-----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, RbmHK/HuZ3/YHQolv06Ek3HSttGlnGxuth/XTUPJdQIT4enfHKiARDJnYEjclaKU KvK+n+88mZBrxxcfru3vSQ== 0000950147-98-000611.txt : 19980813 0000950147-98-000611.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950147-98-000611 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 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-Q SEC ACT: SEC FILE NUMBER: 001-00082 FILM NUMBER: 98683365 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-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1998 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 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 [ ]. Number of Common Shares outstanding at August 7, 1998: 58,674,000 shares. ================================================================================ PHELPS DODGE CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended June 30, 1998 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Statement of Consolidated Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Common Shareholders' Equity Notes to Consolidated Financial Information Review by Independent Accountants Report of Independent Accountants on Review of Interim Financial Information Item 2. Management's Discussion and Analysis Results of Operations Results of Phelps Dodge Mining Company Results of Phelps Dodge Industries Other Matters Relating to the Statement of Consolidated Income Changes in Financial Condition Part II. Other Information Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Index to Exhibits PHELPS DODGE CORPORATION AND SUBSIDIARIES Part I. Financial Information Item 1. Financial Statements STATEMENT OF CONSOLIDATED INCOME (Unaudited; in millions except per share data)
First Six Second Quarter Months -------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- SALES AND OTHER OPERATING REVENUES $ 794.4 1,065.0 1,592.7 2,086.7 --------- ------- ------- ------- OPERATING COSTS AND EXPENSES Cost of products sold 605.7 742.9 1,196.1 1,438.8 Depreciation, depletion and amortization 71.0 69.7 144.5 138.6 Selling and general administrative expense 30.4 35.2 64.2 68.9 Exploration and research expense 13.4 26.5 26.3 43.7 (Gain) loss on asset dispositions (see Note 4) 0.1 -- (186.1) -- --------- ------- ------- ------- 720.6 874.3 1,245.0 1,690.0 --------- ------- ------- ------- OPERATING INCOME 73.8 190.7 347.7 396.7 Interest expense (22.9) (16.4) (44.6) (32.8) Capitalized interest 0.7 3.7 1.2 6.2 Miscellaneous income and expense, net 16.0 15.0 22.3 24.9 --------- ------- ------- ------- INCOME BEFORE TAXES, MINORITY INTERESTS AND EQUITY IN NET EARNINGS OF AFFILIATED COMPANIES 67.6 193.0 326.6 395.0 Provision for taxes on income (25.6) (57.8) (119.5) (122.4) Minority interests in consolidated subsidiaries (1.4) (2.8) (3.8) (5.1) Equity in net earnings (losses) of affiliated (0.2) 2.4 0.8 4.8 companies --------- ------- ------- ------- NET INCOME $ 40.4 134.8 204.1 272.3 ========= ======= ======= ======= BASIC EARNINGS PER SHARE $ 0.69 2.18 3.49 4.32 ========= ======= ======= ======= DILUTED EARNINGS PER SHARE $ 0.69 2.16 3.48 4.29 ========= ======= ======= ======= AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 58.5 61.7 58.4 63.0 AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 58.7 62.3 58.7 63.5
See Notes to Consolidated Financial Information. BUSINESS SEGMENTS (Unaudited; in millions)
First Six Second Quarter Months -------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- SALES AND OTHER OPERATING REVENUES Phelps Dodge Mining Company $ 440.4 603.8 881.6 1,194.1 Phelps Dodge Industries 354.0 461.2 711.1 892.6 --------- ------- ------- ------- $ 794.4 1,065.0 1,592.7 2,086.7 ========= ======= ======= ======= OPERATING INCOME (LOSS) Phelps Dodge Mining Company $ 34.9 142.4 89.5 314.2 Phelps Dodge Industries (see Note 4) 46.1 59.9 277.3 105.2 Corporate and other (7.2) (11.6) (19.1) (22.7) --------- ------- ------- ------- $ 73.8 190.7 347.7 396.7 ========= ======= ======= =======
See Notes to Consolidated Financial Information. CONSOLIDATED BALANCE SHEET (Unaudited; in millions)
June 30, Dec. 31, 1998 1997 ---- ---- ASSETS Cash and cash equivalents $ 336.0 157.9 Accounts receivable, net 391.5 420.5 Inventories 287.9 297.8 Supplies 114.7 115.1 Prepaid expenses 12.8 7.8 Deferred income taxes 49.5 52.0 --------- ------- Current assets 1,192.4 1,051.1 Investments and long-term accounts receivable 99.2 131.8 Property, plant and equipment, net 3,515.6 3,445.1 Other assets and deferred charges 253.8 337.2 --------- ------- $ 5,061.0 4,965.2 ========= ======= LIABILITIES Short-term debt $ 87.8 91.4 Current portion of long-term debt 65.2 54.8 Accounts payable and accrued expenses 445.3 553.2 Dividends payable (see Note 9) 29.3 -- Accrued income taxes 49.2 1.7 --------- ------- Current liabilities 676.8 701.1 Long-term debt 831.7 857.1 Deferred income taxes 499.1 439.2 Other liabilities and deferred credits 336.4 344.1 --------- ------- 2,344.0 2,341.5 --------- ------- MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 95.6 113.3 --------- ------- COMMON SHAREHOLDERS' EQUITY Common shares, 58.7 outstanding (12/31/97 - 58.6) 366.7 366.5 Capital in excess of par value 2.3 -- Retained earnings 2,416.8 2,301.0 Accumulated other comprehensive income (loss) (155.7) (146.9) Other (8.7) (10.2) --------- ------- 2,621.4 2,510.4 --------- ------- $ 5,061.0 4,965.2 ========= =======
See Notes to Consolidated Financial Information. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; in millions)
Six months ended June 30, ------------- 1998 1997 ---- ---- OPERATING ACTIVITIES Net income $ 204.1 272.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 144.5 138.6 Deferred income taxes 21.6 35.5 Equity earnings net of dividends received 0.4 (1.9) Changes in current assets and liabilities: (Increase) decrease in accounts receivable (32.0) (29.8) (Increase) decrease in inventories (17.8) (18.5) (Increase) decrease in supplies (4.1) 1.3 (Increase) decrease in prepaid expenses (5.9) (11.4) (Increase) decrease in deferred income taxes 1.1 1.0 Increase (decrease) in interest payable 3.2 2.0 Increase (decrease) in other accounts payable (50.6) (8.4) Increase (decrease) in accrued income taxes 48.8 1.9 Increase (decrease) in other accrued expenses (4.9) (6.1) Gain on asset disposition (see Note 4) (186.1) -- Other adjustments, net (13.1) (1.3) -------- ------ Net cash provided by operating activities 109.2 375.2 -------- ------ INVESTING ACTIVITIES Capital outlays (179.8) (281.9) Capitalized interest (1.2) (6.2) Investment in subsidiaries (129.6) (33.7) Proceeds from asset dispositions and other (see Note 4) 452.0 (1.3) -------- ------ Net cash provided by (used in) investing activities 141.4 (323.1) -------- ------ FINANCING ACTIVITIES Increase in debt 19.1 214.3 Payment of debt (33.9) (24.3) Common dividends (58.9) (63.2) Purchase of common shares -- (306.6) Other, net 1.2 9.7 -------- ------ Net cash used in financing activities (72.5) (170.1) -------- ------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 178.1 (118.0) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 157.9 470.1 -------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 336.0 352.1 ======== =====
See Notes to Consolidated Financial Information. CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (Unaudited; in millions)
Common Shares Accumulated --------------- Other Number Capital in Comprehensive Common of At Par Excess of Retained Income Shareholders' shares Value Par Value Earnings (Loss) Other Equity ------ ----- -------- -------- ------ ----- ------ BALANCE AT DECEMBER 31, 1997 58.6 $366.5 $ -- $2,301.0 $(146.9) $(10.2) $ 2,510.4 Stock options exercised 0.1 0.2 1.8 2.0 Restricted shares issued, net -- -- (0.4) 1.5 1.1 Other investment adjustments 0.9 0.9 Dividends on common shares (88.3) (88.3) Comprehensive income: Net income 204.1 204.1 Other comprehensive income, net of tax: Translation adjustment (8.9) (8.9) Unrealized gains on securities 0.1 0.1 ------- -------- Other comprehensive income (8.8) (8.8) ------- -------- Comprehensive income 195.3 ---- ------ ---- -------- ------- ------ -------- BALANCE AT JUNE 30, 1998 58.7 $366.7 $2.3 $2,416.8 $(155.7) $ (8.7) $2,621.4 ==== ====== ==== ======== ======= ====== ========
See Notes to Consolidated Financial Information. NOTES TO CONSOLIDATED FINANCIAL INFORMATION (Unaudited) 1. The unaudited consolidated financial information presented herein has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and note disclosures required by generally accepted accounting principles. Therefore, this information should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation's Form 10-K for the year ended December 31, 1997. This information reflects all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the interim periods reported. 2. The results of operations for the three-month and six-month periods ended June 30, 1998, are not necessarily indicative of the results to be expected for the full year. 3. Depending on market circumstances, the Corporation may periodically purchase or liquidate various copper price protection contracts for a portion of its expected future mine production to mitigate the risk of adverse price fluctuations. The Corporation currently has no such copper price protection contracts in place. 4. Effective January 1, 1998, the Corporation sold Accuride Corporation and related 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 $186.1 million ($122.8 million after taxes, or $2.09 per common share). 5. On February 3, 1998, the Corporation acquired the stock of Cobre Mining Company Inc. (Cobre) for $113.3 million including acquisition costs. The Corporation also assumed Cobre's outstanding debt of $14.8 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. 6. In the 1998 first quarter, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." The Corporation has presented the required information in the Consolidated Statement of Common Shareholders' Equity. SFAS No. 130 has no effect on the Corporation's results of operations, financial position, capital resources or liquidity. 7. On March 4, 1998, and April 3, 1998, respectively, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up Activities." These statements become effective for fiscal periods beginning after December 15, 1998. The Corporation will adopt both SOPs in 1999. The Corporation does not expect either SOP to have a material effect on its results of operations or financial position. 8. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. This Statement is effective for fiscal years beginning after June 15, 1999. Phelps Dodge plans to adopt SFAS No. 133 effective January 1, 2000. The Corporation is evaluating the effect this Statement will have on its financial reporting and disclosures. 9. On June 24, 1998, the Corporation's board of directors declared a regular quarterly dividend of 50 cents per common share for the 1998 third quarter. This dividend is to be paid on September 10, 1998, to common shareholders of record at the close of business on August 20, 1998. This has resulted in an outstanding dividends payable balance of $29.3 million as of June 30, 1998. REVIEW BY INDEPENDENT ACCOUNTANTS The financial information as of June 30, 1998, and for the three-month and six-month periods ended June 30, 1998 and 1997, included in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP (PwC), the Corporation's independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. PwC's report is included in this quarterly report. PwC does not carry out any significant or additional audit tests beyond those that would have been necessary if its report had not been included in this quarterly report. Accordingly, such report is not a "report" or "part of a registration statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. PRICEWATERHOUSECOOPERS LLP REPORT OF INDEPENDENT ACCOUNTANTS July 13, 1998 To the Board of Directors and Shareholders of the Phelps Dodge Corporation We have reviewed the accompanying consolidated balance sheet of Phelps Dodge Corporation and its subsidiaries as of June 30, 1998, and the consolidated statements of income, of cash flows and of common shareholders' equity for the three-month and six-month periods ended June 30, 1998 and 1997. This financial information is the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial information referred to above for it to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of income, of cash flows and of common shareholders' equity for the year then ended (not presented herein), and in our report dated January 15, 1998, except as to Note 2, which is as of February 3, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Phoenix, Arizona Item 2. Management's Discussion and Analysis RESULTS OF OPERATIONS Phelps Dodge Corporation had consolidated net income of $40.4 million, or 69 cents per common share, in the second quarter of 1998, compared with $134.8 million, or $2.16 per common share, in the 1997 second quarter. Earnings for the six months ended June 30, 1998, were $81.3 million, or $1.39 per common share, before a non-recurring, after-tax gain of $122.8 million, or $2.09 per common share, from the January 1998, sale of Accuride Corporation, Phelps Dodge's wheel and rim business. Net income after the non-recurring gain for the six months ended June 30, 1998, was $204.1 million, or $3.48 per common share, compared with $272.3 million, or $4.29 per common share, in the corresponding 1997 period. Earnings before non-recurring items were less in the 1998 second quarter and the six-month period ended June 30, 1998, than in the corresponding 1997 periods principally as a result of lower average copper prices. The average spot price per pound of cathode copper on the New York Commodity Exchange (COMEX) was approximately 36 cents per pound (32 percent) lower in the second quarter of 1998 than the second quarter of 1997, and 35 cents per pound (31 percent) lower than the average price in the first half of 1997. The effect of this price decrease was mitigated by increased volumes of copper sold from mine production, decreased copper production costs, and improved results at the Corporation's carbon black and wire and cable businesses. The COMEX spot price per pound of copper cathode, upon which the Corporation bases its selling price for a majority of its production, averaged 78 cents in both the second quarter and first six months of 1998, compared with $1.14 and $1.13 in the corresponding 1997 periods. From July 1 to August 7, 1998, the COMEX price averaged 75 cents per pound, closing at 74 cents on August 7, 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 present share of 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. Depending on market circumstances, the Corporation may periodically purchase or liquidate various copper price protection contracts for a portion of its expected future mine production to mitigate the risk of adverse price fluctuations. The Corporation currently has no such copper price protection contracts in place. Sales were $794.4 million in the 1998 second quarter and $1,592.7 million in the first six months of 1998, compared with $1,065.0 million and $2,086.7 million in the corresponding 1997 periods. The 1998 decreases principally resulted from lower average copper prices and the absence of Accuride Corporation, partially offset by higher sales volumes of copper and carbon black. 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 in 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, principally as by-products, 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. ================================================================================
First Six Second Quarter Months -------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- Copper production (short tons): Total production 263,100 241,400 526,900 476,700 Less minority participants' shares * 44,500 41,900 89,300 82,600 ------- ------- ------- ------- Net Phelps Dodge share 218,600 199,500 437,600 394,100 ======= ======= ======= ======= Copper sales (short tons): Net Phelps Dodge share from own mines 214,800 189,700 430,100 382,500 Purchased copper 79,100 83,100 159,000 156,200 ------- ------- ------- ------- Total copper sales 293,900 272,800 589,100 538,700 ======= ======= ======= ======= New York Commodity Exchange average spot price per pound - copper cathodes $ 0.78 1.14 0.78 1.13 (in millions) Sales and other operating revenues $ 440.4 603.8 881.6 1,194.1 Operating income $ 34.9 142.4 89.5 314.2
- ------------------------- * Minority participant interests include (i) a 15 percent undivided interest in the Morenci, Arizona, copper mining complex held by Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership interest in Chino Mines Company in New Mexico held by Heisei Minerals Corporation, and (iii) a 20 percent interest in Candelaria in Chile held by SMMA Candelaria, Inc., a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. ================================================================================ Phelps Dodge Mining Company's sales and other operating revenues decreased by $163.4 million, or 27 percent, in the 1998 second quarter and by $312.5 million, or 26 percent, in the first six months of 1998 compared with the corresponding 1997 periods. These variances primarily reflected decreased average selling prices for copper that resulted in revenue reductions of approximately $196 million and $377 million, respectively. Partially offsetting that price variance was a 21,100 ton, or 8 percent, increase in the volume of copper sold in the 1998 second quarter and a 50,400 ton, or 9 percent increase in the volume of copper sold for the first six months. These sales volume increases principally were due to greater availability of Phelps Dodge mined copper resulting from production increases at the Candelaria mine in Chile and the February 1998 acquisition of Cobre Mining Company Inc. (Cobre) (see Note 5 to the Consolidated Financial Information). Phelps Dodge Mining Company reported operating income of $34.9 million in the 1998 second quarter, compared with $142.4 million in the corresponding 1997 period. For the six-month period ended June 30, 1998, Phelps Dodge Mining Company contributed operating income of $89.5 million, compared with $314.2 million in the corresponding 1997 period. These decreases primarily reflected the lower average copper prices, partially offset by the higher volumes of copper sold from mine production and lower copper production costs. Copper sold from mine production increased by 25,100 tons, or 13 percent, over second quarter 1997 production and by 47,600 tons, or 12 percent, over production in the first six months of 1997. Lower 1998 copper production costs were primarily due to the effect of the Candelaria mine expansion. The comparison for the six-month period also reflected a first quarter insurance claim recovery that added $11.5 million to Phelps Dodge Mining Company's operating income ($6.7 million or 11 cents per share, after taxes) in the first half of 1998. On May 29, 1998, the Corporation announced that it had withdrawn as a member of the Kafue Consortium. The Consortium had been negotiating with the Government of the Republic of Zambia on the purchase of a 94 percent interest in the Nkana and Nchanga Divisions of the Zambia Consolidated Copper Mines Limited. 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 August 7, 1998, employees who were covered by the agreements have continued to work without a contract. 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 chemical 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 its sale, effective January 1, 1998, its wheel and rim operations through Accuride Corporation and its subsidiaries. ================================================================================
First Six Second Quarter Months -------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- (in millions) Sales and other operating revenues: Specialty chemicals $ 109.0 106.4 222.3 215.1 Wheels and rims * -- 87.1 -- 168.6 Wire and cable 245.0 267.7 488.8 508.9 -------- ----- ----- ----- $ 354.0 461.2 711.1 892.6 ======== ===== ===== ===== Operating income: Specialty chemicals $ 21.8 18.6 43.1 35.8 Wheels and rims * (0.1) 13.7 186.1 19.8 Wire and cable 24.4 27.6 48.1 49.6 -------- ----- ----- ----- $ 46.1 59.9 277.3 105.2 ======== ===== ===== =====
- ------------------------- * Accuride Corporation, the Corporation's wheel and rim business, was sold effective January 1, 1998, resulting in a pre-tax gain of $186.1 million (see Note 4 to the Consolidated Financial Information). ====================================================================== Phelps Dodge Industries' reported sales of $354.0 million in the second quarter and $711.1 million for the first six months of 1998, compared with $461.2 million and $892.6 million in the corresponding 1997 periods. The decreases principally reflected the effect of the sale of Accuride which contributed sales of $87.1 million in the 1997 second quarter and $168.6 million for the first six months of 1997. Also included in the decreases were reduced sales prices for magnet wire related to low copper prices, and the effect of Asian economic disruptions on the Corporation's wire and cable business, particularly in Thailand. During the 1998 second quarter, Phelps Dodge Industries recorded operating income of $46.1 million, compared with $46.2 million in the corresponding 1997 period before Accuride's $13.7 million contribution. Operating income in the first six months of 1998 was $91.2 million before a $186.1 million pre-tax gain from the sale of Accuride, compared with $85.4 million in the first six months of 1997 before Accuride's $19.8 million contribution. The 1998 operating income equaled or exceeded corresponding prior year periods, excluding Accuride, despite the continuing Asian economic disruptions. This reflected strong performances by its U.S. and European carbon black businesses. The new 60 percent owned wire and cable joint venture in Brazil, which was acquired at the end of 1997, contributed to the 1998 performance of Phelps Dodge Industries. On June 16, 1998, the Corporation announced an agreement to acquire the Brazilian carbon black manufacturing business of Copebras S.A., a subsidiary of Minorco, for approximately $220 million. Columbian Chemicals will assume management and operating responsibility of the new company. The sales transaction is expected to be completed later in the year. The manufacturing facility has an annual production capacity of 170,000 metric tons of carbon black and annual sales of approximately $110 million. 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 August 7, 1998, employees who were covered by the agreement have continued to work without a contract. OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED INCOME The Corporation's 1998 second quarter exploration and research expense was $13.4 million, a decrease of 49 percent from that in the 1997 second quarter. Exploration and research expense for the first six months of 1998 was $26.3 million, a 40 percent decrease from the corresponding 1997 period. These decreases were principally a result of the closure of the U.S. exploration offices during the 1997 fourth quarter, but also reflected generally lower exploration expenditures worldwide. Miscellaneous income and expense, net, in the 1998 second quarter included a non-cash, pre-tax gain of $8.8 million from the dissolution of joint venture partnerships between Phelps Dodge and Sumitomo Electric Industries, Ltd. at five international wire and cable manufacturing and support companies. A non-cash, pre-tax gain of $6.0 million was included in miscellaneous income and expense, net, in the 1997 second quarter from the exchange of shares of a cost-basis investment in a wire and cable business located in Greece. Interest expense net of capitalized interest was $22.2 million in the second quarter of 1998 and $43.4 million in the first six months, compared with $12.7 million and $26.6 million in the corresponding periods in 1997. The 1998 increases principally reflect interest associated with corporate debt issued in the 1997 fourth quarter. The Corporation continues to review its year 2000 readiness including cost estimations, exposure and contingency plans. Comprehensive plans to identify, correct or reprogram and test its systems to ensure year 2000 compliance have been finalized. The Corporation is in the process of implementing the required changes to its internal computer systems with particular attention being given to process control technology. Also, the Corporation continues to focus attention on the compliance efforts of vendors, customers, service providers, shippers and other third-party providers, and is in the process of attaining confirmations from them with regard to their state of readiness. Notwithstanding the substantive efforts described above, the Corporation could potentially experience disruptions to some aspects of its operations. Contingency plans are therefore under development in order to mitigate the extent of potential disruptions to the business operations. The total cost to the Corporation of achieving year 2000 compliance, which is not expected to be material to the operations of Phelps Dodge, is estimated at approximately $10 million as previously reported in the 1997 Annual Report on Form 10-K. CHANGES IN FINANCIAL CONDITION Capital expenditures and investments during the first six months of 1998 were $241.7 million for Phelps Dodge Mining Company, including $113.3 million for the acquisition of the stock of Cobre Mining Company. Capital expenditures and investments were $71.0 million for Phelps Dodge Industries. Capital expenditures and investments in the corresponding 1997 period were $220.3 million for Phelps Dodge Mining Company, including $108.3 million for the expansion of the Corporation's Candelaria mining operations in Chile, and $92.8 million for Phelps Dodge Industries. The Corporation expects capital expenditures and investments for the year 1998 to be approximately $350 million for Phelps Dodge Mining Company and approximately $325 million for Phelps Dodge Industries, including the planned acquisition of Copebras. At June 30, 1998, the Corporation's total debt was $984.7 million, compared with $1,003.3 million at year-end 1997. The Corporation's ratio of debt to total capitalization was 26.6 percent at June 30, 1998, compared with 27.7 percent at December 31, 1997. On June 10, 1998, the Corporation paid a regular quarterly dividend of 50 cents per share on its common shares for the 1998 second quarter; the total amount paid was $29.3 million, bringing total 1998 dividends paid through June 30 to $58.9 million. On June 24, 1998, the board of directors declared a 1998 third quarter regular dividend of 50 cents per common share to be paid on September 10, 1998, to shareholders of record at the close of business on August 20, 1998. This year through August 7, the Corporation has not purchased any of its shares under its May 7, 1997, share purchase authorization. Under that program, 2,394,000 shares remain authorized for purchase. There were 58,674,000 common shares outstanding at June 30, 1998. Part II. Other Information Item 1. Legal Proceedings I. Reference is made to Paragraph II, section A.2.(a) of Item 3, Legal Proceedings of the Corporation's Form 10-K for the year ended December 31, 1997, regarding 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). On May 4, 1998, Phelps Dodge and the Gila River Indian Community executed a settlement agreement that resolves the issues between themselves pertinent to this litigation. This settlement is subject to the approval of the Secretary of the Interior and the passage of federal legislation. Item 4. Submission of Matters to a Vote of Security Holders The Corporation's annual meeting was held on May 6, 1998. A total of 49,685,703 common shares, or about 84.7 percent of the issued and outstanding common shares of the Corporation, were represented at the meeting. Set forth below is a description of the matters voted upon at the meeting and a summary of the voting regarding each matter:
For Withheld --- -------- Election of Directors: Paul Hazen 49,320,772 364,931 Manuel J. Iraola 49,322,352 363,351 Marie L. Knowles 49,315,654 370,049 Gordon R. Parker 49,324,895 360,808
For Against Abstain --- ------- ------- Appointment of Auditors 49,455,491 36,099 194,113 Proposal to adopt the 1998 Stock Option and Restricted Stock Plan 43,770,370 1,756,651 204,407
There were no broker non-votes included in the results of the election of directors listed above, the appointment of auditors, or adoption of the 1998 Stock Option and Restricted Stock Plan. Item 6. Exhibits and Reports on Form 8-K (a) Any exhibits required to be filed by the Corporation are listed in the Index to Exhibits. (b) No reports on Form 8-K were filed by the Corporation during the quarter ended June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHELPS DODGE CORPORATION ------------------------ (Corporation or Registrant) Date: August 12, 1998 By: Gregory W. Stevens ------------------ Gregory W. Stevens Vice President and Controller (Principal Accounting Officer) PHELPS DODGE CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.12 The Corporation's 1998 Stock Option and Restricted Stock Plan (the 1998 Plan), (incorporated by reference to Exhibit 99 to the Corporation's Registration Statement on Form S-8 (Reg No. 333-52175) (SEC File No. 1-82)). Forms of Stock Option Agreement and Reload Option Agreement under the 1998 Plan, and form of Restricted Stock Agreement under the 1998 Plan, all effective as of March 4, 1998 (SEC File No. 1-82). 12 Computation of ratios of total debt to total capitalization. 15 Letter from PricewaterhouseCoopers LLP with respect to unaudited interim financial information. EX-10.12 2 STOCK OPTION AGREEMENT PHELPS DODGE CORPORATION AND SUBSIDIARIES Exhibit 10.12 STOCK OPTION AGREEMENT (1998 Stock Option and Restricted Stock 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 1998 Stock Option and Restricted Stock Plan (the "Plan"), is hereinafter referred to as the "Committee") has granted to the Employee an option under the Plan to purchase Common Shares of the Corporation on the terms set forth below. To evidence the option 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; 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. The Option granted hereby shall be subject to the provisions of the Plan. Capitalized terms used herein that are not defined in this Agreement shall have the meanings assigned to such terms in 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 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 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 become exercisable under this paragraph earlier than six months from the date on which the Option was granted (the "Grant Date")). If any portion of the Option shall be exercised, the Option shall thereafter remain exercisable, according to its terms, only with respect to the number of Common Shares as to which the Option would otherwise be exercisable less the number of Common Shares with respect to which the Option has previously been exercised. 3. Who May Exercise. During the Employee's lifetime the Option may be exercised only by him. If the Employee dies while in the employ of the Corporation or one of its Subsidiaries, the Option may be exercised for the full number of Common Shares specified in Section 1 hereof less the number of Common Shares with respect to which the Option has previously been exercised, by the Employee's estate, personal representative or beneficiary who acquired the right to exercise the Option 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 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 by will or by the laws of descent and distribution, at any time prior to the termination date provided by Section 4 hereof. Following the End of Business on the earlier of the 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 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 in the Plan), 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 on or after the Employee's normal retirement date, 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 has previously been exercised. 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 which is not exercisable on the date the Employee's employment terminates for any reason other than death, Disability, or retirement on or after the Employee's normal retirement date 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. 5. Restrictions on Exercise. The Option may be exercised only with respect to full Common Shares. No fractional shares shall be issued. The Option 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 shall be exercisable in accordance with the terms hereof, and subject to such administrative regulations as the Committee may have adopted, 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. For valuation purposes, the day of exercise of the Option 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) 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 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 with respect to any related Common Shares or payment. The Corporation may require the Employee or other person exercising the Option 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, the Option shall not be 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, or in the name of a trust or other legal entity established to held property for the benefit of the Employee or members of his immediate family. 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. (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 Options 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. 13. Predecessor Plans. The Employee hereby acknowledges and agrees that all of the Employee's outstanding options that were granted pursuant to the Predecessor Plans (as defined in the Plan) shall hereafter become subject to the terms of 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 ---------------------------- Senior Vice President ------------------------------ Employee Supplement A [Incentive Stock Option -- 1998 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 -- 1998 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 in the Plan) 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. 2. Qualifying Termination. For the purpose of this Supplement, 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 detriment to the Corporation, and its Subsidiaries, taken as a whole; (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 materially 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 material 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 or any Subsidiary in the Employee's base salary as in effect immediately prior to such Change of Control; the failure by the Corporation or any Subsidiary 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 or any Subsidiary which would adversely affect the Employee's participation in or materially reduce his benefits under such plan; or (z) the Corporation's or any Subsidiary's requiring the Employee to be based anywhere other than his location immediately prior to such Change of Control or a location within 50 miles of his location immediately prior to such Change of Control; or the Corporation's or any Subsidiary's requiring the Employee to travel on the Corporation's or any Subsidiary's business to an extent substantially more burdensome than his travel obligations immediately prior to such Change of Control. Supplement D [Reload Option -- 1998 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 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. RELOAD OPTION AGREEMENT (1998 Stock Option and Restricted Stock Plan) RELOAD 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 1998 Stock Option and Restricted Stock Plan (the "Plan"), is hereinafter referred to as the "Committee") has granted to the Employee an option under the Plan to purchase Common Shares of the Corporation on the terms set forth below. Such grant was made on _____________________ in connection with the exercise on that date by the Employee of an option (the "Original Option") issued under the Plan, evidenced by a Stock Option Agreement dated _______________________. In connection with such exercise, the Employee delivered to the Corporation in payment of part or all of the exercise price of the Original Option _________ Common Shares that he owned for at least three months prior to the date of exercise. To evidence the option 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 Reload Option; Reload Option Price. The Corporation hereby evidences and confirms its grant to the Employee of (i) an option (the "Reload Option") to purchase _________ of the Corporation's Common Shares at `an option price of $________ per share. The Reload Option granted hereby shall be subject to the provisions of the Plan. Capitalized terms used herein that are not defined in this Agreement shall have the meanings assigned to such terms in the Plan. 2. Term for Exercise. The Reload Option shall become exercisable, subject to the provisions of Sections 3 and 4 hereof, on ______________, which is the date six months after the grant date specified in Section 1 hereof. Unless an earlier expiration date is specified by this Agreement, the Reload Option shall expire at 5:00 P.M., Arizona Mountain time (such time shall hereinafter be referred to as the "End of Business"), on ________________, which is the expiration date of the Original Option (the "Termination Date"). 3. Who May Exercise. During the Employee's lifetime the Reload Option may be exercised only by him. If the Employee dies while in the employ of the Corporation or one of its Subsidiaries, the Reload Option may be exercised for the full number of Common Shares specified in Section 1 hereof less the number of Common Shares with respect to which the Reload Option has previously been exercised, by the Employee's estate, personal representative or beneficiary who acquired the right to exercise the Reload Option 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 Reload Options 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 Reload Option by will or by the laws of descent and distribution, at any time prior to the termination date provided by Section 4 hereof. Following the End of Business on the earlier of the Termination Date, the fifth anniversary of the Employee's death or the termination date provided by Section 4, as the case may be, the Reload Option 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 in the Plan), Retirement (as defined in the Plan) or the Employee's termination for Cause (as defined in the Plan), the Reload 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 Reload 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. If the Employee's employment is terminated for Cause, all Reload 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 Reload Option which is not exercisable on the date the Employee's employment terminates for any reason other than death, Disability, or retirement on or after the Employee's normal retirement date shall expire at the End of Business on such termination date. Any portion of the Reload 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 Reload Option could have been exercised. 5. Restrictions on Exercise. The Reload Option may be exercised only with respect to full Common Shares. No fractional shares shall be issued. The Reload Option 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 Reload 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 Reload 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 Reload Option shall be exercisable in accordance with the terms hereof, and subject to such administrative regulations as the Committee may have adopted, the Reload Option may be exercised in whole or from time to time in part by written notice to the Committee, (i) identifying the Reload Option by Grant Date and the option price, (ii) specifying the number of Common Shares with respect to which the Reload 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 Reload 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 Reload 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. For valuation purposes, the day of exercise of the Reload Option shall be deemed to be the day on which notice, addressed to the Committee, either to exercise the Reload 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) 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 Reload Option 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 Reload Option or with respect to any related Common Shares or payment. The Corporation may require the Employee or other person exercising the Reload Option 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, the Reload Option shall not be 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 Reload Option may be issued or transferred in the name of the Employee and another person jointly with the right of survivorship, or in the name of a trust or other legal entity established to held property for the benefit of the Employee or members of his immediate family. 8. Rights as Stockholder. The Employee shall have no rights as a stockholder with respect to any Common Shares covered by the Reload 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 Reload 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 Reload Option shall pertain to the securities and other property, if any, which a holder of the number of Common Shares covered by the Reload 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 Reload 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. (b) 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 Reload 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 is a supplement titled "Supplement D -- New 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 nave 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 D [New Reload Option -- 1998 Plan] Supplement D to the Stock Reload Option Agreement (the "Agreement") dated between Phelps Dodge Corporation (the "Corporation") and (the "Employee"). 1. Issuance of New Reload Option. In the event that the Employee exercises this Reload Option (a) at least six months prior to the expiration date of this Reload Option, (b) while still employed by the Corporation or a Subsidiary and (c) prior to the expiration date of the Plan, 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 "New 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 Reload Option; provided that a New Reload Option shall not be granted if the Exercise Date is (a) within six months of the expiration date of the Reload 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 Reload Option an additional New Reload Option in accordance with the terms of this Supplement. 2. Terms of New Reload Option. The New Reload Option shall be exercisable on the same terms and conditions as apply to the Reload Option as set forth in this Agreement, except that (a) the New 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 New Reload Option shall be the date of expiration of the Reload Option under this Agreement. The Corporation may issue a new agreement to evidence the New Reload Option and, if it does, that agreement shall supersede this Agreement in all respects insofar as the New Reload Option is concerned. 3. Right of Committee to Disapprove New Reload Option. Notwithstanding the foregoing, the continuance of a New Reload Option granted pursuant to this Supplement shall be subject to the disapproval of the Committee in its sole discretion exercised at the meeting of the Committee next following the date such New Reload Option is granted. Any New Reload Options so disapproved by the Committee shall terminate upon such disapproval. DATE NAME ADDRESS ADDRESS Award of Restricted Stock Dear NAME: Phelps Dodge Corporation (the "Company") is pleased to confirm to you that at a meeting held on ______________, the Compensation and Management Development Committee of the Board of Directors of Phelps Dodge Corporation (the "Committee") awarded you _____ shares of Restricted Stock of the Company pursuant to the 1998 Stock Option and Restricted Stock Plan (the "Plan"). This letter will confirm the following agreement between you and the Company pursuant to the Plan. Capitalized words used in this letter and defined in the Plan are used as so defined. This award of Restricted Stock is subject to the terms and conditions of the Plan, as supplemented by this letter. 1. Restriction on Transfer. Except as provided in paragraphs 3 and 4 below, the shares of Restricted Stock awarded to you hereunder may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered until _____________________ (the "Restricted Period"). 2. Forfeiture of Restricted Stock. Except as provided in paragraph 3 below, if your employment with the Company and its Subsidiaries terminates prior to the end of the Restricted Period for any reason including without limitation any termination by you or by the Company in its absolute discretion, your shares of Restricted Stock shall revert back to the Company without any payment to you and you shall cease to have any rights with respect to such shares of Restricted Stock. In the case of such reversion, such shares shall be retransferred to the Company by means of the stock power referred to in paragraph 5 below. 3. Death, Disability or Retirement. If your employment with the Company and its Subsidiaries terminates by reason of your Death, your Disability or your Retirement (except for a termination occurring within six months of the date of the grant of your shares of Restricted Stock on account of your Disability or Retirement), the Restricted Period shall lapse upon your termination of employment. 4. Change of Control. The Restricted Period shall lapse in the event that, on or after the date six months after the date of the grant of your shares of Restricted Stock, a Change of Control occurs. 5. Rights as a Shareholder. Subject to the provisions of paragraph 7 below, you shall have all the rights of a holder of Common Shares with respect to your Restricted Stock, including the right to vote the shares and to receive dividends. Notwithstanding the foregoing, your Restricted Stock shall be held by the Company prior to the lapse of the Restricted Period and you shall deliver to the Company a stock power executed in blank in such form as the Company shall determine. 6. Administration. The Plan is administered by the Committee and any interpretation or construction of the Plan or this letter by the Committee, and any determination made by the Committee pursuant to the Plan or this letter, shall be conclusive and binding on the Company, you and any other interested party. 7. Conversions and Property Distributions. In the event your Restricted Stock is exchanged for or converted into securities other than Common Shares or in the event that any distribution is made with respect to such Restricted Stock either in Common Shares or in other property or by way of an extraordinary cash dividend, the securities or other property or cash that you receive shall be subject to the same restrictions as apply to your Restricted Stock, including those provided by the last sentence of paragraph 5 above. 8. Withholding. You shall be required to pay, as a condition of receiving a share certificate without legend, any applicable federal, state or local tax withholding requirements, which, if the Committee shall permit, may be satisfied by the withholding of shares of Restricted Stock with respect to which the Restricted Period has lapsed, subject to such terms and conditions as the Committee shall impose. 9. Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York. Please sign one of the two copies of this letter where indicated below and the attached Stock Power and return them to me at your earliest convenience. Please retain the other copy of this letter for your records. PHELPS DODGE CORPORATION By: ----------------------- Ramiro G. Peru Senior Vice President ACCEPTED AND AGREED TO: Date: EX-12 3 COMPUTATION OF TOTAL DEBT TO TOTAL CAP PHELPS DODGE CORPORATION AND SUBSIDIARIES Exhibit 12 COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION (Unaudited; dollars in millions)
June 30, December 31, 1998 1997 ---- ---- Short-term debt $ 87.8 91.4 Current portion of long-term debt 65.2 54.8 Long-term debt 831.7 857.1 ---------- ---------- Total debt 984.7 1,003.3 Minority interests in subsidiaries 95.6 113.3 Common shareholders' equity 2,621.4 2,510.4 ---------- ---------- Total capitalization $ 3,701.7 3,627.0 ========== ========== Ratio of total debt to total capitalization 26.6% 27.7% ========== ==========
EX-15 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 15 PRICEWATERHOUSECOOPERS LLP Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: We are aware that Phelps Dodge Corporation has incorporated by reference our report dated July 13, 1998 (issued pursuant to the provisions of Statements on Auditing Standards No. 71) in the Prospectus constituting part of its Registration Statement and Post-Effective Amendment No. 1 on Form S-3 (Nos. 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, 333-42231 and 333-52175). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, PricewaterhouseCoopers LLP Phoenix, Arizona August 11, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 336,000 0 391,500 0 287,900 1,192,400 3,515,600 0 5,061,000 676,800 831,700 0 0 366,700 2,254,700 5,061,000 1,592,700 1,592,700 1,196,100 1,196,100 (15,300) 0 43,400 326,600 119,500 204,100 0 0 0 204,100 3.49 3.48
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