-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1tFKsXJD+AIdGNfAAltSfZkqZqumkOkDpOlhNIGOyVskLdc4gsKRZlyvsVe98mo hLNsucHhL1PObhITrK0WNg== 0000950123-99-008740.txt : 19990923 0000950123-99-008740.hdr.sgml : 19990923 ACCESSION NUMBER: 0000950123-99-008740 CONFORMED SUBMISSION TYPE: DEFA14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHELPS DODGE CORP CENTRAL INDEX KEY: 0000078066 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY SMELTING & REFINING OF NONFERROUS METALS [3330] IRS NUMBER: 131808503 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEFA14A SEC ACT: SEC FILE NUMBER: 001-00082 FILM NUMBER: 99715298 BUSINESS ADDRESS: STREET 1: 2600 NORTH CENTRAL AVE CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6022348100 MAIL ADDRESS: STREET 1: 2600 NORTH CENTRAL AVENUE CITY: PHOENIX STATE: AZ ZIP: 85004-3089 DEFA14A 1 DEFINITIVE ADDITIONAL PROXY MATERIAL 1 SCHEDULE 14A (RULE 14a-101) SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [X] Definitive Additional Materials [ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
PHELPS DODGE CORPORATION - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)1 and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------ (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------ (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------ (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------ (5) Total fee paid: ------------------------------------------------------------------------ [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------ (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------ (3) Filing Party: ------------------------------------------------------------------------ (4) Date Filed: ------------------------------------------------------------------------ 2 [PHELPS DODGE CORPORATION LOGO] September 22, 1999 Dear Shareholder: We announced today that we have amended our exchange offers to holders of common stock of Asarco Incorporated and Cyprus Amax Minerals Company. We are now offering to exchange $9.00 net in cash plus 0.2880 shares of Phelps Dodge common stock for each outstanding share of Asarco common stock, and are separately offering to exchange $6.89 net in cash plus 0.2203 shares of Phelps Dodge common stock for each outstanding common share of Cyprus Amax, in each case on a fully prorated basis. Asarco shareholders may elect to receive either $25.90 in cash or 0.4413 shares of Phelps Dodge common stock for each Asarco common share, and Cyprus Amax shareholders may elect to receive either $19.81 in cash or 0.3376 shares of Phelps Dodge common stock for each Cyprus Amax common share, in each case subject to proration if the stock portion or the cash portion of the offer is oversubscribed. YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE AMENDED EXCHANGE OFFERS ARE IN THE BEST INTERESTS OF PHELPS DODGE AND ITS SHAREHOLDERS, HAS APPROVED THE AMENDED EXCHANGE OFFERS AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH OF THE PROPOSED STOCK ISSUANCES IN CONNECTION WITH THE EXCHANGE OFFERS. The attached document contains additional information about our amended proposal for a business combination of Phelps Dodge with Asarco and Cyprus Amax. You should read this document together with the proxy statement dated September 13, 1999, which was previously mailed to you, before returning the enclosed proxy card or casting your vote in person at the Special Meeting. If you have already returned a proxy card and do not wish to change your vote, you need not take any action at this time. WE URGE YOU TO VOTE FOR APPROVAL OF EACH OF THE PROPOSED STOCK ISSUANCES. If you should have any questions regarding the proposed stock issuance or our amended offers to acquire Asarco and Cyprus Amax, or if you would like to receive another copy of the September 13, 1999 proxy statement, please call our proxy solicitors, Innisfree M&A Incorporated, toll-free at 1-888-750-5834. Sincerely, /s/ DOUGLAS C. YEARLEY /s/ J. STEVEN WHISLER - ------------------------------------------------ ------------------------------------------------ Douglas C. Yearley J. Steven Whisler Chairman and President and Chief Executive Officer Chief Operating Officer
3 PROXY STATEMENT SUPPLEMENT OF PHELPS DODGE CORPORATION FOR THE SPECIAL MEETING OF SHAREHOLDERS ------------------------------------ TO BE HELD ON OCTOBER 13, 1999 ------------------------------------ This Proxy Statement Supplement amends and supplements the proxy statement dated September 13, 1999, which we previously mailed to you, relating to the special meeting of shareholders of Phelps Dodge Corporation to be held on Wednesday, October 13, 1999, at 10:00 a.m., local time, at The Heard Museum, 2301 North Central Avenue, Phoenix, Arizona. PHELPS DODGE'S AMENDED PROPOSAL FOR A BUSINESS COMBINATION WITH ASARCO AND CYPRUS AMAX On September 22, 1999, Phelps Dodge Corporation ("Phelps Dodge") announced that it was amending its exchange offers for common shares of ASARCO Incorporated ("Asarco") and Cyprus Amax Minerals Company ("Cyprus Amax"). Phelps Dodge is now offering to exchange $9.00 net in cash plus 0.2880 shares of Phelps Dodge common stock for each outstanding share of Asarco common stock, and is separately offering to exchange $6.89 net in cash plus 0.2203 shares of Phelps Dodge common stock for each outstanding share of Cyprus Amax common stock, in each case on a fully prorated basis. Asarco shareholders may elect to receive either $25.90 in cash or 0.4413 shares of Phelps Dodge common stock for each Asarco common share, and Cyprus Amax shareholders may elect to receive either $19.81 in cash or 0.3376 shares of Phelps Dodge common stock for each Cyprus Amax common share, in each case subject to proration if the stock portion or the cash portion of the offer is oversubscribed. If Phelps Dodge obtains all of the common shares of Asarco and of Cyprus Amax pursuant to the amended offers, former shareholders in Asarco and Cyprus Amax would own approximately 13% and 23%, respectively, of the common stock of Phelps Dodge, based upon the number of shares outstanding of Phelps Dodge, Cyprus Amax and Asarco on August 13, 1999, August 3, 1999 and July 31, 1999, respectively. The text of the press release issued by Phelps Dodge on September 22, 1999 is set forth below: PHELPS DODGE INCREASES OFFERS TO ACQUIRE ASARCO AND CYPRUS AMAX; ADDS SUBSTANTIAL CASH COMPONENT TO BOTH OFFERS OFFERS PROVIDE 40% PREMIUMS TO ASARCO, CYPRUS AMAX SHAREHOLDERS PHOENIX, AZ, SEPTEMBER 22, 1999 -- Phelps Dodge Corporation (NYSE: PD) announced today that it has increased its offers to acquire Asarco Incorporated (NYSE: AR) and Cyprus Amax Minerals Company (NYSE: CYM) and added a substantial cash component to both offers. The revised offers would provide approximately 40% premiums to the shareholders of both Asarco and Cyprus Amax, based on the unaffected stock prices of all three companies. Phelps Dodge is now offering to acquire all shares of Asarco for $9.00 in cash and 0.2880 Phelps Dodge shares per Asarco share on a fully prorated basis. Based on Phelps Dodge's closing share price yesterday, the revised offer currently values Asarco at $25.47 per share, or a total equity value of $1.01 billion, based on approximately 39.8 million Asarco shares outstanding. Phelps Dodge is now offering to acquire all shares of Cyprus Amax for $6.89 in cash and 0.2203 Phelps Dodge shares per Cyprus Amax share on a fully prorated basis, maintaining the Asarco/Cyprus Amax announced exchange ratio of 0.765. Based on Phelps Dodge's closing share price yesterday, the revised offer currently values Cyprus Amax at $19.49 per share, or a total equity value of $1.76 billion, based on approximately 90.5 million Cyprus Amax shares outstanding. In the revised offers, shareholders of Asarco and Cyprus Amax will have the right to elect to receive all cash or all Phelps Dodge shares. The all-cash election for Asarco shareholders is $25.90 per Asarco share and the all-stock election is 0.4413 Phelps Dodge shares per Asarco share, subject to proration to maintain the overall cash/stock allocation. The all-cash election for Cyprus Amax shareholders is $19.81 per Cyprus Amax share and the all-stock election is 0.3376 Phelps Dodge shares per Cyprus Amax share, 1 4 subject to proration to maintain the overall cash/stock allocation. The stock portion of the consideration received will be tax-free to shareholders of both companies. Phelps Dodge expects the revised three-way merger to remain immediately and substantially accretive to its cash flow and significantly accretive to its earnings per share beginning in the second year after closing, based on the current portfolio of the combined companies and analysts' estimates of copper prices of $0.80 to $0.85 per pound in 2001. Based on its strong balance sheet, Phelps Dodge expects to finance the approximately $1 billion cash portion of the offers primarily through existing credit facilities and cash on hand. "With these substantial increases, there can be no question that our offers provide clearly superior value to Asarco and Cyprus Amax shareholders compared to the no-premium two-way merger," said Douglas C. Yearley, Chairman and Chief Executive Officer of Phelps Dodge. "It is now time for Asarco and Cyprus Amax to come to the table. With their cooperation, we will be in a position to close this compelling three-way merger immediately following the October 13 Phelps Dodge shareholder meeting." Yearley added: "The Asarco and Cyprus Amax shareholder votes on September 30 will be a clear-cut referendum. If shareholders approve the two-way no-premium merger, we will immediately withdraw our clearly superior offers and will not bid further." RECOMMENDATION OF THE BOARD THE BOARD OF DIRECTORS OF PHELPS DODGE HAS DETERMINED THAT THE AMENDED EXCHANGE OFFERS ARE IN THE BEST INTERESTS OF PHELPS DODGE AND ITS SHAREHOLDERS, HAS APPROVED THE AMENDED EXCHANGE OFFERS AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH OF THE PROPOSED STOCK ISSUANCES IN CONNECTION WITH THE EXCHANGE OFFERS. If you have already returned a proxy card and do not wish to change your vote, you need not take any action at this time. If you have any questions about the voting of your shares, the proposed stock issuance or our amended offers to acquire Asarco and Cyprus Amax, please call our proxy solicitors, Innisfree M&A Incorporated, toll-free at 1-888-750-5834. REGULATORY MATTERS On September 20, 1999, Asarco filed suit against Phelps Dodge in the U.S. District Court for the Southern District of New York, alleging that Phelps Dodge's proposed acquisition of Asarco and Cyprus Amax would violate the U.S. antitrust laws, tortiously interferes with the proposed merger between Asarco and Cyprus Amax and constitutes unfair competition. Although the complaint makes reference to preliminary injunctive relief, no request for such relief has yet been made to the court. Phelps Dodge believes this lawsuit is without merit. PRO FORMA FINANCIAL INFORMATION The following comparative per share data and unaudited pro forma combined financial information restate the comparative per share data and unaudited pro forma combined financial information contained in the September 13, 1999 Proxy Statement of Phelps Dodge Corporation for the Special Meeting of Shareholders to be held on October 13, 1999, to give effect to the terms of the amended exchange offers. 2 5 COMPARATIVE PER SHARE DATA The following table presents historical per common share information for Phelps Dodge, Asarco and Cyprus Amax, and the pro forma and equivalent pro forma per common share data giving effect to the combination of Phelps Dodge and Asarco, Phelps Dodge and Cyprus Amax and Phelps Dodge, Asarco and Cyprus Amax, for the six months ended June 30, 1999 and the year ended December 31, 1998. The pro forma combined per share information does not purport to represent what the combined financial position or results of operations would actually have been if the combinations had occurred at January 1, 1998, nor are they necessarily indicative of Phelps Dodge's future consolidated results of operations or financial position. The information tabled below should be read in conjunction with the historical financial statements of the combining corporations incorporated by reference in the September 13, 1999 Proxy Statement, the "Selected Historical Financial Data" of Phelps Dodge, Asarco and Cyprus Amax on pages 41 through 46 of the September 13, 1999 Proxy Statement, and the "Unaudited Pro Forma Combined Financial Information" on page 5 of this Proxy Statement Supplement.
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- Per common share Historical: Phelps Dodge Book value(1)..................................... $40.91 $44.68 Net income(loss) Basic.......................................... (0.98) 3.28 Diluted........................................ (0.98) 3.26 Cash dividends.................................... 1.00 2.00 Asarco Book value(1)..................................... 36.68 38.45 Net income(loss) Basic.......................................... (1.42) (3.29) Diluted........................................ (1.42) (3.29) Cash dividends.................................... 0.10 0.70 Cyprus Amax Book value(1)..................................... 20.17 21.32 Net income(loss) Basic.......................................... (0.95) (1.65) Diluted........................................ (0.95) (1.65) Cash dividends.................................... 0.25 0.80 Pro forma: Combined Phelps Dodge and Asarco Book value(1)..................................... 45.65 49.74 Income(loss) from continuing operations Basic.......................................... (1.52) 1.15 Diluted........................................ (1.52) 1.14 Cash dividends(2)................................. 1.00 2.00
3 6
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- Asarco Equivalent(3) Book value(1)..................................... 20.15 21.95 Income(loss) from continuing operations--Basic and Diluted........................................ (0.67) 0.51 Cash dividends.................................... 0.44 0.88 Combined Phelps Dodge and Cyprus Amax Book value(1)..................................... 45.31 49.38 Income(loss) from continuing operations--Basic and Diluted........................................ (1.84) 0.17 Cash dividends(2)................................. 1.00 2.00 Cyprus Amax Equivalent(3) Book value(1)..................................... 15.30 16.67 Income(loss) from continuing operations--Basic and Diluted........................................ (0.62) 0.06 Cash dividends.................................... 0.34 0.68 Combined Phelps Dodge, Asarco and Cyprus Amax Book value(1)..................................... 48.42 52.70 Income(loss) from continuing operations--Basic and Diluted........................................ (2.01) (0.80) Cash dividends(2)................................. 1.00 2.00 Asarco Equivalent(3) Book value(1)..................................... 21.37 23.26 Income(loss) from continuing operations--Basic and Diluted........................................ (0.89) (0.35) Cash dividends.................................... 0.44 0.88 Cyprus Amax Equivalent(3) Book value(1)..................................... 16.35 17.79 Income(loss) from continuing operations--Basic and Diluted........................................ (0.68) (0.27) Cash dividends.................................... 0.34 0.68
- ------------------------- (1) Book value per share is determined as at June 30, 1999 and December 31, 1998. (2) Pro forma combined cash dividends per share of Phelps Dodge common stock reflect Phelps Dodge's historical dividend rate per share declared in the periods presented. (3) Pro forma combined equivalent per share of Asarco and Cyprus Amax common stocks reflects the pro forma combined per share of Phelps Dodge's common stock amount multiplied by the exchange ratio of 0.4413 and 0.3376 of Phelps Dodge stock for each share of Asarco and Cyprus Amax, respectively. 4 7 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The Unaudited Pro Forma Combined Financial Information of Phelps Dodge presented following is derived from the historical consolidated financial statements of Phelps Dodge, Asarco and Cyprus Amax. The Unaudited Pro Forma Combined Financial Information is presented under three separate scenarios (collectively the "Transactions"): (i) the acquisition by Phelps Dodge of Asarco and Cyprus Amax; (ii) the acquisition by Phelps Dodge of Asarco; and (iii) acquisition by Phelps Dodge of Cyprus Amax. The acquisitions of Asarco and Cyprus Amax are not dependent upon each other. Under each of the scenarios, the Unaudited Pro Forma Combined Financial Information is prepared using the purchase method of accounting, with Phelps Dodge treated as the acquirer and as if the transactions had been completed as of January 1, 1998, for statement of operations purposes and on June 30, 1999, for balance sheet purposes. The Unaudited Pro Forma Combined Financial Information is based upon the historical financial statements of Phelps Dodge, Asarco and Cyprus Amax adjusted to give effect to the proposed business combinations. The pro forma assumptions and adjustments for each transaction scenario are described in the accompanying notes presented on the following pages. The assumptions and related pro forma adjustments have been developed from information available to Phelps Dodge from the December 31, 1998, Form 10-K filings and June 30, 1999, Form 10-Q filings of Asarco and Cyprus Amax and the Form 8-K filing dated June 30, 1999, of Cyprus Amax. Such pro forma adjustments have been included only to the extent known and reasonably available to Phelps Dodge. Phelps Dodge also has reviewed the Form S-4 Registration Statement of Asarco Cyprus Incorporated filed on August 20, 1999, in connection with the proposed merger of Asarco and Cyprus Amax. Their filing included unaudited pro forma combined financial information for Asarco and Cyprus Amax as if the merger had occurred at specific assumed dates. Certain pro forma adjustments that Phelps Dodge noted in reviewing this unaudited pro forma combined financial information have not been incorporated in the accompanying Unaudited Pro Forma Combined Financial Information because information necessary to make or assess such adjustments is not available to Phelps Dodge. As a consequence of the nature of the Transactions, there may be, and likely will be, actions and other events or changes initiated by Asarco and/or Cyprus Amax that would significantly change purchase prices and purchase price allocations. Also, Phelps Dodge has not had access to additional proprietary and confidential corporate financial and other information of Asarco and Cyprus Amax and has not had an opportunity to undertake any due diligence procedures. Such information and procedures may provide Phelps Dodge with additional information that could materially affect the purchase price paid for the acquisition of Asarco or Cyprus Amax, the purchase price allocation and, accordingly, the assumptions and pro forma adjustments. Identified factors which may have a significant impact on the basis and results of the combinations are described in Note 2 of the accompanying notes to the Unaudited Pro Forma Combined Balance Sheet and Combined Statements of Operations for each scenario. Furthermore, the ultimate determination of the purchase price paid for the acquisition of Cyprus Amax and Asarco may change significantly from the current estimate. For the purpose of this Unaudited Pro Forma Combined Financial Information, the purchase price has been estimated based upon the market price of $58.00 for each Phelps Dodge common share, that being the closing market price at September 17, 1999. The final purchase price will be based largely upon the average market price of Phelps Dodge common stock at the earlier of the dates the combinations are announced or consummated between Phelps Dodge, Asarco and Cyprus Amax. As a result of these uncertainties, the final determination and allocation of purchase price may differ from the amounts assumed in this Unaudited Pro Forma Combined Financial Information and those differences may be material. The Unaudited Pro Forma Combined Financial Information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial positions of Phelps Dodge would have been had the acquisitions of Asarco and/or Cyprus Amax occurred on the respective dates assumed, nor is it necessarily indicative of future consolidated operating results or financial position. 5 8 The Unaudited Pro Forma Combined Financial Information does not include the realization of cost savings from operating efficiencies, synergies or other restructurings resulting from the Transactions and does not contemplate the liabilities that may be incurred in any related restructurings. Phelps Dodge estimated consolidated annual cash cost savings of at least $200 million as a result of synergies, reduced overhead costs and other actions resulting from the combination of all three companies. Phelps Dodge believes that the Transactions and the resulting activities would yield substantial cash cost savings of at least $75 million beyond those that can be realized by Asarco Cyprus Incorporated which were estimated to be $125 million in the Form S-4 Registration Statement of Asarco Cyprus Incorporated filed on August 20, 1999. There is no assurance that these cost savings can or will be realized. Also, the Unaudited Pro Forma Combined Financial Information does not reflect the impact of any potential sale of acquired assets. This Unaudited Pro Forma Combined Financial Information should be read in conjunction with the separate historical consolidated financial statements and accompanying notes of Phelps Dodge, Asarco and Cyprus Amax that are incorporated by reference in the September 13, 1999 Proxy Statement. You should not rely on the Unaudited Pro Forma Combined Financial Information as an indication of the consolidated results of operations or financial position that would have been achieved if the business combinations had taken place earlier or of the consolidated results of operations or financial position of Phelps Dodge after the completion of such transactions. 6 9 PHELPS DODGE CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS PHELPS DODGE, ASARCO AND CYPRUS AMAX COMBINED FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
HISTORICAL ----------------------------------- PRO FORMA PRO FORMA PHELPS DODGE ASARCO CYPRUS AMAX ADJUSTMENTS COMBINED ------------ ------ ----------- ----------- --------- Sales and other operating revenues....................... $1,354 966 561 -- 2,881 ------ ----- --- ------ ----- Operating costs and expenses Cost of products sold.......... 1,073 855 428 -- 2,356 Depreciation, depletion and amortization................ 144 73 104 (32)(I) 289 Selling and general administrative expense...... 60 72 34 -- 166 Exploration and research expense..................... 21 11 8 -- 40 Non-recurring charges and provision for asset dispositions*............... 83 4 -- -- 87 ------ ----- --- ------ ----- 1,381 1,015 574 (32) 2,938 ------ ----- --- ------ ----- Operating income (loss).......... (27) (49) (13) 32 (57) Interest expense............... (48) (38) (69) (9)(E) (4)(A) (3)(K) (171) Capitalized interest........... -- -- 2 4(A) 6 Miscellaneous income and expense, net................ (7) 10 (11) (1)(J) 6(A) (3) ------ ----- --- ------ ----- Income (loss) before taxes, minority interests and equity in net earnings of affiliated companies...................... (82) (77) (91) 25 (225) Provision for taxes on income...................... 19 25 14 (1)(A) (9)(F) 48 Minority interests in consolidated subsidiaries... 1 (4) -- 1(J) (2) Equity in net earnings (losses) of affiliated companies..... 5 -- -- (5)(A) -- ------ ----- --- ------ ----- Income (loss) from continuing operations..................... (57) (56) (77) 11 (179) Preferred stock dividends...... -- -- (9) 9(E) -- ------ ----- --- ------ ----- Income (loss) from continuing operations applicable to common shares......................... $ (57) (56) (86) 20 (179) ====== ===== === ====== ===== Net earnings (loss) per share Basic.......................... $(0.98) (2.01) Diluted........................ $(0.98) (2.01) Weighted average shares outstanding Basic.......................... 57.8 89.2 Diluted........................ 57.8 89.2
- ------------ * See historical financial statements incorporated by reference in the September 13, 1999 proxy statement for a description of non-recurring charges and provision for asset dispositions. 7 10 PHELPS DODGE CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS PHELPS DODGE, ASARCO AND CYPRUS AMAX COMBINED YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
HISTORICAL ----------------------------------- PRO FORMA PRO FORMA PHELPS DODGE ASARCO CYPRUS AMAX ADJUSTMENTS COMBINED ------------ ------ ----------- ----------- --------- Sales and other operating revenues......................... $3,064 2,233 1,660 (218)(A) 6,739 ------ ----- ----- ------- ------ Operating costs and expenses Cost of products sold............ 2,361 1,963 1,087 (200)(A) 5,211 Depreciation, depletion and amortization................... 293 145 254 (7)(A) (63)(I) 622 Selling and general administrative expense......... 123 144 105 -- 372 Exploration and research expense........................ 55 27 45 -- 127 Non-recurring charges and provision for asset dispositions*.................. (191) 72 118 -- (1) ------ ----- ----- ------- ------ 2,641 2,351 1,609 (270) 6,331 ------ ----- ----- ------- ------ Operating income (loss)............ 423 (118) 51 52 408 Interest expense................. (97) (68) (157) (19)(E) (13)(A) (5)(K) (359) Capitalized interest............. 2 -- 2 13(A) 17 Miscellaneous income and expense, net............................ 9 29 17 (6)(J) (4)(A) 45 ------ ----- ----- ------- ------ Income (loss) before taxes, minority interests and equity in net earnings of affiliated companies........................ 337 (157) (87) 18 111 Provision for taxes on income.... (134) 53 (11) (12)(F) (104) Minority interests in consolidated subsidiaries...... (8) (27) 1 8(J) (26) Equity in net earnings (losses) of affiliated companies........ (4) -- (53) 4(A) (53) ------ ----- ----- ------- ------ Income (loss) from continuing operations....................... 191 (131) (150) 18 (72) Preferred stock dividends........ -- -- (19) 19(E) -- ------ ----- ----- ------- ------ Income (loss) from continuing operations applicable to common shares........................... $ 191 (131) (169) 37 $ (72) ====== ===== ===== ======= ====== Net earnings (loss) per share Basic............................ $ 3.28 (0.80) Diluted.......................... $ 3.26 (0.80) Weighted average shares outstanding Basic............................ 58.2 89.6 Diluted.......................... 58.5 89.6 ------
- ------------ * See historical financial statements incorporated by reference in the September 13, 1999 proxy statement for a description of non-recurring charges and provision for asset dispositions. 8 11 PHELPS DODGE CORPORATION PRO FORMA COMBINED BALANCE SHEET PHELPS DODGE, ASARCO AND CYPRUS AMAX COMBINED JUNE 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS)
HISTORICAL ----------------------------------- PRO FORMA PRO FORMA PHELPS DODGE ASARCO CYPRUS AMAX ADJUSTMENTS COMBINED ------------ ------ ----------- ----------- --------- ASSETS Cash and cash equivalents....... $ 144 125 1,275 (981)(B) (30)(C) (5)(E) 528 Accounts receivable, net........ 396 404 37 -- 837 Inventories..................... 263 305 239 (127)(A) 84(D) 764 Supplies........................ 104 -- 55 127(A) 286 Prepaid expenses and other assets........................ 15 135 74 5(D) (33)(A) 196 Deferred income taxes........... 45 -- 32 33(A) 110 ------ ----- ----- ------ ------ Current assets................ 967 969 1,712 (927) 2,721 Investments and long-term accounts receivable........... 95 190 328 29(D) (13)(J) 9(A) 638 Property, plant and equipment, net........................... 3,501 2,592 2,546 (805)(D) 7,834 Other assets and deferred charges....................... 339 226 160 (9)(A) 5(E) 721 ------ ----- ----- ------ ------ Total Assets............. $4,902 3,977 4,746 (1,711) 11,914 ====== ===== ===== ====== ====== LIABILITIES Short-term debt................. $ 214 16 249 -- 479 Current portion of long-term debt.......................... 62 31 79 -- 172 Accounts payable and accrued expenses...................... 456 496 324 -- 1,276 Dividends payable............... 29 -- 9 -- 38 Accrued income taxes............ 11 90 81 -- 182 ------ ----- ----- ------ ------ Current liabilities............. 772 633 742 -- 2,147 Long-term debt.................. 801 1,017 1,499 244(E) (95)(D) 3,466 Deferred income taxes........... 493 28 14 (202)(F) 333 Other liabilities and deferred credits....................... 376 306 412 52(D) 1,146 ------ ----- ----- ------ ------ 2,442 1,984 2,667 (1) 7,092 ------ ----- ----- ------ ------ Minority interests in consolidated subsidiaries.................... 86 534 20 (147)(J) 493 ------ ----- ----- ------ ------ Shareholders' equity Common shares................... 362 525 1 (526)(H) 196(G) 558 Treasury shares................. -- -- (86) 86(A) -- Preferred shares................ -- -- 5 (5)(E) -- Capital in excess of par value......................... 5 -- 2,912 (86)(A) (2,826)(H) 1,625(G) 1,630 Retained earnings............... 2,198 949 (768) 134(J) (181)(H) 2,332 Accumulated other comprehensive income (loss)................. (183) (15) (5) 20(H) (183) Other........................... (8) -- -- -- (8) ------ ----- ----- ------ ------ Total Shareholders' Equity................. 2,374 1,459 2,059 (1,563) 4,329 ------ ----- ----- ------ ------ Total Liabilities and Shareholders' Equity... $4,902 3,977 4,746 (1,711) 11,914 ====== ===== ===== ====== ======
9 12 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION 1. BASIS OF PRESENTATION The Unaudited Pro Forma Combined Financial Information has been derived from historical consolidated financial statements of Phelps Dodge, Asarco and Cyprus Amax incorporated by reference into this Proxy Statement. See Phelps Dodge "Unaudited Pro Forma Combined Financial Information" on page 5 of this Proxy Statement Supplement. The assumptions and related pro forma adjustments described below have been developed from public historical information available to Phelps Dodge. Pro forma adjustments have been included only to the extent known and reasonably available to Phelps Dodge. Additional information may exist that could materially affect the assumptions and related pro forma adjustments. Such information is not available to Phelps Dodge because it is within the particular and singular knowledge of Asarco and Cyprus Amax. 2. THE OFFER Phelps Dodge is proposing a three-way business combination of Phelps Dodge, Asarco and Cyprus Amax through separate offerings to exchange all the issued and outstanding Asarco and Cyprus Amax common shares for a combination of Phelps Dodge common shares and cash. Phelps Dodge is offering to exchange $9.00 net in cash plus 0.2880 shares of Phelps Dodge common stock for each outstanding share of Asarco common stock, on a fully prorated basis. Asarco shareholders may elect to receive either $25.90 in cash or 0.4413 shares of Phelps Dodge common stock for each Asarco common share that is validly tendered and not properly withdrawn, subject to proration if the stock portion or the cash portion of the offer is oversubscribed. Separately, Phelps Dodge is offering to exchange $6.89 net in cash plus 0.2203 shares of Phelps Dodge common stock for each outstanding common share of Cyprus Amax Minerals Company, on a fully prorated basis. Cyprus Amax shareholders may elect to receive either $19.81 in cash or 0.3376 shares of Phelps Dodge common stock for each Cyprus Amax common share that is validly tendered and not properly withdrawn, subject to proration. Debt will be incurred to finance the cash component of the acquisitions. An equivalent amount of debt is expected to be repaid upon consummation of the acquisitions. 10 13 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) The transactions would be accounted for under the purchase method. The purchase price for the business combinations is estimated as follows (dollars in millions and shares in thousands except per share data):
ASARCO CYPRUS AMAX COMBINED ------ ----------- -------- Common shares outstanding (as reported in June 30, 1999, Form 10-Qs)................................... 39,783 90,454 Exchange offer ratio of Phelps Dodge common shares for each common share................................... 0.2880 0.2203 Phelps Dodge common shares to be issued............... 11,458 19,927 31,385 Closing market price of each Phelps Dodge common share on September 17, 1999............................... $ 58.00 ======== Fair value of Phelps Dodge common shares issued, comprising par value of $196 ($6.25 per share) and capital in excess of par of $1,625.................. $ 1,821 Cash consideration of $9.00 for each Asarco and $6.89 for each Cyprus Amax common share................... 981 Redemption of Cyprus Amax Series A Preferred Stock (Note 3E)........................................... 244 Estimated transaction costs........................... 30 -------- Purchase price........................................ $ 3,076 ========
The final purchase price could change materially from the purchase price estimated above as a result of changes in the market price of common shares of Phelps Dodge and/or the relative market price of Asarco and Cyprus Amax common shares. There are arrangements in place at Asarco and Cyprus Amax that could impact the purchase price including employment agreements, change of control agreements, severance agreements, restricted stock awards, stock appreciation rights, and certain pension and other employee benefit plans. In addition, actions may be taken by the management of Asarco and Cyprus Amax, in a defensive posture or for other reasons, that could impact the purchase price including amending existing agreements or issuing stock options and other similar bonus awards. The potential impact of these factors cannot be estimated but could be material. The estimated purchase price does not give effect to outstanding stock options which could impact the number of Phelps Dodge shares issued and/or the purchase price either by their exercise or their conversion to outstanding stock options of Phelps Dodge. Such effects prior to completion of the business combination cannot be reasonably estimated from available public information. As reported in their December 31, 1998, Form 10-Ks, Asarco and Cyprus Amax had 1,721,249 and 6,346,801 stock options outstanding, respectively. Cyprus Amax had 2,024,009 outstanding stock options with weighted average exercise prices less than the per share equivalent value of Cyprus Amax common stock as determined by the terms of the exchange offer. Asarco's stock options had an average exercise price of $26.12, more than the per share equivalent value of Asarco's common stock as determined by the exchange offer. If Cyprus Amax's 2,024,009 stock options and all of Asarco's outstanding stock options were exercised prior to consummation of the business combinations, the estimated purchase price would be increased by approximately $84 million which would be substantially offset by cash and cash equivalents received as proceeds from such exercises. Although it is Phelps Dodge's desire that all outstanding Asarco and Cyprus Amax stock options be converted to Phelps Dodge stock options at the respective exchange offering basis, it is not assured whether such conversions can be achieved in whole or in part nor, consequently, the potential effect on the purchase price. 11 14 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) The estimated purchase price does not include any effect of Cyprus Amax's outstanding preferred share purchase rights or Asarco's Shareholder Rights Plan. As described in its December 31, 1998, Form 10-K, Cyprus Amax issued in February 1999 one preferred purchase right for each share of common stock which confers certain rights to the holder including certain rights in the event of an acquisition of 15% or more of Cyprus Amax's common stock. As described in Asarco's December 31, 1998, Form 10-K, Asarco adopted a new Shareholder Rights Plan in January 1998 that provides certain common stock purchase rights if a person or group becomes the beneficial owner of 15% or more of Asarco's common stock, with certain exceptions. The final determination of the purchase price may differ from the amount assumed in the Unaudited Pro Forma Combined Financial Information and that difference may be material. 3. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS The following assumptions and related pro forma adjustments give effect to the proposed business combinations of Phelps Dodge, Asarco and Cyprus Amax as if such combinations occurred on January 1, 1998, in the Unaudited Pro Forma Combined Statements of Operations for the six-month interim period ended June 30, 1999, and for the year ended December 31, 1998, respectively, and on June 30, 1999, for the Unaudited Pro Forma Combined Balance Sheet. The Unaudited Pro Forma Combined Financial Information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Phelps Dodge would have been had the business combinations with Asarco and Cyprus Amax occurred on the respective dates assumed, nor is it necessarily indicative of future consolidated operating results or financial position. Future cash cost savings, which Phelps Dodge estimated will be at least $200 million annually, are not recognized in this Unaudited Pro Forma Combined Financial Information. Non-recurring items related to 1998 and the six-month interim period ended June 30, 1999, are included (see "Selected Historical Financial Data" at pages 41 through 46 of the September 13, 1999 Proxy Statement for a summary of non-recurring items and special charges). (A) Reclassifications have been made to the Asarco and Cyprus Amax historical consolidated financial information to conform to Phelps Dodge's presentation. The historical financial information of Cyprus Amax excludes the results of operations and assets of its discontinued Coal segment as reported for 1998 operations in Cyprus Amax's Form 8-K dated June 30, 1999, and as reported as of and for the six months ended June 30, 1999, in its Form 10-Q filing for such period. Cyprus Amax's historical financial information for the year ended December 31, 1998, also has been adjusted to exclude the identifiable results of recurring operations of its Lithium segment which was sold in October 1998. 12 15 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
BALANCE SHEET SIX MONTHS YEAR ENDED AT JUNE 30, ENDED JUNE 30, DECEMBER 31, (IN $ MILLIONS): 1999 1999 1998 - -------------------------------------- ------------- -------------- ------------ Asarco reclassification adjustments: Inventories......................... (127) Supplies............................ 127 Deferred income taxes (current asset)........................... 33 Prepaid expenses and other assets... (33) Miscellaneous income and expense, net.............................. (2) (4) Equity in net earnings of affiliated companies........................ 2 4 Interest expense.................... 4 13 Capitalized interest................ (4) (13) Cyprus Amax reclassification adjustments: Investments and notes receivable.... 9 Other assets and deferred charges... (9) Treasury shares..................... 86 Capital in excess of par value...... (86) Miscellaneous income and expense, net.............................. 8 Provision for taxes on income....... (1) Equity in net earnings (losses) of affiliated companies............. (7) Elimination of recurring results from the disposed Cyprus Amax Lithium segment: Sales and other revenues............ (218) Cost of products sold (derived)..... (200) Depreciation, depletion and amortization expense............. (7)
(B) This pro forma adjustment represents payment of the cash component of the purchase price. (C) Phelps Dodge estimates it will incur approximately $30 million of transaction costs, consisting primarily of investment bankers, attorneys and accountant fees, and financial printing and other charges. These estimates are preliminary and therefore are subject to change. (D) If the business combinations are consummated, they will be accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. Accordingly, the assets and liabilities of Asarco and Cyprus Amax would be recorded at their estimated fair values. Phelps Dodge has not had access to information that is within the peculiar knowledge of Asarco and Cyprus Amax and has not performed its due diligence necessary to determine the fair value of their assets or liabilities or to identify unknown liabilities or obligations. Pro forma adjustments to allocate the purchase price have been recorded in the Unaudited Pro Forma Combined Financial Information on the basis of fair values reported for certain assets and liabilities in public information of Asarco and Cyprus Amax. Because fair value information for the remaining assets and liabilities and any possible identifiable intangible assets are not reasonably available to Phelps Dodge, the excess of the historical net book values 13 16 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) of Asarco's and Cyprus Amax's assets acquired over the estimated purchase price has been allocated as a reduction of their combined net property, plant and equipment. Additionally, Phelps Dodge believes that cost savings will be realized upon the consolidation and integration of the three companies. Phelps Dodge has not developed formal plans for combining the three operations. Accordingly, additional liabilities may be incurred in connection with the business combinations and any ultimate restructuring. These additional liabilities and costs have not been contemplated in the Unaudited Pro Forma Combined Financial Information because information necessary to reasonably estimate such costs and to formulate detailed restructuring plans is not available to Phelps Dodge. Accordingly, the allocation of the purchase price cannot be estimated with a reasonable degree of accuracy and may differ materially from the amounts assumed in the Unaudited Pro Forma Combined Financial Information. The pro forma purchase price allocation adjustments are estimated as follows (in millions): Reduction of debt to fair value (as reported in Cyprus Amax's June 30, 1999, Form 10-Q and the Form S-4 Registration Statement of Asarco Cyprus Incorporated filed August 20, 1999).......................................... $ 95 Restricted investment in Grupo Mexico (as reported in Asarco's December 31, 1998, Form 10-K).................... $ 29 Increase in LIFO based inventory to replacement cost (as reported in Asarco's June 30, 1999, Form 10-Q and in Cyprus Amax's December 31, 1998, Form 10-K)............... $ 84 Excess projected benefit obligation over the fair value of pension plan assets (as reported in Cyprus Amax's December 31, 1998, Form 10-K, comprising a $5 million reduction of prepaid expenses and other assets and a $52 million increase in other liabilities and deferred credits)....... $ 57 Excess fair value of pension plan assets over the projected benefit obligation (as reported in Asarco's December 31, 1998, Form 10-K).......................................... $ 10 Reduction in deferred tax liabilities (Note F).............. $ 202 Reduction in net property, plant and equipment (derived).... $ 805
(E) The payment of the cash consideration in connection with the exchange of all Asarco and Cyprus Amax common shares outstanding is expected to be approximately $981 million. The funds are expected to be obtained from cash on hand and from borrowings under the Corporation's revolving credit facility. The existing revolving credit facility allows borrowings up to $1 billion from time to time until its scheduled maturity on June 25, 2002. The agreement allows for two, one-year renewals beyond the scheduled maturity with approvals of those lenders representing at least two-thirds of the commitments provided by the facility. Phelps Dodge has not made any definitive plans for repayment of borrowings under its revolving credit facility, however, it expects to repay at least an equivalent amount of consolidated debt after completion of the acquisitions of Asarco and Cyprus Amax. Accordingly, no change in interest expense nor debt financing fees have been reflected in the Unaudited Pro Forma Combined Financial Statements. (F) The estimated income tax effect of the pro forma adjustments have been recorded based upon the estimated effective tax rates of approximately 32% for Asarco and 15% for Cyprus Amax which rates have been derived from public quarterly and annual filings of Asarco and Cyprus Amax. The business combinations are expected to be tax-free transactions with Asarco's and Cyprus Amax's historical tax bases surviving for income tax reporting purposes. 14 17 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) Provisions for pro forma income tax expense have been recorded for pro forma adjustments to the Pro Forma Combined Statements of Operations resulting from pro forma purchase price allocation adjustments and other items. Cyprus Amax has reported $176 million of U.S. net operating loss carryforwards through 1998, expiring from 1999 to 2012, which along with other deferred tax assets are subject to an existing valuation allowance. Asarco has reported $573.7 million of net loss carryforwards, which expire if unused from 2008 through 2018. The net operating loss carryforwards may be subject to annual limitations after the acquisitions because of the change in ownership rules. The annual limits will be calculated as the long-term tax exempt rate (currently 5.18%) times the separate fair market values of Cyprus Amax and Asarco, with Asarco's value potentially determined without SPCC. Once all facts are known, the annual limits may necessitate an increase in the consolidated valuation allowance for deferred tax assets. Pro forma income tax expense and deferred tax allocations recorded upon consummation of the business combinations could vary significantly from the pro forma estimates because information regarding Asarco's and Cyprus Amax's income tax reporting is not available to Phelps Dodge. (G) This pro forma adjustment reflects the issue of 31,385,000 shares of Phelps Dodge common stock in connection with the exchange offers for all the outstanding common shares of Asarco and Cyprus Amax. The common stock of Phelps Dodge represents common shares of $196 million at $6.25 per share par value and capital in excess of par of $1,625 million. No common shares have been included for the potential share issues in connection with the outstanding stock options of Asarco and Cyprus Amax. (H) These pro forma adjustments eliminate the historical shareholders' equity accounts of Asarco and Cyprus Amax. (I) This pro forma adjustment records the estimated reduction in depreciation, depletion and amortization expense related to the pro forma reduction in property, plant and equipment recorded in connection with the business combination purchase price allocation. Because neither fair value nor book value information regarding the composition of Asarco's or Cyprus Amax's property, plant and equipment is available to Phelps Dodge, actual adjustments to depreciation, depletion and amortization expense could differ substantially from these estimates. (J) Phelps Dodge holds a 14.0% equity interest in Southern Peru Copper Corporation (SPCC) which is accounted for as a cost basis investment with a book value of $13.2 million at June 30, 1999. Asarco reports a 54.3% equity interest in SPCC which it consolidated in both its June 30, 1999, Form 10-Q and December 31, 1998, Form 10-K. As a result of Phelps Dodge's increased ownership in SPCC that would arise through the acquisition of Asarco, Phelps Dodge would qualify for use of the consolidation method of reporting for its investment in SPCC. Accordingly, a pro forma adjustment is recorded to consolidate Phelps Dodge's interest in SPCC including the elimination of Phelps Dodge's cost basis investment in SPCC and its recognition of dividend income from SPCC, the reduction of minority interests in consolidated subsidiaries representing Phelps Dodge's 14.0% interest, and the retroactive restatement of Phelps Dodge's retained earnings. (K) This pro forma adjustment recognizes imputed interest expense resulting from the fair value adjustment of Asarco's long-term debt as reported in the Form S-4 Registration Statement of Asarco Cyprus Incorporated filed August 20, 1999. A pro forma adjustment to recognize imputed interest resulting from the $42 million fair value adjustment of Cyprus Amax's debt has not been provided because information necessary to calculate such adjustment is not reasonably available to Phelps Dodge. 15 18 COMBINATION OF PHELPS DODGE, ASARCO AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) (L) Pro forma weighted average common stock and common stock equivalents outstanding are estimated as follows (in millions):
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999 1998 ---------------- ---------------- BASIC DILUTED BASIC DILUTED ----- ------- ----- ------- Average number of Phelps Dodge common shares outstanding................. 57.8 57.8 58.2 58.5 Anti dilutive pro forma potential common shares...................... -- -- -- (0.3) Phelps Dodge common shares to be issued in connection with the business combination (Note 2)...... 31.4 31.4 31.4 31.4 ----- ----- ----- ----- 89.2 89.2 89.6 89.6 ===== ===== ===== =====
The average number of common shares outstanding does not give effect to Asarco's and Cyprus Amax's outstanding stock options or other common stock equivalents, which cannot be estimated because information is not available to Phelps Dodge. Based upon public information reported and the current exchange offer bases, Phelps Dodge estimates that the incremental number of Phelps Dodge shares issueable upon the exercise of all Cyprus Amax and Asarco outstanding stock options is approximately 2.9 million. 16 19 PHELPS DODGE CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS PHELPS DODGE AND ASARCO COMBINED FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
HISTORICAL ---------------------- PRO FORMA PRO FORMA PHELPS DODGE ASARCO ADJUSTMENTS COMBINED ------------ ------ ----------- --------- Sales and other operating revenues.......................... $1,354 966 -- 2,320 ------ ----- --- ----- Operating costs and expenses Cost of products sold............. 1,073 855 -- 1,928 Depreciation, depletion and amortization................... 144 73 (28)(J) 189 Selling and general administrative expense........................ 60 72 -- 132 Exploration and research expense........................ 21 11 -- 32 Non-recurring charges and provision for asset dispositions*.................. 83 4 -- 87 ------ ----- --- ----- 1,381 1,015 (28) 2,368 ------ ----- --- ----- Operating income (loss)............. (27) (49) 28 (48) Interest expense.................. (48) (38) (3)(K) (14)(E) (4)(A) (107) Capitalized interest.............. -- -- 4(A) 4 Miscellaneous income and expense, net................... (7) 10 (1)(F) (2)(A) -- ------ ----- --- ----- Income (loss) before taxes, minority interests and equity in net earnings of affiliated companies......................... (82) (77) 8 (151) Provision for taxes on income..... 19 25 (3)(G) 41 Minority interests in consolidated subsidiaries................... 1 (4) 1(F) (2) Equity in net earnings (losses) of affiliated companies........... 5 -- 2(A) 7 ------ ----- --- ----- Income (loss) from continuing operations........................ $ (57) (56) 8 (105) ====== ===== === ===== Net earnings (loss) per share Basic............................. $(0.98) (1.52) Diluted........................... $(0.98) (1.52) Weighted average shares outstanding Basic............................. 57.8 69.3 Diluted........................... 57.8 69.3
- ------------ * See historical financial statements incorporated by reference in the September 13, 1999 proxy statement for a description of non-recurring charges and provision for asset dispositions. 17 20 PHELPS DODGE CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS PHELPS DODGE AND ASARCO COMBINED FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
HISTORICAL --------------------- PRO FORMA PRO FORMA PHELPS DODGE ASARCO ADJUSTMENTS COMBINED ------------ ------ ----------- --------- Sales and other operating revenues......... $3,064 2,233 -- 5,297 ------ ----- ---- ----- Operating costs and expenses Cost of products sold.................... 2,361 1,963 -- 4,324 Depreciation, depletion and amortization.......................... 293 145 (56)(J) 382 Selling and general administrative expense............................... 123 144 -- 267 Exploration and research expense......... 55 27 -- 82 Non-recurring charges and provision for asset dispositions*................... (191) 72 -- (119) ------ ----- ---- ----- 2,641 2,351 (56) 4,936 ------ ----- ---- ----- Operating income (loss).................... 423 (118) 56 361 Interest expense......................... (97) (68) (5)(K) (28)(E) (13)(A) (211) Capitalized interest..................... 2 -- 13(A) 15 Miscellaneous income and expense, net.... 9 29 (6)(F) (4)(A) 28 ------ ----- ---- ----- Income (loss) before taxes, minority interests and equity in net earnings of affiliated companies..................... 337 (157) 13 193 Provision for taxes on income............ (134) 53 (5)(G) (86) Minority interests in consolidated subsidiaries.......................... (8) (27) 8(F) (27) Equity in net earnings (losses) of affiliated companies.................. (4) -- 4(A) -- ------ ----- ---- ----- Income (loss) from continuing operations... $ 191 (131) 20 80 ====== ===== ==== ===== Net earnings (loss) per share Basic.................................... $ 3.28 1.15 Diluted.................................. $ 3.26 1.14 Weighted average shares outstanding Basic.................................... 58.2 69.7 Diluted.................................. 58.5 70.0
- ------------ * See historical financial statements incorporated by reference in the September 13, 1999 proxy statement for a description of non-recurring charges and provision for asset dispositions. 18 21 PHELPS DODGE CORPORATION PRO FORMA COMBINED BALANCE SHEET PHELPS DODGE AND ASARCO COMBINED JUNE 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS)
HISTORICAL --------------------- PRO FORMA PRO FORMA PHELPS DODGE ASARCO ADJUSTMENTS COMBINED ------------ ------ ----------- --------- ASSETS Cash and cash equivalents.............. $ 144 125 (358)(B) 358(E) (7)(E) (20)(C) (45)(D) 197 Accounts receivable, net............... 396 404 -- 800 Inventories............................ 263 305 (127)(A) 80(D) 521 Supplies............................... 104 -- 127(A) 231 Prepaid expenses and other assets...... 15 135 10(D) (33)(A) 127 Deferred income taxes.................. 45 -- 33(A) 78 ------ ----- ---- ----- Current assets...................... 967 969 18 1,954 Investments and long-term accounts receivable.......................... 95 190 29(D) (13)(F) 301 Property, plant and equipment, net..... 3,501 2,592 (718)(D) 5,375 Other assets and deferred charges...... 339 226 7(E) 572 ------ ----- ---- ----- Total Assets................... $4,902 3,977 (677) 8,202 ====== ===== ==== ===== LIABILITIES Short-term debt........................ $ 214 16 -- 230 Current portion of long-term debt...... 62 31 -- 93 Accounts payable and accrued expenses............................ 456 496 -- 952 Dividends payable...................... 29 -- -- 29 Accrued income taxes................... 11 90 -- 101 ------ ----- ---- ----- Current liabilities................. 772 633 -- 1,405 Long-term debt......................... 801 1,017 (53)(D) 358(E) 2,123 Deferred income taxes.................. 493 28 (175)(G) 346 Other liabilities and deferred credits............................. 376 306 -- 682 ------ ----- ---- ----- 2,442 1,984 130 4,556 ------ ----- ---- ----- Minority interests in consolidated subsidiaries........................... 86 534 (147)(F) 473 ------ ----- ---- ----- Shareholders' equity Common shares....................... 362 525 (525)(I) 71(H) 433 Capital in excess of par value...... 5 -- 594(H) 599 Retained earnings................... 2,198 949 (949)(I) 134(F) 2,332 Accumulated other comprehensive income (loss)..................... (183) (15) 15(I) (183) Other............................... (8) -- -- (8) ------ ----- ---- ----- Total Shareholders' Equity..... 2,374 1,459 (660) 3,173 ------ ----- ---- ----- Total Liabilities and Shareholders' Equity......... $4,902 3,977 (677) 8,202 ====== ===== ==== =====
19 22 COMBINATION OF PHELPS DODGE AND ASARCO NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION 1. BASIS OF PRESENTATION The Unaudited Pro Forma Combined Financial Information has been derived from historical consolidated financial statements of Phelps Dodge and Asarco incorporated by reference into this Proxy Statement. See Phelps Dodge "Unaudited Pro Forma Combined Financial Information" on page 5 of this Proxy Statement Supplement. The assumptions and related pro forma adjustments described below have been developed from public historical information available to Phelps Dodge. Pro forma adjustments have been included only to the extent known and reasonably available to Phelps Dodge. Additional information may exist that could materially affect the assumptions and related pro forma adjustments. Such information is not available to Phelps Dodge because it is within the particular and singular knowledge of Asarco. 2. THE OFFER Phelps Dodge is proposing a business combination of Phelps Dodge and Asarco through a separate offering to exchange all the issued and outstanding Asarco common shares for a combination of Phelps Dodge common shares and cash. Phelps Dodge is offering to exchange $9.00 net in cash plus 0.2880 shares of Phelps Dodge common stock for each outstanding share of Asarco Incorporated common stock, on a fully prorated basis. Asarco shareholders may elect to receive either $25.90 in cash or 0.4413 shares of Phelps Dodge common stock for each Asarco common share that is validly tendered and not properly withdrawn, subject to proration if the stock portion or the cash portion of the offer is oversubscribed. The transaction would be accounted for under the purchase method. The purchase price for the business combination is estimated as follows (dollars in millions and shares in thousands except per share data):
ASARCO -------- Common shares outstanding (as reported in June 30, 1999, Form 10-Q)................................................ 39,783 Exchange offer ratio of Phelps Dodge common shares for each common share.............................................. 0.2880 Phelps Dodge common shares to be issued..................... 11,458 Closing market price of each Phelps Dodge common share on September 17, 1999........................................ $ 58.00 ======== Fair value of Phelps Dodge common shares issued, comprising par value of $71 ($6.25 per share) and capital in excess of par of $594............................................ $ 665 Cash consideration of $9.00 for each Asarco common share.... 358 Estimated transaction costs................................. 20 -------- Purchase price.............................................. $ 1,043 ========
The final purchase price could change materially from the purchase price estimated above as a result of changes in the market price of common shares of Phelps Dodge and/or the relative market price of Asarco common shares. There are arrangements in place at Asarco that could impact the purchase price including employment agreements, change of control agreements, severance agreements, restricted stock awards, and certain pension and other employee benefit plans. In addition, actions may be taken by the management of Asarco, in a defensive posture or for other reasons, that could impact the purchase price including amending existing agreements or issuing stock options and other similar bonus awards. The potential impact of these factors cannot be estimated but could be material. 20 23 COMBINATION OF PHELPS DODGE AND ASARCO NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) The estimated purchase price does not give effect to outstanding stock options which could impact the number of Phelps Dodge shares issued and/or the purchase price either by their exercise or their conversion to outstanding stock options of Phelps Dodge. Such effects prior to completion of the business combination cannot be reasonably estimated from available public information. As reported in its December 31, 1998, Form 10-K, Asarco had 1,721,249 stock options outstanding with an average exercise price of $26.12, more than the per share equivalent value of Asarco's common stock as determined by the exchange offer. If all of Asarco's outstanding stock options were exercised prior to consummation of the business combinations, the estimated purchase price would be increased by approximately $44 million which would be substantially offset by cash and cash equivalents received as proceeds from such exercises. Although it is Phelps Dodge's desire that all outstanding Asarco stock options be converted to Phelps Dodge stock options at the exchange offering basis, it is not assured whether such conversions can be achieved in whole or in part nor, consequently, the potential effect on the purchase price. The estimated purchase price does not include any effect of Asarco's Shareholder Rights Plan. As described in Asarco's December 31, 1998, Form 10-K, Asarco adopted a new Shareholder Rights Plan in January 1998 that provides certain common stock purchase rights if a person or group becomes the beneficial owner of 15% or more of Asarco's common stock, with certain exceptions. The final determination of the purchase price may differ from the amount assumed in the Unaudited Pro Forma Combined Financial Information and that difference may be material. 3. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS The following assumptions and related pro forma adjustments give effect to the proposed business combination of Phelps Dodge and Asarco as if such combination occurred on January 1, 1998, in the Unaudited Pro Forma Combined Statements of Operations for the six-month interim period ended June 30, 1999, and for the year ended December 31, 1998, respectively, and on June 30, 1999, for the Unaudited Pro Forma Combined Balance Sheet. The Unaudited Pro Forma Combined Financial Information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Phelps Dodge would have been had the business combination with Asarco occurred on the respective dates assumed, nor is it necessarily indicative of future consolidated operating results or financial position. Future cash cost savings are not recognized in this Unaudited Pro Forma Combined Financial Information. Non-recurring items related to 1998 and the six-month interim period ended June 30, 1999, are included (see "Selected Historical Financial Data" at pages 41 through 46 of the September 13, 1999 Proxy Statement for a summary of non-recurring items and special charges). 21 24 COMBINATION OF PHELPS DODGE AND ASARCO NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) (A) Reclassifications have been made to the Asarco historical consolidated financial information to conform to Phelps Dodge's presentation.
BALANCE SHEET AT SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 JUNE 30, 1999 DECEMBER 31, 1998 ---------------- ---------------- ----------------- (IN $ MILLIONS) Asarco reclassification adjustments: Inventories....................... (127) Supplies.......................... 127 Deferred income taxes (current asset)......................... 33 Prepaid expenses and other assets......................... (33) Miscellaneous income and expense, net............................ (2) (4) Equity in net earnings (losses) of affiliated companies........... 2 4 Interest expense.................. 4 13 Capitalized interest.............. (4) (13)
(B) This pro forma adjustment represents payment of the cash component of the purchase price. (C) Phelps Dodge estimates it will incur approximately $20 million of transaction costs, consisting primarily of investment bankers, attorneys and accountant fees, and financial printing and other charges. These estimates are preliminary and therefore are subject to change. (D) If the business combination is consummated, it will be accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. Accordingly, the assets and liabilities of Asarco would be recorded at their estimated fair values. Phelps Dodge has not had access to information that is within the peculiar knowledge of Asarco and has not performed its due diligence necessary to determine the fair value of its assets or liabilities or to identify unknown liabilities or obligations. Pro forma adjustments to allocate the purchase price have been recorded in the Unaudited Pro Forma Combined Financial Information on the basis of fair values reported for certain assets and liabilities in public information of Asarco. Because fair value information for the remaining assets and liabilities and any possible identifiable intangible assets are not reasonably available to Phelps Dodge, the excess of the historical net book values of Asarco's assets acquired over the estimated purchase price has been allocated as a reduction of its combined net property, plant and equipment. Additionally, Phelps Dodge believes that cost savings will be realized upon the consolidation and integration of Asarco. Phelps Dodge has not developed formal plans for combining the operations. Accordingly, additional liabilities may be incurred in connection with the business combination and any ultimate restructuring. These additional liabilities and costs have not been contemplated in the Unaudited Pro Forma Combined Financial Information because information necessary to reasonably estimate such costs and to formulate detailed restructuring plans is not available to Phelps Dodge. Accordingly, the allocation of the purchase price cannot be estimated with a reasonable degree of accuracy and may differ materially from the amounts assumed in the Unaudited Pro Forma Combined Financial Information. The merger agreement by and between Asarco and Cyprus Amax has a $45 million termination fee under certain circumstances. If such fee is required to be paid upon consummation of Phelps Dodge's 22 25 COMBINATION OF PHELPS DODGE AND ASARCO NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) proposed acquisition of Asarco, cash and cash equivalents of Asarco would be decreased by the fee payment which in turn would impact the purchase price allocation. The Unaudited Pro Forma Combined Financial Information has been adjusted to give effect to payment of the termination fee. The pro forma purchase price allocation adjustments are estimated as follows (in millions): Reduction of debt to fair value (as reported in the Form S-4 Registration Statement of Asarco Cyprus Incorporated filed August 20, 1999).......................................... $ 53 Restricted investment in Grupo Mexico (as reported in Asarco's December 31, 1998, Form 10-K).................... $ 29 Increase in LIFO based inventory to replacement cost (as reported in Asarco's June 30, 1999, Form 10-Q)............ $ 80 Excess fair value of pension plan assets over the projected benefit obligation (as reported in Asarco's December 31, 1998, Form 10-K).......................................... $ 10 Reduction in deferred tax liabilities (Note G).............. $175 Reduction in net property, plant and equipment (derived).... $718
(E) The $358 million cash consideration paid in connection with the exchange of all Asarco common shares outstanding is expected to be obtained from cash on hand and from borrowings under the Corporation's revolving credit facility. The existing revolving credit facility allows borrowings up to $1 billion from time to time until its scheduled maturity on June 25, 2002. The agreement allows for two, one-year renewals beyond the scheduled maturity with approvals of those lenders representing at least two-thirds of the commitments provided by the facility. Although the Corporation has not made any definitive plans for repayment of such borrowings, for pro forma purposes, repayment from future refinancing through the issuance of $358 million of ten-year debt has been assumed. Interest is estimated to be fixed at 7.75% resulting in annual interest expense of $28 million. The interest rate estimate is based upon the ten-year Treasury bill rates at September 17, 1999, plus commercially indicative rate basis points. A change in interest rate on the debt by 1/8 percent would impact annual interest expense by approximately $450,000. Debt issue costs are estimated to be approximately $7 million with annual amortization of approximately $700,000. (F) Phelps Dodge holds a 14.0% equity interest in Southern Peru Copper Corporation (SPCC) which is accounted for as a cost basis investment with a book value of $13.2 million at June 30, 1999. Asarco reports a 54.3% equity interest in SPCC which it consolidated in both its June 30, 1999, Form 10-Q and December 31, 1998, Form 10-K. As a result of Phelps Dodge's increased ownership in SPCC that would arise through the acquisition of Asarco, Phelps Dodge would qualify for use of the consolidation method of reporting for its investment in SPCC. Accordingly, a pro forma adjustment is recorded to consolidate Phelps Dodge's interest in SPCC including the elimination of Phelps Dodge's cost basis investment in SPCC and its recognition of dividend income from SPCC, the reduction of minority interests in consolidated subsidiaries representing Phelps Dodge's 14.0% interest, and the retroactive restatement of Phelps Dodge's retained earnings. (G) The estimated income tax effect of the pro forma adjustments has been recorded based upon the estimated effective tax rate of approximately 32% for Asarco which rate has been derived from public quarterly and annual filings. The business combination is expected to be a tax-free transaction with Asarco's historical tax bases surviving for income tax reporting purposes. A provision for pro forma income tax expense has been recorded for pro forma adjustments to the Pro Forma Combined Statements of Operations resulting from pro forma purchase price allocation adjustments and other items. 23 26 COMBINATION OF PHELPS DODGE AND ASARCO NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) Asarco has reported $573.7 million of net loss carryforwards, which expire if unused from 2008 through 2018. The net operating loss carryforwards may be subject to annual limitations after the acquisitions because of the change in ownership rules. The annual limits will be calculated as the long-term tax exempt rate (currently 5.18%) times the fair market value of Asarco, with Asarco's value potentially determined without SPCC. Once all facts are known, the annual limits may necessitate an increase in the consolidated valuation allowance for deferred tax assets. Pro forma income tax expense and deferred tax allocations recorded upon consummation of the business combination could vary significantly from the pro forma estimates because information regarding Asarco's income tax reporting is not available to Phelps Dodge. (H) This pro forma adjustment reflects the issue of 11,458,000 shares of Phelps Dodge common stock in connection with the exchange offer for all the outstanding common shares of Asarco. The common stock of Phelps Dodge represents common shares of $71 million at $6.25 per share par value and capital in excess of par of $594 million. No common shares have been included for the potential share issues in connection with the outstanding stock options of Asarco. (I) These pro forma adjustments eliminate the historical shareholders' equity accounts of Asarco. (J) This pro forma adjustment records the estimated reduction in depreciation, depletion and amortization expense related to the pro forma reduction in property, plant and equipment recorded in connection with the business combination purchase price allocation. Because neither fair value nor book value information regarding the composition of Asarco's property, plant and equipment is available to Phelps Dodge, actual adjustments to depreciation, depletion and amortization expense could differ substantially from these estimates. (K) This pro forma adjustment recognizes imputed interest expense resulting from the fair value adjustment of Asarco's long-term debt as reported in the Form S-4 Registration Statement of Asarco Cyprus Incorporated filed August 20, 1999. (L) Pro forma weighted average common stock and common stock equivalents outstanding are estimated as follows (in millions):
SIX MONTHS YEAR ENDED ENDED JUNE 30, 1999 DECEMBER 31, 1998 ---------------------- ------------------ BASIC DILUTED BASIC DILUTED ------- --------- ----- ------- Average number of Phelps Dodge common shares outstanding.............. 57.8 57.8 58.2 58.5 Phelps Dodge common shares to be issued in connection with the business combination (Note 2)................. 11.5 11.5 11.5 11.5 ---- ---- ---- ---- 69.3 69.3 69.7 70.0 ==== ==== ==== ====
The average number of common shares outstanding does not give effect to Asarco's outstanding stock options or other common stock equivalents, which cannot be estimated because information is not available to Phelps Dodge. Based upon public information reported and the current exchange offer basis, Phelps Dodge estimates that the incremental number of Phelps Dodge shares issuable upon the exercise of all Asarco outstanding stock options is approximately 0.8 million shares. 24 27 PHELPS DODGE CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS PHELPS DODGE AND CYPRUS AMAX COMBINED FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
HISTORICAL -------------------------- PRO FORMA PRO FORMA PHELPS DODGE CYPRUS AMAX ADJUSTMENTS COMBINED ------------ ----------- ----------- --------- Sales and other operating revenues... $1,354 561 -- 1,915 ------ --- ---- ----- Operating costs and expenses Cost of products sold.............. 1,073 428 -- 1,501 Depreciation, depletion and amortization................ 144 104 2(I) 250 Selling and general administrative expense......................... 60 34 -- 94 Exploration and research expense... 21 8 -- 29 Non-recurring charges and provision for asset dispositions*......... 83 -- -- 83 ------ --- ---- ----- 1,381 574 2 1,957 ------ --- ---- ----- Operating income (loss).............. (27) (13) (2) (42) Interest expense................... (48) (69) (9)(E) (126) Capitalized interest............... -- 2 -- 2 Miscellaneous income and expense, net.................... (7) (11) 8(A) (10) ------ --- ---- ----- Income (loss) before taxes, minority interests and equity in net earnings of affiliated companies... (82) (91) (3) (176) Provision for taxes on income...... 19 14 2(F) (1)(A) 34 Minority interests in consolidated subsidiaries.................... 1 -- -- 1 Equity in net earnings (losses) of affiliated companies............ 5 -- (7)(A) (2) ------ --- ---- ----- Income (loss) from continuing operations......................... (57) (77) (9) (143) Preferred stock dividends.......... -- (9) 9(E) -- ------ --- ---- ----- Income (loss) from continuing operations applicable to common shares............................. $ (57) (86) -- (143) ====== === ==== ===== Net earnings (loss) per share Basic.............................. $(0.98) (1.84) Diluted............................ $(0.98) (1.84) Weighted average shares outstanding Basic.............................. 57.8 77.7 Diluted............................ 57.8 77.7
- ------------ * See historical financial statements incorporated by reference in the September 13, 1999 proxy statement for a description of non-recurring charges and provision for asset dispositions. 25 28 PHELPS DODGE CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS PHELPS DODGE AND CYPRUS AMAX COMBINED FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
HISTORICAL --------------------------- PRO FORMA PRO FORMA PHELPS DODGE CYPRUS AMAX ADJUSTMENTS COMBINED ------------ ----------- ----------- --------- Sales and other operating revenues........................ $3,064 1,660 (218)(A) 4,506 ------ ----- ---- ----- Operating costs and expenses Cost of products sold............. 2,361 1,087 (200)(A) 3,248 Depreciation, depletion and amortization................. 293 254 (7)(A) 3(I) 543 Selling and general administrative expense....... 123 105 -- 228 Exploration and research expense...................... 55 45 -- 100 Non-recurring charges and provision for asset dispositions*................ (191) 118 -- (73) ------ ----- ---- ----- 2,641 1,609 (204) 4,046 ------ ----- ---- ----- Operating income (loss)........... 423 51 (14) 460 Interest expense................ (97) (157) (19)(E) (273) Capitalized interest............ 2 2 -- 4 Miscellaneous income and expense, net................. 9 17 -- 26 ------ ----- ---- ----- Income (loss) before taxes, minority interests and equity in net earnings of affiliated companies....................... 337 (87) (33) 217 Provision for taxes on income... (134) (11) 5(F) (140) Minority interests in consolidated subsidiaries.... (8) 1 -- (7) Equity in net earnings (losses) of affiliated companies...... (4) (53) -- (57) ------ ----- ---- ----- Income (loss) from continuing operations...................... 191 (150) (28) 13 Preferred stock dividends....... -- (19) 19(E) -- ------ ----- ---- ----- Income (loss) from continuing operations applicable to common shares.......................... $ 191 (169) (9) 13 ====== ===== ==== ===== Net earnings (loss) per share Basic........................... $ 3.28 0.17 Diluted......................... $ 3.26 0.17 Weighted average shares outstanding Basic........................... 58.2 78.1 Diluted......................... 58.5 78.4
- ------------ * See historical financial statements incorporated by reference in the September 13, 1999 proxy statement for a description of non-recurring charges and provision for asset dispositions. 26 29 PHELPS DODGE CORPORATION PRO FORMA COMBINED BALANCE SHEET PHELPS DODGE AND CYPRUS AMAX COMBINED JUNE 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS)
HISTORICAL -------------------------- PRO FORMA PRO FORMA PHELPS DODGE CYPRUS AMAX ADJUSTMENTS COMBINED ------------ ----------- ----------- --------- ASSETS Cash and cash equivalents.............. $ 144 1,275 (623)(B) (20)(C) (45)(D) (5)(E) 726 Accounts receivable, net............... 396 37 -- 433 Inventories............................ 263 239 4(D) 506 Supplies............................... 104 55 -- 159 Prepaid expenses....................... 15 74 (5)(D) 84 Deferred income taxes.................. 45 32 -- 77 ------ ----- ------ ----- Current assets....................... 967 1,712 (694) 1,985 Investments and long-term accounts receivable........................... 95 328 9(A) 432 Property, plant and equipment, net..... 3,501 2,546 45(D) 6,092 Other assets and deferred charges...... 339 160 (9)(A) 5(E) 495 ------ ----- ------ ----- Total Assets.................... $4,902 4,746 (644) 9,004 ====== ===== ====== ===== LIABILITIES Short-term debt........................ $ 214 249 -- 463 Current portion of long-term debt...... 62 79 -- 141 Accounts payable and accrued expenses............................. 456 324 -- 780 Dividends payable...................... 29 9 -- 38 Accrued income taxes................... 11 81 -- 92 ------ ----- ------ ----- Current liabilities.................. 772 742 -- 1,514 Long-term debt......................... 801 1,499 244(E) (42)(D) 2,502 Deferred income taxes.................. 493 14 5(F) 512 Other liabilities and deferred credits.............................. 376 412 52(D) 840 ------ ----- ------ ----- 2,442 2,667 259 5,368 ------ ----- ------ ----- Minority interests in consolidated subsidiaries........................... 86 20 -- 106 ------ ----- ------ ----- Shareholders' equity Common shares.......................... 362 1 (1)(H) 125(G) 487 Treasury shares........................ -- (86) 86(A) -- Preferred shares....................... -- 5 (5)(E) -- Capital in excess of par value......... 5 2,912 (86)(A) (2,826)(H) 1,031(G) 1,036 Retained earnings...................... 2,198 (768) 768(H) 2,198 Accumulated other comprehensive income (loss)............................... (183) (5) 5(H) (183) Other.................................. (8) -- -- (8) ------ ----- ------ ----- Total Shareholders' Equity...... 2,374 2,059 (903) 3,530 ------ ----- ------ ----- Total Liabilities and Shareholders' Equity.......... $4,902 4,746 (644) 9,004 ====== ===== ====== =====
27 30 COMBINATION OF PHELPS DODGE AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION 1. BASIS OF PRESENTATION The Unaudited Pro Forma Combined Financial Information has been derived from historical consolidated financial statements of Phelps Dodge and Cyprus Amax incorporated by reference into this Proxy Statement. See Phelps Dodge "Unaudited Pro Forma Combined Financial Information" on page 5 of this Proxy Statement Supplement. The assumptions and related pro forma adjustments described below have been developed from public historical information available to Phelps Dodge. Pro forma adjustments have been included only to the extent known and reasonably available to Phelps Dodge. Additional information may exist that could materially affect the assumptions and related pro forma adjustments. Such information is not available to Phelps Dodge because it is within the particular and singular knowledge of Cyprus Amax. 2. THE OFFER Phelps Dodge is proposing a business combination of Phelps Dodge and Cyprus Amax through a separate offering to exchange all the issued and outstanding Cyprus Amax common shares for a combination of Phelps Dodge common shares and cash. Phelps Dodge is offering to exchange $6.89 net in cash plus 0.2203 shares of Phelps Dodge common stock for each outstanding share of Cyprus Amax common stock, on a fully prorated basis. Cyprus Amax shareholders may elect to receive either $19.81 in cash or 0.3376 shares of Phelps Dodge common stock for each Cyprus Amax common share that is validly tendered and not properly withdrawn, subject, in each case, to proration if the stock portion or the cash portion of the offer is oversubscribed. Debt will be incurred to finance the cash component of the acquisition. An equivalent amount of debt is expected to be repaid upon consummation of the acquisition. The transaction would be accounted for under the purchase method. The purchase price for the business combinations is estimated as follows (dollars in millions and shares in thousands except per share data):
CYPRUS AMAX -------- Common shares outstanding (as reported in June 30, 1999, Form 10-Q)................................................ 90,454 Exchange offer ratio of Phelps Dodge common shares for each common share.............................................. 0.2203 Phelps Dodge common shares to be issued..................... 19,927 Closing market price of each Phelps Dodge common share on September 17, 1999........................................ $ 58.00 ======== Fair value of Phelps Dodge common shares issued, comprising par value of $125 ($6.25 per share) and capital in excess of par of $1,031.......................................... $ 1,156 Cash Consideration of $6.89 for each Cyprus Amax common share..................................................... 623 Redemption of Cyprus Amax Series A Preferred Stock (Note 3E)....................................................... 244 Estimated transaction costs................................. 20 -------- Purchase price.............................................. $ 2,043 ========
The final purchase price could change materially from the purchase price estimated above as a result of changes in the market price of common shares of Phelps Dodge and/or the relative market price of Cyprus Amax common shares. There are arrangements in place at Cyprus Amax that could impact the purchase price including employment agreements, change of control severance agreements, stock appreciation rights, and 28 31 COMBINATION OF PHELPS DODGE AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) certain pension and other employee benefit plans. In addition, actions may be taken by the management of Cyprus Amax, in a defensive posture or for other reasons, that could impact the purchase price including amending existing agreements or issuing stock options and other similar bonus awards. The potential impact of these factors cannot be estimated but could be material. The estimated purchase price does not give effect to outstanding stock options which could impact the number of Phelps Dodge shares issued and/or the purchase price either by their exercise or their conversion to outstanding stock options of Phelps Dodge. Such effects prior to completion of the business combination cannot be reasonably estimated from available public information. As reported in its December 31, 1998, Form 10-K, Cyprus Amax had 6,346,801 stock options outstanding of which 2,024,009 had weighted average exercise prices less than the per share equivalent value of Cyprus Amax common stock as determined by the terms of the exchange offer. If Cyprus Amax's 2,024,009 stock options were exercised prior to consummation of the business combination, the estimated purchase price would be increased by approximately $40 million which would be substantially offset by cash and cash equivalents received as proceeds from such exercises. Although it is Phelps Dodge's desire that all outstanding Cyprus Amax stock options be converted to Phelps Dodge stock options at the exchange offering basis, it is not assured whether such conversions can be achieved in whole or in part nor, consequently, the potential effect on the purchase price. The estimated purchase price does not include any effect of Cyprus Amax's outstanding preferred share purchase rights. As described in its December 31, 1998, Form 10-K, Cyprus Amax issued in February 1999 one preferred purchase right for each share of common stock which confers certain rights to the holder including certain rights in the event of an acquisition of 15% or more of Cyprus Amax's common stock. The final determination of the purchase price may differ from the amount assumed in the Unaudited Pro Forma Combined Financial Information and that difference may be material. 3. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS The following assumptions and related pro forma adjustments give effect to the proposed business combination of Phelps Dodge and Cyprus Amax as if such combination occurred on January 1, 1998, in the Unaudited Pro Forma Combined Statements of Operations for the six-month interim period ended June 30, 1999, and for the year ended December 31, 1998, respectively, and on June 30, 1999, for the Unaudited Pro Forma Combined Balance Sheet. The Unaudited Pro Forma Combined Financial Information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Phelps Dodge would have been had the business combination with Cyprus Amax occurred on the respective dates assumed, nor is it necessarily indicative of future consolidated operating results or financial position. Future cash cost savings are not recognized in this Unaudited Pro Forma Combined Financial Information. Non-recurring items related to 1998 and the six-month interim period ended June 30, 1999 are included (see "Selected Historical Financial Data" at pages 41 through 46 of the September 13, 1999 Proxy Statement for a summary of non-recurring items and special charges). (A) Reclassifications have been made to the Cyprus Amax historical consolidated financial information to conform to Phelps Dodge's presentation. The historical financial information of Cyprus Amax excludes the results of operations and assets of its discontinued Coal segment as reported for 1998 operations in Cyprus Amax's Form 8-K dated June 30, 1999, and as reported as of and for the six months ended June 30, 1999, in its Form 10-Q filing for such period. Cyprus Amax's historical financial 29 32 COMBINATION OF PHELPS DODGE AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) information for the year ended December 31, 1998, also has been adjusted to exclude the identifiable results of recurring operations of its Lithium segment which was sold in October 1998.
BALANCE SHEET SIX MONTHS YEAR ENDED AT JUNE 30, ENDED DECEMBER 31, 1999 JUNE 30, 1999 1998 ------------- ------------- ------------ (IN $ MILLIONS) Reclassification adjustments: Investments and notes receivable................ 9 Other assets and deferred charges................... (9) Treasury shares.............. 86 Capital in excess of par value..................... (86) Miscellaneous income and expense, net.............. 8 Provision for taxes on income.................... (1) Equity in net earnings (losses) of affiliated companies................. (7) Elimination of recurring results from sold Lithium segment: Sales and other operating revenues.................. (218) Cost of products sold (derived)................. (200) Depreciation, depletion and amortization expense...... (7)
(B) This pro forma adjustment represents payment of the cash component of the purchase price. (C) Phelps Dodge estimates it will incur approximately $20 million of transaction costs, consisting primarily of investment bankers, attorneys and accountant fees, and financial printing and other charges. These estimates are preliminary and therefore are subject to change. (D) If the business combination is consummated, it will be accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. Accordingly, the assets and liabilities of Cyprus Amax would be recorded at their estimated fair values. Phelps Dodge has not had access to information that is within the peculiar knowledge of Cyprus Amax and has not performed its due diligence necessary to determine the fair value of its assets or liabilities or to identify unknown liabilities or obligations. Pro forma adjustments to allocate the purchase price have been recorded in the Unaudited Pro Forma Combined Financial Information on the basis of fair values reported for certain assets and liabilities in public information of Cyprus Amax. Because fair value information for the remaining assets and liabilities and any possible identifiable intangible assets are not reasonably available to Phelps Dodge, the excess of the historical net book values of Cyprus Amax's assets acquired over the estimated purchase price has been allocated as a reduction of its combined net property, plant and equipment. Additionally, Phelps Dodge believes that cost savings will be realized upon the consolidation and integration of Cyprus Amax. Phelps Dodge has not developed formal plans for combining the operations. Accordingly, additional liabilities may be incurred in connection with the business combination and any ultimate restructuring. These additional liabilities and costs have not been contemplated in the Unaudited 30 33 COMBINATION OF PHELPS DODGE AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) Pro Forma Combined Financial Information because information necessary to reasonably estimate such costs and to formulate detailed restructuring plans is not available to Phelps Dodge. Accordingly, the allocation of the purchase price cannot be estimated with a reasonable degree of accuracy and may differ materially from the amounts assumed in the Unaudited Pro Forma Combined Financial Information. The merger agreement by and between Asarco and Cyprus Amax has a $45 million termination fee under certain circumstances. If such fee is required to be paid upon consummation of Phelps Dodge's proposed acquisition of Cyprus Amax, cash and cash equivalents of Cyprus Amax would be decreased by the fee payment which in turn would impact the purchase price allocation. The Unaudited Pro Forma Combined Financial Information has been adjusted to give effect to payment of the termination fee. The pro forma purchase price allocation adjustments are estimated as follows (in millions): Reduction of debt to fair value (as reported in Cyprus Amax's June 30, 1999, Form 10-Q).......................... $42 Increase in LIFO based inventory to replacement cost (as reported in Cyprus Amax's December 31, 1998, Form 10-K)... $ 4 Excess projected benefit obligation over the fair value of pension plan assets (as reported in Cyprus Amax's December 31, 1998, Form 10-K, comprising a $5 million reduction of prepaid expenses and other assets and a $52 million increase in other liabilities and deferred credits)....... $57 Increase in deferred tax liabilities (Note F)............... $ 5 Increase in net property, plant and equipment (derived)..... $45
(E) The payment of the cash consideration in connection with the exchange of all Cyprus Amax common shares outstanding is expected to be approximately $623 million. The funds are expected to be obtained from cash on hand and from borrowings under the Corporation's revolving credit facility. The existing revolving credit facility allows borrowings up to $1 billion from time to time until its scheduled maturity on June 25, 2002. The agreement allows for two, one-year renewals beyond the scheduled maturity with approvals of those lenders representing at least two-thirds of the commitments provided by the facility. Phelps Dodge has not made any definitive plans for repayment of borrowings under its revolving credit facility, however, it expects to repay at least an equivalent amount of consolidated debt after completion of the acquisition of Cyprus Amax. Accordingly, no change in interest expense nor debt financing fees have been reflected in the Unaudited Pro Forma Combined Financial Statements. (F) The estimated income tax effect of the pro forma adjustments has been recorded based upon the estimated effective tax rate of approximately 15% for Cyprus Amax which rate has been derived from public quarterly and annual filings. The business combination is expected to be a tax-free transaction with Cyprus Amax's historical tax bases surviving for income tax reporting purposes. A provision for pro forma income tax expense has been recorded for pro forma adjustments to the Pro Forma Combined Statements of Operations resulting from pro forma purchase price allocation adjustments and other items. Cyprus Amax has reported $176 million of U.S. net operating loss carryforwards through 1998, expiring from 1999 to 2012, which along with other deferred tax assets are subject to an existing valuation allowance. The net operating loss carryforwards may be subject to annual limitations after the acquisition because of the change in ownership rules. The annual limits will be calculated as the long-term tax exempt rate (currently 5.18%) times the fair market value of Cyprus Amax. Once all facts are known, the annual limits may necessitate an increase in the consolidated valuation allowance for deferred tax assets. 31 34 COMBINATION OF PHELPS DODGE AND CYPRUS AMAX NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED) Pro forma income tax expense and deferred tax allocations recorded upon consummation of the business combination could vary significantly from the pro forma estimates because information regarding Cyprus Amax's income tax reporting is not available to Phelps Dodge. (G) This pro forma adjustment reflects the issue of 19,927,000 shares of Phelps Dodge common stock in connection with the exchange offers for all the outstanding common shares of Cyprus Amax. The common stock of Phelps Dodge represents common shares of $125 million at $6.25 per share par value and capital in excess of par of $1,031 million. No common shares have been included for the potential shares issues in connection with the outstanding stock options of Cyprus Amax. (H) These pro forma adjustments eliminate the historical shareholders' equity accounts of Cyprus Amax. (I) This pro forma adjustment records the estimated increase in depreciation, depletion and amortization expense related to the pro forma increase in property, plant and equipment recorded in connection with the business combination purchase price allocation. Because neither fair value nor book value information regarding the composition of Cyprus Amax's property, plant and equipment is available to Phelps Dodge, actual adjustments to depreciation, depletion and amortization expense could differ substantially from these estimates. (J) A pro forma adjustment to recognize imputed interest resulting from the $42 million fair value adjustment of Cyprus Amax's debt has not been provided because information necessary to calculate such adjustment is not reasonably available to Phelps Dodge. (K) Pro forma weighted average common stock and common stock equivalents outstanding are estimated as follows (in millions):
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999 1998 ---------------- ---------------- BASIC DILUTED BASIC DILUTED ----- ------- ----- ------- Average number of Phelps Dodge common shares outstanding......... 57.8 57.8 58.2 58.5 Phelps Dodge common shares to be issued in connection with the business combination (Note 2)..... 19.9 19.9 19.9 19.9 ---- ---- ---- ---- 77.7 77.7 78.1 78.4 ==== ==== ==== ====
The average number of common shares outstanding does not give effect to Cyprus Amax's outstanding stock options or other common stock equivalents, which cannot be estimated because information is not available to Phelps Dodge. Based upon public information reported and the current exchange offer basis, Phelps Dodge estimates that the incremental number of Phelps Dodge shares issueable upon the exercise of all Cyprus Amax outstanding stock options is approximately 2.1 million. 32 -----END PRIVACY-ENHANCED MESSAGE-----