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Phelps Dodge Corporation
(Name of Registrant as Specified in its Charter)
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by registration statement number, or the Form or Schedule and the
date of its filing.
You are cordially invited to attend our annual meeting of
shareholders to be held at 9:00 a.m. (MST) on Friday,
May 27, 2005, at the Heard Museum, 2301 North Central
Avenue, Phoenix, Arizona. Enclosed with this proxy statement are
your proxy card and the 2004 annual report to shareholders,
which includes the Corporation’s Annual Report on
Form 10-K.
Your vote is important. Whether you plan to attend the annual
meeting or not, you may access electronic voting via the
internet or the automated telephone voting feature, both of
which are described on your enclosed proxy card, or you may
sign, date and return the proxy card in the envelope provided.
If you plan to attend the annual meeting you may vote in person.
Registration and seating will begin at 8:30 a.m. Each
shareholder will be asked to sign an admittance card and may be
asked to present a valid picture identification. Shareholders
holding stock in brokerage accounts will need to bring a copy of
a brokerage statement reflecting stock ownership as of the
April 7, 2005 record date. Cameras and recording devices
will not be permitted at the meeting.
Last year, 88% of our outstanding shares were represented in
person or by proxy, and we hope to increase our shareholder
participation this year.
Sincerely,
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of Phelps Dodge Corporation:
The annual meeting of shareholders of Phelps Dodge Corporation
will be held at the Heard Museum, 2301 North Central Avenue,
Phoenix, Arizona, on Friday, May 27, 2005, at
9:00 a.m. (MST), to consider and take action on the
following:
3. Approve an amendment to the Corporation’s Restated
Certificate of Incorporation to increase the number of
authorized Common Shares;
4. Ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants for the year 2005; and
5. Transact any other business that may properly be brought
before the annual meeting.
Only holders of record of the Corporation’s common shares
at the close of business on April 7, 2005 will be entitled
to vote at the meeting. On April 7, 2005, we had 96,893,021
common shares outstanding.
If you participate in the Mellon Investor Services LLC Investor
Services Program for Phelps Dodge Corporation Shareholders, all
common shares held for your account under that plan will be
voted in accordance with your proxy.
Proxies are solicited by the Board of Directors. You may revoke
your proxy before it is voted at the annual meeting by
delivering a signed revocation letter or a new proxy, dated
later than your first proxy, to Catherine R. Hardwick, Assistant
General Counsel and Secretary.
Shareholders who do not expect to attend the meeting in person
are asked to access electronic voting via the internet or
telephone voting as described on the enclosed proxy card or
date, sign and complete the proxy card and return it without
delay in the enclosed envelope, which requires no postage stamp
if mailed in the United States. If you are attending in person
and have previously mailed your proxy card, you may revoke your
proxy and vote in person at the meeting.
This proxy statement and accompanying materials are being first
sent to shareholders on April 15, 2005.
The Corporation currently has eleven directors divided into
three classes: three in Class I, four in Class II and
four in Class III. The terms of office of the four
Class II directors expire at the 2005 annual meeting of
shareholders.
Class II Election
The four nominees for election as Class II directors are
listed below. If elected, the nominees for election as
Class II directors will serve for a term of three years and
until their successors are elected and qualify. Unless you
instruct us on the proxy card to vote differently, we will vote
signed, returned proxies FOR the election of such nominees. If
for any reason any nominee cannot or will not serve as a
director, we may vote such proxies for the election of a
substitute nominee designated by the Board of Directors.
Class II Nominees
A nominee must receive a plurality of the votes cast at the
annual meeting to be elected. Abstentions and broker non-votes,
therefore, have no effect on the election of directors.
Age, Principal Occupation, Business
Director
Nominee
Experience and Other Directorships Held
Since
Archie W. Dunham (Class II)
Mr. Dunham was Chairman of ConocoPhillips (integrated energy
company) from August 2002, following the merger of Conoco Inc.
and Phillips Petroleum Company in August 2002, until his
retirement on September 30, 2004. He was Chairman,
President and Chief Executive Officer of Conoco Inc. (integrated
energy company) from August 1999 to August 2002, and President
and Chief Executive Officer of Conoco Inc. from January 1996 to
August 2002. He was an Executive Vice President of E.I. du Pont
de Nemours and Company, Conoco’s former parent, from 1995
to October 1998. Mr. Dunham is a director of Louisiana
Pacific Corporation and Union Pacific Corporation. Age 66.
1998
1
Age, Principal Occupation, Business
Director
Nominee
Experience and Other Directorships Held
Since
William A. Franke (Class II)
Mr. Franke was Chairman and Chief Executive Officer of America
West Holdings Corporation from February 1997 and President from
April 1999 until his retirement on September 1, 2001. He
was Chief Executive Officer of its principal subsidiary, America
West Airlines, Inc. (airline carrier), from April 1999 until his
retirement on September 1, 2001 and was Chairman of its
Board from 1992 until his retirement on September 1, 2001.
He was also its President from April 1999 until May 24,2000. He has been President of Franke and Company, Inc.,
Phoenix, Arizona, an investment firm, since 1987. He is the
managing member of Indigo Partners, LLC and Indigo Pacific
Partners, LLC, private equity funds focused on investments in
the air transportation sector. He is also a managing partner of
Newbridge Latin America, L.P., a private equity fund with
investments in that region and an officer of several of the
investment funds’ portfolio companies. Age 68.
1980
Robert D. Johnson (Class II)
Mr. Johnson was named on January 7, 2005 as non-executive
Chairman of Honeywell Aerospace (supplier of aircraft engines,
equipment, systems and services) a division of Honeywell Inc.,
and plans to retire from Honeywell in January, 2006. From
December 1999 until January 2005 Mr. Johnson was the
President and Chief Executive Officer of Honeywell Aerospace.
From March 1999 to December 1999, he was President and Chief
Executive Officer of Allied Signal Aerospace (supplier of
aircraft engines, equipment, systems and services), a division
of Allied Signal Inc. From January 1999 until March 1999, he was
President and Chief Executive Officer of the Marketing, Sales
and Services division of Allied Signal Aerospace-Allied Signal
Inc. From September 1997 until December 1998, he was President
and Chief Executive Officer of Electronic and Avionics Systems,
Allied Signal Aerospace, a division of Allied Signal Inc. From
July 1994 until September 1997, he was Vice President and
General Manager of Aerospace Services at Allied Signal
Aerospace, a division of Allied Signal Inc. He is a director of
Ariba, Inc. Age 57.
2003
J. Steven Whisler (Class II)
Mr. Whisler was elected Chairman of the Corporation on
May 3, 2000, and he has been Chief Executive Officer since
January 1, 2000. He was President from December 1997 to
October 31, 2003 and was also Chief Operating Officer from
December 1997 until January 1, 2000. He was President of
Phelps Dodge Mining Company, a division of the Corporation, from
1991 to October 1998. He is a director of Burlington Northern
Santa Fe Corporation and America West Holdings Corporation.
Age 50.
1995
The Board of Directors recommends a vote FOR
all of the Class II nominees.
2
Continuing Directors
The seven directors whose terms will continue after the annual
meeting and will expire at the 2006 annual meeting
(Class III) or the 2007 annual meeting (Class I) are
listed below.
Age, Principal Occupation, Business
Director
Director
Experience and Other Directorships Held
Since
Robert N. Burt (Class III)
Mr. Burt retired as Chairman of the Board and Chief Executive
Officer of FMC Corporation (chemicals and machinery for
industry, agriculture and government) in November 2001. He held
those positions since 1991. He is a director of Pfizer
Corporation and Janus Capital Group Inc. Age 67.
1993
Robert D. Krebs (Class III)
Mr. Krebs retired as Chairman of Burlington Northern
Santa Fe Corporation (transportation) in April 2002. He
held that position since December 2000. He was Chairman and
Chief Executive Officer from June 1999 until December 2000, and
Chairman, President and Chief Executive Officer from April 1997
to May 1999. Age 62.
1987
William J. Post (Class III)
Mr. Post has been Chairman of the Board of Pinnacle West
Capital Corporation (holding company of subsidiaries operating,
selling and delivering electricity and energy-related products
and services) since February 2001, and its Chief Executive
Officer since February 1999. He was also its President from
August 1999 to February 2001, and from February 1997 to February
1999. He is currently Chairman of the Board of Arizona Public
Service Company (APS) (supplier of electricity), a subsidiary of
Pinnacle West Capital Corporation. He was Chairman of the Board
and Chief Executive Officer of APS from February 2001 to
September 2002. From October 1998 to February 2001, he was
APS’s Chief Executive Officer. He was APS’s President
and Chief Executive Officer from February 1997 to October 1998.
Age 54.
2001
Jack E. Thompson (Class III)
Mr. Thompson is the Vice Chairman of Barrick Gold Corporation
(multinational gold mining company), a position he has held
since December 2001. Mr. Thompson has announced that he
will retire from Barrick and its Board of Directors effective
April 28, 2005. From April 1999 until December 2001 he was
the Chairman and Chief Executive Officer of Homestake Mining
Company (multinational gold mining company) which merged with
Barrick Gold Corporation in December 2001. From July 1998 until
March 1999 he was the Chairman, President and Chief Executive
Officer of Homestake Mining Company and its President and Chief
Executive Officer from May 1996 until July 1998. He is a
director of Stillwater Mining Co., Century Aluminum Company and
Tidewater Inc. He also sits on the advisory board of Resource
Capital Funds III, LLP. Age 55.
2003
3
Age, Principal Occupation, Business
Director
Director
Experience and Other Directorships Held
Since
Marie L. Knowles (Class I)
Mrs. Knowles was Executive Vice President and Chief Financial
Officer of Atlantic Richfield Company (diversified energy
company) from July 1996 until her retirement on June 1,2000. From 1993 until 1996 she was Senior Vice President of
Atlantic Richfield Company and President of ARCO Transportation
Company, a former subsidiary of Atlantic Richfield Company.
Mrs. Knowles is a director of McKesson Corporation and a
trustee of the Fidelity Funds. Age 57.
1994
Jon C. Madonna (Class I)
Mr. Madonna was Chairman of the Board of DigitalThink, Inc. (e-
learning company) from April 2002 until it was sold in May 2004.
From April 2001 until March 2002 he was President and Chief
Executive Officer of DigitalThink, and from January 1999 until
October 2000 he was the President and Chief Executive Officer of
Carlson Wagonlit Corporate Travel (business travel and expense
management company). He was Vice Chairman of The Travelers Group
(financial services and insurance company) from January 1997
until October 1998. Mr. Madonna was Chairman of KPMG
International (international accounting and tax services
company) from July 1995 to January 1996 and Chairman and Chief
Executive Officer of KPMG Peat Marwick USA from 1990 until 1996.
Mr. Madonna is a director of AT&T, Albertsons Inc., and
Tidewater Inc. Age 61.
2003
Gordon R. Parker (Class I)
Mr. Parker was Chairman of Newmont Mining Corporation from 1986
until his retirement in 1994. He was Chief Executive Officer
from 1985 until 1993. Mr. Parker is a director of
Caterpillar, Inc. and Gold Fields Limited. Age 69.
1995
4
CORPORATE GOVERNANCE AND GENERAL INFORMATION
CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Governance
Adherence to the highest standards of corporate governance
practices has been the foundation for conducting the businesses
of Phelps Dodge since 1885. In 2004, the Corporation celebrated
the 75th anniversary of its listing on the New York Stock
Exchange. Additional information about the Corporation’s
corporate governance practices, including its Corporate
Governance Guidelines, the Charters for the Audit Committee,
Compensation and Management Development Committee and the
Committee on Directors and Corporate Governance, are published
on the Corporation’s website at www.phelpsdodge.com.
The Phelps Dodge Corporation Code of Business Ethics &
Policies (to which every non-bargained domestic and
international employee attests annually) and the Code of Ethics
for Directors are also available on the Corporation’s
website. Each of these documents is also available free of
charge to any shareholder who requests a copy in writing.
Board Independence
The Board of Directors requires that a majority of its members
be independent. The Board adopted the following independence
standards, which are consistent with criteria established by the
New York Stock Exchange, to assist the Board in making these
independence determinations.
A Director is independent if the Board has made an affirmative
determination that such Director has no material relationship
with the Corporation (directly or as a partner, shareholder or
officer of an organization that has a relationship with the
Corporation). In addition:
• A Director who is an employee or whose immediate
family member is an executive officer, of the Corporation is not
independent until three years after the end of such employment
relationship.
• A Director who receives, or whose immediate family
member receives, more than $100,000 during any twelve-month
period in direct compensation from the Corporation, other than
Director and Committee fees and a pension or other forms of
deferred compensation for prior service (provided such
compensation is not contingent in any way on continued service),
is not independent until three years after he or she ceased to
receive more than $100,000 in any twelve-month period in such
compensation.
• A Director who is affiliated with or employed by, or
whose immediate family member is affiliated with or employed in
a professional capacity by, a present or former internal or
external auditor of the company is not independent until three
years after the end of the affiliation or the auditing
relationship.
• A Director who is employed or whose immediate family
member is employed, as an executive officer of another company
where any of the Corporation’s present executives serve on
that company’s compensation committee is not independent
until three years after the end of such service or the
employment relationship.
• A Director who is a current employee, or whose
immediate family member is an executive officer, of a company
that has made payments to, or receives payments from, the
Corporation for property or services in an amount which, in any
single fiscal year, exceeds the greater of $1 million or 2%
of
5
such other company’s consolidated gross revenues, in each
case is not independent until three years after falling below
such threshold.
The Board has reviewed all material transactions and
relationships between each director, or any member of his or her
immediate family, and the Corporation, its senior management and
its independent accounting firm and internal audit firm. Based
on this review and in accordance with the independence standards
outlined above, the Board of Directors has affirmatively
determined that all of the non-employee directors, other than
Mr. Post, are independent. As a result, nine of the
Corporation’s eleven directors are independent.
The Board has determined that Mr. Post is not independent
because he is an executive officer of another company that
during 2003 and 2004 received payments from the Corporation in
an amount which exceeded the greater of $1 million or 2% of
such other company’s consolidated gross revenues.
Mr. Post is an executive officer of Pinnacle West Capital
Corporation (“Pinnacle West”) and its subsidiary,
Arizona Public Service Company (“APS”). Pinnacle West
and APS are engaged in the business of supplying electricity to
substantial portions of Arizona and other parts of the western
United States. The rates charged by Pinnacle West and APS for
electricity, which in some cases were fixed by governmental
authority, offered economic advantages to the Corporation, in
part because of the proximity of APS’s generation and
transmission facilities to certain of the Corporation’s
Arizona operations. Because the Corporation’s purchases of
electricity from Pinnacle West and APS amounted to approximately
2.3% of Pinnacle West’s consolidated gross revenues in
2004, Mr. Post does not qualify as an independent director.
We understand the NYSE is reviewing its independence standards
with respect to circumstances such as Mr. Post’s,
where fees charged to customers are at regulated rates.
Board Meetings
The Board of Directors met sixteen times during 2004. Each
director attended at least 75% of the combined number of
meetings of the Board and of the committees on which such
director served. The average attendance for all directors was
94%. The non-management directors meet regularly in executive
sessions without management. Executive sessions are presided
over by the Chair of the Committee on Directors and Corporate
Governance. The Chair of that Committee may, if desired,
delegate such responsibility to another independent director,
including the Chair of the Committee having jurisdiction over
the bulk of the issues to be discussed at an executive session.
The Corporation does not require directors to attend the annual
meeting of shareholders. The Corporation believes that
information concerning the Corporation is readily available from
a variety of sources, including from management, and the Board
is accessible to shareholders through additional, more effective
means. Mr. Whisler was the only director who attended the
2004 annual meeting.
The Board of Directors at its meeting on February 2, 2005
adopted a policy limiting the non-employee directors to
membership on four boards of publicly held companies in addition
to membership on the Phelps Dodge Board of Directors.
Shareholders may communicate with the directors by sending
written correspondence in care of the Assistant General Counsel
and Secretary of the Corporation to One North Central Avenue,
Phoenix, Arizona, 85004. Share-
6
holder communications will be delivered to the director, or
group of directors, to whom they are addressed, or if addressed
to all directors as a group, to the Chair of the Committee on
Directors and Corporate Governance.
Board Committees
The Audit Committee comprises Messrs. Franke, (Mrs.)
Knowles (Chair), Krebs, Madonna, Parker and Thompson and met
nine times during 2004. The Board of Directors determined, at
its February 25, 2005 meeting, that Mrs. Knowles
(Chair) is an audit committee financial expert (as defined by
SEC regulations) and that each member of the Committee is
independent, financially literate and possesses financial
management expertise. The Committee generally performs the
following functions:
• Selects, evaluates and makes all decisions
concerning the performance, compensation, retention and
termination of the Corporation’s independent public
accounting firm;
• Assists the Board of Directors with oversight of:
(i) the quality and integrity of the Corporation’s
financial statements; (ii) the Corporation’s
compliance with legal and regulatory requirements;
(iii) the independence and qualifications of the
Corporation’s independent registered public accounting
firm; and (iv) the performance of the Corporation’s
internal audit function;
• Prepares the report of the Audit Committee to be
included in the Corporation’s proxy statement as required
under the rules of the Securities and Exchange
Commission; and
• Provides an open avenue of communication among the
independent accountants, financial and senior management, the
internal auditing function, and the Board of Directors.
The Compensation and Management Development Committee,
comprises Messrs. Burt, Dunham (Chair), Franke, Johnson,
(Mrs.) Knowles and Parker and met four times during 2004. The
Board of Directors, at its February 25, 2005 meeting,
determined that each member of the Committee is independent. The
Committee generally performs the following functions:
• Reviews and approves the compensation of the
Corporation’s senior officers;
• Reviews management recommendations concerning the
compensation of other officers and key personnel;
• Reviews the Corporation’s program for
management development; and
• Reviews and approves incentive compensation awards,
stock option grants and awards of restricted stock.
The Committee on Directors and Corporate Governance
comprises Messrs. Burt (Chair), Dunham, Johnson, Krebs and
Madonna and met three times during 2004. The Board of Directors,
at its February 25, 2005 meeting, determined that each
member of the Committee is independent. The Committee generally
performs the following functions:
• Makes recommendations concerning the composition of
the Board and its Committees, and reviews director compensation;
• Reviews the qualifications of potential director
candidates and recommends to the Board nominees for election as
directors; and
• Develops and reviews the Board governance policies
and makes recommendations concerning the corporate governance
program for the Corporation.
7
Applications, recommendations or proposed nominations for
directors will be referred to the Committee on Directors and
Corporate Governance. Applications, recommendations and
nominations should be sent to the Assistant General Counsel and
Secretary of the Corporation and should include the address and
a brief description of the background, professional experience
and qualifications of the individual recommended.
The Committee on Directors and Corporate Governance considers
candidates for Board membership suggested by its members and
other Board members, as well as management and shareholders.
There are no differences in the manner in which the Committee on
Directors and Corporate Governance evaluates nominees for the
Board of Directors based on whether or not the nominee is
recommended by a shareholder. The Committee on Directors and
Corporate Governance evaluates prospective nominees against a
number of standards and qualifications, including the
qualifications in the Phelps Dodge Corporate Governance
Guidelines under the heading, “Membership Criteria for
Non-Employee Directors of Phelps Dodge Corporation.” The
Corporate Governance Guidelines are published on the
corporation’s website at www.phelpsdodge.com. The
Committee also considers such other factors as it deems
appropriate, including the current composition of the Board, the
balance of management and independent directors, the need for
Audit Committee expertise and the evaluations of other
prospective nominees. The Committee then determines whether to
interview the prospective nominees, and, if warranted, one or
more of the members of the Committee on Directors and Corporate
Governance, and others as appropriate, interview such
prospective nominees whether in person or by telephone. After
completing this evaluation and interview, the Committee on
Directors and Corporate Governance makes a recommendation to the
full Board of Directors as to the persons who should be
nominated by the Board of Directors. The Board of Directors then
determines the nominees after considering the recommendation and
report of the Committee on Directors and Corporate Governance.
The Corporation has in the past retained an executive search
firm to assist it in identifying and evaluating potential
director candidates as and when necessary.
The Environmental, Health and Safety Committee, comprises
Messrs. Burt, Johnson, (Mrs.) Knowles, Parker (Chair), Post
and Thompson and met four times in 2004. The Committee generally
performs the following functions:
• Reviews the Corporation’s environmental, health
and safety policies;
• Reviews management’s implementation of these
policies; and
• Makes reports and recommendations to the Board
concerning the results of its reviews.
The Finance Committee comprises Messrs. Dunham,
Franke, Krebs (Chair), Madonna, Post and Thompson and met three
times during 2004. The Committee generally performs the
following functions:
• Reviews the financial affairs of the Corporation and
its subsidiaries;
8
• Recommends to the Board financial policies and
actions to accommodate the Corporation’s goals and
operating strategies while maintaining a sound financial
condition; and
• Reviews the funding and management of assets for
retirement income plans of the Corporation and its subsidiaries.
Board Compensation
Directors who are not salaried employees of the Corporation
(non-employee directors) receive compensation for their Board
service comprised of both cash and equity components. The
Committee on Directors and Corporate Governance reviewed
director compensation and based upon a study of director
compensation recommended certain increases and changes in
structure. The following compensation structure for directors
was approved by the full Board effective July 1, 2004:
Annual Retainer
$65,000
Annual Committee
Chair Retainers
Audit Committee: $12,500
Compensation and Management Development Committee: $7,500
Committee on Directors and Corporate Governance: $5,000
Environmental, Health and Safety Committee: $3,000
Finance Committee: $3,000
Attendance Fees
$1,500 for each Board meeting
$1,500 for each Board Committee meeting
Shares of Stock
The foregoing retainers and fees, at the election of the
Director, may be received in an equivalent number of the
Corporation’s common shares in lieu of cash.
Stock Units
Number of stock units equal in value to $75,000 on date of grant
under the Directors Stock Unit Plan described below.
Directors Stock Unit Plan
In order to encourage increased stock ownership, the Board of
Directors adopted the Corporation’s Directors Stock Unit
Plan. Pursuant to this plan, effective as of January 1,2005, each non-employee director receives an annual grant of
stock units having a value equal to $75,000 on the date of the
grant. One unit is equal in value to one share of the
Corporation’s common stock. While stock units do not confer
on a director the right to vote, each stock unit is credited on
each dividend payment date with stock units equal to the
applicable dividend payable on the Corporation’s common
shares. Upon termination of service as a director, the director
is entitled to payment of his or her accumulated stock units in
an equivalent number of the Corporation’s common shares or
in cash.
Deferred Compensation
Plan for Directors
Directors may defer payment of retainers and/or meeting fees to
future years and may elect to have such deferred compensation
deemed to:
• receive interest at prevailing market rates;
• be invested in the Corporation’s common
shares; or
• be invested in one of several investment funds
designated for that purpose.
9
Matching
Gifts Plan
Directors are eligible to participate in the Corporation’s
Matching Gifts Plan. The Corporation will match a
Director’s contributions to qualified organizations up to
$10,000 annually.
Expenses and Benefits
All directors are reimbursed for travel and other related
expenses incurred in attending Board and Committee meetings.
During 2004, travel expenses (including certain travel expenses
for spouses) increased significantly due to site visits and
board meetings held at the Corporation’s operations in Peru
and Chile. The Corporation also provides non-employee directors
with life insurance benefits.
Directors Stock Ownership Policy
The Board of Directors in 1997 adopted a policy that each
director, within three years of his or her election, shall own a
total of not less than 2,000 common shares of the Corporation.
Stock units granted to a director under the Corporation’s
Directors Stock Unit Plan or shares elected in lieu of cash
compensation under the Deferred Compensation Plan for the
Directors of Phelps Dodge Corporation apply toward attainment of
this requirement All directors are in compliance with the stock
ownership policy.
Directors and Officers Liability Insurance
The Corporation maintains directors and officers (D&O)
liability insurance policies issued by National Union Fire
Insurance Company of Pittsburgh, PA, Federal Insurance Company,
American Casualty Company of Reading, PA, Zurich American
Insurance Company, XL Insurance (Bermuda) Ltd., and Allied World
Assurance Company, Ltd. The policies insure (i) directors,
officers, division presidents and vice presidents of the
Corporation and its subsidiaries for certain liabilities they
may incur in the performance of their duties that are not
indemnifiable under the Bylaws, (ii) the Corporation for
its obligations to indemnify such persons against such
liabilities, and (iii) the Corporation for losses arising
from a securities claim. These policies are placed on an annual
basis from June 1, 2004 to June 1, 2005. The
Corporation also purchases additional D&O liability
insurance coverage from Corporate Officers and Directors
Assurance Ltd. and Starr Excess Liability Insurance
International Ltd. These policies also are placed on an annual
basis from June 1, 2004 to June 1, 2005. The annual
premium for the D&O liability insurance is $2,658,375. The
Corporation also purchases pension trust liability insurance
policies on an annual basis for the period June 1, 2004 to
June 1, 2005. These policies insure directors, officers and
employees who are fiduciaries of employee benefit plans of the
Corporation and its subsidiaries and the sponsor organizations.
The annual premium for the pension trust liability insurance is
$201,250.
* * * * *
10
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The following directors served on the Compensation and
Management Development Committee during 2004: Messrs. Burt,
Dunham (Chair), Franke, Johnson, (Mrs.) Knowles and Parker,
effective March 1, 2004. None of these directors is or has
been an officer or employee of the Corporation or any of its
subsidiaries or has had any other relationship with the
Corporation or any of its subsidiaries requiring disclosure
under the applicable rules of the Securities and Exchange
Commission.
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the common share ownership as of
March 31, 2005 for our directors and executive officers.
“Beneficial Ownership” includes shares a director or
officer has the power to vote or transfer, and stock options
that were exercisable on March 31, 2005 or within
60 days thereafter. On March 31, 2005, the directors
and the five named executive officers of the Corporation owned,
in the aggregate, 650,851 shares of the Corporation’s
common stock (less than one percent of the shares outstanding).
The Corporation’s non-employee directors also have
interests in stock-based units under Corporation’s plans.
While these units may not be voted or transferred, they are
listed in the table below because they represent a component of
the total economic interest of our directors in the
Corporation’s stock.
Options
Shares
Exercisable
Beneficially
Within
Stock
Name of Beneficial Owner
Owned
60 Days
Units(1)
Total
Robert N. Burt
2,437
0
7,808
10,245
Archie W. Dunham
1,000
0
14,744
(2)
15,744
William A. Franke
2,000
0
8,535
10,535
Robert D. Johnson
542
0
1,414
1,956
Marie L. Knowles
1,000
2,296
7,555
10,851
Robert D. Krebs
2,156
8,036
8,140
18,332
Kalidas V. Madhavpeddi
25,348
(3)
1,733
0
27,081
Jon C. Madonna
1,000
0
1,414
2,414
Arthur R. Miele
22,522
(3)
1,733
0
24,255
Gordon R. Parker
3,122
2,296
7,695
13,113
Ramiro G. Peru
57,926
(3)
0
0
57,926
William J. Post
1,000
0
4,564
5,564
Timothy R. Snider
65,638
(3)
0
0
65,638
Jack E. Thompson
2,000
0
1,414
3,414
J. Steven Whisler
199,583
(3)
184,200
0
383,783
Directors and executive officers as a group (19 persons)
453,445
201,560
63,283
718,288
(1)
Except where indicated below, represents stock units awarded
under the Directors Stock Unit Plan.
(2)
Includes stock units credited under the Deferred Compensation
Plan for Directors of the Corporation.
(3)
Includes, as of March 31, 2005, the following shares of
restricted stock awarded under the Phelps Dodge 1998 Stock
Option and Restricted Stock Plan and the Phelps Dodge 2003
Stock Option and Restricted Stock Plan: Mr. Whisler,
109,625 shares, Mr. Snider, 46,360 shares,
Mr. Peru, 33,540 shares, Mr. Miele
11,245 shares and Mr. Madhavpeddi, 17,470 shares.
Based on a review of reports filed by our directors, executive
officers and beneficial holders of 10% or more of our
outstanding shares, and upon representations from those persons,
all reports required to be filed by our reporting persons during
2004 were filed on time, with the exceptions of the initial
Form 3 filings for newly elected officers Denise R. Danner,
Vice President and Controller, and David C. Naccarati, the
President of Phelps Dodge Mining Company, a division of the
Corporation.
To the knowledge of the Corporation, the following entities
beneficially owned in excess of five percent of the
Corporation’s common shares as of December 31, 2004:
A report on Schedule 13G, dated February 14, 2005,
disclosed that this entity, as a registered investment adviser,
had sole voting power over 12,088,240 shares and sole
dispositive power over 13,474,598 shares which represented
14.12% of the outstanding common shares at December 31,2004.
(b)
A report on Schedule 13G, dated February 9, 2005,
disclosed that this entity, as a registered investment adviser,
had sole dispositive power over 8,730,500 shares which
represented 9.10% of the outstanding common shares at
December 31, 2004. Shares reported by Capital Research and
Management Company include 500,000 shares resulting from
the assumed conversion of 200,000 shares of the 6.75%
Series A Mandatory Convertible Preferred Shares due
August 15, 2005.
(c)
A report on Schedule 13G, dated February 14, 2005,
disclosed that this entity, as a registered investment adviser,
had sole voting power over 1,517,060 shares and sole
dispositive power over 8,553,670 shares which represented
8.96% of the outstanding common shares at December 31, 2004.
Equity compensation plans approved by security holders
1,728,326
$
46.52
4,227,652
Equity compensation plans not approved by security holders(1)
61,379
$
53.16
Not Determinable
Total
1,789,705
$
46.75
4,227,652
Of the 4,227,652 shares available for grant as of
December 31, 2004 under the shareholder-approved Phelps
Dodge 2003 Stock Option and Restricted Stock Plan,
1,962,406 shares may be issued as Restricted Stock.
(1)
Two plans in which members of the Board of Directors may
participate and that have not been approved by security holders
include provisions that authorize, under certain circumstances
the issuance of equity shares. The Phelps Dodge Corporation
Directors Stock Unit Plan, effective as of January 1, 1997,
provided for an annual grant of 450 units in each of 1998,
1999 and 2000. Commencing in 2001 and continuing through 2004
the grants were equal in value to $50,000 and increased to
$75,000 for awards on January 1, 2005. Commencing in 2001,
these grants were based upon the fair market value of a share of
Phelps Dodge stock on December 31 of the previous year.
This plan terminates in accordance with its terms on
December 31, 2006. Participants in this plan may elect to
receive a distribution from this plan in the form of Phelps
Dodge common shares or cash upon termination from service as a
director. Directors may elect, in accordance with the provisions
of the Deferred Compensation Plan for the Directors of Phelps
Dodge Corporation, effective as of January 1, 1999, to
defer the payment of their directors’ fees, and if so
elected, to receive in the future the payment of those fees in
Phelps Dodge common shares or cash. Participating directors may
elect to receive a distribution from this plan, no later than
the plan year in which the director reaches age 75, either
in cash or in shares of Phelps Dodge common stock, or in a
specified combination thereof. Based on the nature of these
plans it is not possible to determine the exact number of equity
securities that remain for future issuance under these plans,
although the number of shares already issued under these plans
since their inception, as set forth in column (a) is not
material.
13
EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid our five
most highly compensated executive officers in 2004, 2003, and
2002.
Summary Compensation Table
Long-Term
Annual Compensation
Compensation
Other
Restricted
Base
Annual
Stock
Options
All Other
Salary
Bonus
Compensation
Awards
Granted
Compensation
Name and Principal Position
Year
($)
$
($)(1)
($)(2)
(#)
($)(3)
J. Steven Whisler
2004
891,667
1,400,000
3,279
2,068,562
27,600
87,037
Chairman and Chief Executive Officer
2003
850,000
1,000,000
17,481
1,319,000
–0–
50,733
2002
750,000
1,150,000
4,507
812,100
150,000
35,049
Timothy R. Snider
2004
512,500
750,000
6,316
787,882
10,500
52,823
President and Chief Operating Officer
2003
450,000
500,000
7,304
659,500
–0–
21,557
2002
385,000
600,000
3,724
284,235
45,000
19,624
Ramiro G. Peru
2004
407,917
600,000
5,233
525,254
7,000
61,032
Executive Vice President and
2003
385,000
425,000
8,169
494,625
–0–
22,108
Chief Financial Officer
2002
350,000
420,000
2,385
203,025
35,000
15,929
Arthur R. Miele
2004
316,500
375,000
6,622
385,734
5,200
53,654
Senior Vice President-Marketing, and
2003
309,000
325,000
9,556
–0–
–0–
16,751
President, PD Sales Company
2002
300,000
350,000
3,230
150,239
21,400
18,591
Kalidas V. Madhavpeddi
2004
315,000
375,000
5,166
385,734
5,200
27,028
Senior Vice President-Asia, and
2003
305,000
325,000
5,293
164,875
–0–
13,999
President-PD Wire & Cable
2002
262,500
200,000
2,404
142,118
25,000
12,028
(1)
Amounts shown under “Other Annual Compensation”
include tax payment reimbursements.
(2)
Mr. Whisler has an aggregate total of 87,725 shares in
unvested restricted stock holdings, valued at $8,694,863 as of
12/ 31/ 2004; Mr. Snider has an aggregate total of
45,060 shares in unvested restricted stock holdings, valued
at $4,466,122 as of 12/ 31/ 2004; Mr. Peru has an aggregate
total of 27,040 shares in unvested restricted stock
holdings, valued at $2,680,691 as of 12/ 31/ 2004;
Mr. Miele has an aggregate total of 7,445 shares in
unvested restricted stock holdings, valued at $737,911 as of 12/
31/ 2004; and Mr. Madhavpeddi has an aggregate total of
13,670 shares in unvested restricted stock holdings, valued
at $1,354,902 on 12/ 31/ 2004. Dividends are paid on the
restricted shares in the same amount and at the same time as
dividends paid to all other owners of common shares.
(3)
Amounts shown include the following contributions and accruals
by the Corporation for 2004 to the Phelps Dodge Employee Savings
Plan and 2004 accruals under the Phelps Dodge Corporation
Supplemental Savings Plan, and for premium payments for life
insurance policies issued through the Executive Life Insurance
Plan for the reported executives:
Employee
Supplemental
Executive Life
Name
Savings Plan
Savings Plan
Insurance Plan
J. Steven Whisler
8,200
27,467
51,370
Timothy R. Snider
8,200
12,300
32,323
Ramiro G. Peru
8,200
8,117
44,715
Arthur R. Miele
8,200
4,460
40,994
Kalidas V. Madhavpeddi
8,200
4,400
14,428
Stock Options
Each of the executives listed in the Summary Compensation Table
was eligible to receive stock option grants during 2004. These
grants are a compensatory award, normally made on an annual
basis, intended to reward each named executive based on the
Corporation’s future performance.
14
The following table contains information with respect to the
normal compensatory option grants made to each named executive
during 2004 and the hypothetical value at the time of grant
based on a variation of the Black-Scholes option pricing model
(see footnote (3) below). The Corporation is not aware of
any option pricing model that can provide a true assessment of
the value of the options. During their lives, the options could
have a greater or a lesser value than that shown in the table,
and under some circumstances they could have zero value.
Option Grants in 2004
% of Total
Stock
Options Granted
Options
to Employees
Expiration
Grant Date
Name
Granted(1)
in 2004(2)
Price
Date
Present Value(3)
J. Steven Whisler
27,600
27.2
$
74.61
2/4/14
$
842,076
Timothy R. Snider
10,500
10.3
$
74.61
2/4/14
$
320,355
Ramiro G. Peru
7,000
6.9
$
74.61
2/4/14
$
213,570
Arthur R. Miele
5,200
5.1
$
74.61
2/4/14
$
158,652
Kalidas V. Madhavpeddi
5,200
5.1
$
74.61
2/4/14
$
158,652
(1)
Stock options expire no later than the tenth anniversary of the
date of grant, plus one day. If an employee retires on his
normal retirement date, or retires early under any pension or
retirement plan maintained by the Corporation or any subsidiary,
becomes disabled, or dies, his exercisable options terminate
upon the fifth anniversary of his retirement, disability or
death or the original expiration date, if earlier. If an
optionee’s employment terminates for any reason other than
retirement, disability or death, his exercisable options
terminate no later than one month following the termination of
his employment.
Stock options become exercisable in three or four substantially
equal annual installments beginning on the first anniversary of
the date of grant or earlier as the Compensation and Management
Development Committee in its discretion may determine. The
Committee may also approve provisions making installments
exercisable (a) upon the employee’s retirement,
(b) as the Committee deems appropriate in a change of
control of the Corporation but not later than the date the
employee ceases to be employed if the employee ceases to be
employed within two years following the change of control.
(2)
Illustrates the total number of options granted as a percent of
the aggregate number of 2004 options (101,300) granted to all
employees.
(3)
The hypothetical present value of the options at the date of
grant was determined using a variation of the Black-Scholes
option pricing model. The Black-Scholes model is a complicated
mathematical formula which is widely used to value options
traded on the stock exchanges. However, executive stock options
differ from exchange-traded options in several key respects.
Executive options are long-term, nontransferable and subject to
vesting restrictions, whereas exchange-traded options are
short-term and can be exercised or sold immediately in a liquid
market. The model used here is adapted to estimate the present
value of an executive option and considers a number of factors,
including the grant price of the option, the volatility of the
Corporation’s common shares, the dividend rate, the term of
the option, the time it is expected to be outstanding and
interest rates. The Black-Scholes values were derived using as
assumptions the following financial factors which existed at or
about the time that the options were granted: volatility of
0.4125, dividend yield of 0%, and an interest rate of 3.27%. In
view of the Corporation’s historic exercise experience,
options were assumed to be outstanding for five years at time of
exercise. No downward adjustments were made to the resulting
grant-date option values to account for potential forfeiture or
non-transferability of the options in question. Because the
Black-Scholes model was not developed for executive options and
requires the use of assumptions primarily based on conditions in
effect at the time of grant (and not over the term of the
option), it provides only a theoretical estimate of the value of
these options.
15
Aggregated Option Exercises in 2004 and December 31,2004 Option Values
The following table provides information concerning options
exercised in 2004 by the named executives and the options held
by them at December 31, 2004:
Value of
Number of
Unexercised
Unexercised
In-the-Money
Options at
Options at
Shares
12/31/04
12/31/04
Acquired On
Value
(Exercisable/
(Exercisable/
Name
Exercise
Realized
Unexercisable)
Unexercisable)(1)
J. Steven Whisler
448,340
$9,856,696
325,000/
77,600
$20,351,125/
$3,601,838
Timothy R. Snider
270,905
8,128,687
20,000/
25,500
943,550/
1,134,953
Ramiro G. Peru
201,882
4,658,181
18,334/
18,667
1,181,535/
854,172
Arthur R. Miele
129,433
3,802,736
9,667/
12,334
622,990/
544,836
Kalidas V. Madhavpeddi
63,169
1,912,299
25,000/
13,534
1,512,212/
615,045
(1)
Value is based on the mean of the high and low of the common
shares on the Consolidated Trading Tape on December 31,2004 ($99.1150). A substantial number of the transactions
reported above were executed pursuant to and in accordance with
the terms of Rule 10b5-1(c) trading plans adopted by the
named executives during 2004.
PENSION AND OTHER RETIREMENT BENEFITS
Retirement Plans
The following pension table shows the estimated aggregate annual
benefits payable in the form of a straight life annuity
commencing at age 65 under the Phelps Dodge Retirement Plan
(the “Retirement Plan”) as supplemented by the Phelps
Dodge Corporation Supplemental Retirement Plan (the
“Supplemental Retirement Plan”) that makes up amounts
otherwise limited by the Internal Revenue Code (the
“Code”).
Pension Plan Table
Estimated Annual Benefits for Years of Service Indicated (b)
Final Average
Compensation(a)
10
15
20
25
30
35
40
45
$
300,000
$
45,324
$
67,986
$
90,648
$
113,310
$
135,972
$
158,634
$
181,296
$
203,958
$
400,000
$
61,324
$
91,986
$
122,648
$
153,310
$
183,972
$
214,634
$
245,296
$
275,958
$
500,000
$
77,324
$
115,986
$
154,648
$
193,310
$
231,972
$
270,634
$
309,296
$
347,958
$
600,000
$
93,324
$
139,986
$
186,648
$
233,310
$
279,972
$
326,634
$
373,296
$
419,958
$
700,000
$
109,324
$
163,986
$
218,648
$
273,310
$
327,972
$
382,634
$
437,296
$
491,958
$
800,000
$
125,324
$
187,986
$
250,648
$
313,310
$
375,972
$
438,634
$
501,296
$
563,958
$
900,000
$
141,324
$
211,986
$
282,648
$
353,310
$
423,972
$
494,634
$
565,296
$
635,958
$
1,000,000
$
157,324
$
235,986
$
314,648
$
393,310
$
471,972
$
550,634
$
629,296
$
707,958
$
1,100,000
$
173,324
$
259,986
$
346,648
$
433,310
$
519,972
$
606,634
$
693,296
$
779,958
$
1,200,000
$
189,324
$
283,986
$
378,648
$
473,310
$
567,972
$
662,634
$
757,296
$
851,958
$
1,300,000
$
205,324
$
307,986
$
410,648
$
513,310
$
615,972
$
718,634
$
821,296
$
923,958
$
1,400,000
$
221,324
$
331,986
$
442,648
$
553,310
$
663,972
$
774,634
$
885,296
$
995,958
$
1,500,000
$
237,324
$
355,986
$
474,648
$
593,310
$
711,972
$
830,634
$
949,296
$
1,067,958
$
1,600,000
$
253,324
$
379,986
$
506,648
$
633,310
$
759,972
$
886,634
$
1,013,296
$
1,139,958
$
1,700,000
$
269,324
$
403,986
$
538,648
$
673,310
$
807,972
$
942,634
$
1,077,296
$
1,211,958
$
1,800,000
$
285,324
$
427,986
$
570,648
$
713,310
$
855,972
$
998,634
$
1,141,296
$
1,283,958
$
1,900,000
$
301,324
$
451,986
$
602,648
$
753,310
$
903,972
$
1,054,634
$
1,205,296
$
1,355,958
$
2,000,000
$
317,324
$
475,986
$
634,648
$
793,310
$
951,972
$
1,110,634
$
1,269,296
$
1,427,958
16
(a)
The Retirement Plan provides a member upon normal retirement at
age 65 with a monthly pension for life in a defined amount
based upon final average monthly compensation and years of
benefit service. Under the Retirement Plan, final average
monthly compensation is the highest average of the
participant’s monthly salary for any consecutive 36-month
period during the most recent 120 months of employment,
which produces the highest average; plus the participant’s
final average monthly incentive compensation which is equal to
the aggregate incentive compensation earned by the participant
during the five consecutive calendar years occurring in the most
recent 10 consecutive calendar years which produces the
highest average, divided by 60. Benefit service includes all
periods of employment with the Corporation or its participating
subsidiaries. Benefits under the Retirement Plan are subject to
certain limitations under the Code, and to the extent the result
of such limitations would be a benefit less than would otherwise
be paid under such Plan, the difference is provided under the
Supplemental Retirement Plan. The formula for determining
benefits payable under the Retirement Plan takes into account
estimated social security benefits payable. The amounts set
forth in the table assume maximum social security benefits
payable in 2004.
(b)
The expected credited years of benefit service at normal
retirement for the Corporation’s five current named
executive officers as of December 31, 2004 are as follows:
Mr. Whisler, 43 years; Mr. Snider, 45 years;
Mr. Peru, 42 years; Mr. Miele, 38 years; and
Mr. Madhavpeddi, 40 years. The years of service are
based on normal retirement for all executive officers under the
Retirement Plan and the applicable provisions of the
Supplemental Retirement Plan.
SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
Severance Agreements With Our Executives
The Corporation has severance agreements (“Severance
Agreements”) with each of its five named executive officers
and other members of its senior management under which each such
executive will receive a lump sum payment equal to his annual
base salary in the event the Corporation terminates his
employment, other than for cause or mandatory retirement, or the
executive voluntarily terminates his employment because of
material reductions in his salary or his position, duties and
responsibilities. The terminated executive will also receive
(i) outplacement services at a cost up to a maximum of 15%
of his base salary and (ii) the cost of continued coverage
for a limited period under the Corporation’s group health,
life insurance and disability plans. All executive officers, as
well as certain other key management personnel, have Severance
Agreements with the Corporation.
Change of Control Agreements With Our Executives
The Corporation also has agreements with the named executive
officers and other members of its senior management team under
which each executive will receive, in the event he ceases to be
employed by the Corporation within two years following a change
of control of the Corporation (for a reason other than death,
disability, willful misconduct, or under certain circumstances a
voluntary termination of employment by the executive), a lump
sum equal to (i) three times the executive’s highest
base salary during that year and the prior two years plus
(ii) three times the executive’s target bonus under
the Annual Incentive Compensation Plan in the year in which the
change of control occurs, less (iii) any severance amounts
payable under his Severance Agreement. These executives also
have a 30-day window period beginning immediately after the
first anniversary date of the change of control to voluntarily
terminate their employment and still receive their change of
control benefits. If the payments trigger an excise tax under
the Internal Revenue Code, the Corporation will provide the
executive with a tax gross-up payment to reimburse the executive
for any excise taxes, as well as the presumed income taxes on
the gross-up. The Corporation will pay the cost for the
terminated executive to receive continued coverage for three
years under certain of the Corporation’s insured group
medical, dental, vision, life insurance and long-term disability
plans, and for the cost of continuing executive physicals and
financial counseling services for a similarly limited period.
These executives are also eligible to receive outplacement
services at a cost up to a maximum amount of 15% of their base
salary.
17
A second group of key management personnel receive similar
change of control agreements that provide a lump sum benefit
equal to two times the executive’s highest base salary
during that year and the prior two years plus two times the
executive’s target bonus under the Annual Incentive
Compensation Plan in the year in which the change of control
occurs, less any severance amounts payable under the Severance
Agreement. These plans do not have the 30-day window period, nor
are the executives eligible for a tax gross-up payment unless
the benefits payable due to a change of control are at least
120% of the allowable cap. The Corporation will pay the cost of
the group benefits outlined above for a period of two years. All
of the other material terms and conditions are substantially the
same. Except under certain circumstances, all change of control
agreements currently expire on December 31, 2007.
Other Change of Control Provisions
Although normal compensatory options granted by the Corporation
become exercisable in three or four substantially equal annual
installments beginning on the first anniversary of the date of
grant, they also become exercisable in certain change of control
situations. Specifically, such options are exercisable (but not
earlier than six months from the date of grant) for a period of
30 days beginning on the date the Corporation’s common
shares are purchased pursuant to a third party tender offer or
the Corporation’s shareholders approve a merger or similar
transaction in which the Corporation will not survive as a
publicly held corporation or, in the case of the five named
executive officers and certain other employees, the date the
employee ceases to be employed if he/she ceases to be employed
within two years following a change of control.
The Phelps Dodge Corporation Supplemental Retirement Plan
provides for the payment of unreduced benefits to employees who
meet liberalized age and length of service requirements and
whose employment is terminated by the Corporation or any of its
subsidiaries within two years following a change of control of
the Corporation. The Phelps Dodge Corporation Supplemental
Retirement Plan also provides an additional 36 months of
service credit to an executive who, due to his termination of
employment within two years following a change of control of the
Corporation, becomes entitled to receive payments under his
change of control agreement with the Corporation. The Phelps
Dodge Corporation Supplemental Savings Plan obligates the
Corporation to transfer an amount equal to the deficiency in the
assets of the Plan’s trust fund, if any, prior to the day
on which a change of control occurs.
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Committee
The Committee is composed solely of independent directors
(currently six) who are not employees of the Corporation. It has
periodically retained independent compensation consultants to
advise it in connection with various compensation matters. The
Committee currently retains Pearl Meyer & Partners,
Inc., an independent executive compensation consulting firm, to
advise the Committee and work with management regarding
executive compensation.
Corporate Goals and Compensation Philosophy
The Corporation’s goal is to be the leader in the domestic
and international mining and manufacturing activities in which
it competes while maximizing longer-term shareholder value.
The Committee designs its executive compensation program to
ensure the Corporation’s ability to attract, retain and
motivate the best qualified and highest performing employees.
The Committee believes it can align total compensation with
shareholder interests and motivate senior managers participating
in these programs by:
•
Emphasizing the relationship between pay and performance to
reward managers who maximize the value of the Corporation’s
stock over the long-term;
18
•
Increasing the relative amount of compensation at risk as
management responsibilities increase;
•
Assuring that the elements of variable compensation are linked
as directly as practicable to measurable financial, operational
and other measurable performance criteria;
•
Encouraging stock ownership by executives.
The Corporation’s compensation philosophy emphasizes
variable compensation in both short-term and long-term
incentives. The Corporation targets base salaries at the median
of the comparison group (as described below) and similarly-sized
general manufacturing companies. Annual total cash (base salary
plus annual incentive) is targeted near the 60th percentile of
the comparison group and industry data. Total remuneration
(total cash plus long-term incentives, including stock options
and restricted stock) is targeted between the 50th and 75th
percentiles of the comparison group and industry data. The
Committee believes that superior performance should result in
superior compensation.
Elements of Executive Compensation
The executive officers are compensated by salaries, annual cash
incentive awards and long-term incentive compensation in the
form of stock options and restricted stock grants, with each
element focusing on performance. Salaries focus on level of
responsibility and individual performance. Annual cash
incentives relate to corporate and, where appropriate, division,
unit and individual performance. Long-term incentive awards,
delivered in the form of stock options and restricted stock,
create a long-term shared interest with shareholders based on
the Corporation’s performance and related growth of
shareholder value.
The Committee believes that the Corporation competes for its
executive talent primarily with similarly-sized industrial
companies based in the United States. Accordingly, the Committee
compares the compensation for the Corporation’s top five
executives, at least annually, to the compensation paid to
executives holding similar positions at 13 publicly held
industrial corporations of a median size, measured by revenues
and market capitalization similar to that of the Corporation
(referred to as the “comparison group”). This data is
blended with a larger group of companies of similar size to
determine an appropriate consensus of market pay values. For
other executives, compensation awards are determined based upon
market comparisons to similar positions within relevant and
similarly-sized industrial companies. The Committee believes
that the competitive data used is generally representative of
the competitive level of compensation paid to executive officers
in companies the size of the Corporation. Thus, the companies
used for comparison purposes to establish the compensation paid
to the Corporation’s executive officers is a larger group
than the companies included in the peer group used in the
performance graphs on pages 24 and 25 to compare
shareholder returns.
Beginning in 2004, the Committee determined salary increases,
incentive compensation awards, and long-term equity grants at
the same time, permitting a comprehensive total compensation
review in light of the prior year’s performance both by the
Corporation and by the executive. This total compensation review
occurs during the first quarter of each calendar year.
Executive Salaries
Individual salaries for executive officers are established by
the Committee based upon the officer’s performance,
existing general economic and industry conditions and the
Corporation’s performance during the prior year. Generally,
salary adjustments are targeted to advance salaries to
competitive levels, over time, for sustained and excellent
performance. The Committee believes current salaries for the
executive officers were generally below appropriate levels when
compared to employees in similar positions in the comparison
group and other industrial companies of similar size. The
Committee determined that the individual executives named in the
Summary Compensation Table have sustained excellent individual
performance, and given the significant progress made on the
Quest for Zero enterprise performance initiative and the
Corporation’s operating performance, salaries for the named
executives have been increased in 2005.
19
Annual Incentives
The Annual Incentive Compensation Plan (“AICP”)
provides executive officers and certain other officers and
managers with compensation based on success in achieving annual
corporate, division and, where appropriate, unit goals.
Corporate goals are set using measures of return on equity and
net operating cash flow return on invested capital. Division and
unit goals generally are set using an earnings or cost measure
and a net operating cash flow return on invested capital
measure. In late 2001, the Corporation publicly announced its
Quest for Zero enterprise performance system, which has
been a third measure of performance since 2002. In 2004 the
Corporation’s return on equity performance and net
operating cash flow return on invested capital performance each
surpassed the maximum goal. Quest for Zero impact on
production costs and operating income was between the
established threshold and target goals. In 2004, certain
division and unit performance ranged from below threshold to
above target. Based on these results and an assessment of
individual performance, the Committee approved AICP awards for
2004 above the targeted amounts for the listed executives.
For the 2005 AICP plan year, the metrics will focus on cost
containment and reduction, along with measures for net operating
cash flow return on invested capital and return on equity.
Long-Term Incentive Compensation
The Committee has historically used the granting of stock
options and restricted stock as the principal method for
providing long-term incentive compensation. To accommodate the
annual total compensation review by the Committee, which occurs
early in the calendar year, the normal 2003 grant cycle was
shifted to early 2004. In 2004, a combination of restricted
stock and stock options were granted to the AICP participants.
The executive officers received a larger percentage of the
intended long-term value via stock options, while for other
designated executives, greater emphasis was placed on awards of
restricted stock. These restricted stock awards vest
incrementally over a period of three to five years from the
award date. The stock options vest ratably over a period of one
to three years from the grant date.
Stock Ownership Guidelines
To emphasize the shared interests of management and
shareholders, the Corporation established stock ownership
guidelines for officers and management of the Corporation. The
guidelines are expressed as a multiple of salary and are then
divided by the average 10-year stock price. The ownership
targets range from two times salary at the lower end of the
organization up to five times salary for the CEO. All of the
named executives currently meet their respective ownership
guideline levels.
Tax Code Issues
Section 162(m) of the Internal Revenue Code generally
places a $1 million per person limit on the deduction a
publicly held corporation may take for compensation paid to its
chief executive officer and its four other highest compensated
“covered employees,” excluding for this purpose
deferred compensation and, in general, compensation constituting
“performance-based” compensation. In 1998 and 2003,
the Corporation obtained shareholder approval for the Phelps
Dodge 1998 and 2003 Stock Option and Restricted Stock
Plans, respectively, which continue to exclude the compensation
from stock options from the $1 million deductibility limit.
Other elements of the compensation payable to executive
officers, such as salary, annual incentive compensation and
restricted stock, are not excludable from such limit. For the
year 2004, the total compensation subject to Section 162(m)
that was awarded to Messrs. Whisler, Snider, and Peru
exceeded one million dollars. This was due, in part, to the
vesting of restricted stock shares issued to such individuals
five years ago and the Corporation’s performance in
achieving maximum financial results while strengthening the
balance sheet. This resulted in the loss of a Federal income tax
deduction with respect to approximately $3,289,358, $298,728 and
$1,729,453, respectively, of their compensation for 2004.
20
A new plan is presented in this proxy for shareholder
consideration which, if approved, will allow the annual
incentive payments and awards of restricted stock that are
granted on the basis of performance to be exempt from
Section 162(m) so that the Corporation will not risk losing
the ability to claim a Federal income tax deduction with respect
to the compensation payable under such an award to a person who
is at the time of vesting a covered employee for purposes of
Section 162(m).
CEO Compensation
The Committee determines the chief executive officer’s
compensation using the same philosophy and policies as for all
executive officers.
Mr. Whisler earned $891,667 in base salary in 2004. His
salary increase was designed to bring his compensation closer to
the median of the comparison group and to reflect his personal
performance. The Corporation reported at year-end 2004 net
cash provided by operating activities of $1.7 billion. In
addition, the debt-to-equity ratio was reduced from 38.5% to
18.3% during 2004; net income of $1.046 billion was earned,
translating to earnings per share of $10.58; and a 25 cents per
share quarterly dividend was reinstated during the third quarter
of 2004. Mr. Whisler’s commitment to the design,
implementation, and execution of the Quest for Zero
enterprise performance system and the continued focus on
cost containment was critical to its success. The Committee
awarded Mr. Whisler an incentive payment of $1,400,000 for
2004 performance in recognition of the significant overall
improvement in the company’s financial performance. The
combination of base salary and bonus places
Mr. Whisler’s total cash compensation for 2004 between
the median and the 75th percentile of the peer group of
companies and industry data used for compensation purposes. In
2004, Mr. Whisler received an award of 27,725 shares
of restricted stock which will vest incrementally over the third
to fifth anniversaries of the award, and 27,600 stock options
which vest incrementally over three years from date of grant.
The primary basis for the Committee’s restricted stock and
stock option grants was to provide a significant incentive for
Mr. Whisler to enhance long-term shareholder value. The
specific basis for the Committee’s determination regarding
Mr. Whisler’s compensation in 2004 included his role
in improving the Corporation’s financial results in the
short-and long-term.
Conclusion
The Committee will continue to evaluate the Corporation’s
compensation programs to best enable the Corporation to employ
and motivate its employees. Such employees, properly motivated,
are believed to be key to achieving the Corporation’s goal
to be the international leader in the mining and manufacturing
arenas in which it competes and the related enhancement of
shareholder value over the long term.
THE COMPENSATION AND MANAGEMENT
DEVELOPMENT COMMITTEE
Archie W. Dunham, Chairman
Robert N. Burt
William A. Franke
Robert D. Johnson
Marie L. Knowles
Gordon R. Parker
21
AUDIT COMMITTEE REPORT
The Committee has reviewed and discussed with management of the
Corporation and PricewaterhouseCoopers LLP, the independent
registered public accounting firm for the Corporation, the
audited financial statements of the Corporation for the fiscal
year ended December 31, 2004 (the “Audited Financial
Statements”).
The Committee has discussed with PricewaterhouseCoopers LLP the
matters required to be discussed by Statement on Auditing
Standards No. 61 (as amended by SAS 89 and SAS 90), as in
effect on the date of this proxy statement.
The Committee has: (i) considered whether non-audit
services provided by PricewaterhouseCoopers LLP are compatible
with its independence; (ii) received the written
disclosures and the letter from PricewaterhouseCoopers LLP
required by the Independence Standards Board Standard
No. 1, as in effect on the date of this proxy statement;
and (iii) discussed with PricewaterhouseCoopers LLP its
independence.
Based on the reviews and discussions described above, the
Committee recommended to the Board of Directors of the
Corporation that the audited financial statements be included in
the Corporation’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2004 for filing with the
Securities and Exchange Commission.
The Board of Directors has adopted a Charter of the Audit
Committee, a copy of which is published on the
Corporation’s website at www.phelpsdodge.com. The Audit
Committee Charter requires the Committee to pre-approve all
audit engagement fees and terms, as well as all non-audit
engagements with the independent accountants. The Committee may
delegate to one or more members the authority to grant such
pre-approvals, which then must be presented to the full Audit
Committee at its next scheduled meeting. All audit and non-audit
fees incurred in 2004 were pre-approved by the Committee.
THE AUDIT COMMITTEE
Marie L. Knowles, Chair
William A. Franke
Robert D. Krebs
Jon C. Madonna
Gordon R. Parker
Jack E. Thompson
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES
The Corporation’s fees for services performed by its
principal accounting firm, PricewaterhouseCoopers LLP, during
fiscal years 2004 and 2003 were:
2004
2003
Audit fees(1)
$
3,396,727
$
2,245,693
Audit-related fees(2)
284,243
185,778
Tax fees(3)
532,801
986,348
All other fees(4)
31,220
16,015
$
4,244,991
$
3,433,834
(1)
The audit fees for the years ended December 31, 2004 and
2003, respectively, were for professional services rendered for
the audits of the consolidated financial statements of the
Corporation and statutory and subsidiary audits, Sarbanes-Oxley
Section 404 requirements, issuance of comfort letters and
assistance with review of documents filed with the SEC. The
amounts represent actual billings during the calendar year.
22
(2)
The audit-related fees for the years ended December 31,2004 and 2003, respectively, were primarily for assurance and
related services with respect to employee benefit plan audits,
due diligence assistance and ancillary financial statement
audits.
(3)
Tax fees for the years ended December 31, 2004 and 2003,
respectively, were for services related to tax compliance
(including preparing or reviewing tax returns and claims for
refunds and providing assistance with tax audits) and tax
advice. In 2004, fees for tax compliance services totaled
$398,355 and fees for tax advice totaled $134,446. In 2003, fees
for tax compliance services totaled $707,529 and fees for tax
advice totaled $278,819.
(4)
All other fees for the year ended December 31, 2004 and
2003, respectively, were primarily for annual license fees for
financial reporting and accounting literature.
CODE OF ETHICS OF PHELPS DODGE CORPORATION
The Corporation requires all non-bargained domestic and
international employees to certify that they have read and are
in compliance with its Code of Business Ethics &
Policies as a condition of continued employment with the
Corporation. The code of ethics is published in nine different
languages and is posted on the Corporation’s website in
English and Spanish at www.phelpsdodge.com. All executive
officers and financial officers attest annually to the ethical
business practices and the financial reporting and financial
management policies contained in the code of ethics and thereby
satisfy the NYSE rule that requires a financial code of ethics
for the principal executive officer, chief financial officer and
principal accounting officer or controller. The Board of
Directors has also adopted a code of ethics, which can be found
on the Corporation’s website.
In addition, the Corporation maintains a hotline service,
24 hours per day, 365 days per year, for the receipt
of complaints and questions. Global Compliance Services, an
external compliance services company, provides this hotline
service for employees and third parties to submit complaints and
questions. Callers may remain anonymous if they so desire.
The Phelps Dodge Ethics and Compliance Hotline number is
(800) 295-6783 (toll-free) and also appears on the
Corporation’s website. The compliance services provider
simultaneously issues reports of complaints directly to the
Chairperson of the Audit Committee, to the Director of Corporate
Audit and to the Assistant General Counsel and Secretary of the
Corporation.
Complaints are investigated and remedial action is taken as
appropriate and to the satisfaction of the Audit Committee.
Questions are referred to the appropriate management group for
response. The Director of Corporate Audit follows up to ensure
all complaints are properly addressed.
23
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG PHELPS DODGE CORPORATION, THE S&P 500 INDEX AND A
PEER GROUP
The Corporation’s peer group comprises selected companies
within its industry to create an industry average. The
group’s returns are weighted according to each member
company’s market capitalization and include Inco Ltd.,
Falconbridge Ltd., Phelps Dodge Corporation, Noranda Inc.,
Freeport-McMoRan Copper & Gold Inc. and Teck Cominco
Ltd.
Cumulative Total
12/99
12/00
12/01
12/02
12/03
12/04
PHELPS DODGE CORPORATION
100.00
86.28
50.95
49.77
119.65
156.48
S&P 500
100.00
90.89
80.09
62.39
80.29
86.09
PEER GROUP
100.00
72.88
64.09
69.20
145.82
163.35
*
$100 invested on 12/31/1999 in stock or index, including
reinvestment of dividends. Fiscal year ending December 31.
24
COMPARISON OF TEN YEAR CUMULATIVE TOTAL RETURN*
AMONG PHELPS DODGE CORPORATION, THE S&P 500 INDEX AND A
PEER GROUP
The Corporation’s peer group comprises selected companies
within its industry to create an industry average. The
group’s returns are weighted according to each member
company’s market capitalization and include Inco Ltd.,
Falconbridge Ltd., Phelps Dodge Corporation, Noranda Inc.,
Freeport-McMoRan Copper & Gold Inc. and Teck Cominco
Ltd.
Cumulative Total Return
12/94
12/95
12/96
12/97
12/98
12/99
12/00
12/01
12/02
12/03
12/04
PHELPS DODGE CORPORATION
100.00
103.66
115.85
109.66
92.70
127.29
109.82
64.85
63.35
152.30
199.18
S&P 500
100.00
137.58
169.17
225.60
290.08
351.12
319.15
281.22
219.07
281.91
302.30
PEER GROUP
100.00
112.50
119.53
80.77
59.75
99.38
72.43
63.69
68.77
144.92
162.34
*
$100 invested on 12/31/1994 in stock or index, including
reinvestment of dividends. Fiscal year ending December 31.
25
APPROVAL OF THE PHELPS DODGE CORPORATION
2006 EXECUTIVE PERFORMANCE INCENTIVE PLAN
The Board of Directors unanimously adopted the Phelps Dodge
Corporation 2006 Executive Performance Incentive Plan (Incentive
Plan) and recommends that shareholders approve the Incentive
Plan at the Annual Meeting.
A copy of the proposed Incentive Plan is attached to this Proxy
Statement as Appendix A. A summary of the Incentive Plan is
set forth below and is qualified in its entirety by reference to
the full text of the Incentive Plan.
Purpose of the Incentive Plan
The primary purpose of the Incentive Plan is to qualify
restricted stock awards under the Phelps Dodge 2003 Stock Option
and Restricted Stock Plan (2003 Plan) and awards under the
Corporation’s annual incentive compensation plan, as
performance based compensation under section 162(m) of the
Internal Revenue Code (Section 162(m)). Qualifying these
awards under Section 162(m) would exempt the incentive
compensation from the one million dollar cap on deductibility of
compensation expenses for federal income tax purposes.
No awards will be made under the Incentive Plan until after it
is approved by the Corporation’s shareholders, and it is
currently anticipated that the first performance period will be
the Corporation’s 2006 fiscal year. The Compensation
Committee intends to continue its existing competitive pay
philosophy, as discussed in the Compensation Committee Report
beginning on page 19. The adoption of the Incentive Plan,
including the availability of the Plan Funding Amount, is not
expected to significantly change the number or size of incentive
awards. It is simply a vehicle to fund performance-based
compensation awards consistent with the requirements of
Section 162(m).
Participation in and Administration of the Incentive Plan
The members of the Corporation’s Senior Management Team
(including all of the named executive officers) are eligible to
participate in this plan as selected by the Compensation and
Management Development Committee of the Board (Compensation
Committee). The Compensation Committee will designate those
individuals eligible for an award under this plan no later than
the time when 25% of the applicable performance period has
elapsed (and in no event will the designation take place later
than 90 days after the performance period has commenced).
The Incentive Plan is administered by the Compensation
Committee, which has the power and full authority to interpret
the plan and to grant awards thereunder. The Compensation
Committee’s decisions on matters related to the plan are
final, conclusive, and binding.
Performance Criteria
Awards under the Incentive Plan are made from the Plan Funding
Amount. For any performance period under the plan, the Plan
Funding Amount will equal 2% of Net Cash Provided by Operating
Activities for the applicable performance period, plus any
amount from the Plan Funding Amount for the immediately
preceding performance period that was not awarded with respect
to that performance period. For any particular performance
period, the Net Cash Provided by Operating Activities is the net
cash provided by operating activities of the Corporation for the
applicable performance period as reviewed by the
Corporation’s independent auditors and released by the
Corporation as part of its Consolidated Statement of Cash Flows.
26
Grant and Payment of Annual Awards
No later than the date when 25% of the applicable performance
period has elapsed (and in no event later than 90 days
after the applicable performance period has commenced), the
Compensation Committee will designate that portion of the Plan
Funding Amount that will be allocated to each participant. No
participant will be allocated more than 40% of the Plan Funding
Amount for any performance period. The Compensation Committee
cannot make awards that exceed 100% of the Plan Funding Amount.
In accordance with the terms and conditions of the Incentive
Plan, the Compensation Committee does not have the authority to
increase an allocation to a participant once such allocation has
been made. However, the Compensation Committee has full
discretion to reduce or eliminate any portion of the allocation
to a participant for any or no reason. The Compensation
Committee must certify each award before it is paid.
Incentive Plan awards may be made in cash and/or shares of
restricted stock as determined by the Compensation Committee in
its sole discretion and will be made no later than two and a
half months after the end of the performance period for which
the awards are made. The Corporation cannot determine at this
time the number or size of specific awards. All awards are
subject to applicable tax and other withholding requirements.
Participants may elect to defer payment of all or a portion of
any award payable in cash in accordance with the terms and
conditions of the plan documents and applicable laws and
regulations. If awards are made in shares of restricted stock,
such shares shall be issued under the 2003 Plan. The Corporation
is not asking shareholders to approve the issuance of additional
shares under this Incentive Plan.
Miscellaneous Provisions
The Board at any time may terminate the Incentive Plan, in whole
or in part. The Corporation will bear the expenses of
administering the Incentive Plan. Nothing in the Incentive Plan
confers on any participant the right to continued employment by
the Corporation or affect any right of the Corporation to
terminate the employment of any participant. The Corporation may
establish other bonus plans or programs and pay discretionary
bonuses or other incentives to executive officers and members of
the Senior Management Team outside of this Incentive Plan.
Federal Income Tax Consequences
The following is a brief description of the material federal
income tax consequences generally arising with respect to the
Incentive Plan:
Cash payments made under the Incentive Plan will be taxable to
the recipients thereof when paid and the Corporation will
generally be entitled to a federal income tax deduction in the
calendar year for which the amount is paid. Any portion of an
incentive award that is to be paid in shares of restricted stock
will be taxable to the recipient in an amount equal to the fair
market value of such shares on the date when such shares are no
longer subject to any restrictions.
Section 162(m) limits the ability of a public corporation
to deduct compensation greater than $1,000,000 paid with respect
to a particular year to an individual who is, on the last day of
that year, the corporation’s chief executive officer or one
of its four other most highly compensated executive officers,
other than compensation that is performance related within the
meaning of Section 162(m). Should any awards under the
Incentive Plan not qualify as performance based compensation,
such awards may not be deductible by the Corporation for federal
income tax purposes because of the limitations imposed by
Section 162(m).
Shareholder Approval
Shareholder approval of the Incentive Plan is required to allow
awards made under the Incentive Plan to qualify as
performance-based compensation for purposes of
Section 162(m). Shareholder approval of the Incentive Plan
is important as the Incentive Plan will provide valuable
benefits to the Corporation.
27
The affirmative vote of a majority of the votes cast at the
Annual Meeting on this proposal is required for the approval of
the 2006 Executive Incentive Plan. Thus, a shareholder who does
not vote at the Annual Meeting will not affect the outcome of
the vote, while shareholders who vote to abstain will in effect
be voting against approval of the Incentive Plan. Brokers who
hold shares of Common Stock as nominees will not have
discretionary authority to vote such shares if they have not
received voting instructions from the beneficial owners.
The Board of Directors recommends a vote FOR approval
of the 2006 Executive Performance Incentive Plan.
AUTHORIZATION OF INCREASED NUMBER OF COMMON SHARES
The Board of Directors has authorized and recommends that
shareholders approve an amendment to Article THIRD of the
Corporation’s Restated Certificate of Incorporation
(“Restated Certificate”) to increase to
300 million the authorized number of the Corporation’s
Common Shares. The text of the proposed amendment is set forth
in Appendix B to this Proxy Statement. Article THIRD
of the Restated Certificate currently authorizes the issuance of
200 million Common Shares, par value $6.25 per share.
As of April 7, 2005, 96,893,021 Common Shares were issued
and outstanding, and 8,909,193 Common Shares were held in the
treasury of the Corporation. The Corporation has reserved
4,166,000 Common Shares for issuance upon conversion of the
6.75% Series A Mandatory Convertible Preferred Shares,
which will convert in August 2005, and 1,076,403 Common Shares
for issuance upon exercise of outstanding employee stock
options. A total of 3,886,752 Common Shares remain available for
issuance under existing stock and option plans. As a result, as
of April 7, 2005, a total of 106,022,176 Common Shares
are issued or otherwise reserved for specific purposes.
The Board of Directors recommends that shareholders approve the
amendment to the Restated Certificate to increase the number of
authorized shares of Common Stock from 200 million shares
to 300 million shares. This increase will provide
additional flexibility for the Corporation to acquire assets or
companies, implement stock splits or stock dividends, raise
capital, institute employee benefit plans, and pursue other
corporate purposes.
The additional shares would be available for issuance without
further shareholder action unless required by the Restated
Certificate, applicable law or the rules of any stock exchange
upon which the Corporation’s securities may be listed. The
New York Stock Exchange, on which the Common Shares are
presently listed, currently requires shareholder approval as a
prerequisite to listing additional shares in several instances,
including certain acquisition transactions and equity
compensation plans.
The availability of the additional shares could discourage or
frustrate an attempt to effect a change in control of the
Corporation. The additional shares could be used to dilute the
stock ownership of a person seeking to obtain control of the
Corporation. At present, the Corporation has no agreements,
plans or commitments with respect to the sale or issuance of the
additional Common Shares which would be authorized by the
proposed amendment. The Board of Directors is not aware of any
person seeking to obtain control of the Corporation.
Authorization of the proposed amendment will require the
affirmative vote of the holders of a majority of the Common
Shares outstanding on the record date for the Annual Meeting.
Thus, a shareholder who does not vote at the Annual Meeting will
not affect the outcome of the vote, while shareholders who vote
to abstain will in effect be voting against approval of the
additional shares. Brokers who hold shares of Common Stock as
nominees will have discretionary authority to vote such shares
if they have not received voting instructions from the
beneficial owners by the tenth day before the Annual Meeting,
provided that this Proxy Statement is transmitted to the
beneficial owners at least fifteen (15) days prior to the
Annual Meeting.
The Board of Directors recommends a vote FOR approval
of the amendment to increase the number of authorized Common
Shares.
28
RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
The Audit Committee of the Board of Directors has appointed
PricewaterhouseCoopers LLP as its independent registered public
accounting firm for the Corporation for the year 2005.
PricewaterhouseCoopers LLP or a predecessor firm has been the
independent accountants for the Corporation since 1915. A
representative of PricewaterhouseCoopers LLP will be present at
the annual meeting with the opportunity to make a statement if
he so desires and to respond to appropriate questions.
The Board of Directors recommends a vote FOR
ratification
of the appointment of PricewaterhouseCoopers LLP
as the independent registered public accounting firm for the
Corporation in 2005.
OTHER BUSINESS
The Board of Directors is not aware of any other matters to be
presented at the annual meeting. If any other matter proper for
action at the meeting should be presented, the holders of the
accompanying proxy will vote the shares represented by the proxy
on such matter in accordance with their best judgment. If any
matter not proper for action at the meeting should be presented,
the holders of the proxy will vote against consideration of the
matter or the proposed action.
VOTING PROCEDURES
All shares represented by the accompanying proxy, if the proxy
is duly executed and received by the Corporation at or prior to
the annual meeting, will be voted at the meeting in accordance
with any instructions specified on such proxy. Where no
instruction is specified, the shares may be voted according to
the printed instructions on the proxy.
It is the policy of the Corporation that, except under limited
circumstances, each shareholder proxy card, ballot and voting
tabulation that identifies any shareholder will be kept
confidential and that the receipt and tabulation of such votes
will be conducted by independent third parties, including the
Corporation’s transfer agent and its proxy solicitation
firm, and not by employees of the Corporation.
The cost of soliciting proxies for the meeting will be borne by
the Corporation. The Corporation has retained The Proxy Advisory
Group of Strategic Stock Surveillance, LLC, 331 Madison
Avenue, New York, NY10017, to assist in soliciting
proxies for a fee estimated at $8,500 plus reasonable expenses.
Strategic Stock Surveillance and some officers and other
employees of the Corporation may solicit proxies in person and
by telephone or otherwise. The Corporation may also reimburse
brokers and others who are record holders of the
Corporation’s shares for their reasonable expenses incurred
in obtaining voting instructions from beneficial owners of such
shares.
29
PROPOSALS FOR 2006
The Corporation will review for inclusion in next year’s
proxy statement shareholder proposals received by
December 15, 2005. Proposals should be sent to the
Assistant General Counsel and Secretary at One North Central
Avenue, Phoenix, Arizona85004.
Shareholder proposals not included in next year’s proxy
statement may be brought before the May 26, 2006 annual
meeting of shareholders by a shareholder of the Corporation who
is entitled to vote at the meeting, who has given a written
notice to the Assistant General Counsel and Secretary of the
Corporation containing certain information specified in the
By-Laws and who was a shareholder of record at the time such
notice was given. Such notice must be delivered to or mailed and
received at the One North Central Avenue address in the
preceding paragraph no earlier than December 31, 2005 and
no later than January 30, 2006, except that if the date of
the 2006 annual meeting of shareholders is changed, and the
meeting is held before March 31, 2006 or after
June 29, 2006, such notice must be delivered or mailed and
received at the One North Central Avenue address in the
preceding paragraph no earlier than the close of business on the
120th day prior to the new date of such annual meeting and
no later than the close of business on the later of (i) the
90th day prior to the new date of such meeting and (ii) the
10th day following the day on which a public announcement of the
new date of such annual meeting is first made.
If a shareholder notifies the Corporation after January 30,2006 of an intention to present a proposal at the
Corporation’s May 27, 2006 annual meeting or, if the
date of the 2006 annual meeting is changed and the meeting is
held before March 31, 2006 or after June 29, 2006, if
a shareholder notifies the Corporation of an intention to
present a proposal at such meeting after the close of business
on the later of (i) the 90th day prior to the new date of
such meeting and (ii) the 10th day following the day on
which a public announcement of the new date of such annual
meeting is first made, and for any reason any such proposal is
voted on at such meeting, the Corporation’s proxy holders
will have the right to exercise discretionary voting authority
with respect to such proposal.
ANNUAL REPORT FOR 2004
The annual report of the Corporation for the year 2004, which
includes the Corporation’s Annual Report on Form 10-K,
is being furnished concurrently with this proxy statement to
persons who were shareholders of record as of April 7,2005, the record date for the annual meeting. These materials do
not form part of the material for the solicitation of proxies.
Section 1.1. The
purpose of the Phelps Dodge Corporation 2006 Executive
Performance Incentive Plan (the “Plan”) is to qualify
certain restricted stock awards under the Phelps Dodge 2003
Stock Option and Restricted Stock Plan (the “2003
Plan”) and awards under the Corporation’s annual
incentive compensation plan (collectively the
“Awards”), as performance based compensation pursuant
to section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”).
ARTICLE II
Administration of the Plan
Section 2.1. Subject
to the authority and powers of the Board of Directors in
relation to the Plan as hereinafter provided, the Plan shall be
administered by a Committee designated by the Board of
Directors. The Committee will consist of at least two directors,
each of whom shall qualify as an “outside director” as
defined by Code Section 162(m) and the New York Stock
Exchange and a “non-employee director” as defined in
Rule 16b-3 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934. The
Committee shall have the power and full authority to interpret
the Plan; from time to time to adopt, modify, and rescind such
rules and regulations for carrying out the Plan as it may deem
appropriate in its sole discretion; to select Participants to
participate in the Plan; to grant Awards from the Plan Funding
Amount; provided, however, that the Committee may not exercise
any authority otherwise granted to it hereunder if such action
would have the effect of increasing the amount of an Award to
any Covered Officer. All determinations by the Committee shall
be made by the affirmative vote of a majority of its members,
but any determination reduced to writing and signed by a
majority of the members shall be fully as effective as if it had
been made by a majority vote at a meeting duly called and held.
All decisions by the Committee pursuant to the provisions of the
Plan and all orders or resolutions of the Board of Directors
pursuant thereto shall be final, conclusive and binding on all
persons, including the Participants, the Company and its
subsidiaries and their respective equity holders.
ARTICLE III
Eligibility for and
Payment of Awards
Section 3.1. Subject
to the provisions of the Plan, in each Performance Period the
Committee may select members of the Company’s Senior
Management Team, including those who are deemed to be Covered
Officers, to be Participants in the Plan for the applicable
Performance Period. Those individuals eligible to participate in
the Plan for any given Performance Period will be designated by
the Committee no later than the time when 25% of the Performance
Period has elapsed and in no event shall this designation take
place later than 90 days after the Performance Period has
commenced.
Section 3.2. After
completion of each Performance Period under the Plan, the
Committee will certify in writing the amount of the Plan Funding
Amount and the amount of the Awards payable to each Participant.
As soon as administratively feasible after such certification,
each Participant will receive payment in either a cash lump sum
or an equivalent equity interest with an award of restricted
stock under the 2003 Plan, as determined in the sole discretion
of the Committee. In no event shall the awards or payments under
this section be made later than
21/2
months after the end of the Performance Period for which the
Awards are made.
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Section 3.3. Notwithstanding
the provisions of Section 3.2, a Participant may elect to
defer payment of all or any portion of an Award payable in cash
(a “Cash Award”) as of (i) a date prior to the
beginning of the Performance Period for which such Cash Award is
to be made or (ii) such other date as may be prescribed by
the Committee in compliance with Section 409A of the Code
and the rules, regulations and interpretive guidance promulgated
thereunder (collectively, “Section 409A”). Any
such deferral election shall be made in accordance with
procedures established by the Committee and shall be subject at
all times to compliance with Section 409A.
Section 3.4.
(a) Awards to Participants will be calculated in accordance
with this Section 3.4.
(b) The Plan Funding Amount for each Performance Period
will equal 2% of Net Cash Provided by Operating Activities for
the applicable Performance Period. The Plan Funding Amount will
also include any amount from the Plan Funding Amount for the
immediately preceding Performance Period that was not awarded
with respect to the immediately preceding Performance Period.
(c) The Committee shall not make awards that exceed 100% of
the amount included in the Plan Funding Amount.
(d) No later than the date when 25% of the Performance
Period has elapsed, and in no event later than 90 days
after the Performance Period has commenced, the Committee will
designate in writing that portion of the Plan Funding Amount
that will be allocated to each Participant (subject to the
limitations set forth in Section 3.4(c) above). No
Participant shall be allocated more than 40% of the Plan Funding
Amount for any Performance Period. The Committee shall have the
full discretion to reduce or eliminate any portion of the Plan
Funding Amount allocated to any Participant for any or no
reason, but the Committee, once an allocation has been made,
shall not have the authority to increase any such allocation for
any Participant.
(e) Any provision of the Plan to the contrary
notwithstanding, no Covered Officer shall be entitled to any
payment of an Award with respect to a Performance Period unless
the members of the Committee shall have certified the following:
(i) the Participant Share for each Covered Officer; and
(ii) the Plan Funding Amount for such year.
(f) Upon a termination of a Participant’s employment
due to death, Disability or Retirement (as such terms are
defined in the 2003 Plan), and subject to the Committee’s
final award of any such amount, the Participant shall become
entitled to payment of an Award in an amount equal to
(i) the total value of such Award as of the termination of
the Performance Period in which the date of termination occurs
multiplied by (ii) a fraction, the numerator of which shall
equal the number of days during such Performance Period that the
Participant was an employee of the Company or any of its
subsidiaries and the denominator of which shall equal 365. Any
such payment shall be made in a cash lump sum on the date on
which payment would otherwise have been made in accordance with
Section 3.2 hereunder. Following such payment, the
Participant shall have no further rights, and the Company shall
have no further liabilities, in respect of such Award.
Upon a termination of a Participant’s employment for any
reason other than death, Disability or Retirement that occurs
prior to the date on which payment would otherwise have been
made with respect to any given Performance Period, the
Participant shall not be entitled to any payments under the Plan
with respect to such Performance Period, unless the Committee
determines otherwise in its sole discretion.
ARTICLE IV
General Provisions
Section 4.1. A
Participant may designate in writing a beneficiary (including
the trustee or trustees of a trust) who shall upon the death of
such Participant be entitled to receive all amounts which would
have been payable hereunder to such Participant. A Participant
may rescind or change any such designation at any time. Except
as provided in this Section 4.1, none of the amounts which
may be payable under the Plan may be assigned or transferred
otherwise than by will or by the laws of descent and
distribution.
A-2
Section 4.2. All
payments made pursuant to the Plan shall be subject to
withholding in respect of income and other taxes required by law
to be withheld, in accordance with procedures to be established
by the Committee.
Section 4.3. The
selection of an individual for participation in the Plan shall
not give such Participant any right to be retained in the employ
of the Company or any of its subsidiaries, and the right of the
Company or any such subsidiary to dismiss or discharge any such
Participant, or to terminate any arrangement pursuant to which
any such Participant provides services to the Company, is
specifically reserved. The benefits provided for Participants
under the Plan shall be in addition to, and shall in no way
preclude, other forms of compensation to or in respect of such
Participants.
Section 4.4. The
Board of Directors and the Committee shall be entitled to rely
on the advice of counsel and other experts, including the
independent public accountants for the Company. No member of the
Board of Directors or of the Committee or any officers of the
Company or its subsidiaries shall be liable for any act or
failure to act under the Plan, except in circumstances involving
bad faith on the part of such member or officer.
Section 4.5. Nothing
contained in the Plan shall prevent the Company or any
subsidiary or affiliate of the Company from adopting or
continuing in effect other compensation arrangements, which
arrangements may be either generally applicable or applicable
only in specific cases.
Section 4.6. The
Plan shall be construed in accordance with and governed by the
applicable laws of the United States of America and, as
applicable, the State of New York.
Section 4.7. This
Plan shall become effective as of the date it is approved by a
vote of the Company’s shareholders, and no payments shall
be made pursuant to this Plan prior to such date.
Section 4.8. Notwithstanding
anything contained in this Plan to the contrary, any and all
Awards, payments, distributions, deferral elections,
transactions and any other actions or arrangements made or
entered into pursuant to this Plan shall remain subject at all
times to compliance with Section 409A. If the Committee
determines in its sole discretion that an Award, payment,
distribution, deferral election, transaction or any other action
or arrangement contemplated by the provisions of the Plan would,
if undertaken, cause a Participant to become subject to
Section 409A, such Award, payment, distribution, deferral
election, transaction or other action or arrangement shall not
be undertaken and the related provisions of the Plan will be
deemed modified or, if necessary, rescinded in order to comply
with Section 409A.
ARTICLE V
Amendment or Termination
of the Plan
Section 5.1. The
Board of Directors may at any time terminate, in whole or in
part, or from time to time amend the Plan, provided that, except
as otherwise provided in the Plan, no such amendment or
termination shall adversely affect any Awards previously made to
a Participant and deferred by such Participant pursuant to
Section 3.3. The Board may at any time and from time to
time delegate to the Committee any or all of its authority under
this Section 5.1.
ARTICLE VI
Definitions
Section 6.1. For
the purposes of the Plan, the following terms shall have the
meanings indicated:
(a) Award: The grant of an award pursuant to
Article III by the Committee to a Participant of restricted
stock under the 2003 Plan or cash.
(b) Board of Directors: The Board of Directors of the
Company.
A-3
(c) Committee: The Committee designated pursuant to
Section 2.1. Until otherwise determined by the Board of
Directors, the Compensation and Management Development Committee
of the Board shall be the Committee under the Plan.
(d) Covered Officer: At any date, (i) any individual
who, with respect to the previous taxable year of the Company,
was a “covered employee” of the Company within the
meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended, and the rules promulgated thereunder by the
Internal Revenue Service of the Department of the Treasury,
provided, however, the term “Covered Officer” shall
not include any such individual who is designated by the
Committee, in its discretion, at the time of any grant or at any
subsequent time, as reasonably expected not to be such a
“covered employee” with respect to the current taxable
year of the Company and (ii) any individual who is
designated by the Committee, in its discretion, at the time of
any grant or at any subsequent time, as reasonably expected to
be such a “covered employee” with respect to the
current taxable year of the Company or with respect to the
taxable year of the Company in which any Award will be paid to
such individual.
(e) Net Cash Provided by Operating Activities: With respect
to any Performance Period, the net cash provided by operating
activities of the Company for such period as reviewed by the
Company’s independent auditors and released by the Company
to the public as part of the Company’s Consolidated
Statement of Cash Flows.
(f) Participant: An individual who has been selected by the
Committee to receive an Award.
(g) Participant Share: The percentage of the Plan Funding
Amount allocated to a Participant by the Committee.
(h) Performance Period: The fiscal year of the Company, or
such shorter or longer period as determined by the Committee in
its discretion.
(i) Plan Funding Amount: The amount described in
Section 3.4(b).
(j) Section 162(m): Section 162(m) of the
Internal Revenue Code of 1986, as amended, and rules promulgated
by the Internal Revenue Service thereunder.
Article THIRD of the Restated Certificate of Incorporation
of Phelps Dodge Corporation, as in force and effect on the date
hereof, will be amended as follows:
“THIRD: The total number of shares that the Corporation
shall have authority to issue shall be three hundred six million
(306,000,000), consisting of six million (6,000,000) Preferred
Shares having a par value of one dollar per share and three
hundred million (300,000,000) Common Shares having a par value
of six dollars and twenty-five cents ($6.25) per share.”
B-1
The Board of Directors recommends you vote FOR MANAGEMENT PROPOSALS 1, 2, 3 AND 4.
Mark Here
for Address
Change or
Comments
o
SEE REVERSE SIDE
WITHHELD
FOR ALL
FOR ALL
PROPOSAL 1:
Election of
Directors for the term
specified in the Proxy
Statement:
o
o
01 A. Dunham
03 R. Johnson
02 W. Franke
04 J. Steven Whisler
WITHHELD FOR: (Write name(s) of nominee(s) below).
FOR
AGAINST
ABSTAIN
PROPOSAL 2:
Approve the Phelps
Dodge Corporation
2006 Executive
Performance
Incentive Plan
o
o
o
PROPOSAL 3: Approve
an amendment to the
Corporation’s
Restated
Certificate of
Incorporation to
increase the number
of authorized
common shares
o
o
o
FOR
AGAINST
ABSTAIN
PROPOSAL 4: Ratify
the appointment of
PricewaterhouseCoopers
LLP as independent
accountants for the
year 2005
o
o
o
The proxies are instructed to vote as
directed above, and in their discretion on
all other matters. Where no direction is
specified, this proxy will be voted FOR
Management Proposals 1, 2, 3 and 4 as
recommended by the Board of Directors.
Choose MLinkSM for fast, easy and
secure 24/7 online access to your future proxy
materials, investment plan statements, tax
documents and more. Simply log on to Investor
ServiceDirect® at
www.melloninvestor.com/isd where step-by-step
instructions will prompt you through
enrollment.
WILL
ATTEND
If you plan to attend
the Annual Meeting, please
mark the WILL ATTEND box.
o
Signature
Signature
Date
NOTE: Please sign name exactly as it appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.
A corporation should sign in its full
corporate name as a duly authorized officer, stating such officer’s title.
Trustees, guardians, executors and
administrators should sign in their official capacity giving their full title as
such. A partnership should sign in the
partnership name by an authorized person,
stating such person’s title and relationship
to the partnership.
5 Detach here from proxy voting card 5
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Internet and telephone voting are available through 11:59 PM EST
the day prior to annual meeting day.
Your telephone or Internet vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
Solicited on Behalf of the Board of Directors of Phelps Dodge Corporation
The undersigned shareholder of PHELPS DODGE CORPORATION hereby appoints Timothy R. Snider
and S. David Colton, or any one of them, proxies of the undersigned, each with power of
substitution, at the annual meeting of shareholders of the Corporation to be held at the Heard
Museum, 2301 North Central Avenue, Phoenix, Arizona, on Friday, May 27, 2005 at 9:00 a.m., MST and
at any adjournments thereof, to vote all Common Shares of the Corporation held or owned by the
undersigned, including any which may be held for the undersigned’s account under the Phelps Dodge
Corporation Common Stock Investor Services Program administered by Mellon Investor Services LLC.
For those participants who hold accounts with Common Shares through the Phelps Dodge Employee
Savings Plan and/or The Phelps Dodge Corporation Supplemental Savings Plan: the undersigned
instructs J.P. Morgan Chase Bank as Trustee for the Plans, to vote all shares or fractions of
shares credited to the account as of the latest available processing date on or before May 27,2005, as directed on the reverse side of this proxy. Those shares for which no directions are
received will be voted by the Trustee in its sole discretion.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
Address Change/Comments (Mark the corresponding box on the reverse side)
5Detach here from proxy voting card5
You can now access your Phelps Dodge account online.
Access your Phelps Dodge Corporation shareholder/stockholder account online via Investor
ServiceDirect ® (ISD).
Mellon Investor Services LLC, Transfer Agent for Phelps Dodge Corporation, now makes it easy and
convenient to get current information on your shareholder account.
