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