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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.
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<PAGE>
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
<PAGE>
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements
STATEMENT OF CONSOLIDATED INCOME
(Unaudited; in millions except per share data)
<TABLE>
<CAPTION>
First Six
Second Quarter Months
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
BUSINESS SEGMENTS
(Unaudited; in millions)
<TABLE>
<CAPTION>
First Six
Second Quarter Months
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
========= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED BALANCE SHEET
(Unaudited; in millions)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1998 1997
---- ----
<S> <C> <C>
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
========= =======
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions)
<TABLE>
<CAPTION>
Six months
ended
June 30,
-------------
1998 1997
---- ----
<S> <C> <C>
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
======== =====
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Unaudited; in millions)
<TABLE>
<CAPTION>
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
------ ----- -------- -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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
==== ====== ==== ======== ======= ====== ========
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
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.
<PAGE>
<AUDIT-REPORT>
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
</AUDIT-REPORT>
<PAGE>
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.
================================================================================
<TABLE>
<CAPTION>
First Six
Second Quarter Months
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
- -------------------------
* 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.
================================================================================
<TABLE>
<CAPTION>
First Six
Second Quarter Months
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
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
======== ===== ===== =====
</TABLE>
- -------------------------
* 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.
<PAGE>
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:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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)
<PAGE>
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.
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.
<PAGE>
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:
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Exhibit 12
COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION
(Unaudited; dollars in millions)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
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%
========== ==========
</TABLE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 336,000
<SECURITIES> 0
<RECEIVABLES> 391,500
<ALLOWANCES> 0
<INVENTORY> 287,900
<CURRENT-ASSETS> 1,192,400
<PP&E> 3,515,600
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,061,000
<CURRENT-LIABILITIES> 676,800
<BONDS> 831,700
0
0
<COMMON> 366,700
<OTHER-SE> 2,254,700
<TOTAL-LIABILITY-AND-EQUITY> 5,061,000
<SALES> 1,592,700
<TOTAL-REVENUES> 1,592,700
<CGS> 1,196,100
<TOTAL-COSTS> 1,196,100
<OTHER-EXPENSES> (15,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,400
<INCOME-PRETAX> 326,600
<INCOME-TAX> 119,500
<INCOME-CONTINUING> 204,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,100
<EPS-PRIMARY> 3.49
<EPS-DILUTED> 3.48
</TABLE>
