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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FREEPORT-McMoRan SULPHUR INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 72-1392855
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) No.)
1615 POYDRAS STREET 70112
NEW ORLEANS, LOUISIANA (Zip Code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code: 504-582-4000
Securities to be registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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Common Stock, par value $.01 per share
(together with associated Preferred Stock New York Stock Exchange
Purchase Rights)
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Securities to be registered pursuant to Section 12(g) of the Act: None
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ITEM 1. BUSINESS
The information required by this item is contained in the sections "Summary"
and "Business" of the Information Statement attached hereto as Annex A (the
"Information Statement") and such sections are incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained in the sections
"Summary," "Selected Financial and Operating Data," "Selected Pro Forma
Financial and Operating Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Information Statement and
such sections are incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained in the section "Business"
of the Information Statement and such section is incorporated herein by
reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the section "Principal
Stockholders" of the Information Statement and such section is incorporated
herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in the section
"Management--Directors and Executive Officers" of the Information Statement and
such section is incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained in the sections
"Management--Director Compensation," "--Executive Compensation," "--Compensation
Committee Interlocks and Insider Participation," "--The Employee Benefits
Agreement" and "--Stock Option Plans" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the sections "Certain
Transactions," "The Distributions--The Distribution Agreement" and
"Management--The Employee Benefits Agreement" of the Information Statement and
such sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained in the sections
"Business--Legal Proceedings" and "--Environmental Matters" of the Information
Statement and such sections are incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the sections
"Information Statement--Cover Page," "Risk Factors--Absence of Trading Markets"
and "--Dividends," "Summary--The Distributions," "Dividend Policy" and
"Description of Capital Stock" of the Information Statement and such sections
are incorporated herein by reference.
2
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ITEM 10. RECENT SALE OF UNREGISTERED SECURITIES
On August 26, 1997 the Company issued 100 shares of Common Stock to FRP in
exchange for $100.00 in cash. In connection with the Contribution, the Company
will issue an additional 10,346,478 shares to FRP in exchange for FRP's
contribution to the Company of the Transferred Businesses. All of the shares
issued to FRP in each of these transactions are being distributed in the FRP
Distribution that is the subject of the Information Statement. The discussion
contained in the "Summary--The Distributions" and "The Distributions" sections
of the Information Statement is incorporated herein by reference. Capitalized
terms used in response to this Item shall have the meanings assigned them in the
Information Statement.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained in the section
"Description of Capital Stock" of the Information Statement and such section is
incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may limit the liability of and indemnify its directors and
officers against liability in a variety of circumstances. In accordance with the
DGCL, the Company's Certificate of Incorporation contains provisions eliminating
the personal liability of the directors except for liability for (a) a breach of
his or her duty of loyalty to the Company or to its stockholders, (b) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) dividends or stock repurchases or redemptions that are
unlawful under Delaware law and (d) any transaction from which he or she
receives an improper personal benefit. In addition, the Company's By-laws
require the Company to indemnify its officers and directors against expenses and
costs, judgments, settlements and fines incurred in the defense of any claim,
including any claim brought by or in the right of the Company, to which they
were made parties by reason of being or having been officers or directors.
Information required by this Item is also contained in the section
"Description of Capital Stock-- Limitation on Directors' and Officers' Liability
and Indemnification," of the Information Statement and such section is
incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the section beginning
with "Index to Financial Statements" of the Information Statement and such
information is incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The Index to Financial Statements on page F-1 of the Information Statement
is incorporated herein by reference.
(b) Exhibits
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2.1 Contribution and Distribution Agreement by and among the Company, FTX and FRP,
dated as of August 26, 1997*
2.2 Form of IGL Contribution Agreement*
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3
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3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Form of the Company's Common Stock certificate*
8.1 Opinion of Miller & Chevalier, Chartered
10.1 Form of Employee Benefits Agreement by and between FTX and the Company*
10.2 Asset Sale Agreement for Main Pass Block 299 between FRP and Chevron USA, Inc.
dated as of May 2, 1990*
10.3 Main Pass 299 Sulphur and Salt Lease, effective May 1, 1988*
10.4 Joint Operating Agreement by and between FRP, IMC-Fertilizer, Inc. and Felmont
Oil Corporation, dated June 5, 1990*
10.5 Joint Operating Agreement by and between FRP, IMC-Fertilizer, Inc. and Felmont
Oil Corporation, dated May 1, 1988*
10.6 Agreement to Coordinate Operating Agreements by and between FRP, IMC-Fertilizer
and Felmont Oil Corporation, dated May 1, 1988*
10.7 Asset Purchase Agreement between FRP and Pennzoil Company dated as of October
22, 1994 (the "Asset Purchase Agreement")*
10.8 Amendment No. 1 to the Asset Purchase Agreement dated as of January 3, 1995*
10.9 Agreement for Sulphur Supply, as amended, dated as of July 1, 1993 among FRP,
IMC Fertilizer and IMC-Agrico Company (the "Sulphur Supply Agreement")*
10.10 Side letter with IGL regarding the Sulphur Supply Agreement*
10.11 Processing and Marketing Agreement between the Freeport Sulphur Company (a
division of FRP) and Felmont Oil Corporation dated June 19, 1990 (the
"Processing Agreement")*
10.12 Amendment Number 1 to the Processing Agreement*
10.13 Amendment Number 2 to the Processing Agreement*
10.14 1997 Stock Option Plan for Non-Employee Directors*
10.15 Company Adjusted Stock Award Plan*
10.16 Freeport Sulphur 1997 Stock Option Plan*
10.17 Form of Stockholder Protection Rights Agreement between Freeport-McMoRan
Sulphur Inc. and Mellon Securities Trust Company, as Rights Agent.*
27.1 Financial Data Schedule*
99.1 Solvency Opinion of Valuation Research Corporation*
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* Incorporated by reference to the Company's Registration Statement on Form
S-1 dated November 17, 1997.
4
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Pursuant to the requirements of Section 12 of the 1934 Act, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
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FREEPORT-MCMORAN SULPHUR INC.
November 14, 1997 By: /s/ ROBERT M. WOHLEBER
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Name: Robert M. Wohleber
Title: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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5
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INFORMATION STATEMENT
[LOGO]
COMMON STOCK
$.01 PAR VALUE PER SHARE
This Information Statement relates to 10,346,578 shares of common stock (the
"Common Stock") of Freeport-McMoRan Sulphur Inc. ("Freeport Sulphur" or the
"Company") which will be distributed to the public unitholders and the holders
of general partnership interests (collectively referred to herein as "FRP
Partners") of Freeport-McMoRan Resource Partners, Limited Partnership ("FRP") in
connection with the merger (the "Merger") of Freeport-McMoRan Inc. ("FTX"), the
administrative managing general partner of FRP and the holder of a 51.6%
partnership interest in FRP, into IMC Global Inc. ("IGL").
Freeport Sulphur is a newly-formed wholly-owned subsidiary of FRP. In
connection with the Merger, FRP has agreed to contribute to Freeport Sulphur the
assets and liabilities of FRP's sulphur business and certain of FRP's oil and
gas operations, including those businesses commonly referred to as the "Main
Pass" operations, and IGL has agreed to transfer its separate interest in the
Main Pass operations to FRP, which FRP will also contribute to Freeport Sulphur.
The contributions by FRP and IGL are referred to herein as the "Contribution."
Following the Contribution, Freeport Sulphur will own an 83.3% interest in the
Main Pass operations and will own 100% of the other assets contributed by FRP.
Following the Contribution, FRP will distribute all of the shares of Common
Stock to FTX and the public unitholders of FRP in accordance with their
respective partnership interests (the "FRP Distribution"). Of the total number
of shares of Common Stock to be distributed, 5,008,065 shares will be
distributed to the public unitholders of FRP, and 5,338,513 shares will be
distributed to FTX as the owner of a 51.6% interest in FRP. Each public
unitholder will be entitled to receive one share of Common Stock for each ten
units of FRP partnership interest that it holds on the effective date of the
Merger. Cash will be paid in lieu of fractional interests in a share of Common
Stock. The FRP Distribution will not be effected until approval of the Merger by
the stockholders of FTX and IGL has been received and all other conditions to
the Merger (other than the FRP Distribution) have been satisfied or waived.
No FRP Partner will be required to make a payment for the shares of Common
Stock received in the FRP Distribution and no FRP Partner will be required to
surrender or exchange units of FRP partnership interest in order to receive
shares of Common Stock. Neither the Contribution nor the FRP Distribution will
otherwise affect the ownership interests of FRP Partners in FRP which,
immediately after the Contribution, will continue to be principally engaged in
the phosphate fertilizer business through IMC-Agrico Company, a joint venture
between FRP and IGL. Future FRP cash distributions to unitholders will continue
to be determined under the terms of the FRP partnership agreement.
There is currently no public market for the Common Stock, although it is
expected that a "when-issued" trading market may develop on or about the record
date for the FRP Distribution. Freeport Sulphur has applied for listing of the
Common Stock on the New York Stock Exchange upon notice of issuance and expects
to receive approval of such listing prior to the FRP Distribution.
RECIPIENTS OF THE COMMON STOCK SHOULD NOTE THE FACTORS DISCUSSED IN "RISK
FACTORS" BEGINNING ON PAGE 11.
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WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
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THE DATE OF THIS INFORMATION STATEMENT IS NOVEMBER 17, 1997.
<PAGE>
AVAILABLE INFORMATION
Following the FRP Distribution, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"1934 Act") and in accordance therewith will file reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy statements and other information to be filed
by the Company with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Commission's Regional
Offices, including the following: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information may be obtained by
mail at prescribed rates from the Public Reference Section of the Commission at
450 Fifth Street, N.W. Street, N.W., Washington, D.C. 20549 or accessed
electronically on the Commission's Web site at (http://www.sec.gov). The Company
has applied for listing of the Common Stock on the New York Stock Exchange (the
"NYSE") upon notice of issuance and reports and other information concerning the
Company can also be inspected at the NYSE offices, 20 Broad Street, New York,
New York, 10005.
The Company intends to furnish holders of Common Stock with annual reports
containing consolidated financial statements prepared in accordance with United
States generally accepted accounting principles and audited and reported on,
with an opinion expressed, by an independent public accounting firm, as well as
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
The Company has filed with the Commission a Registration Statement on Form
10 under the 1934 Act covering the Common Stock. This Information Statement does
not contain all of the information in the Registration Statement and the related
exhibits, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained herein concerning the
provisions of any documents are not necessarily complete and, in each instance,
reference is made to the copy of such document filed or incorporated by
reference as an exhibit to the Registration Statement. The Registration
Statement and the related exhibits filed by the Company with the Commission may
be inspected and copied at the public reference facilities of the Commission
listed above.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS INFORMATION
STATEMENT OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS INFORMATION STATEMENT NOR CONSUMMATION OF THE FRP DISTRIBUTION
CONTEMPLATED HEREBY SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF, OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
2
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 2
SUMMARY................................................................... 5
RISK FACTORS.............................................................. 12
Competition........................................................... 12
Reliance on IGL as Continuing Customer................................ 12
Effect of Prices on Sulphur Mining Operations......................... 12
Seasonality and Volatility of Sulphur Markets......................... 13
Depletion of Oil and Gas Reserves..................................... 13
Absence of Independent Operating History.............................. 13
Limited Relevance of Historical Financial Information................. 13
Absence of Trading Market............................................. 14
Dividends............................................................. 14
Reserve Estimates and Future Net Cash Flows........................... 14
Environmental Matters................................................. 14
Operating Hazards..................................................... 16
Dependence on Management and Administrative Services.................. 16
Anti-takeover Measures................................................ 16
THE DISTRIBUTIONS......................................................... 17
Background of and Reasons for the Distributions....................... 17
The Distribution Agreement............................................ 17
The Solvency Opinion.................................................. 18
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 19
Partnership Status of FRP............................................. 19
Contribution of the Transferred Businesses to Freeport Sulphur........ 20
Stockholders' Rights Agreement........................................ 20
Distribution of Company Common Stock.................................. 20
Basis of the Transferred Businesses to the Company; Basis and Holding
Period of Company Common Stock to FRP Partners....................... 21
Suspended Losses...................................................... 22
Tax Treatment of FRP and Company Income or Loss....................... 23
Distributions from the Company........................................ 23
Sale or Exchange of Common Stock...................................... 23
Tax Implications of the Merger to FRP................................. 23
Other Tax Aspects..................................................... 24
DIVIDEND POLICY........................................................... 25
DISTRIBUTING SECURITY HOLDER.............................................. 25
CAPITALIZATION............................................................ 25
SELECTED FINANCIAL AND OPERATING DATA..................................... 26
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA........................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 30
Overview.............................................................. 30
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3
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Impairment Assessment of Sulphur Assets............................... 30
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Results of Operations................................................. 31
Capital Resources and Liquidity....................................... 32
Environmental......................................................... 33
Cautionary Statement.................................................. 33
BUSINESS.................................................................. 34
General............................................................... 34
Strategy.............................................................. 35
Sulphur Business...................................................... 36
Oil and Gas Business.................................................. 42
Competition........................................................... 43
Customers............................................................. 45
Engineering, Research and Development................................. 45
Operating Hazards..................................................... 45
Regulatory Matters.................................................... 45
Environmental Matters................................................. 46
Employees............................................................. 47
Legal Proceedings..................................................... 47
MANAGEMENT................................................................ 48
Directors and Executive Officers...................................... 48
Director Compensation................................................. 49
Committees of the Board of Directors.................................. 49
Executive Compensation................................................ 49
Compensation Committee Interlocks and Insider Participation........... 50
The Employee Benefits Agreement....................................... 50
Stock Option Plans.................................................... 51
PRINCIPAL STOCKHOLDERS.................................................... 58
CERTAIN TRANSACTIONS...................................................... 59
DESCRIPTION OF CAPITAL STOCK.............................................. 60
Common Stock.......................................................... 60
Preferred Stock....................................................... 60
Certain Charter and By-law Provisions................................. 61
Rights Agreement...................................................... 64
Transfer Agent........................................................ 64
Limitation of Directors' and Officers' Liability and
Indemnification...................................................... 64
SHARES ELIGIBLE FOR FUTURE SALE........................................... 65
INDEX TO FINANCIAL STATEMENTS............................................. F-1
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4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS INFORMATION STATEMENT. UNLESS OTHERWISE NOTED OR THE CONTEXT
REQUIRES OTHERWISE, REFERENCES HEREIN TO THE HISTORICAL OPERATIONS AND
PERFORMANCE OF THE "COMPANY" OR "FREEPORT SULPHUR" REFER ONLY TO THE OPERATIONS
AND PERFORMANCE OF THE FRP TRANSFERRED BUSINESSES AND NOT OF THE IGL TRANSFERRED
BUSINESSES, AND PROSPECTIVE STATEMENTS ABOUT THE "COMPANY" OR "FREEPORT SULPHUR"
REFER TO FREEPORT SULPHUR AS IF EACH OF THE CONTRIBUTION AND THE DISTRIBUTIONS
(AS DEFINED BELOW) HAD BEEN CONSUMMATED.
THE DISTRIBUTIONS
This Information Statement relates to the 10,346,578 shares of Common Stock
of the Company which are to be delivered on a pro rata basis to the FRP Partners
in the FRP Distribution. In connection with the Merger, FRP and the Company have
entered into a Contribution and Distribution Agreement, dated August 26, 1997
(the "Distribution Agreement"), pursuant to which FRP has agreed to contribute
to Freeport Sulphur the assets and liabilities of FRP's sulphur business, and of
certain of FRP's oil and gas operations, including those businesses commonly
referred to as the "Main Pass" operations, located offshore Louisiana in the
Gulf of Mexico (the "FRP Transferred Businesses). Also in connection with the
Merger and under the terms of a separate contribution agreement, IGL has agreed
to transfer to FRP its separate interest in the Main Pass operations (the "IGL
Transferred Businesses), which FRP will also contribute to Freeport Sulphur. The
FRP Transferred Businesses and the IGL Transferred Businesses are sometimes
referred to herein collectively as the "Transferred Businesses." Following the
Contribution, the Company will own an 83.3% interest in the Main Pass operations
(with Homestake Sulphur Company ("Homestake") continuing to own the remaining
16.7%) and will own 100% of the other assets contributed by FRP pursuant to the
Distribution Agreement.
Following the Contribution, FRP will distribute all 10,346,578 shares of the
Company's Common Stock to the FRP Partners in accordance with their respective
partnership interests on the effective date of the Merger (the "Record Date"),
such that, following the FRP Distribution, FTX will own 5,338,513, or 51.6%, of
the outstanding shares of Common Stock and FRP's public unitholders will own in
the aggregate 5,008,065, or 48.4%, of the outstanding shares of Common Stock. In
the FRP Distribution, the FRP public unitholders will receive one share of
Common Stock for each ten units of FRP partnership interest held as of the
Record Date. Cash will be issued in lieu of fractional interests in a share of
Common Stock. At the Effective Time of the Merger (the "Effective Time"), each
FTX stockholder will be entitled to receive a proportionate number of shares of
the Common Stock received by FTX in the FRP Distribution (the "FTX Stockholder
Distribution" and together with the FRP Distribution, the "Distributions"). The
FRP Distribution will not be effected until approval of the Merger by the
stockholders of FTX and IGL has been received and all other conditions to the
Merger (other than the FRP Distribution) have been satisfied or waived.
The 10,346,578 shares of Common Stock to be distributed to the FTX
stockholders and to the FRP public unitholders in the Distributions will
constitute all of the outstanding Common Stock immediately following the
Distributions. There is currently no public market for the Common Stock,
although it is expected that a "when-issued" trading market will develop on or
about the Record Date. Freeport Sulphur has applied for listing of the Common
Stock on the NYSE upon notice of issuance and expects to receive approval of
such listing prior to the FRP Distribution. See "Description of Capital Stock."
5
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THE COMPANY
Freeport Sulphur is a Delaware corporation formed in August 1997 to succeed
to the sulphur and certain oil and gas operations of FRP. Management believes
that Freeport Sulphur is the world's largest producer of mined, or "Frasch,"
sulphur and the largest supplier of elemental sulphur in the United States. The
Company's sulphur operations include the mining, purchase, transportation,
terminaling and marketing of sulphur. Its oil and gas operations consist of the
production and sale of oil and gas from its Main Pass facilities.
The Main Pass sulphur deposit, which was discovered offshore Louisiana in
the Gulf of Mexico in 1988, is the largest known sulphur reserve in North
America. The Company's Main Pass offshore mining complex is the largest
structure of its type in the Gulf of Mexico and one of the largest in the world,
and was designed to produce an average of 5,500 long tons (2,240 lbs.) per day
over its life. The Company began operating the Culberson mine in West Texas in
January 1995 following its acquisition of substantially all of the domestic
sulphur assets of Pennzoil Company ("Pennzoil"). As of December 31, 1996, the
Main Pass and Culberson mines were estimated to contain proved sulphur reserves
totaling 53.1 million long tons net to the Company (or 69.7 million long tons
net to the Company on a pro forma basis after the contribution of the IGL
Transferred Business). In addition to the Culberson mine, the Company also
acquired from Pennzoil sulphur terminals and handling facilities in Galveston,
Texas and Tampa, Florida, land and marine transportation equipment, and sales
and other related commercial contracts and obligations.
The Company's principal business is the sale of sulphur and the marketing of
its terminaling and transportation assets for use by recovered sulphur producers
and industrial consumers of sulphur. The phosphate fertilizer industry generally
accounts for approximately 90% of the Company's sulphur sales. The Company's
1996 sulphur sales were approximately 2.9 million long tons representing 25% of
domestic consumption (or 3.4 million long tons representing 30% of domestic
consumption on a pro forma basis after the contribution of the IGL Transferred
Businesses). Sales to IMC-Agrico Company, a joint venture partnership between
IGL and FRP that is a manufacturer of phosphate fertilizers and the largest
purchaser of elemental sulphur in the world ("IMC-Agrico"), represented
approximately 65% of the Company's sulphur sales (or 71% on a pro forma basis
after the contribution of the IGL Transferred Businesses). Pursuant to a Sulphur
Supply Agreement, the Company has agreed to supply and IMC-Agrico has agreed to
purchase approximately 75% of IMC-Agrico's annual sulphur consumption for as
long as IMC-Agrico has an operational need for sulphur. The price per ton for
all sulphur delivered under the agreement is based upon the weighted average
market price for sulphur delivered by other sources to IMC-Agrico's New Wales
production plant in central Florida, except that the Company is entitled to a
premium with respect to approximately 40% of the sulphur that it delivers under
the agreement. IMC-Agrico also pays a portion of the freight costs associated
with the delivery of sulphur under the agreement. Management believes that the
terms of the Sulphur Supply Agreement are no less favorable to the Company than
those that could have been negotiated with an unaffiliated party.
The Main Pass site also contains proved oil reserves from which the Company
produces and sells oil for the Main Pass joint venture. Oil production averaged
approximately 10,700 barrels per day (5,200 barrels net to the Company, or 7,400
barrels net to the Company on a pro forma basis after the contribution of the
IGL Transferred Businesses) during the year ended December 31, 1996, and 9,400
barrels per day (4,600 barrels net to the Company, or 6,500 barrels net the
Company on a pro forma basis after the contribution of the IGL Transferred
Businesses) during the nine months ended September 30, 1997. As of December 31,
1996, Main Pass was estimated to contain 12.8 million barrels (5.2 million
barrels net to the Company, or 7.4 million barrels net to the Company on a pro
forma basis after the contribution of the IGL Transferred Businesses) of proved
oil reserves. In 1997, such estimates were reduced to 8.2 million barrels (3.2
million barrels net to the Company, or 4.6 million barrels net to the Company on
a pro forma basis after the contribution of the IGL Transferred Businesses) of
proved oil reserves, which are expected to decline substantially in subsequent
years and to be fully depleted by 2001.
The Company's principal executive offices are located at 1615 Poydras
Street, New Orleans, Louisiana 70112, and its telephone number is (504)
582-4000.
6
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SUMMARY OF FEDERAL TAX CONSEQUENCES
The following is a summary of the principal expected federal income tax
consequences to FRP's public unitholders of the Contribution, Distributions and
Merger. Miller & Chevalier, Chartered, as tax counsel for FRP and FTX will
render certain opinions regarding the federal income tax consequences of these
transactions. This summary is qualified by, and amplified in, the discussion in
the section of this Information Statement entitled "Federal Income Tax
Consequences," and by the opinion that will be rendered, a copy of which has
been filed as an exhibit to the Registration Statement to which this Information
Statement is attached.
In the opinion of tax counsel, the Contribution will result in a non-taxable
exchange of assets from FRP for stock of the Company, and the FRP Distribution
will result in a generally non-taxable distribution of the Common Stock to the
FRP Partners. Accordingly, FRP Partners will incur no tax liability as a result
of this exchange, except that FRP Partners who receive cash in lieu of
fractional shares will be treated as having received and then sold the
fractional shares in a taxable transaction and it is likely that FRP will
recognize taxable gain in an amount equal to the value of the 25% interest in
Main Pass joint venture that IGL will transfer to FRP immediately before the
Contribution. As partners in FRP, FRP Partners have been allocated a share of
FRP's income and deductions and have received partnership distributions that are
generally nontaxable to the partners. FRP Partners will become stockholders of
the Company, which will succeed to the FRP Transferred Businesses. They will no
longer be allocated income or deductions from the FRP Transferred Businesses,
and distributions from the Company generally will be taxable as dividends. In
the opinion of tax counsel, FRP public unitholders with "suspended passive
activity losses" from FRP may not deduct those suspended losses upon
consummation of the Contribution, the Distributions, and the Merger except to
the extent they recognize gain. Other aspects of the passive activity loss rules
after the FRP Distribution are not clear. See "Certain Federal Income Tax
Consequences-- Suspended Losses." In the opinion of tax counsel, the basis and
holding period of the Common Stock received in the FRP Distribution will be
determined by reference to the basis and holding period of the transferred
assets, which is subject to some uncertainty. FRP intends to report to FRP
Partners in its annual tax package its calculations of the partners' basis and
holding period in the distributed Common Stock.
Following the distribution of Common Stock to FRP Partners, FTX, FRP's
majority owner and Administrative Managing General Partner, will merge into IGL.
Because FTX owns more than 50% of FRP, the Merger will result in a constructive
termination of FRP under section 708 of the Internal Revenue Code of 1986, as
amended (the "Code"). In tax counsel's opinion, the termination will not result
in the recognition of gain or loss to FRP or the FRP Partners. It is tax
counsel's opinion that the termination will, however, accelerate the income or
loss recognition to the FRP Partners of the income or loss earned between June
30, 1997 and the Effective Time of the Merger by IMC-Agrico which has a June 30
fiscal year-end.
7
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The summary financial data provided below reflect the historical results of
operations and financial position of the FRP Transferred Businesses only and do
not include the IGL Transferred Businesses. The historical financial information
is not necessarily indicative of the financial position and results of
operations that would have been achieved had the Company been operated as an
independent entity during the periods covered or the results that may be
achieved in the future. Historical net income and dividends per share amounts
are not presented because the FRP Transferred Businesses were operated through
divisions of FRP for the periods presented. See "Risk Factors--Limited Relevance
of Historical Financial Information."
The summary historical financial information as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
has been derived from the audited financial statements of the FRP Transferred
Businesses included elsewhere herein and does not include the IGL Transferred
Businesses. The summary financial information as of September 30, 1997 and for
each of the nine-month periods ended September 30, 1997 and 1996 has been
derived from the unaudited financial statements of the FRP Transferred
Businesses, and in the opinion of management includes all adjusting entries
(consisting only of normal recurring adjustments), necessary for a fair
presentation of the results of the periods presented.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical audited financial statements of the FRP
Transferred Businesses and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------
1997 1996 1996 1995 1994
---------- -------------- ---------- -------------- ----------
(IN THOUSANDS, EXCEPT REALIZED PRICE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................. $ 158,304 $ 167,379 $ 221,426 $ 255,949 $ 151,795
Net income (loss) before income
taxes(1)................................ (425,171 (2) 11,620 12,39 225,020(3) 7,353
Pro forma net income (loss)
(unaudited)(1).......................... (269,558) 7,251 7,733 18,175 4,662
OPERATING DATA:
Sulphur sales (long tons)................. 2,167 2,142 2,900 3,050 2,088
Sulphur average realized price............ $ 60.75 $ 63.01 $ 61.78 $ 70.44 $ 53.07
Oil sales (barrels)....................... 1,248 1,508 1,896 2,218 2,534
Oil average realized price................ $ 18.37 $ 18.82 $ 19.49 $ 15.82 $ 13.74
CASH FLOW DATA:
Operating................................. $ 20,834 $ 41,512 $ 51,844 $ 65,407 $ 34,202
Investing................................. (2,099) (3,743) (1,688) (3,335 ) (10,006)
Financing................................. (19,279) (38,560 ) (49,814) (59,298 ) (24,596)
OTHER DATA:
EBITDA(4)................................. 26,468 41,614 50,192 68,720 47,284
Capital expenditures...................... 2,989 4,948 3,834 3,710 11,231
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, ----------------------
1997 1996 1995
------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................... $ 27,205 $ 25,794 $ 42,059
Property, plant and equipment, net...................................... 92,562(2) 535,653 575,029
Total assets............................................................ 178,581 633,620 680,467
Net assets to be transferred............................................ 39,910 484,360 521,782
</TABLE>
- ------------------------
(1) As a partnership, FRP pays no federal or state income taxes and historically
has not provided for income taxes for the FRP Transferred Businesses. Pro
forma net income includes an estimated tax provision for the applicable
periods as if the FRP Transferred Businesses operated as a stand-alone
taxpaying entity.
(2) In 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), which requires an
assessment of the carrying value of long-lived assets and a reduction of
such carrying value to fair value when events or changes in circumstances
indicate that the carrying amount may not be recoverable. In the third
quarter of 1997, FRP and FTX determined that the sulphur assets were
impaired within the meaning of SFAS No. 121 because their book value
exceeded the estimated undiscounted net cash flow recoverable with respect
thereto. Accordingly, in the third quarter of 1997, FRP and FTX recorded an
impairment writedown totaling $425.4 million to reduce these properties to
their fair value (measured by the difference between the carrying value of
such assets and the current discounted value of estimated future net cash
flows).
(3) Includes charges totaling $7.0 million allocated to the FRP Transferred
Businesses to reflect a compensation charge related to FTX stock
appreciation rights, which was attributable to the significant rise in the
price of FTX common stock during such period. Pursuant to a management
services agreement with FTX, these costs were allocated to FRP, and thus to
the FRP Transferred Businesses, based on payroll costs.
(4) EBITDA represents net income before income taxes plus depreciation and
amortization expense. EBITDA is not a measure of cash flow, operating
results or liquidity as determined by generally accepted accounting
principles. The Company has supplementally disclosed information concerning
EBITDA because management believes that EBITDA is commonly accepted as
providing useful information regarding a company's historical ability to
incur and service debt. Management of the Company believes that factors that
should be considered by investors in evaluating EBITDA include, but are not
limited to, trends in EBITDA as compared to cash flow from operations, debt
service requirements and capital expenditures. EBITDA as defined and
measured by the Company may not be comparable to similarly titled measures
of other companies. Further, EBITDA should not be considered in isolation or
as an alternative to, or more meaningful than, net income or cash flow
provided by operations as determined in accordance with generally accepted
accounting principles as an indicator of the Company's profitability or
liquidity.
9
<PAGE>
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
The unaudited pro forma balance sheet data as of September 30, 1997 provided
below gives effect to the transfer of the Transferred Businesses as if such
transfer had occurred on September 30, 1997, and the unaudited pro forma income
statement data for the nine-month period ended September 30, 1997 and the year
ended December 31, 1996 gives effect to the transfer of the Transferred
Businesses as if such transfer had occurred on January 1, 1996. The unaudited
pro forma financial data does not purport to represent what the Company's
financial position or results of operations would have been had such transfer
occurred on the dates indicated or the results that may be achieved in the
future.
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE
AND REALIZED PRICE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues....................................................................... $ 190,510 $ 268,919
Net income (loss) before income taxes(1)(2).................................... (422,183) 25,326
Net income (loss)(1)........................................................... (267,664) 15,803
Net income (loss) per share.................................................... (25.76) 1.52
Weighted average common shares................................................. 10,390 10,409
OPERATING DATA:
Sulphur sales (long tons)...................................................... 2,521 3,385
Sulphur average realized price................................................. $ 61.87 $ 63.10
Oil sales (barrels)............................................................ 1,782 2,708
Oil average realized price..................................................... $ 18.37 $ 19.49
OTHER DATA:
EBITDA(3)...................................................................... $ 31,924 $ 66,326
Capital expenditures........................................................... 4,203 5,346
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital................................................................................. $ 43,377
Property, plant and equipment, net(2)(4)........................................................ 114,462
Total assets(2)................................................................................. 278,144
Stockholder's equity(2)......................................................................... 107,677
</TABLE>
- ------------------------
(1) As a partnership, FRP pays no federal or state income taxes and historically
has not provided for income taxes for the Transferred Businesses. Pro forma
net income includes an estimated tax provision for the applicable periods as
if the Transferred Businesses operated as a stand-alone taxpaying entity.
(2) In 1995, the Financial Accounting Standards Board adopted SFAS No. 121,
which requires an assessment of the carrying value of long-lived assets and
a reduction of such carrying value to fair value when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
the third quarter of 1997, FRP and FTX determined that the sulphur assets
were impaired within the meaning of SFAS No. 121 because their book value
exceeded the estimated undiscounted net cash flow recoverable with respect
thereto. Accordingly, in the third quarter of 1997, FRP and FTX recorded an
impairment writedown totaling $425.4 million to reduce these properties
10
<PAGE>
to their fair value (measured by the difference between the carrying value
of such assets and the current discounted value of estimated future net cash
flows).
(3) EBITDA represents net income before income taxes plus depreciation and
amortization expense. EBITDA is not a measure of cash flow, operating
results or liquidity as determined by generally accepted accounting
principles. The Company has supplementally disclosed information concerning
EBITDA because management believes that EBITDA is commonly accepted as
providing useful information regarding a company's historical ability to
incur and service debt. Management of the Company believes that factors that
should be considered by investors in evaluating EBITDA include, but are not
limited to, trends in EBITDA as compared to cash flow from operations, debt
service requirements and capital expenditures. EBITDA as defined and
measured by the Company may not be comparable to similarly titled measures
of other companies. Further, EBITDA should not be considered in isolation or
as an alternative to, or more meaningful than, net income or cash flow
provided by operations as determined in accordance with generally accepted
accounting principles as an indicator of the Company's profitability or
liquidity.
(4) The property, plant and equipment to be contributed by IGL were estimated to
have a fair value of approximately $21.9 million using the same assumptions
applied in the impairment assessment of FRP's sulphur assets discussed in
(2) above.
11
<PAGE>
RISK FACTORS
COMPETITION
There are two principal sources of elemental sulphur: (i) mined sulphur and
(ii) recovered sulphur produced as a by-product by oil refineries and gas
treatment plants. Recovered sulphur from domestic and foreign sources is a major
and lower cost source of supply for most sulphur customers and is the major
source of competition for the Company. As a by-product of the producer's
refining operations, the principal cost recognized by such producers is the cost
of handling and transportation to customers.
Production of recovered sulphur from high-sulphur gas processing plants and
oil refineries in the United States has increased at an average rate of
approximately 125,000 tons per year for the last three years. Because U.S.
recovered sulphur producers do not have the ability to store large inventories
of sulphur, they must move it to market and, depending on the proximity of their
plants to the principal sulphur market of central Florida, such producers may
enjoy a significant cost advantage over the Company.
Because the supply of U.S. recovered sulphur alone cannot meet total
domestic demand, mined sulphur, along with imported recovered sulphur obtained
principally from Canada and Mexico, are required to supply the balance. Canadian
recovered sulphur producers have facilities for storing excess sulphur
production in solid form, and approximately 90% of the Western Hemisphere's
sulphur inventories currently consist of sulphur recovered from natural gas in
the province of Alberta in western Canada. At certain price levels in the U.S.
sulphur markets, and depending on prices in the foreign markets they supply,
Canadian producers can be expected to increase sulphur sales to U. S. buyers in
competition with the Company.
The principal competitive risk to the Company's ability to mine sulphur
profitably is the potential for decreased domestic demand for sulphur, increased
production from domestic recovered sulphur producers, increases in imported
recovered sulphur and the rate at which stored sulphur, particularly in Canada,
is released into the market. In addition, the current level of Canadian sulphur
inventories limits the potential of the Company to realize significant price
increases for its sulphur. See "Business-- Competition."
RELIANCE ON IGL AS CONTINUING CUSTOMER
Approximately 65% of the Company's 1996 sulphur sales (71% on a pro forma
basis after the contribution of the IGL Transferred Businesses) were made to
IMC-Agrico, and, subsequent to the Distributions, IMC-Agrico will continue to
account for a substantial percentage of the Company's sulphur sales. Sales of
sulphur to IMC-Agrico are generally made at market prices, with a portion of
such sales receiving additional price consideration. Although the Company has a
long-term supply contract with IMC-Agrico that requires IMC-Agrico to purchase
sulphur from the Company as long as IMC-Agrico's phosphate fertilizer operations
require the use of sulphur, the loss of or a significant decline in its sales of
sulphur to IMC-Agrico could have a material adverse effect on the Company's
business and operating results.
EFFECT OF PRICES ON SULPHUR MINING OPERATIONS
Although current sulphur prices allow the Company to generate positive cash
flows from its mining operations, any significant decline in the market price of
sulphur for a sustained period would require the Company to consider the
suspension or curtailment of mining operations at either or both of its
operating mines. In such event, it is likely that the Culberson mine would be
closed first, because of the higher transportation costs associated with that
site. Because of the costs associated with closing and re-opening mine sites, as
well as the potential loss of mining or mineral development rights if mining
operations were suspended, the Company could decide to operate its mines for
some period even if they did not generate
12
<PAGE>
positive cash flow, and if operations were suspended, it could be difficult and
expensive for the Company to subsequently re-open a mine.
SEASONALITY AND VOLATILITY OF SULPHUR MARKETS
Because the principal use of sulphur is in the manufacture of phosphate
fertilizers, the Company's ability to successfully market its sulphur is
materially dependent on prevailing agricultural conditions and the worldwide
demand for fertilizers. Although phosphate fertilizer sales are fairly constant
month-to-month, seasonal increases occur in the domestic market prior to the
fall and spring planting season. Generally, domestic phosphate fertilizer sales
are at reduced levels after the spring planting season, although the decline in
domestic sales generally coincides with the time when major commercial and
governmental buyers in China, India and Pakistan purchase product for mid-year
delivery. Sales are also influenced by current and projected grain inventories
and prices, quantities of fertilizers imported to and exported from North
America, domestic fertilizer consumption and the agricultural policies of
certain foreign governments.
Like other commodities, the market and prices for sulphur have been and may
continue to be volatile. The Company's operating margins and cash flow are
subject to substantial fluctuations in response to changes in supply and demand
for sulphur, conditions in the domestic and foreign agriculture industry, market
uncertainties and other factors beyond its control.
DEPLETION OF OIL AND GAS RESERVES
Approximately 16.7% of the Company's 1996 revenues and 73.4% of its 1996 net
income were generated from the sale of oil recovered from Main Pass. Oil
revenues are expected to decline substantially in 1997 and subsequent years, and
the Company currently estimates that proved oil reserves at the Main Pass site
will be depleted by the year 2001. The Main Pass site is the Company's only oil
and gas property, and the Company currently does not intend to pursue oil and
gas exploration activities after the Main Pass reserves are depleted.
ABSENCE OF INDEPENDENT OPERATING HISTORY
In recent years the Company's operations have been conducted by FRP, FTX and
their predecessors as part of a diversified business that was partly integrated
with FRP's other business activities and not as a stand-alone business.
Following the Distributions, the Company will be an independent entity engaged,
except for the production of oil and gas at the Main Pass operations,
exclusively in the sulphur business, and neither FRP nor FTX will have any
obligation to provide financial or operational support to the Company.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
Because the Company has not been operated in recent years as an independent
entity, the historical financial information included herein was derived from
the audited financial statements of the FRP Transferred Businesses and is not
necessarily indicative of the results of operations, financial position and cash
flows that would have been achieved if the Company had been an independent
entity during the periods presented or that will be achieved in the future. The
Company's operations were an integral part of FRP's operations during the
periods covered by the historical financial statements included herein, and
certain historical financial data included herein has been extracted from FRP's
books and records based on allocations between FRP's sulphur and oil operations
and FRP's other businesses, and based on other assumptions necessary to reflect
the Company's operations as if they had been operated as an independent
enterprise. Additionally, the historical financial information included herein
does not give effect to the contribution of the IGL Transferred Businesses,
which is presented only on a pro forma basis. See "Pro Forma Financial
Statements (Unaudited) of Freeport-McMoRan Sulphur Inc.," including the
discussion of
13
<PAGE>
the assumptions reflected therein, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ABSENCE OF TRADING MARKET
There is currently no trading market for the Company's Common Stock and
there can be no assurance that any such market will be established or
maintained. The Company has applied for listing of the Common Stock on the NYSE.
Even if an active trading market develops for the Common Stock, there can be no
assurance that its trading volume will be adequate to assure liquidity of a
stockholder's investment.
DIVIDENDS
The Company intends to retain earnings to meet its working capital needs and
finance its continuing operations. Thus, the Company does not plan to pay cash
dividends to its stockholders for the foreseeable future. See "Dividend Policy."
RESERVE ESTIMATES AND FUTURE NET CASH FLOWS
The Company's reporting of proved sulphur and oil and gas reserves is based
upon engineering estimates. Reserve engineering is a subjective process of
estimating the recovery from underground accumulations of sulphur, oil and
natural gas that are not susceptible to exact measurement, and the accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable sulphur and oil and gas reserves and of future net cash
flows necessarily depend upon a number of variable factors and assumptions, such
as historical production from the area compared with production from other
producing areas, the assumed effects of governmental regulations and assumptions
concerning future sulphur and oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may vary considerably from actual results. Because all reserve
estimates are to some degree speculative, the quantities of sulphur and oil and
natural gas that are ultimately recovered, production and operating costs, the
amount and timing of future development and reclamation expenditures, and future
sulphur and oil and natural gas sales prices may all vary materially from those
assumed in these estimates. In addition, different reserve engineers may make
different estimates of reserve quantities and cash flows based on the same data.
All of the Company's sulphur reserves are considered proved because of extensive
drilling and production experience; nevertheless, reserves are estimates and the
amount of sulphur actually produced may vary from the estimates, and such
variances could be material.
The present values of estimated future net cash flows referred to in this
Information Statement should not be construed as the current market value of the
Company's estimated proved oil and gas reserves. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, while actual future prices and costs may be materially higher or
lower. Actual net cash flows also will be affected by factors such as the amount
and timing of production, supply and demand for oil and gas, curtailments or
increases in consumption by gas purchasers and changes in governmental
regulations and taxation. The timing of future net cash flows from proved
reserves, and thus their actual present value, will be affected by the timing of
production and the incurrence of expenses in the development and production of
oil and gas properties. In addition, the 10% discount factor required by the
Commission to be used to calculate discounted future net cash flows for
reporting purposes is not necessarily the most appropriate discount factor based
on interest rates in effect from time to time and risks associated with the oil
and gas reserves owned by the Company or the oil and gas industry in general.
ENVIRONMENTAL MATTERS
The Company's operations include exploration, mining, development and
production of natural resources, and the extraction, handling, production,
storage, transportation and disposal of materials and waste products that may be
toxic or hazardous. Consequently, the Company is subject to numerous
14
<PAGE>
environmental laws and regulations. The Company has incurred, and expects to
continue to incur, significant capital expenditures and operating expenses based
on these laws and regulations. Continued governmental and public emphasis on
environmental issues may result in increased capital and operating costs in the
future, although the impact of future laws and regulations or future changes to
existing laws and regulations cannot be predicted or quantified.
Federal legislation (sometimes referred to as "Superfund" legislation)
imposes liability, without regard to fault, for clean-up of certain waste sites,
even though waste management activities at the site may have been performed in
compliance with regulations applicable at the time. Under the Superfund
legislation, one responsible party may be required to bear more than its
proportional share of clean-up costs if payments cannot be obtained from other
responsible parties. In addition, federal and state regulatory programs and
legislation mandate clean-up of certain wastes at operating sites. Governmental
authorities have the power to enforce compliance with these regulations and
permits, and violators are subject to civil and criminal penalties, including
fines, injunctions or both. Third parties also have the right to pursue legal
actions to enforce compliance. Liability under these laws can be significant and
unpredictable.
The Company may receive in the future notices from governmental agencies
that it is one of many potentially responsible parties at certain sites under
relevant federal and state environmental laws. Some of these sites may involve
significant clean-up costs. The ultimate settlement of liability for the
clean-up of such sites usually occurs many years after the receipt of notices
identifying potentially responsible parties because of the many complex,
technical and financial issues associated with site clean-up. The Company cannot
predict its potential liability for clean-up costs that it may incur in the
future.
The recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain crude oil and natural
gas exploration and production wastes as "hazardous wastes," which would make
the wastes subject to significantly more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the Company's operating costs, as well as the oil and gas
industry in general. Initiatives to further regulate the disposal of crude oil
and natural gas wastes are also pending in certain states and could have a
similar impact. In addition to compliance costs, government entities and other
third parties may assert substantial liabilities against owners and operators of
oil and gas properties for oil spills, discharges of hazardous materials,
remediation and clean-up costs and other environmental damages, including
damages caused by previous property owners. The imposition of any such
liabilities on the Company could have a material adverse effect on the Company's
financial condition and results of operations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on the Company.
In connection with the Contribution, the Company has assumed responsibility
for potential liabilities, including environmental liabilities, associated with
the prior conduct of the Transferred Businesses. Among these are potential
liabilities arising from sulphur mines that were depleted and closed in the past
in accordance with reclamation and environmental laws in effect at the time,
particularly in coastal or marshland areas that have experienced subsidence or
erosion. The Company believes that it is in compliance with existing laws
regarding such closed operations, and has implemented controls in some areas
that it believes exceed its legal responsibilities. Nevertheless, it is possible
that new laws or actions by governmental agencies could result in significant
unanticipated additional reclamation costs. For additional information regarding
certain reclamation obligations, see "Business--Environmental Matters."
The Company could also be subject to potential liability for personal injury
or property damage relating to wellheads and other materials at closed mines in
coastal areas that have become exposed through coastal erosion. Although the
Company has insurance in place to protect it against certain of these
15
<PAGE>
liabilities, there can be no assurance that such insurance coverage would be
sufficient. There can also be no assurance that the Company's current or future
accruals for reclamation costs will be sufficient to fully cover such costs.
OPERATING HAZARDS
The Company's offshore sulphur mining, oil production and marine
transportation operations are subject to marine perils, including collisions,
hurricanes and other adverse weather conditions. All of the Company's oil and
sulphur production activities are subject to blowouts, cratering, fires and
other risks, any of which could result in serious personal injury or death and
substantial damage to property and the environment. The Company's operations may
be subject to significant interruption, and the Company may be subject to
significant liability, due to industrial accidents, severe weather or other
natural disasters occurring at one or more of its mining operations.
The Company has in place, through FM Services Company ("FMS"), a company
that, prior to the Distributions was an affiliate of FTX and FRP and subsequent
to the Distributions will be 25% owned by the Company, certain liability,
property damage, business interruption and other insurance coverages in types
and amounts that it considers reasonable and believes to be customary in the
Company's business. This insurance provides protection against loss from some,
but not all, potential liabilities incident to the ordinary conduct of the
Company's business, including coverage for certain types of damages associated
with environmental and other liabilities that arise from sudden, unexpected and
unforeseen events, with such coverage limits, retentions, deductibles and other
features as management deems appropriate. The occurrence of an event that is not
fully covered by insurance could have a material adverse effect on the Company's
financial condition and results of operations.
DEPENDENCE ON MANAGEMENT AND ADMINISTRATIVE SERVICES
The Company depends on certain management and administrative services
provided by FMS. Pursuant to a management services agreement (the "Services
Agreement") between the Company and FMS, FMS manages and supports certain of the
Company's operations. The Services Agreement does not assure the Company
unlimited access to all of the executive officers listed under "Management," and
there may be competition between the Company and its former affiliates for the
time and effort of the employees of FMS who provide services to the Company. If
the Company were deprived of adequate access to certain key members of its
management team or other personnel, or lost access to such services altogether,
the Company's results of operations could be materially and adversely affected.
See "Certain Transactions."
ANTI-TAKEOVER MEASURES
The Company's charter documents contain provisions that may have the effect
of discouraging a proposal for a takeover of the Company in which the Company's
stockholders could receive a substantial premium for some or all of their
shares. These provisions, among other things, authorize the issuance of "blank
check" preferred stock and divide the board of directors into three classes,
serving three-year staggered terms. The Company also intends to enter into a
Stockholder Protection Rights Agreement (the "Rights Agreement"), pursuant to
which each share of Common Stock will have an associated preferred stock
purchase right that, if triggered by the acquisition of 15% or more of the
outstanding Common Stock, would have the effect of significantly increasing the
cost to a potential acquiror of a takeover of the Company. In addition, the
Company is subject to certain provisions of Delaware law that limit, in some
cases, the ability of the Company to engage in certain business combinations
with significant stockholders. Such provisions, either alone, or in combination
with each other and the Rights Agreement, may give the Company's current
directors and executive officers a substantial ability to influence the outcome
of a proposed takeover. See "Description of Capital Stock--Certain Charter and
By-law Provisions."
16
<PAGE>
THE DISTRIBUTIONS
THE FOLLOWING DESCRIPTION OF THE DISTRIBUTION AGREEMENT DOES NOT PURPORT TO
BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENT, A
COPY OF WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT TO
WHICH THIS INFORMATION STATEMENT IS ATTACHED. ALL FRP PARTNERS ARE URGED TO READ
THE DISTRIBUTION AGREEMENT IN ITS ENTIRETY.
BACKGROUND OF AND REASONS FOR THE DISTRIBUTIONS
The FRP Distribution is being undertaken in connection with the Merger and
will occur immediately prior to the Effective Time. Contemporaneously with the
execution of the Agreement and Plan of Merger dated August 26, 1997 between FTX
and IGL pursuant to which the Merger is to be consummated, FTX, FRP and Freeport
Sulphur entered into the Distribution Agreement, pursuant to which FRP agreed to
contribute to Freeport Sulphur the FRP Transferred Businesses. In addition, in
connection with the Merger and under the terms of a separate contribution
agreement, IGL has agreed to transfer the IGL Transferred Businesses to FRP,
which FRP will also contribute to Freeport Sulphur. Following the Contribution,
Freeport Sulphur will own an 83.3% interest in the Main Pass operations, and
will own 100% of the other assets contributed by FRP pursuant to the
Distribution Agreement.
In reaching its determination to approve the FRP Distribution, FTX, acting
in its capacity as the administrative managing general partner of FRP,
considered the following possible beneficial effects of the FRP Distribution on
the FRP unitholders:
(i) Completion of the FRP Distribution will not affect the participation
by FRP unitholders in either the phosphate fertilizer or sulphur businesses,
but will enable such unitholders in the future to evaluate separately their
continued participation in either or both of such businesses;
(ii) As noted earlier, the 25% interest in the Main Pass operations
currently held by IGL will be contributed to Freeport Sulphur, and the FRP
unitholders will benefit from such contribution;
(iii) Overall investor understanding of FRP and Freeport Sulphur should
be enhanced by the separation of the phosphate fertilizer and sulphur lines
of business;
(iv) The combination of FTX and IGL should allow for the achievement of
significant cost savings through the elimination of FTX's administrative
function and the streamlining of certain similar functions at the IMC-Agrico
level, which should benefit not only the IGL stockholders, but also the FRP
unitholders;
(v) IGL has indicated that the Merger will provide it with an
opportunity to better integrate its phosphate business (conducted through
IMC-Agrico) and its other crop nutrient businesses; will provide IGL more
direct control over the business operations of IMC-Agrico and streamline
policy-making functions at IMC-Agrico; permit a more focused approach in
developing the long-term business strategies of IMC-Agrico; and permit
faster and more effective decision-making by IMC-Agrico. To the extent any
of such actions enable IGL to enhance IMC-Agrico's productivity, FRP
unitholders should participate in such benefits.
THE DISTRIBUTION AGREEMENT
THE CONTRIBUTION
The Distribution Agreement provides for the transfer to the Company of
certain assets of IGL, FTX and FRP and the assumption by the Company of certain
liabilities related to those assets. The assets to be received by the Company in
the Contribution include substantially all of the assets used by FRP in the
production, marketing and distribution of sulphur, including its interest in the
Main Pass operations, as well as the oil and gas production operations at Main
Pass. Pursuant to the Merger and under the terms of a separate contribution
agreement, IGL's 25% interest in the Main Pass operations will also be
transferred to FRP, which in turn will contribute that interest to the Company.
The liabilities assumed by the Company are generally those liabilities
associated with the ownership, acquisition, conduct or past operation of the
assets received in the Contribution. See "Business."
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<PAGE>
THE DISTRIBUTIONS
The Distribution Agreement provides that the FRP Distribution will be
effected through the distribution to each holder of record of units of
partnership interests in FRP as of the close of business on the Record Date of
one share of the Company's Common Stock for every 10 units of partnership
interest held. In the FTX Stockholder Distribution, the FTX stockholders of
record as of the Effective Time will receive their pro rata share of the Common
Stock received by FTX in the FRP Distribution. The FRP Distribution will not be
effected until approval of the Merger by the stockholders of FTX and IGL has
been received and all other conditions to the Merger (other than the FRP
Distribution) have been satisfied or waived.
Based upon the number of units of FRP partnership interest expected to be
outstanding as of the Record Date, FRP will distribute 10,346,578 shares of
Common Stock in the FRP Distribution, of which 51.6% or 5,338,513 shares will be
distributed to FTX and 48.4% or 5,008,065 shares will be distributed to the FRP
public unitholders. All of the shares of Common Stock received by FTX will be
delivered to the FTX stockholders in the FTX Stockholder Distribution. As a
result of the Distributions, the FRP public unitholders and the FTX stockholders
will own all of the outstanding shares of Common Stock of the Company.
Under the terms of the Distribution Agreement, the Distribution Agent for
each of the FRP Distribution and the FTX Stockholder Distribution will aggregate
any fractional shares of Common Stock otherwise distributable in connection with
the FRP Distribution and the FTX Stockholder Distribution, respectively, sell
them in the open market, and make a pro rata distribution of the proceeds of
such sales to FRP public unitholders or FTX stockholders, as appropriate, who
would otherwise have received a fractional share in the FRP Distribution or the
FTX Stockholder Distribution.
MUTUAL INDEMNITIES
The Distribution Agreement provides that FTX and FRP on the one hand and the
Company on the other will indemnify one another against certain losses, damages,
claims and liabilities assumed or retained by the indemnifying party. Among
other things, FTX and FRP are obligated to indemnify the Company for an
indefinite period against losses related to (i) the failure by FRP or FTX to
perform their respective obligations under the Distribution Agreement, (ii)
liabilities associated with any FRP assets not transferred to, and liabilities
not assumed by, the Company , (iii) taxes relating to the operation of the
Transferred Businesses prior to the Contribution, and (iv) the breach of any
representation or warranty by FRP or FTX contained in the Distribution
Agreement. The Company is obligated to indemnify FRP and FTX for an indefinite
period against (i) the failure by the Company to perform its obligations under
the Distribution Agreement, (ii) liabilities associated with any FRP assets
transferred to the Company pursuant to the Contribution, and liabilities
associated with the operation of the Transferred Businesses prior to the
Contribution, (iii) taxes relating to the operation of the Transferred
Businesses after the Contribution and (iv) the breach of any representation or
warranty of the Company contained in the Distribution Agreement.
THE SOLVENCY OPINION
The Company and FTX have received the opinion of Valuation Research
Corporation that the FRP Distribution does not violate certain provisions of
Delaware limited partnership law regarding the making of distributions and,
after giving effect to the Contribution and the Distributions, that the Company
(i) will be solvent after taking into account the liabilities and obligations
undertaken in connection with and as a result of the Contribution, (ii) will be
able to pay its debts and liabilities as they become due, and (iii) will not be
left with insufficient capital with which to engage in its businesses. Receipt
of this opinion is a condition precedent to the consummation of the Merger. A
copy of the opinion has been filed as an exhibit to the Registration Statement
to which this Information Statement is attached.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax consequences to FRP's public unitholders resulting from the formation
of the Company, the contribution of the Transferred Businesses by FRP to the
Company, the distribution of Common Stock to FRP Partners, and the Merger and
does not purport to be a complete analysis or description of all potential tax
effects of the Contribution, the Distributions, and the Merger. The discussion
reflects, as to those matters noted, the opinion of Miller & Chevalier,
Chartered, tax counsel to FRP and FTX that will be rendered in connection with
the Distributions. The opinion that will be rendered has been filed as an
exhibit to the Registration Statement to which this Information Statement is
attached. An opinion of counsel is not binding on the Internal Revenue Service
("IRS") or the courts, and no assurance can be given that the IRS will not
challenge the tax treatment of certain matters discussed herein, or if it does,
that it will not be successful. The summary does not address any tax
consequences of the Contribution, the Distributions, and the Merger under
applicable state, local, or foreign tax laws. The discussion is based on the
current provisions of the Code, final and proposed Treasury regulations,
administrative positions of the Internal Revenue Service, and court decisions.
All of the foregoing are subject to change, possibly with retroactive effect.
The summary is included herein for general information purposes only and
does not address all aspects of federal income taxation that may be relevant to
a particular investor in light of his personal tax circumstances or all of the
tax consequences that may be relevant to certain types of investors subject to
special treatment under the federal income tax laws (such as foreign FRP
Partners, individual retirement accounts, insurance companies, and tax-exempt
organizations). The summary also does not address the tax consequences to
subsequent purchasers of FRP partnership interests or Common Stock and, with
regard to Company stockholders, is limited to stockholders who will hold Common
Stock as capital assets within the meaning of section 1221 of the Code. Each FRP
Partner should consult his own tax advisors as to the specific tax consequences
to him of the Contribution, the Distributions, and the Merger and with respect
to the effects of any state, local, or foreign tax laws to which he may be
subject.
PARTNERSHIP STATUS OF FRP
The tax consequences of the Contribution, the Distributions, and the Merger
depend, in large part, on the classification of FRP as a partnership rather than
as an association or publicly traded partnership taxable as a corporation for
federal income tax purposes. As a partnership, FRP does not incur federal tax
liability; rather, items of partnership income, gain, loss, deduction, and
credit flow through to FRP Partners. Furthermore, FRP Partners generally do not
recognize gain or loss on the receipt of a distribution from FRP.
Historically, Treasury Regulations distinguished between a partnership and
an association taxable as a corporation by reference to four corporate
characteristics: (1) free transferability of interests, (2) centralization of
management, (3) limited liability, and (4) continuity of life. In tax counsel's
opinion, based on certain representations of FTX, FRP has lacked a preponderance
of the corporate characteristics and thus has been classified properly as a
partnership under these regulations.
Treasury Regulations promulgated in 1996, referred to as the "check-the-box"
regulations, generally substitute an elective regime for the four-factor test.
Under these regulations, a domestic business entity formed before 1997 that has
two or more members and is not organized under a state or federal corporate code
generally will have the same classification that it claimed on December 31,
1996, unless it elects otherwise. FRP was formed prior to 1997 and claimed
partnership status as of December 31, 1996, according to representations made by
FTX. Therefore, under the "check-the-box" regulations, it is tax counsel's
opinion that FRP will automatically be considered a partnership for federal tax
purposes unless it elects otherwise, which FRP has represented that it will not,
or unless FRP were to fail to meet the requirements for exception to the rules
that require publicly traded partnerships to be treated as corporations.
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Code section 7704 treats publicly traded partnerships (such as FRP) as
corporations for federal income tax purposes, subject to certain exceptions. One
exception applies to partnerships whose gross income consists at least 90% of
qualifying income, including generally income derived from the operations of
mineral or natural resource businesses. FTX has represented to tax counsel that
FRP has satisfied the 90% of income test for each year it has been in existence.
Accordingly, based on these representations, it is tax counsel's opinion
that FRP currently is properly classified for federal income tax purposes as a
partnership rather than an association or publicly traded partnership taxable as
a corporation. The remainder of this discussion reflects and is based on that
opinion. It is the further opinion of tax counsel that FRP will continue to be
classified as a partnership for federal income tax purposes after the
Distributions so long as it continues to meet the 90% of income test and does
not elect otherwise. IGL, in its capacity as successor to FTX as administrative
managing general partner of FRP, has represented that it will use its best
efforts to maintain partnership status by monitoring the qualifying income
levels and the activities of FRP in the future.
CONTRIBUTION OF THE TRANSFERRED BUSINESSES TO FREEPORT SULPHUR
The Company was formed by FRP in August 1997. Immediately prior to the
Effective Time of the Merger, FRP will contribute the Transferred Businesses to
the Company in exchange for newly issued Common Stock. It is tax counsel's
opinion that, for federal income tax purposes, this transaction constitutes a
contribution of assets to the Company by FRP in exchange for common stock and
the assumption of the liabilities of FRP pursuant to Code section 351, which
provides that such contributions are generally nontaxable except to the extent
that the transferee assumes liabilities of the transferor in excess of the
transferor's basis in the assets, requiring gain recognition under Code section
357(c) to that extent. FTX has represented that FRP's basis in the assets
transferred to the Company (excluding any special basis adjustments) will exceed
the liabilities to be assumed by the Company, and based on this representation,
it is tax counsel's opinion that no gain will be recognized pursuant to Code
section 357(c). FTX has further represented that the Company will not assume any
nonrecourse liabilities of FRP. Accordingly, based on this representation, it is
tax counsel's further opinion that the FRP Partners will recognize no taxable
gain pursuant to Code sections 731 and 752, which would treat an FRP Partner's
share of the nonrecourse liabilities assumed by the Company as a cash
distribution to the Partner.
The Transferred Businesses will include a 25% interest in the Main Pass
joint venture that IGL will transfer to FRP immediately before the Contribution
by FRP to the Company. While the appropriate treatment of the transfer of the
IGL Transferred Businesses from IGL to FRP is not clear, tax counsel believes it
likely that FRP will recognize taxable gain on that receipt in an amount equal
to the value of the IGL Transferred Businesses, which FTX estimates to be worth
less than 16% of the total value of the Transferred Businesses.
STOCKHOLDERS' RIGHTS AGREEMENT
Based on a published IRS ruling, it is tax counsel's opinion that the
Company's adoption of the Rights Agreement will not constitute the distribution
of stock or other property by the Company to its stockholders, an exchange of
property or stock (either taxable or nontaxable), or any other event giving rise
to the realization of gross income by FRP or the FRP Partners on the receipt of
the Rights. The ruling does not address the federal income tax consequences of
any redemption of the Rights or any transaction involving the Rights subsequent
to a triggering event, and tax counsel expresses no opinion on the federal
income tax consequences of such events or transactions.
DISTRIBUTION OF COMPANY COMMON STOCK
Also immediately prior to the Effective Time of the Merger, FRP will
distribute all of the outstanding shares of Common Stock to FRP Partners. In the
opinion of tax counsel, this distribution constitutes a
20
<PAGE>
distribution of property from a partnership to its partners pursuant to Code
section 731, which provides generally that such distributions are not taxable.
Code section 731(c), however, requires that gain be recognized on certain
partnership distributions of marketable securities to the extent that the value
of the securities exceeds the partner's basis in his partnership interest. The
marketable securities rule, however, is subject to an exception contained in the
Treasury Regulations for securities that are acquired by a partnership in a
nonrecognition transaction. For this exception to apply, the value of the money
and marketable securities transferred by FRP to the Company must be less than
20% of the value of all the assets transferred by FRP to the Company.
Accordingly, unless the amount of marketable securities, if any, and money
acquired by the Company from FRP were to be determined to exceed 20% of the
value of all of the assets acquired by the Company from FRP, it is tax counsel's
opinion that the distribution will constitute a nontaxable distribution of
property to the FRP Partners. FTX does not anticipate that the amount of
marketable securities, if any, and money acquired by the Company from FRP will
exceed the 20% limitation, and the remainder of this discussion is premised on
that expectation. If the 20% limitation were not to be met, FTX anticipates that
each FRP Partner would have either sufficient basis in his FRP partnership
interest to prevent the recognition of gain or available suspended passive
losses to offset any recognized gain. See "--Suspended Losses."
In the opinion of tax counsel, FRP Partners who receive cash in lieu of
fractional shares will be treated as having received and then sold the
fractional shares in a taxable transaction.
BASIS OF THE TRANSFERRED BUSINESSES TO THE COMPANY; BASIS AND HOLDING PERIOD OF
COMPANY COMMON STOCK TO FRP PARTNERS.
It is tax counsel's opinion that the basis of the Common Stock that the FRP
Partners receive in the FRP Distribution will be determined by reference to the
basis of the shares in the hands of FRP, which will be determined by reference
to the basis of the Transferred Businesses. Similarly, the holding period of the
Common Stock in the hands of the FRP Partners will be determined by the period
for which the Transferred Businesses have been held by FRP (and not the period
for which the FRP Partners have held their interests in FRP).
BASIS OF THE TRANSFERRED BUSINESSES TO THE COMPANY
In the opinion of tax counsel, the Company's acquisition of the Transferred
Businesses from FRP will not result in the recognition of gain or loss to the
Company, and the Company's adjusted tax basis in the Transferred Businesses will
equal the adjusted tax basis of those assets in the hands of FRP. The adjusted
tax basis of the assets contributed to the Company will both determine the
amount of future deductions attributable to those assets (which will reduce the
amount of the Company's income subject to tax) and will determine the basis of
the Common Stock received by FRP and distributed to the FRP Partners. The
computation of the Company's adjusted tax basis in the assets it receives will
depend in part on determinations of the adjusted tax basis of assets contributed
to or acquired by FRP prior to the formation of the Company and the accuracy of
subsequent adjustments to that basis to reflect capital expenditures, depletion,
depreciation, or amortization. The technical rules governing the computation of
the adjusted tax basis of partnership assets are extremely complex, and FRP
cannot be certain that the manner in which it has computed the adjusted tax
basis of the assets it will transfer to the Company will be respected by the
IRS. Those basis adjustments are further complicated by the fact that FRP has
elected to make the "special basis adjustments" permitted by Code section 754
that have been made to increase the basis of FRP's assets to reflect the price
at which FRP Partners have purchased their interests in FRP. It is tax counsel's
opinion that, while there is no currently effective authority on point and the
matter is uncertain, these special basis adjustments should be available to be
taken into account in determining the basis of both the assets contributed to
the Company and the basis of the Common Stock distributed to FRP Partners.
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<PAGE>
BASIS AND HOLDING PERIOD OF THE SHARES RECEIVED BY FRP PARTNERS
In tax counsel's opinion, in general, the basis and holding period of the
Common Stock received by FRP upon the transfer of assets to the Company will be
the same as the basis and holding period of the assets previously held by FRP;
and the basis and holding period of each FRP Partner in the Common Stock
distributed to such Partner will be the same to the Partner as to FRP (unless
the basis of the FRP Partner in his FRP partnership interest is less than FRP's
basis in those shares). An FRP Partner must reduce its basis in the FRP
partnership interest by the amount of the basis of the Common Stock received.
The IRS has required in its Revenue Rulings that the basis and holding
period of stock received by a stockholder in exchange for multiple assets
contributed to a corporation in a nonrecognition transaction be split to reflect
the basis and holding period of the various assets transferred. This approach
appears intended to require that the basis and holding period of the portion of
the shares attributable to capital assets (and assets used in a trade or
business within the meaning of Code section 1231) be reflected separately from
the portion attributable to inventory and other non-capital assets. As noted
above, FRP has maintained "special basis adjustments" for FRP Partners in the
Transferred Businesses to reflect the price at which each FRP Partner acquired
his FRP partnership interests. FRP has represented to tax counsel that it
intends to implement the "split basis" allocation by determining the basis of
the shares distributed to each FRP Partner (and the portion attributable to
different categories of assets with different holding periods) by reference to
both that Partner's share of FRP's common basis and the special basis adjustment
previously maintained for each Partner in the Transferred Businesses. FRP has
also represented to tax counsel that it intends to report that basis as well as
its calculations of the holding periods to each Partner with the custom tax
information provided to FRP Partners for FRP's tax year that will end on the
date of the Merger. Tax counsel is of the opinion that this approach is
consistent with the purposes of both the partnership special basis adjustment
provisions and the "split" basis and holding period rulings, but there is no
authority bearing on the question and tax counsel is unable to opine that the
specific methodology adopted by FRP would be sustained were IRS to assert a
different approach.
SUSPENDED LOSSES
Currently, an FRP unitholders' ability to deduct his share of FRP's losses
and deductions is subject to the passive activity loss limitation of Code
section 469 (as well as certain other limitations), and FRP expects that many
FRP unitholders have suspended passive activity losses from FRP (i.e., losses
not currently deductible under the limitation contained in Code section 469).
The passive activity loss limitation applies to individuals, estates, trusts,
personal service corporations, certain closely held corporations, and affiliated
groups of these corporations. The passive activity loss rules are highly
complex, and there is no authority addressing the passive activity loss
consequences of a distribution by a publicly traded partnership of corporate
stock representing a portion of the business activity previously conducted by
the partnership. Based on the legislative history of the passive activity loss
rules, it is tax counsel's opinion that individual FRP unitholders who recognize
gain on the receipt of cash in lieu of fractional shares may deduct suspended
passive activity losses from FRP to that extent, but any remaining suspended
passive activity losses may not be deducted by reason of the distribution beyond
the gain recognized.
It is also tax counsel's opinion that individual FRP unitholders may deduct
their suspended passive activity losses when they have disposed of both their
FRP partnership interests and their Common Stock in fully taxable transactions,
but other aspects of the passive activity loss rules after the distribution are
less certain. For example, the extent to which passive activity losses may be
deducted against gains recognized upon the sale of Common Stock shares by an FRP
unitholder who continues to hold FRP partnership interests, or against gains
recognized upon the sale of FRP partnership interests by an FRP unitholder who
continues to hold Common Stock, is not clear. The legislative history of the
passive activity loss rules and Treasury Regulations indicate that an FRP
unitholder cannot deduct suspended passive activity losses from FRP when he
receives dividends from Common Stock.
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<PAGE>
THE APPLICATION OF THE PASSIVE ACTIVITY LOSS RULES TO FRP UNITHOLDERS AND TO
TRANSACTIONS IN COMMON STOCK AFTER THE FRP DISTRIBUTION IS HIGHLY UNCERTAIN, AND
FRP UNITHOLDERS CONCERNED WITH THE PASSIVE ACTIVITY LOSS LIMITATION ARE STRONGLY
ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS.
TAX TREATMENT OF FRP AND COMPANY INCOME OR LOSS
Because FRP is characterized as a partnership for federal income tax
purposes, each FRP Partner currently is required to take into account his share
of the income, gain, loss, and deductions generated by FRP's business. For 1997,
the income, gain, loss, or deductions generated by the Transferred Businesses
will be allocated to the FRP Partners through the date they are transferred to
the Company. Thereafter, the income from the Transferred Businesses will be
realized by the Company and will become subject to the federal corporate income
tax.
DISTRIBUTIONS FROM THE COMPANY
In tax counsel's opinion, distributions of cash or other property by the
Company with respect to its Common Stock will be dividends to the extent they
represent current or accumulated earnings and profits as determined for federal
income tax purposes. To the extent that a distribution exceeds the Company's
earnings and profits, it will be treated first as a nontaxable return of capital
to a stockholder and then as capital gain. Dividends received by corporate
holders may be eligible for the corporate dividends received deduction, subject
to the conditions and limitations applicable to the deduction, and in certain
circumstances may be extraordinary dividends within the meaning of Code section
1059. Corporate stockholders should consult their own tax advisors regarding the
dividends received deduction and extraordinary dividend rules. It should be
noted, however, that the Company intends to retain earnings to meet its working
capital needs and finance its continuing operations, and does not expect to pay
dividends on its Common Stock for the foreseeable future. See "Dividends
Policy."
SALE OR EXCHANGE OF COMMON STOCK
It is tax counsel's opinion that, in general, any gain or loss from the sale
or exchange of Common Stock will be characterized as capital gain or loss. The
gain or loss will be measured by the difference between the amount realized on
the sale and the stockholder's adjusted tax basis in the Common Stock. An
individual stockholder's capital gain generally will be taxed at a maximum rate
of 20% (10% for individuals in the 15% tax bracket) if the stockholder has owned
the Common Stock for more than 18 months at the time of the sale and at a
maximum rate of 28% if the stockholder has owned the Common Stock for more than
12 months but not more than 18 months at the time of the sale.
TAX IMPLICATIONS OF THE MERGER TO FRP
Following the FRP Distribution to FRP Partners, FTX, FRP's majority owner
and administrative managing general partner, will merge into IGL. Because FTX
owns more than 50% of FRP, the Merger will result in a constructive termination
of FRP under Code section 708. Under recently issued regulations, FRP's assets
and liabilities will be deemed contributed to a newly constituted partnership,
the interests in which will be deemed to be distributed to the FRP Partners,
including IGL (the new majority owner and administrative managing general
partner), in a constructive liquidation of the partnership in which FTX held
more than 50%. In tax counsel's opinion, the termination will not result in the
recognition of gain or loss by the FRP Partners.
The termination will result, however, in the closing of FRP's taxable year
and the need for the newly constituted partnership to make new elections for
federal tax purposes. Moreover, it is tax counsel's opinion that the termination
will result in an early closing with respect to FRP of IMC-Agrico's taxable year
which would otherwise close on June 30, 1998. As a result, assuming that the
Effective Time is in 1997, FRP Partners will be required to report in 1997 their
shares of IMC-Agrico's income, gain, loss and
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deductions both for the period from July 1, 1996 to June 30, 1997, (which would
be reported during 1997 to FRP and to FRP's Partners regardless of the Merger),
and for the period between June 30, 1997 and the Effective Time of the Merger,
(which would otherwise be reported in 1998).
In addition, because IGL will own more than 50% of FRP, the Merger will
result in a change of FRP's taxable year from a calendar year-end to a June 30
fiscal year-end. As a result, FRP Partners that are calendar-year taxpayers will
report in 1998 their share of FRP's income or loss for less than one year, from
the Effective Time of the Merger through June 30, 1998. For each tax year
thereafter, their inclusion of FRP income will include their share of gains or
losses earned from July 1 of the prior year through June 30 of the current year,
assuming that IGL maintains a June 30 tax year-end and continues to be the
majority partner of FRP.
OTHER TAX ASPECTS
In addition to federal income taxes, FRP Partners may be subject to other
taxes, such as state or local income taxes that may be imposed by various
jurisdictions and may be required to file tax returns through the date of
consummation of the Contribution, the Distributions, and the Merger in those
states in which properties owned by FRP are located. FRP Partners may also be
subject to income, intangible property, estate and inheritance taxes in their
state of domicile. Tax counsel expresses no opinion on these matters, and FRP
Partners should consult their own tax advisors with regard to state income,
inheritance, and estate taxes.
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DIVIDEND POLICY
The Company currently intends to retain its earnings to meet its working
capital requirements and finance its business operations and does not plan to
pay cash dividends to its stockholders for the foreseeable future. Any future
determination to pay cash dividends will be made by the Board of Directors in
light of Company's earnings, cash flow, financial position, capital
requirements, credit agreements and such other factors as the Board of Directors
deems relevant at that time.
DISTRIBUTING SECURITY HOLDER
All of the shares of Common Stock being delivered hereby are being
distributed to FRP Partners in the FRP Distribution in accordance with the terms
of the Distribution Agreement. No cash consideration is being paid by FRP
Partners in connection with the FRP Distribution and neither the Company nor FRP
will receive any proceeds from the FRP Distribution.
CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of the
Company as of September 30, 1997, after giving effect to the transactions
described in the "Pro Forma Financial Statements (Unaudited) of Freeport-McMoRan
Sulphur Inc." included elsewhere herein. The table set forth below should be
read in conjunction with the Financial Statements of the FRP Transferred
Businesses and the notes thereto, the "Pro Forma Financial Statements
(Unaudited) of Freeport-McMoRan Sulphur Inc.," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Information Statement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
PRO FORMA
------------------
(IN THOUSANDS)
<S> <C>
Long-term debt, less current maturities................................... $ 0
--------
Stockholders' equity:
Preferred Stock, no par value per share, 50,000,000 shares authorized;
none issued or outstanding............................................ --
Common Stock, $0.01 par value per share, 100,000,000 shares authorized;
10,346,578 million shares issued and outstanding...................... 103
Additional paid-in capital.............................................. 107,574
--------
Total stockholders' equity............................................ 107,677
--------
Total capitalization...................................................... $ 107,677
--------
--------
</TABLE>
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SELECTED FINANCIAL AND OPERATING DATA
The selected financial data provided below reflect the historical results of
operations and financial position of the FRP Transferred Businesses only and do
not include the IGL Transferred Businesses. The historical financial information
is not necessarily indicative of the financial position and results of
operations that would have been achieved had the Company been operated as an
independent entity during the periods covered or the results that may be
achieved in the future. Historical net income and dividend per share amounts are
not presented because the FRP Transferred Businesses were operated through
divisions of FRP for the periods presented. See "Risk Factors--Limited Relevance
of Historical Financial Information."
The following selected financial data as of December 31, 1996 and 1995 and
for each of the years in the three-year period ended December 31, 1996 has been
derived from the audited financial statements of the FRP Transferred Businesses
and does not include the IGL Transferred Businesses. The selected financial data
as of December 31, 1994, 1993 and 1992 and for each of the years in the two-year
period ended December 31, 1993 are unaudited and were derived from the
accounting records of FRP. The selected financial data as of and for each of the
nine-month periods ended September 30, 1997 and 1996, have been derived from the
unaudited financial statements of the FRP Transferred Businesses, and in the
opinion of management includes all adjusting entries (consisting only of normal
recurring adjustments), necessary for a fair presentation of the results of the
periods presented.
The selected financial information of the FRP Transferred Businesses set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
audited financial statements of the FRP Transferred Businesses and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------- ---------- ---------- ------------- ---------- ------------- ----------
(IN THOUSANDS, EXCEPT REALIZED PRICE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................... $ 158,304 $ 167,379 $ 221,426 $ 255,949 $ 151,795 $ 131,732 $ 163,852
Loss on valuation and sale
of assets................. -- -- -- -- -- (86,631) --
Net income (loss) before
income taxes(1)........... (425,171)(2) 11,620 12,392 25,020(3) 7,353 (122,253)(4) (11,641)
Pro forma net income (loss)
(unaudited)(1)............ (269,558) 7,251 7,733 18,175 4,662 (77,508) (7,380)
OPERATING DATA:
Sulphur sales (long tons)... 2,167 2,142 2,900 3,050 2,088 1,403 1,038
Sulphur average realized
price..................... $ 60.75 $ 63.01 $ 61.78 $ 70.44 $ 53.07 $ 57.28 $ 82.69
Oil sales (barrels)......... 1,248 1,508 1,896 2,218 2,534 3,443 4,884
Oil average realized
price..................... $ 18.37 $ 18.82 $ 19.49 $ 15.82 $ 13.74 $ 14.43 $ 15.91
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 27,205 $ 38,271 $ 25,794 $ 42,059 $ 41,590 $ 25,105 $ 18,668
Property, plant and equipment, net..... 92,562(2) 542,454 535,653 575,029 551,916 577,491 662,878
Total assets........................... 178,581 633,668 633,620 680,467 637,902 668,274 723,576
Net assets to be transferred........... 39,910 494,842 484,360 521,782 556,060 573,303 663,238
</TABLE>
- ------------------------------
(1) As a partnership, FRP pays no federal or state income taxes and historically
has not provided for income taxes for the FRP Transferred Businesses. Pro
forma net income includes an estimated tax provision for the applicable
periods as if the FRP Transferred Businesses operated as a stand-alone
taxpaying entity.
26
<PAGE>
(2) In 1995, the Financial Accounting Standards Board adopted SFAS No. 121,
which requires an assessment of the carrying value of long-lived assets and
a reduction of such carrying value to fair value when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
the third quarter of 1997, FRP and FTX determined that the sulphur assets
were impaired within the meaning of SFAS No. 121 because their book value
exceeded the estimated undiscounted net cash flow recoverable with respect
thereto. Accordingly, in the third quarter of 1997, FRP and FTX recorded an
impairment writedown totaling $425.4 million to reduce these properties to
their fair value (measured by the difference between the carrying value of
such assets and the current discounted value of estimated future net cash
flows).
(3) Includes charges totaling $7.0 million allocated to the FRP Transferred
Businesses to reflect a compensation charge related to FTX stock
appreciation rights, which was attributable to the significant rise in the
price of FTX common stock during such period. Pursuant to a management
services agreement with FTX, these costs were allocated to FRP, and thus to
the FRP Transferred Businesses, based on payroll costs.
(4) Includes charges totaling $11.6 million for restructuring and other related
charges.
27
<PAGE>
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The unaudited pro forma balance sheet data as of September 30, 1997 provided
below gives effect to the transfer of the Transferred Businesses as if such
transfer had occurred on September 30, 1997, and the unaudited pro forma income
statement data for the nine-month period ended September 30, 1997 and the year
ended December 31, 1996 gives effect to the transfer of the Transferred
Businesses as if such transfer had occurred on January 1, 1996. The unaudited
pro forma financial data does not purport to represent what the Company's
financial position or results of operations would have been had such transfer
occurred on the dates indicated or the results that may be achieved in the
future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE AND
REALIZED PRICE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................. $ 190,510 $ 268,919
Net income (loss) before income taxes(1)(2).......... (422,183) 25,326
Net income (loss)(1)................................. (267,664) 15,803
Net income (loss) per share.......................... (25.76) 1.52
Weighted average common shares....................... 10,390 10,409
OPERATING DATA:
Sulphur sales (long tons)............................ 2,521 3,385
Sulphur average realized price....................... $ 61.87 $ 63.10
Oil sales (barrels).................................. 1,782 2,708
Oil average realized price........................... $ 18.37 $ 19.49
OTHER DATA:
EBITDA(3)............................................ $ 31,924 $ 66,326
Capital expenditures................................. 4,203 5,346
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER
30, 1997
------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital......................................................... $ 43,377
Property, plant and equipment, net(2)(4)................................ 114,462
Total assets(2)......................................................... 278,144
Stockholder's equity(2)................................................. 107,677
</TABLE>
- ------------------------
(1) As a partnership, FRP pays no federal or state income taxes and historically
has not provided for income taxes for the Transferred Businesses. Pro forma
net income includes an estimated tax provision for the applicable periods as
if the Transferred Businesses operated as a stand-alone taxpaying entity.
(2) In 1995, the Financial Accounting Standards Board adopted SFAS No. 121,
which requires an assessment of the carrying value of long-lived assets and
a reduction of such carrying value to fair value when events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. In the third quarter of 1997, FRP and FTX determined that the
sulphur assets were impaired within the meaning of SFAS No. 121 because
their book value exceeded the estimated undiscounted net cash flow
recoverable with respect thereto. Accordingly, in the third quarter of 1997,
FRP and FTX recorded an impairment writedown totaling $425.4 million to
reduce these properties to their fair value (measured by the difference
between the carrying value of such assets and the current discounted value
of future net cash flows).
28
<PAGE>
(3) EBITDA represents net income before income taxes plus depreciation and
amortization expense. EBITDA is not a measure of cash flow, operating
results or liquidity as determined by generally accepted accounting
principles. The Company has supplementally disclosed information concerning
EBITDA because management believes that EBITDA is commonly accepted as
providing useful information regarding a company's historical ability to
incur and service debt. Management of the Company believes that factors that
should be considered by investors in evaluating EBITDA include but are not
limited to, trends in EBITDA as compared to cash flow from operations, debt
service requirements and capital expenditures. EBITDA as defined and
measured by the Company may not be comparable to similarly titled measures
of other companies. Further, EBITDA should not be considered in isolation or
as an alternative to, or more meaningful than, net income or cash flow
provided by operations as determined in accordance with generally accepted
accounting principles as an indicator of the Company's profitability or
liquidity.
(4) The property, plant and equipment to be contributed by IGL were estimated to
have a fair value of approximately $21.9 million using the same assumptions
applied in the impairment assessment of FRP's sulphur assets discussed in
(2) above.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations relates to the historical results of operations and
financial condition of the FRP Transferred Businesses only and does not include
the IGL Transferred Businesses. Such information should be read in conjunction
with the audited financial statements of the FRP Transferred Businesses and the
Pro Forma Financial Statements of Freeport-McMoRan Sulphur Inc. included
elsewhere herein. Prior to the Contribution, the Company's operations were
conducted as an integral part of FRP's operations, and certain historical
financial data has been extracted from FRP's books and records based on
allocations between the FRP Transferred Businesses and FRP's other businesses,
and based on other assumptions necessary to reflect the Company's operations as
if they had been conducted as an independent enterprise. The results of
operations described below are not necessarily indicative of the operating
results that the Company would have achieved on an independent basis or of
future operating results.
The Company's business consists of the sale of sulphur, the marketing of
logistics services, the operation of two sulphur mines and a logistics system
consisting of sulphur transportation and terminaling assets. The Company's
operations include the Main Pass mine located offshore Louisiana in the Gulf of
Mexico, the Culberson mine located in west Texas, five sulphur terminals located
across the Gulf Coast, and marine and rail transportation assets. The oil
operations consist of FRP's interest in the Main Pass operations.
IMPAIRMENT ASSESSMENT OF SULPHUR ASSETS
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121
which requires an assessment of the carrying value of long-lived assets and a
reduction of such carrying value to fair value when events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. As a result of its most recent review of its sulphur assets, FRP
and FTX concluded that the carrying value of the Main Pass sulphur assets
exceeded the undiscounted estimated future net cash flows, such that an
impairment writedown of $416.4 million (based on September 30, 1997 book values)
was required. A similar analysis of the Culberson mine sulphur assets, based on
a reassessment of recoverable reserves utilizing recent production history, also
indicated that a writedown of $9.0 million (based on September 30, 1997 book
values) was required. Fair values were estimated using discounted estimated
future net cash flows related to these assets. The writedowns to fair value were
recorded by FRP and FTX in the third quarter of 1997 and are reflected in the
unaudited September 30, 1997 financial statements as additional depreciation and
amortization charges. Future operating results of the Company will reflect lower
depreciation and amortization expense as a result of these writedowns.
30
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- -------------- --------- ------------ ---------
(DOLLARS IN MILLIONS, EXCEPT REALIZED PRICES)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 158.3 $ 167.4 $ 221.4 $ 255.9 $ 151.8
Net income (loss)........... (425.2 (1) 11.6 12.4 25.0(2) 7.4
Sulphur sales (long tons)... 2,167,000 2,141,800 2,900,000 3,049,700 2,087,800
Sulphur average realized
price per ton............. $ 60.75 $ 63.01 $ 61.78 $ 70.44 $ 53.07
Oil sales (barrels)......... 1,247,600 1,507,500 1,895,500 2,217,600 2,533,700
Oil average realized price
per barrel................ $ 18.37 $ 18.82 $ 19.49 $ 15.82 $ 13.74
</TABLE>
- ------------------------
(1) Includes charges totaling $425.4 million for asset impairments.
(2) Includes charges totaling $7.0 million allocated to the FRP Transferred
Businesses to reflect a compensation charge related to FTX stock
appreciation rights, which was attributable to the significant rise in the
price of FTX common stock during such period. Pursuant to a management
services agreement with FTX, these costs were allocated to FRP, and thus to
the FRP Transferred Businesses, based on payroll costs.
------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
Sulphur operations reported a net loss of $429.2 million in the nine-month
1997 period compared with net income of $4.7 million for the 1996 period,
primarily because of the asset impairment charges and lower sulphur prices.
Sulphur realized prices for the 1997 period were 4% lower than the 1996 period.
Sulphur sales volumes for 1997 rose slightly from the 1996 period, primarily due
to increased sales to IMC-Agrico. Production levels at the Main Pass and
Culberson sulphur mines were reduced in early 1996 in response to lower domestic
demand for sulphur, and these mines continue to operate at curtailed levels.
Higher sales volumes in 1997 were met through inventory reductions and recovered
sulphur purchases. Combined production from the two mines averaged 7,600 tons
per day for the nine-month 1997 period compared with 8,000 tons per day for the
1996 period.
Main Pass net income from oil and gas operations totaled $4.0 million in
1997 and $8.2 million in 1996 reflecting slightly lower average realizations and
reduced production levels. Current estimates are that the proved oil reserves at
the Main Pass site will be depleted by the year 2001.
Production and delivery costs were higher in the 1997 period because of
higher sulphur sales volumes, energy costs and drilling costs. Depreciation and
amortization in the nine-month 1997 period includes the asset impairment
charges, but without the charges was lower compared with the 1996 period because
of the lower production rates. General and administrative expenses were lower in
the 1997 period compared with the 1996 period.
1996 COMPARED WITH 1995
Sulphur net income totaled $3.3 million for 1996 compared with $23.0 million
for 1995 primarily because of lower prices and volumes and slightly higher unit
costs. Sulphur sales volumes for 1996 were 5% lower than the 1995 level.
Production levels at the Main Pass and Culberson mines were reduced in early
1996 in response to lower domestic sulphur sales to U.S. phosphate fertilizer
producers. Production averaged 7,800 tons per day for 1996 compared with 8,500
tons per day in 1995. Sulphur market prices were 12% lower than the 1995 period,
reflecting lower demand from the phosphate fertilizer industry and
31
<PAGE>
higher recovered sulphur supplies. Unit production costs for 1996 rose slightly
from 1995 levels because of the reduced production levels and increased energy
costs.
Main Pass oil net income for 1996 totaled $9.1 million compared with $2.0
million for 1995. Despite lower sales volumes, net income benefited in 1996 from
a significant increase in average realizations caused by the overall rise in
world oil prices which occurred in mid-1996 and again in late 1996. Lower
production for 1996 reflected declining reservoir production levels.
Production and delivery and depreciation and amortization costs were lower
in 1996 because of the reduced production levels. General and administrative
expenses were lower in 1996 primarily because of a $7.0 million charge ($5.2
million to sulphur operations and $1.8 million to oil operations) that was
allocated to the FRP Transferred Businesses to reflect a compensation charge
related to FTX stock appreciation rights, which was attributable to the
significant rise in the price of FTX common stock during such period. Pursuant
to a management services agreement with FTX, these costs were allocated to FRP,
and thus to the FRP Transferred Businesses, based on payroll costs.
1995 COMPARED WITH 1994
Sulphur net income totaled $23.0 million for 1995 compared with $4.3 million
for 1994. Sales increased by 46% due to the Company's acquisition in January
1995 of substantially all of Pennzoil's sulphur assets, including sales
contracts for approximately 900,000 long tons per year, and to the strengthening
in sulphur prices during 1995. Main Pass unit production costs for 1995 were
virtually unchanged from 1994.
Main Pass oil net income was $2.0 million in 1995 compared with $3.1 million
in 1994. Lower production in 1995 was offset by higher average realized prices.
Production and delivery and depreciation and amortization costs were higher
in 1995 primarily because of the Company's acquisition of Pennzoil's sulphur
assets in January 1995. General and administrative expenses were higher in 1995
primarily because of the FTX stock appreciation rights charges discussed above
and the Pennzoil acquisition.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities totaled $20.8 million for the
nine-month 1997 period, $41.5 million for the nine-month 1996 period, $51.8
million for 1996, $65.4 million for 1995 and $34.2 million for 1994. Lower net
income and increased working capital requirements resulted in lower net cash
provided by operating activities in the nine-month 1997 period compared with the
nine-month 1996 period. Net cash provided by operating activities in 1996 was
lower than in 1995 primarily because of lower net income. Net cash provided by
operating activities in 1995 was $31.2 million higher than in 1994 primarily
because of higher net income and lower reclamation and shutdown expenditures.
Capital expenditures primarily relate to maintaining current levels of
production. Capital expenditures totaled $3.0 million for the nine-month 1997
period, $4.9 million for the nine-month 1996 period, $3.8 million for 1996, $3.7
million for 1995 and $11.2 million for 1994. Higher capital expenditures in 1994
related to drilling additional development wells at the Main Pass oil
operations. Proceeds from asset sales included certain warehousing and supply
assets of $0.9 million in the nine-month 1997 period, $1.2 million in the
nine-month 1996 period and $2.1 million in 1996 mostly from the sale of certain
marine assets, and $1.2 million from the sale of an airplane and certain marine
assets in 1994. Capital expenditures for 1997 are expected to be slightly higher
compared with 1996 and 1995 because of additional drilling activities scheduled
in 1997 to maintain required levels of water treatment capacity for the sulphur
operations. Funding for capital expenditures is provided by operating cash
flows.
Based on current projections, management believes that the Company will
generate sufficient cash flow from operations to fund its ongoing working
capital requirements, reclamation costs and projected
32
<PAGE>
capital expenditures for the foreseeable future. Additionally, the Company is in
discussions with various banks and expects to establish a revolving credit
facility to further enhance its liquidity and financial flexibility.
ENVIRONMENTAL
The Company, through its predecessors, has a history of commitment to
environmental responsibility. Since the 1940s, long before public attention
focused on the importance of maintaining environmental quality, the Company has
conducted pre-operational, bioassay, marine ecological and other environmental
surveys to ensure the environmental compatibility of its operations. The
Company's environmental policy commits its operations to compliance with local,
state and federal laws and regulations, and prescribes the use of periodic
environmental audits of all facilities to evaluate compliance status and
communicate that information to management. The Company has access to
environmental specialists who have developed and implemented corporate-wide
environmental programs. The Company continues to study methods to reduce
discharges and emissions.
Federal legislation (sometimes referred to as "Superfund" legislation)
requires payments for cleanup of certain waste sites, even though waste
management activities were performed in compliance with regulations applicable
at the time. Under the Superfund legislation, one party may, under certain
circumstances, be required to bear more than its proportional share of cleanup
costs at a site where it has responsibility pursuant to the legislation, if
payments cannot be obtained from other responsible parties. Other legislation
mandates cleanup of certain wastes at operating sites. States also have
regulatory programs that can mandate waste cleanup. Liability under these laws
involves inherent uncertainties.
Estimated future expenditures to restore properties and related facilities
to a condition that complies with environmental and other regulations are
accrued over the life of the properties. The future expenditures are estimated
based on current costs, laws and regulations. As of September 30, 1997, the
Company had accrued $45.6 million ($17.0 million of which will be reimbursed by
third parties) for abandonment and restoration of its non-operating sulphur
assets and $8.1 million for the dismantling of the Main Pass oil operations.
Current liabilities include $11.5 million at September 30, 1997 for reclamation
and mine shutdown, $2.5 million of which will be reimbursed by third parties.
The Company's share of abandonment and restoration costs for its two operating
sulphur mines is estimated to total approximately $50 million, $18.8 million of
which had been accrued at September 30, 1997, with essentially all such costs
expected to be incurred after mine closure. These estimates are by their nature
imprecise and can be expected to be revised over time because of changes in
government regulations, operations, technology and inflation.
The Company has made, and will continue to make, expenditures at its
operations for protection of the environment. Continued government and public
emphasis on environmental issues can be expected to result in increased future
investments for environmental controls, which will be charged against income
from future operations. Present and future environmental laws and regulations
applicable to current operations may require substantial capital expenditures
and may affect its operations in other ways that cannot now be accurately
predicted.
The Company maintains insurance coverage in amounts deemed prudent for
certain types of damages associated with environmental liabilities that arise
from sudden, unexpected and unforeseen events.
CAUTIONARY STATEMENT
This Information Statement contains forward-looking statements regarding the
Company's business strategy, reserve expectations, demand for sulphur,
competition, the availability of financing, the ability to satisfy future cash
obligations, and environmental costs. Important factors that might cause future
results to differ from these projections include the reliance on IGL and FRP as
continuing customers, the seasonality and volatility of sulphur markets,
competition, and environmental issues as described in more detail under "Risk
Factors."
33
<PAGE>
BUSINESS
GENERAL
Freeport Sulphur is a Delaware corporation formed in August 1997 to succeed
to the sulphur and certain oil and gas operations of FRP. Management believes
that Freeport Sulphur is the world's largest producer of mined, or "Frasch,"
sulphur and the largest supplier of elemental sulphur in the United States.
Pursuant to the Distribution Agreement, FRP will contribute to Freeport Sulphur
all of its sulphur operations, and certain of its oil and gas operations,
including FRP's 58.3% interest in the Main Pass operations and its sulphur mine
in Culberson County, Texas. In addition, in connection with the Merger, IGL will
transfer to FRP, which in turn will contribute to Freeport Sulphur, IGL's 25%
interest in the Main Pass operations, with the result that the Company will have
an 83.3% interest in the Main Pass operations, and Homestake will continue to
own the remaining 16.7% interest. The Company also will continue to serve as the
operator of the Main Pass operations. The Company's sulphur operations include
the mining, purchase, transportation, terminaling and marketing of sulphur. Its
oil and gas operations consist of the production and sale of oil and gas from
its Main Pass facilities.
Sulphur, both in its elemental form and in the form of sulphuric acid, is
essential to agriculture and industry. Sulphur is a base element primarily used
in the production of sulphuric acid, which is used in the manufacture of
phosphate fertilizers and other agricultural chemicals, and has numerous
industrial applications, including ore and metal leaching, petroleum and mineral
refining, and chemical manufacturing. While sulphur is essential in almost every
segment of the economy, it is generally used as a processing agent and is seldom
apparent in the final product.
Freeport Sulphur is the successor to a line of business that has been
conducted by FRP and its predecessors since 1912, making it the longest
continuously operating sulphur company in the United States. Since its founding,
the Company has introduced numerous innovations in the production and
transportation of sulphur, including the development of a mine in marsh terrain
near the mouth of the Mississippi River, the use of directional drilling (a
critical technique for exploiting offshore sulphur deposits), and the
development of technology for transporting molten sulphur, which has earned the
acceptance of U.S. sulphur consumers as an environmentally and economically
superior method. Freeport Sulphur was the first, and remains the only, company
to superheat seawater for sulphur mining, and in 1960 constructed the first
offshore sulphur mine, followed by a second offshore mine constructed in 1968,
and a third offshore mine with the construction of the Main Pass mine in 1992.
Freeport Sulphur remains the only company to successfully operate offshore
sulphur mines. Over its history, the Company has mined more than 160,000,000
long tons of sulphur, and in 1988 discovered the largest sulphur deposit in
North America at Main Pass in the Gulf of Mexico. Through its 1995 acquisition
of substantially all of the sulphur assets of Pennzoil, Freeport Sulphur became
the world's largest producer of mined sulphur and a leading supplier of sulphur
to the United States market, and positioned itself as having the industry's
largest molten sulphur handling system.
The Main Pass sulphur deposit is the largest known sulphur reserve in North
America. The Company's Main Pass offshore mining complex is the largest
structure of its type in the Gulf of Mexico and one of the largest in the world,
and was designed to produce an average of 5,500 long tons per day over its life.
The Company began operating the Culberson mine in January 1995 following its
acquisition of substantially all of Pennzoil's domestic sulphur assets. As of
December 31, 1996, the Main Pass and Culberson mines were estimated to contain
proved sulphur reserves totaling 53.1 million long tons net to the Company (or
69.7 million long tons net to the Company on a pro forma basis after the
contribution of the IGL Transferred Businesses). In addition to the Culberson
mine, the Company also acquired from Pennzoil sulphur terminals and handling
facilities in Galveston, Texas and Tampa, Florida, land and marine
transportation equipment, and sales and other related commercial contracts and
obligations.
The Company's principal business is the sale of sulphur and the marketing of
its terminaling and transportation assets for use by recovered sulphur producers
and industrial consumers of sulphur. The
34
<PAGE>
phosphate fertilizer industry generally accounts for approximately 90% of the
Company's sulphur sales. The Company's 1996 sulphur sales were approximately 2.9
million long tons, representing 25% of domestic consumption (or 3.4 million long
tons, representing 30% of domestic consumption, on a pro forma basis after the
contribution of the IGL Transferred Businesses). Sales to IMC-Agrico, a
manufacturer of phosphate fertilizers and the largest purchaser of elemental
sulphur in the world, represented approximately 65% of the Company's sulphur
sales (or 71% on a pro forma basis after the contribution of the IGL Transferred
Businesses). Pursuant to a Sulphur Supply Agreement, the Company has agreed to
supply and IMC-Agrico has agreed to purchase approximately 75% of IMC-Agrico's
annual sulphur consumption for as long as IMC-Agrico has an operational need for
sulphur. The price per ton for all sulphur delivered under the agreement is
based upon the weighted average market price for sulphur delivered by other
sources to IMC-Agrico's New Wales production plant in central Florida, except
that the Company is entitled to a premium with respect to approximately 40% of
the sulphur that it delivers under the agreement. IMC-Agrico also pays a portion
of the freight costs associated with the delivery of sulphur under the
agreement. Management believes that the terms of the Sulphur Supply Agreement
are no less favorable to the Company than those that could have been negotiated
with an unaffiliated party.
The Company operates the largest molten sulphur handling system in North
America and has the capacity to transport and terminal over five million long
tons of molten sulphur annually. The Company uses this system both to support
the movement of its own mined and purchased sulphur and as a service that it
markets to recovered sulphur producers and industrial consumers.
Freeport Sulphur is a major purchaser of recovered sulphur, which is sulphur
recovered from the refining of sour natural gas and sour crude oil, purchasing
almost one million tons per year. Approximately 30% of the Company's 1996
sulphur sales were supplied from its recovered sulphur purchases. Substantially
all of the sulphur purchased by the Company, along with the sulphur produced at
the Main Pass and Culberson mines, is sold by the Company to industrial
companies for use in the manufacture of sulphuric acid.
The Main Pass operations also contain proved oil reserves from which the
Company produces and sells oil for the Main Pass joint venture. Oil production
averaged approximately 10,700 barrels per day (5,200 barrels net to the Company,
or 7,400 barrels net to the Company on a pro forma basis after the contribution
of the IGL Transferred Businesses) during the year ended December 31, 1996, and
9,400 barrels per day (4,600 barrels net to the Company, or 6,500 barrels net
the Company on a pro forma basis after the contribution of the IGL Transferred
Businesses) during the nine months ended September 30, 1997. As of December 31,
1996, Main Pass was estimated to contain 12.8 million barrels (5.2 million
barrels net to the Company, or 7.4 million barrels net to the Company on a pro
forma basis after the contribution of the IGL Transferred Businesses) of proved
oil reserves. In 1997, such estimates were reduced to 8.2 million barrels (3.2
million barrels net to the Company, or 4.6 million barrels net to the Company on
a pro forma basis after the contribution of the IGL Transferred Businesses) of
proved oil reserves, which are expected to decline substantially in subsequent
years and to be fully depleted by 2001.
STRATEGY
The Company's strategy is to utilize its extensive production facilities and
its transportation and other logistical capabilities to maintain its leadership
position in the U.S. sulphur market and to capitalize on new marketing
opportunities that are expected to develop from projected increases in global
phosphate fertilizer demand and other uses of sulphur. In addition, the Company
may expand its third party transportation and terminaling services business and
seek opportunities to increase its recovered sulphur marketing activities.
The Company is also evaluating related business opportunities including the
possible construction and operation of sulphur recovery and sulphuric acid
plants for third parties. The Company believes it can market its operational,
technological and marketing expertise to other industrial concerns, and enter
into
35
<PAGE>
strategic alliances with enterprises having complementary expertise and shared
growth objectives. The Company also plans to seek opportunities to expand its
business in technologies related to its current Main Pass oil operations such as
sour crude oil processing for others in the Gulf of Mexico region, and the
application of its seawater heating technology to such uses as secondary oil
recovery.
Freeport Sulphur's future sulphur sales volumes and realizations will
continue to depend on the level of demand from the phosphate fertilizer industry
and the availability of competing supplies from recovered sulphur producers.
Accordingly, the Company continually evaluates its sulphur business strategy in
light of competitive factors and the dynamics of the sulphur market, including
the possibility of adjusting overall production levels to match changes in
market fundamentals.
With respect to the Company's oil business, the Company does not currently
intend to pursue oil operations that are not related to Main Pass.
SULPHUR BUSINESS
SOURCES AND USES OF SULPHUR
Sulphur is present in many areas of the world and its production is
generally classified into three categories: elemental, pyrites and sulphur in
other forms ("SOF"). Elemental sulphur represents over two-thirds of worldwide
supplies of sulphur in all forms. Its sources include sulphur mined by the
Frasch process from underground deposits and recovered sulphur. The remaining
one-third of worldwide sulphur is in the form of pyrites (metal sulphides) and
SOF, with the most significant source being sulphuric acid recovered as a
by-product from the smelting of non-ferrous metals. In the United States, mined
elemental sulphur is principally found in the caprock that covers salt domes in
the coastal areas of the Gulf of Mexico and in strata-bound deposits in West
Texas. Recovered elemental sulphur is produced from the processing of natural
gas that contains hydrogen sulfide and from the refining of sour (high sulphur
content) crude oil. Recovered sulphur is the largest source of sulphur in the
world, representing approximately 85% of global production of elemental sulphur.
Worldwide, over 56 million long tons of sulphur are consumed annually, of
which over 90% is converted to sulphuric acid. The remainder is used in
elemental form in fertilizer applications, chemical manufacturing and other
applications. While sulphur is essential in almost every segment of the economy,
it is generally used as a processing agent and is seldom apparent in the final
product.
Sulphur is used primarily in the manufacture of phosphate fertilizer, with
over 60% of worldwide sulphur consumption being used for this purpose. Sulphur
is burned to form sulphuric acid, which is then used to convert phosphate rock
to phosphoric acid, the base material for the manufacture of phosphate
fertilizer. Approximately 0.4 of a long ton of sulphur is required to produce
one short ton of diammonium phosphate fertilizer, the principal form of
phosphate fertilizer. Although the Company is highly dependent on the phosphate
fertilizer market, management believes that the overall strength of the
phosphate fertilizer market and the resulting demand for sulphuric acid should
support production at current levels for the immediate future. Industry studies
indicate that world demand for phosphate fertilizer, driven by anticipated
population growth, increases in levels of grain consumption and other factors,
will exceed production capacities in the next several years. This has led to
plans to construct new capacity and feasibility studies evaluating the expansion
of existing capacity and the addition of new capacity for the manufacture of
phosphate fertilizer.
Sulphur is itself an important plant nutrient, along with nitrogen,
phosphorous and potassium. In 1996, 9.0 million tons of sulphur were applied to
soils worldwide through fertilizer application. Sulphur is also a key raw
material in the manufacture of many fungicides and other agricultural chemicals.
The Sulphur Institute estimates the current annual worldwide plant nutrient
sulphur deficit at 8.2 million tons and the outlook is for increasing
deficiencies, thus making the use of sulphur as a fertilizer a developing and
growing market.
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<PAGE>
In addition to its agricultural applications, sulphur (usually in the form
of sulphuric acid) is essential to the manufacturing processes of
pharmaceuticals, paper, chemicals, paint, steel, petroleum and other products.
Sulphuric acid is also used in the manufacture of detergents and animal feed.
There is a growing demand for sulphur in the form of sulphuric acid for ore
leaching by the non-ferrous metals industry mainly due to advancements in
solvent extraction-electrowinning technology (SX/EW). This advancement has
allowed the development of oxide ore bodies that previously were not considered
commercially exploitable.
SULPHUR MINE OPERATIONS
OVERVIEW. Although sulphur is one of the most common elements in the
earth's crust, discoveries of elemental sulphur in quantities that can be mined
economically are rare. The Company is currently mining two such deposits, the
Main Pass mine offshore Louisiana in the Gulf of Mexico and the Culberson mine
in West Texas. The Company's sulphur discovery at Main Pass in 1988 was the
first major sulphur discovery in North America in over 25 years. The Main Pass
and Culberson mines utilize the Frasch mining process, which involves drilling
wells and injecting superheated water into the underground sulphur deposit to
melt solid sulphur, which is then recovered in liquid form. The Company has used
the Frasch process for more than 80 years, and has developed technology using
superheated seawater in the Frasch process, thereby enhancing offshore mining.
THE FRASCH PROCESS. The sulphur deposits at the Company's Culberson and
Main Pass mines are located approximately 400 and 2,000 feet underground,
respectively. Sulphur production wells are drilled into sulphur bearing
formations by rotary drilling rigs employing a directional drilling technique
that permits drilling from the well platform at angles of up to 85 DEG. from
vertical, allowing sulphur within a radius of more than 3,700 feet to be mined
from a single platform. In addition to production wells, pressure control wells
must also be drilled to recover excess water from the underground formation and
to facilitate water flow. The Frasch process used by the Company permits cost
efficient extraction of sulphur from these underground deposits. Superheated
water and compressed air are forced separately through concentric pipes towards
the sulphur deposit where the heated water liquefies the sulphur and the
compressed air helps lift the molten sulphur to the surface. The Frasch process
was developed in the 1890s and Freeport Sulphur was only the second company to
use this technology. The Company has also developed proprietary technology that
enables it to use seawater in the Frasch process without experiencing the
corrosion and scaling that otherwise would affect the heat exchangers and
pipelines. Frasch mining of sulphur deposits at locations where large quantities
of fresh water are unavailable, such as Main Pass, would not be commercially
viable without these techniques.
Natural gas and water are the two resources essential to the Frasch process.
Natural gas is used to fire steam boilers that produce the superheated water
necessary for sulphur liquefaction. The Company's mine operations currently
consume approximately nine billion cubic feet of natural gas annually. The
Company is dependent on others for the supply of natural gas, but has never
experienced difficulty in obtaining the required supply of natural gas because
it has long-term supply agreements in place with prices tied to market indices.
At Main Pass, where the Company consumes the majority of its natural gas
requirements, gas is supplied by a single supplier, but the Company has access
to a large multiple-supplier pipeline should its primary supplier have
difficulties in delivering its requirements. At the Culberson mine and the Port
Sulphur terminal, natural gas is provided by multiple suppliers. In its Main
Pass operations the Company also supplements its natural gas needs with the gas
that is produced in conjunction with its Main Pass oil operations, which is
provided to the sulphur mining operations in exchange for electricity used by
the oil operations. In the event of a national shortage of natural gas,
curtailment may be imposed by federal authorities and may interfere with the
mining process, but the Company believes that the risk of such curtailment
during the anticipated life of the mines is remote. Moreover, if necessary, the
boilers can also operate on fuel oil. The availability of water for the Main
Pass mine is not a factor for the Company because of its ability to use
seawater.
37
<PAGE>
[PICTURE]
DIAGRAMMATIC SKETCH OF A SALT DOME SULPHUR DEPOSIT
THE MINES. The Main Pass deposit was discovered by the Company in 1988. The
mine currently has the highest production rate of any sulphur mine in the world
and contains the largest known Frasch sulphur reserve in North America. The free
sulphur in the Main Pass deposit exists in the porous limestone that is part of
the caprock covering a salt dome. The Main Pass offshore complex, which is more
than a mile in length, is one of the largest structures of its type in the world
and is the largest in the Gulf of Mexico. The Main Pass mine was designed to
produce an average of 5,500 long tons per day over its life and has two sulphur
storage tanks with a combined capacity of 24,000 long tons. The facility, which
has housing capacity for 240 persons, is located in 210 feet of water and is
designed to withstand hurricane force conditions. In the event of a major storm
in the Gulf, personnel would be evacuated, but the mine is designed to remain in
operation through a communications link to Freeport Sulphur's corporate office
in New Orleans. During the year ended December 31, 1996, sulphur production at
Main Pass averaged approximately 5,350 long tons per day. All Main Pass sulphur
is transported to the Company's terminal in Port Sulphur, Louisiana in 7,500-ton
self-propelled tankers. The Company receives a fee from Homestake for operating
the Main Pass mine and for processing, transporting and marketing Homestake's
share of the Main Pass sulphur. At December 31, 1996, the Main Pass deposit was
estimated to contain proved sulphur reserves totaling 66.2 million long tons
(38.6 million long tons net to the Company, or 55.1 million long tons net to the
Company on a pro forma basis after the contribution of the IGL Transferred
Businesses). Production from the Main Pass mine is subject to a royalty of 12.5%
of net mine revenues that is payable to the U.S. Department of
Interior--Minerals Management Services (the "MMS").
The Company began operating the Culberson mine, which is located in West
Texas south of the New Mexico border, in January 1995 after acquiring the mine
from Pennzoil. The Culberson mine's free sulphur is part of a strata-bound
orebody located in the Upper Permian and Salado formations. For the year ended
December 31, 1996, production at the Culberson mine averaged approximately 2,450
long tons per day. A unique feature of the Culberson mine is a continuous water
re-injection system, through which water recovered from pressure control wells
is reheated and re-injected into the production wells. This recycling system
results in significant cost savings. Once mined, the liquid sulphur is stored in
on-site tanks with a combined capacity of 45,000 long tons until it is shipped
to the Company's Galveston terminal by a Company-owned 95-car unit train that
averages 8,400 long tons of liquid sulphur per trip. At December 31, 1996, the
Culberson mine was estimated to contain proved sulphur reserves totaling 14.5
million long tons. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impairment Assessment of Sulphur Assets."
Production from the Culberson mine is subject to a royalty of 9% of net mine
revenues that is payable to the State of Texas and several private land owners
through a unitization agreement.
The agreement pursuant to which the Company obtained the Culberson mine
requires the Company to make quarterly payments to Pennzoil, based on a unit
volume payment multiplied by an assumed volume of sulphur, both of which are
determined by the average market price of sulphur during the quarter. The
Company is obligated to make these payments irrespective of whether the
Culberson mine is operational. The payments terminate upon the earlier of
January 2015 or the quarter in which the
38
<PAGE>
cumulative assumed volume of production exceeds 18.6 million long tons. Under
this arrangement, the Company paid Pennzoil $2 million and $1.5 million for
fiscal 1996 and the first nine months of 1997, respectively.
The Company has the right, exercisable on January 1, 1999 (the "First Option
Date") and each subsequent third anniversary of the First Option Date, to
terminate its obligation to make further quarterly installment payments in
exchange for a lump sum payment of $65 million less a cumulative inflation
adjustment on the date such right is exercised, but in no event less than $10
million. If the Company does not exercise its right on any option date, Pennzoil
may, within a defined time period after each option date, require the Company to
make a single payment of $10 million in exchange for relinquishing its rights to
receive any further payments under the agreement.
The Company also has rights to sulphur deposits at its Caminada Mine,
located eight miles from Grand Isle in the Gulf of Mexico, which the Company is
not currently mining. The Company is maintaining its lease rights to the
remaining sulphur reserves under a "suspension of production" issued by the MMS.
The Company estimates that the Caminada mine has approximately 1.8 million long
tons of recoverable proved sulphur reserves remaining.
SULPHUR RESERVES. The table below sets forth the Company's portion of the
proved developed reserves for the Company's two sulphur mines.
<TABLE>
<CAPTION>
LONG TONS AT
SEPTEMBER 30,
PROVED DEVELOPED RESERVES(1) 1997(2)
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Main Pass................................................................... 37.8 million(3)
Culberson................................................................... 7.8 million
</TABLE>
- ------------------------
(1) All sulphur reserves are considered proved because of the Company's
extensive drilling and production experience.
(2) Reserves represent long tons (2,240 lbs.) of sulphur that are expected to be
recovered from the host formation. Long tons of sulphur are calculated in
place and a recovery factor, based on the percentage of residual sulphur
expected to be left behind, is applied to calculate the total estimated
recoverable tons.
(3) Or 54.0 million long tons on a pro forma basis after the contribution of the
IGL Transferred Businesses.
39
<PAGE>
SULPHUR PURCHASES
The Company is a major purchaser of recovered sulphur in the United States
and management expects its sulphur purchasing program, which is currently
averaging almost one million long tons per year, to increase and become a more
significant component of the Company's business. The Company purchases recovered
sulphur principally from oil refineries located along the lower Mississippi
River and in the Louisiana and Texas Gulf Coast regions, and from gas processing
plants in southern Mississippi.
The Company's recovered sulphur purchase program provides it with a source
of sulphur that is as important as the production from its mines in enabling the
Company to meet its sales contract commitments. Approximately 30% of the
Company's 1996 sulphur sales volume was supplied through recovered sulphur
purchases. The Company believes that its position as a leading sulphur supplier
in the domestic market, coupled with its extensive sulphur handling
capabilities, would allow it to replace any curtailed mine production with
purchased recovered sulphur at price levels that would maintain the Company's
profitability; however there can be no assurance that it will be able to do so.
SULPHUR HANDLING OPERATIONS
OVERVIEW. The Company operates the largest molten sulphur handling system
in North America and has the capacity to transport and terminal over five
million long tons of molten sulphur annually. The Company uses this system both
to support the movement of its own mined and purchased sulphur, and as a service
that it markets to recovered sulphur producers and industrial consumers. The
Company believes that the integration of the sulphur handling business with its
production, purchasing and marketing operations gives the Company a synergistic
competitive advantage over other suppliers of similar services.
MARINE TRANSPORTATION. The Company operates two molten sulphur tankers,
each having a capacity of approximately 25,000 tons. The two tankers have the
combined capacity to transport 3.5 million long tons of sulphur per year across
the Gulf of Mexico, which are loaded at the Company's Galveston and Port Sulphur
terminals and delivered to its Tampa terminals. The Company's inland barge
system is capable of transporting over one million tons annually. Each of the
Company's barges has a capacity of approximately 2,500 long tons and serves the
Texas, Louisiana and Mississippi Gulf Coast regions and the lower Mississippi
River. Two 7,500-ton tankers are used to transport sulphur from the Main Pass
mine's offshore production platform and can also be used in Gulf Coast service
to transport sulphur from the Company's terminals to its customers.
LAND TRANSPORTATION. The Company operates a rail car fleet of more than 500
cars, including a 95-car unit train that transports sulphur from the Culberson
mine to the Galveston terminal for loading onto the Company's tankers for
shipment to its Tampa terminals. The Company also makes other rail movements in
connection with transporting sulphur directly to customers' plants. The Company
also transports approximately 500,000 tons of molten sulphur per year through a
third party trucking service used primarily to serve the Galveston, Texas, lower
Mississippi River and Pensacola, Florida areas.
TERMINALS. The Company owns and operates five sulphur terminals in the
United States, the largest of which is located at Port Sulphur, Louisiana. The
Port Sulphur facility is a combined liquid storage tank farm and stockpile area
for solid sulphur. Liquid sulphur is stored in steam-heated, insulated tanks
having an aggregate capacity of approximately 110,000 long tons. The solid
storage area can hold approximately 1.3 million long tons of solid sulphur.
Because substantially all of the Company's domestic customers consume sulphur in
liquid form, the Company delivers all of its production in liquid form. This
reduces the need to remelt the sulphur, conserves energy and reduces costs, and
is an environmentally superior handling method. Sulphur can be solidified for
long-term storage to maintain inventory reserves. The Company owns a high
capacity sulphur melter that permits the conversion of solid sulphur into liquid
sulphur to supplement mine production during periods of high demand and to cover
shortfalls in mine production or in recovered sulphur purchases. Sulphur is
transported from Port Sulphur by barge to
40
<PAGE>
customers' plants in Louisiana on the lower Mississippi River or along the Gulf
Coast of Texas and Mississippi, or by tanker to the Company's terminals in
Tampa.
The Company's other terminals are located in Tampa and Pensacola, Florida
and Galveston, Texas. There are two Tampa terminals, each of which has a liquid
storage capacity of 90,000 long tons and is supplied with sulphur from Port
Sulphur and Galveston by the Company's sulphur tankers. Each of the Tampa
facilities ships molten sulphur to phosphate fertilizer producers in central
Florida by tank truck. The Pensacola terminal has a storage capacity of 10,000
long tons and is used for the storage, handling and shipping of recovered
sulphur purchases or transporting recovered sulphur for third parties. Molten
sulphur is shipped by barge from the Pensacola terminal to either the Port
Sulphur terminal or directly to lower Mississippi River customers.
The Galveston terminal was acquired from Pennzoil in 1995 and has five
15,000-long ton liquid storage tanks and solid storage capacity of one million
long tons. This terminal receives sulphur from the Company's Culberson mine by
unit train, and recovered sulphur purchases by truck, barge or rail, and then
ships sulphur to local customers by truck or barge or to the Tampa terminals by
tanker. The Galveston terminal also has the ability to load solid sulphur aboard
large oceangoing vessels, giving the Company access to international markets
should market conditions favor sulphur exports.
SULPHUR SALES
Substantially all of the Company's sulphur is sold to the phosphate
fertilizer industry for the manufacture of sulphuric acid, which is used to
produce phosphoric acid, a base chemical used in the production of phosphate
fertilizers. Typically, the phosphate fertilizer industry accounts for
approximately 90% of the Company's total sulphur sales. Freeport Sulphur's
domestic shipments to its five largest customers represented 91% of total
shipments in 1996, 89% in 1995 and 94% in 1994. The majority of the Company's
sulphur supply contracts, with the exception of its contract with IMC-Agrico
discussed below, are for a term of one year or longer and generally call for the
repricing of sulphur on a quarterly or six-month basis.
The Company also processes, transports, and markets Homestake's share of
production at the Main Pass mine for a fee. In addition to supplying the
domestic sulphur market and providing transportation and terminaling services
for others, Freeport Sulphur maintains the capability of marketing sulphur
internationally should market conditions favor export sales.
Sales to IMC-Agrico, a manufacturer of phosphate fertilizers and the largest
purchaser of elemental sulphur in the world, represented approximately 65% of
the Company's sulphur sales (or 71% on a pro forma basis after the contribution
of the IGL Transferred Businesses) and 54% of its total revenues (or 57% on a
pro forma basis after the contribution of the IGL Transferred Businesses) during
1996. Pursuant to a Sulphur Supply Agreement, the Company has agreed to supply
and IMC-Agrico has agreed to purchase approximately 75% of IMC-Agrico's annual
sulphur consumption for as long as IMC-Agrico has an operational need for
sulphur. The price per ton for all sulphur delivered under the agreement is
based upon the weighted average market price for sulphur delivered by other
sources to IMC-Agrico's New Wales production plant in central Florida, except
that the Company is entitled to a premium with respect to approximately 40% of
the sulphur that it delivers under the agreement. IMC-Agrico also pays a portion
of the freight costs associated with the delivery of sulphur under the
agreement. Management believes that the terms of the Sulphur Supply Agreement
are no less favorable to the Company than those that could have been negotiated
with an unaffiliated party.
Revenues from the Company's sulphur sales depend significantly on production
levels of phosphate fertilizer, the availability of sulphur that is recovered
from high-sulphur oil and natural gas refining and the rate at which stored
surpluses, particularly in Canada, are released into the market and depleted.
Improved phosphate consumption rates, coupled with reduced imports and curtailed
mine production, stabilized sulphur prices beginning in mid-year 1996 and
continuing into the first-half of 1997. However,
41
<PAGE>
current prices are substantially weaker than the high levels of the early
1990's, primarily because of economic and political changes in Eastern Europe
and the former Soviet Union, which led to the closure of plants consuming in
excess of seven million tons of sulphur per year. To the extent that current
United States phosphate fertilizer production remains strong, sustained sulphur
demand is expected to continue; however, the current level of Canadian sulphur
inventories limits the potential for significant price increases. See
"Competition."
OIL AND GAS BUSINESS
OVERVIEW
The Main Pass site also contains oil and natural gas reserves located within
the same caprock reservoir that contains the sulphur reserves. The Company's
estimate of proved recoverable oil reserves at Main Pass at December 31, 1996
was 12.8 million barrels (5.2 million barrels net to the Company or 7.4 million
barrels net to the Company on a pro forma basis after the contribution of the
IGL Transferred Businesses). After 1996 such estimates were reduced to 8.2
million barrels (3.2 million barrels net to the Company, or 4.6 million barrels
net to the Company on a pro forma basis after the contribution of the IGL
Transferred Businesses) due to adjustments made by the Company to the 1996
reserve estimate to account for production during the first half of fiscal 1997
and because certain reserves are no longer believed to be recoverable based on
updated geologic information. No credit was taken in this adjustment for
possible offsetting increases in reserves based on recent production history,
but some offset additions may be possible when Ryder Scott Company performs a
review of the reserves at the end of fiscal 1997. The Main Pass oil reserves are
expected to decline substantially in subsequent years and to be fully depleted
by 2001, and the Company does not intend to pursue oil and gas exploration
operations that are not related to Main Pass.
RESERVES AND ACREAGE
For information relating to estimates of the Company's net interests in
proved oil reserves as of December 31, 1996, and for supplementary information
relating to estimates of discounted future net cash flows from proved oil
reserves, and changes in such estimates, reference is made to the audited
financial statements of the FRP Transferred Businesses, included elsewhere
herein.
At various times, the Company is required to report estimates of oil
reserves to various governmental authorities. The basis for reporting estimates
of reserves to these authorities may not be comparable to the reserves presented
herein because of differences in the times at which such estimates are made and
variances in reserve and other definitions of the particular governmental
authority. Generally, however, the reserves data used for these governmental
reports is computed from the same reserve information base as reported herein.
The Company's interest in Main Pass, which is located in federal waters
offshore Louisiana, constitutes the only oil and gas producing property owned by
Freeport Sulphur. The property consists of 1,125 gross acres and is fully
developed within the meaning of governmental reporting requirements.
The Company possesses a leasehold interest in its Main Pass oil property
that is maintained by production and will remain in effect until production and
drilling and development operations cease. The Company believes that the lease
terms are sufficient to allow for reasonable development of the reserves and
that it has satisfactory title to such property.
PRODUCTION
Recoverable hydrocarbons at Main Pass are located in the upper portion of
the same caprock that hosts the sulphur reserves and in an overlying layer of
sand. The limestone caprock reservoir and the overlying sand are in fluid
contact with each other, share a common oil and gas composition and have the
42
<PAGE>
same pressure characteristics. Oil production commenced in the fourth quarter of
1991 with cumulative total production as of September 30, 1997 totaling 34.1
million barrels. Oil production has been enhanced by the injection of
superheated water in the sulphur mining operations, which both lowers oil
viscosity, allowing it to flow more freely, and maintains reservoir pressure,
thereby enhancing recovery. Any associated gas that is produced with the oil is
provided to the sulphur mining operation in exchange for electricity used in the
oil operations. The co-development of the sulphur and oil reserves has yielded
significant operating synergies and efficiencies.
The purchase agreement pursuant to which the Company obtained the rights to
the Main Pass oil lease obligates the Company under certain circumstances to
make an annual production payment to Chevron U.S.A. Inc. The payment amount is
based on the amount of annual oil production at the Main Pass site and the
amount by which the average annual price of oil exceeds certain specified prices
during the term of the contract. If the average annual price of oil does not
exceed the specified prices, no payment is due. No payments were made for fiscal
1996 or the first nine months of 1997 in connection with this obligation. This
payment obligation will convert to a royalty right on behalf of Chevron upon the
occurrence of certain events that the Company anticipates will occur in the
first half of 1998. Under this royalty right, Chevron will be entitled to
receive 25% of revenues (less transportation costs) of oil and gas production
after the first to occur of (i) cumulative oil production at the Main Pass site
in excess of 36 million barrels or (ii) 20 years from the date of first oil
production (November 6, 1991); provided that this 25% overriding royalty is
limited to 50% of net profit realized on oil production.
OIL SALES
Oil prices have historically exhibited, and can be expected to continue to
exhibit, volatility as a result of such factors as conflicts in the Middle East,
actions by the Organization of Petroleum Exporting Countries and changes in
worldwide economic and political conditions. Since the beginning of 1997, oil
prices have fallen by approximately 25%, with some experts speculating that
prices may soften further prior to year end. The oil produced at Main Pass
contains sulphur and is generally heavier than other Gulf Coast crude oils. As a
result, it sells at a discount relative to Gulf Coast crude oils containing less
sulphur and to lighter grade crude oils.
Oil produced at the Main Pass mine is sold to two Gulf Coast refiners with
sales volumes split 72% and 28%. Both sales contracts are for a term of six
months and are priced at market for the oil's grade. AMOCO Production Company is
the Company's largest oil customer, accounting for 74% of oil revenues and 12%
of the Company's total revenues for fiscal 1996.
COMPETITION
SULPHUR
In the United States, there are two principal sources of elemental sulphur:
(i) mined sulphur produced by Freeport Sulphur and (ii) recovered sulphur
produced by more than 50 companies at more than 130 refineries and gas treatment
plants. There are four producers of mined sulphur worldwide, of which management
believes Freeport Sulphur is the largest and the only mined sulphur producer
serving the United States market. For 1996, Freeport Sulphur estimates that its
production of sulphur accounted for approximately 27% of domestic, and 6% of
world, elemental sulphur production.
The Company estimates that total domestic sulphur consumption in 1996 was
11.5 million tons, of which domestic Frasch sulphur accounted for approximately
25%, domestic recovered sulphur accounted for approximately 60%, and imported
sulphur, primarily from Canada and Mexico, accounted for approximately 14%. The
remaining 1% of domestic sulphur consumption was attributable to sulphuric acid
produced in metal smelting operations and imported sulphuric acid.
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The following table sets forth for each of the years 1994 through 1996 the
total estimated domestic sulphur consumption in tons, together with the
percentage supplied by Frasch suppliers, domestic recovered sulphur and imported
sulphur:
DOMESTIC SULPHUR CONSUMPTION
<TABLE>
<CAPTION>
TOTAL
CONSUMPTION
(MILLIONS OF FRASCH DOMESTIC PERCENTAGE
YEAR TONS) SUPPLIERS RECOVERED IMPORTED
- --------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
1996 11.5 25% 60% 14%
1995 11.7 27% 55% 17%
1994 10.9 28% 58% 13%
</TABLE>
------------------------
Recovered sulphur from domestic and foreign sources is the major source of
competition for Freeport Sulphur. Approximately 90% of the Western Hemisphere's
sulphur inventories currently consist of sulphur recovered from natural gas in
the province of Alberta in western Canada, primarily because United States
recovered sulphur suppliers do not have the ability to store large inventories
of sulphur. During the 1990s world sulphur supply has been in surplus resulting
in a build up of Canadian sulphur inventories. Canadian sulphur inventories were
estimated to be 9.8 million tons at year end 1996 and are expected to increase.
Production of recovered sulphur in the United States has increased at an
average rate of approximately 125,000 tons per year for the last three years,
and totaled approximately 7.6 million tons in 1996. High-sulphur gas processing
capacity in the U.S. is not expected to increase above current levels, but the
sulphur content of crude oil feedstocks to U.S. oil refineries is expected to
continue to increase. Although growth in U.S. recovered sulphur production is
expected to continue, the rate of growth is expected to slow, as the refining
industry is consolidating into a smaller number of large refineries, and it is
estimated that total U.S. refinery processing will not increase substantially.
Technology for recovery of sulphur from coal and oil-burning utility plants is
well advanced and this and other sources of sulphur resulting from air pollution
abatement efforts will have some impact on sulphur supplies. Industry studies
vary in their forecast of the worldwide elemental sulphur balance; however it is
widely accepted that a surplus currently exists and will continue into the
foreseeable future.
Recovered sulphur provides a major and lower cost source of supply for most
sulphur customers. The supply of U.S. recovered sulphur alone, however, cannot
satisfy total domestic demand, and mined sulphur, along with imported recovered
sulphur obtained principally from Canada and Mexico are required to supply the
balance. The principal competitive risk to the Company's ability to mine sulphur
profitably is the potential for decreased domestic demand for sulphur, increased
production from domestic recovered sulphur producers, increases in imported
recovered sulphur, and the rate at which stored sulphur, particularly in Canada,
is released into the market.
OIL
A large number of companies and individuals are engaged in the development
and production of oil. A substantial number of the companies engaged in the
development and production of oil possess financial resources considerably
greater than those of the Company.
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CUSTOMERS
IMC-Agrico is the Company's single largest sulphur customer, accounting for
approximately 65% of sulphur sales and 54% of total sales for fiscal 1996 (or
71% and 57%, respectively, on a pro forma basis after the contribution of the
IGL Transferred Businesses). The Company's next four largest customers represent
approximately 25% of sulphur sales. These companies represent a mix of
industrial companies and phosphate fertilizer manufacturers.
The oil produced from Main Pass is sold to two Gulf Coast refiners with
sales volumes split 72% and 28%. AMOCO Production Company is the largest
customer, accounting for 12% of the Company's total revenues for fiscal 1996.
ENGINEERING, RESEARCH AND DEVELOPMENT
Crescent Technology, Inc. ("Crescent") furnishes certain engineering
consulting, research and development, environmental and safety services to the
Company. Many of Crescent's employees are former employees of the Company, FTX
and other formerly related companies who formed Crescent in 1993 to provide
technical services to such companies and others on an outsourced basis. Crescent
owns and operates laboratory and pilot plant facilities at Belle Chase,
Louisiana, where minerals analysis, metallurgical work and other research and
testing are conducted, which contributes to the Company's technical operations
and commercial activities. Additionally, Crescent maintains engineering
consulting and mine development groups in New Orleans, Louisiana, which provide
the engineering consulting, environmental services and design and construction
supervision activities required to implement new ventures and apply improvements
to the Company's existing operations.
OPERATING HAZARDS
The Company's oil and gas and sulphur production activities are subject to
all of the risks normally incident to the development and production of
hydrocarbons and sulphur, including blowouts, cratering, fires and other risks,
any of which could result in serious personal injury or death and substantial
damage to property and the environment. Additionally, its offshore sulphur
mining, oil production and marine transportation operations are subject to
marine perils, including collisions, hurricanes and other adverse weather
conditions. Freeport Sulphur carries insurance for certain of these risks, with
such coverage limits, retentions, deductibles, and other features as management
deems appropriate.
REGULATORY MATTERS
The Company's mining, production and exploration activities are subject to
various federal, state and local laws governing exploration, development,
production, exports, taxes, labor standards, occupational health and safety,
toxic substances and other matters. Regulations pertaining to the environment
mandate, among other things, the maintenance of air and water quality standards,
solid and hazardous waste standards, protection of underground sources of
drinking water, and protection and regulation of wetland areas. The Company will
succeed to all licenses, permits or other authorizations obtained or held by FRP
or any of its affiliates insofar as they relate to the sulphur and Main Pass oil
and gas businesses. All licenses, permits and other authorizations currently
required of each existing operation have been obtained or timely applied for.
To comply with these federal, state and local laws, material capital and
operating expenditures on environmental projects, both with respect to
maintaining current operations and initiating new operations, may be required in
the future. The amount of such expenditures cannot be estimated at this time,
but such costs could have an adverse effect on the Company's financial condition
and results of operations. There is also a risk that more stringent laws
affecting the operation of mining companies could be enacted, and although such
regulations would affect the industry as a whole, compliance with such new
regulations could be costly.
45
<PAGE>
Domestic oil operations are subject to extensive state and federal
regulation. Compliance is often burdensome, and failure to comply carries
substantial penalties. The heavy and increasing regulatory burden on the oil
industry increases the cost of doing business and consequently affects
profitability.
ENVIRONMENTAL MATTERS
Federal laws and regulations have expanded greatly in recent years with
respect to environmental considerations. The United States Department of
Interior, the U.S. Environmental Protection Agency (the "EPA") and the Coast
Guard administer laws and regulations that impose liability upon the lessee
under a federal lease for the cost of cleanup of pollution damages. A serious
incident of pollution may also result in any one of these agencies requiring
lessees under federal leases to suspend or cease operations in the particular
area. The Company carries insurance against some, but not all, of these risks.
The Company, through its predecessors, has a history of commitment to
environmental responsibility. Since the 1940s, long before the general public
recognized the importance of maintaining environmental quality, the Company has
conducted pre-operational, bioassay, marine ecological and other environmental
surveys to ensure the environmental compatibility of its operations. The
Company's environmental policy commits its operations to compliance with
applicable laws and regulations. The Company has implemented corporate-wide
environmental programs and continues to study methods to reduce discharges and
emissions.
The largest effluent from sulphur mining operations is the pressure control
water recovered from the sulphur-bearing formation. At Main Pass, pressure
control wells remove water from the formation and discharge the water under the
terms of a National Pollutant Discharge Elimination System permit issued by the
EPA. At the Culberson mine, the pressure control water is removed from the
formation and reused in the Frasch mining process. The injection of mine water
at Culberson is authorized by an Underground Injection Control permit issued by
the EPA. Other water discharges at the two mines and five terminals are made
under permits issued by the EPA, state regulatory agencies in the States of
Texas, Louisiana or Florida, or local regulatory authorities. All of these
discharges are in substantial compliance with applicable regulations.
The Company has various other permits with respect to air emissions, solid
waste production and disposal, dredging of bottom sediment and the operation of
port facilities that facilitate its business activities. Agencies that provide
these permits and authorizations include the MMS, the U.S. Coast Guard, the
Louisiana Department of Environmental Quality, the Louisiana Department of
Natural Resources, the Texas Natural Resources Conservation Commission, and the
Florida Department of Environmental Protection. The Company believes it is in
compliance in all material respects with the terms and conditions of these
permits and does not anticipate any significant new costs to obtain new permits
or to maintain compliance with existing permits.
In connection with the Contribution, the Company has assumed responsibility
for environmental liabilities associated with the prior conduct of the
Transferred Businesses, including reclamation responsibilities at three
previously producing sulphur mines. Sulphur production was suspended at the
Company's Caminada offshore sulphur mine in 1994, and the Company will be
required to salvage the mining facilities once the remaining reserves are
produced or it becomes certain that such reserves will not be economically
recoverable. The Company's salvage expense will be shared on a 50/50 basis with
Exxon Corporation, and a reserve has been accrued for the estimated expense.
The Company's Grande Ecaille mine, which was depleted in 1978, was salvaged
in accordance with applicable regulations at the time of closure. Although the
Company has no legal obligation to do so, it has undertaken to reclaim wellheads
and other materials, none of which are classified as hazardous, that are being
exposed through coastal erosion, and it is anticipated that these reclamation
activities will continue for several more years. Additional expenditures may be
required from time to time if erosion continues, although the Company does not
expect such expenditures to be material. Additional expenditures may be
46
<PAGE>
necessary in the future to remove building foundations should the Company decide
it is in the best interest of the Company to do so.
Reclamation of the Company's two producing sulphur mines, Main Pass and
Culberson, will be required upon the closure of those facilities, and a reserve
account is being accumulated to cover this expense. The Company has also closed
nine other sulphur mines, all of which have been reclaimed in accordance with
applicable regulations and customary industry practices.
In September 1997 the Company completed the salvage of its Grand Isle mine
in the Gulf of Mexico, which was depleted in 1991, by converting it into an
artificial reef for the enhancement of marine life. The reef was constructed at
the request of the State of Louisiana as part of its "Rigs-to-Reefs" program
through which the State and private industry are cooperating to provide useful
marine habitats using offshore structures that are no longer needed for
commercial activities. The Grand Isle reef is the first in shallow water and is
the largest in the Gulf of Mexico. The reef was donated to the State of
Louisiana, which has assumed all responsibility for its upkeep, although the
Company will retain responsibility for any environmental liabilities that may
arise from previous mining activities with respect to this site.
Although the Company believes that its prior reclamation activities were
carried out in compliance with then applicable laws and regulations and that it
is accruing adequate reserves to cover future reclamation costs, no assurance
can be given that the Company will not incur materially greater reclamation
costs than those anticipated.
EMPLOYEES
As of September 30, 1997, Freeport Sulphur had 426 active employees. There
are 402 employees working at the Company's mine sites and terminals, and 24
employees located at its New Orleans headquarters. None of the employees of
Freeport Sulphur is represented by any union or covered by any collective
bargaining agreement. The Company believes its employee relations are
satisfactory.
The Company also uses contract personnel to perform many of the technical
tasks customarily conducted by Company employees at its Main Pass mine, which
minimizes development costs and allows the Company to use its management staff
to direct the efforts of both the sulphur mine and oil operations. Freeport
Sulphur also receives financial, legal and administrative and other related
services through an administrative services agreement with FMS. See "Risk
Factors--Dependence on Management and Administrative Services."
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings of a
character normally incident to its businesses. The Company believes that its
potential liability in any such pending or threatened proceedings will not have
a material adverse effect on the financial condition or results of operations of
the Company. The Company, through FMS, maintains liability insurance to cover
some, but not all, potential liabilities normally incident to the ordinary
course of its businesses with such coverage limits as management deems prudent.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's directors (the "Directors") and executive officers (the "Executive
Officers").
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James R. Moffett........................... 59 Co-Chairman of the Board
Rene L. Latiolais.......................... 55 Co-Chairman of the Board
Richard C. Adkerson........................ 50 Vice Chairman of the Board
Robert M. Wohleber......................... 46 President, Chief Executive Officer and Director
John G. Amato.............................. 53 General Counsel
J. Terrell Brown........................... 57 Director
Thomas D. Clark, Jr........................ 56 Director
B. M. Rankin, Jr........................... 67 Director
</TABLE>
James R. Moffett has served as the Chairman of the Board of each of
Freeport-McMoRan Cooper & Gold Inc. ("FCX") and FTX for the last five years. Mr.
Moffett has also served as Chief Executive Officer of FCX since July 1995. Mr.
Moffett is also President Commissioner of P.T. Freeport Indonesia Company
("PTFI"), an operating subsidiary of FCX, and Co-Chairman of the Board of
McMoRan Oil & Gas Co. ("MOXY"), an oil and gas exploration company.
Rene L. Latiolais has served as Vice Chairman of the Board of FCX since
1994. Since 1993 Mr. Latiolais has also served as a Commissioner of PTFI. Mr.
Latiolais currently serves as President and Chief Executive Officer of FTX and
FRP. He is also a Director of FTX. Mr. Latiolais held the office of Chief
Operating Officer of FTX until 1995, the office of Executive Vice President of
FTX until 1993, and the office of Senior Vice President of FTX from 1987 until
1992.
Richard C. Adkerson has served as President and Chief Operating Officer of
FCX since April 1997. Mr. Adkerson has also served as Chief Financial Officer of
FCX since 1994 and, prior to April 1997, served FCX as Executive Vice President.
Mr. Adkerson is also Vice Chairman of the Board of FTX, Co-Chairman of the Board
and Chief Executive Officer of MOXY and Chairman of the Board and Chief
Executive Officer of FM Properties Inc. ("FMPO"), a real estate development
company. From 1992 to 1995 Mr. Adkerson served as Senior Vice President and
Chief Financial Officer of FTX. Mr. Adkerson also serves as a Director of Hi-Lo
Automotive, Inc.
Robert M. Wohleber has served as Senior Vice President of FRP and FTX since
November 1996. From June 1994 to November 1996, Mr. Wohleber served as Vice
President of FTX. He served as Vice President and Treasurer of FTX from May 1992
to June 1994 and served as Treasurer of FTX from May 1989 to May 1992. Mr.
Wohleber was named a Senior Vice President of FCX in November 1997. He served as
a Vice President of FCX from July 1994 to November 1997, as Vice President and
Treasurer of FCX from July 1993 to June 1994, and as Treasurer of FCX from
August 1990 to June 1993.
John G. Amato has served as General Counsel of MOXY since 1994, and has also
served as the General Counsel of FMPO since 1995. Prior to August 1995, Mr.
Amato served as General Counsel of FTX and FCX. Mr. Amato currently provides
legal and business advisory services to FTX and FCX under a consulting
arrangement.
J. Terrell Brown is Chairman of the Board of Directors and Chief Executive
Officer of United Companies Financial Corporation ("United Companies"), a
provider of non-traditional consumer and mortgage lending. He is also Chairman
of the Board of Directors and Chief Executive Officer of each of United
Companies' subsidiaries. He has served as a director and executive officer of
United Companies since 1969 and was named Chief Executive Officer in 1985.
48
<PAGE>
Thomas D. Clark, Jr. has served as the Dean of E. J. Ourso College of
Business Administration at Louisiana State University since 1995 and is the
Ourso Distinguished Professor of Business. Prior to his current position, Mr.
Clark held a variety of positions at Florida State University and the Air Force
Institute of Technology, including Chairman of Information and Management
Services and Director of the Center for Information Systems Research. Mr. Clark
also serves as a director of Ocean Energy, Inc., an oil and gas exploration
company.
B. M. Rankin, Jr. is a private investor. Mr. Rankin has served as a Director
of FTX since 1981, of MOXY since 1994 and of FCX since 1995.
The Board of Directors consists of three classes, each serving a three-year
term of office, with the members of one class being elected each year. Messrs.
Brown and Latiolais are members of the class serving until the 1998 annual
meeting of stockholders, Messrs. Clark and Wohleber are members of the class
serving until the 1999 annual meeting of stockholders, and Messrs. Adkerson,
Moffet and Rankin are members of the class serving until the 2000 annual meeting
of stockholders.
DIRECTOR COMPENSATION
Each Director who is not an employee of the Company will be paid an annual
director's fee of $15,000 and an attendance fee of $500 for each committee
meeting attended. All Directors will be paid an attendance fee of $1,000 for
each board meeting attended. Each Director will be reimbursed for reasonable
out-of-pocket expenses incurred in attending board and committee meetings. Each
Director who is not an employee of the Company will also be eligible to receive
options to purchase shares of Common Stock under the terms of the Director Plan
described below.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established an Audit Committee and a
Corporate Personnel Committee (the "Compensation Committee"). The Audit
Committee is responsible for reviewing the Company's financial statements and
annual audit and meeting with the Company's independent public accountants to
review the Company's internal controls and financial management practices. The
members of the Audit Committee are Messrs. Brown, Clark and Rankin.
The Compensation Committee is responsible for recommending to the Board of
Directors compensation for the Company's key employees, including its Executive
Officers, and administering the Company's incentive plans and performing such
other similar functions as may be assigned by the Board of Directors. The
members of the Compensation Committee are Messrs. Brown and Clark.
EXECUTIVE COMPENSATION
The Company was not incorporated until August 26, 1997, and therefore did
not have any Executive Officers or employees during the year ended December 31,
1996. The future compensation and employment arrangements of the Company's
Executive Officers and employees will be determined by the Board of Directors
and the Compensation Committee.
The services of the Executive Officers who are not employed by the Company
will be provided to the Company by FMS under a management services agreement.
The Company will reimburse FMS at FMS' cost, including allocated overhead, for
such services. Such Executive Officers will be compensated exclusively by FMS
for their services to the Company. Those Executive Officers who are also
employees of FMS are eligible to participate in certain FMS employee benefit
plans and programs. The total costs to FMS for such Executive Officers,
including the costs borne by FMS with respect to such plans and programs, will
be allocated to the Company, to the extent practicable, in proportion to the
time spent by such Executive Officers on Company affairs. No other payment will
be made by the Company to FMS for providing such compensation and benefit plans
and programs to such Executive Officers.
49
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Messrs. Brown and
Clark, neither of whom has ever been an officer or employee of the Company, nor
has or has had any other significant relationship with the Company. No Executive
Officer of the Company serves as a director or member of the compensation
committee of another entity, one of whose executive officers will serve as a
Director or on the Compensation Committee of the Company.
THE EMPLOYEE BENEFITS AGREEMENT
The Company, FTX and FRP have entered into the Employee Benefits Agreement
to provide for the transfer of assets and liabilities pertaining to certain
employee benefit plans maintained by FTX for the benefit of FTX employees who
have in the past provided services to FRP in connection with the FRP Transferred
Businesses and to provide for the compensation and benefits of those employees
who will become employees of the Company (the "Transferred Employees"). In
accordance with the terms of the Employee Benefits Agreement, the Company will
sponsor qualified and non-qualified defined contribution and defined benefit
pension plans that initially will have substantially the same provisions as the
FTX pension plans and will provide credit for prior FTX service. All liabilities
under the FTX pension plans with regard to the Transferred Employees will be
transferred to the Company's plans. Assets sufficient to fund the transferred
qualified plan liabilities will be transferred from the FTX plans to the
comparable Company plans, and assets sufficient to fund the transferred
non-qualified plan liabilities will be transferred from FTX to the Company.
The Company will establish new welfare benefit plans, such as medical,
dental, life insurance, disability and sick leave plans, which will credit
Transferred Employees with prior service at FTX and will credit items such as
deductibles, limits and usage of and by Transferred Employees under similar FTX
plans. FTX will pay the Company an actuarially-determined amount to cover the
costs of post-retirement medical benefits for Transferred Employees. The Company
will assume responsibility for all claims made after the Merger by Transferred
Employees on sickness, disability or other leaves of absence. FTX will retain
liability for retiree medical benefits for employees who retired prior to the
Merger, but the Company has agreed to reimburse FTX quarterly for a portion of
those expenses for former employees who provided services primarily for the
Transferred Businesses. In addition, the Company will reimburse FTX for claims
and premiums related to COBRA coverage for certain employees who lose medical
coverage as a result of the Merger and related transactions.
Pursuant to the Employee Benefits Agreement, each outstanding stock option,
stock appreciation right, and stock incentive unit relating to FTX common stock
that has been granted under an FTX stock option or stock incentive plan and that
is held by any person other than an employee of IGL or the IMC-Agrico joint
venture (collectively, the "FTX Awards") will be converted into an adjusted FTX
stock option, stock appreciation right, or stock incentive unit, respectively
(an "Adjusted FTX Award"), and a new non-qualified option to purchase Common
Stock (a "Company Option") under the Company's Adjusted Stock Award Plan
described below. Thus, after the FTX Stockholder Distribution, each holder of an
FTX Award will hold an Adjusted FTX Award and a Company Option. The number of
shares of FTX common stock subject to the Adjusted FTX Award will be the same as
the number of shares of FTX common stock subject to the related FTX Award, and
the number of shares of Common Stock subject to the Company Option will be the
number of shares of Common Stock that a holder of record of the number of shares
of FTX common stock subject to the related FTX Award would be eligible to
receive in the FTX Stockholder Distribution.
If the FTX Award that is converted contains a "tax-offset" payment right
feature, the Company Option derived from such FTX Award will relate to a number
of shares of Common Stock determined as described above multiplied by a factor
of 1.6556. No Company Option will contain a "tax-offset" payment
50
<PAGE>
right feature. Each Company Option will, however, have in-tandem "limited
rights" equal in number to the number of shares of Common Stock subject to such
Company Option.
The exercise price of each FTX Award will be allocated between the Adjusted
FTX Award and the Company Option based on the relative fair market values of FTX
common stock and Common Stock at the time of the Merger. Each Company Option and
each Adjusted FTX Award will have the same exercisability terms, remaining
duration and change of control provisions as the FTX Award from which it was
derived.
In connection with the Merger, each outstanding Adjusted FTX Award, whether
a stock option, stock appreciation right or stock incentive unit, will, in
effect, be converted into an IGL stock option, stock appreciation right or stock
incentive unit, respectively.
In accordance with the terms of the Employee Benefits Agreement, FTX will
calculate, as of the date of the FTX Stockholder Distribution, its liability
under various non-qualified incentive plans in respect of the deferred
compensation of the Transferred Employees. In consideration of a cash payment by
FTX to the Company in an amount equal to such accrued liability, the Company
will assume such liability in respect of the Transferred Employees. Similarly,
FTX shall determine the total amount of cash bonus payments that it would have
made to the Transferred Employees as a group under non-qualified incentive plans
for 1997, and, in consideration of a cash payment by FTX to the Company in an
amount equal thereto, the Company will assume the payment of such amounts to the
Transferred Employees as soon as feasible after 1997 in accordance with
procedures it may later establish for payment of cash incentives to its
employees.
STOCK OPTION PLANS
COMPANY ADJUSTED STOCK AWARD PLAN
The Company has adopted the Freeport-McMoRan Sulphur Inc. Adjusted Stock
Award Plan (the "Company Adjusted Stock Award Plan"). The purpose of the Company
Adjusted Stock Award Plan is to provide for the issuance of the Company Options
as described under "The Employee Benefits Agreement" above. No other awards will
be made under the Company Adjusted Stock Award Plan.
The maximum number of shares of Common Stock in respect of which stock
options may be granted under the Company Adjusted Stock Award Plan is expected
to be approximately 450,000, and will be determined in accordance with the
conversion procedures described under "The Employee Benefits Agreement" above.
No individual will be granted awards under the Company Adjusted Stock Award Plan
with respect to more than 200,000 shares of Common Stock. The shares of Common
Stock to be delivered under the Company Adjusted Stock Award Plan will be made
available from the authorized but unissued shares of Common Stock or from
treasury shares.
The Company Adjusted Stock Award Plan will be administered by the
Compensation Committee, upon which no Director who is an officer of the Company
may serve. Current and former employees, officers and directors of FTX who hold
FTX Awards at the Effective Time of the Merger are eligible to receive stock
options under the Company Adjusted Stock Award Plan. It is estimated that
approximately 180 persons will receive stock options under the Company Adjusted
Stock Award Plan pursuant to the conversion of FTX Awards described above.
Stock options granted under the Company Adjusted Stock Award Plan will have
the terms described under "The Employee Benefits Agreement" above. If the
Compensation Committee determines that any dividend or other distribution
(whether in the form of cash, securities, or other property), recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase or exchange of shares, issuance of
warrants or other rights to purchase securities of the Company, or other similar
corporate transaction or event affects the Common Stock such that an adjustment
is appropriate to prevent dilution or enlargement of the benefits intended under
the Company
51
<PAGE>
Adjusted Stock Award Plan, then the Compensation Committee has discretion to (i)
adjust the number and type of shares (or other securities or property) with
respect to which options may be granted, (ii) make equitable adjustments in the
number and kind of shares (or other securities or property) subject to
outstanding stock options and the respective exercise prices thereof and (iii)
if appropriate, provide for the payment of cash to a participant.
The Company Adjusted Stock Award Plan may be amended at any time by the
Board of Directors, except that stockholder approval will be required if
determined by the Compensation Committee to be necessary or advisable in order
to comply with any tax or regulatory requirement.
The federal income tax consequences of the stock options are described below
under "--Federal Income Tax Consequences."
The following table sets forth information with respect to the stock options
anticipated to be granted under the Company Adjusted Stock Award Plan, to (i)
each of the Executive Officers, (ii) all Executive Officers as a group, (iii)
each of the Directors who is not an Executive Officer, (iv) all Directors who
are not Executive Officers as a group and (v) all employees of the Company,
including all officers who are not Executive Officers as a group, based on the
number of FTX Awards held by each of them as of October 31, 1997 and assuming
that each share of FTX common stock converted in the Merger will entitle the
holder to receive 0.2123 of a share of Common Stock. No associate of any
Director or Executive Officer is anticipated to be eligible to participate in
the Company Adjusted Stock Award Plan. Other than the persons identified in the
following table, no person is anticipated to receive more than 5% of the awards
anticipated to be granted under the Company Adjusted Stock Award Plan. Each
option will be immediately exercisable in full and will have a term equal to the
remaining term of the FTX Award. Each stock option is granted in conjunction
with a limited right, the terms of which are as described under "--1997 Stock
Option Plan" below.
NEW PLAN BENEFITS UNDER THE
COMPANY ADJUSTED STOCK AWARD PLAN
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SHARES UNDERLYING OPTIONS
OPTIONS ANTICIPATED TO BE ANTICIPATED TO BE
NAME AND POSITION GRANTED GRANTED TO EMPLOYEES
- -------------------------------------------------------- ------------------------------- -----------------------
<S> <C> <C>
James R. Moffett, Co-Chairman of the Board.............. 74,897 16.9%
Rene L. Latiolais, Co-Chairman of the Board............. 96,227 21.8%
Richard C. Adkerson, Vice Chairman of the Board......... 23,609 5.3%
Robert M. Wohleber, President, Chief Executive Officer
and Director.......................................... 9,431 2.1%
John G. Amato, General Counsel.......................... 14,747 3.3%
J. Terrell Brown, Director.............................. -- --
Thomas D. Clark, Jr., Director.......................... -- --
B.M. Rankin, Jr., Director.............................. 3,711 *
Executive Officer Group................................. 218,911 49.5%
Non-Executive Officer Director Group.................... 3,711 *
Non-Executive Officer Employee Group.................... 219,615 49.7%
</TABLE>
- ------------------------
* Less than 1%.
------------------------
1997 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The Company has adopted the Freeport-McMoRan Sulphur Inc. 1997 Stock Option
Plan for Non-Employee Directors (the "Director Plan"). The purpose of the
Director Plan is to align more closely the interests of the Company's
non-employee Directors with those of the Company's stockholders by providing for
the automatic grant of stock options to such Directors in accordance with the
terms of the Director Plan.
52
<PAGE>
The maximum number of shares of Common Stock in respect of which options may
be granted under the Director Plan is 75,000. The shares of Common Stock to be
delivered under the Director Plan will be made available from the authorized but
unissued shares of Common Stock or from treasury shares.
Except for determinations with respect to the transferability of options,
which will be made by the Compensation Committee, the Director Plan will be
administered by the Board of Directors.
All Directors who are not employees or officers of the Company or a
subsidiary will be "Eligible Directors" under the Director Plan. There will
initially be three Eligible Directors. Each Eligible Director will be granted an
option to purchase 5,000 shares of Common Stock upon the Distributions and an
option to purchase 1,000 shares on May 1 of each year that the Director Plan is
in effect.
Options granted under the Director Plan will be non-qualified options. The
exercise price of options granted under the Director Plan will be 100% of the
fair market value of the underlying shares of Common Stock on the date of grant.
Each option becomes exercisable in 25% annual increments beginning on the first
anniversary of the date of grant, and will have a term of 10 years. Upon
termination of Board service, except in the case of death or retirement, an
option may be exercised, to the extent exercisable at the time of termination of
Board service, for a period of three months, but no later than the expiration
date of the option. Upon death or retirement from service as a Director, a
Director's options that were exercisable on the date of death or retirement or
could have become exercisable within one year after such date will remain
exercisable until the earlier of (i) in the case of death, the first anniversary
of the date of death, or in the case of retirement, the third anniversary of the
date of such retirement or (ii) the expiration date of the option. An option
will become exercisable in full upon a change of control of the Company, as
defined in the Director Plan.
The option exercise price may be satisfied in cash or by delivering shares
of Common Stock owned by the optionee.
If the Board determines that any dividend or other distribution (whether in
the form of cash, securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of shares or other securities of the
Company, issuance of warrants or other rights to purchase securities of the
Company, or other similar corporate transaction or event affects the Common
Stock such that an adjustment is appropriate to prevent dilution or enlargement
of the benefits intended under the Director Plan, then the Board has discretion
to (i) adjust the number and type of shares (or other securities or property)
with respect to which options may be granted, (ii) make equitable adjustment in
the number and kind of shares (or other securities or property) subject to
outstanding stock options and the respective exercise prices thereof and (iii)
if appropriate, provide for the payment of cash to a participant. In the event
the Company is merged or consolidated into or with another corporation in a
transaction in which the Company is not the survivor, or in the event that
substantially all of the Company's assets are sold to another entity not
affiliated with the Company, any holder of an option, whether or not then
exercisable, will be entitled to receive (unless the Company takes such
alternative action as may be necessary to preserve the economic benefit of the
option for the optionee) on the effective date of any such transaction, in
cancellation of such option, an amount in cash equal to the excess, if any, of
the fair market value on the effective date of any such transaction of the
shares underlying such option over the aggregate exercise price thereof.
The Director Plan may be amended or terminated at any time by the Board of
Directors, except that no amendment will be made without stockholder approval if
stockholder approval is deemed necessary to comply with regulatory requirements.
The federal income tax consequences of the stock options are described below
under "--Federal Income Tax Consequences."
53
<PAGE>
1997 STOCK OPTION PLAN
The Company has adopted the Freeport-McMoRan Sulphur Inc. 1997 Stock Option
Plan (the "Stock Plan"). The purpose of the Stock Plan is to motivate and reward
key personnel by giving them a proprietary interest in the Company's success.
Awards under the Stock Plan will be made by the Compensation Committee. The
Compensation Committee has full power and authority to designate participants,
set the terms of awards and to make any determinations necessary or desirable
for the administration of the Plan.
Those persons eligible to participate in the Stock Plan are: (a) officers
and key employees of the Company and its existing or future subsidiaries, (b)
officers and employees of any entity with which the Company has contracted to
receive executive, management or legal services and who provide services to the
Company or a subsidiary under such arrangement, (c) any consultant or advisor to
the Company, a subsidiary or an entity with which the Company has contracted to
receive executive, management or legal services and who provides services to the
Company or a subsidiary under such arrangement and (d) any person who has agreed
in writing to become eligible to participate within 30 days. A subsidiary is
defined as (i) a corporation or other entity in which the Company possesses
directly or indirectly equity interests representing at least 50% of the voting
power or 50% of the total value of all classes of equity interests of such
corporation or other entity and (ii) any other entity in which the Company has a
direct or indirect economic interest that is designated as a subsidiary by the
Compensation Committee. The Compensation Committee may delegate to certain
Executive Officers of the Company the power to make awards to eligible persons
who are not Executive Officers or Directors, subject to limitations to be
established by the Compensation Committee. It is anticipated that the
Compensation Committee's determinations of which eligible individuals will be
granted awards and the terms thereof will be based on each individual's present
and potential contribution to the success of the Company and its subsidiaries.
It is estimated that approximately fifty persons will be granted awards under
the Stock Plan.
The maximum number of shares of Common Stock with respect to which awards
payable in shares of Common Stock may be granted under the Stock Plan is
1,000,000, plus, to the extent authorized by the Board, the number of shares
reacquired by the Company in the open market or in private transactions for an
aggregate price no greater than the cash proceeds received by the Company from
the exercise of Stock Plan options. Grants of stock appreciation rights, limited
rights and other stock-based awards not granted in tandem with options and
payable only in cash may relate to no more than 1,000,000 shares. No individual
may receive in any year awards under the Stock Plan that relate to more than
200,000 shares of Common Stock. Shares subject to awards that are forfeited or
canceled will again be available for award. In addition, to the extent that
shares are delivered to pay the exercise price of options or are delivered or
withheld by the Company in payment of the withholding taxes relating to an award
under the Stock Plan, the number of shares withheld or delivered will again be
available for grant under the Stock Plan. The shares to be delivered under the
Stock Plan will be made available from the authorized but unissued shares of
Common Stock or from treasury shares.
Stock options, stock appreciation rights, limited rights, and other
stock-based awards may be granted under the Stock Plan in the discretion of the
Compensation Committee. Options granted under the Stock Plan may be either
non-qualified or incentive stock options. Only employees of the Company and its
subsidiaries will be eligible to receive incentive stock options. Stock
appreciation rights and limited rights may be granted in conjunction with or
unrelated to other awards and, if in conjunction with an outstanding option or
other award, may be granted at the time of such award or thereafter, at the
exercise price of such other award. The Compensation Committee has discretion to
fix the exercise price of such options at a price not less than 100% of the fair
market value of the underlying Common Stock at the time of grant thereof (or at
the time of grant of the related award in the case of a stock appreciation right
or limited right granted in conjunction with an outstanding award), except that
this limitation on the Compensation Committee's discretion does not apply in the
case of awards granted in substitution for outstanding awards
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<PAGE>
previously granted by an acquired company or a company with which the Company
combines. The Compensation Committee has broad discretion as to the terms and
conditions upon which options and stock appreciation rights are exercisable, but
under no circumstances will an option, a stock appreciation right or a limited
right have a term exceeding 10 years.
The option exercise price may be satisfied in cash, or in the discretion of
the Compensation Committee, by exchanging Common Stock owned by the optionee or
by a combination of cash and Common Stock. The ability to pay the option
exercise price in Common Stock would permit an optionee to engage in a series of
successive stock-for-stock exercises of an option (sometimes referred to as
"pyramiding") and thereby fully exercise an option with little or no cash
investment; however, it is expected that the Compensation Committee's policy
will be to require any stock tendered in payment of the exercise price to be in
certificated form and to have been held by the exercising optionee for such time
as is sufficient to avoid any adverse accounting consequences to the Company
resulting from the permitting of stock-for-stock exercises.
Upon the exercise of a stock appreciation right with respect to Common
Stock, a participant would be entitled to receive, for each such share subject
to the right, the excess of the fair market value of such shares on the date of
exercise over the exercise price of such right. The Compensation Committee has
the authority to determine whether the value of a stock appreciation right is
paid in cash or Common Stock or a combination thereof.
Limited rights generally are exercisable only during a period beginning not
earlier than one day and ending not later than 90 days after the expiration date
of any tender offer, exchange offer or similar transaction that results in any
person or group becoming the beneficial owner of more than 40% of all classes
and series of the Company's stock outstanding, taken as a whole that have voting
rights with respect to the election of directors of the Company (not including
shares of preferred stock which may be issued in the future that have the right
to elect directors only if the Company fails to pay dividends). Upon the
exercise of a limited right granted under the Stock Plan, a participant would be
entitled to receive, for each share of Common Stock subject to such right, the
excess, if any, of the highest price paid in or in connection with such
transaction over the grant price of the limited right.
The Stock Plan also authorizes the Compensation Committee to grant to
participants awards of Common Stock and other awards that are denominated in,
payable in, valued in whole or in part by reference to, or are otherwise based
on the value of, Common Stock ("Other Stock-Based Awards"). The Compensation
Committee has discretion to determine the participants to whom Other Stock-Based
Awards are to be made, the times at which such awards are to be made, the size
of such awards, the form of payment, and all other conditions of such awards,
including any restrictions, deferral periods or performance requirements. The
terms of the Other Stock-Based Awards will be subject to such rules and
regulations as the Compensation Committee determines.
Any award under the Stock Plan may provide that the participant has the
right to receive currently or on a deferred basis dividends or dividend
equivalents or other cash payments in addition to or in lieu of such awards, all
as the Compensation Committee determines.
If the Compensation Committee determines that any dividend or other
distribution (whether in the form of cash, securities or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase or exchange of shares
or other securities of the Company, issuance of warrants or other rights to
purchase securities of the Company, or other similar corporate transaction or
event affects the Common Stock such that an adjustment is appropriate to prevent
dilution or enlargement of the benefits intended under the Stock Plan, then the
Compensation Committee has discretion to (i) adjust the number and kind of
shares that may be the subject of future awards under the Stock Plan, (ii) make
equitable adjustment in the number and kind of shares (or other securities or
property) subject to outstanding awards and the respective grant or exercise
prices thereof and (iii) if appropriate, provide for the payment of cash to a
participant.
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The Stock Plan may be amended or terminated at any time by the Board of
Directors, except that no amendment may be made without stockholder approval if
such approval is determined by the Compensation Committee to be necessary or
advisable in order to comply with any tax or regulatory requirement, including
any approval requirement that is necessary to qualify awards as
"performance-based" compensation under Section 162(m) of the Code.
The grant of awards under the Stock Plan is entirely in the discretion of
the Compensation Committee. The Compensation Committee has not yet made a
determination as to the awards to be granted under the Stock Plan.
FEDERAL INCOME TAX CONSEQUENCES
An optionee will not recognize any income for federal income tax purposes
upon the grant of a non-qualified stock option, nor will the Company normally
realize any deduction for federal income tax purposes at the time of grant. When
an optionee exercises a non-qualified option, the difference between the
exercise price and any higher fair market value of the Common Stock on the date
of exercise will be ordinary income to the optionee (subject to withholding) and
will generally be allowed as a deduction at that time for federal income tax
purposes to the Company.
Any gain or loss realized by an optionee on disposition of the Common Stock
acquired upon exercise of a non-qualified option will generally be capital gain
or loss to the optionee, long-term or short-term depending on the holding
period, and will not result in any additional federal income tax consequences to
the Company. The optionee's basis in the Common Stock for determining gain or
loss on the disposition will be the fair market value of the Common Stock
determined generally at the time of exercise.
When an optionee exercises an incentive stock option while employed by the
Company or a subsidiary or within three months (one year for disability) after
termination of employment by reason of retirement or death, no ordinary income
will be recognized by the optionee at that time, but the excess (if any) of the
fair market value of the Common Stock acquired upon such exercise over the
option price will be an adjustment to taxable income for purposes of the federal
alternative minimum tax applicable to individuals. If the Common Stock acquired
upon exercise of the incentive stock option is not disposed of prior to the
expiration of one year after the date of acquisition and two years after the
date of grant of the option, the excess (if any) of the sale proceeds over the
aggregate option exercise price of such Common Stock will be long-term capital
gain, but the Company will not be entitled to any tax deduction with respect to
such gain. Generally, if the Common Stock is disposed of prior to the expiration
of such periods (a "Disqualifying Disposition"), the excess of the fair market
value of such Common Stock at the time of exercise over the aggregate option
exercise price (but not more than the gain on the disposition if the disposition
is a transaction on which a loss, if realized, would be recognized) will be
ordinary income at the time of such Disqualifying Disposition (and the Company
will generally be entitled to a federal income tax deduction in a like amount).
Any gain realized by the optionee as the result of a Disqualifying Disposition
that exceeds the amount treated as ordinary income will be capital in nature,
long-term or short-term depending on the holding period. If an incentive stock
option is exercised more than three months (one year for disability) after
termination of employment, the federal income tax consequences are the same as
described above for non-qualified stock options.
If the exercise price of an option is paid by the surrender of previously
owned shares, the basis of the previously owned shares carries over to the
shares received in replacement therefor. If the option is a non-qualified
option, the income recognized on exercise is added to the basis. If the option
is an incentive stock option, the optionee will recognize gain if the shares
surrendered were acquired through the exercise of an incentive stock option and
have not been held for the applicable holding period. This gain will be added to
the basis of the shares received in replacement of the previously owned shares.
Awards that are granted, accelerated or enhanced upon the occurrence of a
change of control may give rise, in whole or in part, to excess parachute
payments within the meaning of Section 280G of the
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Code to the extent that such payments, when aggregated with other payments
subject to Section 280G, exceed the limitations contained therein. Such excess
parachute payments will be nondeductible to the Company and subject the
recipient of the payments to a 20% excise tax.
If permitted by the Compensation Committee, at any time that a participant
is required to pay to the Company the amount required to be withheld under
applicable tax laws in connection with the exercise of a stock option or the
issuance of Common Stock, the participant may elect to have the Company withhold
from the shares that the participant would otherwise receive shares of Common
Stock having a value equal to the amount to be withheld. This election must be
made prior to the date on which the amount of tax to be withheld is determined.
The foregoing discussion summarizes the federal income tax consequences of
stock options that may be granted under the Company Adjusted Stock Award Plan,
the Directors Plan and the Stock Plan, based on current provisions of the Code,
which are subject to change. This summary does not cover any foreign, state or
local tax consequences or participation in such plans.
RETIREMENT BENEFIT PROGRAM
The Company has adopted a retirement benefit program. Under the program,
each participant, including Executive Officers, is entitled to benefits based
upon the sum of his starting account balance, annual benefit credits and annual
interest credits allocated to his "account." The starting account balance is
equal to the value of the participant's accrued benefit under FTX's plan at the
time of the FTX Stockholder Distribution. The annual benefit credit consists of
two parts: (1) 4% of the participant's earnings for the year in excess of the
social security wage base for the year; and (2) a percentage of the
participant's total earnings for the year. The percentage of total earnings is
determined as follows:
- 15%, if as of January 1, 1997, the participant's age plus service totaled
65 or more, he was at least 50 years old and had at least 10 years of
service;
- 10%, if as of January 1, 1997, the participant's age plus service totaled
55 or more, he had at least 10 years of service, and he did not meet the
requirements for a 15% allocation;
- 7%, if as of January 1, 1997, the participant's age plus service totaled
45 or more, he had at least 5 years of service, and he did not meet the
requirements for a greater allocation;
- 4%, if the participant did not meet the requirements for a greater
allocation.
The annual interest credit is equal to the account balance at the end of the
prior year multiplied by the annual yield on 10-year U.S. Treasury securities on
the last day of the preceding year. Interest credits stop at the end of the year
in which the participant reaches age 60. Upon retirement a participant's account
balance is payable either in a lump sum or an annuity, as selected by the
participant. A participant's "earnings" are comprised of annual base salary,
plus a percentage of certain bonuses, which percentage is the lesser of 50% or
the percentage of the bonus not deferred. Years of service include not only
years with the Company but also any years with FTX and FRP and any of their
predecessors.
Benefits payable to a participant under the FTX retirement benefit program
under which participants in the Company's plan have previously participated were
at one time determined primarily by such individual's final average compensation
and years of service. The Company's retirement benefit program does not
incorporate this design. However, if a participant's age plus service equaled 65
or more as of January 1, 1997, and as of that date the participant had both
attained age 50 and had at least 10 years of service, the participant is
"grandfathered" into a benefit of no less than the benefit under the former FTX
retirement benefit formula based on years of service and final average earnings.
Currently no Executive Officers are participating in this program.
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PRINCIPAL STOCKHOLDERS
None of the individuals serving as a Director or Executive Officer of the
Company currently owns any shares of Common Stock, all of which currently are
owned by FRP. The Directors and Executive Officers will receive shares of Common
Stock in respect of shares of FTX common stock and FRP units of partnership
interest held by them at the time of the Distributions. In addition, the Company
has agreed to issue to the Directors and Executive Officers and other holders of
stock options, stock appreciation rights and other similar stock-based awards
granted under certain FTX benefit plans options to purchase Common Stock under
the Company Adjusted Stock Award Plan described above.
The following table sets forth certain information regarding the number of
shares of Common Stock expected to be beneficially owned by (i) each of the
Directors and Executive Officers; (ii) all Directors and Executive Officers as a
group and (iii) each person expected to own more than 5% of the outstanding
Common Stock, immediately after the Distributions, determined in accordance with
Rule 13d-3 under the 1934 Act. In calculating the number of shares, it is
assumed that each share of FTX common stock converted in the Merger will entitle
the holder to receive 0.2123 of a share of Common Stock. Except as otherwise
noted, each of the individuals will have sole voting and investment power with
respect to such Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
ANTICIPATED TO BE
BENEFICIALLY PERCENTAGE OF
NAME OWNED (1) CLASS
- ------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
James R. Moffett......................................................... 77,501(2)(3) *
Rene L. Latiolais........................................................ 43,241(2)(4) *
Richard C. Adkerson...................................................... 9,985(2)(5) *
Robert M. Wohleber....................................................... 2,684 *
John G. Amato............................................................ 41,468(6) *
J. Terrell Brown......................................................... -- --
Thomas D. Clark, Jr...................................................... -- --
B.M. Rankin, Jr.......................................................... 36,182(7) *
All Directors and Executive Officers as a Group.......................... 211,061(8) 2.0%
Wellington Management Company, L.L.P. ................................... 1,307,680 12.6%
75 State Street
Boston, Massachusetts 02109
Merrill Lynch & Co., Inc. ............................................... 797,413 7.7%
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes shares that would be acquired within sixty days after October 31,
1997, upon the exercise of outstanding FTX stock options or Company stock
options to be granted pursuant to the Company Adjusted Stock Option Plan as
follows: Mr. Moffett, 18,840 shares; Mr. Latiolais, 30,827 shares; Mr.
Adkerson, 7,678 shares; Mr. Wohleber, 2,684 shares; Mr. Amato, 14,455
shares; Mr. Rankin, 2,822 shares; all Directors and Executive Officers as a
group, 74,484 shares.
(2) Includes shares held by the trustee under FTX's Employee Capital
Accumulation Program as of October 31, 1997 as follows: Mr. Moffett, 917
shares; Mr. Latiolais, 639 shares and Mr. Adkerson, 178 shares.
(3) Includes 9,614 shares held for the benefit of three trusts with respect to
which Mr. Moffett, as co-trustee, shares voting and investment power, but as
to which he disclaims beneficial ownership.
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(4) Includes 58 shares held by custodian of reinvestment plan for the benefit of
Mr. Latiolais.
(5) Includes 52 shares held in a retirement trust for the benefit of Mr.
Adkerson.
(6) Includes 54 shares held in a retirement trust for the benefit of Mr. Amato;
3 shares held in a retirement trust for the benefit of Mr. Amato's wife; 617
shares held for trusts with respect to which Mr. Amato, as trustee, has sole
voting and investment power but as to which he disclaims beneficial
ownership and 17,151 shares held for the benefit of trusts with respect to
which Mr. Amato, as co-trustee, shares voting and investment power but as to
which he disclaims beneficial ownership.
(7) Includes 12,281 shares with respect to which Mr. Rankin has sole voting and
investment power under a power of attorney but as to which he disclaims
beneficial ownership.
(8) Includes the 41,544 shares discussed in footnotes (2) through (7) above.
------------------------
CERTAIN TRANSACTIONS
FRP and the Company are parties to the Distribution Agreement and the
Employee Benefits Agreement, which are discussed elsewhere in this Information
Statement. See "The Merger and the Distributions" and "Management--Employee
Benefits Agreement." At the time these agreements were negotiated and executed,
the Company was a wholly-owned subsidiary of FRP.
Prior to 1996, the Company received certain management and administrative
services from FTX. Beginning in 1996, FMS began providing these services under a
Management Services Agreement that was negotiated and executed when FMS was an
affiliate of FTX and FRP, and the Company was a wholly-owned subsidiary of FRP.
Subsequent to the Distributions, FMS will be 25% owned by the Company. Pursuant
to these arrangements, the Company paid FTX $8.8 million and $15.9 million
(including $7.0 million for stock appreciation right costs) for fiscal 1994 and
1995, respectively, and in 1996 paid FMS and FTX $6.7 million and $2.0 million,
respectively.
IMC-Agrico and the Company are parties to the Sulphur Supply Agreement. At
the time this agreement was negotiated and executed, the Company was a
wholly-owned subsidiary of FRP, which currently owns a 41.45% interest in
IMC-Agrico. For fiscal 1994, 1995 and 1996, payments from IMC-Agrico represented
58%, 54% and 54% of the Company's total revenues, respectively.
Prior to January 1, 1997, the Main Pass operations were managed by
Freeport-McMoRan Oil and Gas Company ("FMOG"), an affiliate of FRP and FTX. For
fiscal 1994, 1995 and 1996, the Company paid FMOG $0.8 million, $0.9 million and
$1.0 million, respectively, for management services provided pursuant to this
arrangement. Since January 1, 1997, the Main Pass operations have been managed
by FRP and, after the Distributions, will be managed by the Company.
Management believes that the terms of all of these agreements are, and
expects that the terms of all future agreements with affiliates will be, on
terms no less favorable to the Company than those that could be obtained in an
arm's-length transaction with an unaffiliated party.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, $.01 par value per share, and 50,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"). Upon completion of the
Distributions, approximately 10,346,578 shares of Common Stock will be
outstanding, and no shares of Preferred Stock will be outstanding. Prior to the
Distributions, there has been no public market for the Common Stock. Although
application has been made to have the Common Stock listed on the NYSE, there can
be no assurance that a market for the Common Stock will develop or, if
developed, will be sustained. See "Risk Factors--Absence of Trading Market." The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Company's Certificate of Incorporation
("Certificate") and By-laws, copies of which are filed as exhibits to the
Registration Statement to which this Information Statement is attached.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share of Common
Stock held of record on all matters as to which stockholders are entitled to
vote and stockholders may not cumulate votes for the election of directors.
Subject to any preferences accorded to the holders of the Preferred Stock, if
and when issued by the Board of Directors, holders of Common Stock are entitled
to dividends at such times and in such amounts as the Board of Directors may
determine. The Company does not intend to pay dividends for the foreseeable
future. See "Dividend Policy." Upon the dissolution, liquidation or winding up
of the Company, after payment of debts, expenses and the liquidation preference
plus any accrued dividends on any outstanding shares of Preferred Stock, the
holders of Common Stock will be entitled to receive all remaining assets of the
Company ratably in proportion to the number of shares held by them. Holders of
Common Stock have no preemptive, subscription or conversion rights and are not
subject to further calls or assessments, or rights of redemption by the Company.
The shares of Common Stock being distributed in the Distributions will be
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority, without approval of the
stockholders, to issue shares of Preferred Stock in one or more series and to
fix the number of shares and rights, preferences and limitations of each series.
Among the specific matters that may be determined by the Board of Directors are
the dividend rights, the redemption price, if any, the terms of a sinking fund,
if any, the amount payable in the event of any voluntary liquidation,
dissolution or winding up of the affairs of the Company, conversion rights, if
any, and voting powers, if any.
The existence of authorized but unissued Common Stock and undesignated
Preferred Stock may enable the Board of Directors to make more difficult or to
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise. If, in the exercise of its fiduciary
responsibilities, the Board of Directors were to determine that a takeover
proposal was not in the Company's best interest, such shares could be issued by
the Board of Directors without stockholder approval in one or more transactions
that might prevent or make more difficult or costly the completion of the
takeover transaction by diluting the voting or other rights of the proposed
acquiror or insurgent stockholder group, by creating a substantial voting block
in institutional or other hands that might undertake to support the position of
the incumbent Board of Directors, by effecting an acquisition that might
complicate or preclude the takeover, or otherwise. The Company's Certificate
grants the Board of Directors broad power to establish the rights and
preferences of the authorized and unissued Preferred Stock, one or more series
of which could be issued entitling holders (i) to vote separately as a class on
any proposed merger or consolidation, (ii) to cast a proportionately larger vote
together with the Common Stock on any such transaction or for all purposes,
(iii) to elect directors having terms of office or voting rights greater than
those of other directors, (iv) to convert Preferred Stock into a greater number
of shares of Common Stock or other securities, (v) to demand redemption at a
specified price under prescribed
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circumstances related to a change of control or (vi) to exercise other rights
that could have the effect of impeding a takeover. The issuance of shares of
Preferred Stock pursuant to the Board of Directors' authority described above
may adversely effect the rights of holders of the Common Stock.
In addition, certain other charter provisions that are described below may
have the effect, either alone, in combination with each other, or combined with
the existence of authorized but unissued capital stock, of making more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors.
CERTAIN CHARTER AND BY-LAW PROVISIONS
CLASSIFIED BOARD OF DIRECTORS
The Company's Certificate and By-laws divide the members of the Board of
Directors into three classes, with each class to be as nearly equal in number of
directors as possible, serving staggered three-year terms.
SIZE OF THE BOARD OF DIRECTORS; REMOVAL OF DIRECTORS; FILING OF VACANCIES ON
THE BOARD OF DIRECTORS
The Company's Certificate and By-laws provide that the number of directors
shall be fixed from time to time by the Board of Directors, but shall not be
fewer than the number required by Delaware law. Under the Company's Certificate,
a vote of 80% of the outstanding shares of capital stock entitled to vote
generally in an election of directors (the "Voting Stock") is required to remove
a director, and a director may only be so removed for cause involving fraud or a
violation of the duty of loyalty as determined by a final judgment of a court of
competent jurisdiction. The Certificate also provides that a newly created
directorship resulting from an increase in the number of directors may only be
filled by the Board of Directors and any vacancies on the Board of Directors
resulting from death, resignation, removal or other cause may be filled only by
the affirmative vote of both (a) a majority of the remaining directors then in
office and (b) a majority of all Continuing Directors (defined below), voting as
a separate group. In addition, these provisions specify that any director
elected to fill a vacancy on the Board of Directors will serve for the remainder
of the full term of the class of directors in which the new directorship was
created or in which the vacancy occurred.
STOCKHOLDER ACTION BY UNANIMOUS CONSENT
Under Delaware law, unless a corporation's certificate of incorporation
specifies otherwise, any action that could be taken by its stockholders at an
annual or special meeting may be taken, instead, without a meeting and without
notice to or a vote of other stockholders, if a consent in writing is signed by
holders of outstanding stock having voting power that would be sufficient to
take such action at a meeting at which all outstanding shares were present and
voted. The Company's Certificate provides that stockholder action may be taken
only at an annual or special meeting of stockholders. As a result, the Company's
stockholders may not act upon any matter except at a duly called meeting.
AMENDMENT OF THE BY-LAWS
Under Delaware law, the power to adopt, amend or repeal by-laws is conferred
upon the stockholders; however, a corporation may in its certificate of
incorporation also confer upon the board of directors the power to adopt, amend
or repeal its By-laws. The Company's Certificate and By-laws grant the Board of
Directors the power to adopt, amend and repeal the By-laws at any regular or
special meeting of the Board of Directors but only upon the affirmative vote of
both (i) a majority of the directors then in office and (ii) a majority of the
Continuing Directors (defined below), voting as a separate group. The Company's
stockholders may adopt, amend or repeal the By-laws but only at any regular or
special meeting of stockholders by an affirmative vote of 80% of the Voting
Stock.
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ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND STOCKHOLDER BUSINESS
The Company's By-laws permit stockholders to nominate a person for election
as a director or bring other matters before a stockholders' meeting only if such
stockholder has been, for at least one year, the beneficial owner of at least 1%
of the Voting Stock and only if written notice of such intent to nominate or
bring business before a meeting is given as described below.
A stockholder intending to nominate a person for election as a director or
to propose other matters at a stockholders' meeting must furnish notice of such
intention to the Company's Secretary not more than 270 days and not less than 60
days in advance of the first anniversary of the preceding year's annual
stockholders' meeting, subject to certain exceptions applicable principally to
special meetings. The notice must, among other things, state the name, age and
address of the stockholder submitting the notice and any persons acting in
concert with such stockholder, the number of shares of Voting Stock held by the
stockholder and the dates such stock was acquired, and must include a
representation by such stockholder that he or she is a holder of record of the
Company's capital stock and intends to appear at the meeting in person and make
the nomination or bring up the specified matter.
In the case of nominations for directors, the notice must also state (i) the
name, age, address and principal occupation of each nominee, (ii) a description
of all arrangements between the nominating stockholder and each nominee, (iii)
other information required to be included in a proxy statement pursuant to the
proxy rules of the Commission and (iv) the consent of each nominee to serve as a
director of the Company if elected and an affidavit of each such nominee
certifying that he meets the qualifications necessary to serve as a director of
the Company. In the case of other proposed business, the notice must set forth a
brief description of the business, the reasons for conducting such business at
the meeting and any material interest of the stockholder therein. The Chairman
of the stockholders' meeting will have the power to disregard any nomination or
other matter that fails to comply with these procedures. In addition, the
Company's Secretary may require any stockholders submitting a notice of intent
to make a nomination or bring other business before a stockholders' meeting to
furnish such documentary information as may be necessary to determine that such
stockholder has been for at least one year the beneficial owner of at least 1%
of the Voting Stock.
With respect to any proposal by a stockholder to bring before a meeting any
matter other than the nomination of directors, the Company's By-laws provide
that the Company may disregard proposals that (i) are substantially duplicative
of a prior-received proposal to be voted upon at an upcoming meeting, (ii) deal
with substantially the same subject matter as a prior proposal that was voted
upon within the preceding five years and that failed to receive affirmative
votes in excess of certain specified levels, which range, depending on the
circumstances, between 3% and 10%, or (iii) in the judgment of the Board of
Directors, are not proper subjects for action by stockholders under Delaware
law.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION
Under Delaware law, unless the certificate of incorporation specifies
otherwise, a corporation's certificate of incorporation may be amended by the
affirmative vote of the majority of the stockholders. The Company's Certificate
requires the affirmative vote of 80% of the Voting Stock to amend, alter or
repeal certain provisions of the Certificate regarding (i) stockholder unanimous
written consents, (ii) the classification, filling of vacancies and removal of
members of the Board of Directors, (iii) the limitation of liability of
directors, (iv) business combinations and (v) amendments to the Certificate and
the By-laws.
SPECIAL MEETINGS OF THE STOCKHOLDERS
The Company's By-laws provide that special meetings of stockholders may be
called only by the Chairman of the Board of Directors, the Company's president
or a majority of the Board of Directors. Stockholders do not have the power to
call a special meeting.
62
<PAGE>
BUSINESS COMBINATIONS
Delaware law provides that, unless otherwise provided in a corporation's
certificate of incorporation, a merger, sale of substantially all of the assets
or dissolution of a company requires the approval of the holders of a majority
of the outstanding capital stock. The Company's Certificate does not alter this
vote requirement generally, but provides that, if one of these transactions or
certain issuances, reclassifications or other transactions affecting the
Company's capital stock involves an Interested Stockholder (defined below), the
transaction must be approved (i) by a majority of both the directors then in
office and a majority of the Continuing Directors (defined below), voting as a
separate group and (ii) by the affirmative vote of (A) the holders of 80% of the
Voting Stock, voting together as a single class, and (B) 75% of the Voting Stock
other than Voting Stock beneficially owned by the Interested Stockholder. An
Interested Stockholder is any person who (i) beneficially owns 15% or more of
the Voting Stock or (ii) is an affiliate of the Company and, at any time within
two years prior to the date in question, beneficially owned 15% or more of the
then outstanding Voting Stock, other than the Company or its subsidiaries, or
any person owning any shares of the capital stock of the Company as of the date
of filing of the Company's Certificate and any person whose beneficial ownership
of any capital of the Company arises solely as a result of a trusteeship or a
custodial relationship with any employee stock ownership or other employee
benefit plan of the Company. A Continuing Director is any member of the Board of
Directors who is not an Interested Stockholder or an affiliate thereof and (i)
was a director prior to the time the Interested Stockholder became an Interested
Stockholder or (ii) was recommended or elected by a majority of the Continuing
Directors at a meeting at which a quorum consisting of a majority of the
Continuing Directors was present. In the absence of an Interested Stockholder,
the Continuing Directors shall mean all the directors then in office.
This additional voting requirement does not apply if the transaction has
been approved by a majority of the Continuing Directors, or if all of the
following conditions have been met: (i) the aggregate amount of consideration
received per share by the holders meet certain "fair price" criteria, (ii) prior
to the consummation of the transaction (a) there has been no failure to declare
or pay dividends on any outstanding Preferred Stock or Common Stock, (b) the
Interested Stockholder has not received the benefits (except proportionately as
a stockholder) of any loans, advances or other financial assistance or tax
advantages provided by the Company, and (c) the Interested Stockholder has not
caused any material change in the Company's equity capital structure, and (iii)
the Interested Stockholder has not become the beneficial owner of any additional
shares of Voting Stock except as part of the transaction that resulted in such
Interested Stockholder becoming an Interested Stockholder or as a result of a
pro rata stock dividend.
The Company is also subject to Section 203 of the Delaware General
Corporation Law (the "DGCL"), which imposes a three-year moratorium on the
ability of Delaware corporations to engage in a wide range of specified
transactions with any interested stockholder, defined to include, among others,
any person other than such corporation and any of its majority-owned
subsidiaries who own 15% or more of any class or series of stock entitled to
vote generally in the election of directors, unless, among other exceptions, the
transaction is approved by (i) the Board of Directors prior to the date the
interested stockholder obtained such status, or (ii) the holders of two-thirds
of the outstanding shares of each class or series of stock entitled to vote
generally in the election of directors, not including those shares owned by the
interested stockholder.
The provisions described above may tend to deter any potential unfriendly
offers or other efforts to obtain control of the Company that are not approved
by the Board of Directors and thereby deprive the stockholders of opportunities
to sell shares of Common Stock at prices higher than the prevailing market
price. On the other hand, these provisions will tend to assure continuity of
management and corporate policies and to induce any person seeking control of
the Company or a business combination with the Company to negotiate on terms
acceptable to the then elected Board of Directors.
63
<PAGE>
RIGHTS AGREEMENT
The Company plans to adopt the Rights Agreement at or prior to the
Distributions, pursuant to which each share of Common Stock will include an
associated preferred share purchase right (a "Right"). Each Right will entitle
the registered holder to purchase from the Company one one-hundredth of a share
of Participating Preferred Stock, $.01 par value, for an exercise price to be
determined by the Board of Directors (the "Exercise Price"), subject to
adjustment. The Rights will be represented by the Common Stock certificates and
will be exercisable only after an entity acquires 15% or more of the outstanding
Common Stock or commences a tender offer that will result in the entity owning
15% or more of the Common Stock. After an entity acquires 15% or more of the
outstanding Common Stock, each Right would then entitle the holder (other than
the acquiring entity) to purchase, at the Exercise Price, the number of shares
of Common Stock or other securities of the Company (or, in certain situations,
the acquiring entity) having a market value of twice the Right's Exercise Price
(the "Flip-in Date"). The Rights will expire on the tenth anniversary of the
date it is entered into unless earlier redeemed by the Company, as described
below. Until a Right is exercised, the holder, as such, will have no rights as a
stockholder of the Company, including without limitation, the right to vote or
to receive dividends.
The Board of Directors of the Company may, at its option, at any time prior
to the close of business on the Flip-in Date, redeem all (but not less than all)
the then outstanding Rights at a price to be determined by the Board of
Directors (the "Redemption Price"), as provided in the Rights Agreement.
Immediately upon the action of the Board of Directors of the Company electing to
redeem the Rights, without any further action and without any notice, the right
to exercise the Rights will terminate and each Right will thereafter represent
only the right to receive the Redemption Price in cash for each Right so held.
The Rights will not prevent a takeover of the Company. However, the Rights
may cause substantial dilution to a person or group that acquires 15% or more of
the Common Stock unless the Rights are first redeemed by the Board of Directors
of the Company. The Rights are intended to encourage any person desiring to
acquire a controlling interest in the Company to do so through a transaction
negotiated with the Company's Board of Directors rather than through a hostile
takeover attempt. The Rights are intended to assure that any acquisition of
control of the Company will be subject to review by the Board to take into
account, among other things, the interests of all the Company's stockholders.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is ChaseMelon
Shareholder Services, L.L.C.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
In accordance with the DGCL, the Company's Certificate contains provisions
eliminating the personal liability of the directors to the Company and its
stockholders for monetary damages for breaches of their fiduciary duties as
directors to the fullest extent permitted by Delaware law. By virtue of these
provisions, under current Delaware law, a director of the Company will not be
personally liable for monetary damages for a breach of his or her fiduciary duty
except for liability for (a) a breach of his or her duty of loyalty to the
Company or to its stockholders, (b) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (c) dividends or
stock repurchases or redemptions that are unlawful under Delaware law and (d)
any transaction from which he or she receives an improper personal benefit. In
addition, the Certificate provides that if Delaware law is amended to authorize
the further elimination or limitation of the liability of a director, then the
liability of the directors shall be eliminated or limited to the fullest extent
permitted by Delaware law, as amended. These provisions pertain only to breaches
of duty by directors as directors and not in any other corporate capacity, such
as officers, and limit liability only for breaches of fiduciary duties under
Delaware corporate law and not for violations of other laws such as the federal
securities laws.
64
<PAGE>
As a result of the inclusion of such provisions, stockholders may be unable
to recover monetary damages against directors for actions taken by them that
constitute negligence or gross negligence or that are in violation of their
fiduciary duties, even though it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have any effective remedy against the challenged conduct. These provisions may
have the effect of reducing the likelihood of derivative litigation against
directors that might have benefitted the Company.
The Company believes that such provisions are necessary to attract and
retain qualified individuals to serve as directors. In addition, such provisions
will allow directors to perform their duties in good faith without concern for
the application of monetary liability on a retrospective basis in the event that
a court determines their conduct to have been negligent or grossly negligent.
The Company's By-laws require the Company to indemnify its officers and
directors against expenses and costs, judgments, settlements and fines incurred
in the defense of any claim, including any claim brought by or in the right of
the Company, to which they were made parties by reason of being or having been
officers or directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Distributions, the Company will have 10,346,578
shares of Common Stock outstanding, all of which will be owned by the FTX
stockholders and the FRP public unitholders. All such shares will be freely
transferable without restriction under the 1933 Act except by persons who are
deemed to be an "affiliate" of the Company as defined in Rule 144 under the 1933
Act or by persons who may be deemed to be an "affiliate" of FTX or IGL as
defined in paragraphs (c) and (d) of Rule 145 under the 1933 Act. Under the
Company Adjusted Stock Award Plan, the Company will issue options to purchase
Common Stock in substitution for certain options to purchase FTX common stock
outstanding under various FTX employee benefit plans at the time of the Merger.
See "Management--The Employee Benefits Agreement." In addition to such stock
options, the Company may grant additional options to purchase Common Stock
pursuant to the Directors Plan and Stock Plan subject to certain restrictions.
See "Management--Stock Option Plans." The Company currently expects to file a
registration statement under the 1933 Act to register shares reserved for
issuance under the Stock Option Plans discussed above. Shares issued pursuant to
the Company's Stock Option Plans after the effective date of such Registration
Statement (other than shares issued to "affiliates" as such term is defined
under the 1933 Act) generally will be freely tradeable without restriction or
further registration under the 1933 Act.
Pursuant to Rules 144 and 145 under the 1933 Act, the sale of Common Stock
held by affiliates of the Company, former affiliates of FTX or affiliates of IGL
will be subject to certain restrictions. Such persons may sell Common Stock
under such rules only if (i) the Company has filed all reports required to be
filed by Section 13 or 15(d) of the 1934 Act during the preceding twelve months,
(ii) such Common Stock is sold in a "broker's transaction" which is defined
under the 1933 Act as a sale in which (a) the seller does not solicit or arrange
for orders to buy the securities, (b) the seller does not make any payment other
than to the broker, (c) the broker does no more than execute the order and
receive a normal commission and (d) the broker does not solicit customer orders
to buy the securities, and (iii) such sale and all other sales made by such
person within the preceding three months do not exceed the greater of (x) one
percent of the outstanding shares of Common Stock or (y) the average weekly
trading volume of Common Stock on the New York Stock Exchange during the
four-week period preceding the sale. Any former affiliate of FTX who is not an
affiliate of IGL or the Company after the Merger may sell Common Stock without
restriction following the first anniversary of the Effective Time of the Merger.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FREEPORT-MCMORAN SULPHUR INC.
Report of Independent Public Accountants................................................................. F-2
Balance Sheet as of August 26, 1997...................................................................... F-3
Note to Balance Sheet.................................................................................... F-3
FRP TRANSFERRED BUSINESSES
Report of Independent Public Accountants................................................................. F-4
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 and 1995....................... F-5
Statements of Operations for the nine months ended September 30, 1997 and 1996 (unaudited) and the years
ended December 31, 1996, 1995 and 1994................................................................. F-6
Statements of Cash Flow for the nine months ended September 30, 1997 and 1996 (unaudited) and the years
ended December 31, 1996, 1995 and 1994................................................................. F-7
Statements of Changes in Net Assets to be Transferred for the nine months ended September 30, 1997 and
1996 (unaudited) and the years ended December 31, 1996, 1995 and 1994.................................. F-8
Notes to Financial Statements............................................................................ F-9
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) OF FREEPORT-MCMORAN SULPHUR INC.
Pro Forma Condensed Balance Sheet as of September 30, 1997............................................... F-21
Pro Forma Statement of Operations for the nine months ended September 30, 1997........................... F-22
Pro Forma Statement of Income for the year ended December 31, 1996....................................... F-23
Notes to Pro Forma Financial Statements.................................................................. F-24
IGL TRANSFERRED BUSINESSES
Report of Independent Public Accountants................................................................. F-27
Statements of Gross Sulphur and Oil Revenues and Direct Operating Expenses for the nine months ended
September 30, 1997 (unaudited) and for the year ended December 31, 1996................................ F-28
Notes to Financial Statements............................................................................ F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Freeport-McMoRan Sulphur Inc.:
We have audited the accompanying balance sheet of Freeport-McMoRan Sulphur
Inc. (a Delaware corporation) as of August 26, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Freeport-McMoRan Sulphur Inc. as of
August 26, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana,
September 16, 1997
F-2
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
BALANCE SHEET
AUGUST 26, 1997
<TABLE>
<S> <C>
Cash.............................................................. $ --
---------
---------
Preferred stock, par value $0.01, 50,000,000 shares authorized,
none issued or outstanding...................................... $ --
Common stock, par value $0.01, 100,000,000 shares authorized, 100
shares issued and outstanding................................... 1.00
Additional paid-in capital........................................ 99.00
Less subscription receivable...................................... (100.00)
---------
Total stockholder's equity.................................... $ --
---------
---------
</TABLE>
The accompanying note is an integral part of this financial statement.
NOTE TO BALANCE SHEET
On August 26, 1997, IMC Global Inc. ("IGL") and Freeport-McMoRan Inc.
("FTX") executed a definitive agreement for FTX to merge with and into IGL (the
"Merger"). The terms of the Merger provide that each share of FTX common stock
will be converted into the right to receive (i) 0.90 of a share of IGL common
stock, (ii) one-third of a warrant exercisable for a share of IGL common stock
and (iii) a proportionate number of shares of a newly formed company
(Freeport-McMoRan Sulphur Inc.) that would be held by FTX immediately prior to
consummation of the Merger. Completion of the Merger is subject to, among other
things, approval of the definitive merger agreement by the IGL and FTX
shareholders and the expiration or early termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (early termination
having been granted). Both companies expect the Merger to be completed by the
end of 1997.
On August 26, 1997, Freeport-McMoRan Resource Partners, Limited Partnership
("FRP") acquired 100 shares of Freeport-McMoRan Sulphur Inc. (the "Company")
common stock, par value $0.01 per share for a $100.00 subscription. The Company,
a Delaware corporation, was formed for the purpose of owning and operating the
sulphur business and the 58.3% interest in the Main Pass sulphur and oil
operations owned by FRP, together with the 25.0% interest in Main Pass owned by
IGL, a joint venture partner with FRP, (collectively, the "Transferred
Businesses"). The Company will operate the Transferred Businesses and assume
substantially all liabilities related to the Transferred Businesses.
Immediately prior to the Merger, IGL will transfer its 25% interest in Main
Pass to FRP. FRP will then contribute the Transferred Businesses to the Company.
FRP intends to distribute 100% of the Company's common stock to its public
unitholders and to FTX, the administrative managing general partner and the
owner of 51.6% of FRP's partnership interest. FTX will then distribute the
shares of common stock that it receives from FRP to the FTX stockholders on a
pro rata basis. Until such distributions, the Company will be wholly owned by
FRP. FTX shall bear all of the costs and expenses incurred in connection with
the distributions.
Each share of the Company's common stock will also represent one right under
the Company's Preferred Stock Purchase Rights Plan. The rights are not currently
exercisable. Under certain circumstances the rights become exercisable for the
Company's preferred stock or the stock of a person effecting certain
reorganizations, mergers or combinations with the Company.
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Freeport-McMoRan Sulphur Inc.:
We have audited the accompanying balance sheets of the FRP Transferred
Businesses (Note 1) of Freeport-McMoRan Resource Partners, Limited Partnership
("FRP") as of December 31, 1996 and 1995, and the related statements of
operations, cash flow and changes in net assets to be transferred for each of
the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of FRP's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the FRP Transferred
Businesses as of December 31, 1996 and 1995 and the results of their operations
and cash flow for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana,
September 16, 1997
F-4
<PAGE>
FRP TRANSFERRED BUSINESSES
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
SEPTEMBER ---------- ----------
30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,572 $ 3,116 $ 2,774
Accounts receivable:
Customers................................................................. 21,878 27,402 31,359
Other..................................................................... 11,460 15,849 9,018
Inventories:
Products.................................................................. 24,216 21,859 22,221
Materials and supplies.................................................... 9,119 8,214 9,542
Prepaid expenses and other.................................................. 2,117 6,764 6,058
----------- ---------- ----------
Total current assets...................................................... 71,362 83,204 80,972
----------- ---------- ----------
Property, plant and equipment............................................... 918,870 916,858 932,102
Less accumulated depreciation and amortization.............................. 826,308 381,205 357,073
----------- ---------- ----------
Net property, plant and equipment......................................... 92,562 535,653 575,029
----------- ---------- ----------
Other assets................................................................ 14,657 14,763 24,466
----------- ---------- ----------
Total assets................................................................ $ 178,581 $ 633,620 $ 680,467
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND NET ASSETS TO BE TRANSFERRED
Current liabilities:
Accounts payable............................................................ $ 14,029 $ 6,610 $ 13,980
Accrued liabilities......................................................... 18,619 25,539 16,742
Current portion of reclamation and mine shutdown reserves................... 11,509 25,261 8,191
----------- ---------- ----------
Total current liabilities................................................. 44,157 57,410 38,913
Reclamation and mine shutdown reserves...................................... 61,055 56,848 79,857
Other liabilities........................................................... 33,459 35,002 39,915
Net assets to be transferred................................................ 39,910 484,360 521,782
----------- ---------- ----------
Liabilities and net assets to be transferred................................ $ 178,581 $ 633,620 $ 680,467
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FRP TRANSFERRED BUSINESSES
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------
1997 1996 1996 1995 1994
----------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 158,304 $ 167,379 $ 221,426 $ 255,949 $ 151,795
Cost of sales:
Production and delivery............................ 126,328 118,228 160,982 168,504 94,388
Depreciation and amortization...................... 451,639 29,994 37,800 43,700 39,931
----------- ---------- ---------- ---------- -----------
Total cost of sales.............................. 577,967 148,222 198,782 212,204 134,319
General and administrative expenses................ 5,508 7,537 10,252 18,725 10,123
----------- ---------- ---------- ---------- -----------
Total costs and expenses......................... 583,475 155,759 209,034 230,929 144,442
----------- ---------- ---------- ---------- -----------
Net income (loss).................................. (425,171) 11,620 12,392 25,020 7,353
Pro forma income taxes (unaudited)................. 155,613 (4,369) (4,659) (6,845) (2,691)
----------- ---------- ---------- ---------- -----------
Pro forma net income (loss) (unaudited)............ $ (269,558) $ 7,251 $ 7,733 $ 18,175 $ 4,662
----------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FRP TRANSFERRED BUSINESSES
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................... $ (425,171) $ 11,620 $ 12,392 $ 25,020 $ 7,353
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 451,639 29,994 37,800 43,700 39,931
Reclamation and mine shutdown
expenditures................................ (15,188) (6,451) (7,504) (2,476) (11,193)
Other......................................... (2,266) 3,462 6,421 4,642 6,074
(Increase) decrease in working capital:
Accounts receivable......................... 14,671 11,578 (3,234) (17,504) (6,674)
Inventories................................. (3,262) (2,050) 1,690 5,465 7,742
Prepaid expenses and other.................. (111) (508) 166 (1,605) (1,520)
Accounts payable and accrued liabilities.... 522 (6,133) 4,113 8,165 (7,511)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities....... 20,834 41,512 51,844 65,407 34,202
----------- ----------- ----------- ----------- -----------
Cash flow from investing activities:
Capital expenditures............................ (2,989) (4,948) (3,834) (3,710) (11,231)
Sale of assets and other........................ 890 1,205 2,146 375 1,225
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities........... (2,099) (3,743) (1,688) (3,335) (10,006)
----------- ----------- ----------- ----------- -----------
Cash flow from financing activities:
Net distributions to FRP........................ (19,279) (38,560) (49,814) (59,298) (24,596)
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities........... (19,279) (38,560) (49,814) (59,298) (24,596)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................... (544) (791) 342 2,774 (400)
Cash and cash equivalents at beginning of
year.......................................... 3,116 2,774 2,774 -- 400
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period...... $ 2,572 $ 1,983 $ 3,116 $ 2,774 $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes, which include information in Note 8 regarding noncash
transactions,
are an integral part of these financial statements.
F-7
<PAGE>
FRP TRANSFERRED BUSINESSES
STATEMENTS OF CHANGES IN NET ASSETS TO BE TRANSFERRED
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year......................... $ 484,360 $ 521,782 $ 521,782 $ 556,060 $ 573,303
Net income (loss).................................... (425,171) 11,620 12,392 25,020 7,353
Net distributions to FRP............................. (19,279) (38,560) (49,814) (59,298) (24,596)
---------- ---------- ---------- ---------- ----------
Balance at end of period............................. $ 39,910 $ 494,842 $ 484,360 $ 521,782 $ 556,060
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS AND BASIS OF PRESENTATION
ORGANIZATION AND OPERATIONS. On August 26, 1997, Freeport-McMoRan Resource
Partners, Limited Partnership ("FRP") acquired 100 shares of Freeport-McMoRan
Sulphur Inc. (the "Company" or "Freeport Sulphur") common stock, par value $0.01
per share, for a $100 subscription. The Company, a Delaware corporation, was
formed for the purpose of owning and operating the sulphur business and the
58.3% interest in the Main Pass sulphur and oil operations owned by FRP (the
"FRP Transferred Businesses"), together with the 25.0% interest in Main Pass
owned by IMC Global Inc. ("IGL"), a joint venture partner with FRP. FRP intends
to transfer these assets and related liabilities to the Company in connection
with the merger of Freeport-McMoRan Inc. ("FTX"), the administrative managing
general partner and the owner of 51.6% of FRP's partnership interest, with and
into IGL (the "Merger").
FRP intends to distribute 100% of the Company's common stock to its public
unitholders and to FTX. FTX will then distribute the shares of Freeport Sulphur
common stock that it receives from FRP to the FTX stockholders on a pro rata
basis in connection with the Merger.
BASIS OF PRESENTATION. The FRP Transferred Businesses operated as an
integral part of FRP during the periods covered by these financial statements,
which have been prepared from the books and records of FRP. Certain data has
been extracted from FRP records, or in certain cases derived on the basis of
allocations between the FRP Transferred Businesses and FRP's other businesses,
for purposes of presentation in the accompanying financial statements. No
interest expense has been allocated to the FRP Transferred Businesses as no
interest costs have been incurred in the past and no debt previously recorded by
FRP will be assumed by the Company. Intercompany balances between FRP and the
FRP Transferred Businesses have related to various general and administrative
and similar charges and have been settled monthly. FRP is not a taxable entity
and historically has not provided income taxes related to the FRP Transferred
Businesses. The related net deferred tax liability that would have been recorded
by the Company is disclosed in Note 5, but is not included in the accompanying
balance sheets. FTX provides benefit plans for those employees that are expected
to become Freeport Sulphur employees upon completion of the Merger. FTX will
transfer certain liabilities related to these plans to the Company and pay cash
to the Company for the assumption of certain of these liabilities as discussed
further in Note 6. The liabilities and cash amounts are not reflected in the
accompanying balance sheets.
The FRP Transferred Businesses balance sheet as of September 30, 1997 and
the related statements of operations, cash flow and changes in net assets to be
transferred for the nine-month periods ended September 30, 1997 and 1996 are
unaudited. These unaudited financial statements have been prepared from the
books and records of FRP and reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of the results for the periods.
All such adjustments are, in the opinion of management, of a normal recurring
nature.
Upon completion of the merger, the combined financial statements of the
Company will include the operations of the FRP Transferred Businesses and the
25.0% interest in Main Pass owned by IGL. The Company will account for the 25.0%
interest in Main Pass owned by IGL at fair value under purchase accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of the FRP Transferred Businesses
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. The
F-9
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
more significant areas requiring the use of management estimates include
reclamation and environmental obligations, postretirement and other employee
benefits, future cash flows associated with assets and useful lives for
depreciation and amortization. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. Highly liquid investments purchased with a
maturity of three months or less are considered cash equivalents.
INVENTORIES. Inventories are stated at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at
cost, including interest capitalized during the construction and development
period. Expenditures for replacements and improvements are capitalized.
Depreciation for mining and production assets, including mineral interests, is
determined using the unit-of-production method based on estimated recoverable
reserves. Other assets are depreciated on a straight-line basis over estimated
useful lives of 17 to 30 years for buildings and 5 to 25 years for machinery and
equipment.
In 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 121 (SFAS 121) which requires an assessment
of the carrying value of long-lived assets and a reduction of such carrying
value to fair value when events or changes in circumstances indicate that the
carrying amount may not be recoverable. As a result of its most recent review of
its sulphur assets, FRP and FTX concluded that the carrying value of the Main
Pass sulphur assets exceeded the undiscounted estimated future net cash flows,
such that an impairment writedown of $416.4 million (based on September 30, 1997
book values) was required. A similar analysis of the Culberson sulphur assets,
based on a reassessment of recoverable reserves utilizing recent production
history, also indicated an impairment writedown of $9.0 million (based on
September 30, 1997 book values) was required. Fair values were estimated using
discounted estimated future net cash flows related to these assets. The
writedowns to fair value were recorded by FRP and FTX in the third quarter of
1997 and are reflected in the unaudited September 30, 1997 financial statements
as additional depreciation and amortization charges. Future operating results of
Freeport Sulphur will reflect lower depreciation and amortization expense as a
result of these writedowns.
OIL CAPITALIZED COSTS. Oil producing operations are reflected using the
successful efforts method of accounting. Costs of leases, productive exploratory
wells and development activities are capitalized. Other exploration costs are
expensed. Depreciation and amortization is determined on a field-by-field basis
using the unit-of-production method. Gain or loss is included in income when
properties are sold.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE. The FRP Transferred Businesses
incur significant costs for environmental programs and projects. Expenditures
pertaining to future revenues from operations are capitalized. Expenditures
resulting from the remediation of conditions caused by past operations which do
not contribute to future revenue generation are expensed. Liabilities are
recognized for remedial activities when the efforts are probable and the cost
can be reasonably estimated.
Estimated future expenditures to restore properties and related facilities
to a condition that complies with environmental and other regulations are
accrued over the life of the properties. The future expenditures are estimated
based on current costs, laws and regulations. As of December 31, 1996, the
balance sheet included a $57.6 million accrual for abandonment and restoration
of non-operating sulphur assets, including $22.5 million which will be
reimbursed by third parties. Total estimated abandonment cost for Main Pass oil
operations is $10 million and $6.2 million was accrued at December 31, 1996. The
current
F-10
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
portion of reclamation and mine shutdown reserves includes $7.9 million which
will be reimbursed by third parties. The FRP Transferred Businesses' share of
abandonment and restoration costs for its two operating sulphur mines is
estimated to total approximately $50 million, $18.3 million of which had been
accrued at December 31, 1996, with essentially all costs being incurred after
mine closure. These estimates are by their nature imprecise and can be expected
to be revised over time because of changes in government regulations,
operations, technology and inflation.
A rollforward of the reclamation and mine shutdown reserves follows (in
thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO OTHER - BALANCE AT
BEGINNING COSTS AND OTHER ADD END OF
OF PERIOD EXPENSE ACCOUNTS (DEDUCT) PERIOD
----------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1996
Sulphur......................... $ 83,145 $ 3,920 $ -- $ (11,147)a $ 75,918
Oil............................. 4,903 1,288 -- -- 6,191
----------- ----------- ----- ---------- -----------
$ 88,048 $ 5,208 $ -- $ (11,147)b $ 82,109
----------- ----------- ----- ---------- -----------
----------- ----------- ----- ---------- -----------
1995
Sulphur......................... $ 59,446 $ 2,643 $ -- $ 21,056a $ 83,145
Oil............................. 3,657 1,257 -- (11) 4,903
----------- ----------- ----- ---------- -----------
$ 63,103 $ 3,900 $ -- $ 21,045b $ 88,048
----------- ----------- ----- ---------- -----------
----------- ----------- ----- ---------- -----------
1994
Sulphur......................... $ 68,742 $ 1,041 $ -- $ (10,337) $ 59,446
Oil............................. 1,609 2,385 -- (337) 3,657
----------- ----------- ----- ---------- -----------
$ 70,351 $ 3,426 $ -- $ (10,674)b $ 63,103
----------- ----------- ----- ---------- -----------
----------- ----------- ----- ---------- -----------
</TABLE>
a. Includes $23.5 million of liabilities assumed in 1995 in connection with the
acquisition of the sulphur assets of Pennzoil Company which was subsequently
reduced by $8.3 million in 1996.
b. Includes expenditures of $7.5 million in 1996, $2.5 million in 1995 and
$11.2 million in 1994.
NEW ACCOUNTING STANDARDS. In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Income," and SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS 130 establishes standards for the
reporting and display of comprehensive income in the financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in equity. SFAS 131 requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. SFAS 130 and 131 are effective for 1998. Adoption of these
standards is not expected to result in material changes to the FRP Transferred
Businesses' financial statements, financial position or results of operations.
F-11
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY PLANT AND EQUIPMENT, NET
The components of net property, plant and equipment of the FRP Transferred
Businesses follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Buildings and facilities.............................................. $ 480,562 $ 496,336
Capitalized oil exploration and development costs..................... 201,517 200,460
Capitalized interest and start-up costs............................... 132,850 132,850
Transportation, terminaling and other assets.......................... 97,395 99,960
Machinery and equipment............................................... 4,534 2,496
---------- ----------
Property, plant and equipment....................................... 916,858 932,102
Accumulated depreciation and amortization, including $192.5 million
and $179.2 million for 1996 and 1995, respectively, for capitalized
oil exploration and development costs............................... 381,205 357,073
---------- ----------
Property, plant and equipment, net.................................... $ 535,653 $ 575,029
---------- ----------
---------- ----------
</TABLE>
4. MANAGEMENT SERVICES
FTX has provided certain management and administrative services to FRP (and
thus the FRP Transferred Businesses) including technical, administrative,
accounting, financial, tax and other services under a management services
agreement. The costs of such services, which include related overhead, have been
allocated to the FRP Transferred Businesses based on time spent by FTX employees
in the conduct of the FRP Transferred Businesses' business activities. Such
costs are non-interest bearing and reimbursed monthly. Management believes the
costs for such services do not differ materially from the costs that would have
been incurred had the relevant personnel providing these services been employed
directly by the FRP Transferred Businesses. The total amount charged by FTX to
the FRP Transferred Businesses for such services was $2.0 million in 1996, $15.9
million in 1995 (including $7.0 million for stock appreciation rights costs
resulting from the rise in FTX's common stock price during the year) and $8.8
million in 1994.
Beginning in 1996, FM Services Company (FMS), an entity owned 50 percent
each by FTX and Freeport-McMoRan Copper & Gold Inc., a former subsidiary of FTX,
began providing most of the services previously provided by FTX on a similar
cost-reimbursement basis, totaling $6.7 million for 1996. Prior to 1997, FTX
operated the Main Pass oil facilities and charged the FRP Transferred Businesses
$1.3 million in 1996, $1.0 million in 1995 and $0.8 million in 1994 for
specified overhead and other costs. Beginning in 1997, FRP operated the
facilities and upon consummation of the Merger, Freeport Sulphur will operate
the Main Pass oil facilities.
After the Merger, FMS will continue to provide similar management and
administrative services to Freeport Sulphur pursuant to a management services
agreement. As a result, management believes general and administrative expenses
will not differ materially from those reported in these financial statements,
except that Freeport Sulphur will not have stock appreciation rights and it is
not possible to predict the impact of compensation expenses that are associated
with performance.
F-12
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Because FRP is not a taxable entity, historically it has not provided for
income taxes. Freeport Sulphur will record deferred income taxes pursuant to
SFAS 109 immediately upon the transfer of assets and liabilities and will
recognize the income tax effect of deferred taxes at that time. The components
of deferred taxes that would have been recorded by Freeport Sulphur as of
December 31, 1996 and 1995, based upon temporary differences existing at that
time, including the estimated deferred compensation, postretirement and pension
benefits related to the FRP Transferred Businesses, follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax asset:
Reclamation and shutdown reserve.................................. $ 22,656 $ 21,743
Deferred compensation, postretirement and pension benefits........ 11,752 11,330
Other............................................................. 4,538 5,973
----------- -----------
Total deferred tax asset........................................ 38,946 39,046
----------- -----------
Deferred tax liability:
Property, plant and equipment..................................... (121,668) (110,908)
----------- -----------
Net deferred tax liability........................................ $ (82,722) $ (71,862)
----------- -----------
----------- -----------
</TABLE>
The estimated net deferred tax liability at December 31, 1996 shown above
does not reflect the impact of the sulphur impairment assessments discussed in
Note 2. These impairment assessments will result in Freeport Sulphur having an
estimated net deferred tax asset totaling approximately $62 million upon
transfer of assets and liabilities from FRP.
Unaudited pro forma income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current....................................................... $ (6,201) $ 4,942 $ (9,520)
Deferred...................................................... 10,860 1,903 12,211
--------- --------- ---------
$ 4,659 $ 6,845 $ 2,691
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Unaudited reconciliations of the differences between pro forma income taxes
computed at the federal statutory tax rate and pro forma income taxes recorded
follow (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ---------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma income taxes computed at
the federal statutory tax rate... $ 4,337 35% $ 8,757 35% $ 2,500 34%
Increase (decrease) attributable
to:
Statutory depletion................ -- -- (2,385) (10) -- --
State taxes........................ 322 3 473 2 191 3
-- -- --
--------- --------- ---------
Pro forma income taxes............. $ 4,659 38% $ 6,845 27% $ 2,691 37%
-- -- --
-- -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. PENSION AND OTHER EMPLOYEE BENEFITS
PENSIONS. Substantially all employees have been covered by FTX's or FMS's
defined benefit plans. Additionally, unfunded nonqualified plans are sponsored
for those participants in the qualified defined benefit plans whose benefits are
limited under federal income tax laws. The accumulated benefits and plan assets
were not separately determined and amounts allocated to the FRP Transferred
Businesses under these plans have not been material. In connection with the
Merger, Freeport Sulphur will form its own defined benefit plans and FTX will
transfer to the new Freeport Sulphur plan (for the qualified plan), or to
Freeport Sulphur (for the nonqualified plan), assets and liabilities pertaining
to those FTX employees who will become Freeport Sulphur employees. The Freeport
Sulphur plans initially will have substantially the same provisions as the FTX
plans and will provide credit for prior FTX service. The final actuarial
valuation will be made as of the date of the consummation of the Merger. The
estimated actuarial liability related to the new Freeport Sulphur plans as of
January 1, 1998 follows (in thousands) and is not included in the FRP
Transferred Businesses balance sheets.
<TABLE>
<S> <C>
Accumulated Benefit Obligation..................................... $ 11,299
---------
---------
Projected Benefit Obligation (PBO)................................. $ 13,300
Less Plan assets................................................... 15,500
---------
Overfunded PBO................................................... (2,200)
Unrecognized amounts:
Transition asset................................................. 170
Prior service credit............................................. 7,829
Gains............................................................ 4,856
---------
Accrued pension liability.......................................... $ 10,655
---------
---------
</TABLE>
OTHER POSTRETIREMENT BENEFITS. FTX and FMS provide certain health care and
life insurance benefits for retired employees. The related expense allocated to
the FRP Transferred Businesses from FTX totaled $2.5 million in 1996 (including
$0.2 million for service cost and $2.3 million in interest for prior period
F-14
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
services), $4.7 million in 1995 ($0.2 million and $4.5 million, respectively)
and $4.3 million in 1994 ($0.2 million and $4.1 million, respectively). The FRP
Transferred Businesses' share of the FMS plan was not significant for 1996.
In connection with the Merger, Freeport Sulphur will assume the liability
for the portion of FTX's postretirement benefit liability related to active
employees transferred to Freeport Sulphur and FTX will pay Freeport Sulphur cash
for the amount of the liability. The final actuarial determination will be made
upon consummation of the Merger. The estimated actuarial information as of
January 1, 1998 follows (in thousands) and neither the liability nor the cash
payment is included in the FRP Transferred Businesses balance sheets:
<TABLE>
<S> <C>
Accumulated postretirement benefits................................. $ 2,858
Unrecognized prior service credits.................................. 662
Unrecognized gains.................................................. 1,425
---------
Accrued postretirement liability.................................... $ 4,945
---------
---------
</TABLE>
The initial health care cost trend rate used was 8 percent for 1998,
decreasing 0.5 percent per year until reaching 5 percent. A one percent increase
in the trend rate would increase the amounts by approximately 10 percent. The
discount rate used was 7.75 percent. Freeport Sulphur will have the right to
modify or terminate these benefits.
In connection with the Merger, Freeport Sulphur will assume a liability to
IGL for a portion of IGL's postretirement benefit costs relating to certain
retired employees of FTX. An actuarial determination will be made of the
liability associated with these employees upon consummation of the Merger.
Freeport Sulphur estimates the liability to be approximately $10 million.
STOCK OPTIONS. Freeport Sulphur will adopt an Adjusted Stock Award Plan to
provide for the issuance of fixed options to holders of FTX fixed options and
FTX stock appreciation rights (SARs). The fixed options granted under the
Adjusted Stock Award Plan will reflect the option holder's economic position
under the FTX options as adjusted for the proportionate market value of Freeport
Sulphur shares at the time of the Merger. The number of fixed options to be
issued by Freeport Sulphur will be based upon the number of FTX options and SARs
outstanding as of the date of consummation of the Merger, adjusted for the
distribution ratio of Freeport Sulphur shares to FTX shares. As of December 31,
1996, FTX had outstanding a total of 2.1 million fixed options and SARs, of
which stock options representing 0.9 million shares were exercisable at an
average option price of $19.01 per share. Compensation expense for the aggregate
intrinsic value of the FTX SARs has already been recorded in the accompanying
FRP Transferred Businesses financial statements through allocations of general
and administrative costs from FTX. As these SARs will be converted to fixed
options under the Freeport Sulphur Adjusted Stock Award Plan, the related
accrued SAR liability will be recorded as additional paid-in capital in the
Freeport Sulphur balance sheets.
Freeport Sulphur will adopt the disclosure only provisions of SFAS 123 and
will continue to apply APB Opinion No. 25 and related interpretations in
accounting for its stock based compensation plans. Had compensation cost for
FTX's fixed stock option grants been determined in accordance with SFAS 123, the
FRP Transferred Businesses would have been allocated additional charges totaling
$1.2 million ($0.7 million to pro forma net income) in 1996 and none in 1995.
F-15
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
Freeport Sulphur will adopt other benefit plans, certain of which are
related to its performance, which costs will be recognized in general and
administrative expense. Upon consummation of the Merger, Freeport Sulphur will
also assume certain FTX liabilities totaling approximately $0.4 million under
its plans related to those employees transferred from FTX to Freeport Sulphur in
exchange for an equal cash payment.
7. COMMITMENTS AND CONTINGENCIES
LONG-TERM CONTRACTS AND OPERATING LEASES. FRP Transferred Businesses'
minimum annual contractual charges under noncancelable long-term contracts and
operating leases total $176.9 million, with $18.2 million in 1997, $14.0 million
in 1998, $13.6 million in 1999, $13.5 million in 2000 and $13.4 million in 2001.
ENVIRONMENTAL. The FRP Transferred Businesses have made, and will continue
to make, expenditures for protection of the environment. The FRP Transferred
Businesses are subject to contingencies as a result of environmental laws and
regulations. The related future cost is indeterminable because of such factors
as the unknown timing and extent of the corrective actions that may be required
and the application of joint and several liability.
8. ACQUISITIONS
In January 1995, FRP acquired essentially all of the domestic assets of
Pennzoil Co.'s sulphur division, including the Culberson sulphur mine in West
Texas. Under the terms of the purchase, Pennzoil will receive quarterly payments
from FRP over 20 years based on the prevailing price of sulphur. These payments
totaled $2.0 million in 1996 and $5.2 million in 1995. The installment payments
may be terminated earlier either by FRP through the exercise of a $65 million
call option or by Pennzoil through the exercise of a $10 million put option.
Neither option may be exercised prior to 1999. Freeport Sulphur will assume the
terms of the purchase agreement with Pennzoil. The purchase price allocation
follows (in thousands):
<TABLE>
<S> <C>
Current assets.................................................... $ 5,635
Property, plant and equipment..................................... 48,837
Current liabilities............................................... (7,499)
Reclamation and mine shutdown reserves............................ (15,200)
Accrued long-term liabilities..................................... (31,773)
---------
Net cash investment............................................... $ --
---------
---------
</TABLE>
Accrued long-term liabilities include the estimated future installment
payments based on the prevailing sulphur price at the time of acquisition.
9. BUSINESS SEGMENTS
FRP Transferred Businesses operates in two business segments, sulphur and
oil. Frasch sulphur is produced through the offshore Louisiana Main Pass mine
and the Culberson mine in West Texas. The sulphur business segment also includes
an extensive logistics network, including sulphur terminaling and
F-16
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. BUSINESS SEGMENTS (CONTINUED)
transportation assets, and purchases of recovered sulphur. Oil is produced at
Main Pass from the same geologic formation that holds the deposit's sulphur.
A significant portion of the sulphur production is sold to the IMC-Agrico
Joint Venture (IMC-Agrico), a chemical fertilizer producer jointly owned by IGL
and FRP, under a long-term supply contract that extends for as long as
IMC-Agrico's operations have a requirement for sulphur. As a percentage of total
FRP Transferred Businesses revenues, sales to IMC-Agrico totaled 54% in 1996,
54% in 1995 and 58% in 1994. Oil produced from Main Pass is sold to two major
Gulf Coast refining companies. As a percentage of total FRP Transferred
Businesses revenues, oil sales to one of these refining companies, Amoco,
totaled 12% in 1996, 11% in 1995 and 19% in 1994. No other single customer
accounted for greater than 10% of total revenues in 1994 through 1996. The
Company's definition of its business segments is not expected to change as a
result of the adoption of SFAS 131.
<TABLE>
<CAPTION>
SULPHUR OIL TOTAL
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996
Revenues................................................... $ 184,425 $ 37,001 $ 221,426
Production and delivery.................................... 150,086 10,896 160,982
Depreciation and amortization.............................. 23,006 14,794 37,800
General and administrative expense......................... 8,040 2,212 10,252
---------- --------- ----------
Net income................................................. $ 3,293 $ 9,099 $ 12,392
---------- --------- ----------
---------- --------- ----------
Capital expenditures....................................... $ 2,777 $ 1,057 $ 3,834
---------- --------- ----------
---------- --------- ----------
Total assets............................................... $ 612,051 $ 21,569 $ 633,620
---------- --------- ----------
---------- --------- ----------
1995
Revenues................................................... $ 220,796 $ 35,153 $ 255,949
Production and delivery.................................... 158,703 9,801 168,504
Depreciation and amortization.............................. 24,564 19,136 43,700
General and administrative expense......................... 14,489 4,236 18,725
---------- --------- ----------
Net income................................................. $ 23,040 $ 1,980 $ 25,020
---------- --------- ----------
---------- --------- ----------
Capital expenditures....................................... $ 2,148 $ 1,562 $ 3,710
---------- --------- ----------
---------- --------- ----------
Total assets............................................... $ 647,650 $ 32,817 $ 680,467
---------- --------- ----------
---------- --------- ----------
1994
Revenues................................................... $ 116,908 $ 34,887 $ 151,795
Production and delivery.................................... 84,530 9,858 94,388
Depreciation and amortization.............................. 21,397 18,534 39,931
General and administrative expense......................... 6,711 3,412 10,123
---------- --------- ----------
Net income................................................. $ 4,270 $ 3,083 $ 7,353
---------- --------- ----------
---------- --------- ----------
Capital expenditures....................................... $ 1,827 $ 9,404 $ 11,231
---------- --------- ----------
---------- --------- ----------
Total assets............................................... $ 593,829 $ 44,073 $ 637,902
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-17
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Proved and probable mineral reserves follow:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sulphur-long tons (a)........................ 53,149 55,185 41,018 38,637 41,570
</TABLE>
- ------------------------
(a) Main Pass reserves are subject to a 12.5 percent royalty based on net mine
revenues. Culberson reserves totaled 14.5 million tons at December 31, 1996
and 15.4 million tons at December 31, 1995 and are subject to a 9 percent
royalty based on net mine revenues. Subsequent to December 31, 1996,
Culberson reserves were revised downward to approximately 8 million tons to
reflect recent production history.
11. SUPPLEMENTARY OIL INFORMATION
The supplementary information presented below is prepared in accordance with
requirements prescribed by the Financial Accounting Standards Board. Information
regarding capitalized oil exploration and development costs is included in Note
3.
Costs Incurred In Oil Property Acquisition, Exploration and Development
Activities.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition of properties
Proved......................................................... $ -- $ -- $ --
Unproved....................................................... -- -- --
Exploration costs................................................ -- -- --
Development costs................................................ 1,057 1,562 9,404
--------- --------- ---------
$ 1,057 $ 1,562 $ 9,404
--------- --------- ---------
--------- --------- ---------
</TABLE>
PROVED OIL RESERVES (UNAUDITED). Proved oil reserves at December 31, 1996,
have been estimated by independent petroleum engineers in accordance with
guidelines established by the Securities and Exchange Commission (SEC). There
are numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting the future rates of production and timing of development
expenditures. Thus, the following reserve estimates, which relate to reserves
attributable to the FRP Transferred Businesses, are based upon existing economic
and operating conditions; they are only estimates and should not be construed as
being exact. The reserves related to the FRP Transferred Businesses are located
in
F-18
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTARY OIL INFORMATION (CONTINUED)
offshore United States waters. Oil, including condensate and plant products, is
stated in thousands of barrels.
<TABLE>
<CAPTION>
OIL
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Proved reserves:
Beginning of year........................................... 6,638 7,279 9,962
Revisions of previous estimates............................. 446 1,577 (149)
Production.................................................. (1,896) (2,218) (2,534)
--------- --------- ---------
End of year................................................. 5,188 6,638 7,279
--------- --------- ---------
--------- --------- ---------
Proved developed reserves:
End of year................................................. 4,108 5,155 5,383
--------- --------- ---------
--------- --------- ---------
</TABLE>
Subsequent to December 31, 1996, proved undeveloped reserve estimates were
revised downward by approximately 1 million barrels to reflect recent drilling
results.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED OIL
RESERVES (UNAUDITED). The standardized measure of discounted future net cash
flows and changes therein relating to the proved oil reserves of the FRP
Transferred Businesses were computed using reserve valuations based on
regulations prescribed by the SEC. These regulations provide for the use of
current oil prices (escalated only when known and determinable price changes are
provided by contract and law) in the projection of future net cash flows.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash flows........................................ $ 107,118 $ 113,231 $ 107,485
Future costs applicable to future cash flows:
Production costs....................................... 47,114 39,720 33,588
Development and abandonment costs...................... 18,727 17,971 22,932
---------- ---------- ----------
Future net cash flows before income taxes................ 41,277 55,540 50,965
Future income taxes...................................... -- -- --
---------- ---------- ----------
Future net cash flows.................................... 41,277 55,540 50,965
Discount for estimated timing of net cash flows
(10% discount rate).................................... 2,323 6,787 5,315
---------- ---------- ----------
$ 38,954 $ 48,753 $ 45,650
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Because Freeport Sulphur will have sufficient tax deductions to utilize
against estimated future taxable income, in accordance with SFAS 69 no
deductions for future income taxes have been made above.
F-19
<PAGE>
FRP TRANSFERRED BUSINESSES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTARY OIL INFORMATION (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED OIL RESERVES (UNAUDITED).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of year......................................... $ 48,753 $ 45,650 $ 43,498
Revisions:
Changes in prices....................................... 7,316 8,841 33,165
Accretion of discount................................... 4,875 4,565 4,350
Other changes (primarily revised estimates of
development costs in 1994 and reserve quantities in
1995)................................................. 3,058 13,487 (19,738)
Development costs incurred during the year................ 1,057 1,562 9,404
Revenues, less production costs........................... (26,105) (25,352) (25,029)
---------- ---------- ----------
End of year............................................... $ 38,954 $ 48,753 $ 45,650
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Oil prices have declined subsequent to December 31, 1996. The future cash
flows from proved reserves presented above do not reflect the decline.
F-20
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------
FRP IGL
TRANSFERRED TRANSFERRED
FREEPORT BUSINESSES BUSINESSES OTHER
SULPHUR (NOTE 1) (NOTE 1) (NOTE 2) PRO FORMA
----------- ----------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ -- $ 2,572 $ 1,640 $ 8,280a $ 12,492
Accounts receivable............................... -- 33,338 -- 1,137b 34,475
Inventories....................................... -- 33,335 2,702 2,366c 38,403
Prepaid expenses and other........................ -- 2,117 -- -- 2,117
----------- ----------- ----------- ------------- -----------
Total current assets............................ -- 71,362 4,342 11,783 87,487
----------- ----------- ----------- ------------- -----------
Property, plant and equipment..................... -- 918,870 21,900 -- 940,770
Less accumulated depreciation and amortization.... -- 826,308 -- -- 826,308
----------- ----------- ----------- ------------- -----------
Net property, plant and equipment................. -- 92,562 21,900 -- 114,462
----------- ----------- ----------- ------------- -----------
Other assets...................................... -- 14,657 -- 61,538d 76,195
----------- ----------- ----------- ------------- -----------
Total assets...................................... $ -- $ 178,581 $ 26,242 $ 73,321 $ 278,144
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities............................... $ -- $ 44,157 $ 3,052 $ (3,099)e $ 44,110
Reclamation and mine shutdown reserves............ -- 61,055 5,152 -- 66,207
Accrued postretirement benefits and other
liabilities..................................... -- 33,459 -- 26,691a 60,150
Net assets to be transferred...................... -- 39,910 18,038 (57,948) --
Stockholder's equity.............................. -- -- -- 107,677 107,677
----------- ----------- ----------- ------------- -----------
Total liabilities and stockholder's equity........ $ -- $ 178,581 $ 26,242 $ 73,321 $ 278,144
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-21
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------
FRP IGL
TRANSFERRED TRANSFERRED
FREEPORT BUSINESSES BUSINESSES OTHER
SULPHUR (NOTE 1) (NOTE 1) (NOTE 2) PRO FORMA
----------- ----------- ----------- ---------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ -- $ 158,304 $ 34,190 $ (1,984)f $ 190,510
Cost of sales:
Production and delivery....................... -- 126,328 24,159 (409)f,g 150,078
Depreciation and amortization................. -- 451,639 -- 2,468h 454,107
----------- ----------- ----------- ---------------- -----------
Total cost of sales......................... -- 577,967 24,159 2,059 604,185
General and administrative expenses........... -- 5,508 -- 3,000i 8,508
----------- ----------- ----------- ---------------- -----------
Total costs and expenses.................... -- 583,475 24,159 5,059 612,693
----------- ----------- ----------- ---------------- -----------
Net income (loss) before income taxes......... -- (425,171) 10,031 (7,043) (422,183)
Income tax benefit............................ -- 155,613 -- (1,094)j 154,519
----------- ----------- ----------- ---------------- -----------
Net income (loss)............................. $ -- $ (269,558) $ 10,031 $ (8,137) $ (267,664)
----------- ----------- ----------- ---------------- -----------
----------- ----------- ----------- ---------------- -----------
Average shares outstanding.................... 10,390
-----------
-----------
Net income (loss) per share................... $ (25.76)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-22
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------
FRP IGL
TRANSFERRED TRANSFERRED
FREEPORT BUSINESSES BUSINESSES OTHER
SULPHUR (NOTE 1) (NOTE 1) (NOTE 2) PRO FORMA
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ -- $ 221,426 $ 50,337 $ (2,844)f $ 268,919
Cost of sales:
Production and delivery........................... -- 160,982 30,414 (2,644 f,g 188,752
Depreciation and amortization..................... -- 37,800 -- 3,200h 41,000
----- ----------- ----------- ---------- -----------
Total cost of sales............................. -- 198,782 30,414 556 229,752
General and administrative expenses............... -- 10,252 -- 3,589i 13,841
----- ----------- ----------- ---------- -----------
Total costs and expenses........................ -- 209,034 30,414 4,145 243,593
----- ----------- ----------- ---------- -----------
Net income before income taxes.................... -- 12,392 19,923 (6,989) 25,326
Provision for income taxes........................ -- (4,659) -- (4,864)j (9,523)
----- ----------- ----------- ---------- -----------
Net income........................................ $ -- $ 7,733 $ 19,923 $ (11,853) $ 15,803
----- ----------- ----------- ---------- -----------
----- ----------- ----------- ---------- -----------
Average shares outstanding........................ 10,409
-----------
-----------
Net income per share.............................. $ 1.52
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-23
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
The accompanying Pro Forma Statements of Income have been prepared assuming the
transaction discussed below occurred on January 1, 1996, whereas the Pro Forma
Condensed Balance Sheet assumes the transaction occurred on September 30, 1997.
The pro forma financial statements are not necessarily indicative of the results
that would have been achieved nor are they indicative of future results.
1. FRP TRANSFERRED BUSINESSES AND IGL TRANSFERRED BUSINESSES
BACKGROUND. On August 26, 1997, IMC Global Inc. ("IGL") and
Freeport-McMoRan Inc. ("FTX") executed a definitive agreement for FTX to merge
with and into IGL (the "Merger"). The terms of the Merger provide that each
share of FTX common stock will be converted into the right to receive (i) 0.90
of a share of IGL common stock, (ii) one-third of a warrant exercisable for a
share of IGL common stock and (iii) a proportionate number of shares of a newly
formed company (Freeport-McMoRan Sulphur Inc.) that would be held by FTX
immediately prior to consummation of the Merger. Completion of the Merger is
subject to, among other things, approval of the definitive merger agreement by
the IGL and FTX shareholders and the expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(early termination having been granted). Both companies expect the Merger to be
completed by the end of 1997.
In connection with the Merger, Freeport-McMoRan Resource Partners, Limited
Partnership, a Delaware limited partnership that is 51.6% owned by FTX ("FRP"),
will contribute to Freeport-McMoRan Sulphur Inc. ("Freeport Sulphur"), a newly
formed subsidiary of FRP, certain assets and liabilities described below and the
shares of Freeport Sulphur will be distributed to the FRP unitholders, including
FTX. FTX will then distribute its Freeport Sulphur shares to its stockholders as
part of the Merger consideration.
Among the assets that will be contributed by FRP to Freeport Sulphur is
FRP's 58.3% interest in the Main Pass sulphur and oil joint venture (the "Main
Pass Joint Venture") in which IGL also has a 25% interest. The Main Pass Joint
Venture is primarily a sulphur mining operation, with the related oil deposit
being located in the same caprock containing the sulphur reserves.
Immediately prior to the Merger, IGL will transfer its 25% interest in the
Main Pass Joint Venture to FRP (the "IGL Transferred Businesses"). FRP will then
contribute to Freeport Sulphur the IGL Transferred Businesses, and the FRP
Transferred Business; including FRP's interest in the Main Pass Joint Venture,
FRP's Culberson sulphur mine in West Texas (acquired from Pennzoil Company in
1995) and various related sulphur terminaling and transportation assets in the
Gulf Coast area.
The pro forma balance sheet information reflects the pro forma effects of
the contribution of the assets and liabilities attributable to the FRP
Transferred Businesses and the IGL Transferred Businesses, reflected at
September 30, 1997 historical cost. While no consideration will actually be paid
by FRP to IGL for the IGL Transferred Businesses, the receipt of the IGL
Transferred Businesses will be recorded by FRP at fair value. The estimated fair
value of the property, plant and equipment to be contributed by IGL was based on
the same assumptions applied in the impairment assessment of FRP's sulphur
assets as discussed in Note 3. The pro forma income statement information
reflects the pro forma results of the FRP Transferred Businesses and the
historical revenues and direct operating expenses of the IGL Transferred
Businesses for the periods presented.
2. OTHER ADJUSTMENTS
a. Upon consummation of the Merger, FTX will (i) reimburse Freeport Sulphur
$6.3 million for certain employee benefits obligations totaling $26.7 million
which Freeport Sulphur will assume relating to
F-24
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
2. OTHER ADJUSTMENTS (CONTINUED)
transferred employees who will become Freeport Sulphur employees and (ii)
establish an operating cash balance of $2.0 million for ongoing Freeport Sulphur
operations.
b. Reflects estimated IGL Transferred Businesses customer receivable
balance ($2.9 million) for its share of sulphur production taken in-kind less
intercompany balances.
c. Reflects estimated sulphur and oil inventory balances attributable to
the IGL Transferred Businesses.
d. Reflects net deferred tax asset associated with differences in book and
tax asset and liability bases as per Statement of Financial Accounting Standards
No. 109 (SFAS 109) after giving effect to the impairment assessment of FRP's
sulphur assets discussed in Note 3.
e. Reflects reductions in accounts payable related to amounts to be settled
by IGL pursuant to the Merger and intercompany balances.
f. Reflects elimination of management and similar fees charged IGL by FRP
as operator of the Main Pass Joint Venture.
g. Reflects estimated $1.0 million annual increase in insurance cost
related to the IGL Transferred Businesses and an estimated reduction in employee
benefit costs.
h. Reflects estimated depreciation and amortization, including reclamation
and shutdown reserve accruals, for the IGL Transferred Businesses based on their
proportionate share of future costs and the estimated fair value of the
property, plant and equipment to be contributed by IGL to FRP.
i. Reflects estimated identifiable increase in Freeport Sulphur general and
administrative expenses relative to public entity-related costs ($1.05 million
annually) and estimated general and administrative expenses attributable to the
IGL Transferred Businesses which were previously recovered from IGL.
j. Reflects estimated applicable income tax provision associated with the
IGL Transferred Businesses and other pro forma income statement adjustments.
3. IMPAIRMENT ASSESSMENT OF SULPHUR ASSETS.
In 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 121 (SFAS 121) which requires an assessment
of the carrying value of long-lived assets and a reduction of such carrying
value to fair value when events or changes in circumstances indicate that the
carrying amount may not be recoverable. As a result of its most recent review of
its sulphur assets, FRP and FTX concluded that the carrying value of the Main
Pass sulphur assets exceeded the undiscounted estimated future net cash flows,
such that an impairment writedown of $416.4 million (based on September 30, 1997
book values) was required. A similar analysis of the Culberson sulphur assets,
based on a reassessment of recoverable reserves utilizing recent production
history, also indicated an impairment writedown of $9.0 million (based on
September 30, 1997 book values) was required. Fair values were estimated using
discounted estimated future cash flows related to these assets and the
writedowns are reflected in the pro forma September 30, 1997 financial
statements as additional accumulated depreciation and amortization charges. The
writedowns to fair value were recorded by FRP and FTX in the third quarter of
1997.
F-25
<PAGE>
FREEPORT-MCMORAN SULPHUR INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
4. PRO FORMA EARNINGS PER SHARE.
Pro forma earnings per share is computed by dividing pro forma net income by
pro forma common and common equivalent shares outstanding. Pro forma common and
common equivalent shares are based on the number of Freeport Sulphur shares
expected to be issued and outstanding (10,346,578) and the expected number of
common stock equivalents under the Freeport Sulphur Adjusted Stock Award Plan.
In February 1997, the FASB issued SFAS 128, "Earnings Per Share," which
simplifies the computation of earnings per share (EPS). SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997 and
requires restatement for all prior period EPS data presented. Adoption of SFAS
128 would not change Freeport Sulphur's pro forma EPS.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Freeport-McMoRan Sulphur Inc.:
We have audited the accompanying statement of gross sulphur and oil revenues
and direct operating expenses of the assets to be acquired (IGL Transferred
Businesses) by Freeport-McMoRan Sulphur Inc. (see Note 1) for the year ended
December 31, 1996. This statement is the responsibility of management. Our
responsibility is to express an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the statements. We
believe our audit provides a reasonable basis for our opinion.
The accompanying statement presents only the gross sulphur and oil revenues
and direct operating expenses (see Note 1) and are not intended to be a complete
presentation of the revenues and expenses of the Contributed Assets.
In our opinion, the statement referred to above presents fairly, in all
material respects, the gross sulphur and oil revenues and direct operating
expenses of the IGL Transferred Businesses for the year ended December 31, 1996
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana,
September 16, 1997
F-27
<PAGE>
The following statement of gross sulphur and oil revenues and direct
operating expenses of the assets to be acquired (IGL Transferred Businesses) by
Freeport-McMoRan Sulphur Inc. ("Freeport Sulphur") for the year ended December
31, 1996 have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their accompanying report. The statement is
presented to provide historical data about the IGL Transferred Businesses and
may not be indicative of future results of operations of the IGL Transferred
Businesses.
Separate financial statements for the IGL Transferred Businesses have never
been prepared. Depreciation, depletion and amortization has not been included
because the historical expenses incurred by the predecessor owner may not be
comparable to amounts to be incurred by Freeport Sulphur in future periods.
Further, it is not possible to make a practicable or objective determination of
the portion of general or administrative expenses or other indirect expenses
which were attributable to the IGL Transferred Businesses and any such
allocation would not be indicative of the level of such expenses to be incurred
in the future. In addition, a provision for income taxes has not been included
because the tax position of the predecessor owner will not affect Freeport
Sulphur's future tax provisions.
IGL TRANSFERRED BUSINESSES
STATEMENTS OF GROSS SULPHUR AND OIL REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1996
NINE MONTHS ------------
ENDED
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Sulphur and Oil sales........................................... $ 34,190 $ 50,337
Production and delivery......................................... 24,159 30,414
------------- ------------
Revenues over direct operating expenses......................... $ 10,031 $ 19,923
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
NOTES TO STATEMENTS OF GROSS SULPHUR AND OIL REVENUES
AND DIRECT OPERATING EXPENSES OF THE IGL TRANSFERRED BUSINESSES
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND. On August 26, 1997, IMC Global Inc. ("IGL") and
Freeport-McMoRan Inc. ("FTX") executed a definitive agreement for FTX to merge
with and into IGL (the "Merger"). The terms of the Merger provide that each
share of FTX common stock will be converted into the right to receive (i) 0.90
of a share of IGL common stock, (ii) one-third of a warrant exercisable for a
share of IGL common stock and (iii) a proportionate number of shares of a newly
formed company (Freeport-McMoRan Sulphur Inc.) that would be held by FTX
immediately prior to consummation of the Merger. Completion of the Merger is
subject to, among other things, approval of the definitive merger agreement by
the IGL and FTX shareholders and the expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(early termination having been granted). Both companies expect the Merger to be
completed by the end of 1997.
In connection with the Merger, Freeport-McMoRan Resource Partners, Limited
Partnership, a Delaware limited partnership that is 51.6% owned by FTX ("FRP"),
will contribute to Freeport-McMoRan Sulphur Inc. ("Freeport Sulphur"), a newly
formed subsidiary of FRP, certain assets and liabilities described below and the
shares of Freeport Sulphur will be distributed to the FRP unitholders, including
FTX. FTX will then distribute its Freeport Sulphur shares to its stockholders as
part of the Merger consideration.
Among the assets that will be contributed by FRP to Freeport Sulphur is
FRP's 58.3% interest in the Main Pass sulphur and oil joint venture (the "Main
Pass Joint Venture") in which IGL also has a 25% interest. The Main Pass Joint
Venture is primarily a sulphur mining operation, with the related oil deposit
being located in the same caprock containing the sulphur reserves.
Immediately prior to the Merger, IGL will transfer its 25% interest in the
Main Pass Joint Venture to FRP (the "IGL Transferred Businesses"). FRP will then
contribute to Freeport Sulphur the IGL Transferred Businesses, and the FRP
Transferred Businesses; including FRP's interest in the Main Pass Joint Venture,
FRP's Culberson sulphur mine in West Texas (acquired from Pennzoil Company in
1995) and various related sulphur terminaling and transportation assets in the
Gulf Coast area.
BASIS OF PRESENTATION. The accompanying statement of gross sulphur and oil
revenues and direct operating expenses relates to the interests in IGL's
producing sulphur and oil properties described above and may not be
representative of future operations. The statement does not include federal and
state income taxes, interest, depreciation, depletion and amortization or
corporate general and administrative expenses because such amounts have
historically not been allocated to the IGL Transferred Businesses or such
amounts would not be indicative of those expenses which would be incurred by
Freeport Sulphur. The statement includes gross sulphur and oil revenues and
direct operating and production expenses, including production and ad valorem
taxes, for the entire periods presented.
With respect to Main Pass sulphur production, IGL takes its share of sulphur
in kind and sells such production under a long-term contract to the IMC-Agrico
Joint Venture (IMC-Agrico), a chemical fertilizer producer jointly owned by IGL
and FRP. The contract price paid by IMC-Agrico for approximately the first
500,000 tons is based on a fixed premium over the per ton weighted average cost
of IGL's purchases of sulphur on behalf of IMC-Agrico under other long-term
supply contracts and tons sold in excess of that amount exclude the fixed
premium.
The unaudited statement of gross sulphur and oil revenues and direct
operating expenses for the nine-month period ended September 30, 1997, in the
opinion of management, was prepared on a basis consistent with the audited
statement of gross sulphur and oil revenues and direct operating expenses and
F-29
<PAGE>
NOTES TO STATEMENTS OF GROSS SULPHUR AND OIL REVENUES (CONTINUED)
AND DIRECT OPERATING EXPENSES OF THE IGL TRANSFERRED BUSINESSES
1. BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)
includes all adjustments (which includes normal recurring adjustments) necessary
to present fairly the gross sulphur and oil revenues and direct operating and
production expenses for this interim period and may not be indicative of future
revenues and expenses.
2. SUPPLEMENTAL INFORMATION ON SULPHUR AND OIL RESERVES (UNAUDITED)
Proved and probable sulphur mineral reserves at December 31, 1996 totaled
16.6 million long tons which are subject to a 12.5 percent royalty based on net
mine revenues.
The supplementary oil reserve information presented below is prepared in
accordance with requirements prescribed by the Financial Accounting Standards
Board. Proved oil reserves at December 31, 1996, have been estimated by
independent petroleum engineers in accordance with guidelines established by the
Securities and Exchange Commission (SEC). There are numerous uncertainties
inherent in estimating quantities of proved reserves and in projecting the
future rates of production and timing of development expenditures. Thus, the
following reserve estimates, which relate to reserves attributable to the IGL
Transferred Businesses, are based upon existing economic and operating
conditions; they are only estimates and should not be construed as being exact.
The reserves related to the IGL Transferred Businesses are located in offshore
United States waters. Oil, including condensate and plant products, is stated in
thousands of barrels. An analysis of the estimated changes in quantities of
proved oil reserves of the IGL Transferred Businesses for the year ended
December 31, 1996 is shown below.
<TABLE>
<CAPTION>
OIL
---------
<S> <C>
Proved reserves:
Beginning of year................................................................... 2,845
Revisions of previous estimates..................................................... 191
Discoveries and extensions.......................................................... --
Production.......................................................................... (813)
---------
End of period....................................................................... 2,223
---------
---------
Proved developed reserves:
End of year......................................................................... 1,761
---------
---------
</TABLE>
Subsequent to December 31, 1996, proved undeveloped reserve estimates were
revised downward by approximately 0.5 million barrels to reflect recent drilling
results.
The standardized measure of discounted future net cash flows and changes
therein relating to the proved oil reserves of the IGL Transferred Businesses
were computed using reserve valuations based on regulations prescribed by the
SEC. These regulations provide for the use of current oil prices (escalated only
when known and determinable price changes are provided by contract and law) in
the projection of
F-30
<PAGE>
NOTES TO STATEMENTS OF GROSS SULPHUR AND OIL REVENUES (CONTINUED)
AND DIRECT OPERATING EXPENSES OF THE IGL TRANSFERRED BUSINESSES
2. SUPPLEMENTAL INFORMATION ON SULPHUR AND OIL RESERVES (UNAUDITED) (CONTINUED)
future net cash flows. The estimated standardized measure of discounted future
net cash flows relating to proved reserves of the IGL Transferred Businesses at
December 31, 1996 is shown below (in thousands).
<TABLE>
<S> <C>
Future cash flows.................................................. $ 45,910
Future costs applicable to future cash flows:
Production costs................................................. 20,193
Development and abandonment costs................................ 8,027
---------
Future net cash flows before income taxes.......................... 17,690
Future income taxes --
---------
Future net cash flows.............................................. 17,690
Discount for estimated timing of net cash flows (10% discount
rate)............................................................ 995
---------
$ 16,695
---------
---------
</TABLE>
Because the tax position of the predecessor owner will not affect Freeport
Sulphur's future tax provisions, no deductions for future income taxes have been
made above. Oil prices have declined subsequent to December 31, 1996. The future
cash flows from proved reserves presented above do not reflect the decline.
An analysis of the sources of changes in the standardized measure of
discounted future net cash flows relating to proved reserves of the IGL
Transferred Businesses for the year ended December 31, 1996 is shown below (in
thousands).
<TABLE>
<S> <C>
Beginning of year.................................................. $ 20,895
Development costs incurred during the period....................... 453
Revisions:
Changes in prices................................................ 3,136
Accretion of discount............................................ 2,090
Other changes.................................................... 1,309
Revenues, less production costs.................................... (11,188)
---------
End of year........................................................ $ 16,695
---------
</TABLE>
F-31
<PAGE>
[LETTERHEAD]
November 17, 1997
Freeport-McMoRan Inc.
1615 Poydras Street
P. O. Box 61119
New Orleans, Louisiana 70161
Ladies and Gentlemen:
You have requested our opinion regarding certain U.S. federal income tax
consequences to Unitholders of Freeport-McMoRan Resource Partners, Limited
Partnership ("FRP") resulting from the formation of Freeport-McMoRan Sulphur
Inc. (the "Company"), the contribution of assets by FRP to the Company (the
"Contribution"), the distribution of Company stock ("Common Stock") to FRP
Partners (the "Distributions"), and the merger of Freeport-McMoRan Inc.
("FTX") into IMC Global Inc. ("IGL") (the "Merger"). Our opinions are based
on the current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), final and proposed Treasury regulations, administrative
positions of the Internal Revenue Service (the "IRS"), and court decisions.
All of the foregoing are subject to change, possibly with retroactive effect.
Our opinions are also based on our review of the facts, including those facts
found in the SEC filings for the Contribution, the Distributions, and the
Merger (I.E, the Form S-1 registration statement and accompanying Prospectus,
the Form S-4 registration statement and accompanying Joint Proxy Statement
and Prospectus, and the Form 10 registration statement and accompanying
<PAGE>
Freeport-McMoRan Inc.
Page 2
Information Statement) and on certain representations made to us by FTX and
IGL. Terms used in this opinion have the same meanings as the corresponding
terms used in the SEC filings, and the term "Unitholders" refers to
beneficial owners of publicly traded partnership interests of FRP.
This opinion does not address all aspects of federal income taxation
that may be relevant to a particular Unitholder in light of his personal tax
circumstances or all of the tax consequences that may be relevant to certain
types of Unitholders (such as foreign FRP Partners, individual retirement
accounts, insurance companies, and tax-exempt organizations) subject to
special treatment under the federal income tax laws. We also express no
opinion on the tax consequences to subsequent purchasers of FRP partnership
interests or Company stock and, with regard to Company stock, our opinion is
limited to Unitholders who will hold Common Stock as capital assets within
the meaning of section 1221 of the Code. Moreover, we express no opinion on
the tax consequences of the Contribution, the Distributions, and the Merger
under applicable state, local, or foreign tax laws.
Future legislative or administrative changes or court decisions (which
may or may not have retroactive application) could significantly and
adversely affect the tax considerations discussed in this opinion. Moreover,
our opinions are not binding on the IRS or the courts, and the IRS may
disagree with our conclusions. In the event of any such disagreement, our
opinion expresses the positions that we believe would prevail if the matters
were litigated, although there can be no assurance that the positions
expressed below would be upheld in a judicial proceeding.
<PAGE>
Freeport-McMoRan Inc.
Page 3
FACTS
FRP is a publicly-traded Delaware limited partnership. Formed in 1986,
FRP primarily conducts operations in the phosphate crop nutrients and sulphur
industries with some oil and gas operations.
FRP is engaged in the production, distribution, and sale of phosphate
crop nutrients and animal feed ingredients as well as the mining and sale of
phosphate rock through IMC-Agrico, a joint venture with IMC Global Inc.
("IGL"). IMC-Agrico is a leading U.S. miner of phosphate rock with 25 million
tons of annual capacity and a leading U.S. producer of concentrated
phosphates with an annual capacity of approximately four million tons of
phosphoric acid. FRP indirectly owns approximately 42 percent of IMC-Agrico
through Agrico, L.P. (FRP directly owns 99.8 percent of Agrico, L.P., which
in turn owns approximately 42 percent of IMC-Agrico.) Both Agrico, L.P., and
IMC-Agrico were formed under the state partnership laws of Delaware. FRP and
Agrico, L.P. have a December 31 tax year-end; IMC-Agrico has a June 30 tax
year-end.
FRP's sulphur business consists of the exploration for and mining,
transporting, terminalling, and marketing of sulphur in addition to the
exploration for, development, and production of oil and gas reserves.
Specifically, FRP owns 58.3 percent of Main Pass Block 299. Located offshore
Louisiana in the Gulf of Mexico, the Main Pass deposit contains the largest
known sulphur reserve in North America. The Main Pass offshore mining complex
is the largest structure of its type in the Gulf of Mexico and one of the
largest in the world. FRP also owns a
<PAGE>
Freeport-McMoRan Inc.
Page 4
sulphur mine in Culberson, Texas, which FRP began operating in 1995, after
the acquisition of substantially all of Pennzoil Company's domestic sulphur
assets. In addition to the Culberson mine, the acquisition also included
sulphur terminals and handling facilities in Galveston, Texas, and Tampa,
Florida, as well as land and marine transportation equipment and sales and
other related commercial contracts and obligations.
FTX is the administrative managing general partner of FRP and, together
with its wholly-owned subsidiary, FMRP Inc., holds partnership units
representing an approximate 51.6 percent interest of FRP. The remaining
interests of FRP are held by public unitholders and are traded on the New
York Stock Exchange. FTX entered into an agreement and plan of merger with
IGL on August 26, 1997. IGL, a publicly-traded corporation with a June 30 tax
year-end, is one of the world's leading producers of crop nutrients for the
international agricultural community and is one of the foremost distributors
in the United States of crop nutrients and related products through its
retail and wholesale distribution networks.
In connection with the Merger, FRP formed the Company, a Delaware
corporation, in August 1997 to succeed to FRP's sulphur and oil and gas
operations. FRP, FTX, and the Company entered into a Contribution and
Distribution Agreement on August 26, 1997, in which FRP agreed to contribute
to the Company, immediately prior to the Effective Time of the Merger, the
assets and liabilities of FRP's sulphur business and oil and gas operations
(the "Transferred Businesses") in exchange for all of the equity interests, a
single class of common stock, of the Company. Specifically, the Transferred
Businesses will include FRP's interest in Main Pass Block 299, as described
above, as well as the Culberson mine and other assets that
<PAGE>
Freeport-McMoRan Inc.
Page 5
FRP acquired from Pennzoil in 1995 but will not include any nonrecourse
liabilities. Moreover, in connection with the formation of the Company but
prior to the transfer of assets from FRP to the Company, IGL will transfer
its 25 percent interest in Main Pass Block 299 (the "IGL Transferred
Businesses") to FRP, which FRP will include in its contribution to the
Company. Thus, following the Contribution, the Company will own an 83.3
percent interest in the Main Pass operations (with the remaining interest
being owned by Homestake Mining Company). IGL's transfer to FRP, along with
the transfer of miscellaneous assets from FTX to FRP prior to FRP's
contribution to the Company, are pursuant to an Assignment and Assumption
Agreement that IGL and FRP agreed to enter into on August 26, 1997.
Following the Contribution and immediately prior to the Effective Time
of the Merger, FRP will distribute all of the shares of Common Stock to FRP
Partners in accordance with their respective partnership interests. (FTX's
shares will be distributed to FTX stockholders as part of the Merger
consideration.) FRP Partners will receive cash in lieu of any fractional
share of Common Stock. Each share of Common Stock will include an associated
right to purchase one one-hundredth of a share of Freeport Sulphur
Participating Preferred Stock, $.01 par value per share (the "Rights"). As a
result of the Merger, IGL will replace FTX as FRP's majority owner and has
agreed to assume FTX's obligations as administrative managing general partner
of FRP.
DISCUSSION
A. PARTNERSHIP STATUS OF FRP
The tax consequences of the Contribution, the Distributions, and the
Merger depend, in large part, on the classification of FRP as a partnership
rather than as an association or publicly
<PAGE>
Freeport-McMoRan Inc.
Page 6
traded partnership taxable as a corporation for federal income tax purposes.
As a partnership, FRP does not incur federal tax liability; rather, items of
partnership income, gain, loss, deduction, and credit flow through to FRP
Partners. Furthermore, FRP Partners generally do not recognize gain or loss
on the receipt of a distribution from FRP.
Under general principles of federal income taxation, an unincorporated
organization is classified as a partnership if it is not a trust, estate, or
corporation. Section 7701(a)(2). FRP is clearly not an estate or trust.
Treas. Reg. Section 301.7701-4.
Historically, Treasury Regulations distinguished between a partnership
and an association taxable as a corporation by reference to four corporate
characteristics: (1) free transferability of interests, (2) centralization of
management, (3) limited liability, and (4) continuity of life. An
organization organized as a limited partnership, such as FRP, would not be
taxable as a corporation under these regulations unless the organization
possessed a preponderance (i.e., three or more) of these four corporate
characteristics. Treas. Reg. Section 301.7701-2(a)(3), prior to amendment by
T.D. 8697, 61 Fed. Reg. 66584 (1996). In our opinion, based on certain
representations of FTX, FRP has lacked a preponderance of the corporate
characteristics and thus has been classified properly as a partnership under
these regulations.
Treasury Regulations promulgated in 1996, referred to as the
"check-the-box" regulations, generally substitute an elective regime for the
four-factor test. Under these regulations, a domestic business entity formed
before 1997 that has two or more members and is not organized under a state
or federal corporate code generally will have the same classification that it
claimed on December 31, 1996, unless it elects otherwise. Treas. Reg. Section
301.7701-3(b)(3),
<PAGE>
Freeport-McMoRan Inc.
Page 7
as amended by T.D. 8697, 61 Fed. Reg. 66584 (1996). FRP was formed prior to
1997 and claimed partnership status as of December 31, 1996, according to
representations made by FTX. Therefore, under the "check-the-box"
regulations, it is our opinion that FRP will automatically be considered a
partnership for federal tax purposes unless it elects otherwise, which FRP
has represented that it will not, or unless FRP were to fail to meet the
requirements for exception to the rules that require publicly traded
partnerships to be treated as corporations.
Code section 7704 treats publicly traded partnerships (such as FRP) as
corporations for federal income tax purposes, subject to certain exceptions.
One exception applies to partnerships whose gross income consists at least 90
percent of qualifying income, including generally income derived from the
operations of mineral or natural resource businesses. Code section
7704(c),(d). FTX has represented to us that FRP has satisfied the 90 percent
of income test for each year it has been in existence.
Accordingly, based on these representations, it is our opinion that FRP
currently is properly classified for federal income tax purposes as a
partnership rather than an association or publicly traded partnership taxable
as a corporation. The remainder of this discussion reflects and is based on
that opinion. It is our further opinion that FRP will continue to be
classified as a partnership for federal income tax purposes after the
Distributions so long as it continues to meet the 90 percent of income test
and does not elect otherwise. IGL, in its capacity as successor to FTX as
administrative managing general partner of FRP, has represented that it will
use its best efforts to maintain partnership status by monitoring the
qualifying income levels and the activities of FRP in the future.
<PAGE>
Freeport-McMoRan Inc.
Page 8
B. CONTRIBUTION OF THE TRANSFERRED BUSINESSES TO THE COMPANY
In our opinion, for federal income tax purposes, FRP's contribution of
the Transferred Businesses to the Company in exchange for newly-issued Common
Stock constitutes a contribution of assets to the Company by FRP in exchange
for common stock and the assumption of the liabilities of FRP pursuant to
Code section 351, which provides that such contributions are generally
nontaxable except to the extent that the transferee assumes liabilities of
the transferor in excess of the transferor's basis in the assets, requiring
gain recognition under Code section 357(c) to that extent. Code sections
351(a), 357(c). FTX has represented that FRP's basis in the assets
transferred to the Company (excluding any special basis adjustments) will
exceed the liabilities to be assumed by the Company, and based on this
representation, it is our opinion that no gain will be recognized pursuant to
Code section 357(c). FTX has further represented that the Company will not
assume any nonrecourse liabilities of FRP. Accordingly, based on this
representation, it is our further opinion that the FRP Partners will
recognize no taxable gain pursuant to Code sections 731 and 752, which would
treat an FRP Partner's share of the nonrecourse liabilities assumed by the
Company as a cash distribution to the Partner.
The Transferred Businesses will include a 25 percent interest in Main
Pass joint venture that IGL will transfer to FRP immediately before the
Contribution by FRP to the Company (the "IGL Transferred Businesses"). While
the appropriate treatment of the transfer of the IGL Transferred Businesses
from IGL to FRP is not clear, we believe it likely that FRP will recognize
taxable gain on that receipt in an amount equal to the value of the IGL
Transferred Businesses,
<PAGE>
Freeport-McMoRan Inc.
Page 9
which FTX estimates to be worth less than 15 percent of the total value of
the Transferred Businesses.
C. STOCKHOLDERS' RIGHTS PLAN
Based on a published IRS ruling, it is our opinion that the Company's
adoption of the Rights Plan will not constitute the distribution of stock or
other property by the Company to its stockholders, an exchange of property or
stock (either taxable or nontaxable), or any other event giving rise to the
realization of gross income by FRP or the FRP Partners on the receipt of the
Rights. Rev. Rul. 90-11, 1990-1 C.B. 10. The ruling does not address the
federal income tax consequences of any redemption of the Rights or any
transaction involving the Rights subsequent to a triggering event, and we
express no opinion on the federal income tax consequences of such events or
transactions.
D. DISTRIBUTION OF COMPANY COMMON STOCK
In our opinion, the distribution by FRP of all of the outstanding shares
of Common Stock to the FRP Partners constitutes a distribution of property
from a partnership to its partners pursuant to Code section 731, which
provides generally that such distributions are not taxable. Code section
731(c), however, requires that gain be recognized on certain partnership
distributions of marketable securities to the extent that the value of the
securities exceeds the partner's basis in his partnership interest. The
marketable securities rule, however, is subject to an exception contained in
the Treasury Regulations for securities that are acquired by a partnership in
a nonrecognition transaction. Treas. Reg. Section 1.731-2(d)(1)(ii). For this
exception to apply, the value of the money and marketable securities
transferred by FRP to the Company
<PAGE>
Freeport-McMoRan Inc.
Page 10
must be less than 20 percent of the value of all the assets transferred by
FRP to the Company. Accordingly, unless the amount of marketable securities,
if any, and money acquired by the Company from FRP were to be determined to
exceed 20 percent of the value of all of the assets acquired by the Company
from FRP, it is our opinion that the distribution will constitute a
nontaxable distribution of property to the FRP Partners. FTX does not
anticipate that the amount of marketable securities, if any, and money
acquired by the Company from FRP will exceed the 20 percent limitation, and
the remainder of our opinion is premised on that expectation. If the 20
percent limitation were not to be met, FTX anticipates that each FRP Partner
would have either sufficient basis in his FRP partnership interest to prevent
the recognition of gain or available suspended passive activity losses to
offset any recognized gain. SEE Suspended Losses.
In our opinion, FRP Partners who receive cash in lieu of fractional
shares will be treated as having received and then sold the fractional shares
in a taxable transaction. SEE Rev. Rul. 66-365, 1966-2 C.B. 116; Rev. Proc.
77-41, 1977-2 C.B. 574.
E. BASIS OF THE TRANSFERRED BUSINESSES TO THE COMPANY; BASIS AND HOLDING
PERIOD OF COMPANY COMMON STOCK TO FRP PARTNERS
It is our opinion that the basis of the Common Stock that the FRP
Partners receive in the Distributions will be determined by reference to the
basis of the shares in the hands of FRP, which will be determined by
reference to the basis of the Transferred Businesses. Code sections 358(a)(1)
and 732(a)(1). Similarly, the holding period of the Common Stock in the hands
of the FRP Partners will be determined by the period for which the
Transferred Businesses have been
<PAGE>
Freeport-McMoRan Inc.
Page 11
held by FRP (and not the period for which the FRP Partners have held their
interests in FRP). Code sections 735(b) and 1223(1).
BASIS OF THE TRANSFERRED BUSINESSES TO THE COMPANY. In our opinion, the
Company's acquisition of the Transferred Businesses from FRP will not result
in the recognition of gain or loss to the Company, and the Company's adjusted
tax basis in the Transferred Businesses will equal the adjusted tax basis of
those assets in the hands of FRP. Code sections 351, 362(a). The adjusted tax
basis of the assets contributed to the Company will both determine the amount
of future deductions attributable to those assets (which will reduce the
amount of the Company's income subject to tax) and will determine the basis
of the Common Stock received by FRP and distributed to FRP Partners. The
computation of the Company's adjusted tax basis in the assets it receives
will depend in part on determinations of the adjusted tax basis of assets
contributed to or acquired by FRP prior to the formation of the Company and
the accuracy of subsequent adjustments to that basis to reflect capital
expenditures, depletion, depreciation, or amortization. The technical rules
governing the computation of the adjusted tax basis of partnership assets are
extremely complex, and FRP cannot be certain that the manner in which it has
computed the adjusted tax basis of the assets it will transfer to the Company
will be respected by the IRS. Those basis adjustments are further complicated
by the fact that FRP has elected to make the "special basis adjustments"
permitted by Code section 754 that have been made to increase the basis of
FRP's assets to reflect the price at which FRP Partners have purchased their
interests in FRP. It is our opinion that, while there is no currently
effective authority on point and the matter is uncertain, these special basis
adjustments should be available to be taken into account in
<PAGE>
Freeport-McMoRan Inc.
Page 12
determining the basis of both the assets contributed to the Company and the
basis of the Common Stock distributed to FRP Partners. SEE Prop. Treas. Reg.
Section 1.743-2, 62 Fed. Reg. 55768, 55771 (Oct. 28, 1997) (proposed to be
effective for transfers on or after the date final regulations are issued).
BASIS AND HOLDING PERIOD OF THE SHARES RECEIVED BY FRP PARTNERS. In our
opinion, in general, the basis and holding period of the Common Stock
received by FRP upon the transfer of assets to the Company will be the same
as the basis and holding period of the assets previously held by FRP; and the
basis and holding period of each FRP Partner in the Common Stock distributed
to such Partner will be the same to the Partner as to FRP (unless the basis
of the FRP Partner in his FRP partnership interest is less than FRP's basis
in those shares). Code sections 358(a)(1), 732(a)(1), 735(b), 1223(1). An FRP
Partner must reduce its basis in the FRP partnership interest by the amount
of the basis of the Common Stock received. Code sections 705 and 733.
The IRS has required in its Revenue Rulings that the basis and holding
period of stock received by a stockholder in exchange for multiple assets
contributed to a corporation in a nonrecognition transaction be split to
reflect the basis and holding period of the various assets transferred. Rev.
Rul. 84-111, 1984-2 C.B. 88; Rev. Rul. 85-164, 1985-2 C.B. 117. This approach
appears intended to require that the basis and holding period of the portion
of the shares attributable to capital assets (and assets used in a trade or
business within the meaning of Code Section 1231) be reflected separately
from the portion attributable to inventory and other non-capital assets. As
noted above, FRP has maintained "special basis adjustments" for FRP Partners
<PAGE>
Freeport-McMoRan Inc.
Page 13
in the Transferred Businesses to reflect the price at which each FRP Partner
acquired his FRP partnership interests. FRP has represented to us that it
intends to implement the "split basis" allocation by determining the basis of
the shares distributed to each FRP Partner (and the portion attributable to
different categories of assets with different holding periods) by reference
to both that Partner's share of FRP's common basis and the special basis
adjustment previously maintained for each Partner in the Transferred
Businesses. FRP has also represented to us that it intends to report that
basis as well as its calculations of the holding periods to each Partner with
the custom tax information provided to FRP Partners for FRP's tax year that
will end on the date of the Merger. We are of the opinion that this approach
is consistent with the purposes of both the partnership special basis
adjustment provisions and the "split" basis and holding period rulings, but
there is no authority bearing on the question and we are unable to opine that
the specific methodology adopted by FRP would be sustained were IRS to assert
a different approach.
F. SUSPENDED LOSSES
Currently, an individual Unitholder's ability to deduct his share of
FRP's losses and deductions is subject to the passive activity loss
limitation of Code section 469 (as well as certain other limitations). The
passive activity loss limitation applies to individuals, estates, trusts,
personal service corporations, certain closely held corporations, and
affiliated groups of these corporations. Code section 469(a)(2). The passive
activity loss rules are highly complex, and there is no authority addressing
the passive activity loss consequences of a distribution by a publicly traded
partnership of corporate stock representing a portion of the business activity
<PAGE>
Freeport-McMoRan Inc.
Page 14
previously conducted by the partnership. Based on the legislative history of
the passive activity loss rules, it is our opinion that individual
Unitholders who recognize gain on the receipt of cash in lieu of fractional
shares may deduct suspended passive activity losses from FRP to that extent,
but any remaining suspended passive activity losses may not be deducted by
reason of the distribution beyond the gain recognized. S. Rep. No. 99-313,
99th Cong. 2d Sess. at 719 n.7 (1986).
It is also our opinion that individual Unitholders may deduct their
suspended passive activity losses when they have disposed of both their FRP
partnership interests and their Common Stock in fully taxable transactions,
but other aspects of the passive activity loss rules after the distribution
are less certain. ID. at 725-727, Code section 469(k)(3). For example, the
extent to which passive activity losses may be deducted against gains
recognized upon the sale of Common Stock by a Unitholder who continues to
hold FRP partnership interests, or against gains recognized upon the sale of
FRP partnership interests by a Unitholder who continues to hold Common Stock,
is not clear. The legislative history of the passive activity loss rules and
Treasury Regulations indicate that a Unitholder cannot deduct suspended
passive activity losses from FRP when he receives dividends from Common
Stock. S. Rep. No. 99-313, 99th Cong. 2d Sess. at 727 n.13 (1986); SEE ALSO
Treas. Reg. Section 1.469-1(f)(4)(iii), Example (5).
G. TAX TREATMENT OF FRP AND COMPANY INCOME OR LOSS
Because FRP is characterized as a partnership for federal income tax
purposes, each FRP Partner currently is required to take into account his
share of the income, gain, loss, and deductions generated by FRP's business.
Code section 701. For 1997, the income, gain, loss, or
<PAGE>
Freeport-McMoRan Inc.
Page 15
deductions generated by the Transferred Businesses will be allocated to the
FRP Partners through the date they are transferred to the Company.
Thereafter, the income from the Transferred Businesses will be realized by
the Company and will become subject to the federal corporate income tax. Code
section 11(a).
H. DISTRIBUTIONS FROM THE COMPANY
In our opinion, distributions of cash or other property by the Company
with respect to its Common Stock will be dividends to the extent they
represent current or accumulated earnings and profits as determined for
federal income tax purposes. Code sections 301(c),316. To the extent that a
distribution exceeds the Company's earnings and profits, it will be treated
first as a nontaxable return of capital to a stockholder and then as capital
gain. Code section 301(c). Dividends received by corporate holders may be
eligible for the corporate dividends received deduction, subject to the
conditions and limitations applicable to the deduction, and in certain
circumstances may be extraordinary dividends within the meaning of Code
section 1059. Code section 243.
I. SALE OR EXCHANGE OF COMMON STOCK
It is our opinion that, in general, any gain or loss from the sale or
exchange of Common Stock will be characterized as capital gain or loss. Code
section 1221. The gain or loss will be measured by the difference between the
amount realized on the sale and the stockholder's adjusted tax basis in the
Common Stock. Code section 1001(a). An individual stockholder's capital gain
generally will be taxed at a maximum rate of 20 percent (10 percent for
individuals in the 15 percent tax bracket) if the stockholder has owned the
Common Stock for more than 18
<PAGE>
Freeport-McMoRan Inc.
Page 16
months at the time of the sale and at a maximum rate of 28 percent if the
stockholder has owned the Common Stock for more than 12 months but not more
than 18 months at the time of the sale. Code section 1(h).
J. TAX IMPLICATIONS OF THE MERGER TO FRP
The merger of FTX (FRP's majority owner and administrative managing
general partner) into IGL after the distribution of Common Stock to FRP
Partners will result in a constructive termination of FRP under Code section
708 because FTX owns more than fifty percent of FRP. Code section
708(b)(1)(B). Under recently issued regulations, FRP's assets and liabilities
will be deemed contributed to a newly constituted partnership, the interests
in which will be deemed to be distributed to FRP Partners, including IGL (the
new majority owner and administrative managing general partner), in a
constructive liquidation of the partnership in which FTX held more than fifty
percent. Treas. Reg. Section 1.708-1(b)(1)(iv). In our opinion, the
termination will not result in the recognition of gain or loss by the FRP
Partners.
The termination will result, however, in the closing of FRP's taxable
year and the need for the newly constituted partnership to make new elections
for federal tax purposes. Code section 706(c)(1), Treas. Reg. Section
1.708-1(b)(1)(iii). Moreover, it is our opinion that the termination will
result in an early closing with respect to FRP of IMC-Agrico's taxable year
which would otherwise close on June 30, 1998. Code section 706(c)(2)(A),
Treas. Reg. Section 1.708-1(b)(1)(ii); SEE ALSO Treas. Reg. Section
1.706-1(c)(2)(ii). As a result, assuming that the Effective Time is in 1997,
FRP Partners will be required to report in 1997 their shares of IMC-Agrico's
income, gain, loss and deductions both for the period from July 1, 1996 to
June 30, 1997 (which would be
<PAGE>
Freeport-McMoRan Inc.
Page 17
reported during 1997 to FRP and to FRP's Partners regardless of the Merger)
and for the period between June 30, 1997 and the Effective Time of the Merger
(which would otherwise be reported in 1998).
In addition, because IGL will own more than fifty percent of FRP, the
Merger will result in a change of FRP's taxable year from a calendar year-end
to a June 30 fiscal year-end. Code section 706(b). As a result, FRP Partners
that are calendar-year taxpayers will report in 1998 their share of FRP's
income or loss for less than one year, from the Effective Time of the Merger
through June 30, 1998. For each tax year thereafter, their inclusion of FRP
income will include their share of gains or losses earned from July 1 of the
prior year through June 30 of the current year, assuming that IGL maintains a
June 30 tax year-end and continues to be the majority partner of FRP.
<PAGE>
Freeport-McMoRan Inc.
Page 18
* * * *
We consent to the use of this opinion as an exhibit to the Form 10
registration statement and to the references to us in the Information
Statement annexed to the Form 10 registration statement.
Very truly yours,
MILLER & CHEVALIER, Chartered
By: /s/ David B. Cubeta
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRP
TRANSFERRED BUSINESSES FINANCIAL STATEMENTS AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996 AND FOR THE 9 AND 12 MONTHS THEN ENDED, RESPECTIVELY,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 2,572 3,116
<SECURITIES> 0 0
<RECEIVABLES> 21,878 27,402
<ALLOWANCES> 0 0
<INVENTORY> 33,335 30,073
<CURRENT-ASSETS> 71,362 83,204
<PP&E> 918,870 916,858
<DEPRECIATION> 826,308 381,205
<TOTAL-ASSETS> 178,581 633,620
<CURRENT-LIABILITIES> 44,157 57,410
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 178,581 633,620
<SALES> 158,304 221,426
<TOTAL-REVENUES> 158,304 221,426
<CGS> 577,967 198,782
<TOTAL-COSTS> 577,967 198,782
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (425,171) 12,392
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (425,171) 12,392
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (425,171) 12,392
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
