<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 33-52493
PROSPECTUS October 13, 1994
9,700,000
TERRA INDUSTRIES INC.
LOGO
COMMON SHARES
LOGO
All common shares, no par value (the "Common Shares"), offered hereby are
being sold by Terra Industries Inc. ("Terra" or the "Company"). The Company
will close this offering simultaneously with the consummation of its
acquisition of Agricultural Minerals and Chemicals, Inc. and the proceeds of
this offering will be used to finance, in part, such acquisition. Minorco
(U.S.A.) Inc. has agreed with the Underwriters that it or an affiliate will
purchase directly from the Underwriters 5.4 million or approximately 55.7% of
the Common Shares offered hereby at a price equal to the Price to Public less
the Underwriting Discount. The Common Shares are listed on the New York Stock
Exchange and the Toronto Stock Exchange under the symbol "TRA". On October 13,
1994, the last reported sale price of the Common Shares as reported on the New
York Stock Exchange Composite Tape was $12.375 per share.
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON SHARES OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(/1/) DISCOUNT(/1/)(/2/) COMPANY(/3/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $12.25 $0.53 $11.72
- -------------------------------------------------------------------------------
Total(/4/)........................ $115,963,000 $2,279,000 $113,684,000
</TABLE>
- -------------------------------------------------------------------------------
(1) Minorco (U.S.A.) Inc. or an affiliate will pay the Underwriters the Price
to Public less the Underwriting Discount for the 5.4 million Common Shares
it has agreed to purchase.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,097,000.
(4) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
650,000 Common Shares on the same terms as set forth above to cover over-
allotments, if any. If the option is exercised in full, the Price to
Public, Underwriting Discount and Proceeds to Company will be
$123,925,500, $2,623,500 and $121,302,000, respectively. See
"Underwriting."
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by the Underwriters, subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and
reject orders in whole or in part. It is expected that delivery of the
certificates for the Common Shares will be made in New York, New York on or
about October 20, 1994.
S.G.WARBURG & CO. INC.
<PAGE>
[MAP APPEARS HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON SHARES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and consolidated financial
statements (and notes thereto) included elsewhere or incorporated by reference
in this Prospectus. Except as otherwise noted, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." Except as otherwise indicated, all financial information is
presented on the basis of generally accepted accounting principles. Unless
otherwise referred to herein or the context otherwise requires, references to
the "Company" or "Terra" shall mean Terra Industries Inc., including, where the
context so requires, its direct and indirect subsidiaries. Terms defined in
this Summary shall have the same meanings when used elsewhere in this
Prospectus. Prospective investors are urged to read this Prospectus in its
entirety. See "Investment Considerations" for a discussion of certain factors
that should be considered carefully in evaluating an investment in the Common
Shares.
THE COMPANY
The Company is a leading producer of nitrogen fertilizer and marketer of
fertilizer, crop protection products and seed. The Company recently announced
that it has entered into an agreement to acquire Agricultural Minerals and
Chemicals Inc., a Delaware corporation ("AMCI"), a leading producer of nitrogen
fertilizer and methanol. The Company will close this offering simultaneously
with the consummation of the acquisition of AMCI and the proceeds of this
offering will be used to finance, in part, such acquisition. See "The
Acquisition."
After giving effect to the acquisition of AMCI, the Company will be the third
largest producer of anhydrous ammonia and one of the two largest producers of
nitrogen solutions in the United States and Canada. Nitrogen fertilizer is a
basic crop nutrient which is applied seasonally by farmers to improve crop
yield and quality. Nitrogen fertilizer is produced by combining gaseous
nitrogen with hydrogen to form anhydrous ammonia, the simplest form of nitrogen
fertilizer, which can be further processed into other fertilizer products such
as urea and nitrogen solutions. The Company presently operates three nitrogen
fertilizer facilities and believes that, with the addition of AMCI's two
nitrogen fertilizer facilities, it will be among the most efficient nitrogen
fertilizer manufacturers in the markets it serves. The Company also believes
that it will benefit from favorable transportation logistics and other
operating synergies and current prices in the nitrogen fertilizer industry,
which is operating near capacity.
Through the AMCI acquisition, the Company will also substantially increase
its participation in the methanol production industry. It will have
approximately 320 million gallons per year of methanol production capacity,
representing approximately 16% of the total United States rated capacity.
AMCI's methanol facility in Beaumont, Texas is the largest such facility in the
U.S. Methanol is used primarily as a feedstock in the production of other
chemicals such as formaldehyde, acetic acid and chemicals used in the building
products industry, and is also a feedstock in MTBE, an additive in oxygenated
gasoline. Demand in the United States for oxygenated gasoline has been growing
as a result of current federally-mandated standards for gasoline. Increased
general economic activity in the U.S. and abroad, the phase-in of such
standards and a large number of plant shutdowns and turnarounds in the industry
created a tight market for methanol thus far in 1994. A published index of
contract prices for methanol increased from $0.495 per gallon in January 1994
to $0.98 per gallon in August 1994.
The Company owns and operates the largest independent farm service center
network in the United States and Canada and is the second largest supplier of
crop production inputs in the United States. The Company's distribution network
for fertilizer, crop protection products and seed has grown over the last
several years to include approximately 350 farm service centers, 58 fertilizer
storage facilities and 770 affiliated dealer locations serving the United
States and the eastern region of Canada. This growth generally
3
<PAGE>
has been the result of a healthy farm economy, acquisitions, additional
facilities and aggressive marketing. The Company's distribution network is
served by independent suppliers and the Company's own production facilities,
which presently include one crop protection chemical dry flowable formulation
plant and seven liquid chemical formulation facilities in addition to three
nitrogen fertilizer plants. The production from AMCI's nitrogen fertilizer
plants will also be available for the Company's distribution network.
The Company's long-term strategy for growth is to (i) acquire and upgrade
production and distribution facilities, (ii) increase distribution volumes by
expanding sales from Company-operated locations and its affiliated dealer
network, (iii) change its product mix to include more profitable products and
(iv) continue to build customer loyalty by providing value-added services.
Towards this strategy, the Company made two significant acquisitions in 1993.
In April, the Company added a manufactured fertilizer facility and 32 farm
service centers in Canada and in December the Company added 12 farm service
centers in Florida. The acquisition of AMCI is a major element in the
continuation of this strategy.
As of the date hereof, approximately 52.4% of the outstanding Common Shares
are owned by Minorco (U.S.A.) Inc., a Colorado corporation ("Minorco USA").
Since the Company became publicly-owned in 1983, Minorco USA and its affiliates
have owned a majority of the Company's outstanding equity securities. Minorco
USA is involved in mining and natural resource-related activities in North
America. Minorco USA is indirectly wholly-owned by Minorco, a company
incorporated under the laws of Luxembourg as a societe anonyme ("Minorco").
Minorco is an international natural resources company with operations in gold,
base metals, industrial minerals, paper and packaging and agribusiness. Six of
the Company's ten directors are also officers and/or directors of Minorco USA
or its affiliates. Minorco USA has agreed with the Underwriters that it or an
affiliate will purchase directly from the Underwriters 5.4 million or
approximately 55.7% of the Common Shares offered hereby at a price equal to the
price to the public less the underwriting discount. See "Underwriting."
The Company's principal executive offices are located at Terra Centre, 600
Fourth Street, P. O. Box 6000, Sioux City, Iowa 51102-6000 and its telephone
number is (712) 277-1340.
THE ACQUISITION
The Company has agreed to acquire AMCI (the "Acquisition") pursuant to a
Merger Agreement dated as of August 8, 1994 (the "Merger Agreement") between
the Company, AMCI and AMCI Acquisition Corporation, a wholly-owned subsidiary
of the Company ("Merger Sub"). The Acquisition is to be accomplished by merging
Merger Sub with and into AMCI, whereupon the present stockholders and option
holders of AMCI will receive cash in an aggregate amount of approximately $400
million (subject to adjustment as described herein) and AMCI will become a
wholly-owned subsidiary of the Company. Immediately following the consummation
of the Acquisition, AMCI will be merged with and into the Company. See "The
Acquisition." At the closing of the Acquisition, a subsidiary of AMCI will
enter into a methanol hedging agreement pursuant to which it will receive $4
million in exchange for agreeing to make payments based on the market prices of
methanol and natural gas through 1997. For an example of the calculation of
payments due under the Methanol Hedging Agreement based on certain price
assumptions, see "The Acquisition--The Methanol Hedging Agreement."
AMCI owns and operates its nitrogen fertilizer facilities through
Agricultural Minerals Company, L.P., a Delaware limited partnership ("AMCLP").
Senior Preference Units representing a 39.8% partnership interest in AMCLP are
publicly traded on the New York Stock Exchange. See "Description of Certain
Indebtedness and Other Obligations" and "Investment Considerations--Holding
Company Structure and AMCLP."
THE PUT OPTION
The Company is offering the Common Shares as described herein in lieu of
exercising its rights under a put option agreement dated as of August 8, 1994
(the "Put Option Agreement") between the Company
4
<PAGE>
and Minorco USA, pursuant to which Minorco USA granted to the Company the right
to sell to Minorco USA and cause Minorco USA to purchase 13,333,333 Common
Shares, at a purchase price of $7.50 per Common Share, payable in cash, for
aggregate proceeds to the Company of $100 million. Under applicable rules of
the New York Stock Exchange, the Company's issuance of Common Shares upon
exercise of its rights under the Put Option Agreement must be approved by an
affirmative majority vote of stockholders. If this offering is consummated, the
Company will not exercise its rights under the Put Option Agreement.
THE REFINANCING
The Company will apply the net proceeds of this offering, available cash of
the Company and AMCI and their subsidiaries and funds borrowed by the Company
and such subsidiaries under the Credit Agreement (the "Credit Agreement") to be
entered into in connection with the Acquisition to (a) the payment of the
Acquisition consideration to the holders of AMCI common stock and stock
options, (b) the retirement of bank loans to Terra International Inc., a
wholly-owned subsidiary of the Company ("Terra International"), under a 1992
revolving credit agreement, of which there were approximately $56 million
outstanding on June 30, 1994, (c) the retirement of an additional $40 million
in bank loans of the Company and its subsidiaries, (d) the retirement of a $35
million term loan, a $20 million term loan and a $50 million revolving credit
facility of AMCI's subsidiaries and (e) the payment of fees and expenses
related to the Acquisition and the related financing transactions. In addition,
as a result of the merger of AMCI into the Company, the Company will assume
AMCI's obligations under $175 million in aggregate principal amount of 10.75%
Senior Notes due 2003 (the "Senior Notes"). The borrowings under the Credit
Agreement (includes borrowings to repurchase any Senior Notes required to be
repurchased as described herein and working capital facilities), the assumption
of the Senior Notes and the retirement of the loans as described above are
referred to collectively herein as the "Refinancing." See "The Refinancing."
After consummation of the Acquisition and the Refinancing, the primary
obligor with respect to the Credit Agreement will be Terra Capital, Inc.
("Terra Capital"), a new subsidiary of the Company to which the capital stock
of Terra International and AMCI's two directly-owned subsidiaries will be
contributed. Terra Capital will be wholly-owned by Terra Capital Holdings, Inc.
("Terra Holdings"), another new subsidiary of the Company, and Terra Holdings
will be wholly-owned by the Company. See "Post-Acquisition Company Structure"
below. Also, Terra International, which is currently the Company's principal
operating subsidiary, and one of its subsidiaries, Terra International (Canada)
Inc. ("Terra Canada"), will continue to have other obligations outstanding.
Capitalized lease obligations of a subsidiary of AMCI will also continue after
the closing of the Acquisition and the Refinancing. See "Capitalization,"
"Liquidity and Capital Resources After the Acquisition and the Refinancing" and
"Description of Certain Indebtedness and Other Obligations."
THE OFFERING
<TABLE>
<S> <C>
Common Shares being offered........ 9,700,000 shares(1)
Common Shares to be outstanding
after the Offering................ 80,589,246 shares(1)(2)
Use of Proceeds.................... To finance, in part, the Company's
acquisition of AMCI. See "Use of Proceeds."
New York Stock Exchange and Toronto
Stock Exchange symbol............. TRA
</TABLE>
- --------
(1) Does not include up to 650,000 Common Shares that may be sold pursuant to
the Underwriters' over-allotment option. See "Underwriting."
(2) Based on Common Shares outstanding at September 30, 1994. Does not include
outstanding stock options with respect to 1,256,550 Common Shares as of
such date.
5
<PAGE>
CERTAIN HISTORICAL AND PRO FORMA FINANCIAL DATA
THE COMPANY
The following table sets forth certain historical financial data of the
Company as of and for each of the fiscal years in the five-year period ended
December 31, 1993 and as of and for each of the six-month periods ended June
30, 1993 and 1994. See "Index to Financial Statements" and "Incorporation of
Certain Documents by Reference." The following table also sets forth summary
unaudited pro forma combined financial data of the Company after giving effect
to the Acquisition, the sale of Common Shares in this offering, the Refinancing
and the Company's 1993 Canada and Florida acquisitions. See footnote (a) below.
The unaudited pro forma combined financial data have been derived from, and
should be read in conjunction with, the historical consolidated financial
statements of the Company and AMCI, including the respective notes thereto,
which are included elsewhere in this Prospectus and incorporated herein by
reference. See "Index to Financial Statements" and "Pro Forma Combined
Financial Statements of the Company." THE FOLLOWING UNAUDITED PRO FORMA
FINANCIAL DATA ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY AND ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS THAT ACTUALLY WOULD HAVE OCCURRED HAD THE
ACQUISITION, THE REFINANCING AND THIS OFFERING BEEN CONSUMMATED ON THE DATES
INDICATED OR THE RESULTS THAT MAY OCCUR OR BE OBTAINED IN THE FUTURE.
6
<PAGE>
TERRA INDUSTRIES INC.
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30 (UNAUDITED),
-------------------------------------------------------------------- --------------------------------
PRO
FORMA PRO FORMA
1989 1990 1991 1992 1993 1993(A) 1993 1994 1994(A)
-------- --------- ---------- ---------- ---------- ----------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Total revenues....... $949,458 $ 962,202 $1,022,597 $1,082,191 $1,238,001 $1,716,332 $820,341 $1,077,756 $1,309,632
Cost of sales........ 798,407 806,772 849,684 904,246 1,021,187 1,372,161 681,611 897,685 1,034,690
Depreciation and
amortization........ 14,242 14,997 14,399 14,994 15,470 59,730 7,757 9,060 30,884
Selling, general and
administrative
expenses............ 124,628 138,315 132,845 137,232 161,791 191,199 84,137 100,172 111,418
Equity in earnings of
unconsolidated
affiliates.......... -- -- -- -- (2,275) (2,051) (940) (36) (438)
-------- --------- ---------- ---------- ---------- ---------- -------- ---------- ----------
Income before
interest, minority
interest and income
taxes............... 12,181 2,118 25,669 25,719 41,828 95,293 47,776 70,875 133,078
Net interest expense. 17,134 17,056 12,563 7,533 9,683 43,838 4,784 3,858 25,565
Minority interest.... -- -- -- -- -- 19,789 -- -- 15,526
-------- --------- ---------- ---------- ---------- ---------- -------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes........ (4,953) (14,938) 13,106 18,186 32,145 31,666 42,992 67,017 91,987
Income tax
(provision) benefit. 316 816 (1,073) (7,757) (9,300) (17,607) (12,155) (25,400) (37,026)
-------- --------- ---------- ---------- ---------- ---------- -------- ---------- ----------
Income (loss) from
continuing
operations.......... (4,637) (14,122) 12,033 10,429 22,845 $ 14,059 30,837 41,617 $ 54,961
========== ==========
Income (loss) from
discontinued
operations.......... 29,808 (94,379) (168,808) (1,665) -- -- --
-------- --------- ---------- ---------- ---------- -------- ----------
Income (loss) before
extraordinary items
and cumulative
effect of accounting
changes............. 25,171 (108,501) (156,775) 8,764 22,845 30,837 41,617
Extraordinary gain
(loss).............. -- -- 5,115 -- -- -- (2,614)
Cumulative effect of
accounting changes.. -- -- -- 22,265 -- -- --
-------- --------- ---------- ---------- ---------- -------- ----------
Net income (loss).... $ 25,171 $(108,501) $ (151,660) $ 31,029 $ 22,845 $ 30,837 $ 39,003
======== ========= ========== ========== ========== ======== ==========
Per Common Share:
Income (loss) from
continuing
operations.......... $ (0.07) $ (0.21) $ 0.18 $ 0.15 $ 0.33 $ 0.18 $ 0.45 $ 0.59 $ 0.69
========== ==========
Income (loss) from
discontinued
operations.......... 0.45 (1.43) (2.51) (0.02) -- -- --
-------- --------- ---------- ---------- ---------- -------- ----------
Income (loss) before
extraordinary items. 0.38 (1.64) (2.33) 0.13 0.33 0.45 0.59
Extraordinary gain
(loss).............. -- -- 0.07 -- -- -- (0.04)
Cumulative effect of
accounting changes.. -- -- -- 0.32 -- -- --
-------- --------- ---------- ---------- ---------- -------- ----------
Net income (loss).... $ 0.38 $ (1.64) $ (2.26) $ 0.45 $ 0.33 $ 0.45 $ 0.55
======== ========= ========== ========== ========== ======== ==========
Dividends............ $ 0.09 $ 0.12 $ -- $ -- $ 0.02 $ 0.02 $ -- $ 0.04 $ 0.04
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1994
--------------------
ACTUAL PRO FORMA(A)
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $205,836 $ 231,832
Net property, plant and equipment......................... 124,786 550,619
Excess of purchase price over net assets acquired......... -- 317,170
Total assets.............................................. 876,895 1,744,715
Minority interest......................................... -- 155,645
Long-term debt (excluding current maturities)............. 45,782 518,298
Total stockholders' equity................................ 287,956 398,716
</TABLE>
7
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- --------
(a) The summary unaudited pro forma balance sheet data combines the financial
position of the Company as of June 30, 1994 with that of AMCI as if the
Acquisition, the Refinancing, and this offering had been consummated as of
June 30, 1994. The summarized unaudited pro forma income statement data
combines the statements of income of the Company for the year ended
December 31, 1993 and for the six months ended June 30, 1994 with those of
AMCI and its predecessors as if the Acquisition, the Refinancing and this
offering had been consummated as of January 1, 1993. Pro forma adjustments
include the write-up of property, plant and equipment to fair value,
recording of the Refinancing and related interest costs, decrease in cash
and related interest income used to consummate the Acquisition, recording
of purchase price in excess of net assets acquired and related
amortization, and the issuance of 9,700,000 Common Shares at a price of
$12.25 per share (for aggregate net proceeds of approximately $112.5
million) in the offering described herein. The summary unaudited 1993 pro
forma income statement data also gives effect to the Company's (i) March
31, 1993 acquisition of assets from ICI Canada Inc. and (ii) December 31,
1993 acquisition of assets from Asgrow Florida Company. See "Pro Forma
Combined Financial Statements of the Company."
AMCI
AMCI and its wholly-owned subsidiary, Agricultural Minerals Corporation
("AMC"), were formed in connection with the February 1990 acquisition of the
nitrogen fertilizer business of Freeport-McMoRan Resource Partners, Limited
Partnership ("FMRP") by The Morgan Stanley Leveraged Equity Fund II, L.P., a
Delaware limited partnership that is now the principal stockholder of AMCI
("MSLEF II"), and certain other investors. AMC serves as the general partner of
both AMCLP and Agricultural Minerals, Limited Partnership, a Delaware limited
partnership ("AMLP" or the "Operating Partnership"). AMC is also a limited
partner in AMCLP, holding all of the limited partnership interests in AMCLP,
except the Senior Preference Units. AMCLP, in turn, holds a 99% limited
partnership interest in the Operating Partnership. All of AMCI's operating
assets relating to its nitrogen fertilizer business are owned by the Operating
Partnership. AMCI also owns 100% of the capital stock of BMC Holdings Inc., a
Delaware corporation ("BMCH"), which in turn owns 100% of the capital stock of
Beaumont Methanol Corporation, a Delaware corporation ("BMC"). BMCH and BMC
were formed in connection with the December 1991 acquisition of the methanol
business of E. I. du Pont de Nemours and Company ("DuPont") by MSLEF II and
certain other investors. All of AMCI's operating assets relating to its
methanol business are owned by BMC. The businesses of BMC and AMC were
consolidated under AMCI and combined under common ownership in October 1993
after operating under common management since December 1991.
8
<PAGE>
The following table sets forth certain historical and pro forma financial
data for AMCI and BMCH and their predecessor operations on a combined basis for
the periods indicated. This information is qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements of
AMCI, including the notes thereto, included elsewhere herein. Information
presented for the predecessor operations for the periods prior to the years
ended December 31, 1990, 1991 and 1992 is not comparable to subsequent periods
as explained in footnotes (b), (c) and (e).
AGRICULTURAL MINERALS AND CHEMICALS INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -----------------
COMBINED PREDECESSOR COMBINED
OPERATIONS OPERATIONS
---------------------------- -----------------
PRO FORMA
1989(E) 1990(C)(D) 1991(B) 1992(A) 1993(A) 1993 1994
-------- ---------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $352,768 $324,940 $367,729 $324,953 $365,786 $193,579 $231,782
Gross profit............ 61,746 61,524 110,929 90,416 81,878 45,783 80,742
Income before
extraordinary expense.. 28,230 11,549 44,559 20,612 8,544 7,228 26,825
Income before
extraordinary expense
per share.............. $ 2.56 $ 1.18 $ 0.49 $ 0.41 $ 1.54
BALANCE SHEET DATA:
Net property, plant and
equipment.............. $140,919 $235,237 $364,366 $347,012 $326,899 $337,782 $319,383
Total assets............ 195,254 348,459 506,590 505,913 506,395 492,178 530,805
Long-term debt and
capitalized lease
obligations, including
current maturities..... 142,270 135,119 219,418 127,820 217,029
Stockholders' equity.... 135,437 112,244 45,053 107,744 65,065
Cash dividends declared
per share.............. $ 5.72 $ 3.18 $ 7.58 $ 1.17 $ 0.39
</TABLE>
- --------
(a) The financial data for the years ended December 31, 1992 and 1993, have
been derived from the audited financial statements of AMCI included
elsewhere herein.
(b) The financial data for the year ended December 31, 1991, have been derived
from (i) the audited financial statements of DuPont's methanol business for
the period January 1, 1991, to December 12, 1991, which are not included
herein and (ii) the audited financial statements of AMCI for the year ended
December 31, 1991. BMCH information prior to December 12, 1991, is at
DuPont's historical cost and is not comparable to subsequent periods.
Common costs incurred by DuPont on behalf of the methanol operations have
been allocated to the operations using assumptions and methods which AMCI
management believes are reasonable.
(c) The pro forma financial data for the year ended December 31, 1990, have
been derived from (i) the audited financial statements of DuPont's methanol
business for the year ended December 31, 1990, which are not included
herein, (ii) the audited financial statements of FMRP's nitrogen fertilizer
business for the two months ended February 28, 1990, which are not included
herein, and (iii) the audited financial statements of AMCI for the 10
months ended December 31, 1990, which are not included herein. This
information includes pro forma adjustments to reflect the 1990 acquisition
of the AMC business from FMRP as if it had occurred on January 1, 1990. As
a result of purchase accounting adjustments as well as other factors,
including FMRP's accounting policies relating to transfer pricing on
intercompany sales and freight costs, divisional accounting for operating
expenses prior to acquisition, capital costs related to the acquisition and
differences in taxable status, the 1990 financial data is not comparable to
earlier periods. Common costs incurred by DuPont on behalf of the methanol
operations have been allocated to the operations using assumptions and
methods which AMCI management believes are reasonable.
(d) Results for 1990 include the impact of a fire in the lubricating oil unit
which caused minor structural damage to BMC's methanol production facility
in Beaumont, Texas. The 1990 results include a $5.6 million charge for
repair costs.
(e) The financial data for the year ended December 31, 1989 have been derived
from the audited financial statements of FMRP's nitrogen fertilizer
business and the audited financial statements of DuPont's methanol business
for such period, which are not included herein, and are presented at FMRP's
and DuPont's historical cost (without giving retroactive effect to purchase
accounting adjustments in subsequent years). Combined results include a pro
forma tax provision of $15.7 million for the year ended December 31, 1989
for FMRP, a partnership, based on statutory corporate rates in effect
during the periods. Common costs incurred by FMRP and DuPont on behalf of
the fertilizer and methanol operations, respectively, have been allocated
to the operations using assumptions and methods which AMCI management
believes are reasonable.
9
<PAGE>
POST-ACQUISITION COMPANY STRUCTURE
The following chart represents the anticipated organization of the Company
and certain of its subsidiaries after the consummation of the Acquisition, the
merger of AMCI into the Company and the Refinancing. Shaded areas represent
entities to be acquired pursuant to the Acquisition.
(LOGO)
10
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other
information in this Prospectus, the following factors before purchasing the
Common Shares offered hereby.
HOLDING COMPANY STRUCTURE AND AMCLP
Since the operations of the Company are currently conducted through
subsidiaries and the Company's assets consist primarily of investments in its
subsidiaries (which, after the consummation of the Acquisition, will include
AMCI's subsidiaries), the Company's ability to pay dividends on Common Shares
is dependent upon the earnings of its subsidiaries and the distribution of
those earnings to the Company (through loans, dividends or other payments).
Moreover, the limited partnership agreement governing AMCLP requires the
quarterly distribution to the partners of AMCLP of all "Available Cash," which
is generally defined to mean all cash receipts from all sources, less the sum
of all cash disbursements, adjusted for changes in certain reserves
established as AMC determines to be necessary or appropriate in its reasonable
discretion to provide for the proper conduct of the business of AMCLP or the
Operating Partnership (including reserves for future capital expenditures) or
to provide funds for distributions with respect to any of the next four
calendar quarters. The publicly-held Senior Preference Units (which represent
a 39.8% interest in AMCLP) are entitled to receive a minimum quarterly
distribution of $0.605 per unit, plus arrearages, before any amounts are paid
to AMC as distributions on its junior preference and common units. The nature
of the businesses of the Company and AMCLP may give rise to conflicts of
interest between the two. Conflicts could arise, for example, with respect to
transactions involving purchases, sales and transportation of fertilizer and
natural gas and potential acquisitions of businesses or properties. See
"Description of Certain Indebtedness and Other Obligations--AMCLP Senior
Preference Units and Other Obligations."
LEVERAGE
As a result of the Acquisition, the Refinancing and this offering, the
Company will become more leveraged. The Company's long-term debt to total
capitalization ratio will increase substantially and fixed charges will
require a greater percentage of available cash flow. See "Liquidity and
Capital Resources After the Acquisition and the Refinancing," "Unaudited Pro
Forma Combined Financial Statements of the Company" and "Capitalization."
The degree to which the Company is leveraged could have important
consequences to holders of the Common Shares, including the following: (i) a
substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on indebtedness;
(ii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or general corporate
purposes will be limited; (iii) the Company's ability to pay dividends is and
will be limited by financing agreements of it and its subsidiaries (see "Price
Range of Common Shares and Dividend Data" and "Description of Certain
Indebtedness and Other Obligations"); (iv) the agreements governing the
Company's long-term indebtedness contain certain restrictive financial and
operating covenants, including limitations on the amount of acquisitions
(which have been an important part of the Company's growth strategy over the
last several years); (v) the Company will be more leveraged than certain of
its competitors, which might place the Company at a competitive disadvantage;
(vi) upon consummation of the Refinancing, a substantial portion of the
Company's borrowings will be at floating rates of interest, causing the
Company to be sensitive to increases in interest rates; and (vii) the Company
could be more sensitive to a downturn in general economic conditions or in the
agricultural or methanol industries.
VOTING CONTROL BY PRINCIPAL STOCKHOLDER AND RELATED MATTERS
As of the date hereof, Minorco USA owns approximately 52.4% of the
outstanding Common Shares. Since the Company became publicly-owned in 1983,
Minorco and its affiliates have owned a majority of the Company's outstanding
equity securities. As a result of its beneficial ownership of Common Shares,
Minorco and Minorco USA are able to control the election of the Company's
directors and the
11
<PAGE>
management and policies of the Company. As of the date hereof, six of the
Company's ten directors are also officers and/or directors of Minorco USA or
its affiliates. Any future sale of all or a portion of the Common Shares owned
by Minorco USA could adversely affect the market price of the Common Shares.
Minorco USA has agreed with the Underwriters that it or an affiliate will
purchase directly from the Underwriters 5.4 million or approximately 55.7% of
the Common Shares offered hereby at a price equal to the price to the public
less the underwriting discount. See "Underwriting."
DEPENDENCE ON NATURAL GAS; INDUSTRY CONSIDERATIONS
The principal raw material used to produce nitrogen fertilizer is natural
gas. The Company estimates that natural gas costs comprised nearly 50% of the
total costs and expenses associated with the Company's manufactured fertilizer
operations in 1993. Natural gas is also the primary raw material used in the
production of methanol. The Company estimates that natural gas represents over
50% of the costs and expenses associated with methanol operations. A
significant increase in the price of natural gas that could not be recovered
through an increase in nitrogen fertilizer or methanol prices could have a
material adverse effect on the Company's profitability and cash flow. The
Company's policy is to fix the unit cost for 40% to 80% of its natural gas
requirements for the upcoming 12-month period using supply contracts and
various hedging techniques. See "Factors Affecting Demand For Methanol and
MTBE" and "Business--Raw Materials."
The Company's future operating results are also subject to other external
factors which are beyond the Company's control, including the number of
planted acres; the types of crops planted; the effects of general weather
patterns on the timing and duration of field work for crop planting and
harvesting; the supply of crop inputs; the relative balance of supply and
demand for nitrogen fertilizers; the U.S. government's agricultural policy;
and market prices of methanol.
SEASONALITY AND VOLATILITY
The agricultural products business is seasonal, based upon the planting,
growing and harvesting cycles. Inventories must be accumulated in the first
few months of the calendar year to be available for seasonal sales, requiring
significant storage capacity. Inventory accumulations are financed by
suppliers or short-term borrowings, which are retired with the proceeds of the
sales of such inventory. In times of lower demand, the Company can reduce
purchases, thereby decreasing inventory carrying costs. In the past, over half
of the Company's sales generally occurred during the second quarter of each
year. This seasonality also generally results in higher fertilizer prices
during peak periods, with prices typically reaching their highest point in the
spring, dropping in the summer, increasing in the fall (as depleted
inventories are restored) and through the spring.
The agricultural products business can also be volatile as a result of a
number of other factors, the most important of which, for U.S. markets, are
weather patterns and field conditions (particularly during periods of high
fertilizer consumption), current and projected grain stocks and prices and the
U.S. government's agricultural policy. Among the governmental policies that
influence the markets for fertilizer are those directly or indirectly
influencing the number of acres planted, the level of grain stocks, the mix of
crops planted and crop prices.
As with any commodity chemical, the price of methanol is volatile. The
industry has experienced cycles of oversupply resulting in depressed prices
and idled capacity, followed by periods of shortage and rapidly rising prices.
In part, future demand for methanol will depend on the regulatory environment
with respect to oxygenated gasoline. During 1994 to date, increased world
demand for methanol combined with a large number of plant shutdowns and
turnarounds in the industry and the phase-in of federally-mandated standards
for oxygenated gasoline to create a tight market and dramatically increased
prices over 1993 levels. There can be no assurances that such conditions will
continue. See "Factors Affecting Demand For Methanol and MTBE."
12
<PAGE>
FACTORS AFFECTING DEMAND FOR METHANOL AND MTBE
Methanol is used as a feedstock in the production of MTBE, an oxygenate and
octane enhancer used in reformulated gasoline. Reformulated gasoline has lower
volatility and is less aromatic than gasoline. Future MTBE demand is dependent
on a number of market and regulatory forces that are beyond the control of the
Company and difficult to predict.
Federally-mandated standards (the "Clean Air Act Amendments") mandate
numerous comprehensive specifications for motor vehicle fuel, including
increased oxygenate content and lower volatility. Beginning in 1992, the first
phase of the Clean Air Act Amendments required that over thirty metropolitan
areas having the highest concentration of carbon monoxide pollution implement
an oxygenated gasoline program (specifying a minimum oxygen content of 2.7%)
during the portion of the year, generally the winter months, when maximum
allowable carbon monoxide pollution levels are most likely to be exceeded. In
1995, the second phase of the Clean Air Act Amendments will require the year-
round use of reformulated gasoline (with a minimum of 2% oxygen) in the nine
metropolitan areas having the highest concentration of ozone pollution
throughout the year and in any non-attainment area in a state whose Governor
elects to enter the reformulated gasoline program. To date, the areas in which
reformulated gasoline will be required to be sold beginning in 1995 represent
approximately 35% of total U.S. gasoline demand.
Future demand for MTBE (and therefore methanol) will depend on, among other
things, the degree to which the Clean Air Act Amendments are implemented and
enforced, the possible adoption of additional legislation, the willingness of
the regulatory authorities to grant waivers for specific cities or regions,
the difficulties in isolating non-attainment areas from attainment areas and
the demand for oxygenated or reformulated gasolines in areas where its use is
not required. Certain of the areas subject to the Clean Air Act Amendments
have already requested waivers from the United States Environmental Protection
Agency (the "EPA") alleging either conflicts with other pollution control
requirements or that they are no longer non-attainment areas. Representatives
of such areas are in discussions with the EPA with respect to these matters.
Currently, MTBE is the oxygenate most used by the U.S. refining industry.
However, there are alternative oxygenates, principally ethanol, ethyl tertiary
butyl ether, an ethanol derivative, and tertiary amyl methyl ether, a methanol
derivative. Recently, the EPA mandated that, in 1995, at least 15% of
reformulated gasoline use an oxygenating additive made from a renewable
source, which for all practical purposes is ethanol, and that such percentage
increase to 30% in 1996. This mandate, however, has been temporarily stayed by
a U.S. Circuit Court of Appeals pending the outcome of legal challenges.
Although the Company expects there will be a continued market preference for
MTBE, there can be no assurance that MTBE will not be replaced by alternative
oxygenates as a result of price or regulatory changes.
COMPETITION
Nitrogen fertilizer is a global commodity, and customers, including end-
users, dealers and other fertilizer producers and distributors, base their
purchasing decisions principally on the delivered price of the product. The
Company competes with a number of U.S. producers, and producers in other
countries, including state-owned and government-subsidized entities. Some of
the Company's principal competitors may have greater total resources and may
be less dependent on earnings from nitrogen fertilizer sales than the Company.
Some foreign competitors may have access to lower cost or government-
subsidized natural gas supplies. The Company believes that it competes with
other manufacturers of nitrogen fertilizer on the basis of delivery terms and
availability of products as well as on price.
The market for the fertilizer, crop protection products and seed distributed
by the Company is highly competitive. In 1993, sales attributable to the
Company's farm service centers accounted for less than 10% of total crop
production products sold in the U. S. Within the specific market areas served
by its farm service centers, however, the Company's share of the market was
substantially higher in most instances. The Company's competitors include
cooperatives, divisions of diversified agribusiness companies, regional
distributors and independent dealers, some of which have substantially greater
financial and other resources than the Company. The Company competes primarily
by providing a comprehensive line of products and by providing what the
Company believes to be superior services to growers and dealers.
13
<PAGE>
The methanol industry, like the fertilizer industry, is highly competitive
and such competition is based largely on price, reliability and
deliverability. The relative cost and availability of natural gas and the
efficiency of production facilities are important competitive factors.
Significant determinants of a plant's competitive position are the natural gas
acquisition and transportation contracts that a plant negotiates with its
major suppliers. Domestic competitors for methanol include a number of large
integrated petrochemical producers, many of which are better capitalized than
the Company. In addition, the production and trade of methanol has become
increasingly global, and a number of foreign competitors produce methanol
primarily for the export market. See "Factors Affecting Demand for Methanol
and MTBE" and "Business--Competition."
DAMAGE TO FACILITIES; NATURAL HAZARDS
The operations of the Company may be subject to significant interruption if
one or more of its facilities were to experience a major accident or were
damaged by severe weather or other natural disaster. However, the Company
currently maintains, and expects that it will, to the extent economically
feasible, continue to maintain, insurance (including business interruption
insurance) in an amount which the Company believes is sufficient to allow the
Company to withstand major damage to any of its facilities.
ENVIRONMENTAL REGULATION
The Company's and AMCI's business activities are subject to stringent
environmental regulation by federal, provincial, state and local governmental
authorities. The Company and AMCI are also involved in the manufacture,
handling, transportation and storage of materials that are or may be
classified as hazardous or toxic by Federal, state, provincial or other
regulatory agencies. If such materials have been or are disposed at sites that
are targeted for cleanup by federal or state regulatory authorities, the
Company or AMCI (or subsidiaries thereof), as applicable, may be among those
responsible under such laws for all or part of the costs of such cleanup. Each
of the Company and AMCI has been designated as a potentially responsible party
("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act of 1976, as amended ("CERCLA"), and analogous state laws with
respect to one or more sites. There can be no assurance that existing
environmental regulations will not be revised or that new regulations will not
be adopted or become applicable so as to have a material and adverse affect on
the Company's business or financial condition. See "Business--Environmental
and Other Regulatory Matters."
The Company endeavors to comply (and has incurred substantial costs in
connection with such compliance) in all material respects with applicable
environmental, safety and health regulations. The Company does not expect its
continued operation in compliance with such regulations (including operation
of the businesses acquired from AMCI) to have a material adverse effect on its
earnings or competitive position.
THE ACQUISITION
OVERVIEW
On August 8, 1994, the Company agreed to acquire AMCI pursuant to the Merger
Agreement between the Company, AMCI and Merger Sub. The Company will finance
the Acquisition, in part, through the net proceeds of this offering.
THE MERGER AGREEMENT
The Merger. Pursuant to the Merger Agreement, subject to the terms and
conditions described therein, Merger Sub will merge with and into AMCI (the
"Merger"). At the effective time of the Merger (the "Effective Time"), (i)
AMCI will become a wholly-owned subsidiary of the Company and the separate
corporate existence of Merger Sub will cease, (ii) each share of AMCI common
stock outstanding immediately prior to the Effective Time (other than those
held in the treasury of AMCI or owned by a subsidiary of AMCI and those with
respect to which dissenters rights have been perfected, if any) will be
converted into the right to receive $21.2066 in cash and (iii) each share of
AMCI common stock subject to a stock option outstanding immediately prior to
the Effective Time will be cancelled and converted into
14
<PAGE>
the right to receive $10.4765 in cash (calculated as $21.2066 less the
exercise price of $10.73 per share under each such option). Assuming no
dissenting shares, the aggregate consideration payable in the Merger with
respect to all such shares and options will be approximately $400 million. The
aggregate purchase price payable in the Merger is subject to adjustment based
on the working capital of AMCI at the Effective Time as described below.
Immediately following the Effective Time, AMCI will be merged into the Company
and the separate corporate existence of AMCI will cease.
Adjustment to the Merger Consideration. Pursuant to the Merger Agreement,
AMCI will be required to deliver to the Company a good faith estimate (the
"Estimate") of AMCI's Consolidated Working Capital (as defined) as of the
Effective Time prior to the closing of the Merger. In the event that such
estimate exceeds $86 million, AMCI shall pay to MSLEF II, on behalf of the
stockholders of AMCI (in such capacity, the "Sellers' Representative") an
amount equal to such excess. Such payment shall generally be made at the
Effective Time. In the event that the Estimate is less than $86 million, the
Sellers' Representative shall pay to AMCI such deficit at the Effective Time.
The Merger Agreement does not include a restriction on the ability of AMCI to
pay dividends. Thus, subject to such Consolidated Working Capital requirement
and the closing condition requiring a minimum level of cash as described
below, cash generated from the operation of AMCI through the closing of the
Merger will be for the benefit of the stockholders of AMCI.
Within 60 days following the Effective Time, the Sellers' Representative
shall be required to deliver to the Company a statement of the Consolidated
Working Capital of AMCI as of the Effective Time. After review by the Company
and resolution of any disputes pursuant to the procedures set forth in the
Merger Agreement, if the Consolidated Working Capital as finally determined is
less than the Estimate, the Sellers' Representative shall be required to pay
to the Company an amount equal to such deficit and if such Consolidated
Working Capital exceeds the Estimate, the Company shall be required to pay to
the Sellers' Representative an amount equal to such excess. Any amounts
payable after the Effective Time will be paid together with interest from the
Effective Time.
"Consolidated Working Capital" is defined to mean the excess of the
consolidated current assets of AMCI over the consolidated current liabilities
of AMCI, calculated in accordance with AMCI's accounting policies. For
purposes of calculating Consolidated Working Capital, (i) all fees and
expenses of financial, accounting, legal and other advisors to AMCI relating
to services in respect of the Merger billed or to be billed to AMCI and
remaining unpaid at the Effective Time will be deemed to be consolidated
current liabilities and (ii) all amounts expended by AMCI to purchase
directors' and officers' liability insurance to cover its directors and
officers for two years after the consummation of the Merger will be deemed to
be a current receivable from the Company.
Conditions to the Merger. The obligations of the Company and AMCI to
consummate the Merger are subject to the satisfaction or waiver at or prior to
the Effective Time of a number of conditions, including that (i) the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), shall have expired or been terminated
(which condition has been satisfied); (ii) no antitrust action or proceeding
shall be pending against the Company or AMCI to restrain, prohibit or
invalidate the Merger or that could reasonably be expected, if adversely
determined, to materially adversely affect the ability of the Company or AMCI
to own or operate any of the three principal facilities of either the Company
or AMCI after the Effective Time; (iii) no statute, rule, injunction or other
order (whether temporary, preliminary or permanent) shall be in effect which
makes the Merger illegal or otherwise prohibits consummation of the Merger;
(iv) no lawsuits or other litigation or proceedings shall be pending against
AMCI or any of its subsidiaries that, individually or in the aggregate, could
reasonably be expected, if adversely determined, to have a material adverse
effect on AMCI and its subsidiaries, considered as a whole; (v) the Methanol
Hedging Agreement (as defined below) shall have been executed by the parties
thereto; and (vi) the representations and warranties made by the other party
in the Merger Agreement shall be true and the other party shall have complied
with its covenants in the Merger Agreement.
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<PAGE>
The obligation of the Company to effect the Merger is further conditioned
on, among other things, (i) dissenters' rights under Delaware law shall not
have been perfected with respect to more than 5% of AMCI's common stock; (ii)
there shall not have occurred any physical damage, destruction or catastrophic
loss to any of the physical assets (including software) of AMCI and its
subsidiaries that could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on AMCI and its subsidiaries,
considered as a whole; (iii) there shall not have been any emissions,
discharges, spills or releases, or any use, treatment, storage, disposal,
handling, manufacture, transportation or shipment, of any substance by AMCI or
any of its subsidiaries which could reasonably be expected to give rise to
liabilities, claims or costs pursuant to environmental and safety
requirements, and AMCI shall not have received any written notice from any
regulatory agency asserting any claim or requiring any investigatory or
remedial action under applicable environmental and safety requirements, that,
in either case, individually or in the aggregate, could reasonably be expected
to have a material adverse effect on AMCI and its subsidiaries, considered as
a whole; (iv) Robert B. Gwyn and Harvey E. O'Neill, AMCI's President and CEO
and Senior Vice President--Marketing, respectively, shall have executed and
delivered agreements with respect to confidentiality and non-solicitation of
AMCI employees in the form attached to the Merger Agreement; (v) the aggregate
amount of cash and cash equivalents of AMCI and its subsidiaries (other than
AMCLP and AMLP) shall be at least $36 million.
If the offering described herein is consummated, no further approvals of the
Merger or the Merger Agreement are required from the stockholders of the
Company or the stockholders of AMCI. See "The Put Option."
THE PUT OPTION
The Company is offering the Common Shares as described herein in lieu of
exercising its rights under the Put Option Agreement between the Company and
Minorco USA, pursuant to which Minorco USA granted to the Company the right to
sell to Minorco USA and cause Minorco USA to purchase 13,333,333 Common
Shares, at a purchase price of $7.50 per Common Share, payable in cash, for
aggregate proceeds to the Company of $100 million. Under applicable rules of
the New York Stock Exchange (the "NYSE"), the Company's issuance of Common
Shares upon exercise of its rights under the Put Option Agreement must be
approved by an affirmative majority vote of stockholders. If this offering is
consummated, the Company will not exercise its rights under the Put Option
Agreement.
THE METHANOL HEDGING AGREEMENT
As described above, the obligations of the parties to the Merger Agreement
to consummate the Merger are conditioned upon the execution at the closing of
the Merger of a methanol hedging agreement (the "Methanol Hedging Agreement")
between BMC and MSLEF II, as agent (in such capacity, the "Counterparty").
Pursuant to the Methanol Hedging Agreement, the Counterparty will pay to BMC
$4.0 million in cash concurrently with the execution and delivery of the
Methanol Hedging Agreement. In consideration of this payment, BMC will be
obligated, subject to the occurrence of certain events of force majeure, to
make payments to the Counterparty for the period from the closing of the
Merger to December 31, 1995, calendar year 1996 and calendar year 1997 in an
amount equal to the product of: (1) the excess, if any, over $0.65 per gallon
of the remainder of (a) the yearly average of the midpoint of the high and low
transaction prices for domestic barge methanol contracts in cents per gallon
for each month during such period over (b) 0.113 times the average spot price
index (large packages only), in cents per MMBtu, for natural gas, multiplied
by (2) a number of gallons equal to (i) for the period through December 31,
1995, 10.833 million multiplied by the number of whole months and fraction
thereof during such period; (ii) for calendar 1996, 140 million; and (iii) for
calendar 1997, 130 million. BMC's methanol production facility in Beaumont,
Texas has a production capability of approximately 280 million gallons of
methanol per year.
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<PAGE>
The Company expects that BMC will be required to make payments to the
Counterparty under the Methanol Hedging Agreement only if methanol prices
increase relative to natural gas prices as compared to historical price
levels. The Company expects that, through BMC's Beaumont facility and the
Company's other methanol production capabilities, it will be benefiting from
such market price movements at any time at which it is required to make
payments under the Methanol Hedging Agreement. As a result of making such
payments, BMC will not benefit fully from increases in the price of methanol
during the term of the Methanol Hedging Agreement.
The following table sets forth a calculation of the payment, if any, that
would be due under the Methanol Hedging Agreement for any year based on the
applicable price for methanol being equal to (i) $0.51 per gallon, the price
calculated over the 12 months ended June 30, 1994, and (ii) $0.98 per gallon,
the price calculated for the month of August 1994. In both examples, the
assumed quantity of methanol is 140 million gallons and the applicable price
for natural gas is equal to the price calculated over the 12 months ended June
30, 1994.
<TABLE>
<S> <C> <C>
Assumed methanol price............................... $0.51 $0.98
Natural gas price times .113......................... 0.24 0.24
----- -------------
Remainder.......................................... 0.27 0.74
Threshold price...................................... 0.65 0.65
----- -------------
Excess............................................. None $0.09
Assumed hedge quantity (gallons)..................... 140 million
-------------
Payment by BMC..................................... $12.6 million
=============
</TABLE>
Methanol prices are volatile. There can be no assurances as to the actual
prices of methanol and natural gas during the term of the Methanol Hedging
Agreement.
THE REFINANCING
The Company will apply the net proceeds of this offering, available cash of
the Company and AMCI and their subsidiaries and funds borrowed by the Company
and such subsidiaries under the Credit Agreement to be entered into in
connection with the Acquisition to (a) the payment of the Acquisition
consideration to the holders of AMCI common stock and stock options, (b) the
retirement of bank loans to Terra International under a 1992 revolving credit
agreement, of which there were approximately $56 million outstanding on June
30, 1994, (c) the retirement of an additional $40 million in bank loans of the
Company and its subsidiaries, (d) the retirement of a $35 million term loan, a
$20 million term loan and a $50 million revolving credit facility of AMCI's
subsidiaries and (e) the payment of fees and expenses related to the
Acquisition and the Refinancing. In addition, as a result of the merger of
AMCI into the Company, the Company will assume AMCI's obligations under $175
million in aggregate principal amount of the Senior Notes. The indenture
governing the Senior Notes provides that holders may require repurchase of the
Senior Notes at a price equal to 101% of their principal amount plus accrued
interest under certain circumstances, including the Merger. The Company will
have available under the Credit Agreement funds to make any repurchase
payments so required. The Credit Agreement will also include working capital
facilities for the Company and its subsidiaries.
After consummation of the Acquisition and the Refinancing, the primary
obligor with respect to the Credit Agreement will be Terra Capital, a new
subsidiary of the Company to which the capital stock of Terra International,
AMC and BMCH will be contributed. Terra Capital will be wholly-owned by Terra
Holdings, another new subsidiary of the Company, and Terra Holdings will be
wholly-owned by the Company. See "Summary--Post-Acquisition Company
Structure." Also, Terra International, which is currently the Company's
principal operating subsidiary, and one of its subsidiaries, Terra Canada,
will continue to have other obligations outstanding. Capitalized leases of the
Operating Partnership will also
17
<PAGE>
continue after the closing of the Acquisition and the Refinancing. See also
"Capitalization," "Liquidity and Capital Resources After the Acquisition and
the Refinancing" and "Description of Certain Indebtedness and Other
Obligations."
USE OF PROCEEDS
The Company estimates the net proceeds of this offering to be approximately
$112.5 million (approximately $120.2 million if the Underwriters' over-
allotment option is exercised in full), based upon an offering price to the
public of $12.25 per Common Share. The Company intends to use such net
proceeds to finance, in part, the Acquisition. See "The Acquisition" and "The
Refinancing."
PRICE RANGE OF COMMON SHARES AND DIVIDEND INFORMATION
The Common Shares are listed on the NYSE and the Toronto Stock Exchange
under the symbol "TRA". On October 13, 1994, the last reported sale price of
the Common Shares as reported on the New York Stock Exchange Composite Tape
was $12.375 per share. Potential investors are encouraged to obtain current
trading price information. On September 30, 1994, the Common Shares were held
by 5,721 stockholders of record.
The following table sets forth the range of high and low sales prices for
the Common Shares on the NYSE Composite Tape and the amount of dividends
declared for the periods indicated.
<TABLE>
<CAPTION>
DIVIDENDS DECLARED
PER COMMON
HIGH LOW SHARE
------ ------ ------------------
<S> <C> <C> <C>
1992
First quarter................................ $ 6 $4 3/8 $ --
Second quarter............................... 5 7/8 5 --
Third quarter................................ 6 3/4 4 1/2 --
Fourth quarter............................... 5 1/4 4 1/4 --
1993
First quarter................................ $4 7/8 $3 7/8 $ --
Second quarter............................... 4 1/4 3 1/2 --
Third quarter................................ 5 3 5/8 --
Fourth quarter............................... 7 7/8 4 1/2 0.02
1994
First quarter................................ $8 3/4 $6 1/4 $0.02
Second quarter............................... 8 1/4 6 5/8 0.02
Third quarter................................ 13 1/8 5 7/8 0.02
Fourth quarter (through October 13, 1994).... 13 11 1/4 --
</TABLE>
While the Company intends to continue to pay regular cash dividends on its
Common Shares in the future, the decision to do so will be made quarterly by
its Board of Directors based upon the Company's earnings, financial position,
capital requirements and prospects and such other factors as the Board of
Directors deems relevant. The Company's ability to pay cash dividends will be
affected by the covenants and other terms of the financing agreements of the
Company and its subsidiaries, including the Credit Agreement and the indenture
under which the Senior Notes were issued. As a holding company, the Company's
ability to pay dividends will depend on its receipt of funds from its
subsidiaries which, in turn, will be affected by the Credit Agreement and
other obligations of such subsidiaries. See "Description of Certain
Indebtedness and Other Obligations," "Liquidity and Capital Resources After
the Acquisition and the Refinancing" and "Investment Considerations--Holding
Company Structure and AMCLP" and "--Leverage."
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<PAGE>
CAPITALIZATION
Set forth below is the capitalization and short-term debt of the Company at
June 30, 1994, and as adjusted to reflect the Acquisition, this offering, the
merger of AMCI into the Company and the Refinancing. This table should be read
in conjunction with the consolidated financial statements of the Company and
the related notes and other financial information included or incorporated by
reference herein.
<TABLE>
<CAPTION>
AT JUNE 30, 1994
----------------------
(UNAUDITED)
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Borrowings under revolving credit agreements (a)...... $ 67,320 $ 67,320
Bank loans............................................ 40,000 --
Current maturities of long-term debt.................. 2,351 44,364
--------- ----------
Total short-term debt............................... $ 109,671 $ 111,684
========= ==========
Long-term debt (excluding current maturities):
10 3/4% Senior Notes Due 2003 (b)..................... $ -- $ 175,000
Operating Partnership term loan (a)................... -- 35,000
Operating Partnership capitalized lease obligations
due 2000............................................. -- 5,659
New senior secured term loans (a)(c).................. -- 256,857
Other long-term debt.................................. 45,782 45,782
--------- ----------
Total long-term debt (excluding current maturities)... 45,782 518,298
--------- ----------
Minority interest....................................... -- 155,645
--------- ----------
Common stockholders' equity:
Common Shares, 114,375,000 authorized, 70,553,045
(80,253,045 as adjusted) outstanding (d)(e)(f)....... 123,550 133,250
Paid-in capital....................................... 523,915 626,715
Cumulative translation adjustment..................... (795) (795)
Accumulated deficit................................... (358,714) (360,454)
--------- ----------
Total stockholders' equity.......................... 287,956 398,716
--------- ----------
Total capitalization.............................. $ 333,738 $1,072,659
========= ==========
</TABLE>
- --------
(a) Adjusted amount reflects borrowings under the Credit Agreement. See
"Description of Certain Indebtedness and Other Obligations."
(b) As a result of the merger of AMCI into the Company, the Company will
assume AMCI's obligations under the Senior Notes. The indenture governing
the Senior Notes provides that holders may require repurchase of the
Senior Notes at a price equal to 101% of their principal amount plus
accrued interest under certain circumstances, including upon consummation
of the Merger. The Company will have available as part of the Refinancing
funds to make any repurchase payments so required.
(c) Included in this amount is the refinancing of $40 million of short-term
debt.
(d) Does not include 1,663,600 Common Shares subject to outstanding stock
options as of June 30, 1994, of which options with respect to 1,256,550
Common Shares were outstanding as of September 30, 1994.
(e) Adjusted amount reflects the sale of 9,700,000 Common Shares in this
offering at a price of $12.25 per share (for aggregate net proceeds of
$112.5 million).
(f) Does not include 19,125,000 authorized but unissued Class A Shares,
without par value, which were reclassified into an equal number of Common
Shares in connection with the offering.
19
<PAGE>
PRO FORMA COMBINED
FINANCIAL STATEMENTS OF THE COMPANY
The pro forma combined financial statements of the Company have been
prepared to give effect to (1) the Acquisition, (2) the Refinancing, (3) the
sale of 9,700,000 Common Shares in this offering at a price to the public of
$12.25 per share (for aggregate net proceeds of $112.5 million), (4) the
purchase of assets from Asgrow Florida Company ("Asgrow") on December 31, 1993
by the Company's Florida operations ("Terra Asgrow Florida"), and (5) the
acquisition, effective March 31, 1993, of certain assets of ICI Canada Inc.
("ICI Canada") by Terra Canada. These pro forma combined financial statements
have been derived from, and should be read in conjunction with, the historical
financial statements and related notes of the Company and AMCI incorporated by
reference and/or included herein. The Pro Forma Combined Statement of
Financial Position assumes that the Acquisition, the Refinancing and this
offering occurred as of June 30, 1994. The Pro Forma Combined Statements of
Income assume that all such transactions occurred on January 1, 1993.
The pro forma adjustments are based on available financial information and
certain estimates and assumptions. Therefore, it is likely that actual results
will differ from the pro forma adjustments. Management of the Company believes
that any differences between the actual results and the pro forma adjustments
will not have a material effect on the pro forma combined financial statements
as presented herein.
THE FOLLOWING UNAUDITED PRO FORMA FINANCIAL DATA ARE PRESENTED FOR
INFORMATIONAL PURPOSES ONLY AND ARE NOT NECESSARILY INDICATIVE OF THE RESULTS
THAT ACTUALLY WOULD HAVE OCCURRED HAD THE ACQUISITION, THE REFINANCING AND
THIS OFFERING BEEN CONSUMMATED ON THE DATES INDICATED OR THE RESULTS THAT MAY
OCCUR OR BE OBTAINED IN THE FUTURE.
20
<PAGE>
TERRA INDUSTRIES INC.
PRO FORMA COMBINED STATEMENT OF FINANCIAL POSITION
JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE PRO FORMA
COMPANY AMCI ADJUSTMENTS PRO FORMA
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and short-term
investments................... $ 40,520 $ 88,718 $(73,313)(a) $ 55,925
Accounts receivable, net....... 352,464 41,866 -- 394,330
Inventories.................... 268,357 25,382 -- 293,739
Deferred tax asset--current.... 27,338 -- -- 27,338
Other current assets........... 25,459 15,673 (10,086)(b) 31,046
-------- -------- -------- ----------
Total current assets....... 714,138 171,639 (83,399) 802,378
-------- -------- -------- ----------
Property, plant and equipment,
net........................... 124,786 319,383 106,450 (b) 550,619
Deferred tax asset--non-
current....................... 5,772 -- -- 5,772
Net assets of discontinued
operations.................... 3,522 -- -- 3,522
Excess of purchase price over
net assets acquired........... -- -- 317,170 (b) 317,170
Distribution reserve fund...... -- 18,480 -- 18,480
Other assets................... 28,677 21,303 (3,206)(d) 46,774
-------- -------- -------- ----------
Total assets............... $876,895 $530,805 $337,015 $1,744,715
======== ======== ======== ==========
LIABILITIES
Debt due within one year....... $109,671 $ 1,370 $ 643 (a) $ 111,684
Accounts payable............... 293,361 28,531 -- 321,892
Accrued and other liabilities.. 105,270 24,625 7,075 (b) 136,970
-------- -------- -------- ----------
Total current liabilities.. 508,302 54,526 7,718 570,546
-------- -------- -------- ----------
Long-term debt................. 45,782 215,659 256,857 (a) 518,298
Deferred income taxes.......... 2,383 25,231 31,860 (b)(d) 59,474
Other liabilities.............. 32,472 4,179 5,385 (a)(b) 42,036
Minority interest.............. -- 161,798 (6,153)(b) 155,645
Common stock and options with
liquidity rights.............. -- 4,347 (4,347)(b) --
-------- -------- -------- ----------
Total liabilities.......... 588,939 465,740 291,320 1,345,999
-------- -------- -------- ----------
STOCKHOLDERS' EQUITY
Capital stock.................. 123,550 172 9,528 (c) 133,250
Paid-in capital................ 523,915 40,472 62,328 (c) 626,715
Cumulative translation
adjustment.................... (795) -- -- (795)
Accumulated deficit............ (358,714) 24,421 (26,161)(c)(d) (360,454)
-------- -------- -------- ----------
Total stockholders' equity. 287,956 65,065 45,695 398,716
-------- -------- -------- ----------
Total liabilities and
stockholders' equity...... $876,895 $530,805 $337,015 $1,744,715
======== ======== ======== ==========
</TABLE>
See accompanying Notes to the Pro Forma Combined Financial Statements.
21
<PAGE>
TERRA INDUSTRIES INC.
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE PRO FORMA
COMPANY AMCI ADJUSTMENTS PRO FORMA
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net sales...................... $1,059,475 $231,552 $ -- $1,291,027
Other income, net.............. 18,281 324 -- 18,605
---------- -------- -------- ----------
Total.......................... 1,077,756 231,876 -- 1,309,632
---------- -------- -------- ----------
COST AND EXPENSES
Cost of sales.................. 897,685 137,005 -- 1,034,690
Selling, general and
administrative expense........ 100,172 13,104 (1,858)(e) 111,418
Depreciation and amortization.. 9,060 14,269 7,555 (f) 30,884
Equity in earnings of
affiliates.................... (36) (402) -- (438)
Interest income................ (1,983) (1,971) 1,223 (g) (2,731)
Interest expense............... 5,841 12,622 9,833 (h) 28,296
---------- -------- -------- ----------
Total.......................... 1,010,739 174,627 16,753 1,202,119
---------- -------- -------- ----------
Income before minority
interest, income taxes and
extraordinary item............ 67,017 57,249 (16,753) 107,513
Minority interest.............. -- (15,526) -- (15,526)
---------- -------- -------- ----------
Income before income taxes and
extraordinary item............ 67,017 41,723 (16,753) 91,987
Income tax provision........... 25,400 14,898 (3,272)(o) 37,026
---------- -------- -------- ----------
INCOME BEFORE EXTRAORDINARY
ITEM.......................... $ 41,617 $ 26,825 $(13,481) $ 54,961
========== ======== ======== ==========
Weighted average shares
outstanding................... 70,336 9,700 80,036
========== ======== ==========
Income per share before
extraordinary item............ $ 0.59 $ 0.69
========== ==========
</TABLE>
See accompanying Notes to the Pro Forma Combined Financial Statements.
22
<PAGE>
TERRA INDUSTRIES INC.
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TERRA PRO FORMA
THE ASGROW PRO FORMA TERRA PRO FORMA
COMPANY FLORIDA ADJUSTMENTS CANADA AMCI ADJUSTMENTS PRO FORMA
---------- ------- ----------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Net sales............... $1,212,510 $90,607 $(3,644) $24,565 $365,436 $ -- $1,689,474
Other income, net....... 25,491 1,470 (637) 140 394 -- 26,858
---------- ------- ------- ------- -------- -------- ----------
Total................... 1,238,001 92,077 (4,281)(i) 24,705 365,830 -- 1,716,332
COST AND EXPENSES
Cost of sales........... 1,021,187 74,108 (357)(i)(j) 19,775(n) 257,448 -- 1,372,161
Selling, general and
administrative......... 161,791 9,815 (2,347)(i)(k) 1,965 30,531 (10,556)(e) 191,199
Depreciation and
amortization........... 15,470 573 782 (i)(l) 77(n) 26,876 15,952 (f) 59,730
Equity in earnings of
affiliates............. (2,275) -- -- 1,242(n) (1,018) -- (2,051)
Interest income......... (3,261) -- 1,418 (m) -- (1,820) 2,468(g) (1,195)
Interest expense........ 12,944 15 -- 300 17,759 14,015(h) 45,033
---------- ------- ------- ------- -------- -------- ----------
Total................... 1,205,856 84,511 (504) 23,359 329,776 21,879 1,664,877
---------- ------- ------- ------- -------- -------- ----------
Income before minority
interest and income
taxes.................. 32,145 7,566 (3,777) 1,346 36,054 (21,879) 51,455
Minority interest....... -- -- -- -- (19,789) -- (19,789)
---------- ------- ------- ------- -------- -------- ----------
Income before income
taxes and extraordinary
item................... 32,145 7,566 (3,777) 1,346 16,265 (21,879) 31,666
Income tax provision.... 9,300 2,924 (1,450)(o) 1,006 7,721 (1,894)(o) 17,607
---------- ------- ------- ------- -------- -------- ----------
INCOME BEFORE
EXTRAORDINARY ITEMS.... $ 22,845 $ 4,642 $(2,327) $ 340 $ 8,544 $(19,985) $ 14,059
========== ======= ======= ======= ======== ======== ==========
Weighted average shares
outstanding............ 69,064 9,700 78,764
========== ======== ==========
Income per share before
extraordinary item..... $ 0.33 $ 0.18
========== ==========
</TABLE>
See accompanying Notes to the Pro Forma Combined Financial Statements.
23
<PAGE>
The pro forma adjustments necessary to present the combined financial
position are as follows:
(a) The adjustment to cash and short-term investments is determined as
follows (in thousands):
<TABLE>
<S> <C>
Issuance of long-term debt...................................... $ 297,500
Refinance short- to long-term debt.............................. (40,000)
Proceeds from sale of stock (Note (c)).......................... 112,500
Proceeds from sale of call under Methanol Hedging Agreement..... 4,000
Payment of finance fees--other assets........................... (11,200)
Payment of purchase price and working capital adjustment........ (431,113)
Payment of Acquisition related costs............................ (5,000)
---------
Net cash adjustment............................................. $ (73,313)
=========
</TABLE>
Bank loans totaling $40 million used by the Company to repurchase its
convertible subordinated debentures in March 1994 will be repaid with
borrowings under the Credit Agreement.
The proceeds from the sale of the call under the Methanol Hedging
Agreement were recorded as a long-term deferred credit. In the event
that BMC is required to make payments under this agreement, the first
$4 million in payments will be charged against the long-term deferred
credit. The liability, if any, of BMC under this agreement over $4
million will be expensed in the period to which such payment relates,
which will also be the period in which the Company realizes increased
gross profit on methanol sales.
(b) Adjustments to the net assets of AMCI to reflect fair values under
purchase accounting are as follows (in thousands):
<TABLE>
<S> <C> <C>
Equity purchase price of $400,000............................. $400,000
Working capital adjustment as of June 30, 1994 based
on actual working capital of $117,113............... $(31,113)
AMCI net assets at June 30, 1994..................... 65,065
Adjustments to conform AMCI's accounting for plant
turnaround costs to that used by the Company:
Other current assets............................... (10,086)
Other assets....................................... (3,994)
Accrued liabilities ............................... (7,075)
Write-up of property, plant & equipment to fair
value............................................... 106,450
Fair value adjustment to AMCI Senior Notes........... (7,512)
Record liability for underfunded pension plan........ (1,385)
Minority interest in purchase accounting adjustments. 6,153
Adjust accrual for common stock and options with
liquidity rights.................................... 4,347
Record payment of merger related costs............... (5,000)
Provide deferred income taxes on basis differences... (33,020)
--------
Total............................................... 82,830 (82,830)
-------- --------
Excess of purchase price over net assets acquired.... $317,170
========
</TABLE>
The adjustment for plant turnaround costs is to conform AMCI's
accounting policy of capitalizing costs related to the periodic
scheduled maintenance of production facilities and amortization of such
costs over generally two years to the Company's policy of accruing for
such costs over the two-year period preceding the next scheduled
maintenance of the production facilities. The adjustment for the
accrual for common stock and options with liquidity rights is to
reflect the fact that the Company will settle all such outstanding
stock and options for cash as part of the Acquisition, and AMCI will no
longer be obligated to redeem such stock or options.
(c) The pro forma adjustment reflects the elimination of the AMCI equity
accounts and the issuance of 9,700,000 Common Shares in this offering
for aggregate net proceeds of $112.5 million.
24
<PAGE>
(d) The pro forma adjustment reflects the following (in thousands):
<TABLE>
<S> <C>
Fair value adjustments to the Senior Notes of AMCI.............. $(7,512)
<CAPTION>
Payment of finance fees for new financing....................... 11,200
Adjustment of other assets to conform accounting methods........ (3,994)
<S> <C>
Write-off of deferred finance fees related to refinanced credit
lines.......................................................... (2,900)
-------
$(3,206)
=======
</TABLE>
The write-off of $2.9 million of deferred finance fees related to the
refinancing of credit lines, less the income tax benefit of $1.2
million, resulted in a net charge to retained earnings of $1.7 million.
The pro forma adjustments necessary to present the results of operations for
the six months ended June 30, 1994 and the year ended December 31, 1993 are as
follows:
(e) Reduce AMCI executive incentive plan expense that will not exist after
the Merger totaling approximately $1.2 million in 1994 and $10.6
million in 1993 and defer $0.7 million of AMCI acquisition related
costs expensed in the second quarter of 1994.
(f) Amortization of excess purchase price over net assets acquired net of
reduced depreciation expense on assets acquired of $7.6 million in 1994
and $16 million in 1993 based on an extended 18.5 year useful life for
assets acquired.
(g) Reduce interest income by $1.2 million in 1994 and $2.5 million in 1993
for cash utilized in purchase.
(h) Increase interest expense $9.8 million in 1994 and $14.0 million in
1993, net of adjusted amortization of loan finance fees. The pro forma
combined interest expense for new long-term debt is based upon an
assumed blend of 48% variable and 52% fixed interest rates on $257.5
million of debt. The blended interest rate assumed for 1993 was 7.3%
and for 1994 was 7.8%. These are added to the historical interest
expense of the Company and AMCI.
(i) Certain operations of Asgrow, principally a retail location in southern
Georgia and the seed distribution business to vegetable markets in
North Carolina, were not acquired. Revenues, costs of sales, selling
expenses and depreciation are reduced $4.3 million, $2.3 million, $0.5
million and $0.1 million respectively, to reflect operations not
acquired.
Pro forma adjustments do not include expense recognition for $2.9
million ($1.7 million net of income taxes) of deferred finance fees that
would have been incurred as a result of refinancing certain AMCI credit
lines in connection with the Acquisition. These nonrecurring charges
have not been included because they will result from the Acquisition and
will not affect recurring future operations.
(j) Asgrow had purchased proprietary seed from Asgrow Seed Company ("Asgrow
Seed") at Asgrow Seed's cost. Terra Asgrow Florida will purchase seed
from Asgrow Seed at prices that represent wholesale market value. The
increase in seed purchase costs is estimated to increase pro forma cost
of sales by $1.9 million.
(k) Asgrow was charged a total of $1.8 million by its parent for
allocations of research and development costs and general
administrative services. These expenses will not continue.
(l) The acquisition price included approximately $13 million of unassigned
cost which will be charged against operations $0.9 million per year for
15 years.
(m) Interest income is reduced to reflect use of available cash to fund the
purchase from Asgrow.
(n) Terra Canada depreciation expense of $0.9 million for the three months
ended March 31, 1993 is eliminated and replaced with lease expense
computed from $3.3 million annual lease payments and amortization of
lease finance costs. In addition, as a condition of the acquisition,
certain employees were terminated subject to varying transition periods
averaging six months. Pro forma costs of sales is reduced for the full
effect of workforce reductions resulting in cost savings of $0.3
million for the three months ended March 31, 1993.
(o) Income taxes are provided at an assumed rate of 40% for pro forma
adjustments. No reduction in tax expense will result from charges
related to amortization of excess purchase price over net assets
acquired.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES AFTER
THE ACQUISITION AND THE REFINANCING
The Company's primary uses for cash after the Acquisition and the
Refinancing will be to fund its working capital needs, make payments on its
indebtedness and other obligations, make quarterly distributions on AMCLP's
Senior Preference Units and make capital expenditures. Its principal sources
of funds will be cash flow from operations and borrowings under the Credit
Agreement. See "Pro Forma Combined Financial Statements of the Company."
The Company's working capital requirements will be greater with the addition
of AMCI's businesses and will continue to be seasonal. Net cash used by
operating activities of the Company was $1 million and $17.8 million,
respectively, for the year ended December 31, 1993 and the six months ended
June 30, 1994, and net cash provided by operations for AMCI was $65.9 million
and $66.3 million, respectively for the same periods. The fertilizer business
is highly seasonal and volatile due to a number of factors. The Company's
greatest need for working capital generally occurs in the spring and fall
months, as the inventory built by the Company during the summer and winter
months is converted into receivables from customers, but not yet collected.
The Company's lowest working capital need occurs in the summer, as receivables
are collected. See "Business--Seasonality and Volatility."
Because of the increase in the Company's indebtedness and other obligations
resulting from the Acquisition, the Company's need for cash to service such
obligations, as well as quarterly distributions on AMCLP's Senior Preference
Units, will substantially increase. On a pro forma basis, for the year ended
December 31, 1993, the Company's interest expense was $45 million, compared
with actual interest expense of $12.9 million for the Company and $17.8
million for AMCI (and AMCLP paid $18.5 million on the Senior Preference Units
in quarterly distributions in such year.) See "Description of Certain
Indebtedness and Other Obligations--AMCLP Senior Preference Units and Other
Obligations."
The Company intends to continue to make capital expenditures after the
Acquisition to maintain the operating efficiency of its manufacturing
facilities. Capital expenditures for the combined businesses are currently
estimated to be approximately $30 million in 1994 and 1995. Combined capital
expenditures of the Company and AMCI were $27.5 million in 1992 and $28.6
million in 1993.
In addition to operating cash flows, the Company will fund its working
capital needs through the Credit Agreement, which permits revolving borrowings
of up to $175 million and an additional $50 million in revolving borrowings by
AMLP, and Terra Canada's revolving credit agreement, which permits borrowings
of up to $35 million (Cdn.), in each case subject to compliance with various
financial ratios and other covenants. The Company will also utilize borrowings
under the Credit Agreement to pay for any Senior Notes which the Company is
required to repurchase. See "Description of Certain Indebtedness and Other
Obligations." Depending on market and other conditions, the Company may issue
debt or equity securities, including preferred stock and securities
convertible into Common Shares, in public or private offerings in the future
in order to repay portions of its indebtedness under the Credit Agreement.
The Company's leverage after the Acquisition and Refinancing may restrict
the Company's ability to take various actions and respond to circumstances in
the future. See "Investment Considerations-- Leverage." The Company believes,
however, that cash from operations and available financing sources will be
sufficient to meet its cash requirements for the next several years.
BUSINESS
GENERAL
The Company is a leading producer of nitrogen fertilizer and marketer of
fertilizer, crop protection products and seed. After giving effect to the
Acquisition, the Company will be the third largest producer of anhydrous
ammonia and one of the two largest producers of nitrogen solutions in the
United States and
26
<PAGE>
Canada. Through the acquisition of AMCI, the Company will also substantially
increase its participation in the methanol production industry. The Company
owns and operates the largest independent farm service center network in the
United States and Canada and is the second largest supplier of crop production
inputs in the United States.
The Company's production facilities are currently comprised of:
. 3 nitrogen fertilizer plants, which are located in Oklahoma (the
"Woodward Facility"), Iowa (the "Port Neal Facility") and Ontario (the
"Courtright Facility");
. 1 crop protection chemical formulation plant located in Arkansas (the
"Blytheville Formulation Facility"); and
. 7 additional liquid chemical formulation facilities.
The Company's distribution network serves the United States and the eastern
region of Canada and has grown over the last several years to include
approximately:
. 350 farm service centers;
. 58 fertilizer storage facilities; and
. 770 affiliated dealer locations.
AMCI's principal facilities are comprised of:
. a facility, located in Rogers County, Oklahoma, which produces
primarily ammonia and urea ammonium nitrate solution ("UAN") solutions
and which consists of two ammonia plants, two nitric acid plants and
two UAN solution plants (the "Verdigris Facility");
. a facility, located in Mississippi County, Arkansas, which produces
ammonia and urea and which consists of an ammonia plant and a granular
urea plant (the "Blytheville Facility");
. approximately 60 fertilizer storage facilities; and
. a facility located in Beaumont, Texas, for the production of methanol
(the "Beaumont Facility").
MANUFACTURED FERTILIZER
Nitrogen is one of three primary nutrients essential for plant growth.
Nitrogen fertilizer needs to be reapplied each year in areas of extensive
agricultural usage because of absorption by crops and its tendency to escape
from the soil. There are no substitutes for nitrogen fertilizer in the
cultivation of high-yield crops. Ammonia is the simplest form of nitrogen
fertilizer and is the primary raw material for the production of upgraded
nitrogen fertilizers. Ammonia is a gas under normal conditions and requires
special handling and application equipment and procedures. Ammonia is reacted
with other compounds to produce solid and liquid fertilizers, primarily urea
and UAN, which are easier to transport, store and apply than ammonia.
The Company is a major producer and distributor of nitrogen fertilizers and
will gain significant additional capacity with the acquisition of AMCI. The
Company's and AMCI's principal products are ammonia, urea and UAN. After
giving effect to the acquisition of AMCI, the Company will be the third
largest producer of anhydrous ammonia and one of the two largest producers of
UAN in the United States. A significant portion of the Company's and AMCI's
ammonia production is used to produce other nitrogen fertilizer products such
as urea and UAN, which are higher value-added products.
Products. Although, to some extent, the various nitrogen fertilizers are
interchangeable, each has its own distinct characteristics which produce
agronomic preferences among end users. Farmers decide which
27
<PAGE>
type of nitrogen fertilizer to apply based on the crop planted, soil and
weather conditions, regional farming practices and relative nitrogen
fertilizer prices.
Ammonia. Anhydrous ammonia is the simplest form of nitrogen fertilizer and
is the feedstock for the production of most other nitrogen fertilizers,
including urea and UAN. It is produced by reacting natural gas with steam and
air at high temperatures and pressures in the presence of catalysts. It has a
nitrogen content of 82% by weight and is generally the least expensive form of
fertilizer per unit of nitrogen.
Urea. Solid urea is produced for both the feed and fertilizer market by
converting ammonia into liquid urea, which can then be turned into a solid
which is either prilled or granulated. Urea has a nitrogen content of 46% by
weight, the highest level for any solid nitrogen product. Granular urea is
generally sold as fertilizer and prilled urea is generally sold as a feed
supplement. The Company produces both granular and prilled urea. AMCI produces
granular urea.
UAN Solution. The Company produces UAN at all three of its manufacturing
facilities. AMCI's Verdigris Facility in Oklahoma is the largest UAN
production facility in the United States. UAN is produced by combining liquid
urea and ammonium nitrate in water. The nitrogen content of UAN is typically
28% to 32% by weight. UAN is a liquid fertilizer and, unlike ammonia, is
generally odorless and does not need to be refrigerated or pressurized for
transportation or storage.
UAN may be applied uniformly and may be mixed with various herbicides,
permitting the application of several materials simultaneously, and thus
reducing energy and labor costs. In addition, UAN may be applied from ordinary
tanks and trucks and can be sprayed or injected into the soil, or applied
through irrigation systems, throughout the growing season. UAN is relatively
expensive to transport and store because of its high water content. Due to its
stable nature, UAN may be used for no-till row crops where fertilizer is
spread upon the surface and is subject to volatilization losses. The use of
conservation tilling, which reduces erosion, is increasing in the United
States, and the Company believes this trend, if continued, should have a
positive impact on UAN demand.
The Company's and AMCI's nitrogen fertilizer sales mixes for the years ended
December 31, 1991, 1992 and 1993 were as follows (based on tons sold):
<TABLE>
<CAPTION>
THE COMPANY
--------------
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Ammonia.......................................................... 28% 30% 31%
Urea............................................................. 11% 11% 11%
UAN.............................................................. 61% 59% 58%
</TABLE>
<TABLE>
<CAPTION>
AMCI
--------------
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Ammonia.......................................................... 18% 16% 16%
Urea............................................................. 16% 16% 16%
UAN.............................................................. 66% 68% 68%
</TABLE>
Plants. The Company's Woodward Facility, Port Neal Facility and Courtright
Facility are integrated facilities for the production of ammonia, liquid urea
and UAN and other nitrogen fertilizer solutions. In addition, the Port Neal
Facility and the Courtright Facility produce solid urea. The Courtright
Facility's liquid urea and granulation capacity are expected to increase as a
result of a plant upgrade project, announced in February 1994. The project is
expected to be completed in 1995 and will enable the replacement of 65,000
tons of annual ammonia sales with urea and nitrogen solution sales. The
project cost is estimated to be approximately $20 million and is expected to
be funded through lease financing.
Each of the Company's three manufacturing facilities is designed to operate
continuously, except for planned biennial shutdowns for maintenance and
installation of efficiency improvements. Capacity utilization (gross tons
produced divided by capacity tons at expected operating rates and on stream
factors)
28
<PAGE>
of the Company's manufacturing facilities for the years ended December 31,
1993, 1992 and 1991, in the aggregate, was approximately 102%, 99% and 100%,
respectively.
AMCI's Verdigris Facility and Blytheville Facility are also integrated
facilities. The Verdigris Facility produces primarily ammonia and UAN and the
Blytheville Facility produces primarily ammonia and urea. Capacity utilization
of AMCI's manufacturing facilities for the years ended December 31, 1993,
1992, and 1991, in the aggregate, was approximately 101%, 107%, and 104%,
respectively.
Marketing and Distribution. The Company's principal customers for its
manufactured nitrogen fertilizer products are large independent dealers,
national retail chains, cooperatives and industrial customers. Approximately
10% of the Company's fertilizer production is sold through its farm service
center locations to retail customers, while the rest is sold to outside
customers. In 1993, no customer accounted for greater than 10% of total
manufactured nitrogen fertilizer sales.
After giving effect to the acquisition of AMCI, the Company will have
production facilities and significant storage capacity nearby major fertilizer
consuming regions which should allow it to continue to be a major supplier of
nitrogen solutions to its customers.
DISTRIBUTION
The Company's distribution business manages a distribution and marketing
system for a comprehensive line of fertilizer, crop protection products and
seed. It also provides crop protection and other services to its customers.
The Company's customers are primarily farmers and dealers located in the
Midwestern, southern, southwestern and southeastern regions of the United
States, and the eastern region of Canada.
Products. The Company markets a comprehensive line of crop protection
products (herbicides, insecticides, fungicides, adjuvants, plant growth
regulators, defoliants, desiccants and other agricultural chemicals),
fertilizer (nitrogen, phosphates, potash and micronutrients) and seed. The
Company markets several major seed brands and, in its United States marketing
area, is the largest independent seed distributor. The Company focuses
particular marketing efforts on its proprietary brand of corn hybrids, soybean
and cotton seed varieties, which provide higher margins. These products
represented approximately 20% of total seed sales in 1993. The Company also
has an exclusive retail storefront marketing and distribution agreement for
dekalb brand seed in the Midwest, which accounted for approximately 7.5% of
total 1993 seed sales.
Although most crop protection products marketed by the Company are
manufactured by unaffiliated suppliers, the Company also markets its own
Riverside(R) brand products. Riverside products represented approximately 16%
of total crop protection product sales in 1993. The Riverside line includes
over 100 products, nine of which were added in 1993, and consists of
herbicides, insecticides, fungicides, adjuvants, seed treatments, plant growth
regulators, defoliants and desiccants. The majority of Riverside products are
formulated and packaged in facilities owned by the Company. The Riverside line
includes several formulations produced exclusively by the Company, but does
not include proprietary agricultural chemicals. Riverside products generally
provide higher gross margins for the Company than products manufactured by
unaffiliated suppliers. The sale of such products, however, involves
additional indirect costs, including the cost of maintaining and disposing of
excess inventory and potentially greater liability for product defects. For
Riverside pesticide products, the Company possesses and processes the
registrations required by the EPA.
Services. In addition to selling products required to grow crops, the
Company's farm service centers offer a wide variety of services to grower
customers. These services include soil and plant tissue analysis and crop
production program recommendations, custom blending of fertilizers, field
application services and field inspections for pest control and crop program
performance follow-up. The farm service centers
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utilize the Company's Ag Analytical Services laboratory in Elida, Ohio to
analyze nutrient levels in soil and plant tissue samples. The results of these
tests are analyzed by the Company's proprietary CropMaster(R) program, which
provides specific, localized soil fertility recommendations for specific crops
on a field-by-field basis. Crop input recommendations are provided through
computer terminals at most farm service center locations, which are linked to
a mainframe computer located at the Company's headquarters in Sioux City,
Iowa. Recommendations can be made for substantially all crops grown in the
Company's markets. The program also provides "least cost" nutrient blending
formula recommendations, makes seed variety recommendations based on hybrid
characteristics and other factors important to the individual grower, and
maintains crop input records for grower customers.
In connection with product sales to dealers, the Company provides
warehousing and delivery services. For selected dealer customers, the Company
offers a service package called MarketMaster(TM). The package includes
environmental and safety audits, special training courses, access to the
Company's Ag Analytical Services laboratory, use of the CropMaster program and
other services. There were approximately 475 MarketMaster dealer sites at
December 31, 1993.
Marketing and Distribution. The Company markets its products primarily to
agricultural customers, including both dealers and growers. For 1993,
approximately 60% of the Company's distribution revenues were attributable to
retail sales through farm service center locations and approximately 40% were
attributable to wholesale sales to dealers.
The Company also markets its products through its Professional Products
group to non-farm customers, including turf growers, nurseries, golf courses,
parks and athletic facilities. The Company offers these customers herbicides,
insecticides, fungicides, fertilizer, adjuvants, plant growth regulators, seed
and agronomic services. The Professional Products personnel generally work
through the Company's farm service centers, using established delivery systems
and product lines.
The Company's distribution operations are organized into the Northern and
Southern Divisions, which include 13 separate regions. Field personnel receive
regular training through Terra University, a series of courses designed to
develop skills in agronomy, management, sales, environmental and personal
safety, and field application. The field salespeople are supported by the Ag
Analytical Services laboratory, a staff of agronomists and a research station
where the efficacy of various crop protection products and the performance of
numerous seed varieties are tested.
METHANOL
Through the acquisition of AMCI, the Company will substantially increase its
participation in the methanol production industry. After giving effect to such
acquisition, the Company will have approximately 320 million gallons of
methanol production capacity, representing approximately 16% of the total
United States rated capacity.
Product. Methanol is a liquid petrochemical made primarily from natural gas.
It is used primarily as a feedstock in the production of other chemical
products such as formaldehyde, acetic acid and chemicals used in the building
products industry. Methanol is also used as a feedstock in the production of
MTBE, an oxygenate and octane enhancer used as an additive in reformulated
gasoline. Reformulated gasoline has lower volatility and is less aromatic than
gasoline. The methanol manufacturing process involves heating the natural gas
feedstock, mixing it with steam and passing it over a nickel-based catalyst,
which breaks it down into carbon monoxide, carbon dioxide and hydrogen. This
reformed gas is then cooled, compressed and passed over a copper-zinc based
catalyst to produce crude methanol. Crude methanol consists of approximately
80% methanol and 20% water. In order to convert it to high-purity chemical
grade methanol suitable for sale, the crude methanol is distilled in a series
of distillation towers to remove the water and other impurities.
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Plants. During the first half of 1994, the Company completed the capital
improvements necessary to produce methanol instead of ammonia for a portion of
the Woodward Facility's capacity. The project cost approximately $15 million
and gives the Company 40 million gallons of annual methanol capacity at the
Woodward Facility.
After the Acquisition, the Company will own, through BMC, the Beaumont
Facility, which is the largest methanol production facility in the United
States, with approximately 280 million gallons of annual methanol capacity.
The plant and processing equipment are owned by BMC and the land is leased
from DuPont for a nominal annual rental under a lease agreement which expires
in 2090. Because the Beaumont Facility is entirely contained in a complex
owned and operated by DuPont (the "Beaumont Complex"), BMC depends on DuPont
for access to the Beaumont Facility. BMC also relies on DuPont for access and
certain essential services relating to the wharf located at the Beaumont
Complex through which most of the finished product methanol is shipped to
customers and the pipelines used to transport finished product methanol and to
obtain natural gas, as well as for certain utilities and waste water treatment
facilities and other essential services.
Marketing and Distribution. The marketing of BMC's methanol is conducted on
an exclusive basis by Trammochem, a division of Transammonia, Inc., pursuant
to a Marketing Services Agreement between BMC and Trammochem. Trammochem is
one of the largest international traders and marketers of bulk petrochemicals,
including methanol. Affiliates of Transammonia, Inc. are currently
stockholders of AMCI and will receive a portion of any payments made to the
Counterparty under the Methanol Hedging Agreement. Pursuant to the Marketing
Services Agreement, Trammochem provides BMC with marketing services in
connection with the sale of BMC's methanol on a worldwide basis. These
services include analysis of market conditions for methanol, marketing and
sales on a contract basis and sales on a spot basis, arrangement of
transportation of methanol to customers and customer relations activities. BMC
retains responsibility for the invoicing and collection of payments from
customers and is responsible for loading transportation equipment in
accordance with customer requirements. BMC pays Trammochem an annual fee and a
monthly fee based on BMC's earnings and deliveries, respectively. The
Marketing Services Agreement continues until December 31, 1996 and from year
to year thereafter unless terminated by either party on not less than 180
days' written notice in advance of the end of any year. The agreement may also
be terminated in the event of a material default by either party or at the
option of BMC. The Company has no current intention to terminate the Marketing
Services Agreement.
BMC's customers are primarily large chemical or MTBE producers located in
the U.S. Some sales have been made to Central and South America.
Methanol Contracts. BMC has a number of long-term methanol sales contracts,
the most significant of which is with DuPont (the "DuPont Contract"). Through
August 31, 1994, BMC had sold over 85% of its 1994 production under such
contracts. For the remainder of 1994 and 1995, BMC has contracted to sell
nearly 100% of its production at prices indexed to published sources. Most of
BMC's sales contracts (other than the DuPont Contract) cover fixed volumes and
have terms of up to three years.
Under the DuPont Contract, DuPont has agreed to purchase 108 million gallons
of methanol each year until 2001 (representing 39% of the Beaumont Facility
capacity). The DuPont Contract will continue in effect after the initial term
unless terminated by either party on two years' notice. Commencing in 1998,
each of BMC and DuPont will have the unilateral right (exercisable one time
only for the remaining term of the contract) to permanently reduce the
contract quantity required to be delivered by BMC to DuPont in any contract
year by up to 54 million gallons. The price for the methanol delivered under
the DuPont Contract is generally indexed to certain published sources.
PRODUCT FORMULATIONS
The Company's Blytheville Formulation Facility formulates dry flowable
("DF") crop protection products and liquid crop protection chemicals in
separate production lines at the same location. DF formulations are small,
dry, water-dispersible granules that are mixed with water before application.
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Because of their dry form, the granules have several benefits compared with
liquid formulations, including: easier package disposal; easier cleanup of
accidental spills; absence of toxic solvents; no fumes; less weight; less
space required for storage; and no product loss from freezing temperatures or
settling. Because of these benefits, the Company expects more agricultural
chemicals will be offered to growers in DF form in the future. The Blytheville
Formulation Facility is one of 13 known DF plants in the U.S. and formulates
eight DF products and six liquid products. Approximately 40% of the plant's
volume in 1993 was attributable to the Company's own Riverside brand product
line. The Company has developed several DF formulations not available from any
other producer or formulator. The Company has also developed DF formulations
for a number of companies that contract all or portions of their production at
the Blytheville Formulation Facility.
CREDIT
A substantial portion of the Company's sales to its grower and dealer
customers is made on credit terms customary in the industry. During the third
quarter of 1992, the Company established a grower financing program to provide
crop input financing to certain grower customers for all operating
requirements on extended payment terms. In 1993, the Company provided
approximately $25 million in financing to grower customers under this program
and, in 1994, the Company expects to finance approximately $60 million to $65
million. The Refinancing is designed to allow the Company to continue such
program.
SEASONALITY AND VOLATILITY
The agricultural products business is seasonal, based upon the planting,
growing and harvesting cycles. Inventories must be accumulated in the first
few months of the calendar year to be available for seasonal sales, requiring
significant storage capacity. Inventory accumulations are financed by
suppliers or short-term borrowings, which are retired with the proceeds of the
sales of such inventory. In times of lower demand, the Company can reduce
purchases, thereby decreasing inventory carrying costs. In the past, over half
of the Company's sales generally occurred during the second quarter of each
year. This seasonality also generally results in higher fertilizer prices
during peak periods, with prices typically reaching their highest point in the
spring, dropping in the summer, increasing in the fall (as depleted
inventories are restored) through the spring.
The agricultural products business can also be volatile as a result of a
number of other factors, the most important of which, for U.S. markets, are
weather patterns and field conditions (particularly during periods of high
fertilizer consumption), current and projected grain stocks and prices and the
U.S. government's agricultural policy. Among the governmental policies that
influence the markets for fertilizer are those directly or indirectly
influencing the number of acres planted, the level of grain stocks, the mix of
crops planted and crop prices.
As with any commodity chemical, the price of methanol is volatile. The
industry has experienced cycles of oversupply resulting in depressed prices
and idled capacity, followed by periods of shortage and rapidly rising prices.
During 1994 to date, increased world demand for methanol combined with a large
number of plant shutdowns and turnarounds in the industry and the phase-in of
federally-mandated standards for oxygenated gasoline to create a tight market
and dramatically increased prices over 1993 levels. There can be no assurances
that such conditions will continue. In part, future demand for methanol will
depend on the regulatory environment with respect to oxygenated gasoline. See
"Investment Considerations--Factors Affecting Demand For Methanol and MTBE."
Most methanol sold in the U.S. is sold pursuant to long-term contracts based
on market index pricing and a fixed volume. See "Methanol--Methanol
Contracts."
RAW MATERIALS
The principal raw material used to produce nitrogen fertilizer is natural
gas. The Company estimates that natural gas costs comprised nearly 50% of the
total costs and expenses associated with the Company's manufactured fertilizer
operations in 1993. Natural gas is also the primary raw material used in the
production of methanol. Following the completion of the Acquisition, the
Company, through BMC, will
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own the largest methanol facility in the U.S. The Company estimates that
natural gas represents over 50% of the costs and expenses associated with
methanol operations. A significant increase in the price of natural gas that
could not be recovered through an increase in nitrogen fertilizer or methanol
prices could have a material adverse effect on the Company's profitability and
cash flow. The Company's policy is to fix the unit cost for 40% to 80% of its
natural gas requirements for the upcoming 12-month period using supply
contracts and various hedging techniques. See "Factors Affecting Demand For
Methanol and MTBE."
Reliable sources for supply of crop inputs at competitive prices are
critical to the distribution portion of the Company's business. The Company's
sources for fertilizer, agricultural chemicals and seed are typically
manufacturers of the products without an internal capability to distribute
products to the North American grower.
TRANSPORTATION
The Company uses several modes of transportation to receive and distribute
products to customers and its own locations, including railroad and tank cars,
common carrier trucks, barges, common carrier pipelines and Company-owned or
leased vehicles. The Company operates 35 liquid, 21 dry and one anhydrous
ammonia fertilizer terminal storage facilities in 18 states and Ontario,
Canada. The Company also has varying amounts of warehouse space at each of its
farm service centers. AMCI operates 45 liquid, 7 dry and 11 anhydrous ammonia
fertilizer storage facilities (some of which are in the same locations) in 21
states and one methanol storage facility in Beaumont, Texas.
Through Terra Express, Inc. and Terra Express of Oklahoma, Inc., wholly-
owned truck transportation subsidiaries of Terra International (together,
"Terra Express"), the Company provides transportation services to its own
facilities and customers as a contract carrier. Terra Express uses
approximately 90 owner-operated trucks and twenty Company-owned trucks to
deliver fertilizer, crop protection products, seed, feed ingredients and other
products to its own facilities and customers. At its manufacturing facilities,
its Blytheville Formulation Facility and liquid fertilizer storage locations,
the Company utilizes railcars as the major method of transportation. All of
the Company's approximately 1,100 railcars are leased.
Purchased natural gas is transported to the Port Neal Facility via an
interstate pipeline operating as an open access natural gas transporter. Under
a Federal Energy Regulatory Commission order, the Company maintains facilities
for direct access to its interstate pipeline shipper, avoiding additional
costs of local utility services. The Company transports purchased natural gas
for its Woodward Facility through an intrastate pipeline that is not an open
access carrier; however, the Company is able to transport gas supplies from
any in-state source connected to the widespread pipeline system. The
Courtright Facility utilizes local gas storage service provided by a local
utility, and purchased gas is transported from western Canada through the
TransCanada Pipeline under various delivery contracts.
AMCLP transports product primarily via barge and rail car. Additionally,
AMCLP uses trucks to transport smaller quantities of product, and the
Verdigris Facility distributes ammonia through the MAPCO pipeline. As of
December 31, 1993, AMCLP's transportation equipment included 104 leased
ammonia rail cars, and 818 leased UAN rail cars. AMCI transports purchased
natural gas for its facilities through several natural gas pipeline companies
under agreements with various terms.
BMC transports methanol primarily by marine transport via the Neches River
to the Intercoastal Canal and the Gulf of Mexico and via pipeline to selected
customers. Access to the wharf and pipeline use at the Beaumont Facility is
provided through BMC's agreements with DuPont.
RESEARCH AND DEVELOPMENT
The Company operates a 70-acre Agronomy Research Station near its Port Neal
Facility for product and program development and testing, and routinely
conducts product evaluation and testing with growers and universities. The
Company also develops DF and other chemical formulations for its Riverside
product line and for basic chemical products at its product development
laboratory located in Blytheville, Arkansas.
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COMPETITION
Nitrogen fertilizer is a global commodity and customers, including end-
users, dealers and other fertilizer producers, base their purchasing decisions
principally on the delivered price of the product. The Company competes with a
number of U.S. producers, and producers in other countries, including state-
owned and government-subsidized entities. Some of the Company's principal
competitors may have greater total resources and may be less dependent on
earnings from nitrogen fertilizer sales than is the Company. Some foreign
competitors may have access to lower cost or government-subsidized natural gas
supplies. The Company believes that it competes with other manufacturers of
nitrogen fertilizer on the basis of delivery terms and availability of
products as well as on price.
The market for the fertilizer, crop protection products and seed distributed
by the Company is highly competitive. In 1993, sales attributable to the
Company's farm service centers accounted for less than 10% of total crop
production products sold in the U.S. Within the specific market areas served
by its farm service centers, however, the Company's share of the market was
substantially higher in most instances. The Company's competitors include
cooperatives, divisions of diversified agribusiness companies, regional
distributors and independent dealers, some of which have substantially greater
financial and other resources than the Company. The Company competes primarily
by providing a comprehensive line of products and by providing what the
Company believes to be superior services to growers and dealers.
The methanol industry, like the fertilizer industry, is highly competitive
and such competition is based largely on price, reliability and
deliverability. The relative cost and availability of natural gas and the
efficiency of production facilities are important competitive factors.
Significant determinants of a plant's competitive position are the natural gas
acquisition and transportation contracts that a plant negotiates with its
major suppliers. Domestic competitors for methanol include a number of large
integrated petrochemical producers, many of which are better capitalized than
the Company. In addition, the production and trade of methanol has become
increasingly global, and a number of foreign competitors produce methanol
primarily for the export market. See "Investment Considerations--Factors
Affecting Demand for Methanol and MTBE".
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
The Company's and AMCI's operations are subject to various federal, state
and local environmental, safety and health laws and regulations, including
laws relating to air quality, hazardous and solid wastes and water quality.
Terra Canada's operations are subject to various federal and provincial
regulations regarding such matters, including the Canadian Environmental
Protection Act administered by Environment Canada, and the Ontario
Environmental Protection Act administered by the Ontario Ministry of the
Environment. The Company and AMCI are also involved in the manufacture,
handling, transportation and storage of materials that are or may be
classified as hazardous or toxic by federal, state, provincial or other
regulatory agencies. Precautions are taken to reduce the likelihood of
accidents involving these materials. If such materials have been or are
disposed of at sites that are targeted for cleanup by federal or state
regulatory authorities, the Company or AMCI may be among those responsible
under CERCLA or analogous state laws for all or part of the costs of such
cleanup.
Terra International has been designated as a PRP under CERCLA or its state
analogues with respect to various sites. Under CERCLA, all PRPs may be held
jointly and severally liable for the costs of investigation and remediation of
an environmentally damaged site. After consideration of such factors as the
number and levels of financial responsibility of other PRPs, the existence of
contractual indemnities, the availability of defenses and the speculative
nature of the costs involved, the Company's management believes that its
liability with respect to these matters will not be material.
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AMCLP has been named as a PRP at the Glenn Wynn Lagoon portion of the Sand
Springs, Oklahoma, Superfund site. Soil remediation has been completed at the
site, and a long-term ground water monitoring program is in place. FMRP
entered into and paid a de minimis settlement relating to this site in 1991
and has agreed to indemnify AMCLP for any further liability, if any, incurred
by AMCLP. AMCI believes that such agreement will provide a full indemnity for
any further liability, if any, incurred by the Operating Partnership in
connection with such Superfund site. Except for AMCLP's involvement at the
Glenn Wynn Lagoon portion of the Sand Springs Superfund site, AMCI has not
been named as a PRP by any regulatory agency or other party.
Certain state regulatory agencies have enacted requirements to provide
secondary containment for bulk agricultural chemical storage facilities
present at the Company's farm service centers and AMCI's terminals. It is
expected that other states will adopt similar requirements pursuant to federal
mandate. The Company and AMCI have commenced construction of these facilities
at their farm service centers and terminals, respectively, and estimate that
the future cost of complying with these regulations in 1994 and beyond will be
approximately $6.5 million.
On September 27, 1993, Region 6 of the EPA filed a complaint, compliance
order and notice of opportunity for hearing against BMC in connection with the
Beaumont Facility's past management of an ignitable alcohol-containing waste
stream pursuant to the Resource Conservation and Recovery Act, as amended
("RCRA"), and the Texas Solid Waste Disposal Act. In its complaint, U.S. EPA
proposed to assess a civil penalty of $583,950 against BMC for violations of
hazardous waste treatment, storage and disposal, and management and record-
keeping requirements. AMCI has implemented modifications to ensure that its
alcohol-containing stream is non-hazardous under RCRA. AMCI filed its answers
to the complaint, is in negotiations with the EPA and expects to reach a
settlement for less than the proposed civil penalty. Except for this matter,
minor exceedances of permit limitations and AMCI's involvement at the Sand
Springs Superfund site, AMCI is not currently a party to any regulatory
proceeding or litigation relating to environmental matters.
With respect to the Verdigris Facility and Blytheville Facility, FMRP
retains liability for certain environmental matters. With respect to the
Beaumont Facility, DuPont retains responsibility for certain environmental
costs and liabilities stemming from conditions or operations at the Beaumont
Plant to the extent such conditions or operations existed or occurred prior to
the 1991 acquisition of BMC from DuPont. AMCI does not believe that any such
environmental matters, whether or not retained by FMRP or DuPont, will have a
material effect on AMCI's financial condition or results of operations.
Insulation and other construction or building materials at AMCI's plants
contain asbestos. Over 400 suits have been filed by contractors' employees
against DuPont based on exposure to asbestos-containing material at the
complex in which the Beaumont Facility is located. At least nine of these are
directly related to the Beaumont Facility. An estimate of potential liability
associated with these suits is not available. DuPont will retain
responsibility for all claims based on exposure to hazardous materials,
including asbestos, prior to the 1991 acquisition of BMC from DuPont. Although
no suits relating to asbestos exposure have been filed against BMC to date,
the possibility exists that liability could be incurred in the future for
claims based on exposure to asbestos-containing material after such
acquisition.
AMCI and the Company may be required to install additional air and water
quality control equipment, such as low NOx burners, scrubbers, ammonia sensors
and continuous emission monitors, at certain of its facilities in order to
maintain compliance with Clean Air Act and Clean Water Act requirements. These
equipment requirements are also typically applicable to competitors as well.
The Company estimates that the cost of complying with these requirements will
be approximately $11 million to $13 million through 1997.
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The Company endeavors to comply (and has incurred substantial costs in
connection with such compliance) in all material respects with applicable
environmental, safety and health regulations. The Company does not expect its
continued operation in compliance with such regulations (including operation
of the business acquired from AMCI) to have a material adverse effect on its
earnings or competitive position.
EMPLOYEES
The Company had approximately 2,390 full-time employees at December 31,
1993, none of whom were covered by a collective bargaining agreement. In
addition, the Company, which annually hires temporary employees on a seasonal
basis, hired approximately 1,500 temporary employees during its spring selling
season in 1993. As of December 31, 1993, AMCI had 398 employees. None of
AMCI's employees are subject to collective bargaining agreements.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The total number of shares of stock of all classes which the Company has
authority to issue is 133,500,000 shares of capital stock (without par value),
all of which are classified as Common Shares. A stockholder of the Company has
no preemptive rights to subscribe for additional shares of stock or other
securities of the Company except as may be granted by the Board of Directors.
COMMON SHARES
A holder of Common Shares is entitled to one vote for each share held on all
matters submitted generally to a vote of stockholders and, subject to the
voting rights of the holders of preferred shares, if any, the exclusive voting
power for all purposes is vested in the holders of the Common Shares. Holders
of Common Shares do not have the right of cumulative voting in connection with
the election of directors. The Common Shares have no conversion rights and are
not subject to redemption.
Subject to the rights of the holders of preferred shares, if any, the
holders of Common Shares of the Company are entitled to receive, pro rata,
dividends when, as and if declared by the Board of Directors from funds
legally available therefor. In the event of any liquidation, dissolution or
winding up of the Company, after payment or providing for the payment of all
liabilities and amounts due the holders of preferred shares, if any, the
holders of Common Shares are entitled to share ratably in all the remaining
assets.
All of the outstanding Common Shares are, and the Common Shares offered
hereby will be, validly issued, fully paid and nonassessable.
The Transfer Agent for the Common Shares is First Chicago Trust Company of
New York in the United States and Montreal Trust Company in Canada.
OTHER CLASSES AND SERIES OF STOCK
The Board of Directors may classify and reclassify any unissued shares of
capital stock into other classes and series, including one or more series of
preferred shares, by setting or changing in any one or
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more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock. Such stock may rank senior
to the Common Shares in one or more respects.
CERTAIN PROVISIONS OF MARYLAND LAW
The Company is incorporated under the laws of the State of Maryland. The
following paragraphs summarize certain provisions of Maryland General
Corporation Law (the "MGCL") and the Company's Articles of Incorporation (the
"Charter") and By-Laws. The summary does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Company's Charter and By-Laws for complete information.
Business Combinations. The MGCL prohibits certain "business combinations"
(including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an "Interested Stockholder." An
Interested Stockholder is any person (a) who beneficially owns 10% or more of
the voting power of the corporation's shares or (b) an affiliate or associate
of the corporation who, at any time within the two-year period prior to the
date in question, was an Interested Stockholder or an affiliate or an
associate thereof. Such business combinations are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by all
holders of voting shares of the corporation, and (b) 66 2/3% of the votes
entitled to be cast by all holders of voting shares of the corporation other
than voting shares held by the Interested Stockholder or an affiliate or
associate of the Interested Stockholder, with whom the business combination is
to be effected, unless, among other things, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by
the Interested Stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. A Maryland corporation may
adopt an amendment to its charter or by-laws electing not to be subject to the
special voting requirements of the foregoing legislation. Any such amendment
would have to be approved by the affirmative vote of at least 80% of the votes
entitled to be cast by all holders of outstanding shares of voting stock and
66 2/3% of the votes entitled to be cast by holders of outstanding shares of
voting stock who are not Interested Stockholders. The Company has not adopted
such an amendment to its Charter. These provisions of the MGCL also do not
apply to certain corporations (including the Company) which had an Interested
Stockholder on May 31, 1983 unless a resolution is passed by the directors of
such corporation electing to have these provisions apply. The directors of the
Company have not passed such a resolution and, thus, such provisions of the
MGCL do not currently apply to the Company.
Control Share Acquisitions. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
Control shares are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by such a person, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (a) 20% or more but less than 33 1/3%; (b)
33 1/3% or more but less than a majority; or (c) a majority of all voting
power. Control shares do not include shares of stock an acquiring person is
entitled to vote as a result of having previously obtained stockholder
approval. A control share acquisition means, subject to certain exceptions,
the acquisition of, ownership of or the power to direct the exercise of voting
power with respect to, control shares.
37
<PAGE>
A person who has made or proposed to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand therefor to consider the
voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
voting rights, as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such shares are
considered and not approved. If voting rights for "control shares" are
approved at a stockholders' meeting and the acquiror becomes entitled to vote
a majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the stock as determined for purposes of
such appraisal rights may not be less than the highest price per share paid in
the control share acquisition, and certain limitations and restrictions
otherwise applicable to the exercise of dissenters' rights do not apply in the
context of a "control share acquisition."
The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the articles of incorporation or by-laws of the corporation. The By-Laws of
the Company contain an exception from the control share acquisition statute
for shares held by Minorco, any affiliate, associate or immediate transferee
of Minorco, or any associate or affiliate of such immediate transferee of
Minorco.
DESCRIPTION OF CERTAIN INDEBTEDNESS
AND OTHER OBLIGATIONS
The following is a brief description of the basic terms of and instruments
governing certain indebtedness and other obligations of the Company and its
subsidiaries which will be in existence after the consummation of the
Acquisition and the Refinancing. Capitalized terms used in such instruments
but not defined herein have the meaning ascribed to them in such instruments.
These summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the instruments governing such
indebtedness and other obligations.
SENIOR NOTES
AMCI presently has outstanding, and the Company will assume by virtue of the
merger of AMCI into the Company, $175 million in aggregate principal amount of
the Senior Notes. The Senior Notes are issued under an Indenture dated as of
October 15, 1993 (the "Indenture"), between AMCI and Society National Bank, as
trustee and will mature on September 30, 2003. Following such merger, the
Senior Notes will be senior, unsecured obligations of the Company and will
rank pari passu in right of payment with any other senior indebtedness of the
Company. Because the Company is a holding company, all existing and future
liabilities of the Company's subsidiaries, including those under the Credit
Agreement, will be effectively senior to the Senior Notes. In addition, the
Senior Preference Units of AMCLP described below will be effectively senior to
the Senior Notes.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after September 30, 1998, initially at 105.375%
of their principal amount, plus accrued interest, declining to 100% of their
principal amount on September 30, 2000. In addition, at any time prior to
September 30, 1996, the Company may, at its option, redeem up to $61.25
million aggregate principal amount of Senior Notes out of the proceeds of one
or more underwritten public offerings of equity securities at a redemption
price of 110% of their principal amount, plus accrued interest.
38
<PAGE>
The Indenture provides that upon a Change of Control each holder may require
the repurchase of its Senior Notes in cash at a purchase price of 101% of the
principal amount thereof, plus accrued interest, pursuant to an offer to
repurchase which must be mailed within 45 days after the Change of Control.
Because the Acquisition will constitute a Change of Control, the Company will
be required to make such a repurchase offer after consummation of the
Acquisition. The Company will have funds available under the Credit Agreement
to make such repurchases. The Senior Notes are publicly-held and the Company
presently does not know the extent to which Noteholders may accept such offer.
The Indenture contains certain covenants which will limit various actions by
the Company and its subsidiaries, including the incurrence of indebtedness,
the payment of dividends and other distributions, the extent to which the
Company and its subsidiaries may agree to consensual restrictions on the
ability of subsidiaries to pay dividends and indebtedness owed to the Company
and other subsidiaries, the sale of subsidiary stock to third parties,
transactions with affiliates and shareholders, the incurrence of liens,
participation in sale-leaseback transactions, sales of assets and mergers. In
general, the Indenture will permit the Company and certain subsidiaries to
incur indebtedness if, after giving effect to the incurrence of such
indebtedness and the receipt and application of the proceeds therefrom, the
Interest Coverage Ratio of the Company and its consolidated subsidiaries would
be greater than 2:1.
CREDIT AGREEMENT
The following description is based upon the draft Credit Agreement available
on the date hereof. The Credit Agreement will be entered into concurrently
with the consummation of this offering and the Acquisition by the Company and
certain lenders with Citibank, N.A. to act as agent for the ultimate lenders
thereunder. The form of Credit Agreement is attached as an exhibit to the
Registration Statement of which this Prospectus is a part. The terms of the
final Credit Agreement are not anticipated to differ materially from those
described below.
The Facilities. The Credit Agreement will establish the following credit
facilities: a $150 million five-year term loan facility ("Terra Facility A"),
a $80 million seven-year term loan facility ("Terra Facility B"), a $177
million seven-year term loan facility ("Terra Facility C"), a $80 million
seven-year term loan facility ("Terra Facility D"), a $175 million five-year
revolving credit facility ("Terra Facility E"), a $35 million five-year term
facility ("AMLP Facility A") and a $50 million five-year revolving credit
facility ("AMLP Facility B"). To the extent that the net proceeds of this
offering exceed $100 million, the Company expects it will reduce its
borrowings with respect to Terra Facility D by such amount. Based on net
proceeds to the Company from this offering of $112.5 million, the Company
would expect to borrow only $67.5 million with respect to Terra Facility D,
and the Company's right to borrow the remaining amount would be terminated.
Terra Facilities A, B and D will be used to finance the consummation of the
Acquisition and to refinance certain outstanding indebtedness of the Company
and Terra International. Terra Facility C will be available to finance any
required repurchase of the Senior Notes. Terra Facility E will be available to
provide for the on-going working capital needs of Terra Capital, Terra
International and BMC. AMLP Facility A will be used to refinance existing
indebtedness of the Operating Partnership and AMLP Facility B will be
available to provide for the on-going working capital needs of the Operating
Partnership. After consummation of the Acquisition and the Refinancing, the
primary obligor with respect to the Credit Agreement will be Terra Capital,
which will own Terra International, AMC and BMCH. Terra Capital will be
wholly-owned by Terra Holdings, another new subsidiary of the Company, and
Terra Holdings will be wholly-owned by the Company. See "Summary--Post
Acquisition Company Structure."
Interest and Commitment Fees. Loans under the Credit Agreement will bear
interest at one, three or six-month LIBOR, plus the Applicable Margin. The
Applicable Margin will be 2% for all of the Facilities except Terra Facility B
until loans under Terra Facility D are paid in full; thereafter the Applicable
Margin for such Facilities will be 1.5%; provided that such Applicable Margin
will be subject to adjustment up to 2% and down to 1% depending on the
Company's consolidated ratio of debt to cash flow. The Applicable
39
<PAGE>
Margin for Terra Facility B will be 2.5%. Comparable interest rates based on
Citibank's Base Rate will also be available. Commitment fees of 0.5% per year
(subject to reduction if the ratio of debt to cash flow falls to a certain
level) will be charged for unused facilities.
Amortization. Subject to prepayment as summarized below, the loans under the
Facilities will be due as follows: Terra Facility A--semiannual payments over
the first five years after closing of the Merger, Terra Facility B--semiannual
payments over the seven years after closing of the Merger, Terra Facility C--
semiannual payments beginning one year following the first anniversary of the
required repurchase of the
Senior Notes, if any, and continuing over the following six years, Terra
Facility D--semiannual payments over the first seven years after closing of
the Merger, Terra Facility E--five years after closing, AMLP Facilities A and
B--five years after closing. Prepayments will be required in an amount equal
to 75% of Terra Capital's consolidated annual Excess Cash Flow (earnings
before interest, taxes, depreciation and amortization less the sum of cash
interest expense, minority interest payments, capital expenditures, "Specified
Payments" (meaning all interest due on the Senior Notes, dividends on the
Common Shares not exceeding $10 million in 1995, $13 million in 1996, $17
million in 1997, $20 million in 1998 and $23 million thereafter, dividends on
equity securities issued to retire loans under the Credit Agreement and
ordinary expenses of the Company plus up to $5 million per year for other pre-
existing obligations), scheduled payments of principal on indebtedness and
cash payments of taxes), reducing to 50% after $20 million has been so paid in
any year; 100% of the net proceeds over $10 million per year of non-ordinary
course asset sales, reducing to 75% after Terra Facilities C and D have been
retired; 100% of the net proceeds of any equity security issuances until Terra
Facilities C and D have been retired; and 100% of the net insurance and
condemnation proceeds from casualty events (net of expenses, liens and repair
and replacement costs), reducing to 75% after the Terra Facilities C and D
have been retired.
Collateral. Loans under the Credit Agreement will be guaranteed by the
Company, Terra Holdings, Terra Capital, AMC, BMHC and BMC and will be secured
by pledges of the stock of Terra Capital, Terra International, AMC and BMCH
and security interests in substantially all of the personal property of BMCH
and BMC and the Operating Partnership, provided that the security interest
granted in the Operating Partnership's assets will only secure the AMLP
Facilities A and B.
Covenants. The Credit Agreement will contain covenants customary for
financings of this type including: (a) a limitation on annual capital
expenditures to $40 million, (b) a prohibition on optional redemptions and
repurchases of subordinated indebtedness, (c) limitations on additional debt,
liens, receivables sales, investments, changes in lines of business and
transactions with affiliates and (d) an annual limitation on acquisitions of
$15 million (increasing to $50 million when Terra Facilities C and D have been
retired, Terra Facilities A and B have been paid down to $100 million or less
and the debt to cash flow ratio has reached 2.5 to 1 or better), subject to a
50% carryover for one year of any unused amount.
The Credit Agreement will also include financial covenants requiring the
Company to meet and maintain certain financial tests. These include
requirements that the Company maintain, on a consolidated basis, ratios of
earnings before interest, taxes, amortization and depreciation to interest
charges of greater than 4.0 to 1 increasing to 4.50 in 1998 and thereafter and
debt to cash flow of less than 3.75 to 1 until 1996 and 3.0 thereafter (to be
replaced by a ratio of debt to capital once Terra Facilities C and D are
retired), a current ratio of at least 1.25 to 1 through 1997 and 1.50
thereafter and a minimum net worth of $375 million plus increases in capital
stock and 50% of net income.
Events of Default and Other Matters. The Credit Agreement will also contain
customary events of default, including those relating to failure to pay
amounts due, misrepresentation, failure to perform covenants, bankruptcy or
insolvency, litigation and unsatisfied judgments, violations of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and
environmental laws and changes in control or ownership (except that after
Terra Facilities C and D have been retired, it will not be an event of default
if Minorco's ownership is at least 20% of the outstanding number of Common
Shares and Minorco remains the single largest holder of Common Shares). In
addition, if dividends and other
40
<PAGE>
payments with respect to the capital stock of Terra Capital exceed the sum of
Specified Payments plus 50% of the portion of Excess Cash Flow from the
previous year that is not required to be used to prepay the facilities, the
lenders under the Credit Agreement may choose to terminate their commitments
to lend or cause the Company to repurchase their loans.
OTHER OBLIGATIONS OF THE COMPANY'S SUBSIDIARIES
The following briefly describes certain indebtedness and other obligations
of Terra International and Terra Canada that will remain outstanding after the
consummation of the Acquisition and the Refinancing. See the Company's
financial statements and the notes thereto included herein and incorporated by
reference.
Terra International is a party to a receivables purchase agreement dated as
of March 31, 1994, which expires March 31, 1996, allowing for the sale of an
undivided interest in a designated revolving pool of accounts receivable up to
$50 million in proceeds. As of June 30, 1994, $50 million of proceeds were
received.
Terra International also has outstanding $9.2 million Industrial Development
Revenue Bonds dated April 1, 1992 which bear interest at an average of 6.8%
and are subject to sinking fund requirements of $145,000 in 1994 and
increasing to $1,240,000 for the final payment in 2011. The bonds are secured
by a first mortgage on the Company's headquarters building in Sioux City,
Iowa.
Terra International has $37.5 million unsecured notes outstanding as of June
30, 1994 with various institutional investors. Such notes bear interest at
rates between 8.48% and 9.625% and mature between 1996 and 2005. Terra
International is also a party to various non-cancelable operating leases for
agricultural equipment, rail cars and office, production and storage
facilities expiring on various dates through 2001. In addition, it is a party
to various letters of credit and swap agreements and financial derivatives to
manage exposure to interest rates and natural gas prices.
Terra Canada has a $37 million lease arrangement covering certain assets of
the Courtright Facility, which will be increased by approximately $20 million
to provide for an expanded urea plant. Current annual lease payments are
approximately $4 million (Cdn.). The lease expires April 8, 1997, but can be
extended for up to an additional five years with the consent of the lessor and
is guaranteed by Terra International.
Terra Canada also has a $35 million (Cdn.) revolving credit facility used to
provide for working capital needs which expires May 31, 1995 and is renewable
every 120 days for a 360 day term. Terra International provides a guarantee
for this facility. Terra Canada has various foreign exchange forward and
option contracts to manage exposure to currency fluctuations. These agreements
are entered as designated hedges of fixed obligations and hedges of net
foreign currency transaction exposures. It also has various swap agreements to
manage exposure to interest rates.
AMCLP SENIOR PREFERENCE UNITS AND OTHER OBLIGATIONS
AMC holds a 2% interest as general partner in AMCLP and the Operating
Partnership on a combined basis. AMCLP's limited partnership interests are
divided into publicly held Senior Preference Units with a 39.8% interest and
Junior Preference Units and Common Units with a 58.2% interest, both of which
are owned by AMC. The Senior Preference Units are entitled to receive the
minimum quarterly distribution of $0.605 per unit, plus arrearages, before any
amounts are paid to AMC as limited partner. In addition, the limited
partnership agreement requires that 100% of any excess available cash after
payment of the minimum quarterly distribution on Senior Preference Units be
used to fund an $18.5 million reserve fund for the payment of future
distributions on the Senior Preference Units. This reserve was fully funded at
June 30, 1994. After payment of the minimum quarterly distribution on the
Senior Preference Units, assuming the reserve is fully funded, the Junior
Preference Units are entitled to receive the minimum
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<PAGE>
quarterly distribution, plus arrearages, and after the Junior Preference Units
are paid, the Common Units are entitled to receive the minimum quarterly
distribution, plus arrearages other than arrearages outstanding on June 30 of
any year on or prior to the Junior Conversion Date (as defined in AMCLP's
limited partnership agreement), which shall be eliminated. Available cash
remaining after the Common Units have received the minimum quarterly
distribution is distributed to all unit holders pro rata, except that the
right of the Senior Preference Units to participate in any such additional
distribution terminates on the Senior Conversion Date, which is generally
defined as the date (but no sooner than December 31, 1996) on which cash
distributions of at least $2.64 per Senior Preference Unit have been paid for
three consecutive 12-month periods. AMC, as general partner, also receives 2%
of all distributions of Available Cash and is entitled, as an incentive, to
larger percentage interests to the extent that distributions significantly
exceed the minimum quarterly distributions.
For a description of the capitalized lease obligations of the Operating
Partnership that will continue after the consummation of the Acquisition and
the Refinancing, see Note 6 to the Consolidated Financial Statements of AMCI
included herein.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the underwriters named below (the "Underwriters") have severally agreed to
purchase from the Company, and the Company has agreed to sell to them, the
respective numbers of shares set forth opposite the names of such Underwriters
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
S.G.Warburg & Co. Inc........................................... 5,470,000
Bear, Stearns & Co. Inc......................................... 225,000
CS First Boston Corporation..................................... 225,000
Dean Witter Reynolds Inc........................................ 225,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 225,000
Lehman Brothers Inc............................................. 225,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 225,000
Oppenheimer & Co., Inc.......................................... 225,000
PaineWebber Incorporated........................................ 225,000
Prudential Securities Incorporated.............................. 225,000
Salomon Brothers Inc............................................ 225,000
Wertheim Schroder & Co.......................................... 225,000
Wood Gundy Corp................................................. 225,000
Dresdner Securities (USA) Inc................................... 225,000
Petrie Parkman & Co., Inc....................................... 225,000
Dain Bosworth Incorporated...................................... 135,000
Edward D. Jones & Co............................................ 135,000
Kemper Securities, Inc.......................................... 135,000
C.J. Lawrence/Deutsche Bank Securities Corporation.............. 135,000
Piper Jaffray Inc............................................... 135,000
Rauscher Pierce Refsnes, Inc.................................... 135,000
Scott & Stringfellow, Inc....................................... 135,000
Williams MacKay Jordan & Co., Inc............................... 135,000
---------
Total....................................................... 9,700,000
=========
</TABLE>
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Underwriters are committed to purchase all of the Common Shares, if any
are so purchased. Such conditions include that
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<PAGE>
the Merger shall have been consummated. The Company has agreed in the
Underwriting Agreement to use its best efforts to consummate the Merger
concurrently with the closing of the offering described herein.
The Underwriters propose to offer such Common Shares to the public initially
at the offering price per share as set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $0.30 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share on sales to certain
other dealers. This offering of the Common Shares is made for delivery when,
as, and if accepted by the Underwriters and subject to prior sale and
withdrawal, cancellation, or modification of the offer without notice. The
Underwriters reserve the right to reject any order for the purchase of the
shares. After this offering of the Common Shares, the public offering price
and the concessions may be changed by the Underwriters.
Each Underwriter has represented and agreed that: (a) it has not offered or
sold and will not offer or sell in the United Kingdom, by means of any
document, any Common Shares other than to persons whose ordinary business it
is to buy or sell shares or debentures (whether as principal or agent) or in
circumstances which do not constitute an offer to the public within the
meaning of the Companies Act of 1985, as amended; (b) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Shares in, from or
otherwise involving the United Kingdom; and (c) it has issued or passed on and
will issue or pass on in the United Kingdom any document received by it in
connection with the issue of the Common Shares only to a person who is of a
kind described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1988 or is a person to whom the document
may otherwise lawfully be issued or passed on.
The Company has granted to the Underwriters an option for 30 days from the
date of this Prospectus to purchase up to 650,000 additional Common Shares.
The Underwriters may exercise such option only to cover over-allotments of the
Common Shares offered hereby. To the extent the Underwriters exercise this
option, each Underwriter will be obligated, subject to certain conditions, to
purchase the number of additional Common Shares proportionate to such
Underwriter's initial commitment.
Subject to the closing of this offering, Minorco USA has agreed with the
Underwriters that it or an affiliate will purchase 5.4 million or
approximately 55.7% of the Common Shares offered hereby at a price equal to
the price to the public less the underwriting discount. Minorco USA has not
agreed to purchase any Common Shares that may be purchased by the Underwriters
upon exercise of the over-allotment option. The Underwriter's obligations
under the Underwriting Agreement are conditioned upon the consummation of such
sale of Common Shares to Minorco USA or one of its affiliates
contemporaneously with the closing of this offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including any liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
Each of the Company, certain of the Company's executive officers and Minorco
USA has agreed not to offer, sell or contract to sell any Common Shares, or
securities convertible into or exchangeable for Common Shares, except in
limited circumstances, for a period of 90 days from the date of this
Prospectus without the prior written consent of S.G.Warburg & Co. Inc.
S.G.Warburg & Co. Inc. has provided financial advisory services to the
Company in connection with the Acquisition for which it will receive customary
fees and also has provided financial advisory services to Minorco and its
affiliates for which it received customary fees.
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<PAGE>
LEGAL MATTERS
Certain legal matters regarding the issuance of the Common Shares pursuant
to this offering will be passed upon for the Company by Kirkland & Ellis,
Chicago, Illinois (who will rely upon Piper & Marbury, Baltimore, Maryland,
with respect to certain matters of Maryland law), and Piper & Marbury,
Baltimore, Maryland, and for the Underwriters by Andrews & Kurth L.L.P. (who
will rely upon Piper & Marbury with respect to certain matters of Maryland
law).
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1992 and 1993, and for each of the two years in the period ended
December 31, 1993, included and incorporated by reference in this Prospectus
and in the Registration Statement in which this Prospectus is included have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports, which are included and incorporated by reference herein, and
have been so included and incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and schedules of the Company as of
December 31, 1991 and for the year then ended included elsewhere and
incorporated by reference in this Prospectus and in the Registration Statement
in which this Prospectus is included have been audited by Price Waterhouse
LLP, independent certified public accountants, as indicated in their reports
thereon, which are incorporated by reference herein. The financial statements
and schedules audited by Price Waterhouse LLP have been included herein in
reliance on their reports given their authority as experts in accounting and
auditing.
The consolidated financial statements of AMCI at December 31, 1992 and 1993,
and for each of the three years in the period ended December 31, 1993,
appearing in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 13th
Floor, Seven World Trade Center, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained by
mail from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information concerning the Company may be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005 and the Toronto Stock Exchange, Exchange Tower, 2 First Canadian
Place, Toronto, Ontario M5X 1J2 Canada.
Additional information regarding the Company and the Common Shares offered
hereby is contained in the registration statement on Form S-3 (together, with
all exhibits and amendments, the "Registration Statement") filed with the
Commission under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the Commission's rules. For further
information pertaining to the Company and the Common Shares offered hereby,
reference is made to the Registration Statement (including the exhibits
thereto), which may be inspected without charge at the office of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549, and copies
thereof may be obtained from the Commission at prescribed rates.
44
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-8520) are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, as amended by its Form 10-K/A
filed on October 13, 1994; (ii) the Company's Quarterly Report on Form 10-Q
for the fiscal quarters ended March 31, 1994 and June 30, 1994; (iii) the
Company's Current Report on Form 8-K dated August 9, 1994; and (iv) the
description of the Common Shares, set forth in the Registration Statement on
Form 8-A dated May 2, 1988.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offering of the Common Shares offered hereby shall
be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated herein by reference (other
than exhibits, unless such exhibits are specifically incorporated by reference
in such documents). Written requests for such copies should be directed to
George H. Valentine, Vice President, General Counsel and Corporate Secretary,
Terra Industries Inc., Terra Centre, 600 Fourth Street, P.O. Box 6000, Sioux
City, Iowa 51102-6000, telephone: (712) 277-1340.
INFORMATION WITH RESPECT TO AMCI
AMCI and AMCLP are subject to certain of the informational requirements of
the Exchange Act and, in accordance therewith, file reports and other
information with the Commission. Information herein with respect to AMCI and
its subsidiaries, including the AMCI consolidated financial statements (and
related notes) included herewith, have been derived from AMCI's and AMCLP's
Annual Reports on Form 10-K for the year ended December 31, 1993 and Quarterly
Reports on Form 10-Q for the quarter ended June 30, 1994. Copies of all such
reports filed by AMCI and AMCLP are available from the Commission as described
under "Available Information."
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TERRA INDUSTRIES INC. CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-2
Consolidated Statement of Financial Position--June 30, 1994 (unaudited)
and December 31, 1993 and 1992......................................... F-3
Consolidated Statements of Income--Six Months Ended June 30, 1994 and
1993 (unaudited), Year Ended December 31, 1993, 1992 and 1991.......... F-4
Consolidated Statements of Changes in Stockholders' Equity--Six Months
Ended June 30, 1994 (unaudited), Year Ended December 31, 1993, 1992 and
1991................................................................... F-5
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1994
and 1993 (unaudited), Year Ended December 31, 1993, 1992 and 1991...... F-6
Notes to Consolidated Financial Statements.............................. F-7
AGRICULTURAL MINERALS AND CHEMICALS INC. CONSOLIDATED FINANCIAL
STATEMENTS:
Report of Independent Auditors.......................................... F-21
Consolidated Balance Sheets--June 30, 1994 (unaudited) and December 31,
1993 and 1992.......................................................... F-22
Consolidated Statements of Income--Six Months Ended June 30, 1994 and
1993 (unaudited), and Years Ended December 31, 1993, 1992 and 1991..... F-23
Consolidated Statements of Stockholders' Equity--Six Months Ended June
30, 1994 (unaudited), and Years Ended December 31, 1993, 1992 and 1991. F-24
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1994
and 1993 (unaudited), and Years Ended December 31, 1993, 1992 and 1991. F-25
Notes to Consolidated Financial Statements.............................. F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Terra Industries Inc.
We have audited the accompanying consolidated statement of financial
position of Terra Industries Inc. and its subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, cash flows and
changes in stockholders' equity for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of the Corporation for the year ended
December 31, 1991 were audited by other auditors whose report, dated February
13, 1992, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such 1993 and 1992 consolidated financial statements present
fairly, in all material respects, the financial position of the Corporation at
December 31, 1993 and 1992, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the financial statements, the Corporation changed
its method of accounting for post-retirement medical benefits and income taxes
effective January 1, 1992 to conform with Statements of Financial Accounting
Standards No. 106 and 109.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 1, 1994
F-2
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1994 1993 1992
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and short-term investments.............. $ 40,520 $ 65,102 $ 121,789
Accounts receivable, less allowance for
doubtful accounts of $7,348, $5,788 and
$6,427...................................... 352,464 122,774 71,995
Inventories.................................. 268,357 244,995 198,621
Deferred tax asset--current.................. 27,338 26,011 22,660
Other current assets......................... 25,459 10,586 7,611
--------- --------- ---------
Total current assets..................... 714,138 469,468 422,676
--------- --------- ---------
Equity and other investments................. -- 2,218 480
Property, plant and equipment, net........... 124,786 110,670 91,969
Deferred tax asset--non-current.............. 5,772 24,742 23,599
Net assets of discontinued operations........ 3,522 3,488 32,369
Other assets................................. 28,677 23,896 9,099
--------- --------- ---------
Total assets............................. $ 876,895 $ 634,482 $ 580,192
========= ========= =========
LIABILITIES
Debt due within one year..................... $ 109,671 $ 9,636 $ 12,508
Accounts payable............................. 293,361 99,886 86,941
Accrued and other liabilities................ 105,270 128,659 107,410
--------- --------- ---------
Total current liabilities................ 508,302 238,181 206,859
--------- --------- ---------
Long-term debt............................... 45,782 119,061 121,171
Deferred tax liability--non-current.......... 2,383 451 --
Other liabilities............................ 32,472 33,809 30,686
Commitments and contingencies (Note 11)...... -- -- --
--------- --------- ---------
Total liabilities........................ 588,939 391,502 358,716
--------- --------- ---------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 114,375 shares;
outstanding 70,553, 69,455 and 65,346
shares.................................... 123,550 122,257 83,931
Trust Shares, authorized 16,500 shares;
outstanding none, none and 4,010 shares... -- -- 22,312
Paid-in capital.............................. 523,915 516,128 531,609
Cumulative translation adjustment............ (795) (488) --
Accumulated deficit.......................... (358,714) (394,917) (416,376)
--------- --------- ---------
Total stockholders' equity............... 287,956 242,980 221,476
--------- --------- ---------
Total liabilities and stockholders'
equity.................................. $ 876,895 $ 634,482 $ 580,192
========= ========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------- ----------------------------------
1994 1993 1993 1992 1991
---------- -------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales............. $1,059,475 $807,153 $1,212,510 $1,062,045 $1,003,766
Other income, net..... 18,281 13,188 25,491 20,146 18,831
---------- -------- ---------- ---------- ----------
1,077,756 820,341 1,238,001 1,082,191 1,022,597
---------- -------- ---------- ---------- ----------
COST AND EXPENSES
Cost of sales......... 897,685 681,611 1,021,187 904,246 849,684
Depreciation and
amortization......... 9,060 7,757 15,470 14,994 14,399
Selling, general and
administrative
expense.............. 100,172 84,137 161,791 137,232 132,845
Equity in earnings of
unconsolidated
affiliates........... (36) (940) (2,275) -- --
Interest income....... (1,983) (1,868) (3,261) (3,084) (1,789)
Interest expense...... 5,841 6,652 12,944 10,617 14,352
---------- -------- ---------- ---------- ----------
1,010,739 777,349 1,205,856 1,064,005 1,009,491
---------- -------- ---------- ---------- ----------
Income from continuing
operations before
income taxes and
extraordinary items.. 67,017 42,992 32,145 18,186 13,106
Income tax provision.. 25,400 12,155 9,300 7,757 1,073
---------- -------- ---------- ---------- ----------
Income from continuing
operations before
extraordinary items.. 41,617 30,837 22,845 10,429 12,033
Loss from discontinued
operations:
(Loss) income from
operations, net of
taxes.............. -- -- -- (4,025) 1,192
Gain (loss) on
disposition, net of
taxes.............. -- -- -- 2,360 (170,000)
---------- -------- ---------- ---------- ----------
Income (loss) before
extraordinary items
and cumulative effect
of accounting
changes.............. 41,617 30,837 22,845 8,764 (156,775)
Extraordinary gain
(loss) on early
retirement of debt... (2,614) -- -- -- 5,115
Cumulative effect of
accounting changes... -- -- -- 22,265 --
---------- -------- ---------- ---------- ----------
NET INCOME (LOSS)....... $ 39,003 $ 30,837 $ 22,845 $ 31,029 $ (151,660)
========== ======== ========== ========== ==========
Weighted average number
of shares outstanding.. 70,336 69,033 69,064 69,103 67,103
========== ======== ========== ========== ==========
EARNINGS (LOSS) PER
SHARE:
Continuing operations. $ 0.59 $ 0.45 $ 0.33 $ 0.15 $ 0.18
Discontinued
operations........... -- -- -- (0.02) (2.51)
---------- -------- ---------- ---------- ----------
Income (loss) before
extraordinary items.. 0.59 0.45 0.33 0.13 (2.33)
Extraordinary gain
(loss) on early
retirement of debt... (0.04) -- -- -- 0.07
Cumulative effect of
accounting changes... -- -- -- 0.32 --
---------- -------- ---------- ---------- ----------
Net Earnings (Loss)..... $ 0.55 $ 0.45 $ 0.33 $ 0.45 $ (2.26)
========== ======== ========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON CLASS A TRUST PAID-IN TRANSLATION ACCUMULATED
SHARES SHARES SHARES CAPITAL ADJUSTMENT DEFICIT TOTAL
-------- ------- ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1990....... $ 52,203 $17,898 $28,821 $527,607 $(8,823) $(295,745) $321,961
Exchange of HBMS
Special Shares........ 1,366 -- (796) (570) -- -- --
Translation adjustment. -- -- -- -- 8,823 -- 8,823
Retirement of
convertible
debentures............ 2,626 -- -- 8,533 -- 5,115 16,274
Conversion of Class A
Shares................ 17,898 (17,898) -- -- -- -- --
Stock Incentive Plan... 4 -- -- 9 -- -- 13
Net Loss............... -- -- -- -- -- (156,775) (156,775)
-------- ------- ------- -------- ------- --------- --------
December 31, 1991....... 74,097 -- 28,025 535,579 -- (447,405) 190,296
Exchange of HBMS
Special Shares........ 9,791 -- (5,713) (4,078) -- -- --
Exercise of stock
options............... 36 -- -- 95 -- -- 131
Stock Incentive Plan... 7 -- -- 13 -- -- 20
Net Income............. -- -- -- -- -- 31,029 31,029
-------- ------- ------- -------- ------- --------- --------
December 31, 1992....... 83,931 -- 22,312 531,609 -- (416,376) 221,476
Exchange of HBMS
Special Shares........ 38,213 -- (22,312) (15,901) -- -- --
Exercise of stock
options............... 213 -- -- 767 -- -- 980
Stock repurchase....... (107) -- -- (360) -- -- (467)
Translation adjustment. -- -- -- -- (488) -- (488)
Stock Incentive Plan... 7 -- -- 13 -- -- 20
Dividends.............. -- -- -- -- -- (1,386) (1,386)
Net Income............. -- -- -- -- -- 22,845 22,845
-------- ------- ------- -------- ------- --------- --------
December 31, 1993....... 122,257 -- -- 516,128 (488) (394,917) 242,980
Stock Incentive Plan... 120 -- -- 847 -- -- 967
Exercise of stock
options............... 442 -- -- 1,764 -- -- 2,206
Conversion of
convertible
debentures............ 731 -- -- 5,176 -- -- 5,907
Translation adjustment. -- -- -- -- (307) -- (307)
Dividends.............. -- -- -- -- -- (2,800) (2,800)
Net Income............. -- -- -- -- -- 39,003 39,003
-------- ------- ------- -------- ------- --------- --------
June 30, 1994
(unaudited)............ $123,550 $ -- $ -- $523,915 $ (795) $(358,714) $287,956
======== ======= ======= ======== ======= ========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------- ------------------------------
1994 1993 1993 1992 1991
--------- --------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 39,003 $ 30,837 $ 22,845 $ 31,029 $ (151,660)
Adjustments to reconcile
net income from
continuing operations
to net cash (used in)
provided by operating
activities:
Depreciation and
amortization......... 9,060 7,757 15,470 14,994 14,399
Income taxes.......... 20,902 5,494 5,500 6,313 (345)
(Gain) loss on early
retirement of debt... 2,614 -- -- -- (5,115)
Cumulative effect of
accounting changes... -- -- -- (22,265) --
Loss from discontinued
operations........... -- -- -- 1,665 168,808
Unfunded retiree
medical costs........ -- -- 723 1,161 --
Equity in earnings of
unconsolidated
affiliates........... (36) -- (2,275) -- --
Other................. 533 508 713 -- --
Change in current assets
and liabilities,
excluding working
capital purchased/sold:
Accounts receivable... (241,589) (223,463) (24,540) (1,764) (30,847)
Inventories........... (22,032) 20,160 (6,718) (32,136) (30,452)
Other current assets.. (1,214) 2,241 (2,893) (875) 917
Accounts payable...... 193,442 134,573 (9,945) (2,071) 12,693
Accrued and other
liabilities.......... (16,945) (5,887) 2,452 38 20,048
Other................... (1,526) (1,001) (2,354) 684 (4,891)
--------- --------- -------- -------- ----------
NET CASH USED IN
OPERATING ACTIVITIES... (17,788) (28,781) (1,022) (3,227) (6,445)
--------- --------- -------- -------- ----------
INVESTING ACTIVITIES
Proceeds from asset
sales................ -- 5,773 24,391 23,065 124,983
Discontinued
operations........... (1,794) (3,337) 5,630 (5,504) (42,755)
Purchase of property,
plant and equipment.. (20,978) (13,431) (21,620) (17,620) (12,728)
Acquisitions.......... (13,833) (17,160) (58,260) -- --
Proceeds from
investments.......... 582 -- -- -- --
Dividends of
unconsolidated
affiliates........... -- -- 537 -- --
--------- --------- -------- -------- ----------
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES............. (36,023) (28,155) (49,322) (59) 69,500
--------- --------- -------- -------- ----------
FINANCING ACTIVITIES
Net short-term
borrowings........... 100,007 42,628 7,313 -- --
Retirement of
convertible
debentures........... -- -- -- -- (14,430)
Premium paid on
retirement of
convertible
debentures........... (2,533) -- -- -- --
Proceeds from issuance
of long-term debt.... -- -- 250 30,000 --
Principal payments on
long-term debt....... (67,344) (6,468) (12,545) (5,842) (5,832)
Dividends............. (2,800) -- (1,386) -- --
Stock
issuance/repurchase--
net.................. 2,206 -- 513 -- --
--------- --------- -------- -------- ----------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES............. 29,536 36,160 (5,855) 24,158 (20,262)
--------- --------- -------- -------- ----------
Foreign exchange effect
on cash and short-term
investments............ (307) -- (488) -- --
--------- --------- -------- -------- ----------
(DECREASE) INCREASE IN
CASH AND SHORT-TERM
INVESTMENTS............ (24,582) (20,776) (56,687) 20,872 42,793
CASH AND SHORT-TERM
INVESTMENTS AT
BEGINNING OF PERIOD.... 65,102 121,789 121,789 100,917 58,124
--------- --------- -------- -------- ----------
CASH AND SHORT-TERM
INVESTMENTS AT END OF
PERIOD................. $ 40,520 $ 101,013 $ 65,102 $121,789 $ 100,917
========= ========= ======== ======== ==========
INTEREST PAID........... $ 11,800 $ 10,400 $ 14,700
======== ======== ==========
TAXES PAID.............. $ 3,800 $ 6,000 $ 1,100
======== ======== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-6
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The Consolidated Financial Statements include the accounts of Terra
Industries Inc., formerly Inspiration Resources Corporation, and all majority-
owned subsidiaries ("the Corporation").
Operating results and, where appropriate, other data presented for prior
years have been reclassified to reflect discontinued operations described in
Note 4.
Business segment:
The Corporation operates in the agribusiness industry through its wholly
owned subsidiary, Terra International, Inc., a marketer and producer of
fertilizer, crop protection products, seed and services for agriculture.
Foreign Exchange:
Results of operations for the Canadian subsidiary are translated using
average currency exchange rates during the period, while assets and
liabilities are translated using current rates. Resulting translation
adjustments are recorded as currency translation adjustments in stockholders'
equity.
Cash and short-term investments:
The Corporation considers short-term investments with an original maturity
of three months or less to be cash equivalents which are reflected at their
approximate fair value.
Financial instruments:
The Corporation enters into foreign exchange forward and option contracts to
manage exposure to currency fluctuations. These agreements are entered as
designated hedges of fixed obligations and hedges of net foreign currency
transaction exposure. Contract maturities are consistent with the settlement
dates of items being hedged. Fair value of foreign exchange forward contracts
is based on information received from a quotation service and computations by
the Corporation which are based on current rates of exchange. Gains and losses
on these contracts are deferred until maturity and included as a component of
the related transaction, primarily manufacturing costs.
The Corporation enters into financial contracts to manage its cost of
natural gas, the primary material used in production of nitrogen fertilizers.
These contracts include futures contracts, option contracts and swap
agreements. The futures and option contracts require maintenance of cash
balances generally 10% to 20% of the contract value, while option contracts
also require initial premiums payments ranging from 2% to 5% of contract
value. Contract settlement dates are consistent with natural gas purchases
throughout the year and gains or losses resulting from movement in the price
of natural gas futures contracts traded on the NYMEX are deferred and credited
or charged to manufacturing cost in the month to which the hedged transaction
relates.
The Corporation has entered into interest rate swap agreements to manage
exposure to interest rate fluctuations. Under provisions of the agreements,
the Corporation and another party exchange fixed and floating interest rate
payments periodically over the life of the agreements. The differential to be
paid or received under these agreements is recorded as interest expense
consistent with provisions of the agreement.
F-7
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories:
Inventories are stated at the lower of cost or estimated net realizable
value. The cost of inventories is determined using the first-in, first-out
method.
Property, plant and equipment:
Expenditures for plant and equipment additions, replacements and major
improvements are capitalized. Related depreciation is charged to expense on a
straight-line basis over estimated useful lives. Maintenance and repair costs
are expensed as incurred.
Reclassifications:
Certain reclassifications have been made to prior years' financial
statements to conform with current year presentation.
Per-share results:
Earnings-per-share data are based on the weighted average number of Common
Shares that would become outstanding after allowing for the full exchange of
Hudson Bay Mining and Smelting Co., Limited Special Shares held by the public
and exercise of outstanding stock options. All previously unexchanged Special
Shares were automatically exchanged for Common Shares of the Corporation on
July 6, 1993. The dilutive effect of the Corporation's outstanding restricted
shares, stock options and convertible debentures was not significant.
Interim Financial Information:
The unaudited consolidated financial statements as of June 30, 1994 contain
all adjustments necessary to summarize fairly the financial position of Terra
Industries Inc. and all majority-owned subsidiaries and the results of the
Corporation's operations for the six months ended June 30, 1994 and 1993. All
such adjustments are of a normal recurring nature. Because of the seasonal
nature of the Corporation's operations and effects of weather-related
conditions in several of its marketing areas, earnings of any single reporting
period should not be considered as indicative of results for a full year.
2. ACQUISITIONS
On April 8, 1993, a wholly owned subsidiary of the Corporation, Terra
International (Canada) Inc. ("Terra Canada") acquired rights to an anhydrous
ammonia manufacturing plant and related upgrading facilities ("the nitrogen
plant") located at Courtright, Ontario effective as of March 31, 1993. In
addition, Terra Canada purchased working capital associated with the nitrogen
plant and interests in 32 farm service centers operating under the trademark,
Agromart(TM). All but two of the Agromarts(TM) are owned by corporations in
which Terra Canada has a 50% interest, and the remaining 50% interests are
owned by local management and other investors. The remaining two Agromarts(TM)
are wholly owned by Terra Canada. The amount paid in connection with the
transaction was approximately $73 million (Cdn) of which approximately $47
million (Cdn) was provided through lease financing and the remainder was
funded by a working capital line of credit and cash.
On December 31, 1993, Terra International, Inc. purchased net assets of
certain operations of Asgrow Florida Company, Inc. ("Terra Asgrow Florida"), a
distributor of fertilizer, chemicals and seed, for $39 million. Terra Asgrow
Florida operates 12 distribution centers and is a supplier to the vegetable
and ornamental markets, mostly in Florida. The amount paid at closing was
approximately $31 million which was provided from available cash.
F-8
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Terra Canada's operating results from the date of acquisition are included
in the Consolidated Statements of Income. The following represents unaudited
pro forma summary results of operations as if both acquisitions had occurred
at the beginning of 1992:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED ---------------------
JUNE 30, 1994 1993 1992
------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE
DATA)
<S> <C> <C> <C>
Revenues................................... $887,700 $1,351,000 $1,282,800
Income before extraordinary items and
cumulative effect of accounting changes... $ 31,847 $ 25,500 $ 14,300
Net income................................. $ 31,847 $ 25,500 $ 36,600
Net income per share....................... $ 0.46 $ 0.37 $ 0.53
</TABLE>
The pro forma operating results were adjusted to include lease expense
rather than depreciation for the nitrogen plant, increased costs of seed
sales, amortization of intangibles, interest expense on the acquisition
borrowings and the effect of income taxes.
The pro forma information listed above does not purport to be indicative of
the results that would have been obtained if the operations were combined
during the above period. In addition, they are not intended to be a projection
of future operating results or trends.
3. ACCOUNTING CHANGES
In 1992, the Corporation adopted Statement of Financial Accounting Standard
("SFAS") 106, "Employers Accounting for Post-Retirement Benefits Other than
Pensions" and SFAS 109, "Accounting for Income Taxes." In connection with the
adoption of SFAS 106, the Corporation elected to recognize immediately the
prior service cost of providing post-retirement medical benefits during the
active service of the employee. This resulted in a one-time charge of $5.7
million, net of income taxes of $3.5 million. Net income from continuing
operations for 1992 was reduced $0.7 million from that which would have been
reported under the Corporation's previous accounting method. The pro forma
effect of the change on prior years is not determinable. Prior to 1992, the
Corporation recognized expense in the period the benefits were paid. These
benefit costs were not significant in 1991.
Accounting for income taxes under SFAS 109 requires recognition of deferred
tax assets and liabilities for the effect of future tax consequences of events
recognized in the Corporation's financial statements or tax returns. SFAS 109
requires the Corporation to recognize the income tax benefit of operating loss
and tax credit carryforwards expected to be realized; such recognition was
prohibited under SFAS 96, the Corporation's previous method of accounting for
income taxes. A $28.0 million credit was recorded as the effect at January 1,
1992 of a change in accounting principle. Income tax expense from continuing
operations was increased $6.5 million for 1992 pursuant to SFAS 109.
4. DISCONTINUED OPERATIONS
During 1993, the Corporation sold the leasing business and the construction
materials businesses, discontinued in 1992.
As of December 31, 1992, the Corporation's Board of Directors approved plans
to sell the leasing and construction materials businesses as well as equity
interests in a copper alloy producer, an undeveloped beryllium mine property
and its gold mining affiliate. As a result of this decision and a gain on the
sale of remaining coal properties, discontinued in 1990, the Corporation
realized a $2.4 million gain on disposition of discontinued operations during
1992.
F-9
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the 1991 third quarter, the Corporation sold its interests in its
base metals segment consisting of Hudson Bay Mining and Smelting Co., Limited
("HBMS") and related metals marketing and trading operations. The base metals
segment was sold to Minorco, the Corporation's majority stockholder, for $87
million. The Corporation recognized a $170 million loss on the disposal of the
base metals segment.
Financial results of the base metals, coal, leasing and other discontinued
businesses for 1993 have been applied against their respective reserves and
1992 and 1991 amounts have been included in discontinued operations and are as
follows:
<TABLE>
<CAPTION>
1992 1991
----- ------
(IN
MILLIONS)
<S> <C> <C>
Revenues:
Base metals................................................... $ -- $176.8
Leasing....................................................... 5.9 8.3
Construction materials........................................ 27.8 29.4
----- ------
$33.7 $214.5
===== ======
Income (loss) from operations, net of income taxes:
Base metals................................................... $ -- $ (4.8)
Leasing....................................................... (2.8) 3.8
Construction materials........................................ (0.8) (0.2)
Other......................................................... (0.4) 2.4
----- ------
$(4.0) $ 1.2
===== ======
</TABLE>
5. RELATIONSHIP WITH MAJORITY STOCKHOLDER
Minorco, through its beneficial ownership of Common Shares, owns
approximately 53 percent of the equity of the Corporation. In 1992, the
Corporation discontinued its remaining operations in the gold mining business
conducted through its 50 percent interest in Western Gold Exploration and
Mining Company, Limited Partnership ("WestGold"). The remaining 50 percent
interest is owned by Minorco. During 1991, the Corporation sold its base
metals segment to Minorco as described in Note 4. The Corporation subleases
office space to Minorco, procures certain insurance coverages for Minorco and
related companies and shares the cost of an executive of both organizations.
Payments in settlement of these services are made on an ongoing basis.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 DECEMBER 31,
----------- -----------------
1993 1992
(IN THOUSANDS) (UNAUDITED) -------- --------
<S> <C> <C> <C>
Raw materials..................................... $ 28,751 $ 22,983 $ 14,770
Finished goods.................................... 239,606 222,012 183,851
-------- -------- --------
Total......................................... $268,357 $244,995 $198,621
======== ======== ========
</TABLE>
F-10
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 DECEMBER 31,
----------- --------------------
1993 1992
(IN THOUSANDS) (UNAUDITED) --------- ---------
<S> <C> <C> <C>
Land and buildings........................... $ 75,359 $ 66,343 $ 59,589
Plant and equipment.......................... 190,582 179,095 152,766
--------- --------- ---------
265,941 245,438 212,355
Less accumulated depreciation and
amortization................................ (141,155) (134,768) (120,386)
--------- --------- ---------
Total.................................... $ 124,786 $ 110,670 $ 91,969
========= ========= =========
</TABLE>
8. DEBT DUE WITHIN ONE YEAR
Debt due within one year consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 DECEMBER 31,
----------- --------------
1993 1992
(IN THOUSANDS) (UNAUDITED) ------ -------
<S> <C> <C> <C>
Short-term borrowings............................... $107,320 $7,313 $ --
Current maturities of long-term debt................ 2,351 2,323 12,508
-------- ------ -------
Total........................................... $109,671 $9,636 $12,508
======== ====== =======
</TABLE>
The Corporation has short-term domestic bank lines of credit consisting of a
$130 million revolving credit facility, which is used primarily to provide for
domestic seasonal working capital needs, a $26.2 million ($35 million Cdn)
revolving credit facility used to provide for working capital needs for its
Canadian operations, and a $15 million uncommitted line for working capital
needs. There was $7.3 million outstanding at December 31, 1993 under the
Canadian facility at an average rate of 4.6%. Interest on borrowings under
these lines is charged at current market rates.
Under both the domestic and Canadian facility, the Corporation has agreed,
among other things, to maintain certain levels of working capital and net
worth, adhere to maximum debt leverage limitations and restrict payments to
the Corporation from operating subsidiaries. The Corporation's $130 million
revolving credit agreement expires December 31, 1995. A commitment fee of 1/4
percent is paid on the unused portion of the facility, and no borrowings were
outstanding at December 31, 1993. The Corporation's $35 million (Cdn)
revolving credit agreement expires January 5, 1995 and is renewable every 120
days for a 360-day term. A commitment fee of 1/8 percent is paid on the
facility. The Corporation's $15.0 million line is subject to periodic review
and may be withdrawn by the bank at any time.
9. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 DECEMBER 31,
----------- -----------------
1993 1992
(IN THOUSANDS) (UNAUDITED) -------- --------
<S> <C> <C> <C>
Customer deposits................................. $ 7,751 $ 50,714 $ 41,714
Payroll and benefit costs......................... 24,085 17,072 15,167
Income taxes...................................... 16,983 17,025 9,551
Other............................................. 56,451 43,848 40,978
-------- -------- --------
Total......................................... $105,270 $128,659 $107,410
======== ======== ========
</TABLE>
F-11
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 DECEMBER 31,
----------- ------------------
1993 1992
(IN THOUSANDS) (UNAUDITED) -------- --------
<S> <C> <C> <C>
8.5% Convertible Subordinated Debentures, due
2012.......................................... $ -- $ 72,057 $ 72,057
Unsecured Senior Notes, 8.48%, due 2005........ 30,000 30,000 30,000
Industrial Development Revenue Bonds bearing
interest at an average 6.78% with increasing
payments from 1994 to 2011.................... 9,210 9,355 9,485
Industrial Development Revenue Bonds bearing a
variable interest rate repaid December, 1993.. -- -- 5,000
Unsecured Notes, 8.75% to 9.63%, due 1996 to
1998.......................................... 7,500 8,500 10,500
Bank Note, floating rate repaid January, 1993.. -- -- 5,258
Other.......................................... 1,423 1,472 1,379
------- -------- --------
48,133 121,384 133,679
Less current maturities........................ (2,351) (2,323) (12,508)
------- -------- --------
Total...................................... $45,782 $119,061 $121,171
======= ======== ========
Estimated Fair Value........................... $45,800 $121,500 $121,000
======= ======== ========
</TABLE>
Scheduled principal payments for each of the five years 1994 through 1998
are $2.3 million, $2.3 million, $2.8 million, $1.3 million and $6.5 million,
respectively. See Note 19 for subsequent events.
The Corporation's 8.5 percent Convertible Subordinated Debentures
("Debentures") are convertible into Common Shares any time prior to maturity,
unless previously redeemed, at a conversion price of $8.083 per share. The
Debentures are subject to redemption, upon not less than 20 days notice by
mail, at any time, as a whole or in part, at the election of the Corporation.
The redemption price, expressed as a percent of the principal amount of the
Debentures to be redeemed, is 103.40% until May 31, 1994, 102.55% until May
31, 1995 and decreasing yearly thereafter to 100% at June 1, 1997.
During 1992, the Corporation entered into a long-term note purchase
agreement of $30 million in 8.48 percent Senior Notes requiring semi-annual
payments through May 1, 2005. The Corporation has executed interest rate swap
agreements to convert one-half of these notes to LIBOR-based floating rate
instruments. The interest rate agreements became effective on April 15, 1993
and terminates on April 15, 2003. At December 31, 1993, the interest rate
spread, in the Company's favor, amounted to 1.5% on the underlying instruments
and resulted in an effective interest rate of 7.0% on the $30 million Senior
Notes. The debt agreement includes covenants similar to the Revolving Credit
Agreement described in Note 8 and a requirement for rental and interest
obligations coverage.
The Industrial Development Revenue Bonds due in 2011 are secured by a letter
of credit guaranteed by the Corporation and, along with other long-term debt
due in 2003, by the Corporation's headquarters building located in Sioux City,
Iowa.
The fair value of long-term debt was established by reference to the public
exchange market for the publicly traded long-term securities of the
Corporation and consideration of redemption provisions. Estimates of fair
value developed by the Corporation were utilized for other long-term debt.
F-12
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Corporation and its subsidiaries are committed to various non-cancelable
operating leases for agricultural equipment, and office, production, and
storage facilities expiring on various dates through 2001. Total minimum
rental payments are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1994.............................................................. $25,178
1995.............................................................. 21,329
1996.............................................................. 16,998
1997.............................................................. 11,244
1998 and thereafter............................................... 5,061
-------
Total......................................................... $79,810
=======
</TABLE>
The Corporation entered a lease financing agreement in connection with the
purchase of an ammonia manufacturing plant and related upgrading facilities
located near Sarnia, Ontario. The agreement is for a four-year term requiring
annual lease payments of approximately $4.0 million (Cdn). Terra Canada has an
option to purchase the nitrogen plant during the term of the lease and at
expiration for approximately $47 million (Cdn). If, at the end of the lease
term, Terra Canada elects not to exercise its purchase option, the Corporation
must pay to the lessor approximately $40 million (Cdn), subject to
reimbursement based on the proceeds realized upon the sale of the nitrogen
plant by the lessor. Terra Canada has entered into certain agreements in order
to convert its obligations with respect to the nitrogen plant set forth above
from Canadian dollar and fixed rental obligations to U.S. dollar and variable
rental obligations based on interest rate changes tied to LIBOR.
Total rental expense under all leases, including short-term cancelable
operating leases, was approximately $24.7 million, $19.4 million and $18.9
million for the years ended December 31, 1993, 1992 and 1991, respectively.
In 1988, the Corporation formulated a fungicide for E. I. DuPont de Nemours
and Company ("DuPont") at the Blytheville facility. The fungicide was recalled
and claims in excess of $90 million, plus punitive damages, have been filed by
third parties alleging damages from product use. During 1993, the Corporation
reached a settlement with DuPont whereby DuPont will assume responsibility for
all related pending product claims and will reimburse the Corporation for
claims previously settled and not reimbursed by insurers. As a result of this
settlement, reserves established in 1989 to cover expected recall and claims
costs will not be required. Accordingly, the Corporation reduced 1993 costs in
the fourth quarter by $4.2 million, the remaining amount of such reserves.
A subsidiary of the Corporation has been notified by the United States
Environmental Protection Agency ("EPA") that it is a potentially responsible
party ("PRP") in the Matter of Valley Chemical Site, Greenville, Mississippi.
Ten other companies have also been named as PRPs. Based on discussions with
the EPA and review of information from other PRPs, the Corporation believes
its responsibility is limited to a portion of material removal costs which
should not be significant to its operating results.
The Corporation is contingently liable for retiree medical benefits of
employees of coal mining operations sold on January 12, 1993. Under the
purchase agreement, the purchaser agreed to indemnify the Corporation against
its obligations under certain employee benefit plans. Due to the Coal Industry
Retiree Health Benefit Act of 1992, certain retiree medical benefits of union
coal miners have become statutorily mandated, and all companies owning 50
percent or more of any company liable for such benefits as of certain
specified dates becomes liable for such benefits if the company directly
liable is unable to pay them. As a result, if the purchaser becomes unable to
pay its retiree medical obligations assumed pursuant to the sale, the
Corporation may have to pay such amount. The Corporation has estimated that
the present
F-13
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value of liabilities for which it retains contingent responsibility
approximates $12 million at December 31, 1993. In the event the Corporation
would be required to assume this liability, mineral reserves associated with
the sold coal subsidiary would revert to the Corporation.
The Corporation and certain of its subsidiaries are involved in the above
mentioned and various other legal actions and claims, including environmental
matters, arising from the normal course of business. Although it is not
possible to predict with any certainty the outcome of such matters, it is the
opinion of management that these matters will not have a material adverse
effect on either the financial position or results of operations of the
Corporation.
12. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial Instruments--The Corporation enters into foreign exchange forward
and option contracts to manage exposure to currency fluctuations. These
agreements are entered as designated hedges of fixed obligations and hedges of
net foreign currency transaction exposures. At December 31, 1993, the notional
amounts for all foreign exchange forward and foreign currency option contracts
totaled $98.2 million. These amounts are a reflection of the extent of such
activity and are disclosed for informational purposes only. They do not
indicate the significantly smaller credit or economic risks involved in these
agreements.
These contracts had a carrying amount of $0.1 million and a fair value of
$0.9 million. Fair value of foreign exchange forward contracts is based on
quotations received from a quotation service and on computations prepared by
the Corporation which are based on current rates of exchange. Maturities,
which are consistent with the settlement dates of items being hedged, extend
through April 1997. The gains and losses on these contracts are deferred and
included as a component of the related transaction.
The Corporation fixes some natural gas supply prices through the use of swap
agreements and financial derivatives. The Corporation had gas contracts with a
computed value of $24.7 million and a fair value of $24.2 million based on
contract prices and rates in effect at December 31, 1993. Gains and losses on
futures contracts and swap agreements are credited or charged to manufacturing
cost in the month to which the hedged transaction relates.
At December 31, 1993, the Corporation had letters of credit outstanding
totaling $19.5 million, guaranteeing various insurance and financing
activities. Short-term investments of $13.0 million at December 31, 1993 and
1992 are restricted to collateralize certain of the letters of credit.
The Corporation enters into the above agreements with a limited number of
major international financial institutions. The Corporation does not expect
any losses from credit exposure due to review and control procedures
established by corporate policy.
Concentrations of Credit Risk--The Corporation is subject to credit risk
through trade receivables and short-term investments. Although a substantial
portion of its debtors' ability to pay is dependent upon the agribusiness
economic sector, credit risk with respect to trade receivables is minimized
due to a large customer base and its geographic dispersion. Short-term cash
investments are placed with well capitalized, high quality financial
institutions and in short duration corporate and government debt securities
funds. By policy, the Corporation limits the amount of credit exposure in any
one type of investment instrument.
13. STOCKHOLDERS' EQUITY
The Corporation allocates $1.00 per share upon the issuance of Common Shares
to the Common Share capital account.
On July 6, 1993, the outstanding HBMS Special Exchangeable Non-Voting Shares
("HBMS Special Shares") were each automatically exchanged for one Common Share
of the Corporation. Through the
F-14
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Corporation's Trust Shares, each HBMS Special Share had a vote equivalent to
one Common Share of the Corporation. For Common Shares issued upon the
exchange of HBMS Special Shares subsequent to August 31, 1986, the Corporation
allocated $9.53 per share to the Common Share capital account, representing
the average historical capitalization of the HBMS Special Shares.
In 1992, the Corporation issued 375,500 restricted Common Shares under its
1992 Stock Incentive Plan to certain key employees of the Corporation. During
1993 an additional 38,500 shares were issued and 45,500 shares were forfeited.
At December 31, 1993, 368,500 of the unvested shares remain outstanding. Under
terms of the issuance, vesting of stock granted is contingent upon the
attainment, prior to March 1999, of pre-established market price objectives
for the Corporation's shares and/or, for approximately 31 percent of
participants, specified regional or divisional three-year operating profit
objectives. In 1991, the Corporation issued 33,300 restricted Common Shares
under its 1987 Stock Incentive Plan. The agreement restricts the shares to
vesting in equal annual installments over five years. The shares issued are
entitled to normal voting rights and earn dividends as declared during the
performance periods. Compensation expenses are accrued on ratable bases
through the performance periods.
The Corporation has authorized 16,500,000 Trust Shares for issuance. All
Trust Shares previously outstanding were cancelled in July 1993.
In addition to the Common and Trust Shares, the Corporation has authorized
19,125,000 Class A Shares for issuance. All Class A Shares previously
outstanding were converted to Common Shares in 1991.
A summary of changes in the Corporation's outstanding capital stock follows:
<TABLE>
<CAPTION>
COMMON CLASS A TRUST TOTAL
SHARES SHARES SHARES SHARES
(IN THOUSANDS) ------ ------- ------ ------
<S> <C> <C> <C> <C>
December 31, 1990.............................. 43,207 17,898 5,181 66,286
Exchanges of HBMS Special Shares............. 144 -- (144) --
Retirement of Convertible Debentures......... 2,626 -- -- 2,626
Conversion of Class A Shares................. 17,898 (17,898) -- --
Stock Incentive Plan......................... 33 -- -- 33
------ ------- ------ ------
December 31, 1991.............................. 63,908 -- 5,037 68,945
Exchange of HBMS Special Shares.............. 1,027 -- (1,027) --
Exercise of stock options.................... 36 -- -- 36
Stock Incentive Plan......................... 375 -- -- 375
------ ------- ------ ------
December 31, 1992.............................. 65,346 -- 4,010 69,356
Exchange of HBMS Special Shares.............. 4,010 -- (4,010) --
Exercise of stock options.................... 213 -- -- 213
Repurchase of shares......................... (107) -- -- (107)
Stock Incentive Plan......................... (7) -- -- (7)
------ ------- ------ ------
December 31, 1993.............................. 69,455 -- -- 69,455
====== ======= ====== ======
</TABLE>
At December 31, 1993, 12.5 million Common Shares were reserved for issuance
upon award of restricted shares, exercise of employee stock options and
conversion of convertible debentures.
14. STOCK OPTIONS
The Corporation's 1992 Stock Incentive Plan authorized granting key
employees options to purchase Common Shares at not less than fair market value
on the date of grant and also authorizes the award of performance units and
restricted shares. The Corporation's 1983 Stock Option Plan and 1987 Stock
Incentive Plan authorized granting key employees similar options to purchase
Common Shares. No further
F-15
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
options may be granted under the 1983 and 1987 Plan. Awards to a maximum of
2.5 million Common Shares may be granted under the 1992 Plan. Options
generally may not be exercised prior to one year or more than ten years from
the date of grant. At December 31, 1993, 1,763,500 Common Shares were
available for grant under the 1992 Plan. A summary of activity under the 1992,
1987 and 1983 Plans follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
UNDER OPTION PER SHARE
(IN THOUSANDS) ------------ ----------------
<S> <C> <C>
Balance at December 31, 1990..................... 2,603 $4.13 to $13.11
Granted........................................ 356 3.38
Expired/terminated............................. 505 3.38 to 13.11
Exercised...................................... -- --
----- ----------------
Balance at December 31, 1991..................... 2,454 $3.38 to $13.11
Granted........................................ 328 5.00
Expired/terminated............................. 163 3.38 to 11.15
Exercised...................................... 36 3.38 to 4.13
----- ----------------
Balance at December 31, 1992..................... 2,583 $3.38 to $13.11
Granted........................................ 41 5.00
Expired/terminated............................. 266 4.125 to 13.11
Exercised...................................... 213 3.38 to 6.75
----- ----------------
Balance at December 31, 1993..................... 2,145 $3.38 to $11.38
===== ================
</TABLE>
The number of options exercisable at December 31 for each of the past three
years follows:
<TABLE>
<CAPTION>
PRICE RANGE
OPTIONS PER SHARE
(IN THOUSANDS) ------- ---------------
<S> <C> <C>
1991............................................ 2,101 $4.13 to $13.11
1992............................................ 2,255 3.38 to 13.11
1993............................................ 1,777 3.38 to 11.38
===== ===============
</TABLE>
15. RETIREMENT PLANS
The Corporation and its subsidiaries maintain non-contributory pension plans
that cover substantially all salaried and hourly employees. Benefits are based
on a final pay formula for the salaried plans and a flat benefit formula for
the hourly plans. The plans' assets consist principally of equity securities
and corporate and government debt securities. The Corporation and its
subsidiaries also have certain non-qualified pension plans covering
executives, which are unfunded. The Corporation accrues pension costs based
upon annual independent actuarial valuations for each plan and funds these
costs in accordance with statutory requirements. The components of net
periodic pension expense (credit) were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
(IN THOUSANDS) ------ ------ ------
<S> <C> <C> <C>
Current service cost.................................... $2,627 $2,019 $1,914
Interest on projected benefit obligation................ 3,539 2,322 2,077
Actual return on assets................................. (4,629) (2,290) (4,251)
Net amortization and other.............................. 853 28 2,395
------ ------ ------
Pension expense......................................... $2,390 $2,079 $2,135
====== ====== ======
</TABLE>
F-16
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles the plans' funded status to amounts included
in the Consolidated Statements of Financial Position at December 31:
<TABLE>
<CAPTION>
1993 1992
----------------------- -----------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASSETS IN ACCUMULATED ASSETS IN ACCUMULATED
EXCESS OF BENEFITS IN EXCESS OF BENEFITS IN
ACCUMULATED EXCESS OF ACCUMULATED EXCESS OF
BENEFITS PLAN ASSETS BENEFITS PLAN ASSETS
(IN THOUSANDS) ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligations... $(32,550) $(1,532) $(21,764) $(1,069)
Accumulated benefit
obligations................. $(36,213) $(1,680) $(24,376) $(1,109)
Projected benefit
obligations................. $(51,173) $(1,993) $(33,558) $(1,155)
Plan assets at fair value...... 45,626 -- 30,732 --
-------- ------- -------- -------
Funded status.................. (5,547) (1,993) (2,826) (1,155)
Unrecognized net experience
loss (gain)................... 4,061 295 1,673 (386)
Unrecognized prior service
cost.......................... 636 107 667 116
Unrecognized net transition
(asset) obligation............ (3,469) 645 (3,835) 705
Additional minimum liability... -- (734) -- (389)
-------- ------- -------- -------
Pension liability included in
the Consolidated Statements of
Financial Position............ $ (4,319) $(1,680) $ (4,321) $(1,109)
======== ======= ======== =======
</TABLE>
Under the terms of the Canadian purchase agreement, the Corporation
established a pension plan for transferring employees, whereby the seller will
transfer assets, which approximate the projected benefit obligations of $9.8
million. The assumptions used to determine the actuarial present value of
benefit obligations and pension expense during each of the years in the three-
year period ended December 31, 1993 were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rates to determine:
Pension expense................................................ 7.5% 8.5% 8.5%
Present value of benefit obligations........................... 7.5% 8.5% 8.5%
Long-term per annum compensation increase........................ 5.0% 6.0% 6.0%
Long-term return on plan assets.................................. 9.5% 9.5% 9.5%
==== ==== ====
</TABLE>
The Corporation also sponsors a qualifying savings plan covering most full-
time employees. Contributions made by participating employees are matched
based on a specified percentage of employee contributions to 6% of the
employees' pay base. The cost of the Corporation's matching contribution to
the savings plan totaled $1.4 million in 1993, and $1.1 million in 1992 and
1991.
16. POST-RETIREMENT BENEFITS
The Corporation also provides health care benefits for eligible retired
employees of its agribusiness subsidiary. Participants generally become
eligible after reaching retirement age with ten years of service. The plan
pays a stated percentage of most medical expenses reduced for any deductible
and payments made by government programs. The plan is unfunded.
Employees hired prior to January 1, 1990 are eligible for participation in
the plan. Participant contributions and co-payments are subject to escalation.
F-17
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table indicates the components of the post-retirement medical
benefits obligation included in the Corporation's Consolidated Statement of
Financial Position at December 31, 1993:
<TABLE>
<CAPTION>
1993 1992
(IN THOUSANDS) -------- --------
<S> <C> <C>
Accumulated post-retirement medical benefit obligation:
Retirees................................................. $ 2,054 $ 2,168
Fully eligible active plan participants.................. 1,946 2,075
Other active participants................................ 5,305 6,205
-------- --------
Funded status............................................ (9,305) (10,448)
Unrecognized net (gain) loss............................. 149 37
Unrecognized prior service (benefit)..................... (2,040) --
-------- --------
(Accrued) post-retirement benefit cost..................... $(11,196) $(10,411)
======== ========
</TABLE>
Net periodic post-retirement medical benefit cost consisted of the following
components:
<TABLE>
<CAPTION>
1993 1992
(IN THOUSANDS) ------ ------
<S> <C> <C>
Service cost of benefits earned................................. $ 526 $ 723
Interest cost on accumulated post-retirement medical benefit
obligation..................................................... 614 730
Net amortization and other...................................... (127) --
------ ------
Net periodic post-retirement medical benefit cost............... $1,013 $1,453
====== ======
</TABLE>
The Corporation limits its future obligation for post-retirement medical
benefits by capping at 5% the annual rate of increase in the cost of claims it
assumes under the Plan. The weighted average discount rate used in determining
the accumulated post-retirement medical benefit obligation is 7.5% and was
8.0% in 1992. The determination of the Corporation's accumulated post-
retirement benefit obligation as of December 31, 1993 utilizes the annual
limit of 5% for increases in claims costs.
17. OTHER INCOME, NET
Other income consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
(IN THOUSANDS) ------- ------- -------
<S> <C> <C> <C>
Fertilizer service revenue.............................. $13,531 $10,354 $ 9,743
Service charge income................................... 3,930 3,963 3,833
Other, net.............................................. 8,030 5,829 5,255
------- ------- -------
Total............................................... $25,491 $20,146 $18,831
======= ======= =======
</TABLE>
18. INCOME TAXES
Components of the income tax provision (benefit) applicable to continuing
operations are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
(IN THOUSANDS) ------- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $ 4,884 $ 640 $ 600
Foreign............................................... 3,750 -- --
State................................................. 4,709 804 818
------- ------ ------
13,343 1,444 1,418
------- ------ ------
Deferred:
Federal............................................... (4,126) 6,288 (119)
Foreign............................................... 451 -- --
State................................................. (368) 25 (226)
------- ------ ------
(4,043) 6,313 (345)
------- ------ ------
Total income tax provision.......................... $ 9,300 $7,757 $1,073
======= ====== ======
</TABLE>
F-18
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1992, the Corporation adopted SFAS 109 to account for
income taxes as described in Note 3 above. The Corporation has accumulated net
operating loss ("NOL") carryforwards and, in prior years under provisions of
its previous accounting method, the benefits from loss carryforwards had been
included as a reduction of income tax expense in the year utilized.
The income tax provision differs from the federal statutory provision for
the following reasons:
<TABLE>
<CAPTION>
1993 1992 1991
(IN THOUSANDS) ------- ------- -------
<S> <C> <C> <C>
Income (loss) from continuing operations before
taxes:
U.S............................................... $19,046 $18,186 $13,106
Canada............................................ 13,099 -- --
------- ------- -------
$32,145 $18,186 $13,106
======= ======= =======
Statutory income tax:
U.S............................................... $ 6,666 $ 6,183 $ 4,456
Canada............................................ 4,978 -- --
------- ------- -------
11,644 6,183 4,456
Non-deductible expenses............................. 698 710 705
State and local income taxes........................ 3,061 547 391
Benefit of loss carryforwards....................... (4,494) -- (5,036)
Change in federal tax rates......................... (1,233) -- --
Undistributed equity earnings....................... (865) -- --
Other............................................... 489 317 557
------- ------- -------
Income tax provision................................ $ 9,300 $ 7,757 $ 1,073
======= ======= =======
</TABLE>
Deferred tax assets totaled $50.8 million and $46.3 million at December 31,
1993 and 1992, respectively. At December 31, 1993, undistributed earnings of
the Canadian subsidiary, considered permanently invested, for which deferred
income taxes have not been provided, was $8.9 million. The tax effect of NOL
and tax credit carryforwards and significant temporary differences between
reported and taxable earnings that gave rise to net deferred tax assets were
as follows:
<TABLE>
<CAPTION>
1993 1992
(IN THOUSANDS) -------- -------
<S> <C> <C>
NOL, capital loss and tax credit carryforwards............... $ 28,937 $31,209
Discontinued business costs.................................. 7,295 8,992
Unfunded employee benefits................................... 8,146 8,354
Accrued liabilities.......................................... 8,658 5,705
Inventory valuation.......................................... 4,059 3,418
Account receivable allowances................................ 2,176 2,286
Depreciation................................................. (6,297) (4,020)
Valuation allowance.......................................... (2,765) (9,554)
Other........................................................ 93 (131)
-------- -------
$ 50,302 $46,259
======== =======
</TABLE>
Remaining unutilized NOL carryforwards were approximately $55 million and
$51 million at December 31, 1993 and 1992, respectively. NOL carryforwards
that have not been utilized expire in 2005. Investment tax credits of
approximately $1.7 million expire in varying amounts from 1998 through 2000.
Alternative minimum taxes paid of $5.2 million are available to offset future
tax liabilities and have an indefinite life. The Corporation's capital loss
carryforwards totalled $7.9 million and $28.1 million at
F-19
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
December 31, 1993 and 1992, respectively. Capital loss carryforwards that are
not utilized will expire in 1997. The change in the valuation allowance
reflects current utilization of capital losses against capital gains and
changes in tax rates. A valuation allowance is provided since the realization
of tax benefits of capital loss carryforwards is not assured.
Components of income tax provision (benefit) included in net income other
than from continuing operations are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
(IN THOUSANDS) ------- -------- ------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ 120 $2,496
State and local..................................... -- 5,479 1,992
------- -------- ------
-- 5,599 4,488
------- -------- ------
Deferred:
Federal............................................. -- (18,887) 554
State and local..................................... -- (2,001) (629)
------- -------- ------
-- (20,888) (75)
------- -------- ------
$ -- $(15,289) $4,413
======= ======== ======
</TABLE>
19. SUBSEQUENT EVENTS
Subsequent to June 30, 1994 the following events occurred:
On August 9, 1994, the Corporation announced it had signed a definitive
agreement to acquire Agricultural Minerals and Chemicals Inc. ("AMCI"). AMCI
has annual sales of approximately $366 million and operates two fertilizer and
one methanol manufacturing facilities. The acquisition will be accounted for
under the purchase method of accounting. The Corporation will obtain
additional funds from a combination of debt financing, offering of equity
securities and utilization of available cash. See Pro Forma Condensed
Consolidated Financial Statements appearing elsewhere in this Prospectus.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Agricultural Minerals and Chemicals Inc.
We have audited the accompanying consolidated balance sheets of Agricultural
Minerals and Chemicals Inc. as of December 31, 1993 and 1992, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Agricultural Minerals and Chemicals Inc. at December 31, 1993 and 1992, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 11, 1994
F-21
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1994 1993 1992
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 88,718 $ 60,653 $ 44,367
Receivables:
Trade--net of allowance for doubtful
accounts of $630 at December 31, 1993 and
$500 at December 31, 1992.................. 37,534 24,893 18,722
Other, including related party (Note 9)..... 4,332 5,017 3,922
Inventory--finished products.................. 14,546 21,262 32,435
Inventory--materials and supplies............. 10,836 10,365 14,998
Prepaid expenses.............................. 15,673 15,399 8,555
-------- -------- --------
Total current assets...................... 171,639 137,589 122,999
Net property, plant and equipment (Notes 4 and
6)............................................. 319,383 326,899 347,012
Deferred finance charges, net of accumulated
amortization of $2,338 and $3,734 at December
31, 1993 and 1992, respectively................ 10,412 11,450 7,297
Distribution reserve fund (Note 10)............. 18,480 18,480 18,480
Other assets.................................... 10,891 11,977 10,125
-------- -------- --------
Total assets.............................. $530,805 $506,395 $505,913
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 28,531 $ 35,379 $ 30,549
Accrued liabilities........................... 24,197 15,491 11,974
Customer prepayments.......................... 428 2,928 4,377
Revolving credit borrowings (Note 6).......... -- 9,000 24,000
Current portion of long-term debt (Note 6).... 1,370 726 14,691
-------- -------- --------
Total current liabilities................. 54,526 63,524 85,591
Long-term debt and capital lease obligations
(Note 6)....................................... 215,659 218,692 120,428
Other liabilities............................... 4,179 2,055 2,999
Deferred income taxes........................... 25,231 16,425 13,816
Minority interest............................... 161,798 156,352 155,043
Common stock and options with liquidity rights
(Note 5)....................................... 4,347 4,294 15,792
Stockholders' equity:
Agricultural Minerals and Chemicals Inc.
common stock, par value $.01 per share (Notes
1 and 8):
Class A: 25,000,000 and 15,000,000 shares
authorized, 16,951,630 and 9,717,080 shares
issued and outstanding at December 31, 1993
and 1992, respectively..................... 170 170 97
Class B: 25,000,000 and 15,000,000 shares
authorized, 207,000 and 1,067,000 shares
issued and outstanding at December 31, 1993
and 1992, respectively..................... 2 2 11
BMC Holdings Inc. common stock, par value $.01
per share (Note 1):
Class A: 15,000,000 shares authorized,
5,775,000 shares issued and outstanding.... -- -- 58
Class B: 15,000,000 shares authorized,
1,050,000 shares issued and outstanding.... -- -- 10
Capital in excess of par value................ 40,472 40,485 106,005
Retained earnings............................. 24,421 4,396 6,063
-------- -------- --------
Total stockholders' equity................ 65,065 45,053 112,244
-------- -------- --------
Total liabilities and stockholders'
equity................................... $530,805 $506,395 $505,913
======== ======== ========
</TABLE>
See accompanying notes.
F-22
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
------------------ ----------------------------
1994 1993 1993 1992 1991
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $231,782 $193,579 $365,786 $324,953 $252,729
Cost of goods sold........... 151,040 147,796 283,908 234,537 173,500
-------- -------- -------- -------- --------
Gross profit................. 80,742 45,783 81,878 90,416 79,229
Operating expenses........... (12,973) (11,657) (27,775) (25,033) (18,231)
Other operating income....... 37 34 299 230 795
-------- -------- -------- -------- --------
Operating income............. 67,806 34,160 54,402 65,613 61,793
Interest income.............. 1,971 798 1,820 2,317 3,252
Interest expense............. (12,622) (7,368) (17,759) (14,870) (21,448)
Other income (expense)....... 94 316 (2,409) 486 (29)
-------- -------- -------- -------- --------
Income before income taxes,
minority interest and
extraordinary expense....... 57,249 27,906 36,054 53,546 43,568
Income taxes (Note 3)........ (14,898) (6,868) (7,721) (12,484) (16,484)
Minority interest............ (15,526) (13,810) (19,789) (20,450) (1,325)
-------- -------- -------- -------- --------
Income before extraordinary
expense..................... 26,825 7,228 8,544 20,612 25,759
Extraordinary expense--early
retirement of debt, net of
income tax benefit of $1,313
in 1993 and $3,616 in 1991.. -- -- (2,550) -- (5,899)
-------- -------- -------- -------- --------
Net income................... $ 26,825 $ 7,228 $ 5,994 $ 20,612 $ 19,860
======== ======== ======== ======== ========
Weighted average shares
outstanding................. 17,435 17,438 17,438 17,438 11,402
======== ======== ======== ======== ========
EARNINGS PER SHARE:
Income before extraordinary
expense..................... $ 1.54 $ 0.41 $ 0.49 $ 1.18 $ 2.26
Extraordinary expense........ -- -- (0.15) -- (0.52)
-------- -------- -------- -------- --------
Net income................... $ 1.54 $ 0.41 $ 0.34 $ 1.18 $ 1.74
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES AND PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
AGRICULTURAL
MINERALS
AND CHEMICALS
INC. BMC HOLDINGS INC. CAPITAL
COMMON STOCK COMMON STOCK IN
------------------ ------------------ EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS
---------- ------ ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1990................... 10,900,000 $109 -- $-- $108,891 $ 3,015
Capital contributed at
BMCH formation....... -- -- 7,000,000 70 69,930 --
Net income............ -- -- -- -- -- 19,860
Capital contribution
from Equity Incentive
Plan compensation.... -- -- -- -- 1,560 --
Dividends paid (AMCI--
$5.72 per share)..... -- -- -- -- (46,074) (16,274)
Issuance of liquidity
rights on shares and
options.............. (115,920) (1) -- -- (5,649) --
---------- ---- ---------- ---- -------- -------
Balance at December 31,
1991................... 10,784,080 108 7,000,000 70 128,658 6,601
Net income............ -- -- -- -- -- 20,612
Capital contribution
from Equity Incentive
Plan compensation.... -- -- -- -- 1,000 --
Dividends paid (AMCI--
$3.18 per share)..... -- -- -- -- (13,512) (21,150)
Issuance of liquidity
rights on shares and
options.............. -- -- (175,000) (2) (1,858) --
Change in value of
liquidity rights on
shares and options... -- -- -- -- (8,283) --
---------- ---- ---------- ---- -------- -------
Balance at December 31,
1992................... 10,784,080 108 6,825,000 68 106,005 6,063
Net income............ -- -- -- -- -- 5,994
Capital contribution
from Equity Incentive
Plan compensation.... -- -- -- -- (2,061) --
Dividends paid (AMCI--
$7.58 per share)..... -- -- -- -- (74,961) (7,661)
Change in value of
liquidity rights on
shares and options... -- -- -- -- 11,498 --
Exchange of BMCH
shares for AMCI
shares (Note 1)...... 6,374,550 64 (6,825,000) (68) 4 --
---------- ---- ---------- ---- -------- -------
Balance at December 31,
1993................... 17,158,630 172 -- -- 40,485 4,396
Net income
(unaudited).......... -- -- -- -- -- 26,825
Dividends paid (AMCI-
$0.39 per share
(unaudited))......... -- -- -- -- -- (6,800)
Repurchase of Common
Shares (unaudited)... (3,248) -- -- -- (37) --
Capital contribution
from Equity Incentive
Plan Compensation
(unaudited).......... -- -- -- -- 77 --
Change in value of
liquidity rights on
shares and options
(unaudited).......... -- -- -- -- (53) --
---------- ---- ---------- ---- -------- -------
Balance at June 30, 1994
(unaudited)............ 17,155,382 $172 -- $-- $ 40,472 $24,421
========== ==== ========== ==== ======== =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
---------------- --------------------------
1994 1993 1993 1992 1991
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................... $26,825 $ 7,228 $ 5,994 $20,612 $ 19,860
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization. 14,269 13,285 26,876 26,713 16,168
Amortization and write-off of
deferred finance charges..... 1,042 1,315 6,448 2,816 5,416
Provision for deferred income
taxes........................ 8,806 468 2,609 5,782 6,119
Minority interest in earnings. 15,526 13,810 19,789 20,450 1,325
Changes in operating assets
and liabilities:
Receivables................. (9,172) (10,506) (7,266) 2,614 (2,678)
Inventories................. 6,245 20,368 15,806 (13,600) (336)
Prepaid expenses............ (274) (4,564) (6,844) (1,648) (151)
Accounts payable, accrued
liabilities and customer
prepayments................ (642) 3,491 6,898 (1,313) 14,409
Other....................... 3,650 (2,001) (4,370) 181 (2,193)
------- ------- ------- ------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES..................... 66,275 42,894 65,940 62,607 57,939
INVESTING ACTIVITIES
Purchase of methanol assets... -- -- -- -- (164,869)
Capital expenditures.......... (5,576) (4,261) (6,968) (9,878) (3,163)
Proceeds from sale of assets.. -- -- -- 1,100 --
------- ------- ------- ------- --------
NET CASH USED IN INVESTING
ACTIVITIES..................... (5,576) (4,261) (6,968) (8,778) (168,032)
FINANCING ACTIVITIES
Borrowings under revolving
line of credit............... 2,500 35,000 80,000 37,000 5,000
Repayments of revolving line
of credit.................... (17,500) (45,500) (89,000) (18,000) --
Proceeds from issuance of
long-term obligations........ -- -- 175,000 -- 140,000
Repayment of long-term debt... (315) (7,299) (96,701) (9,085) (170,567)
Capital contribution.......... -- -- -- -- 70,000
Proceeds from public offering. -- -- -- -- 153,033
Financing fees and transaction
costs paid................... (439) (545) (10,883) (7,469) (8,792)
Distribution reserve funding.. -- -- -- (18,480) --
Partnership distributions to
minority interests........... (10,080) (9,240) (18,480) (15,265) --
Dividends to shareholders..... (6,800) (12,752) (82,622) (34,662) (62,348)
------- ------- ------- ------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES........... (32,634) (40,336) (42,686) (65,961) 126,326
------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........... 28,065 (1,703) 16,286 (12,132) 16,233
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD............ 60,653 44,367 44,367 56,499 40,266
------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD...................... $88,718 $42,664 $60,653 $44,367 $ 56,499
======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
1. ORGANIZATION AND BUSINESS
Agricultural Minerals and Chemicals Inc. ("AMCI"), a holding company
incorporated in the State of Delaware, owns 100% of the common stock of both
BMC Holdings Inc. ("BMCH") and Agricultural Minerals Corporation ("AMC"), the
general partner of Agricultural Minerals Company, L.P. ("AMCLP"). AMCLP is a
Delaware limited partnership which owns a 99% limited partner interest as the
sole limited partner in Agricultural Minerals, Limited Partnership (the
"Operating Partnership"). The Morgan Stanley Leveraged Equity Fund II, L.P.
("MSLEF II"), is majority owner of AMCI, formerly AMC Holdings Inc. MSLEF II,
which owns AMCI common stock representing 74.2% of all the AMCI common equity
on a fully diluted basis as of June 30, 1994, is a Delaware limited
partnership whose general partner, MSLEF II, Inc., is a wholly owned
subsidiary of Morgan Stanley Group Inc.
In October 1993, AMCI completed the following principal elements of a
recapitalization (the "1993 AMCI Recapitalization"): (a) the transfer to AMCI
of all the outstanding shares of common stock of BMCH by the equity holders of
BMCH in exchange for shares of AMCI common stock, and the exchange of all the
outstanding options to purchase shares of common stock of BMCH for options to
purchase shares of AMCI common stock, at a rate of .934 of a share of AMCI
common stock for each share of common stock of BMCH (the "BMCH Transfer"),
including the exchange by MSLEF II of all the outstanding shares of voting
common stock of BMCH for shares of common stock of AMCI, resulting in BMCH
becoming a wholly owned subsidiary of AMCI; (b) the public offering of $175
million aggregate principal amount of 10 3/4% Senior Notes due 2003 of AMCI
(the "Notes"), the net proceeds of which ($169.8 million) were used to (i)
prepay the entire $85.5 million principal amount of a term loan outstanding
under the then existing credit agreement of Beaumont Methanol Corporation
("BMC"), (ii) pay dividends or dividend equivalents in an aggregate amount of
$75 million to the holders (prior to the BMCH Transfer) of the outstanding
common equity of AMCI, and (iii) for general corporate purposes; (c) the
execution and delivery of a credit agreement among BMCH, BMC and certain
lenders and the agent named therein, providing for the establishment of (i) a
$20 million revolving credit facility, which was used to repay all revolving
loans outstanding under BMC's existing $20 million revolving credit facility
and to provide for BMC's ongoing working capital requirements and for other
general corporate purposes, (ii) a $50 million letter of credit facility (for
the account of BMC and for the benefit of AMCI) to support the payment of
interest on the Notes for a period not to extend beyond December 31, 1996, and
(iii) a guaranty by BMCH of BMC's obligations thereunder. In addition, the
holders of shares of AMCI Class B common stock exchanged their shares for AMCI
Class A common stock. The BMCH Transfer was accounted for as a merger of
entities under common control. Accordingly, the assets and obligations of BMCH
were recorded at their historical cost as of the date of the BMCH Transfer.
The Operating Partnership was organized by AMC, the general partner, to
succeed to and acquire the nitrogen fertilizer business of AMC on December 4,
1991. AMC, as the general partner, conducts, directs, manages and exercises
full control over all business and affairs of AMCLP.
The Operating Partnership is in the business of manufacturing, distributing
and selling fertilizer products, including ammonia, urea and urea ammonium
nitrate solution which are principally used by farmers to improve the yield
and quality of their crops. Customers vary in size and are primarily related
to the agriculture industry. The Operating Partnership sells products
throughout the United States and internationally. The Partnership's customers
vary in size and are primarily related to the agricultural industry. Credit is
extended based on an evaluation of the customer's financial condition, and
generally collateral is not required. Expected credit losses have been
provided for in the financial statements.
F-26
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
On December 4, 1991, AMCLP completed a public offering of 7,636,364 Senior
Preference Units at $21.50 per unit. Immediately prior to the closing, AMC
conveyed substantially all its assets (except for $107.6 million in cash plus
certain assets necessary to provide general and administrative services) and
operations to the Operating Partnership, and the Operating Partnership assumed
substantially all its liabilities (excluding income tax liabilities) in
exchange for a 99% limited partnership interest and a 1% general partnership
interest in the Operating Partnership. The contributed net assets and assumed
obligations of the Operating Partnership were recorded at AMC's historical
cost as of December 4, 1991. AMC then contributed all of its limited partner
interest in the Operating Partnership to AMCLP in exchange for (i) 6,000,000
Junior Preference Units and 5,172,414 Common Units and (ii) 1.0101% or 1/99th
general partnership interest in AMCLP. Thereafter, AMCLP contributed the net
proceeds of the offering to the Operating Partnership. The $148.5 million net
proceeds from the sale of the units, after deducting underwriting discounts
and offering expenses of $15.6 million, were used, along with other available
funds, to repay $150.5 million of long-term debt. Following these
transactions, the Senior Preference Unitholders, which are reported as
minority interests in these consolidated financial statements, have a 39.8%
limited partnership interest in the combined Partnership (AMCLP and the
Operating Partnership). AMC has a 58.2% limited partnership interest in the
combined Partnership through its ownership of Junior Preference Units and
Common Units. In addition, AMC owns a 2% general partnership interest in the
combined Partnership.
BMCH, a holding company, owns 100% of BMC. BMCH was incorporated in the
State of Delaware on November 27, 1991. Prior to the acquisition discussed
below, BMCH did not have significant operations. BMC is in the business of
manufacturing, distributing and selling methanol, which is principally used as
a raw material in the production of a variety of chemical derivatives and in
the production of MTBE, an oxygenate and an octane enhancer for gasoline. BMC
sells methanol produced at its facility located in Beaumont, Texas. BMC's
customers are primarily large chemical or MTBE producers.
On December 12, 1991, BMCH invested $70 million in BMC to provide funding
for BMC's acquisition of certain assets of E. I. du Pont de Nemours and
Company's ("DuPont") methanol business in Beaumont, Texas for a purchase price
of approximately $165 million and to provide start-up capital. The balance of
the acquisition was financed by BMC with $105 million of bank term notes which
were subsequently repaid in connection with the 1993 AMCI Recapitalization
discussed above. The acquisition was accounted for as a purchase, and the
purchase price was allocated to the assets and liabilities based upon their
estimated fair values at the date of the acquisition as follows (in millions):
<TABLE>
<CAPTION>
Property, plant and equipment...................................... $ 158
<S> <C>
Receivables........................................................ 2
Other assets and obligations (net)................................. 5
-----
$ 165
=====
</TABLE>
Concurrent with the acquisition, BMC entered into several agreements with
DuPont, including the DuPont Services Agreement, whereby DuPont provides
certain operating services to the facility on substantially the same terms and
conditions as it provides services and allocates costs to the other
manufacturing processes at the Beaumont complex. Under the Interim Operating
Agreement, which ended November 30, 1992, DuPont operated the facility,
assisted BMC in training new employees and provided consulting and advisory
services. The DuPont carbon dioxide Supply Agreement provides that DuPont will
supply carbon dioxide to the Beaumont facility at agreed quantities and
prices. Under the methanol purchase and sale agreement, BMC sells methanol to
DuPont for a term of ten years from the date of
F-27
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
acquisition at agreed quantities and prices. Under this agreement, DuPont must
purchase a minimum of 108 million gallons of methanol per year at market-based
prices. For the years ended December 31, 1993, 1992 and 1991, sales to DuPont
were $41.3 million, $46.6 million and $5.3 million, respectively.
BMC also has an exclusive marketing services agreement with Trammochem, a
division of Transammonia, Inc., to provide marketing services for the methanol
produced at the Beaumont facility. Trammochem is a major marketer of
chemicals, including methanol, throughout the world (see Note 8).
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
These financial statements present the consolidated financial position,
results of operations and cash flows of AMCI. As discussed in Note 1, the BMCH
Transfer completed in October 1993 resulted in BMCH becoming a wholly owned
subsidiary of AMCI. Subsequent to its formation in late 1991 and until the
BMCH Transfer, the financial statements of BMCH have been combined and
presented as a single entity with those of AMCI because of common ownership,
management and control. Accordingly, the consolidated financial statements of
AMCI for all periods presented include the account balances of that company,
AMC, AMCLP and the Operating Partnership and BMCH and BMC subsequent to their
formation. AMCLP's income is allocated to AMC in accordance with the
provisions of the Agreement of Limited Partnership. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents:
AMCI considers liquid debt instruments with a maturity of three months or
less to be cash equivalents. At December 31, 1993, substantially all cash and
cash equivalents ($60.7 million) is placed with three high credit quality
financial institutions. Cash on hand includes $27.8 million maintained at AMC
(see Note 10 for AMC minimum net worth requirements).
Inventories:
Product inventories are stated at the lower of average cost or market. Cost
includes labor, materials, depreciation and other production costs. Materials
and supplies inventories are stated at the lower of average cost or market.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is provided over the estimated useful lives of the respective
assets, principally on the straight-line basis. Expenditures for additions,
major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are charged to income as incurred. When properties are
retired or otherwise disposed of, the cost thereof and the applicable
accumulated depreciation are removed from the respective accounts, and the
resulting gain or loss is reflected in income.
Deferred Finance Charges:
Deferred finance charges consist of debt issuance costs related to the
issuance of debt securities and are amortized using the interest method over
the term of the related debt.
F-28
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
Plant Turnaround and Catalyst Replacement Costs:
Costs related to the periodic scheduled maintenance of production facilities
(plant turnarounds) and catalyst replacement are capitalized when incurred and
amortized on a straight-line basis, generally over one or two years, until the
next scheduled turnaround for plant turnarounds and over the life of the
catalyst for catalyst replacements. Included in prepaid expenses and other
assets at December 31, 1993 and 1992 are $17.5 million and $8.4 million,
respectively, of unamortized plant turnaround and catalyst replacement costs
incurred by the Operating Partnership and BMC. Prior to 1993, BMC had not
incurred any plant turnaround or catalyst replacement costs.
Hedging Transactions:
BMC and the Operating Partnership enter into both physical and financial
contracts to manage the cost of natural gas, the primary material used in
production of methanol and nitrogen fertilizers. The financial contracts
include both futures contracts and swap agreements. The futures contracts
require maintenance of cash balances that are generally 10% to 20% of the
contract value. Contract settlement dates are scheduled to coincide with the
dates of natural gas purchases that are made throughout the year. Realized
gains and losses from swap agreements and gains or losses resulting from
changes in the price of natural gas futures contracts traded on the NYMEX are
deferred and either credited or charged to manufacturing cost in the month in
which the related natural gas is actually purchased.
BMC and the Operating Partnership have entered into interest rate swap
agreements to manage exposure to interest rate fluctuations. Under provisions
of the agreements, BMC and the Operating Partnership and the counterparty
exchange fixed and floating interest rate payments periodically over the life
of the agreements. The differential paid or received under these agreements is
recorded as a charge or reduction to interest expense in the periods in which
the interest on the related debt is accrued.
Income Taxes:
Subsequent to the BMCH Transfer discussed in Note 1, BMCH will be included
in the consolidated tax return of AMCI. Prior to the BMCH Transfer, AMCI and
BMCH filed separate consolidated tax returns.
Deferred income taxes are computed using the liability method and are
provided on all temporary differences between the financial reporting basis
and the tax basis of AMCI's assets and liabilities.
Earnings Per Share:
Earnings per share are calculated based on the weighted average number of
shares of AMCI common stock outstanding, including shares subject to put
rights, retroactively adjusted for the BMCH Transfer. Shares issuable upon
exercise of outstanding stock options have been excluded from the calculation
since the effect would be antidilutive.
Dividends Per Share:
Dividends per share, prior to the 1993 AMCI Recapitalization, are calculated
based on 10,900,000 shares of common stock issued and outstanding for AMCI,
including 115,920 shares subject to put rights. Distributions to participants
in the 1993 AMCI Management Equity Plan and the 1990 AMCI Equity Incentive
Plan resulting from their right to participate in AMCI dividends are not
included in dividends or the computation of dividends per share. These
dividend equivalent payments are classified as compensation expense.
Environmental Liabilities:
Environmental liabilities are recognized when it is probable that a loss has
been incurred and the amount of that loss is reasonably estimable.
Environmental liabilities are accrued based upon estimates of
F-29
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
expected future costs without discounting to present value the estimated costs
to be paid in the future, and without consideration of possible recoveries
from third parties.
3. INCOME TAXES
AMCI follows the provisions of FASB Statement No. 109, "Accounting for
Income Taxes."
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1992 1991
(IN THOUSANDS) ------ ------- -------
<S> <C> <C> <C>
Current tax expense:
Federal......................................... $3,537 $ 6,526 $ 7,096
State........................................... 262 176 230
------ ------- -------
3,799 6,702 7,326
Deferred tax expense:
Federal......................................... 3,235 4,070 6,925
State........................................... 687 1,712 2,233
------ ------- -------
3,922 5,782 9,158
------ ------- -------
Total income taxes............................ $7,721 $12,484 $16,484
====== ======= =======
</TABLE>
Effective with the 1993 AMCI Recapitalization, BMCH became part of the
consolidated AMCI federal tax return. Operating losses generated by BMCH prior
to the 1993 AMCI Recapitalization can only be used to offset BMCH taxable
income. Operating losses generated by BMCH after the 1993 AMCI
Recapitalization can be used by AMCI to offset any taxable income reported on
the consolidated return.
At December 31, 1993, AMCI has net operating losses of $8.3 million and BMCH
has a net operating loss of $87.6 million and an Alternative Minimum Tax net
operating loss of $24.4 million available to carry forward to future periods
for federal tax purposes which, if not utilized, will expire beginning in 2005
and 2007, respectively. AMCI's current federal tax expense results from the
application of the Alternative Minimum Tax. As of December 31, 1993, deferred
taxes have been reduced by AMCI's Alternative Minimum Tax Credit carryover of
$13.6 million and the benefit of AMCI's and BMCH's net operating loss carry
forwards.
Significant components of AMCI's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1993 1992
(IN THOUSANDS) ------- -------
<S> <C> <C>
Deferred tax liabilities:
Investment in AMCLP.................................... $30,852 $31,583
Tax over book depreciation............................. 29,788 17,660
Other.................................................. 612 --
------- -------
Total deferred tax liabilities........................... 61,252 49,243
Deferred tax assets:
Net operating loss carryover........................... 30,962 18,945
Alternative Minimum Tax credit carryover............... 13,630 12,577
Overhead allocations to inventory...................... 235 2,508
Other.................................................. -- 1,397
------- -------
Total deferred tax assets................................ 44,827 35,427
------- -------
Net deferred tax liability............................... $16,425 $13,816
======= =======
</TABLE>
F-30
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
The provision for income taxes differs from the amounts computed by applying
the statutory federal income tax rate of 35% (34% for 1992 and 1991) to income
before income taxes and extraordinary expense for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1993 1992 1991
(IN THOUSANDS) ------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rates.................. $12,619 $18,204 $14,812
Minority interest in consolidated
partnership................................. (6,926) (6,953) (450)
Change in federal tax rates.................. 628 -- --
BMCH losses not benefited.................... 782 -- --
State income taxes, net of federal benefit... 618 1,233 1,694
Other........................................ -- -- 428
------- ------- -------
Total income taxes....................... $ 7,721 $12,484 $16,484
======= ======= =======
</TABLE>
During the six months ended June 30, 1994 and the years ended December 31,
1993, 1992 and 1991, income taxes paid were $6.1 million, $4.9 million, $6.5
million and $7.1 million, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
JUNE 30,
1994 1993 1992
----------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements...................... $ 5,223 $ 5,223 $ 5,092
Plant and equipment........................ 404,351 397,624 391,285
Terminals and transportation equipment..... 5,887 5,882 5,866
-------- -------- --------
415,461 408,729 402,243
Less accumulated depreciation and
amortization.............................. 96,078 81,830 55,231
-------- -------- --------
$319,383 $326,899 $347,012
======== ======== ========
</TABLE>
Included in the amounts above are assets under capital leases, principally
two terminals and certain processing equipment, amounting to approximately
$3.4 million at both December 31, 1993 and 1992. Accumulated amortization of
such assets was $576,000 and $371,000 at December 31, 1993 and 1992,
respectively. Amortization of these assets has been included in depreciation
and amortization expense.
5. EMPLOYEE BENEFIT PLANS
PENSION PLANS--
Effective July 1, 1990 and January 1, 1992, AMC and BMC, respectively,
adopted noncontributory defined benefit pension plans covering substantially
all employees. Benefits are based on years of service and average final
compensation. Pension costs are funded to satisfy minimum requirements
prescribed by the Employee Retirement Income Security Act of 1974.
F-31
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
Net periodic pension cost of the plans consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1992 1991
(IN THOUSANDS) ------ ------ ------
<S> <C> <C> <C>
Service cost...................................... $1,026 $ 926 $ 778
Interest cost..................................... 304 228 182
Return on plan assets............................. (166) (109) --
Net amortization and deferrals.................... 71 73 72
------ ------ ------
Net periodic pension cost......................... $1,235 $1,118 $1,032
====== ====== ======
</TABLE>
The following table reconciles the funded status of the plans to the amount
included in the balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1993 1992
(IN THOUSANDS) ------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.............................. $2,806 $1,263
Nonvested benefit obligation........................... 700 544
------ ------
Accumulated benefit obligation........................... 3,506 1,807
Effect of salary projection.............................. 2,136 1,782
------ ------
Projected benefit obligation............................. 5,642 3,589
Fair value of plan assets (which are substantially
publicly traded mutual funds)........................... (2,308) (1,495)
Unrecognized amount for prior service cost............... (1,081) (1,109)
Unrecognized net gain.................................... (304) 328
------ ------
Pension liability........................................ $1,949 $1,313
====== ======
</TABLE>
Included in the vested benefit obligation is $250,000 for former DuPont
employees. An equal amount of assets were transferred from DuPont to the BMC
pension plans.
The discount rate used to measure the present value of benefit obligations
is 7.0% and 8.5% and the assumed rate of increase in future compensation
levels is 4.0% and 5.5% at December 31, 1993 and 1992, respectively. The
expected long-term rate of return on the plans' assets is 9.0% at December 31,
1993 and 1992.
OTHERS BENEFIT PLANS--
AMC and BMC have defined contribution plans under which employees who meet
specified service requirements may contribute a percentage of their total
compensation, up to a maximum defined by the plan. Each employee's
contribution, up to a specified maximum, may be matched in full by the
respective company at its discretion. Employee contributions vest immediately,
while company contributions vest over five years. The companies' contributions
to the plans were $800,000, $700,000 and $500,000 for the years ended December
31, 1993, 1992 and 1991, respectively.
AMC and BMC also have incentive compensation plans covering substantially
all of their employees. Incentive compensation is paid to employees under the
plans based on specified levels of earnings before
F-32
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
interest, taxes, depreciation and amortization generated during the 12 month
period ended June 30. Incentive compensation expense under AMC's plan for the
years ended December 31, 1993, 1992 and 1991 was $3.4 million, $3.6 million
and $3.6 million, respectively. There was no such compensation under the BMC
plan for 1993, 1992 or 1991.
As a part of the 1993 AMCI Recapitalization, AMCI adopted the 1993 AMCI
Management Equity Plan, pursuant to which the Compensation Committee granted
options ("AMCI Options") to purchase shares of AMCI common stock and granted
the right to purchase restricted shares of AMCI common stock ("AMCI Restricted
Shares") to officers and key employees of AMCI and its subsidiaries, including
AMC and BMC. Each AMCI Option represents the right to purchase one share of
AMCI common stock. All AMCI Options are nonqualified options. The maximum
number of shares of AMCI common stock that may be issued in connection with
AMCI Options or as AMCI Restricted Shares is 3,056,838, constituting 15.0% of
the fully diluted common equity of AMCI following the 1993 AMCI
Recapitalization.
Following the 1993 AMCI Recapitalization, the officers and key employees of
AMC and BMC own 279,370 AMCI Restricted Shares and 1,729,367 AMCI Options.
Such AMCI Options have an exercise price of $10.73 per share. The AMCI Options
generally vest and become exercisable on September 30, 1998. The 1993 AMCI
Management Equity Plan provides for accelerated vesting of all AMCI Options in
the event of the holder's death, and for partial accelerated vesting (based on
the number of years elapsed from the date of grant) in the event of the
holder's disability, retirement, involuntary termination without cause or
resignation for good reason. In the event that cash dividends are paid on the
outstanding AMCI common stock, each holder of an outstanding AMCI Option is
entitled, pursuant to the 1993 AMCI Management Equity Plan, to receive in cash
a dividend equivalent payment in respect of the shares subject to such AMCI
Option and an additional dividend equivalent payment in respect of a pro rata
portion of the shares, if any, available at such time for future awards of
AMCI Options or AMCI Restricted Shares under the 1993 AMCI Management Equity
Plan. Dividend equivalent payments are made at the same rate as cash dividends
are paid on outstanding shares. As of December 31, 1993, no payments have been
made under this plan.
Prior to the 1993 AMCI Recapitalization, both AMCI and BMCH sponsored an
Equity Incentive Plan which, among other things, provided for the sale of
restricted Class B common stock and the granting of options to purchase one
share of Class B common stock of the respective holding company (AMCI or BMCH)
per option to officers and key employees of AMC and BMC. The total number of
AMCI options authorized was 1,787,153, of which 1,598,000 had been granted as
of December 31, 1992. The total number of BMCH options authorized was 175,000
of which 134,150 had been granted as of December 31, 1992. Holders of the
options received dividend equivalent payments based on AMCI and BMCH
dividends, respectively. The AMCI and BMCH Equity Incentive Plans were
terminated as part of the 1993 AMCI Recapitalization.
The restricted shares of common stock and options to purchase shares of
common stock under the 1993 AMCI Management Equity Plan (as previously under
the Equity Incentive Plans) are subject to liquidity rights under which the
officers and key employees may require the companies to redeem such shares and
options at prices based on the fair value of the shares and underlying options
at specified future dates. The liquidity rights may be exercised with respect
to 25% of such shares and options per year on September 30, 1998, 1999, 2000
and 2001.
F-33
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
Shares and options subject to liquidity rights are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1992
---------- ---------------------
AMCI AMCI BMCH
---------- ---------- ----------
<S> <C> <C> <C>
Restricted shares subject to liquidity
rights................................ 279,370 115,920 175,000
Redemption value per share............. $ 11.47 $ 17.50 $ 10.63
Redemption value (in thousands)........ $ 3,204 $ 2,029 $ 1,860
Options subject to liquidity rights.... 1,729,367 1,407,000 175,000
Redemption value per option............ $ 0.63 $ 8.46 $ --
Redemption value (in thousands)........ $ 1,090 $ 11,903 $ --
</TABLE>
The redemption value of the restricted shares of common stock and options
has been reported as a reduction in common stock and capital in excess of par
value and as a separate component outside of stockholders' equity.
Both the AMCI and BMCH Equity Incentive Plans were combination plans
comprised of options with fixed exercise prices and a liquidity right.
Normally, a combination plan with a liquidity right would be accounted for as
a variable plan, under the presumption that the optionholder would elect to
exercise the liquidity right. However, prior to the 1993 AMCI
Recapitalization, AMCI management estimated the likelihood that the
optionholders would elect to exercise their liquidity rights based on current
economic conditions and expected future dividend payout levels, concluding
that it was more likely that optionholders would elect to hold or exercise
their options rather than exercise their liquidity right. Accordingly, no
compensation expense was recorded for changes in the redemption value of the
options subsequent to the measurement date of December 31, 1991, at which
time, as a result of a $3.67 per share reduction in the exercise price of AMCI
options, AMCI measured compensation of $4.0 million, representing the
aggregate excess of fair value over the exercise price of the granted options,
which was being recognized over the service period. The fair value of BMCH
shares was less than the exercise price of the options, and, accordingly, no
compensation had been recorded. In connection with the 1993 AMCI
Recapitalization and certain resulting covenants in the indenture for the
Notes which restrict the payment of dividends, management has concluded that
the presumption that the previously existing AMCI optionholders would not
elect to exercise their liquidity rights no longer exists and, accordingly,
are accounting for the 1993 AMCI Management Equity Plan as a variable plan.
Compensation expense related to these plans was $10.5 million, including $12.6
million of dividend equivalent payments, $7.6 million, including $6.6 million
of dividend equivalent payments, and $5.2 million, including $3.6 million of
dividend equivalent payments, for the years ended December 31, 1993, 1992 and
1991, respectively.
It is anticipated that certain of BMC's employee benefit plans, including
the pension plan and the defined contribution plan, will be merged into the
corresponding AMC plans effective December 31, 1993. These new AMC plans will
be renamed, amended and restated as plans of AMCI effective January 1, 1994,
subject to the review and approval of the Internal Revenue Service.
F-34
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1994 1993 1992
----------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
10 3/4% Senior Notes due 2003.......... $175,000 $175,000 $ --
BMC term loan at LIBOR plus 2.5%....... -- -- 96,000
BMC Revolver........................... -- 6,000 --
Operating Partnership term loan at
LIBOR plus 2.0%....................... 35,000 35,000 35,000
Operating Partnership capitalized lease
obligations due through 2000.......... 7,029 3,418 4,119
-------- -------- --------
217,029 219,418 135,119
Less current maturities................ 1,370 726 14,691
-------- -------- --------
$215,659 $218,692 $120,428
======== ======== ========
</TABLE>
During October 1993, in conjunction with the 1993 AMCI Recapitalization
discussed in Note 1, AMCI issued $175 million of unsecured 10 3/4% Senior
Notes. The Senior Notes are due in full on September 30, 2003, and interest is
payable semiannually at the stated rate. The AMCI Senior Notes rank senior to
all other indebtedness of AMCI in right of payment; however, the Senior
Preference Units of AMCLP are effectively senior to the Senior Notes. The
Senior Notes are redeemable at AMCI's option at any time on or after September
30, 1998, upon 30 to 60 days' prior written notice. The following table sets
forth the redemption price if the Senior Notes are redeemed during the 12-
month period beginning September 30, of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1998........................................................... 105.375%
1999........................................................... 102.688%
2000 and thereafter............................................ 100.000%
</TABLE>
In addition, at any time prior to September 30, 1996, AMCI may, at its
option, redeem up to $61.25 million of the Senior Notes in connection with one
or more public equity offerings following which there is a public market at a
redemption price of 110% plus accrued interest. The aggregate principal amount
of the Senior Notes so redeemed may not exceed the aggregate proceeds of such
public equity offering.
The Senior Note Indenture, under which the Senior Notes were issued,
contains certain financial tests, as well as other limitations and covenants,
each of which would only be measured in the event that AMCI or a restricted
subsidiary engages in certain activities, including the issuance of additional
debt, payment of certain dividends, issuance of capital stock, certain
transactions with affiliates, incurrence of liens, sale of assets, other than
in the ordinary course of business, and sale-leaseback transactions. Dividend
payments are effectively restricted to an amount not to exceed fifty percent
of AMCI's Adjusted Consolidated Net Income, as defined in the Indenture.
In conjunction with the 1993 AMCI Recapitalization discussed in Note 1, AMCI
contributed $85.5 million to BMCH and BMCH loaned $85.5 million to BMC to
prepay its entire outstanding term loan balance. BMC also amended and restated
its credit agreement which provides for (a) a new $20 million revolving credit
facility, that will mature on December 31, 1996 and which was used to repay
all revolving
F-35
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
loans outstanding under BMC's previously existing $20 million revolving credit
facility, (b) a $50 million letter of credit facility (for the account of BMC
and the benefit of AMCI) to support the payment of interest on the Notes for a
period not to extend beyond December 31, 1996, (c) a guaranty by BMCH of BMC's
obligations thereunder. The indebtedness is secured by a lien on all of BMC's
assets and the guarantee is secured by a pledge by BMCH of BMC's capital
stock. AMCI has the right to terminate the letter of credit established under
the letter of credit facility at any time.
As a result of the debt retirement discussed above, the interest rate swap
agreement BMC has with Chemical Bank is no longer associated with outstanding
debt. Under the interest rate swap agreement, BMC makes 6.1% fixed rate
payments and receives variable-rate interest payments (3.375% at December 31,
1993). At December 31, 1993, the notional amount of the swap agreement was $41
million and the obligation assumed and recorded for the uncovered swap was
$1.1 million. The agreements expire March 31, 1995. BMC is exposed to
favorable or unfavorable market risk to the extent LIBOR increases or
decreases, respectively.
As of December 31, 1993, BMC had no drawings on the letter of credit
facility. Borrowings under the revolving credit facility were $6.0 million and
$7.0 million at December 31, 1993 and 1992, respectively. Interest on the
letter of credit and revolving credit facility is based on the Eurodollar
lending rate plus 3.5% and 2.5%, respectively, or a prime commercial rate plus
2.5% and 1.5%, respectively, at BMC's option, selected at the start of each
interest period. The effective interest rate was 7.5% at December 31, 1993.
BMC incurs certain fees in connection with the borrowings discussed above,
including a commitment fee equal to 1/2 of 1% of the unused amount of the
revolving credit facility, and a letter of credit exposure fee of 3% on the
outstanding unused amount.
The Operating Partnership has a credit agreement (the "Agreement") with a
syndicate of banks which provides for a nonamortizing $35 million term loan
and a $50 million revolving credit facility. Borrowings outstanding under the
revolving credit facility were $9 million and $17 million at December 31, 1993
and 1992, respectively. The $35 million term loan is due in full and the
revolving credit facility expires on December 4, 1996. Subject to certain
exceptions, borrowings under the revolving credit facility must be repaid for
a 30-day period between July 1 and September 30 each year. Interest on both
the term loan and revolving credit facility is based on the prime commercial
lending rate plus 1%, or a Eurodollar rate plus 2%, at AMC's option. The
Operating Partnership Agreement contains financial tests, as well as other
restrictive covenants relating to the use of proceeds of borrowings.
Borrowings under the Operating Partnership Agreement are secured by
substantially all of the Operating Partnership's assets. At December 31, 1993,
the term loan and the outstanding borrowings under the revolving credit
facility bore interest at the rate of 5.4% and 6.3%, respectively. The
Operating Partnership incurs a commitment fee equal to 1/2 of 1% of the unused
amount of the revolving credit facility.
Future minimum payments and sinking fund requirements under long-term debt
and capital lease obligations at December 31, 1993 are (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1994........................................................... $ 726
1995........................................................... 763
1996........................................................... 41,386
1997........................................................... 386
1998........................................................... 386
Later years.................................................... 175,771
--------
$219,418
========
</TABLE>
In conjunction with its long-term debt, the Operating Partnership had
obligations under two interest rate swap agreements at December 31, 1992 with
an aggregate notional amount of $103 million. The swap
F-36
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
agreements, which effectively converted the variable interest rates on the
borrowings under the Agreement to fixed interest rates, expired on March 12,
1993 and April 23, 1993. At December 31, 1992, $68 million of the notional
amount of the swap agreements was no longer associated with outstanding debt,
and accordingly, an obligation was assumed and recorded for such uncovered
swaps in the amount of $1.9 million. The Operating Partnership had no such
obligation outstanding at December 31, 1993.
Interest paid, including payments under the interest rate swap agreements,
was $10.3 million, $11.8 million, $15.9 million and $20.3 million for the six
months ended June 30, 1994 and the years ended December 31, 1993, 1992 and
1991, respectively.
7. LEASES
The Operating Partnership leases certain land, buildings and equipment.
Minimum rental commitments under capital and noncancellable operating leases
as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
(IN THOUSANDS) ------- ---------
<S> <C> <C>
Year ending December 31:
1994.................................................. $ 973 $6,261
1995.................................................. 966 1,880
1996.................................................. 559 774
1997.................................................. 525 610
1998.................................................. 490 301
Later years........................................... 876 70
------ ------
Total minimum lease payments............................ 4,389 9,896
Less amount representing interest....................... 971 --
------ ------
Net minimum lease payments.............................. $3,418 $9,896
====== ======
</TABLE>
Rent expense under noncancellable operating leases, including contingent
rentals of $2.7 million in 1993, $2.6 million in 1992 and $1.6 million in 1991
based primarily on throughput, amounted to approximately $9.6 million, $6.3
million and $5.4 million for 1993, 1992 and 1991, respectively.
8. COMMON STOCK
AMCI has two classes of common stock, Class A common voting stock and Class
B common nonvoting stock. The rights and privileges to which the holders of
Class A and Class B common stock are entitled, other than voting privileges,
are essentially the same.
9. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 1994 and the years ended December 31,
1993, 1992 and 1991, the Operating Partnership and AMC sold $18.0 million,
$21.2 million, $23.0 million and $28.7 million, respectively, of nitrogen
fertilizer products to Transammonia, Inc. ("Transammonia"). A key executive
and principal owner of Transammonia is a general partner of two partnerships
which own common stock representing approximately 7.4% of the common equity of
AMCI on a fully diluted basis. Additionally, one of the members of the board
of directors of AMC and AMCI is an executive of both Transammonia and
Trammochem, Inc. ("Trammochem") a division of Transammonia. Accounts
receivable from Transammonia are $3.6 million, $2.5 million and $1.7 million
at June 30, 1994, December 31, 1993 and 1992, respectively.
F-37
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
Trammo Partners II is a major shareholder in AMCI. The partners in Trammo
Partners II include the principal shareholder and employees of Transammonia.
In addition, a key executive and principal owner of Transammonia serves as a
director of BMCH. Trammochem has exclusive marketing rights to the methanol
produced at the Beaumont facility. Trammochem's compensation for the marketing
of methanol is based on the quantity of methanol sold and the earnings before
depreciation interest and taxes of BMCH. This agreement began December 12,
1991 and continues until December 31, 1996, and from year to year thereafter,
unless terminated by either party. Compensation under this agreement began
January 1, 1992. Compensation for the six months ended June 30, 1994 and for
the years ended December 31, 1993 and 1992 was $1.4 million, $1.2 million and
$2.2 million, respectively.
Transammonia holds an option to purchase 163,450 shares of common stock of
AMCI which is initially exercisable in 1998 at a price of $10.73 per share.
10. AGREEMENTS OF LIMITED PARTNERSHIP
In accordance with the Agreement of Limited Partnership of AMCLP, AMCLP
makes quarterly distributions to Unitholders and the General Partner in an
amount equal to 100% of its Available Cash, as defined, unless Available Cash
is required to fund a reserve amount. AMCLP must fund and maintain a reserve
of $18.5 million to support Minimum Quarterly Distributions on the Senior
Preference Units (the "Reserve Amount"). Such Reserve Amount was fully funded
during 1992 and is invested in Eurodollars at a financial institution.
During the period commencing December 4, 1991, and not ending prior to
December 31, 1996 (the "Preference Period"), Senior Preference, Junior
Preference and Common Units participate equally in distributions after each
class of units has received its Minimum Quarterly Distribution, subject to the
General Partner's right to receive cash distributions.
The General Partner receives a combined minimum 2% of total cash
distributions, and as an incentive, the General Partner's participation
increases if cash distributions exceed specified target levels. During the
Preference Period, distributions are subject to the rights of Senior
Preference Units to receive the Minimum Quarterly Distribution of $.605 per
unit plus any arrearages, before any other distributions. After such amounts
have been paid, the Reserve Amount must be funded before distributions to
Junior or Common Unitholders. Distributions to Common Unitholders are subject
to the preferential rights of the Junior Preference Units to receive Minimum
Quarterly Distributions plus arrearages. Subject to certain conditions, the
Junior Preference Units will become Senior Preference Units on December 31,
1995. As a result of this conversion, distributions on the converted Junior
Preference Units will be made with, and not after, distributions on the Senior
Preference Units and payment of the Minimum Quarterly Distributions on the
converted Junior Preference Units will also be supported by the Reserve
Amount. In addition, the converted Junior Preference Units will be entitled to
receive Minimum Quarterly Distributions before funds are set aside, if
necessary, to restore the Reserve Amount to its required level.
After the Preference Period the Senior Units will still be entitled to the
Minimum Quarterly Distribution, but will not participate with the Common Units
in any distributions above the Minimum Quarterly Distribution.
For a 90-day period after the end of the Preference Period, the holders of
Senior Preference Units will have the right, subject to fulfillment of certain
stock exchange listing requirements, to convert their Senior Preference Units
into fully participating Common Units.
F-38
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
In order for AMCLP and the Operating Partnership to continue to be
classified as partnerships for federal income tax purposes, AMC, as general
partner, must maintain a minimum level of net worth without regard to its
interest in AMCLP. In order to meet this requirement, AMC has maintained a
cash balance ($27.8 million at December 31, 1993) since it does not have
material assets other than its partnership interests. However, AMC is not
required to maintain a cash balance to meet this requirement if other assets
of equivalent value are acquired in order to satisfy the substantial net worth
requirement.
11. OTHER FINANCIAL INFORMATION
FAIR VALUES OF FINANCIAL INSTRUMENTS--
The following methods and assumptions were used by AMCI in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Distribution reserve fund: The carrying amount reported in the balance
sheet for the distribution reserve fund approximates its fair value.
Accrued interest rate swap obligation: The fair value of the interest
rate swap obligation is based on current settlement prices, taking into
account remaining terms of the agreement.
Revolving credit borrowings and long-term debt: The carrying amounts of
the borrowings under revolving credit and long-term debt agreements
approximate fair value.
Off-balance-sheet instruments: Fair values of the off-balance-sheet
instruments (natural gas swaps) are based on contract prices in effect at
December 31, 1993.
Financial instruments with a carrying value different from fair value at
December 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(IN THOUSANDS) -------- ------- -------- -------
<S> <C> <C> <C> <C>
Natural gas swaps..................... $ -- $(4,849) $ -- $(3,827)
Interest rate swaps................... (1,096) (1,096) (2,096) (4,634)
</TABLE>
The Operating Partnership and BMC enter into natural gas swap agreements and
futures contracts to cover approximately 50% of their natural gas requirements
to effectively maintain fixed prices for natural gas to be purchased. The
agreements and contracts vary in length from one month to eighteen months.
Gains and losses on futures contracts and swap agreements are credited or
charged to production cost in the month to which the hedged transaction
relates. The Operating Partnership and BMC are exposed to favorable or
unfavorable market risk to the extent that natural gas prices increase or
decrease, respectively.
INDUSTRY SEGMENT DATA--
AMCI operates in two principal industries--nitrogen fertilizer and methanol,
respectively. The nitrogen fertilizer business produces and distributes
ammonia, urea and urea ammonium nitrate solution which are principally used by
farmers to provide crops with nitrogen, an essential nutrient for plant
growth. The methanol business manufactures, distributes, and sells methanol,
which is principally used as a raw
F-39
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
material in the production of a variety of chemical derivatives and in the
production of MTBE, an oxygenate and an octane enhancer for gasoline. The
following summarizes additional information about the reported industry
segments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) -------- -------- --------
<S> <C> <C> <C>
Revenues:
Nitrogen fertilizer....................... $259,782 $243,397 $247,209
Methanol.................................. 106,004 81,556 5,520
-------- -------- --------
Total revenues.......................... $365,786 $324,953 $252,729
======== ======== ========
Operating profit:
Nitrogen fertilizer....................... $ 46,090 $ 53,350 $ 60,374
Methanol.................................. 8,312 12,263 1,419
-------- -------- --------
Total operating income.................. 54,402 65,613 61,793
Interest expense............................ (17,759) (14,870) (21,448)
Interest and other income (expense)......... (589) 2,803 3,223
-------- -------- --------
Income before income taxes, minority
interests and extraordinary expense........ $ 36,054 $ 53,546 $ 43,568
======== ======== ========
Depreciation and amortization expense:
Nitrogen fertilizer....................... $ 16,045 $ 15,709 $ 15,587
Methanol.................................. 10,831 11,004 581
-------- -------- --------
$ 26,876 $ 26,713 $ 16,168
======== ======== ========
Capital expenditures:
Nitrogen fertilizer....................... $ 6,524 $ 9,262 $ 3,085
Methanol.................................. 444 616 78
-------- -------- --------
$ 6,968 $ 9,878 $ 3,163
======== ======== ========
<CAPTION>
DECEMBER 31,
------------------
1993 1992
-------- --------
<S> <C> <C> <C>
Identifiable assets:
Nitrogen fertilizer....................... $330,169 $317,035
Methanol.................................. 176,226 188,878
-------- --------
Total assets............................ $506,395 $505,913
======== ========
</TABLE>
12. CONTINGENCIES
On September 27, 1993, U.S. EPA Region 6 filed a complaint, compliance order
and notice of opportunity for hearing against BMC in connection with the
Beaumont facility pursuant to the Resource Conservation and Recovery Act, as
amended ("RCRA"), and the Texas Solid Waste Disposal Act. Among other things,
the complaint requires BMC to cease disposing of its waste alcohol stream by
burning the waste in its furnace, and prohibits any such further disposal
except under an operating permit issued pursuant to RCRA. In its complaint,
U.S. EPA proposes to assess a civil penalty of $583,950 against BMC for
violations of hazardous waste treatment, storage and disposal, and management
and recordkeeping
F-40
<PAGE>
AGRICULTURAL MINERALS AND CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Information pertaining to the six months ended June 30, 1994 and 1993 is
unaudited)
requirements. The Company has implemented modifications to ensure that its
waste alcohol stream is nonhazardous under RCRA. The Company intends to
contest such allegations vigorously and to request a hearing at the time it
files its answer. The Company expects the ultimate amount of such loss to be
less than the proposed penalty. Based on current knowledge, the Company does
not expect this matter, or any other known environmental matter, to have a
material adverse effect on its results of operations, financial condition or
cash flow.
BMCH has protested the 1994, 1993 and 1992 assessed value of its plant in
Jefferson County, Texas. Jefferson County has assessed the 1993 value of the
plant at an amount which, if it prevails, would increase 1993 property taxes
by approximately $800,000 over the current amount recorded by BMCH. Management
believes that it has adequately provided for property taxes and does not
expect this matter to have a material adverse effect on the Company's
financial position or future results of operations.
F-41
<PAGE>
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<PAGE>
[Inside back Cover Page.]
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN
THIS PROSPECTUS OR AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................. 3
Investment
Considerations......... 11
The Acquisition......... 14
The Refinancing......... 17
Use of Proceeds......... 18
Price Range of Common
Shares and Dividend
Information............ 18
Capitalization.......... 19
Pro Forma Combined
Financial Statements of
the Company............ 20
Liquidity and Capital
Resources After the
Acquisition and the
Refinancing............ 26
Business................ 26
Description of Capital
Stock.................. 36
Description of Certain
Indebtedness and Other
Obligations............ 38
Underwriting............ 42
Legal Matters........... 44
Experts................. 44
Available Information... 44
Incorporation of Certain
Documents by Reference. 45
Information With Respect
To AMCI................ 45
Index to Financial
Statements............. F-1
</TABLE>
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9,700,000
TERRA INDUSTRIES INC.
LOGO
COMMON SHARES
------------------
P R O S P E C T U S
------------------
S.G.WARBURG & CO. INC.
OCTOBER 13, 1994
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