Employer, or the reduction, temporary suspension, or discontinuance of contributions, be distributed as of an earlier date or dates. ARTICLE XI CHANGE OF CONTROL PROVISIONS 11.1 ADDITIONAL SERVICE. A Participant whose employment with the Company or any Affiliate is terminated within two years after a Change of Control occurs will receive an additional 36 months of Service credit if (i) the Participant has a "Change of Control Agreement" with the Company and (ii) the Participant is entitled to receive payments pursuant to the Change of Control Agreement due to the termination. For purposes of this section, a "Change of Control Agreement" is any agreement entered into by the Participant and the Company which provides the Participant with severance benefits in the event that the Participant's employment with the Company terminates under certain limited circumstances following a Change of Control. 11.2 70/80 RETIREMENT BENEFIT. A Participant whose employment is terminated by the Company or any Affiliate within two years after a Change of Control and whose age and years of Service, as of the date of termination of Service, equal or exceed (i) 70 if such Participant has attained age 55 on or before such date or (ii) 80 if he has not attained age 55 on or before such date, may elect (with the same rights of election as under the Retirement Plan or any other applicable plan) on or before the date of termination of Service to retire on such date (or on such other date as may be mutually agreed to between such Participant and the Company) and to receive, commencing on the first day of the month following or coinciding with his retirement, a retirement benefit in the amount computed under the provisions of Section5.1 and Section 5.2 without any reduction in such retirement benefit on account of the commencement thereof prior to attainment of his Normal Retirement Date; provided that the provisions of Section 5.1 and Section 5.2 shall be applicable without regard to whether or not the Participant has attained age 55. If such a retired Participant shall subsequently become reemployed by the Company any retirement benefit paid to him hereunder shall cease, his Service completed on and after the date of his reemployment shall continue to accrue and upon his subsequent retirement or termination of employment his retirement benefit shall be computed in accordance with the applicable provisions of the Plan, reduced by the Actuarial Equivalent of the amount of any retirement benefit previously paid hereunder. Each Participant in this Plan to whom this Section applies shall be fully vested in his or her benefits under the Plan whether or not he or she meets the Service or age requirements for a deferred vested retirement benefit. 11.3 PLAN ADMINISTRATOR DISCRETION. The Plan Administrator shall determine, in accordance with uniform and nondiscriminatory rules designed to carry out the purpose of this ARTICLE to encourage and facilitate the retirement of older employees with long Service, whether this Section shall apply to any Participant whose age or length of Service is in doubt. 11.4 SPECIAL LUMP SUM OPTION. Notwithstanding any other provision of this Plan to the contrary, the benefits of any Participant whose employment is terminated by the Company or any Affiliate within two years after a Change of Control shall be paid in the form of an Actuarially Equivalent lump sum. If such a Participant shall subsequently become reemployed by the Company, his Service completed on and after the date of his reemployment shall continue to accrue and upon his subsequent retirement or termination of employment his retirement benefit shall be computed in accordance with the applicable provisions of this Plan, reduced by the Actuarial Equivalent of the amount of any retirement benefit previously paid hereunder. ARTICLE XII GENERAL PROVISIONS 12.1 LIMITATION ON PARTICIPANTS' RIGHTS. Participation in the Plan shall not give any Participant the right to be retained in the employ of the Company or any Affiliate or any right or interest in the Trust Fund other than as herein provided. The Company and each Affiliate reserves the right to dismiss any Participant without any liability for any claim either against the Trust Fund, except to the extent herein provided, or against the Company, or Affiliate. 12.2 STATUS OF PARTICIPANTS AS UNSECURED CREDITORS. Each Participant is an unsecured creditor of the Company or the Affiliate that employs the Participant and no Participant has any preferred or secured claim to any assets of the Company or any Affiliate for the payment of benefits under this Plan. If the Company or any Affiliate acquires any insurance policies or other investments to assist it in meeting its obligations to Participants, those policies or other investments will nonetheless remain part of the general assets of the Company or Affiliate. 12.3 STATUS OF TRUST FUND. The Trust Fund is being established to assist the Company and the adopting Affiliates in meeting their obligations to the Participants and to provide the Participants with a measure of protection in certain limited instances. In certain circumstances described in the Trust Agreement, the assets of the Trust Fund may be used for the benefit of the Company's or an Affiliate's creditors and, as a result, the Trust Fund is considered to be part of the Company's and adopting Affiliate's general assets. Benefit payments due under this Plan shall either be paid from the Trust Fund or from the Company's or Affiliate's general assets as directed by the Plan Administrator. Despite the establishment of the Trust Fund, it is intended that the Plan be considered to be "unfunded" for purposes of the Act and the Code. 12.4 CANCELLATION OR REDUCTION OF BENEFITS. An Employer and one of its Participants may agree from time to time to reduce the amount of the Participant's benefit under this Plan. Any such agreement must be in writing, must be signed by the Participant and the Employer, shall relate only to the benefits which the Participant is entitled and shall not circumvent the provisions of Sections 3.3, 6.1, or 6.2 regarding the timing or manner of distributions from this Plan. 12.5 UNIFORM ADMINISTRATION. Whenever in the administration of the Plan any action is required by the Plan Administrator, such action shall be uniform in nature as applied to all persons similarly situated. 12.6 HEIRS AND SUCCESSORS. All of the provisions of this Plan shall be binding upon all persons who shall be entitled to any benefits hereunder, and their heirs and legal representatives. To signify its adoption of this Plan document, the Company has caused this Plan document to be executed by a duly authorized officer of the Company on this 22 day of December, 1997. PHELPS DODGE CORPORATION By Stuart L. Marcus ------------------------------------- Its Vice President - Human Resources ------------------------------------ Appendix A In lieu of the benefits described in the Plan, the listed individuals will be entitled to the benefits approved by the Board of Directors or its delegatee, as described in the individual agreements as specified. 1. Letter agreement between L. William Seidman and the Corporation dated August 15, 1977. 2. Letter agreement between G. Robert Durham and the Corporation dated March 1, 1989. 3. Letter agreement between Edson L. Foster and the Corporation dated January 27, 1988. 4. Letter agreement between William C. Tubman and the Corporation dated November 1, 1989. 5. Letter agreement between Dr. Patrick J. Ryan and the Corporation dated January 27, 1988. 6. Letter agreement between A.L. (John) Lawrence and the Corporation dated November 1, 1989. 7. Retirement Agreement and General Release between John C. Replogle and the Corporation dated December 4, 1997. EX-10.10 6 SUPPLEMENTAL SAVINGS PLAN Exhibit 10.10 PHELPS DODGE CORPORATION SUPPLEMENTAL SAVINGS PLAN SUPPLEMENTAL SAVINGS PLAN TABLE OF CONTENTS ARTICLE I - PREAMBLE ARTICLE II - DEFINITIONS 2.1 DEFINITIONS 2.2 CONSTRUCTION ARTICLE III - ELIGIBILITY 3.1 SELECTION OF PARTICIPANTS 3.2 PARTICIPATION ELECTIONS 3.3 REVISED ELECTIONS 3.4 DISCONTINUANCE OF PARTICIPATION 3.5 ADOPTION BY AFFILIATES 3.6 CHANGE IN AFFILIATE STATUS 3.7 SPECIAL ARRANGEMENTS ARTICLE IV - CONTRIBUTIONS 4.1 PARTICIPANT CONTRIBUTIONS 4.2 MATCHING CONTRIBUTIONS 4.3 PROFIT SHARING CONTRIBUTIONS ARTICLE V - IN-SERVICE DISTRIBUTIONS AND WITHDRAWALS 5.1 SPECIAL PURPOSE DEFERRAL CONTRIBUTIONS 5.2 HARDSHIP 5.3 ACCELERATION OF BENEFITS 5.4 LIMITATION ON DISTRIBUTIONS ARTICLE VI - CREDITING OF CONTRIBUTIONS AND EARNINGS 6.1 TRANSFER TO TRUSTEE; ALLOCATION OF CONTRIBUTIONS 6.2 INVESTMENT EARNINGS OR LOSSES 6.3 INVESTMENT DIRECTION 6.4 FORFEITURES ARTICLE VII - VESTING 7.1 VESTING ARTICLE VIII - PAYMENT OF BENEFITS 8.1 TIME OF PAYMENT 8.2 METHOD OF PAYMENT 8.3 BENEFICIARY DESIGNATIONS 8.4 LIMITATION ON DISTRIBUTIONS ARTICLE IX - ADMINISTRATION OF THE PLAN 9.1 ADOPTION OF TRUST 9.2 POWERS OF THE PLAN ADMINISTRATOR 9.3 CREATION OF COMMITTEE 9.4 CHAIRMAN AND SECRETARY 9.5 APPOINTMENT OF AGENTS 9.6 MAJORITY VOTE AND EXECUTION OF INSTRUMENTS 9.7 ALLOCATION OF RESPONSIBILITIES 9.8 CONFLICT OF INTEREST 9.9 ACTION TAKEN BY COMPANY 9.10 DELEGATIONS OF AUTHORITY 9.11 INDEMNIFICATION ARTICLE X - CLAIMS REVIEW PROCEDURE 10.1 CLAIMS 10.2 APPEALS ARTICLE XI - LIMITATION ON ASSIGNMENT; PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE; CORRECTIONS 11.1 ANTI-ALIENATION CLAUSE 11.2 PERMITTED ARRANGEMENTS 11.3 PAYMENT TO MINOR OR INCOMPETENT 11.4 UNDERPAYMENT OR OVERPAYMENT OF BENEFITS ARTICLE XII - AMENDMENT, MERGER AND TERMINATION 12.1 AMENDMENT 12.2 MERGER OR CONSOLIDATION OF COMPANY 12.3 TERMINATION OF PLAN OR DISCONTINUANCE OF CONTRIBUTIONS ARTICLE XIII - GENERAL PROVISIONS 13.1 LIMITATION ON PARTICIPANTS' RIGHTS 13.2 STATUS OF PARTICIPANTS AS UNSECURED CREDITORS 13.3 CANCELLATION OR REDUCTION OF ACCOUNTS 13.4 EXCEPTION TO CONTRIBUTION RULE 13.5 STATUS OF TRUST FUND 13.6 FUNDING UPON A CHANGE OF CONTROL 13.7 UNIFORM ADMINISTRATION 13.8 HEIRS AND SUCCESSORS 13.9 NO LIABILITY FOR ACCELERATION OF PAYMENTS PHELPS DODGE CORPORATION SUPPLEMENTAL SAVINGS PLAN ARTICLE I PREAMBLE Phelps Dodge Corporation (the "Company"), a corporation organized and existing under the laws of the State of New York, previously adopted the Comprehensive Executive Nonqualified Retirement and Savings Plan of Phelps Dodge Corporation (the "Comprehensive Plan"). The Comprehensive Plan consisted, primarily, of supplemental executive retirement provisions and supplemental savings provisions. The Company has now decided to split the Comprehensive Plan into two separate plans and to replace the supplemental savings provisions of the Comprehensive Plan with the Phelps Dodge Corporation Supplemental Savings Plan (the "Plan"), the terms and provisions of which are set forth in this Plan document. Except as otherwise noted with respect to a particular provision, the Plan is effective as of January 1, 1997 (the "Effective Date") and, as of the Effective Date, constitutes an amendment and restatement of the supplemental savings provisions of the Comprehensive Plan. All amounts previously deferred by Participants or contributed by the Company or any other employer pursuant to the supplemental savings provisions of the Comprehensive Plan, as well as any amounts credited or charged to a Participant's accounts pursuant to the supplemental savings provisions of the Comprehensive Plan, shall be governed by the terms and provisions of this Plan document. The purpose of this Plan is to provide a select group of management or highly compensated employees of the Company and certain of its affiliates with the opportunity to defer a portion of their compensation and to receive related contributions from their employers. As a result, the Plan shall be considered to be a "top hat plan", exempt from many of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). This Plan is not intended to "qualify" for favorable tax treatment pursuant to Section 401(a) of the Internal Revenue Code of 1986 (the "Code") or any successor section or statute. ARTICLE II DEFINITIONS 2.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not begin a sentence, the word or phrase shall generally be a term defined in this Section 2.1 or in the Preamble. The following words and phrases used in the Plan with the initial letter capitalized shall have the meanings set forth in this Section 2.1, unless a clearly different meaning is required by the context in which the word or phrase is used: (a) "Account" or "Accounts" means the accounts which may be maintained by the Plan Administrator to reflect the interest of a Participant under the Plan. (b) "Affiliate" means (1) a corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as is the Company, (2) any other trade or business (whether or not incorporated) controlling, controlled by, or under common control with the Company (within the meaning of Section 414(c) of the Code), and (3) any other corporation, partnership, or other organization which is a member of an affiliated service group (within the meaning of Section 414(m) of the Code) with the Company or which is otherwise required to be aggregated with the Company pursuant to Section 414(o) of the Code. (c) "AICP" means the Phelps Dodge Annual Incentive Compensation Plan, as in effect and amended from time to time. (d) "Base Salary" means the total regular salary paid by an Employer to a Participant during the Plan Year. "Base Salary" excludes commissions, bonuses, overtime, living or other allowances, contributions by an Employer under this Plan or any other employee benefit plan of the Employer (excluding employee salary deferrals under this Plan or the Savings Plan), or other extra, incentive, premium, contingent, supplemental, or additional compensation, all as determined and defined by the Plan Administrator in the exercise of its discretion. For purposes of Sections 4.2 and 4.3, only the Base Salary paid to the Participant during the portion of the Plan Year in which the Participant is an "eligible Participant" pursuant to Section 4.2 or Section 4.3, as applicable, will be considered. (e) "Beneficiary" means the person or trust that a Participant, in his most recent written designation filed with the Plan Administrator, shall have designated to receive his Accounts under the Plan in the event of his death. (f) "Board of Directors" means the Board of Directors of the Company. (g) "Change of Control" For purposes of this Plan, a "Change of Control" shall be deemed to have taken place at the time: (1) when any "person" or "group" of persons (as such terms are used in Section 13 of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act")), other than the Company or any employee benefit plan sponsored by the Company, becomes the "beneficial owner" (as such term is used in Section 13 of the Exchange Act) of 25% or more of the total number of the Company's common shares at the time outstanding; (2) of the approval by the vote of the Company's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Company or by law) of the voting stock of the Company of any merger, consolidation, sale of assets, liquidation or reorganization in which the Company will not survive as a publicly owned company; or (3) when the individuals who, at the beginning of any period of two years or less, constituted the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. (h) "Compensation" means the sum of a Participant's Base Salary and Incentive Compensation. (i) "Deferral Contributions" means the Regular and Special Purpose Deferral Contributions made by a Participant pursuant to Section 4.1. (j) "Deferral Contributions Account" means the Account maintained to record the Deferral Contributions made by a Participant pursuant to Section 4.1. The Deferral Contributions Account shall be divided into as many subaccounts as the Plan Administrator deems necessary to distinguish between the different types of Deferral Contributions and the dates on which they are to be distributed. (k) "Disability" For purposes of this Plan, a Participant shall be conclusively presumed to be under Disability only during the period of time that the Participant qualifies to receive, without considering any offsets, long term disability payments under his Employer's Long Term Disability Insurance Plan. (l) "Distribution Date" means the date or dates selected by the Participant and agreed to by the Plan Administrator on the form prescribed by the Plan Administrator as the date or dates on which the Participant's Special Purpose Deferral Contributions are to be distributed to the Participant. (m) "Employee" means any individual classified by his Employer as a common law employee of the Employer. For this purpose, the classification that is relevant is the classification in which such individual is placed by the Employer for purposes of this Plan and the classification of such individual for any other purpose (e.g., employment tax or withholding purposes) shall be irrelevant. If an individual is characterized as a common law employee of the Employer by a governmental agency or court but not by the Employer, such individual shall be treated as an employee who has not been designated for participation in this Plan. (n) "Employer" means the Company and any Affiliate that has adopted this Plan pursuant to Section 3.5. (o) "Employer Contributions Accounts" means the Profit Sharing Contributions Account and the Matching Contributions Account maintained for a Participant. (p) "Incentive Compensation" means the amount awarded to any Participant in any year under the AICP. (q) "Investment Fund" means the investment fund or funds established by the Plan Administrator pursuant to Section 6.3. (r) "Matching Contributions" means the contributions made by an Employer on behalf of a Participant or all Participants pursuant to Section 4.2. (s) "Matching Contributions Account" means the Account maintained to record the Matching Contributions, if any, made by the Company on a Participant's behalf pursuant to Section 4.2. (t) "Participant" means any Employee selected for participation pursuant to Section 3.1. Depending on the context, the term Participant also may refer to a current or former Employee who no longer is making contributions to the Plan but who has not received a distribution of all amounts to which he is entitled. (u) "Plan Administrator" means the committee designated by the Company to carry out its responsibilities under the Plan as set forth in Section 9.3. (v) "Plan Year" means the 12 month period beginning on each January 1 and ending on the next following December 31. (w) "Profit Sharing Contributions" means the contributions made by an Employer on behalf of a Participant pursuant to Section 4.3. (x) "Profit Sharing Contributions Account" means the Account maintained to record the Profit Sharing Contributions made on behalf of a Participant pursuant to Section 4.3. (y) "Regular Deferral Contribution" means a Deferral Contribution that may only be distributed following a Participant's termination of employment. (z) "Savings Plan" means the Phelps Dodge Employee Savings Plan, as in effect and amended from time to time. (aa) "Special Purpose Deferral Contribution" means a Deferral Contribution that will become distributable upon a Distribution Date designated by the Participant on the form prescribed by the Plan Administrator. (bb) "Trust Agreement" means that certain trust agreement established pursuant to the Plan between the Company and the Trustee or any trust agreement hereafter established, the provisions of which are incorporated herein by reference. (cc) "Trustee" means the Trustee under the Trust Agreement. (dd) "Trust Fund" means all assets of whatsoever kind or nature held from time to time by the Trustee pursuant to the Trust Agreement, without distinction as to income and principal and without regard to source, (i.e., Employer or Participant contributions, earnings or forfeitures). (ee) "Valuation Date" means each day on which the New York Stock Exchange is open for trading. 2.2 CONSTRUCTION. The masculine gender, where appearing in the Plan, shall include the feminine gender (and vice versa), and the singular shall include the plural, unless the context clearly indicates to the contrary. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of this Plan. If any provision of this Plan is determined to be for any reason invalid or unenforceable, the remaining provisions shall continue in full force and effect. All of the provisions of this Plan shall be construed and enforced in accordance with the laws of the State of Arizona. ARTICLE III ELIGIBILITY 3.1 SELECTION OF PARTICIPANTS. (a) GENERAL RULE. Any Employee who was participating in the Plan prior to the Effective Date shall continue to be eligible to participate in the Plan for the 1997 Plan Year. Effective as of January 1, 1998, an Employee must be in AICP Grade 4 or above to participate in the Plan. If an Employee who participated in the Plan prior to January 1, 1998 is in an AICP Grade below Grade 4 or is not eligible to participate in the AICP, the Employee may continue to participate after January 1, 1998, unless the Plan Administrator excludes the Employee from further participation pursuant to Sections 3.1(c) or 3.4. (b) NO WAITING PERIODS. A Participant need not complete any particular period of service in order to be eligible to make Deferral Contributions. In order to receive allocations of Employer Matching Contributions or Profit Sharing Contributions for a Plan Year, however, a Participant must also be eligible to receive matching contributions under the Savings Plan for that Plan Year, as determined in accordance with the provisions of the Savings Plan. (c) LIMITATION OF PARTICIPATION. For purposes of Title I of ERISA, the Plan is intended to be an unfunded plan of deferred compensation covering a select group of management or highly compensated employees. As a result, participation in the Plan shall be limited to Employees who are properly included in one or both of these categories. The Plan Administrator, in the exercise of its discretion, may exclude an Employee who otherwise meets the requirements of Section 3.1(a) from participation in the Plan if it concludes that the exclusion of that Employee is necessary in order to satisfy these requirements. The Plan Administrator also may exclude an Employee who otherwise meets the requirements of Section 3.1(a) for any other reason, or for no reason, as the Plan Administrator deems to be appropriate. 3.2 PARTICIPATION ELECTIONS. Each Participant shall make an election to participate in the Plan on such form or forms and at such time as the Plan Administrator shall require. In the election, the Participant shall select the amount or rate of Deferral Contributions to be made for the following Plan Year and, effective for Plan Years commencing on or after January 1, 1998, shall characterize the Deferral Contributions as either Regular or Special Purpose Deferral Contributions. If Special Purpose Deferral Contributions are being made, the Participant also shall select a Distribution Date or Distribution Dates for such Contributions. Effective for Plan Years commencing on or after January 1, 1998, if Regular Deferral Contributions are being made, the Participant shall select the manner in which distributions are to be made from the Participant's Accounts and whether distributions are to commence immediately following the Participant's termination of employment or whether they are to be postponed until the later of termination of employment or a specified date. If the Participant elects to make any type of Deferral Contributions, the Participant shall authorize the reduction of the Participant's Compensation in an amount equal to his Deferral Contributions. The election form or forms also may set forth such other information as the Plan Administrator shall require. If a Participant's initial election form is executed and delivered within 30 days of the day on which the Participant is notified that he is eligible to participate in the Plan, the Participant's Deferral Contributions may be determined with reference to Compensation earned on or after the first day of the first full payroll period next following receipt of the election form by the Plan Administrator or as of such other uniform date (not earlier than the first day of the next full payroll period) as may be designated by the Plan Administrator. If the Participant does not execute and deliver an initial election form within the initial 30 day period, the Participant's Deferral Contributions may be determined with reference to Compensation earned on or after the first day of the first payroll period in any later Plan Year if the Participant executes and delivers the appropriate form or forms to the Plan Administrator at least 30 days (or such other period specified by the Plan Administrator pursuant to rules of uniform application) prior to the first day of such Plan Year. 3.3 REVISED ELECTIONS. A Participant must file a new election form prior to the beginning of each Plan Year which shall set forth the amount or rate of his Deferral Contributions for the new Plan Year and also shall characterize the Deferral Contributions as either Regular or Special Purpose Deferral Contributions. If Special Purpose Deferral Contributions are being made, the new election form also shall set forth the Distribution Date or Distribution Dates for such Contributions. The new amount or rate of Deferral Contributions will only apply to Deferral Contributions made for the relevant Plan Year and the new form must be filed at least 30 days (or such other period specified by the Plan Administrator pursuant to rules of uniform application) before the first day of such Plan Year. Effective for Plan Years commencing on or after January 1, 1998, a Participant may change the method of distributions or the timing of the commencement of distributions of Regular Deferral Contributions at any time by filing the appropriate form as prescribed by the Plan Administrator. The new election will be honored only if the appropriate form is filed at least two (2) years prior to the Participant's termination of employment. A Participant may not change the Distribution Date for Special Purpose Deferral Contributions that are made prior to the date on which a new election form is effective. In a new election form, however, the Participant may designate a different or additional Distribution Date for Special Purpose Deferral Contributions to be made in the future. 3.4 DISCONTINUANCE OF PARTICIPATION. Once an individual is designated as a Participant, he will continue as such for all future Plan Years unless and until the Plan Administrator specifically acts to discontinue his participation or the Participant's participation is suspended pursuant to Section 5.3(c). The Plan Administrator may discontinue a Participant's participation in the Plan at any time for any or no reason. If a Participant's participation is discontinued, he will no longer be eligible to make Deferral Contributions or to receive Matching or Profit Sharing Contributions. The Participant will not be entitled to receive a distribution, however, until the occurrence of one of the events listed in Articles V or VIII, unless the Plan Administrator, in the exercise of its discretion, directs that a distribution be made as of an earlier date, in which case the Participant's Accounts shall be distributed on the same basis as if the Participant's employment had been terminated. 3.5 ADOPTION BY AFFILIATES. Any Affiliate of the Company may adopt this Plan with the approval of the Plan Administrator. Any Affiliate that permits an Employee to make Deferral Contributions pursuant to Section 4.1, or that allowed an Employee to defer compensation pursuant to the Comprehensive Plan in the past, shall be deemed to have adopted this Plan without any further action. At the request of the Plan Administrator, however, the Affiliate shall evidence its adoption of the Plan by an appropriate resolution of its Board of Directors or in such other manner as may be authorized by the Plan Administrator. By adopting this Plan, the Affiliate shall be deemed to have agreed to make the contributions called for by Article IV, agreed to comply with all of the other terms and provisions of this Plan, delegated to the Plan Administrator the power and responsibility to administer this Plan with respect to the Affiliate's Employees, and delegated to the Company the full power to amend or terminate this Plan with respect to the Affiliate's Employees. 3.6 CHANGE IN AFFILIATE STATUS. If an Affiliate that has adopted this Plan ceases to be an Affiliate of the Company, that Affiliate shall no longer be an Employer and all Participants employed by that Affiliate on the date the Affiliate ceases to be an Affiliate shall be deemed to have terminated employment on such date. 3.7 SPECIAL ARRANGEMENTS. The Company has the discretion to enter into special arrangements with individuals which allow such individuals to receive benefits on some basis other than pursuant to the provision of ARTICLES III, IV and V. All such special arrangements shall be set forth in writing. The remaining provisions of this Plan may apply to any such individual if the Company and the individual so agree; provided, however, that if any provision of this Plan conflicts with a provision included in the written document that describes the special arrangement, the provision of the written document shall control. ARTICLE IV CONTRIBUTIONS 4.1 PARTICIPANT CONTRIBUTIONS. (a) GENERAL RULE. For any Plan Year, a Participant may elect to defer a portion of the Base Salary or Incentive Compensation otherwise payable to him. Any such deferrals shall be expressed in whole percentages or as a specific dollar amount, as specified in the Participant's election form. Except as otherwise provided in Section 13.4, amounts deferred shall be transferred by the Company or the appropriate Affiliate to the Trust. (b) REGULAR OR SPECIAL PURPOSE DEFERRAL CONTRIBUTIONS. As provided in Sections 3.2 and 3.3, in each election form filed for Plan Years commencing on or after January 1, 1998, the Participant shall characterize his Deferral Contributions as Regular Deferral Contributions or Special Purpose Deferral Contributions. Pursuant to Article V, Regular Deferral Contributions are only distributable following the Participant's termination of employment. Special Purpose Deferral Contributions become distributable upon the Distribution Date specified by the Participant. Unless the Plan Administrator adopts rules limiting the number of Distribution Dates that a Participant may specify, the Participant may designate any number of Distribution Dates. (c) LIMITATIONS ON DEFERRALS. The Plan Administrator may limit a Participant's Deferral Contributions in accordance with such uniform rules as it may adopt from time to time. (d) CHANGE IN CONTRIBUTIONS. As provided in Section 3.3, a Participant must file a new election form prior to each new Plan Year to select the amount or rate of Deferral Contributions for the following Plan Year. If a Participant does not file a new election form at such time, no Deferral Contributions will be withheld from the Participant's Compensation during the following Plan Year. (e) SUSPENSION OF DEFERRAL CONTRIBUTIONS. A Participant may suspend the Deferral Contributions being made from his Base Salary at any time by so notifying the Plan Administrator in writing and in accordance with such rules of uniform application as the Plan Administrator may adopt from time to time. If a Participant suspends his Deferral Contributions with respect to Base Salary, the Participant may not file a new election form electing to make Deferral Contributions with respect to Base Salary until the December 1 of the year following the year in which such suspension occurred. The Deferral Contributions made pursuant to such new election form may then commence in accordance with the provisions of Section 3.3. A Participant may not suspend the Deferral Contributions being made from his Incentive Compensation. 4.2 MATCHING CONTRIBUTIONS. Each Employer shall make a Matching Contribution on behalf of each of its "eligible Participants". For this purpose, a Participant is an "eligible Participant" if (i) the Participant is eligible to receive a matching contribution under the Savings Plan, and (ii) the Participant has made Salary Pre-Tax Deferral Contributions (as such term is defined in the Savings Plan) to the Savings Plan in an amount equal to the lesser of the maximum elective deferrals permitted by Section 402(g) of the Code or any other limitation imposed by the Savings Plan. The Matching Contribution due for each eligible Participant shall equal the difference between (i) 2.5% of the Participant's Base Salary and (ii) the Company matching contribution for such eligible Participant under the Savings Plan. Except as otherwise provided in Section 13.4, the Matching Contributions shall be transmitted to the Trust following the end of the Plan Year for which such Matching Contributions are due. The Matching Contributions shall be allocated to the Matching Contributions Accounts of the eligible Participants. If a Participant was eligible to receive a matching contribution under the Savings Plan for only a part of a Plan Year, only the Base Salary paid in such part of the Plan Year will be considered for purposes of this Section 4.2. 4.3 PROFIT SHARING CONTRIBUTIONS. (a) ELIGIBILITY. For each Plan Year, but subject to the limitations set forth below, each Employer shall make a Profit Sharing Contribution on behalf of each of its "eligible Participants." For purposes of this Section, a Participant will be considered to be an "eligible Participant" only if (i) the Participant is also a Participant in the Savings Plan, and (ii) the Participant is eligible, generally, to receive a "Profit Sharing Contribution" (as such term is defined in the Savings Plan). (b) AMOUNT. The Profit Sharing Contribution to which each eligible Participant is entitled pursuant to Section 4.3(a) shall be equal to: (i) the Participant's "eligible Base Salary" multiplied by the "applicable percentage" for that Plan Year; less (2) the Profit Sharing contribution allocated to the Participant under the Savings Plan for that Plan Year. For this purpose, the "applicable percentage" is the percentage contributed to the accounts of the participants in the Savings Plan as a Profit Sharing Contribution in the Plan Year, as adjusted to reflect all limitations and carryovers called for by Section 3.4 of the Savings Plan (or any modified or replacement section of the Savings Plan). A Participant's "eligible Base Salary" is the Base Salary earned by the Participant for the portion of the Plan Year during which the Participant is eligible to receive a profit sharing contribution under the Savings Plan. (c) SPECIAL SITUATIONS. The Plan Administrator shall have the discretion to allow a Participant to receive a Profit Sharing Contribution if the Participant otherwise satisfies all requirements for receiving a profit sharing contribution under the Savings Plan but does not receive such contribution because the Participant is employed by an Employer that does not make profit sharing contributions to the Savings Plan. ARTICLE V IN-SERVICE DISTRIBUTIONS AND WITHDRAWALS 5.1 SPECIAL PURPOSE DEFERRAL CONTRIBUTIONS. A Participant may designate a Distribution Date for Special Purpose Deferral Contributions in his initial or any subsequent election form. If the Participant makes such an election, the subaccount in the Participant's Deferral Contributions Account that is maintained in order to record the Special Purpose Deferral Contributions that are to be distributed as of that Distribution Date will be distributed to the Participant as of the Distribution Date in one lump sum payment. The Distribution Date election shall apply only to subaccounts attributable to Special Purpose Deferral Contributions and no amounts attributable to Regular Deferral Contributions subaccounts or Employer Contributions Accounts will be distributed pursuant to a Distribution Date election. As a general rule, the death, Disability, or other termination of employment of a Participant shall not have any impact on the timing of the distribution of Special Purpose Deferral Contribution subaccounts, which will be distributed to the Participant (or the Participant's Beneficiary in the case of death) as of the originally selected Distribution Date even though the Participant is no longer employed by an Employer. In the exercise of its discretion, however, the Plan Administrator may order the distribution of all or any of said subaccounts at any time following the Participant's death, Disability or other termination of employment and prior to the designated Distribution Date. 5.2 HARDSHIP. In the event of an unforeseeable financial emergency, a Participant may make a written request to the Plan Administrator for a hardship withdrawal from his Deferral Contributions Account or his Employer Contributions Accounts. The maximum hardship withdrawal shall be the balance of the Account or Accounts to which such hardship withdrawal is charged. For purposes of this Plan, an "unforeseeable financial emergency" is defined as a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent (as such term is defined in Section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The granting of a Participant's request for a hardship withdrawal shall be left to the absolute, unfettered discretion of the Plan Administrator and the Plan Administrator may deny such request even if an unforeseeable financial emergency clearly exists. A request for a hardship withdrawal must be made in writing at least 30 days in advance, on a form provided by the Plan Administrator, and must be expressed as a specific dollar amount. The amount of a hardship withdrawal may not exceed the lesser of the amount required to meet the Participant's unforeseeable financial emergency or the maximum withdrawal referred to above. A hardship withdrawal will not be permitted to the extent that the hardship is or may be relieved through reimbursement or compensation by insurance or otherwise, liquidation of the Participant's assets to the extent that such liquidation would not itself cause a severe financial hardship, by the cessation of Deferral Contributions, or by a loan from the Savings Plan. 5.3 ACCELERATION OF BENEFITS. (a) GENERAL. A Participant may elect to receive an accelerated withdrawal from his Deferral Contributions Account (but not his Employer Contributions Accounts) by filing an election with the Plan Administrator on such forms as may be prescribed from time to time by the Plan Administrator. If a Participant who is a current Employee makes such an election, except as otherwise provided below, the Participant shall receive a single lump sum payment equal to 90% of the Participant's Deferral Contributions Account balance. If a Participant who is no longer an Employee makes such an election, except as otherwise provided below, the Participant shall receive a single lump sum payment equal to 80% of the Participant's Deferred Contributions Account balance. For purposes of determining the amount to be distributed, the Participant's Deferral Contributions Account shall be valued as of the effective date of the withdrawal. The accelerated withdrawal shall be paid as soon as reasonably possible following the effective date. (b) FORFEITURE. A Participant who is a current Employee shall forfeit the remaining 10% of his Deferral Contributions Account as of the day on which the accelerated withdrawal is distributed to the Participant. A participant who is a former Employee shall forfeit the remaining 20% or his Deferral Contributions Account as of the day on which the accelerated withdrawal is distributed to the Participant. (c) SUSPENSION OF PARTICIPATION. If a Participant elects to receive an accelerated withdrawal, the Participant's right to make Deferral Contributions shall be suspended for 12 months from the date the accelerated withdrawal is paid to the Participant. Upon expiration of the 12 month suspension period, the Participant shall be permitted to execute a new election form and to begin making Deferral Contributions as of the first day of the first payroll period in any subsequent Plan Year. 5.4 LIMITATION ON DISTRIBUTIONS. To the extent that any payment under this Article, when combined with all other payments received during the year that are subject to the limitations on deductibility under Section 162(m) of the Code, exceeds the limitations on deductibility under Section 162(m) of the Code, such payment shall, in the discretion of the Plan Administrator, be deferred to a later calendar year. Such deferred amounts shall be paid in the next succeeding calendar year, provided that such payment, when combined with any other payments subject to the Section 162(m) limitations received during the year, does not exceed the limitations on deductibility under Section 162(m) of the Code. ARTICLE VI CREDITING OF CONTRIBUTIONS AND EARNINGS 6.1 TRANSFER TO TRUSTEE; ALLOCATION OF CONTRIBUTIONS. All Deferral Contributions, Profit Sharing Contributions, and Matching Contributions shall be transmitted to the Trustee by the Company and the adopting Affiliates as soon as reasonably practicable. The Deferral Contributions, Profit Sharing Contributions and Matching Contributions shall be credited to the Deferral Contributions Account, Profit Sharing Contributions Account, or Matching Contributions Account maintained for that Participant. The Plan Administrator shall maintain a separate subaccount within the Deferral Contributions Account to record the Special Purpose Deferral Contributions (and any investment earnings or losses attributable to those Special Purpose Deferral Contributions) that are to be distributed as of each Distribution Date selected by a Participant. The Plan Administrator also may maintain such other subaccounts as it deems necessary or desirable. All payments from an Account between Valuation Dates shall be charged against the Account as of the preceding Valuation Date. The Accounts are bookkeeping accounts only and the Plan Administrator is not in any way obligated to segregate assets for the benefit of any Participant. 6.2 INVESTMENT EARNINGS OR LOSSES. As of each Valuation Date, the Plan Administrator will determine the positive or negative earnings for each of the Investment Funds available pursuant to Section 6.3(c). The Plan Administrator then will determine the portion of the "adjusted balance" of each of the Participant's Accounts that is invested in each of the Investment Funds and will allocate the positive or negative earnings to Participant Accounts in proportion to the "adjusted balance" for that Account and that Investment Fund. For this purpose, the "adjusted balance" of an Account will be the balance of the Account as of the preceding Valuation Date less all withdrawals, distributions and other amounts chargeable against the Account pursuant to any other provisions of this Plan since the prior Valuation Date. The earnings adjustments allocated to any Account shall be allocated among the subaccounts of that Account in the same manner. 6.3 INVESTMENT DIRECTION. (a) INVESTMENT FUNDS. The Plan Administrator shall designate two or more Investment Funds in which each Participant shall direct the investment of amounts credited to his Accounts. The Investment Funds may be changed from time to time by the Plan Administrator. (b) PARTICIPANT DIRECTIONS. (1) GENERAL. Upon becoming a Participant in the Plan, each Participant may direct that all of the amounts attributable to his Accounts be invested in a single investment fund or may direct fractional (percentage) increments of his Accounts to be invested in such fund or funds as he shall desire, in accordance with such procedures, if any, as may be established by the Plan Administrator. As of each Valuation Date, a Participant may change his designations with respect to future contributions and direct transfers among Investment Funds by making an election in accordance with such procedures as may be established by the Plan Administrator. The designation will continue until changed in accordance with such procedures. (2) DEFAULT SELECTION. In the absence of any designation, a Participant will be deemed to have directed the investment of his Accounts in the Money Market Fund. (3) IMPACT OF ELECTION. The Participant's selection of Investment Funds shall serve only as a measurement of the value of the Accounts of said Participant pursuant to Section 6.2 and Section 6.3(c) and the Plan Administrator and the Trustee are not required to invest a Participant's Accounts in accordance with the Participant's selections. (c) RATE OF RETURN. As soon as possible after each Valuation Date, the Plan Administrator shall determine the rate of return, positive or negative, experienced on each of the Investment Funds. The rate of return determined by the Plan Administrator in good faith and in its discretion pursuant to this Section shall be binding and conclusive on the Participant, the Participant's Beneficiary and all parties claiming through them. The Plan Administrator may delegate the responsibility for calculating the rate of return and the calculation and allocation of the investment earnings adjustments to the Accounts to a third party. (d) CHARGES. In the exercise of its discretion, the Plan Administrator may charge one or more of the Participant's Accounts for the reasonable expenses of carrying out investment instructions directly related to the Accounts, as the Plan Administrator deems appropriate. (e) COMPANY STOCK FUND. The Plan Administrator in the exercise of its discretion, may direct that one or more of the Investment Funds consist, primarily or exclusively, of Company securities. If such a Fund or Funds is established, a Participant's ability to direct investments into or out of such Fund shall be subject to such procedures as the Plan Administrator may prescribe from time to time to assure compliance with Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended, and other applicable requirements. Such procedures also may limit or restrict a Participant's ability to make (or modify previously made) elections pursuant to Sections 3.2 or 3.3. 6.4 FORFEITURES. The amount forfeited pursuant to Section 5.3 shall reduce the amounts that the Company would otherwise contribute to the Plan pursuant to Sections 4.2 and 4.3. ARTICLE VII VESTING 7.1 VESTING. Subject to Section 13.3, a Participant shall have a fully vested, nonforfeitable interest in his Accounts at all times. ARTICLE VIII PAYMENT OF BENEFITS 8.1 TIME OF PAYMENT. (a) GENERAL. With the exception of the distribution or withdrawal of amounts pursuant to Article V and the distribution of amounts pursuant to Section 8.1(b), no distributions will be made to a Participant prior to the Participant's death or termination of employment with the Company and all Affiliates. Subject to the provisions of Section 5.1, which deals with the distribution of the Special Purpose Deferral Contributions subaccounts in a Participant's Deferral Contributions Account, following the Participant's death or termination of employment, distributions normally will be made as soon as possible and in any event shall commence within 60 days following the end of the Plan Year in which the Participant dies or terminates employment. As provided in Section 3.2 and Section 3.3, a Participant may elect in his initial or any revised election form to defer the receipt of distributions until the later of termination of employment or a specified date. If such an election has been made (and, if the election was made in a revised election form, the election form has been in effect for the requisite period of time provided in Section 3.3), distributions to the Participant (or the Participant's Beneficiary in the case of death) shall be postponed to the extent necessary to honor such election. (b) SPECIAL PAYMENT PROVISIONS APPLICABLE ON SALE OF AFFILIATE. A Participant who is employed by an Affiliate as of the date that the Affiliate ceases to be an Affiliate for purposes of this Plan shall receive a distribution of his or her accounts as soon as possible following such date, regardless of any prior election made by the Participant to defer the receipt of benefits pursuant to Section 3.2 and Section 3.3. 8.2 METHOD OF PAYMENT. Any payments from a Participant's Accounts shall be made either in a lump sum in cash, or in cash payments in substantially equal annual installments over a period certain not exceeding 10 years, such method of payment to be elected by the Participant in his initial election form or in any revised election form that has been in effect for the requisite period of time specified in Section 3.3. If installment payments are made, the provisions of Sections 6.2 and 6.3 shall continue to apply to the unpaid balance. Unless a Participant has affirmatively elected to receive payments in installments over a period of 10 years or less, the Participant's Accounts shall be distributed in one lump sum. If a Participant is married at the time an election form or a revised election form is filed, an election to receive payments in other than a lump sum shall be ineffective unless the Participant's spouse consents to such election on a form prescribed by or acceptable to the Plan Administrator for that purpose. 8.3 BENEFICIARY DESIGNATIONS. In the event of the death of the Participant, the Participant's vested interest in his Accounts shall be paid to the Participant's Beneficiary. Each Participant shall have the right to designate, on forms supplied by and delivered to the Plan Administrator, a Beneficiary or Beneficiaries to receive his benefits hereunder in the event of the Participant's death. If the Participant is married at the time the Beneficiary Designation is filed, the designation will be ineffective unless the designation names the spouse as the Beneficiary of at least 50% of the Participant's Accounts or the Participant's spouse consents to the designation. If a Participant marries after a Beneficiary Designation is filed, the designation will no longer be effective. Subject to the spousal consent requirements noted above, each Participant may change his Beneficiary designation from time to time in the manner described above. Upon receipt of such designation by the Plan Administrator, such designation or change of designation shall become effective as of the date of the notice, whether or not the Participant is living at the time the notice is received. There shall be no liability on the part of the Employer, the Plan Administrator or the Trustee with respect to any payment authorized by the Plan Administrator in accordance with the most recent valid Beneficiary designation of the Participant in its possession before receipt of a more recent and valid Beneficiary designation. If no designated Beneficiary is living when benefits become payable, or if there is no validly designated Beneficiary, the Beneficiary shall be the Participant's estate. If the designated Beneficiary dies after the payment of benefits begin, then the Beneficiary for the remainder of the benefits payable shall be the estate of the Beneficiary. 8.4 LIMITATION ON DISTRIBUTIONS. Distributions made under this Article shall be subject to the same limitations set forth in Section 5.4 of the Plan. ARTICLE IX ADMINISTRATION OF THE PLAN 9.1 ADOPTION OF TRUST. The Company shall enter into a Trust Agreement with the Trustee, which Trust Agreement shall form a part of this Plan and is hereby incorporated herein by reference. 9.2 POWERS OF THE PLAN ADMINISTRATOR. (a) GENERAL POWERS OF PLAN ADMINISTRATOR. The Plan Administrator shall have the power and discretion to perform the administrative duties described in this Plan or required for proper administration of the Plan and shall have all powers necessary to enable it to properly carry out such duties. Without limiting the generality of the foregoing, the Plan Administrator shall have the power and discretion to construe and interpret this Plan, to hear and resolve claims relating to the Plan and to decide all questions and disputes arising under the Plan. The Plan Administrator shall determine, in its discretion, the service credited to the Participants, the status and rights of a Participant, and the identity of the Beneficiary or Beneficiaries entitled to receive any benefits payable on account of the death of a Participant. (b) PARTICIPATION. The Plan Administrator also shall have the discretion to exclude employees from participation in the Plan and to discontinue a Participant's participation in the Plan. (c) DISTRIBUTIONS. All benefit disbursements by the Trustee shall be made upon the instructions of the Plan Administrator. (d) DECISIONS CONCLUSIVE. The decisions of the Plan Administrator upon all matters within the scope of its authority shall be binding and conclusive upon all persons. (e) REPORTING. The Plan Administrator shall file all reports and forms lawfully required to be filed by the Plan Administrator and shall distribute any forms, reports or statements to be distributed to Participants and others. (f) INVESTMENTS. The Plan Administrator shall keep itself advised with respect to the investment of the Trust Fund. 9.3 CREATION OF COMMITTEE. A committee shall perform the Company's duties as Plan Administrator. The committee shall consist of at least two members, and they shall hold office during the pleasure of the Board of Directors. Unless and until the Company appoints other individuals to serve on this committee, the committee members shall be the members of the Company's Benefits Administration Committee as they may change from time to time. The committee members shall serve without compensation but shall be reimbursed for all expenses by the Company. The committee shall conduct itself in accordance with the provisions of this Section 9. The members of the committee may resign with 30 days notice in writing to the Company and may be removed immediately at any time by written notice from the Company. 9.4 CHAIRMAN AND SECRETARY. The committee shall elect a chairman from among its members and shall select a secretary who is not required to be a member of the committee and who may be authorized to execute any document or documents on behalf of the committee. The secretary of the committee or his designee shall record all acts and determinations of the committee and shall preserve and retain custody of all such records, together with such other documents as may be necessary for the administration of this Plan or as may be required by law. 9.5 APPOINTMENT OF AGENTS. The committee may appoint such other agents, who need not be members of the committee, as it may deem necessary for the effective performance of its duties, whether ministerial or discretionary, as the committee may deem expedient or appropriate. The compensation of any agents who are not employees of the Company shall be fixed by the committee within any limitations set by the Board of Directors. 9.6 MAJORITY VOTE AND EXECUTION OF INSTRUMENTS. In all matters, questions and decisions, the action of the committee shall be determined by a majority vote of its members. They may meet informally or take any ordinary action without the necessity of meeting as a group. All instruments executed by the committee shall be executed by a majority of its members or by any member of the committee designated to act on its behalf. 9.7 ALLOCATION OF RESPONSIBILITIES. The committee may allocate responsibilities among its members or designate other persons to act on its behalf. Any allocation or designation, however, must be set forth in writing and must be retained in the permanent records of the committee. 9.8 CONFLICT OF INTEREST. No member of the committee who is a Participant shall take any part in any action in connection with his participation as an individual. Such action shall be voted or decided by the remaining members of the committee. 9.9 ACTION TAKEN BY COMPANY. Any action to be taken by the Company shall be taken by resolution adopted by the Board of Directors; provided, however, that by resolution the Board of Directors may delegate to any committee of the Board, any committee of officers or other employees, or any officer of the Company the authority to take any actions hereunder. 9.10 DELEGATIONS OF AUTHORITY. All delegations of responsibility set forth in this document regarding the determination of benefits and the interpretation of the terms of the Plan confer discretionary authority upon the Plan Administrator; provided, however, that the Plan Administrator shall not retain any such discretionary authority after a Change of Control occurs. 9.11 INDEMNIFICATION. To the extent permitted by law, the Company shall and does hereby jointly and severally indemnify and agree to hold harmless the employees, officers and directors of it and its Affiliates who serve in fiduciary or other capacities with respect to the Plan from all loss, damage, or liability, joint or several, including payment of expenses in connection with defense against any such claim, for their acts, omissions and conduct, and for the acts, omissions or conduct of their duly appointed agents, which acts, omissions or conduct constitute or are alleged to constitute a breach of such individual's fiduciary or other responsibilities under the Act or any other law, except for those acts, omissions, or conduct resulting from his own willful misconduct, willful failure to act, or gross negligence; provided, however, that if any party would otherwise be entitled to indemnification hereunder in respect of any liability and such party shall be insured against loss as a result of such liability by any insurance contract or contracts, such party shall be entitled to indemnification hereunder only to the extent by which the amount of such liability shall exceed the amount thereof payable under such insurance contract or contracts. ARTICLE X CLAIMS REVIEW PROCEDURE 10.1 CLAIMS. (a) FILING OF CLAIM. A Participant or Beneficiary entitled to benefits need not file a written claim to receive benefits. If a Participant, Beneficiary or any other person is dissatisfied with the determination of his benefits, eligibility, participation or any other right or interest under this Plan, such person may file a written statement setting forth the basis of the claim with the Plan Administrator in a manner prescribed by the Plan Administrator. In connection with the determination of a claim, or in connection with review of a denied claim, the claimant may examine this Plan and any other pertinent documents generally available to Participants relating to the claim and may submit comments in writing. (b) NOTICE OF DECISION. A written notice of the disposition of any such claim shall be furnished to the claimant within 60 days after the claim is filed with the Plan Administrator, provided that the Plan Administrator may have an additional period to decide the claim if it advises the claimant in writing of the need for an extension and the date on which it expects to decide the claim. The notice of disposition of a claim shall refer, if appropriate, to pertinent provisions of this Plan, shall set forth in writing the reasons for denial of the claim if the claim is denied (including references to any pertinent provisions of this Plan), and where appropriate shall explain how the claimant can perfect the claim. 10.2 APPEALS. (a) REVIEW. If the claim is denied, in whole or in part, the claimant shall also be notified in writing that a review procedure is available. Thereafter, within 90 days after receiving the written notice of the Plan Administrator's disposition of the claim, the claimant may request in writing, and shall be entitled to, a review meeting with the Plan Administrator to present reasons why the claim should be allowed. The claimant shall be entitled to be represented by counsel at the review meeting. The claimant also may submit a written statement of his claim and the reasons for granting the claim. Such statement may be submitted in addition to, or in lieu of, the review meeting with the Plan Administrator. The Plan Administrator shall have the right to request and receive from a claimant such additional information, documents or other evidence as the Plan Administrator may reasonably require. If the claimant does not request a review meeting within 90 days after receiving written notice of the Plan Administrator's disposition of the claim, the claimant shall be deemed to have accepted the Plan Administrator's written disposition, unless the claimant shall have been physically or mentally incapacitated so as to be unable to request review within the 90 day period. (b) DECISION FOLLOWING REVIEW. A decision on review shall be rendered in writing by the Plan Administrator ordinarily not later than 60 days after review, and a written copy of such decision shall be delivered to the claimant. If special circumstances require an extension of the ordinary period, the Plan Administrator shall so notify the claimant. In any event, if a claim is not determined within 120 days after submission for review, it shall be deemed to be denied. (c) DECISIONS FINAL; PROCEDURES MANDATORY. To the extent permitted by law, a decision on review by the Plan Administrator shall be binding and conclusive upon all persons whomsoever. To the extent permitted by law, completion of the claims procedures described in this Section shall be a mandatory precondition that must be complied with prior to commencement of a legal or equitable action in connection with the Plan by a person claiming rights under the Plan or by another person claiming rights through such a person. The Plan Administrator may, in its sole discretion, waive these procedures as a mandatory precondition to such an action. ARTICLE XI LIMITATION ON ASSIGNMENT; PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE; CORRECTIONS 11.1 ANTI-ALIENATION CLAUSE. No benefit which shall be payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of the same shall be void. No benefit shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for or against any person, except to the extent as may be required by law. 11.2 PERMITTED ARRANGEMENTS. Section 11.1 shall not preclude arrangements for the withholding of taxes from benefit payments, arrangements for the recovery of benefit overpayments, or arrangements for direct deposit of benefit payments to an account in a bank, savings and loan association or credit union (provided that such arrangement is not part of an arrangement constituting an assignment or alienation). 11.3 PAYMENT TO MINOR OR INCOMPETENT. Whenever any benefit which shall be payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined by the Plan Administrator to be incompetent by qualified medical advice, the Plan Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of the minor or incompetent, or to cause the same to be paid to the minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of the minor or incompetent if one has been appointed or to cause the same to be used for the benefit of the minor or incompetent. 11.4 UNDERPAYMENT OR OVERPAYMENT OF BENEFITS. In the event that, through mistake or computational error, benefits are underpaid or overpaid, there shall be no liability for any more than the correct amount of benefits under the Plan. Overpayments may be deducted from future payments under the Plan, and underpayment may be added to future payments under the Plan. In lieu of receiving reduced benefits under the Plan, a Participant or Beneficiary may elect to make a lump sum repayment of any overpayment. ARTICLE XII AMENDMENT, MERGER AND TERMINATION 12.1 AMENDMENT. The Company shall have the right at any time, by an instrument in writing duly executed, acknowledged and delivered to the Plan Administrator, to modify, alter or amend this Plan, in whole or in part, prospectively or retroactively; provided, however, that the duties and liabilities of the Plan Administrator and the Trustee hereunder shall not be substantially increased without its written consent; and provided further that the amendment shall not reduce any Participant's interest in the Plan, calculated as of the date on which the amendment is adopted. The agreements referred to in Section 13.3(a) and the offsets referred to in Section 13.3(b) shall not be deemed to violate the last clause of the preceding sentence. 12.2 MERGER OR CONSOLIDATION OF COMPANY. The Plan shall not be automatically terminated by the Company's acquisition by or merger into any other employer, but the Plan shall be continued after such acquisition or merger if the successor employer elects and agrees to continue the Plan. All rights to amend, modify, suspend, or terminate the Plan shall be transferred to the successor employer, effective as of the date of the merger. If an Employer other than the Company is acquired by or merged into any organization other than an Affiliate, the Plan shall be terminated as to the acquired Employer unless the Company and the acquirer agree otherwise in writing. 12.3 TERMINATION OF PLAN OR DISCONTINUANCE OF CONTRIBUTIONS. It is the expectation of the Company and each of the Employers that this Plan and the payment of contributions hereunder will be continued indefinitely. However, continuance of the Plan is not assumed as a contractual obligation of the Company or any other Employer, and the right is reserved at any time to terminate this Plan or to reduce, temporarily suspend or discontinue contributions hereunder. If the Plan is terminated or contributions are reduced, temporarily suspended, or discontinued with respect to all Employers or any one or more Employers, the Accounts of the affected Participants will continue to be held pursuant to the Plan until the date or dates on which such Accounts would have become distributable had the Plan not been terminated or had contributions not been reduced, temporarily suspended, or discontinued. In the exercise of its discretion, however, the Plan Administrator may direct that the Accounts of any Participant affected by the termination of the Plan as to all Employers or a particular Employer, or the reduction, temporary suspension, or discontinuance of contributions, be distributed as of an earlier date or dates. ARTICLE XIII GENERAL PROVISIONS 13.1 LIMITATION ON PARTICIPANTS' RIGHTS. Participation in the Plan shall not give any Participant the right to be retained in the employ of the Company or any Affiliate or any right or interest in the Trust Fund other than as herein provided. The Company and each Affiliate reserves the right to dismiss any Participant without any liability for any claim either against the Trust Fund, except to the extent herein provided, or against the Company, or Affiliate. 13.2 STATUS OF PARTICIPANTS AS UNSECURED CREDITORS. Each Participant is an unsecured creditor of the Company or the Affiliate that employs the Participant and, except for the Deferral Contributions and the Profit Sharing Contributions or Matching Contributions placed in the Trust Fund as provided in this Plan, no assets of the Company or any Affiliate will be segregated from the general assets of the Company or any Affiliate for the payment of benefits under this Plan. If the Company or any Affiliate acquires any insurance policies or other investments to assist it in meeting its obligations to Participants, those policies or other investments will nonetheless remain part of the general assets of the Company or Affiliate. 13.3 CANCELLATION OR REDUCTION OF ACCOUNTS. (a) GENERAL. An Employer and one of its Participants may agree from time to time to reduce (but not below zero) the amount credited to the Participant's Account under this Plan. Any such agreement must be in writing, must be signed by the Participant and the Employer, shall relate only to amounts credited to the Participant's Account and shall not circumvent the provisions of Sections 3.3, 8.1, or 8.2 regarding the timing or manner of distributions from this Plan. (b) OFFSET FOR DISCRETIONARY CONTRIBUTIONS TO SAVINGS PLAN. An Employer may from time to time make a discretionary contribution to the Savings Plan on behalf of a Participant in excess of the matching or profit sharing contributions that the Participant is entitled to receive under the terms of the Savings Plan (a "Discretionary Contribution"). Any Participant who receives a Discretionary Contribution to his Savings Plan account will have his Profit Sharing Contributions Account under this Plan offset in an amount equal to the Discretionary Contribution. If a Participant's Profit Sharing Contributions Account balance is lower than the amount of the Discretionary Contribution, the offset shall first be made against the Profit Sharing Contributions Account (until such balance is zero), and the remainder of the offset shall be made against the Participant's Matching Contributions Account under this Plan. Such offset shall occur on the date that the Discretionary Contribution is credited to the Participant's Savings Plan account. 13.4 EXCEPTION TO CONTRIBUTION RULE. Neither the Company nor any other Employer shall have any obligation to transfer Deferral Contributions made by the Participants, Matching or Profit Sharing Contributions due from the Company or such Employer, or any other amounts to the Trust Fund, if and so long as the assets of the Trust Fund exceed the aggregate Account Balances of all Participants. The provisions of this Section 13.4 supersede the provisions of Sections 4.1, 4.2, 4.3, or any other provision of this Plan that purports to require the Company or any other Employer to transfer amounts to the Trust Fund. 13.5 STATUS OF TRUST FUND. The Trust Fund is being established to assist the Company and the adopting Affiliates in meeting their obligations to the Participants and to provide the Participants with a measure of protection in certain limited instances. In certain circumstances described in the Trust Agreement, the assets of the Trust Fund may be used for the benefit of the Company's or an Affiliate's creditors and, as a result, the Trust Fund is considered to be part of the Company's and adopting Affiliate's general assets. Benefit payments due under this Plan shall either be paid from the Trust Fund or from the Company's or Affiliate's general assets as directed by the Plan Administrator. Despite the establishment of the Trust Fund, it is intended that the Plan be considered to be "unfunded" for purposes of the Act and the Code. 13.6 FUNDING UPON A CHANGE OF CONTROL. Prior to the day on which a Change of Control occurs, if for any reason the assets of the Trust Fund are less than the aggregate Account Balances of all Participants, the Company shall transfer an amount equal to the deficiency to the Trustee of the Trust. If it is discovered at any time that the amount initially transferred is less than the total amount called for by the preceding sentence, the shortfall shall be transferred to the Trustee immediately upon the discovery of such error. 13.7 UNIFORM ADMINISTRATION. Whenever in the administration of the Plan any action is required by the Plan Administrator, such action shall be uniform in nature as applied to all persons similarly situated. 13.8 HEIRS AND SUCCESSORS. All of the provisions of this Plan shall be binding upon all persons who shall be entitled to any benefits hereunder, and their heirs and legal representatives. 13.9 NO LIABILITY FOR ACCELERATION OF PAYMENTS. Under the Plan, Participants are allowed, to a certain extent, to designate the dates on which distributions are to be made to them. The Plan Administrator, however, also has the right, in the exercise of its discretion, to accelerate payments. By accepting the benefits offered by the Plan, each Participant (and each Beneficiary claiming through a Participant) acknowledges that the Plan Administrator may override the Participant's elections and agrees that neither the Participant nor any Beneficiary shall have may claim against the Plan Administrator, the Trustee, or any Employer if distributions are made earlier than anticipated by the Participant due to the Plan Administrator's exercise of its discretion to accelerate payments. To signify its adoption of this Plan document, the Company has caused this Plan document to be executed by a duly authorized officer of the Company on this 22 day of December, 1997. PHELPS DODGE CORPORATION By Stuart L. Marcus ----------------------------------- Its Vice President - Human Resources ---------------------------------- EX-10.11 7 DIRECTORS STOCK UNIT PLAN Exhibit 10.11 PHELPS DODGE CORPORATION DIRECTORS STOCK UNIT PLAN TABLE OF CONTENTS Section 1. Purpose Section 2. Definitions Section 3. Units Section 4. Vesting and Forfeitures Section 5. Participation Agreement Section 6. Payment of Benefits Section 7. Administration Section 8. Amendment and Termination Section 9. Effective Date of the Plan Section 10. Governing Law Section 11. General Provisions Phelps Dodge Corporation Directors Stock Unit Plan Section 1. Purpose The Phelps Dodge Corporation 1997 Directors Stock Unit Plan (the "Plan") was initially adopted effective January 1, 1997, in order to attract, retain and motivate the best qualified directors for the benefit of Phelps Dodge Corporation (the "Corporation") and its shareholders and to provide such directors an economic interest in the Corporation, thereby enhancing a long-term mutuality of interest between such directors and shareholders. In order to increase the mutuality of interest between directors and shareholders, the Retirement Plan for Directors of Phelps Dodge Corporation (the "Retirement Plan") is being terminated and benefits accrued by Eligible Directors under the Retirement Plan are being canceled in exchange for the award of Units under this Plan. Additionally, as described herein, benefits under this Plan are being enhanced in order to replace the benefits that Eligible Directors would have accrued under the Retirement Plan. By the adoption of this document, the Plan is being amended and restated in order to reflect the replacement of the Retirement Plan by the provisions of this Plan. By the adoption of this amended and restated Plan document, the name of the Plan is being changed to the "Phelps Dodge Corporation Directors Stock Unit Plan." Section 2. Definitions When used in this Plan, the following terms shall have the meanings set forth in this Section unless the context clearly indicates otherwise: "Account" shall mean the accounts which may be maintained by the Committee to reflect the number of Units awarded to each Eligible Director under the Plan. "Board" shall mean the Board of Directors of the Corporation. "Change in Control" shall mean the occurrence of any of the following: (a) any "person" or "group" of persons (as such terms are used in Section 13 of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act")), other than the Corporation or any employee benefit plan sponsored by the Corporation, becoming the "beneficial owner" (as such term is used in Section 13 of the Exchange Act) of 25% or more of the total number of the Corporation's Common Shares at the time outstanding; or (b) the approval, by the vote of the Corporation's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Corporation or by law) of the voting stock of the Corporation, of any merger, consolidation, sale of assets, liquidation or reorganization in which the Corporation will not survive as a publicly owned corporation; or (c) the individuals who, at the beginning of any period of two years or less, constituted the Board ceasing, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new Director was approved by the vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period. "Committee" shall mean the Committee on Directors of the Board. "Common Shares" shall mean the shares of common stock 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 an award of Units under Section 3. "Gross Cause" shall include fraud, misappropriation of, or other intentional misconduct damaging to, the property or business of the Corporation or any of its subsidiaries or affiliates, or the commission of a crime. "Retirement Plan" shall mean the Retirement Plan for Directors of Phelps Dodge Corporation. "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, other than (1) a termination caused by the Eligible Director's death or (2) a termination that the Committee determines to have resulted from Gross Cause. "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. Subject to the requirements of Section 5(a), 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 450 Units. (b) Special Award of Converted Retirement Plan Benefits. Subject to the requirements of Section 5(a), the present value of each Eligible Director's accrued benefit under the Retirement Plan, as determined by the Corporation (the "Accrued Benefit"), shall be converted to Units under this Plan. The number of Units awarded to each Eligible Director pursuant to this Section shall be determined by dividing the Eligible Director's Accrued Benefit by the Fair Market Value on December 31, 1997. The number of Units so determined shall be credited to the Eligible Director's Account effective January 1, 1998. After the conversion, Eligible Directors shall not be entitled to any benefits under the Retirement Plan. (c) 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 total 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 total 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. (d) 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 4. Vesting and Forfeitures (a) Vesting. All of the Units awarded each year pursuant to Section 3(a) (450 Units) shall be vested as of the date of Grant. Units awarded pursuant to Section 3(b) shall be vested as January 1, 1998. (b) Forfeitures. Notwithstanding Section 4(a) to the contrary, if the Committee determines that an Eligible Director's termination of service as a Director is due to Gross Cause, all Units credited to the Eligible Director's Account shall be forfeited, and the Eligible Director will not be entitled to receive any benefits under this Plan. Section 5. Participation Agreement (a) Participation Agreement. Effective January 1, 1998, each Eligible Director, as a condition of receiving a Grant, must enter into a Participation Agreement in such form and at such time as the Committee shall require. The Participation Agreement shall indicate the manner in which distributions are to be made to the Eligible Director, and, if the Eligible Director elects installment payments, the period over which, and the frequency with which, such installments should be made. In the Participation Agreement the Eligible Director may elect to postpone the payments to which the Eligible Director is entitled until the later of a specified date or the Eligible Director's Termination. Despite any such election, the payment must be made (or commence if installments are elected) by the fifth anniversary of the Eligible Director's Termination. The Participation Agreement also may set forth such other information as the Committee may require. In the case of Eligible Directors who are participating in this Plan on the date of adoption of this amended and restated Plan document, the Participation Agreement must be executed and delivered to the Committee on or before December 31, 1997. In the case of any other Eligible Director, the Participation Agreement must be executed and delivered to the Committee before the first date as of which the Eligible Director is scheduled to receive a Grant pursuant to Sections 3(a). (b) Revised Participation Agreements. A Participant may file a new Participation Agreement in order to change an election made in a previously filed Participation Agreement. If the new Participation Agreement changes the method of payment from installments to lump sum or vice versa, or if the new Participation Agreement changes the time of distribution, the new election will only be honored if at least one (1) full calendar year elapses between (a) the date as of which such new Participation Agreement is filed and (b) the date as of which such distribution will commence under such election. The foregoing timing restrictions do not apply to a Participant's election to receive cash or Common Shares. Section 6. Payment of Benefits (a) Payment Upon Termination. Except as provided in Sections 6(b) or 6(c) below, upon Termination, each Eligible Director shall be entitled to a distribution of the vested Units credited to the Eligible Director's Account in the manner specified in the Eligible Director's initial Participation Agreement or in any revised Participation Agreement that has been in effect for the requisite period of time specified in Section 5(b). Distribution of an Eligible Director's Accounts pursuant to this Section may be made by means of any one of the following methods: (1) Lump Sum Cash Payment. A single lump sum cash payment in an amount equal to (i) the sum of the number of vested Units credited to the Eligible Director's Account on the effective date of the distribution multiplied by (ii) the Fair Market Value on such date. Such lump sum cash payment shall be made to the Eligible Director within a reasonable period of time following the effective date of the distribution. (2) Lump Sum Payment of Common Shares. A single delivery of a number of Common Shares equal to the number of vested Units credited to the Eligible Director's Account at the effective date of the distribution. Any fractional Common Shares will be settled in cash based on the Fair Market Value on the effective date of the distribution. Such Common Shares (and any cash in lieu of fractional Common Shares) shall be delivered to the Eligible Director within a reasonable period of time following the effective date of the distribution. (3) Cash Installment Payments. By distribution in substantially equal monthly, quarterly, semiannual or annual cash installments over a fixed period selected by the Eligible Director but not in excess of ten (10) years. The amount of each installment shall equal (i) the number of vested Units credited to the Eligible Director's Account as of the effective date of the installment payment multiplied by (ii) the Fair Market Value on such date and divided by (iii) the remaining number of payments to be made. The first installment payment shall be made as soon as possible after the effective date of the installment payment and all subsequent installment payments shall be made at the regular interval elected by the Eligible Director in the Eligible Director's Participation Agreement. (4) Common Shares Installment Payments. By distribution in substantially equal monthly, quarterly, semiannual or annual installments of Common Shares over a fixed period selected by the Eligible Director but not in excess of ten (10) years. The number of Common Shares to be distributed at each installment shall equal (i) the number of vested Units credited to the Eligible Director's Account as of the effective date of the installment payment divided by (ii) the remaining number of payments to be made. Fractional Common Shares will be rounded up to the nearest whole Common Share. However, if the final installment requires the distribution of a fractional Common Share, the fractional Common Share will be settled in cash based on the Fair Market Value on the date immediately preceding the date of distribution. The first installment payment shall be made as soon as possible after the effective date of the installment payment and all subsequent installment payments shall be made at the regular interval elected by the Eligible Director in the Eligible Director's Participation Agreement. The effective date of any lump sum payment and the effective date of any first installment payment shall be the Eligible Director's date of Termination unless the Eligible Director has elected in the Eligible Director's Participation Agreement to defer the distribution in accordance with Section 5(a). Unless an Eligible Director has affirmatively elected to receive payments in any of the forms permitted by paragraphs (2) through (4), above, the Eligible Director's Accounts shall be distributed in a lump sum cash payment pursuant to paragraph (1). (b) Payment Upon Death. In the event of the death of an Eligible Director prior to full distribution of the Eligible Director's vested Account, the Corporation, regardless of the elections made in the Eligible Director's most recent Participation Agreement, 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 credited to such Eligible Director's Account on the date of the Eligible Director's death multiplied by (ii) the Fair Market Value on the date of the Eligible Director's death. (c) Change in Control. Notwithstanding the foregoing, upon the occurrence of a Change in Control, and regardless of the elections made in the Eligible Director's most recent Participation Agreement, 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 (b) 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's Account at the time of the Change in Control multiplied by (ii) the Fair Market Value on the date of the Change in Control. (d) 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. Each Eligible Director's Account will be adjusted, as payments are made to the Eligible Director, to reflect the cancellation of Units. Section 7. 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 8. Amendment and Termination The Board may suspend, revise, amend or discontinue the Plan at any time; provided, however, 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 Eligible 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 9. Effective Date of the Plan The Plan, as amended and restated, shall be effective as of January 1, 1998 and shall terminate as of December 31, 2006 unless extended by the Board or terminated at an earlier date pursuant to Section 8 of the Plan. Section 10. Governing Law The Plan shall be construed in all respects under the laws of the State of New York. Section 11. 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 obligation 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 6 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 Shares, 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 8 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, ------------------------------------ 1997 1996 1995 ---- ---- ---- Short-term debt $ 91,400 66,500 66,600 Current portion of long-term debt 54,800 38,200 16,800 Long-term debt 857,100 554,600 613,100 ---------- ---------- ---------- Total debt 1,003,300 659,300 696,500 Minority interest in subsidiaries 113,300 85,500 73,300 Common shareholders' equity 2,510,400 2,755,900 2,677,700 ---------- ---------- ---------- Total capitalization $3,627,000 3,500,700 3,447,500 ========== ========== ========== Ratio of total debt to total capitalization 27.7% 18.8% 20.2% ========== ========== ==========
EX-21 9 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 Alambres y Cables de Panama, S.A. (Panama) 78.1 Alambres y Cables Venezolanos, C.A. (Venezuela) 87.1 Alcoa Fios E Cabos Electricos, S.A. (Brazil) 60.0 Burro Chief Copper Company (Delaware) 100.0 Cables Electricos Ecuatorianos, C.A. (Ecuador) 67.1 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 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 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 de 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) 87.1 Kalahari Investments Ltd. (Cayman Islands) 100.0 Metals Fabricators of Zambia Limited (Zambia) 51.0 Nesor Alloy Corporation (New Jersey) 100.0 PD Candelaria, Inc. (Delaware) 100.0 Phelps Dodge Australasia, Inc. (Delaware) 100.0 Phelps Dodge Chino, Inc. (Delaware) 100.0 Phelps Dodge Industries, Inc. (Delaware) 100.0 Phelps Dodge International Corporation (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. (Cayman Islands) 66.7 Sevalco Limited (United Kingdom) 100.0 INVESTMENTS CARRIED ON AN EQUITY BASIS: Apache Nitrogen Products, Inc. 38.7 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 Minera Phelps Dodge Mexico, S. de R.L. de C.V. (Mexico) 49.0 PDTL Trading Company Limited (Thailand) 40.0 Phelps Dodge Philippines, Inc. (Philippines) 40.0 SPD Magnet Wire Company (Delaware) 50.0 The Morenci Water and Electric Company (Arizona) 49.0 Summarized financial information is provided for these and other companies (see Note 4 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 10 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 and Post-Effective Amendment No. 1 on Form S-3 (No. 33-44380 and 333-36415) 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, 33-62648 and 333-42231) of Phelps Dodge Corporation of our report dated January 15, 1998, except as to Note 2, which is as of February 3, 1998, 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 16, 1998 EX-24 11 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. 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 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. Manuel J. Iraola ------------------------------ Manuel J. Iraola 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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 8th day of January, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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 12th day of January, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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 26th day of January, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. 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, 1997 of Phelps Dodge Corporation on Form 10-K (1) to sign the Annual Report for the fiscal year ended December 31, 1997 of Phelps Dodge Corporation on Form 10-K ("1997 Form 10-K") to be filed under the Securities Exchange Act of 1934, as amended, and any and all amendments to such 1997 Form 10-K; (2) to file such 1997 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 1997 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, 1998. Douglas C. Yearley ------------------------------ Douglas C. Yearley EX-27.1 12 ART. 5 FDS FOR 1997 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997 JAN-01-1997 DEC-31-1997 1 470,100 0 434,300 13,800 297,800 1,051,100 5,836,100 2,391,000 4,965,200 701,100 857,100 0 0 366,500 2,143,900 4,965,200 3,914,300 3,914,300 2,744,100 2,744,100 417,400 0 62,500 581,900 180,400 408,500 0 0 0 408,500 6.68 6.63
EX-27.2 13 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 252,800 0 486,400 0 308,400 1,222,400 3,242,600 0 4,892,000 852,600 611,300 0 0 371,400 2,201,700 4,892,000 3,048,400 3,048,400 2,102,900 2,102,900 296,600 0 42,100 536,700 166,300 376,500 0 0 0 376,500 6.07 6.02
EX-27.3 14 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 352,100 0 515,000 0 308,100 1,354,700 3,163,900 0 4,943,600 842,400 602,800 0 0 382,100 2,252,800 4,943,600 2,086,700 2,086,700 1,438,800 1,438,800 182,300 0 26,600 395,000 122,400 272,300 0 0 0 272,300 4.32 4.29
EX-27.4 15 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 422,000 0 523,600 0 297,700 1,427,900 3,074,800 0 4,878,600 754,300 531,800 0 0 396,500 2,358,200 4,878,600 1,021,700 1,021,700 695,900 695,900 86,100 0 13,900 202,000 64,600 137,500 0 0 0 137,500 2.14 2.13
EX-27.5 16 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 INCOME AND OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 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 7.02 6.98
EX-27.6 17 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 567,700 0 445,400 0 282,100 1,477,200 2,917,500 0 4,777,200 650,500 600,700 0 0 406,500 2,297,400 4,777,200 2,816,000 2,816,000 1,924,800 1,924,800 276,900 0 44,000 536,600 174,400 359,600 0 0 0 359,600 5.43 5.40
EX-27.7 18 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 541,000 0 485,000 0 289,200 1,515,000 2,841,200 0 4,729,400 611,500 599,900 0 0 412,200 2,298,700 4,729,400 1,962,400 1,962,400 1,311,400 1,311,400 185,600 0 27,000 415,500 135,100 279,400 0 0 0 279,400 4.19 4.16
EX-27.8 19 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 583,500 0 542,200 0 264,500 1,574,200 2,764,900 0 4,699,600 637,900 610,900 0 0 416,800 2,259,500 4,699,600 1,004,700 1,004,700 664,500 664,500 79,900 0 17,000 227,800 72,900 153,100 0 0 0 153,100 2.28 2.26
EX-27.9 20 ART. 5 FDS FOR 1995 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY"), AS RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128"). THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 608,500 0 495,700 12,000 281,500 1,555,200 4,820,800 2,092,100 4,645,900 605,000 613,100 0 0 428,700 2,249,000 4,645,900 4,185,400 4,185,400 2,691,400 2,691,400 269,900 0 62,000 1,075,700 322,700 746,600 0 0 0 746,600 10.72 10.66
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