SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
Commission File Number: 1-13617
Freeport-McMoRan Sulphur Inc.
Incorporated in Delaware 72-1392855
(IRS Employer Identification No.)
1615 Poydras Street, New Orleans, Louisiana 70112
Registrant's telephone number, including area code: (504) 582-4000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
On September 30, 1998, there were issued and outstanding
8,790,646 shares of the registrant's Common Stock, par value
$0.01 per share.
FREEPORT-McMoRan SULPHUR INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Remarks 7
Report of Independent Public Accountants 8
Management's Discussion and Analysis of
Financial Condition
and Results of Operations 9
Part II. Other Information 14
Signature 15
Exhibit Index E-1
<PAGE> 2
FREEPORT-McMoRan SULPHUR INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FREEPORT-McMoRan SULPHUR INC.
CONDENSED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,112 $ 21,293
Accounts receivable 20,943 33,739
Inventories 18,008 34,421
Prepaid expenses and other 9,863 5,982
-------- --------
Total current assets 74,926 95,435
Property, plant and equipment, net 102,567 109,833
Deferred tax asset 53,604 56,757
Other assets 13,384 11,008
-------- --------
Total assets $244,481 $273,033
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 25,447 $ 25,175
Current portion of reclamation
and mine shutdown reserves 16,193 4,656
-------- --------
Total current liabilities 41,640 29,831
Reclamation and mine shutdown reserves 48,934 67,518
Accrued postretirement and pension benefits 10,553 15,594
Other liabilities 46,175 45,693
Stockholders' equity 97,179 114,397
-------- --------
Total liabilities and stockholders' equity $244,481 $273,033
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 3
FREEPORT-McMoRan SULPHUR INC.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- --------- -------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Revenues $50,869 $ 50,554 $164,531 $ 158,304
Cost of sales:
Production and delivery 46,594 40,561 142,626 126,328
Depreciation and amortization 1,147 434,750 13,882 451,639
------- --------- -------- ---------
Total cost of sales 47,741 475,311 156,508 577,967
General and administrative expenses 2,605 1,674 7,979 5,508
------- --------- -------- ---------
Total costs and expenses 50,346 476,985 164,487 583,475
------- --------- -------- ---------
Operating income (loss) 523 (426,431) 44 (425,171)
Other income, net 404 - 1,110 -
------- --------- -------- ---------
Net income (loss)
before income taxes 927 (426,431) 1,154 (425,171)
Provision for income taxes (320) - (399) -
------- --------- -------- ---------
Net income (loss) $ 607 $(426,431) $ 755 $(425,171)
======= ========= ======== =========
Net income (loss) per share of common stock:
Basic $0.07 $(41.21) $0.08 $(41.09)
Diluted $0.06 $(41.21) $0.08 $(41.09)
Average common shares outstanding:
Basic 9,336 10,347 9,746 10,347
Diluted 9,367 10,347 9,802 10,347
PRO FORMA DATA
Net loss before income taxes
reported above $(426,431) $(425,171)
Pro forma benefit for income taxes 156,049 155,613
--------- ---------
Pro forma net loss $(270,382) $(269,558)
========= =========
Pro forma net loss per share $(26.13) $(26.05)
Pro forma average shares outstanding 10,347 10,347
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
FREEPORT-McMoRan SULPHUR INC.
STATEMENTS OF CASH FLOW (Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------
1998 1997
------- ---------
(In Thousands)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 755 $(425,171)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 13,882 451,639
Curtailment gain on Culberson pension and
postretirement liabilities (4,148) -
Reclamation and mine shutdown expenditures (6,801) (15,188)
Utilization of deferred tax asset 399 -
Other (3,434) (2,266)
(Increase) decrease in working capital:
Accounts receivable 12,871 14,671
Inventories 16,413 (3,262)
Prepaid expenses and other (1,126) (111)
Accounts payable and accrued liabilities (260) 522
------- ---------
Net cash provided by operating activities 28,551 20,834
------- ---------
Cash flow from investing activities:
Capital expenditures (5,730) (2,989)
Sale of assets 233 890
------- ---------
Net cash used in investing activities (5,497) (2,099)
------- ---------
Cash flow from financing activities:
Net distributions to PLP - (19,279)
Purchase of FSC common stock (18,271) -
Other 36 -
------- ---------
Net cash used in financing activities (18,235) (19,279)
Net increase (decrease) in cash and
cash equivalents 4,819 (544)
Cash and cash equivalents at
beginning of year 21,293 3,116
------- ---------
Cash and cash equivalents at end of period $26,112 $ 2,572
======= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 5
FREEPORT-McMoRan SULPHUR INC.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Background. Freeport-McMoRan Sulphur Inc. (FSC) became an
independent, publicly held company as of December 22, 1997, when
Phosphate Resource Partners Limited Partnership (PLP), formerly
Freeport-McMoRan Resource Partners, Limited Partnership,
contributed to FSC its sulphur business, including its 58.3
percent interest in its Main Pass sulphur and oil operations
(Main Pass), together with the 25.0 percent interest in Main Pass
previously owned by IMC Global Inc. (IGL), a joint venture
partner with PLP. PLP distributed 10,346,578 shares of FSC common
stock pro rata to its unitholders (the Distribution) in
connection with the merger of Freeport-McMoRan Inc. (FTX), the
former administrative managing general partner and majority owner
of PLP, into IGL (the Merger). FTX distributed the shares of FSC
common stock that it received from PLP to FTX stockholders on a
pro rata basis in connection with the Merger.
Basis of Presentation. FSC operated as an integral part of PLP
prior to the Distribution. For periods prior to the
Distribution, FSC's financial statements were prepared from the
books and records of PLP. FSC's investment in the Main Pass joint
venture is reflected using the proportionate consolidation method
in accordance with standard industry practice. No interest
expense was allocated to FSC as no interest costs were incurred
in the past by FSC and no debt previously recorded by PLP was
assumed by FSC. Intercompany balances between PLP and FSC related
to various general and administrative and similar charges which
were settled monthly. PLP is not a taxable entity and
historically did not provide income taxes on the results of
operations of FSC. Upon formation of FSC as a wholly owned
taxable subsidiary of PLP prior to being spun-off to PLP
unitholders, a deferred tax asset of $63.8 million was recognized
in 1997 to reflect the excess of tax over book basis in the
related assets. Unaudited pro forma income taxes for the third-
quarter and nine-month periods of 1997 are included in the
statements of operations as if FSC were a separate taxable entity
during those periods.
2. MERGER WITH McMoRan OIL & GAS CO.
On August 3, 1998, McMoRan Oil & Gas Co. (MOXY) and FSC announced
that they had signed a definitive agreement to combine their
operations. In the proposed transaction, a new holding company,
McMoRan Exploration Co. (MMR), would issue approximately 5.5
million MMR common shares in exchange for all of FSC's common
shares and approximately 8.6 million MMR common shares in
exchange for all of MOXY's common shares. FSC shareholders would
receive 0.625 MMR shares for each common share of FSC outstanding
and MOXY shareholders would receive 0.20 MMR shares for each
common share of MOXY outstanding. Immediately following the
transaction, MMR would have approximately 14.1 million common
shares outstanding that would be owned approximately 61 percent
by MOXY's existing common shareholders and approximately 39
percent by FSC's existing common shareholders. MMR's Board of
Directors and executive management will include current members
of the Board of Directors and executive management of both MOXY
and FSC. The transaction would be tax-free with respect to both
MOXY and FSC shareholders and will be reported on the basis of
purchase accounting, reflecting MOXY as the acquiring entity.
The completion of the transaction is subject to approval by MOXY
and FSC shareholders of record on October 2, 1998 at special
shareholder meetings scheduled for November 17, 1998.
3. EARNINGS PER SHARE
FSC adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share," in the fourth quarter of 1997
and has restated prior periods' earnings per share (EPS) data as
required by SFAS 128. Basic net income per share of common stock
for the 1998 periods was calculated by dividing net income
applicable to common stock by the weighted-average number of
common shares outstanding during the periods. Diluted net income
per share of common stock was calculated by dividing net income
applicable to common stock by the weighted-average number of
common shares outstanding during the period plus the net effect
of dilutive stock options. Dilutive stock options represented
approximately 31,000 shares in the third quarter of 1998 and
approximately 56,000 shares in the nine-month 1998 period.
Options to purchase approximately 608,400 shares and 221,000
shares of common stock at average exercise prices of $12.10 per
share and $13.13 per share, respectively, were outstanding during
the third-quarter and nine-month periods of 1998, respectively,
but were not included in the computation of diluted net income
per share of common stock. These options were excluded because
their exercise prices were greater than the average market price
of the common stock during the respective periods.
<PAGE> 6
Basic and diluted net income per share of common stock for
the 1997 periods were calculated by dividing net income for the
applicable period by the number of shares distributed on December
22, 1997 (10,346,578 shares). FSC had no options outstanding
prior to December 23, 1997.
4. FINANCIAL CONTRACTS
FSC has entered into financial contracts to manage certain risks
resulting from fluctuations in the price of natural gas, which
comprises a significant portion of its production costs, by
creating offsetting exposures. FSC views all of its financial
contracts as hedges for its future purchases of natural gas
consumed in its operations. Gains or losses on the contracts are
recognized with the hedged transaction. Also, gains or losses
are recognized if the hedged transaction is no longer expected to
occur or if deferral criteria are not met. FSC monitors its
credit risk on an ongoing basis and considers this risk to be
minimal because its contracts are with a financially strong
counterparty.
In June 1998, the Financial Accounting Standards Board
issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activity," which establishes accounting and reporting
standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999 with
earlier application permitted. FSC is currently assessing the
impact that adoption of SFAS 133 would have on its current
accounting for its financial contracts and other derivative
instruments, and has not yet determined the timing or method of
adoption of SFAS 133.
----------------------
Remarks
The information furnished herein should be read in conjunction
with FSC's financial statements contained in its 1997 Annual
Report on Form 10-K. The information furnished herein reflects
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.
<PAGE> 7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
Freeport-McMoRan Sulphur Inc.:
We have reviewed the accompanying condensed balance sheet of
Freeport-McMoRan Sulphur Inc. (a Delaware corporation) as of
September 30, 1998, and the related statements of operations for
the three and nine-month periods ended September 30, 1998 and
1997, and the statements of cash flow for the nine-month periods
ended September 30, 1998 and 1997 for Freeport-McMoRan Sulphur
Inc. and its predecessor. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the balance sheet of Freeport-
McMoRan Sulphur Inc. as of December 31, 1997, and the related
statements of operations, stockholders' equity and cash flow for
the year then ended (not presented herein), and, in our report
dated January 20, 1998, we expressed an unqualified opinion on
those financial statements. In our opinion, the information set
forth in the accompanying condensed balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
October 20, 1998
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
As discussed in Note 1, Freeport-McMoRan Sulphur Inc. (FSC)
became an independent, publicly held company as of December 22,
1997 and prior to that date operated as an integral part of
Phosphate Resource Partners Limited Partnership (PLP). FSC's
1998 financial results reflect the operating results of the
assets previously owned by PLP and the 25.0 percent interest in
the Main Pass sulphur and oil joint venture (Main Pass) acquired
from IMC Global Inc. (IGL). FSC's 1997 financial results reflect
only the operating results of the assets previously owned by PLP.
FSC's sulphur business consists of the sale of sulphur, the
marketing of logistics services, and the operation of a sulphur
mine and a logistics system consisting of sulphur transportation
and terminaling assets. FSC's sulphur operations include the
Main Pass mine located offshore Louisiana in the Gulf of Mexico,
five sulphur terminals located across the Gulf Coast, and marine
and rail transportation assets. The oil operations consist of
FSC's interest in the Main Pass operations, where crude oil is
produced in conjunction with FSC's sulphur mining operations.
On June 30, 1998, FSC announced plans to permanently
discontinue sulphur production at its Culberson sulphur mine
because sulphur prices had fallen to a level at which it was no
longer economically feasible to operate the mine. As a result,
FSC recorded net charges totaling $6.0 million ($3.9 million to
net income or $0.40 per share) in the second quarter of 1998,
including charges of $9.5 million ($6.2 million to net income) to
depreciation and amortization expense for a writedown of the
Culberson mine assets and $0.6 million ($0.4 million to net
income) to production costs for other closure-related costs,
partially offset by a $4.1 million benefit ($2.7 million to net
income) to production costs for a related reduction in pension
and postretirement benefit liabilities.
RECENT DEVELOPMENTS
Sulphur production at Main Pass averaged 3,800 long tons per day
and 4,200 long tons per day for the three and nine-month periods
ended September 30, 1998, respectively, compared with 5,200 long
tons per day for the year ended December 31, 1997. In an effort
to replace sulphur production because of poor well performance
and wells lost as a result of Hurricane Georges, as discussed
below, and restore production to optimum levels given the
curtailment at the Culberson mine, FSC has increased drilling
activities during 1998 and plans to continue efforts to increase
Main Pass production in 1999.
In late September 1998, FSC shut down all Main Pass drilling
and production operations in accordance with standard safety
procedures in response to significant adverse weather conditions
caused by Hurricane Georges. After three days of shutdown, FSC
restarted production, which involved re-heating the portion of
the sulphur deposit being produced prior to the shutdown. Nine
previously producing sulphur wells will require re-drilling. As
a result, production levels will decrease and unit production
costs will increase for the fourth quarter of 1998 and possibly
the first half of 1999 compared with the first nine months of
1998. At the end of October 1998 Main Pass production totaled
approximately 2,400 long tons per day.
In addition to its two sulphur drilling rigs at Main Pass,
FSC has contracted a third-party drilling rig to help restore
production to optimum levels. In the interim, FSC will meet
customer requirements from available Main Pass production,
inventories, increased purchases of recovered sulphur and
extending production of the Culberson mine until its final
shutdown. In response to a weak sulphur market, FSC curtailed
production at its Culberson mine in early 1998 and announced on
June 30, 1998 that it planned to permanently cease operations
at the mine during the third quarter of 1998. However, as a result
of decreased production at Main Pass, FSC now expects to operate
Culberson at reduced rates through at least the fourth quarter of
1998.
FSC has been seeking an increase in sulphur contract prices
compared with market prices in the first nine months of 1998, and
contract prices have generally settled at a $3.00 per ton
increase for the fourth quarter of 1998. Approximately 50
percent of FSC's fourth-quarter sulphur sales will benefit from
the price increase, with full benefit for the price increase
expected to be realized in the first quarter of 1999.
In August 1998, FSC and McMoRan Oil & Gas Co. (MOXY)
announced that they had signed a definitive agreement to combine
their operations. For further discussion see Note 2 to the
financial statements.
<PAGE> 9
In 1973, the United States government made a finding under
the U.S. Antidumping Act of 1921 (the "Antidumping Act") that
certain Canadian producers of elemental sulphur were dumping
sulphur into the U.S. sulphur market in violation of the
Antidumping Act and imposed certain limitations on those
producers. In the intervening period, many of the Canadian
producers that were originally subject to this finding established
that they were no longer selling sulphur in violation of the
Antidumping Act and had the application of the finding revoked
as to them. Under a recent change in law, all antidumping
findings (including the 1973 finding) are now subject to a regular
five-year "sunset review." The U.S. International Trade Commission
(the "ITC") is currently reviewing the 1973 finding and, on
November 5, 1998, voted to expedite its review, which will be
completed by the end of 1998, unless extended. FSC has filed an
opposition to revocation of the 1973 finding, detailing the
potential adverse impact that FSC believes would result if the
finding were revoked. If the ITC were to revoke the 1973 finding,
which FSC does not expect, Canadian sulphur exporters could be
subjected to a future finding and imposition of penalties under
the Antidumping Act if they resumed dumping sulphur into the U.S.
market. No assurance can be given, however, as to the outcome of
the current or any future ITC proceeding.
RESULTS OF OPERATIONS
Summary comparative results for the third-quarter and nine-month
periods follow (dollar amounts in thousands, except
realizations):
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------- ----------------------
1998 1997(a) 1998 1997(a)
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sulphur $47,371 $43,906 $ 149,051 $ 135,328
Oil 3,498 6,648 15,480 22,976
------- ------- --------- ---------
Total revenues $50,869 $50,554 $ 164,531 $ 158,304
======= ======= ========= =========
Operating income (loss):
Sulphur $ (340) $(426,187)b $ (6,296)c $(429,152)b
Oil 863 (244) 6,340 3,981
------ --------- --------- ---------
Total operating income
(loss) $ 523 $(426,431) $ 44 $(425,171)
====== ========= ========= =========
Sulphur sales (long tons) 782,000 690,100 2,460,000 2,167,000
Sulphur average realized
price per long ton $59.92 $61.75 $59.96 $60.75
Oil sales (barrels) 315,100 380,100 1,222,700 1,247,600
Oil average realized
price per barrel $11.04 $17.44 $12.40 $18.37
</TABLE>
a. Results for 1997 represent the operating results of the assets
previously owned by PLP that were transferred to FSC on
December 22, 1997. These results do not include the 25.0
percent interest in Main Pass previously owned by IGL prior to
December 22, 1997 when it was contributed to FSC.
b. Includes charges totaling $425.4 million for impairment of
sulphur assets.
c. Includes net charges totaling $6.0 million for the Culberson
mine shutdown.
Sulphur. Sulphur operations reported operating losses of $0.3
million in the third quarter of 1998 and $6.3 million in the
nine-month 1998 period compared with operating losses of $426.2
million for the 1997 quarter and $429.2 million for the 1997
nine-month period. The 1998 nine-month period includes net
charges of $6.0 million for the Culberson shutdown discussed
above and the 1997 periods include charges totaling $425.4
million for impairment of sulphur assets.
Average realized sulphur prices for the 1998 periods were
lower than the 1997 periods, while sulphur sales volumes rose
because of FSC's additional 25.0 percent interest acquired from
IGL and an increase in recovered sulphur purchases partially
offset by lower production at the Culberson mine. FSC has a
long-term supply contract with IMC-Agrico Company (a joint
venture partnership between IGL and PLP), which extends as long
as IMC-Agrico Company's operations have a requirement for
sulphur. As a percentage of total FSC sulphur sales, sales to
IMC-Agrico Company totaled 72 percent in the 1998 periods, 68
percent in the 1997 third quarter and 64 percent in the 1997
nine-month period.
Overall average sulphur unit production costs, excluding a
$3.5 million net benefit in the second quarter of 1998 related to
the Culberson shutdown, were higher in the 1998 periods primarily
because of lower production and higher drilling costs at Main
Pass caused by poor well performance and Hurricane Georges in the
Gulf of Mexico. Depreciation and amortization expense in the 1998
nine-month period includes $9.5 million to write off the
Culberson mine assets, while the 1997 periods include charges for
<PAGE> 10
impairment of sulphur assets. Unit depreciation rates are
significantly lower in 1998 following the third-quarter 1997
impairment. Excluding the write off of Culberson assets and the
impairment, depreciation and amortization expense was $4.9
million lower in the third quarter of 1998 compared with the
third quarter of 1997 and $13.6 million lower in the first nine
months of 1998 compared with the 1997 period.
In April 1998, FSC entered into contracts to purchase
450,000 million british thermal units (mmbtu's) of natural gas
per month (approximately 75 percent of FSC's expected Main Pass
natural gas purchases) for $2.175 per mmbtu through December
1998. Pursuant to the terms of the contracts, the supplier has
the option to put 450,000 mmbtu's per month to FSC at a price of
$2.175 per mmbtu during 1999. As of September 30, 1998, these
contracts had a fair value of approximately $0.1 million.
Oil. Main Pass operating income (loss) from oil operations
totaled $0.9 million in the third quarter of 1998 and $6.3
million for the nine-month 1998 period, compared with $(0.2)
million in the third quarter of 1997 and $4.0 million in the
nine-month 1997 period. Lower sales volumes in the 1998 periods
reflect a natural production decline, the effects of recent
storms in the Gulf of Mexico and the new royalty discussed below,
partially offset by FSC's additional 25.0 percent interest
acquired from IGL. Gross oil production averaged 6,000 barrels
per day in the third quarter of 1998 and 8,500 barrels per day in
the third quarter of 1997. A 37 percent decline in third-quarter
1998 average realized prices compared with third-quarter 1997 and
a 32 percent decline in average realized prices for the nine-
month 1998 period compared with the 1997 period were the primary
reasons for 47 percent and 33 percent declines, respectively, in
1998 revenues compared with the year-ago periods. Quarterly oil
sales volumes are expected to continue to decline as the reserves
continue to deplete over a period expected to extend through the
year 2002. FSC's share of 1998 oil sales is expected to
approximate 1.6 million barrels, consistent with 1997. Revised
unit depreciation rates in 1998 resulted in a $3.3 million
decrease in third-quarter 1998 depreciation expense compared with
the 1997 quarter and an $8.2 million decrease in nine-month 1998
depreciation expense compared with the 1997 nine-month period.
The original oil and gas lease holder of the oil reserves at
Main Pass owns a royalty equal to 25 percent of revenues (less
transportation costs) from oil production, limited to 50 percent
of net operating revenue, after 36 million barrels of oil have
been produced at Main Pass. FSC exceeded 36 million barrels of
cumulative oil production in June 1998 and, as a result, is now
required to pay royalties to the original lease holder at the
rate of 50 percent of net operating revenue from Main Pass oil
production.
General and administrative expenses were higher in the 1998
periods compared with the 1997 periods primarily because of FSC's
increased interest in Main Pass and certain employee benefit
costs.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities totaled $28.6 million
for the first nine months of 1998, compared with $20.8 million
for the first nine months of 1997. A reduction in sulphur
inventories and lower reclamation and mine shutdown expenditures
in 1998 were the primary reasons for higher net cash provided by
operating activities in the 1998 period compared with the 1997
period.
Capital expenditures, which primarily relate to maintaining
current levels of production, totaled $5.7 million for the nine-
month 1998 period and $3.0 million for the nine-month 1997
period. Capital expenditures for the fourth quarter of 1998 are
expected to total approximately $5.5 million, primarily for
additional drilling activities to replace those wells no longer
producing after Hurricane Georges.
As part of its open market share purchase program, in the
third quarter of 1998 FSC purchased 953,900 shares of its common
stock for $9.4 million, an average of $9.88 per share. As of
September 10, 1998, FSC had completed its open market share
purchase program acquiring 1.6 million shares of its common stock
for $18.3 million, an average of $11.42 per share.
Based on current projections, management believes that FSC
will generate sufficient cash flow from operations to fund its
ongoing working capital requirements, reclamation costs and
projected capital expenditures for the foreseeable future.
Additionally, in December 1997 FSC established a $100 million
revolving credit facility to further enhance its liquidity and
financial flexibility. No amounts were outstanding under this
facility as of October 19, 1998. FSC's proposed merger with MOXY
will not have any impact on FSC's availability under this
facility. As of September 30, 1998, FSC held cash balances
totaling $26.1 million which are available to fund working
capital requirements, reclamation costs, projected capital
expenditures and other growth opportunities that FSC may pursue
in the future.
<PAGE> 11
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 (Y2K) issue is the result of computerized systems
being written to store and process the year portion of dates
using two digits rather than four. Date-aware systems (i.e., any
system or component that performs calculations, comparisons,
sequencing, or other operations involving dates) may fail or
produce erroneous results on or before January 1, 2000 because
the year 2000 will be interpreted as the year 1900.
FSC's State of Readiness. FSC has been pursuing a strategy to
ensure all its significant computer systems and computer
controlled plant and equipment will be able to process dates from
and after January 1, 2000, including leap years, without critical
systems failure (Y2K Compliance or Y2K Compliant). Computerized
systems are integral to the operations of FSC, particularly for
plant and equipment process control at the Main Pass mine.
Certain computerized business systems and related services are
provided by FM Services Company (FMS), which is responsible for
ensuring Y2K Compliance for the systems it manages. FMS has
separately prepared a plan for its Y2K Compliance. Progress of
the Y2K plan is being monitored by FSC executive management and
reported to the Audit Committee of the FSC Board of Directors. In
addition, the independent accounting firm functioning as FSC's
internal auditors is assisting management in monitoring the
progress of the Y2K plan. FSC believes all critical components
of the plan are on schedule for completion by the end of the
second quarter of 1999.
The majority of computerized date-sensitive hardware and
software components used by FSC or FMS are covered by maintenance
contracts with the vendors who originally implemented them.
Almost all of these vendors have already been contacted regarding
Y2K Compliance of their products. Where necessary, software
modifications to ensure compliance will be provided by the
appropriate vendors under their maintenance contracts.
Information Technology (IT) Systems - The bulk of FSC business
systems have been determined to be Y2K Compliant, with
modification and testing work completed earlier in 1998. The
major remaining FSC system that is currently not fully Y2K
Compliant is its accounting system. By the end of 1998, FMS will
install, for an affiliated entity, a Y2K Compliant version of the
same accounting system used by FSC. This will allow any
installation issues to be identified and rectified prior to
installation of this system at FSC in the second quarter of 1999.
FMS also provides payroll and cash disbursements processing for
FSC. FMS has implemented the Y2K version of the payroll
interface software and will conduct Y2K Compliance testing of
third party-provided payroll services in early 1999. FMS will
also conduct Y2K testing of the interfaces to its primary bank
and bank-provided computerized disbursement services in early
1999 after the bank has completed its internal Y2K Compliance
work.
Non-IT Systems - With the exception of the Main Pass production
facilities, FSC is not heavily reliant on computerized process
control systems. FSC has contracted with a third party to
conduct a Y2K Compliance review for the Main Pass process control
system. This work will be completed in the fourth quarter of
1998. Based on the company's own internal review, FSC does not
believe that any significant problems will be detected. However,
the results of this third-party review will be used to determine
the need, if any, for subsequent efforts to address compliance
problems.
Third Party Risks - FSC computer systems are not widely
integrated with the systems of its suppliers or customers. The
primary potential Y2K risk attributable to third parties would be
from a disruption of FSC operations due to a failure by a
supplier to meet its contractual obligations for services and/or
materials (rather than a failure associated with integrated
computer systems). Every FSC supplier has been contacted
regarding Y2K Compliance, and effective August 1, 1998, Y2K
Compliance requirements have been included in all FSC purchasing
contracts. An assessment of Y2K third-party risk is scheduled
for completion in the fourth quarter of 1998. Based on
preliminary work performed to date, FSC does not believe overall
risk from third parties is significant.
The Costs to Address FSC's Y2K Issues. Expenditures for the
necessary modifications required during 1998 and 1999 will
largely be funded by routine software and hardware maintenance
fees paid by FSC or FMS to the related software providers. Based
on current information, FSC believes that the cost of Y2K
Compliance will not be material and will be provided for through
its normal operating and capital budgets. If the software
modifications and conversions referred to above are not made, or
are delayed, the Y2K issue could have a material impact on FSC
operations. Additionally, current cost estimates are based on
management's best estimates, which are derived using numerous
assumptions of future events including
<PAGE> 12
the continued availability of certain resources, third party
modification plans and other factors. There also can be no
assurance that the systems of other companies will be converted
on a timely basis or that failure to convert will not have a
material adverse effect on FSC.
The Risks of FSC's Y2K Issues. The Y2K risk that could have the
largest potential business impact on FSC would probably be a
short-term shutdown of Main Pass operations caused by a
disruption of key materials from suppliers, especially natural
gas. FSC is addressing this potential risk with its natural gas
supplier and pipeline company and expects to have a definitive
assessment of this risk in the fourth quarter of 1998.
FSC's Contingency Plans. Companies, including FSC, cannot make
Y2K Compliance certifications because the ability of any
organization's systems to operate reliably after midnight on
December 31, 1999 is dependent upon factors that may be outside
the control of, or unknown to, the organization. In Securities
and Exchange Commission (SEC) Staff Legal Bulletin No. 5, the SEC
stated that "it is not, and will not, be possible for any single
entity or collective enterprise to represent that it has achieved
complete Year 2000 Compliance and thus to guarantee its
remediation efforts. The problem is simply too complex for such
a claim to have legitimacy. Efforts to solve Year 2000 problems
are best described as 'risk mitigation'."
Although FSC believes the likelihood of any or all of the
above risks occurring to be low, specific contingency plans are
being developed to address certain risk areas. The schedule for
contingency plan development has a projected completion date of
March 1999. While there can be no assurances that FSC will not
be materially adversely affected by Y2K problems, it is committed
to ensuring that it is fully Y2K ready and believes its plans
adequately address the above-mentioned risks.
CAUTIONARY STATEMENT
Management's discussion and analysis of financial condition and
results of operations contains forward-looking statements,
including without limitation, FSC's reserve expectations,
operating costs, the availability of financing, Y2K Compliance,
the ability to satisfy future cash obligations and environmental
costs. Important factors that may cause future results to differ
from these projections include the reliance on IMC-Agrico Company
as a continuing customer, the seasonality and volatility of
sulphur markets, competition and environmental issues as
described in more detail under the heading "Cautionary
Statements" in FSC's Form 10-K for the year ended December 31,
1997.
--------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Daniel W. Krasner vs. James R. Moffett; Rene L. Latiolais; C.
Donald Whitmire, Jr.; J. Terrell Brown; Thomas D. Clark, Jr.;
B.M. Rankin, Jr.; Richard C. Adkerson; Robert M. Wohleber;
Freeport-McMoRan Sulphur Inc. and McMoRan Oil & Gas Co., Civ.
Act. No. 16729-NC (Del. Ch. Filed Oct. 22, 1998).
On October 22, 1998, one Freeport-McMoRan Sulphur Inc. (FSC)
stockholder filed a purported class action lawsuit in Delaware
alleging that FSC's directors breached their fiduciary duty to
FSC stockholders by signing the agreement to merge with McMoRan
Oil & Gas Co. ("MOXY"). The plaintiff contends that the merger
transaction is structured to give preference to MOXY stockholders
and fails to recognize the true value of FSC. The plaintiff
claims that the directors failed to take certain actions that
were necessary to obtain the true value of FSC such as auctioning
the company to the highest bidder or evaluating FSC's worth as a
merger candidate. The plaintiff also claims that MOXY knowingly
aided and abetted the breaches of fiduciary duty committed by the
other defendants. The plaintiff seeks injunctive relief and
monetary damages. FSC intends to vigorously defend this action.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits to this report are listed in the
Exhibit Index beginning on Page E-1 hereof.
(b) During the quarter for which this report is filed,
the registrant filed one Current Report on Form 8-
K dated August 3, 1998 reporting information under
Item 5.
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
FREEPORT-McMoRan SULPHUR INC.
By:/s/ C. Donald Whitmire, Jr.
-----------------------------
C. Donald Whitmire, Jr.
Vice President and
Controller-Financial Reporting
(authorized signatory and
Principal Accounting Officer)
Date: November 12, 1998
<PAGE> 15
Freeport-McMoRan Sulphur Inc.
EXHIBIT INDEX
Number Description
- ------ ----------------------------------------------------------
2.1 Contribution and Distribution Agreement by and among
Freeport-McMoRan Sulphur Inc. (the Company), Freeport-
McMoRan Inc. (FTX) and Freeport-McMoRan Resource Partners,
Limited Partnership (FRP), dated as of August 26, 1997(1)
2.2 Assignment and Assumption Agreement by and between IMC
Global Inc. (IGL) and FRP dated as of December 22, 1997(2)
3.1 Certificate of Incorporation of the Company(1)
3.2 By-laws of the Company(1)
4.1 Form of the Company's Common Stock certificate(1)
4.2 Stockholder Protection Rights Agreement between the Company
and Mellon Securities Trust Company, as Rights Agent(3)
4.3 Amendment No. 1 dated August 1, 1998 to the Stockholder
Protection Rights Agreement dated as of December 17, 1998
between the Company and Mellon Securities Trust Company,
as Rights Agent.
10.1 Employee Benefits Agreement by and between FTX and the
Company(2)
10.2 Asset Sale Agreement for Main Pass Block 299 between FRP
and Chevron USA, Inc. dated as of May 2, 1990(1)
10.3 Main Pass 299 Sulphur and Salt Lease, effective May 1,
1988(1)
10.4 Joint Operating Agreement by and between FRP, IMC-
Fertilizer, Inc. and Felmont Oil Corporation, dated
June 5, 1990(1)
10.5 Joint Operating Agreement by and between FRP, IMC-
Fertilizer, Inc. and Felmont Oil Corporation, dated May
1, 1988(1)
10.6 Agreement to Coordinate Operating Agreements by and
between FRP, IMC-Fertilizer and Felmont Oil Corporation,
dated May 1, 1988(1)
10.7 Asset Purchase Agreement between FRP and Pennzoil Company
dated as of October 22, 1994 (the Asset Purchase
Agreement)(1)
10.8 Amendment No. 1 to the Asset Purchase Agreement dated as
of January 3, 1995(1)
10.9 Agreement for Sulphur Supply, as amended, dated as of July
1, 1993 among FRP, IMC Fertilizerand IMC-Agrico Company
(the Sulphur Supply Agreement)(1)(4)
10.10 Side letter with IGL regarding the Sulphur Supply
Agreement(1)
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)(1)
10.12 Amendment Number 1 to the Processing Agreement(1)
10.13 Amendment Number 2 to the Processing Agreement(1)
<PAGE> E-1
10.14 Services Agreement dated as of December 23, 1997 between
the Company and FM Services Company (FMS)(2)
10.15 Credit Agreement dated as of December 12, 1997 among the
Company, as borrower, the financial institutions party
thereto, the Chase Manhattan Bank, as administrative agent
and documentary agent, and Hibernia National Bank, as co-
agent(2)
Executive Compensation Plans and Arrangements (Exhibits 10.16
through 10.19)
10.16 1997 Stock Option Plan for Non-Employee Directors(1)
10.17 Company Adjusted Stock Award Plan(1)
10.18 Freeport Sulphur 1997 Stock Option Plan(1)
10.19 Letter Agreement dated December 22, 1997 between FMS and
Rene L. Latiolais(2)
15.1 Letter dated October 20, 1998 from Arthur Andersen LLP
regarding unaudited interim financial statements.
27.1 Financial Data Schedule
----------------------
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-40375) filed
with the Securities and Exchange Commission on November
17, 1997.
(2) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference from the Company's Current
Report on Form 8-K dated December 16, 1997.
(4) Portions of this Exhibit have been omitted pursuant to a
confidentiality request filed with the Securities and
Exchange Commission in connection with the filing of the
Registration Statement on Form S-1.
<PAGE> E-2
Exhibit 4.3
Amendment No. 1
to Stockholder Protection Rights Agreement
of
Freeport-McMoRan Sulphur Inc.
This Amendment No. 1 (the "Amendment") to the Stockholder
Protection Rights Agreement between Freeport-McMoRan Sulphur Inc.
(the "Company") and Mellon Securities Trust Company, as Rights
Agent (the "Rights Agent"), dated as of December 17, 1997 by and
between the Company and the Rights Agent (the "Rights Agreement")
is dated and effective as of August 1, 1998.
W I T N E S S E T H
WHEREAS, Section 5.4 of the Rights Agreement grants the
Board of Directors of the Company the exclusive power and
authority to amend the Rights Agreement;
WHEREAS, the Company intends to enter into an Agreement and
Plan of Mergers ("Merger Agreement") with McMoRan Oil & Gas Co.
("MOXY"), McMoRan Exploration Co. ("Parent"), and MOXY LLC and
Brimstone LLC, (collectively, the "Merger Subs"), both Delaware
limited liability companies wholly owned by the Parent.
WHEREAS, the Company's Board of Directors desires to amend
the Rights Agreement to permit MOXY, the Parent, the Merger Subs,
and the Company to enter into and consummate the transactions
contemplated by the Merger Agreement without triggering the
rights under the Rights Agreement.
NOW, THEREFORE, in consideration of the covenants and
agreements contained herein, the parties agree as follows:
1. The last sentence of the definition of "Acquiring
Person" in Section 1.1 of the Rights Agreement is hereby amended
and restated so that said sentence shall read in its entirety as
follows:
In addition, none of (i) the Company, (ii)
any wholly-owned Subsidiary of the Company,
(iii) any employee benefit plan of the
Company, or (iv) McMoRan Oil & Gas Co., a
Delaware corporation, McMoRan Exploration
Co., a Delaware corporation, MOXY LLC, a
Delaware limited liability company, and
Brimstone LLC, a Delaware limited liability
company, and their respective Subsidiaries,
Affiliates, and Associates (hereinafter
collectively the "MOXY Parties") shall be
deemed to be an Acquiring Person.
2. The definition of the "Beneficial Owner," and to have
"Beneficial Ownership" of, and to "Beneficially Own" in Section
1.1 of the Rights Agreement is hereby amended by adding an
additional paragraph at the end of the definition reading as
follows:
Notwithstanding anything in this definition
of the "Beneficial Owner," and to have
"Beneficial Ownership" of, and to
"Beneficially Own" to the contrary, none of
the MOXY Parties, as defined in the last
sentence of the definition of "Acquiring
Person", shall be deemed to be the Beneficial
Owner of, nor to have Beneficial Ownership
of, nor to Beneficially Own any Common Stock
solely by reason of the approval, execution
or delivery by any party thereto, or by
reason of the amendment or consummation of,
an Agreement and Plan of Mergers by and among
the Company and the MOXY Parties dated August
1, 1998 (the "MOXY Merger Agreement").
3. Section 5.2 of the Rights Agreement is hereby amended
so as to read in its entirety as follows:
5.2 Expiration. The Rights and this
Agreement shall expire at the earlier of (a)
the Effective Date of the MOXY Merger
Agreement, as defined in the definition of
"Beneficial Owner," and to have "Beneficial
Ownership" of, and to "Beneficially Own" in
Section 1.1 hereof, or (b) the Expiration
Time and no Person shall have any rights
pursuant to this Agreement or any Right after
such date, except in the case of clause (b),
if the Rights are exchanged or redeemed, as
provided in Section 3.1(c), 3.1(d), 3.1(e),
3.2 or 5.1 hereof.
4. The Rights Agreement is hereby further amended by
adding at the end a new Section 5.19 reading as follows:
5.19 MOXY Merger Agreement. Notwithstanding
anything in this Agreement to the contrary,
none of the approval, execution, delivery,
amendment, or consummation of the MOXY Merger
Agreement, as defined in the definition of
"Beneficial Owner," and to have "Beneficial
Ownership" of and to "Beneficially Own," or
the transactions contemplated thereby or in
connection therewith, shall cause (a) any of
the MOXY Parties, as defined in the
definition of "Acquiring Person", to become
an Acquiring Person, (b) a Stock Acquisition
Date to occur, or (c) a Separation Time to
occur. Any Separation Time that might or
could otherwise occur related to the MOXY
Merger Agreement or the transactions
contemplated thereby or in connection
therewith under this Agreement shall be
indefinitely deferred until such time as the
Board of Directors may otherwise determine.
5. All capitalized terms used herein but not otherwise
defined herein shall have the meanings ascribed to them in the
Rights Agreement.
6. Except as specifically amended by this Amendment, the
Rights Agreement shall remain in full force and effect.
7. Any reference to "this Agreement" or "the Rights
Agreement" shall be deemed to be a reference to the Rights
Agreement as amended hereby.
8. This Amendment, all rights hereunder and provisions
hereof, shall be governed by, and construed in accordance with,
the laws of the State of Delaware without giving effect to
principles of conflict of laws.
9. This Amendment may be executed by the parties in one or
more counterparts, all of which shall be deemed an original, but
all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Amendment effective as of the day and year first above
written.
Freeport-McMoRan Sulphur Inc.
Attest:
By:/s/Michael C. Kilanowski, Jr. By: /s/Robert M. Wohleber
----------------------------- --------------------------
Michael C. Kilanowski, Jr. Robert M. Wohleber
Secretary President and Chief Executive Officer
MELLON SECURITIES TRUST COMPANY
Attest:
By: /s/James S. McNellage By: /s/Nathan L. Hill
------------------------- ------------------------
Name:James S. McNellage Name:Nathan L. Hill
Title:Assistant Vice President Title:Assistant Vice President
Exhibit 15.1
October 20, 1998
Freeport-McMoRan Sulphur Inc.
1615 Poydras St.
New Orleans, LA 70112
Gentlemen,
We are aware that Freeport-McMoRan Sulphur Inc. has incorporated
by reference in its previously filed Registration Statement on
Form S-8 (File No.333-44449) its Form 10-Q for the quarter ended
September 30, 1998, which includes our report dated October 20,
1998 covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities
Act of 1933 (the Act), this report is not considered a part of
the registration statement prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Freeport-McMoRan Sulphur Inc. unaudited financial statements at September
30, 1998 and for the nine months then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 26,112
<SECURITIES> 0
<RECEIVABLES> 17,466
<ALLOWANCES> 0
<INVENTORY> 18,008
<CURRENT-ASSETS> 74,926
<PP&E> 847,033
<DEPRECIATION> 744,466
<TOTAL-ASSETS> 244,481
<CURRENT-LIABILITIES> 41,640
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 97,075
<TOTAL-LIABILITY-AND-EQUITY> 244,481
<SALES> 164,531
<TOTAL-REVENUES> 164,531
<CGS> 156,508
<TOTAL-COSTS> 156,508
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,154
<INCOME-TAX> 399
<INCOME-CONTINUING> 755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 755
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
