<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 1994
REGISTRATION NO. 33-52493
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
TERRA INDUSTRIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1145429
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Terra Centre, 600 Fourth Street, P.O. Box 6000
Sioux City, Iowa 51102-6000
(712) 277-1340
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
GEORGE H. VALENTINE
Vice President, General Counsel and Corporate Secretary
Terra Centre, 600 Fourth Street, P.O. Box 6000
Sioux City, Iowa 51102-6000
(712) 277-1340
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
SCOTT N. GIERKE, P.C. VALERIE FORD JACOB
McDermott, Will & Emery Fried, Frank, Harris,
227 West Monroe Street Shriver & Jacobson
Chicago, Illinois 60606 One New York Plaza
New York, New York 10004
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or a continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER LYON(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Liquid Yield OptionTM Notes Due 2009...... $241,500,000 $494.52 $119,426,580 $41,182*
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Common Shares, without par value.......... (3) N/A N/A N/A
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</TABLE>
TM Trademark of Merrill Lynch & Co., Inc.
(1) Includes $31,500,000 principal amount at maturity of LYONs subject to the
Underwriter's over-allotment option.
(2) Estimated in accordance with Rule 457 under the Securities Act of 1933
solely for purposes of calculating the registration fee.
(3) Such undeterminable number of Common Shares as may be required for issuance
upon conversion of the LYONs being registered hereunder.
* Registration fee equal to $43,786 previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 9, 1994
PROSPECTUS
$210,000,000
TERRA INDUSTRIES INC.
LIQUID YIELD OPTIONTM NOTES DUE 2009
(ZERO COUPON--SENIOR)
------------------------
The issue price of each Liquid Yield OptionTM Note ("LYON") to be issued by
Terra Industries Inc. (the "Company") will be $ ( % of principal amount at
maturity) (the "Issue Price"), and there will be no periodic payments of
interest. The LYONs will mature on , 2009. The Issue Price of each LYON
represents a yield to maturity of % per annum (computed on a semi-annual bond
equivalent basis) calculated from , 1994. The LYONs will be senior
indebtedness of the Company. The Company is a holding company and the LYONs will
be effectively subordinated to all existing and future liabilities, including
indebtedness, of the Company's subsidiaries. As of December 31, 1993, such
subsidiaries had approximately $282 million of total liabilities, including
approximately $57 million of indebtedness. See "Capitalization" and "Description
of LYONs -- Ranking and Holding Company Structure."
Each LYON will be convertible at the option of the Holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Company, into common shares, without par value, of the Company (the "Common
Shares") at a conversion rate of shares per LYON (the "Conversion
Rate"). The Conversion Rate will not be adjusted for accrued original issue
discount ("OID"), but will be subject to adjustment upon the occurrence of
certain events affecting the Common Shares. The foregoing is subject to the
Company's right to pay cash equal to the market value of the Common Shares for
which the LYONs are convertible in lieu, in whole or in part, of delivering
Common Shares. Upon conversion, the Holder will not receive any cash payment
representing accrued OID; such accrued OID will be deemed paid by the Common
Shares, and/or cash in lieu thereof, received on conversion. See "Description of
LYONs -- Conversion Rights." On March 8, 1994, the last reported sale price of
the Common Shares on the New York Stock Exchange ("NYSE") Composite Tape was
$8 1/8 per share.
The LYONs will be purchased by the Company, at the option of the Holder, as
of , 1999 and , 2004 (each, a "Purchase Date") for a
Purchase Price per LYON of $ and $ (Issue Price plus accrued OID through
each Purchase Date), respectively, representing a yield per annum to the Holder
on each such date of %, computed on a semi-annual bond equivalent basis. The
Company, at its option, may elect to pay the Purchase Price on any Purchase Date
in cash or Common Shares at the market value at that time, or any combination
thereof. See "Description of LYONs -- Purchase of LYONs at the Option of the
Holder." In addition, as of 35 business days after the occurrence of any Change
in Control of the Company occurring on or prior to , 1999, the LYONs
will be purchased for cash by the Company, at the option of the Holder, for a
Change in Control Purchase Price equal to the Issue Price plus accrued OID
through the date set for such purchase. See "Description of LYONs -- Change in
Control Permits Purchase of LYONs at the Option of the Holder."
The LYONs are not redeemable by the Company prior to , 1999. On and
after that date, the LYONs are redeemable for cash at the option of the Company,
in whole or in part, at Redemption Prices equal to the Issue Price plus accrued
OID through the date of redemption. See "Description of LYONs--Redemption of
LYONs at the Option of the Company."
For a discussion of certain United States federal income tax consequences
for Holders of LYONs, see "Certain United States Federal Tax Considerations."
Application will be made to list the LYONs on the NYSE. The Common Shares
are currently listed on the NYSE and the Toronto Stock Exchange (the "TSE")
under the symbol TRA.
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE LYONS OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRINCIPAL AMOUNT PRICE TO UNDERWRITING PROCEEDS TO
AT MATURITY PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C> <C>
Per LYON..................... 100% % % %
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Total (3).................... $210,000,000 $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriter an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
$31,500,000 aggregate principal amount at maturity of LYONs on the same
terms as set forth above to cover over-allotments, if any. If the option is
exercised in full, the total Principal Amount at Maturity, Price to Public,
Underwriting Discount and Proceeds to Company will be $241,500,000,
$ , $ and $ , respectively. See "Underwriting."
------------------------
The LYONs are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, and subject to approval of
certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the LYONs will be made, in book-entry form only, through the
facilities of The Depository Trust Company, on or about , 1994.
TM Trademark of Merrill Lynch & Co., Inc.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is , 1994.
<PAGE> 3
[MAP]
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, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements, information statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the regional offices of the Commission, located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60604 and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such information can also be inspected and copied at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York,
10005. See "Additional Information."
INCORPORATION BY REFERENCE
The Company will provide, without charge, to each person to whom a
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents that have been incorporated in this
Prospectus by reference, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference into the documents that are
incorporated herein). See "Incorporation of Certain Documents By Reference."
Requests for such copies should be directed to: George H. Valentine, Esq., 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE LYONS OFFERED
HEREBY OR THE COMPANY'S COMMON SHARES, OR BOTH, 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> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by 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
Underwriter's over-allotment option. Except as otherwise indicated, all
financial information regarding Terra Industries Inc. and its subsidiaries is
presented on the basis of generally accepted accounting principles. Unless
otherwise referred to herein or the context otherwise requires, references to
the "Company" shall mean Terra Industries Inc. and its direct and indirect
subsidiaries, and references to "Terra Industries" shall mean Terra Industries
Inc.
THE COMPANY
The Company is a leading producer of fertilizer, and a leading marketer of
fertilizer, crop protection and seed products. The Company owns and operates the
largest independent farm service center network in North America and is the
second largest supplier of crop production inputs in the United States. In
addition to marketing and producing crop production products, the Company
provides its grower customers with a comprehensive selection of value-added
services such as soil and plant tissue analysis, crop production program
recommendations, custom blending of fertilizers, field application services,
pest control-inspections, crop performance follow-up and financing to selected
growers.
The Company's business strategy is to be the supplier of choice for crop
production products and services. The Company's growth strategy is to strengthen
its market leadership position by increasing sales and improving operating
margins. Key elements of this strategy include (i) increasing distribution
volumes by expanding sales from Company-owned locations and its affiliated
dealer network, (ii) making strategic acquisitions of production and
distribution facilities, (iii) changing its product mix to include a higher
portion of its more profitable private label products and (iv) continuing to
build customer loyalty by providing value-added services.
The Company's distribution network is comprised of approximately 350 farm
service centers, 58 fertilizer storage facilities and 770 affiliated dealers
serving the 48 contiguous United States and three provinces in the eastern
region of Canada. This network is served by independent suppliers and the
Company's production facilities, which include three nitrogen fertilizer plants,
one crop protection chemical formulation plant and seven liquid chemical
formulation facilities.
The Company markets its line of crop protection and production products to
farmers and dealers primarily in the midwestern, southern, southwestern and
southeastern regions of the United States, and the eastern region of Canada.
During 1993, approximately 60% of the Company's distribution revenues consisted
of retail sales to growers while 40% were at wholesale to dealers.
On March 31, 1993, the Company expanded its operations into Canada through
its acquisition of a fertilizer production operation, two Agromart(R) farm
service centers and a 50% interest in 30 other Agromart(R) farm service centers.
On December 31, 1993, the Company acquired the business and substantially all
the assets of Asgrow Florida Company, a leading distributor of fertilizer, crop
protection products and seed to the vegetable, citrus and ornamental markets in
Florida.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
LYONS.............................. $210,000,000 aggregate principal amount at maturity
($241,500,000 aggregate principal amount at maturity if
the Underwriter's over-allotment option is exercised in
full) of LYONs due , 2009. There will be no
periodic interest payments on the LYONs. Each LYON will
have an Issue Price of $ and a principal amount at
maturity of $1,000.
YIELD TO MATURITY OF LYONS......... % per annum (computed on a semi-annual bond equivalent
basis) calculated from , 1994.
CONVERSION RIGHTS.................. Each LYON will be convertible, at the option of the
Holder, at any time on or prior to maturity, unless
previously redeemed or otherwise purchased by the
Company, into Common Shares at the Conversion Rate of
Common Shares per LYON. The Conversion Rate will
not be adjusted for accrued OID, but will be subject to
adjustment upon the occurrence of certain events
affecting the Common Shares. The foregoing is subject to
the Company's right to pay cash equal to the market
value of the Common Shares for which the Common Shares
are convertible in lieu, in whole or in part, of
delivering Common Shares. A Holder may not withdraw his
conversion notice if the Company elects to pay cash in
lieu of delivering Common Shares. Upon conversion, the
Holder will not receive any cash payment representing
accrued OID; such accrued OID will be deemed paid by the
Common Shares and/or cash received on conversion. See
"Description of LYONs -- Conversion Rights."
RANKING AND HOLDING COMPANY
STRUCTURE........................ The LYONs will be senior indebtedness of Terra
Industries. As of December 31, 1993, Terra Industries
had no outstanding senior indebtedness.
Terra Industries is a holding company and the LYONs will
be effectively subordinated to all existing and future
liabilities, including indebtedness, of subsidiaries of
Terra Industries. As of December 31, 1993, Terra
Industries' subsidiaries had approximately $282 million
of total liabilities, including approximately $57
million of indebtedness. The indenture for the LYONs
(the "Indenture") contains no limitation on liens or the
amount of additional indebtedness that may be incurred
by Terra Industries and its subsidiaries. See
"Description of LYONs -- Ranking and Holding Company
Structure."
ORIGINAL ISSUE DISCOUNT............ Each LYON is being offered at an OID for United States
Federal income tax purposes equal to the excess of the
principal amount at maturity of the LYON over the amount
of its Issue Price. Prospective purchasers of LYONs
should be aware that, although there will be no periodic
payments of interest on the LYONs, accrued OID will be
includable periodically in a Holder's gross income for
United States Federal income tax purposes prior to
conversion, redemption, other disposition or maturity of
such Holder's LYONs, whether or not such LYONs are
ultimately converted, redeemed, sold (to the Company or
otherwise) or paid at maturity. See "Certain United
States Federal Tax Considerations -- U.S. Holders --
Original Issue Discount."
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
SINKING FUND....................... None.
OPTIONAL REDEMPTION................ The LYONs will not be redeemable by the Company prior to
, 1999. On and after that date, the LYONs are
redeemable for cash at any time at the option of the
Company, in whole or in part, at Redemption Prices equal
to the Issue Price plus accrued OID through the date of
redemption. See "Description of LYONs -- Redemption of
LYONs at the Option of the Company."
PURCHASE AT THE OPTION OF THE
HOLDER........................... The Company will purchase any LYON, at the option of the
Holder, as of , 1999 and , 2004, for a
Purchase Price per LYON of $ and $
(representing the Issue Price plus accrued OID through
such Purchase Date), respectively, representing a %
yield per annum to the Holder upon such date, computed
on a semi-annual bond equivalent basis. Subject to
certain exceptions, the Company, at its option, may
elect to pay the Purchase Price on any such Purchase
Date in cash or Common Shares at the market value of
such Common Shares at that time, or any combination
thereof. In addition, as of 35 business days after the
occurrence of a Change in Control of the Company
occurring on or prior to , 1999, the Company will
purchase for cash any LYON, at the option of the Holder,
for a Change in Control Purchase Price equal to the
Issue Price plus accrued OID through the Change in
Control Purchase Date. See "Description of LYONs --
Purchase of LYONs at the Option of the Holder" and
"Description of LYONs -- Change in Control Permits
Purchase of LYONs at the Option of the Holder" for a
summary of these provisions and the definition of
"Change in Control."
USE OF PROCEEDS.................... Of the estimated net proceeds, up to $75 million will be
used to repay short-term debt incurred, and to replace
existing funds utilized, to redeem the Company's 8.5%
Convertible Subordinated Debentures due 2009 and the
balance will be available for the Company's general
corporate purposes, including acquisitions. See "Use of
Proceeds."
LISTING............................ Application will be made to list the LYONs on the NYSE.
The Common Shares are currently listed on the NYSE and
the TSE under the symbol TRA.
</TABLE>
5
<PAGE> 7
SUMMARY FINANCIAL DATA
Set forth below are summary consolidated financial data for the Company at
and for the periods indicated. The following information should be read in
conjunction with the consolidated financial statements and the related notes of
the Company included elsewhere and incorporated by reference herein. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1989 1990 1991 1992 1993
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues................................ $949,458 $ 962,202 $1,022,597 $1,082,191 $1,238,001
Cost of sales................................. 798,407 806,772 849,684 904,246 1,021,187
Depreciation and amortization................. 14,242 14,997 14,399 14,994 15,470
Selling, general and administrative expense... 124,628 138,315 132,845 137,232 161,791
Equity in unconsolidated affiliates........... -- -- -- -- (2,275)
-------- --------- ---------- ---------- ----------
Income before interest and income taxes....... 12,181 2,118 25,669 25,719 41,828
Net interest expense.......................... 17,134 17,056 12,563 7,533 9,683
-------- --------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes......................... (4,953) (14,938) 13,106 18,186 32,145
Income tax (provision) benefit................ 316 816 (1,073) (7,757) (9,300)
-------- --------- ---------- ---------- ----------
Income (loss) from continuing operations...... (4,637) (14,122) 12,033 10,429 22,845
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
Extraordinary gain............................ -- -- 5,115 -- --
Cumulative effect of accounting changes....... -- -- -- 22,265 --
-------- --------- ---------- ---------- ----------
Net income (loss)............................. $ 25,171 $(108,501) $ (151,660) $ 31,029 $ 22,845
-------- --------- ---------- ---------- ----------
-------- --------- ---------- ---------- ----------
Per Common Share:
Income (loss) from continuing operations.... $ (0.07) $ (0.21) $ 0.18 $ 0.15 $ 0.33
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
Extraordinary gain.......................... -- -- 0.07 -- --
Cumulative effect of accounting changes..... -- -- -- 0.32 --
-------- --------- ---------- ---------- ----------
Net Income (loss)........................... $ 0.38 $ (1.64) $ (2.26) $ 0.45 $ 0.33
-------- --------- ---------- ---------- ----------
-------- --------- ---------- ---------- ----------
Dividends................................... $ 0.09 $ 0.12 $ -- $ -- $ 0.02
Ratio of earnings to fixed charges(3)....... -- -- 1.6x 2.1x 2.4x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $231,287 $253,203
Total assets................................................................. 634,482 660,056
LYONs offered hereby......................................................... -- 100,116
Other long-term debt(2)...................................................... 119,061 47,004
Total stockholders' equity................................................... 242,980 240,495
</TABLE>
- -------------------------
(1) Adjusted to reflect the sale of the LYONs offered hereby. See "Use of
Proceeds" and "Capitalization."
(2) Excludes current maturities.
(3) For the purposes of computing the ratio of earnings to fixed charges,
earnings consist of earnings from continuing operations before income taxes,
extraordinary items, cumulative effect of accounting changes and fixed
charges. Fixed charges include interest expense and the portion of rents
representative of the interest factor. For the years ended December 31, 1989
and 1990, earnings before fixed charges were insufficient to cover fixed
charges by $4,953 and $14,938, respectively.
6
<PAGE> 8
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other
information in this Prospectus, the following factors before purchasing the
LYONs offered hereby.
HOLDING COMPANY STRUCTURE
Terra Industries' assets consist primarily of investments in its
subsidiaries. As a result, Terra Industries' rights, and the rights of its
creditors (including Holders of LYONs) to participate in the distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization
will be subject to the prior claims of such subsidiary's creditors (including
trade creditors), except to the extent that Terra Industries is itself
recognized as a creditor of such subsidiary, in which case the claims of Terra
Industries would still be subject to the claims of any secured creditor of such
subsidiary and of any holder of indebtedness of such subsidiary senior to that
held by Terra Industries. As of December 31, 1993, Terra Industries'
subsidiaries had approximately $282 million of total liabilities, including
approximately $57 million of indebtedness. There are no restrictions in the
Indenture on the creation of additional senior indebtedness (or any other
indebtedness). See "Description of LYONs -- Ranking and Holding Company
Structure."
The LYONs are obligations exclusively of Terra Industries. Since the
operations of Terra Industries are currently conducted through subsidiaries,
Terra Industries' cash flow and its ability to service its debt, including the
LYONs, is dependent upon the earnings of its subsidiaries and the distribution
of those earnings to Terra Industries or upon loans or other payments of funds
by those subsidiaries to Terra Industries. The subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
amounts due pursuant to the LYONs or to make any funds available therefor,
whether by dividends, loans or other payments. In addition, the payment of
dividends and the making of loan advances to Terra Industries by its
subsidiaries are contingent upon the earnings of those subsidiaries and are
subject to various business considerations and restrictive loan covenants.
VOTING CONTROL BY PRINCIPAL SHAREHOLDER
Minorco, a Luxembourg corporation ("Minorco"), indirectly owns
approximately 53% of the outstanding capital stock of the Company. Minorco is a
publicly held international natural resources company with its principal
interests in mining and the processing of gold, base metals and industrial
materials, pulp, paper, packaging and in agribusiness. As a result of such
beneficial ownership of Common Shares, Minorco is able to control the election
of the Company's directors and the management and policies of the Company. In
addition, the possible future sale by Minorco of all or a portion of the Common
Shares held indirectly by it could adversely affect the market price of the
Common Shares.
INDUSTRY CONSIDERATIONS
The Company's future operating results are subject to certain external
factors which are beyond the Company's control, including the number of planted
acres; the types of crops planted; the effects general weather patterns have 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 availability and cost of natural gas; and the availability and
cost of financing sources to fund seasonal working capital needs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors that Affect Operating Results."
SEASONALITY
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. Over half of the Company's sales
generally occur during the second quarter of each year.
7
<PAGE> 9
ENVIRONMENTAL REGULATION
The Company's business activities are subject to stringent environmental
regulation by federal, provincial, state and local governmental authorities.
There can be no assurance that existing regulations will not be revised or that
new regulations will not be adopted or become applicable to the Company's
business that would have a material and adverse affect on its business or
financial condition.
COMPETITION
The market for fertilizer, crop protection products, seed and services for
agriculture is highly competitive. Nationally, sales attributable to the
Company's farm service centers accounted for less than 10% of total crop
production products. However, within the specific market areas served by its
farm service centers, the Company's share of the market was substantially
higher. 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.
Ten percent of the fertilizer produced by the Company is sold to its farm
service centers, and the remaining 90% is sold to independent dealers, national
retail chains and cooperatives located close to the Company's manufacturing
plants. The Company competes with other manufacturers of nitrogen fertilizer
principally on the basis of price, delivery terms and availability of products.
The profitability of the Company, and the ability of the Company to repay
amounts due on the LYONs, will depend on its ability to compete successfully.
8
<PAGE> 10
THE COMPANY
The Company is a leading producer of fertilizer, and a leading marketer of
fertilizer, crop protection and seed products. The Company owns and operates the
largest independent farm service center network in North America and is the
second largest supplier of crop production inputs in the United States. In
addition to marketing and producing crop production products, the Company
provides its grower customers a comprehensive selection of value-added services
such as soil and plant tissue analysis, crop production program recommendations,
custom blending of fertilizers, field application services, pest
control-inspections, crop performance follow-up and financing to selected
growers.
The Company's business strategy is to be the supplier of choice for crop
production products and services. The Company's growth strategy is to strengthen
its market leadership position by increasing sales and improving operating
margins. Key elements of this strategy include (i) increasing distribution
volumes by expanding sales from Company-owned locations and its affiliated
dealer network, (ii) making strategic acquisitions of production and
distribution facilities, (iii) changing its product mix to include a higher
portion of its more profitable private label products and (iv) continuing to
build customer loyalty by providing value-added services.
The Company's distribution network is comprised of approximately 350 farm
service centers, 58 fertilizer storage facilities and 770 affiliated dealers
serving the 48 contiguous United States and three provinces in the eastern
region of Canada. This network is served by independent suppliers and the
Company's production facilities which include three nitrogen fertilizer plants,
one crop protection chemical formulation plant and seven liquid chemical
formulation facilities.
The Company markets its line of crop protection and production products to
farmers and dealers primarily in the midwestern, southern, southwestern and
southeastern regions of the United States, and the eastern region of Canada.
During 1993, approximately 60% of the Company's distribution revenues consisted
of retail sales to growers while 40% were at wholesale to dealers.
On March 31, 1993, the Company expanded its operations into Canada through
its acquisition of a fertilizer production operation, two Agromart(R) farm
service centers and a 50% interest in 30 other Agromart(R) farm service centers
for an aggregate consideration of $73 million (Cdn), of which approximately $47
million (Cdn) was provided through lease financing. On December 31, 1993, the
Company acquired for $39 million (including certain purchase price adjustments)
the business and substantially all the assets of Asgrow Florida Company, a
leading distributor of fertilizer, crop protection products and seed to the
vegetable, citrus and ornamental markets in Florida.
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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the LYONs are estimated to
be approximately $ million ($ million if the Underwriter's over-allotment
option is exercised in full) net of estimated underwriting discounts and
offering expenses. Up to $75 million of such estimated net proceeds will be used
to repay short-term debt incurred, and to replace existing funds utilized, to
redeem all of the Company's outstanding 8.5% Convertible Subordinated Debentures
due 2009 (the "Convertible Debentures"). The remaining estimated net proceeds
will be used for general corporate purposes, including acquisitions and the
expansion of the Company's existing operations. Pending any such uses, the net
proceeds will be invested in short-term investment grade securities.
9
<PAGE> 11
COMMON SHARES PRICE RANGE AND DIVIDENDS
The Company's Common Shares are listed on the NYSE and the TSE under the
symbol TRA. 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
HIGH LOW PER COMMON SHARE
---- --- ------------------
<S> <C> <C> <C>
1992
First quarter................................................. $ 6 $4 3/8 $ --
Second quarter................................................ 5 7/8 5 --
Third quarter................................................. 5 3/8 4 1/2 --
Fourth quarter................................................ 5 1/4 4 1/4 --
1993
First quarter................................................. $4 7/8 3 3/4 $ --
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 (through March 8, 1994)......................... $8 3/4 $6 7/8 $ 0.02
</TABLE>
On March 8, 1994, the last reported sale price of the Common Shares on the
NYSE Composite Tape was $8 1/8 per share. As of February 28, 1994, the Company
had 5,774 shareholders of record.
Terra Industries has no restriction (other than under Maryland corporate
law) with respect to the issuance or payments of dividends. While Terra
Industries intends to pay regular dividends on its Common Shares in the future,
the decision to do so shall be made quarterly by the Board of Directors and is
dependent upon the Company's earnings, financial position, capital requirements,
credit agreements and such other factors as the Board of Directors deems
relevant. As a holding company, Terra Industries' ability to pay dividends to
its shareholders is partially dependent upon dividends and loans from its
subsidiaries. The payment of dividends and the making of loan advances to Terra
Industries by its subsidiaries are contingent upon the earnings of those
subsidiaries and are subject to various business considerations and restrictive
loan covenants.
10
<PAGE> 12
CAPITALIZATION
Set forth below is the capitalization of the Company at December 31, 1993,
and as adjusted to reflect the sale of LYONs offered by the Company hereby and
the application of a portion of the net proceeds therefrom to repay short-term
debt incurred, and to replace existing funds utilized, to redeem the Convertible
Debentures. See "Use of Proceeds." This table should be read in conjunction with
the Company's Consolidated Financial Statements and the related notes and other
financial information included elsewhere or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current maturities of long-term debt....... $ 9,636 $ 9,636
--------- -----------
--------- -----------
Long-term debt:
LYONs offered hereby................................................ $ -- $ 100,116
Convertible debentures.............................................. 72,057 --
Other long-term debt................................................ 47,004 47,004
--------- -----------
Total long-term debt........................................... 119,061 147,120
--------- -----------
Common stockholders equity:
Common shares, without par value, 114,375,000 shares authorized,
69,454,773 outstanding(1)........................................ 122,257 122,257
Paid-in-capital..................................................... 516,128 516,128
Cumulative translation adjustment................................... (488) (488)
Accumulated deficit................................................. (394,917) (397,402)
--------- -----------
Total stockholders' equity..................................... 242,980 240,495
--------- -----------
Total capitalization...................................... $ 362,041 $ 387,615
--------- -----------
--------- -----------
</TABLE>
- -------------------------
(1) Excludes 2,145,000 common shares subject to outstanding stock options, of
which 1,777,000 are currently exercisable.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of the Company. This
discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere or
incorporated by reference in this Prospectus.
CONSOLIDATED RESULTS
The Company's 1993 income from continuing operations was $22.8 million, or
$0.33 per share, compared with 1992 income from continuing operations of $10.4
million, or $0.15 per share, and 1991 income from continuing operations of $12.0
million, or $0.18 per share. The Company's 1993 net income was $22.8 million, or
$0.33 per share, compared with 1992 net income of $31.0 million, or $0.45 per
share, and a 1991 net loss of $151.7 million, or $2.26 per share. Net income for
1992 included a credit of $22.3 million, or $0.32 per share, to recognize the
combined effect of changes in accounting for income taxes and retiree medical
benefits. Losses from discontinued businesses were $1.7 million and $168.8
million in 1992 and 1991, respectively. The 1991 results included an
extraordinary gain of $5.1 million related to the retirement of Convertible
Debentures.
FINANCIAL COMPARABILITY AND OVERVIEW
During 1993, the Company expanded its operations through the acquisition of
manufacturing and distribution businesses in Canada. Properties acquired in
Canada were comprised of the lease of an anhydrous ammonia production and
upgrading facility located near Sarnia, Ontario and ownership interests in 32
farm service centers in Ontario, New Brunswick and Nova Scotia. Two of the farm
service centers are owned by Terra Canada and 30 are operated by companies in
which Terra Canada has a 50% ownership interest. The Canadian properties,
acquired as of March 31, 1993, contributed $98.3 (including $4.2 million of
intercompany sales) million in revenues and $8.9 million in net income to the
Company's 1993 results.
The Company also purchased assets associated with 12 farm service centers
in Florida (Terra Asgrow) on December 31, 1993. This acquisition had no effect
on 1993 results of operations.
During 1992, the Company adopted Statement of Financial Accounting
Standards (SFAS) 106, "Employers' Accounting for Post-Retirement Benefits Other
than Pensions" and SFAS 109, "Accounting for Income Taxes." The cumulative prior
years' effect of these accounting changes as of January 1, 1992 was a credit of
$22.3 million, or $0.32 per share. The credit resulted principally from the
recognition of income tax benefits expected to be realized by the Company from
its net operating loss (NOL) and tax credit carryforwards. The effect on 1992
income from continuing operations for these changes versus the methods used in
1991 was a reduction of $7.2 million, or $0.10 per share.
As a result of the Company's decision to focus on agribusiness as its sole
operating segment and a gain on the sale of remaining coal properties
discontinued in 1990, the Company realized a $2.4 million gain on the
disposition of discontinued operations in 1992. During 1991, the Company
realized a loss of $170 million on the sale of its base metals segment for $87
million.
12
<PAGE> 14
Operating results for 1992 and 1991 (there was no effect on operating
results for 1993) for the base metals, leasing, construction materials,
beryllium and gold businesses have been included in discontinued operations for
all periods presented and were as follows:
<TABLE>
<CAPTION>
1992 1991
------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Base metals............................................. $ -- $176,760
Leasing................................................. 5,915 8,285
Construction materials.................................. 27,809 29,429
------- --------
$33,724 $214,474
------- --------
------- --------
Net income (loss) from operations:
Base metals............................................. $ -- $ (4,827)
Leasing................................................. (2,801) 3,760
Construction materials.................................. (825) (195)
Other................................................... (399) 2,454
------- --------
$(4,025) $ 1,192
------- --------
------- --------
</TABLE>
FACTORS THAT AFFECT OPERATING RESULTS
Factors that may affect the Company's future operating results include: the
number of planted acres; the types of crops planted; the effects general weather
patterns have 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 availability and cost of natural gas; management's
ability to control selling, general and administrative expenses; and the
availability and cost of financing sources to fund seasonal working capital
needs.
The number of planted acres and the types of crops planted are influenced
by government programs designed to manage carryover stocks and commodity prices
of certain crops. Due to the higher cost of crop inputs per acre for corn and
cotton, compared with other major crops, changes in corn and cotton acreages
have a more significant effect on the demand for the Company's products and
services than changes in other crops. Significant declines in corn carryover
stocks have lowered 1994 government corn acreage set-asides. As a result, and
assuming more favorable weather conditions than experienced during 1993, the
U.S.D.A. forecasts and the Company expects planted corn acreage to increase from
74 million acres to 80 million acres in 1994.
Weather can have a significant effect on operations. Weather conditions
that delay or intermittently disrupt field work during the planting season may
result in fewer crop inputs being applied than normal and/or shift plantings to
crops with shorter growing seasons. Similar conditions following harvest may
delay or eliminate opportunities to apply fertilizers in the fall of the year.
Weather can also have an adverse effect on crop yields, which lowers the income
of the Company's customers and could impair their ability to pay for inputs
purchased from the Company. During 1993, excessive moisture through much of the
Midwest resulted in higher-than-normal unplanted acreage and fewer applications
of crop inputs. Soil moisture levels remain high in some Midwest areas and early
spring precipitation could disrupt field work during the 1994 planting season.
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 basic
manufacturers of the products without an internal capability to distribute
products to the North American grower. The Company has entered into purchase
agreements which should ensure an adequate supply of products for its grower and
dealer customers through 1994.
13
<PAGE> 15
Prices for manufactured fertilizers and feed products are influenced by the
world supply and demand balance for ammonia and nitrogen derivatives and may be
temporarily influenced by regional changes in supply and demand levels.
The principal raw material used to produce nitrogen fertilizer is natural
gas. Natural gas costs comprise almost 50 percent of the total costs and
expenses associated with the Company's Manufactured Fertilizer operations. The
Company believes there is a sufficient supply of natural gas to allow stable
costs over the long-term and has entered into firm contracts to minimize the
risk of interruption or curtailment of natural gas supplies during the heating
season. At December 31, 1993, the Company had fixed prices for approximately 40%
of its 1994 natural gas requirements for its nitrogen fertilizer plants using
supply contracts or financial derivatives. During 1993, most of the natural gas
used at the Company's Courtright Facility was obtained pursuant to fixed price
contracts that were considerably favorable compared with U.S. contracts. The
favorable gas supply contracts expired during the 1993 fourth quarter. Compared
with spot prices for natural gas, the Company estimates the Courtright
Facility's fixed price contracts reduced 1993 costs by $7.0 million.
The Company's business is highly seasonal with the majority of sales
occurring during the second quarter in conjunction with spring planting
activity. Due to the seasonality of the business and the relatively brief
periods products can be used by customers, the Company builds inventories during
the first quarter in order to ensure timely product availability during the peak
sales season. The Company's ability to purchase product at off-season prices and
carry inventory until periods of peak demand generally contributes to gross
profits. For its current level of sales, the Company requires lines of credit to
fund inventory increases as well as to support customer credit terms. The
Company believes that its revolving credit facilities, approximating $156
million, which expire during 1995 are adequate for expected 1994 sales levels.
RESULTS OF CONTINUING OPERATIONS 1993 COMPARED WITH 1992
Consolidated Results
The Company reported income from continuing operations of $22.8 million, or
$0.33 per share, on revenues of $1,238.0 million in 1993, compared with income
from continuing operations of $10.4 million, or $0.15 per share, on revenues of
$1,082.2 million in 1992. The 1993 results include nine months of operation of
Terra International (Canada) Inc. ("Terra Canada"), an indirect wholly owned
subsidiary of Terra Industries, which added $98.3 million to revenues and $8.9
million to income from continuing operations.
The Company's operations are classified into two major categories --
Distribution and Manufactured Fertilizer. The Distribution category includes
sales of products purchased from manufacturers and resold by the Company.
Distribution revenues are derived primarily from grower and dealer customers
through sales of chemicals, fertilizer, seed and related services. The
Manufactured Fertilizer category represents only those operations directly
related to wholesale sales of nitrogen fertilizer and feed ingredients
manufactured at the Company's Woodward, Port Neal and Courtright Facilities.
Total revenues and pretax income from continuing operations for the years
ended December 31, 1993 and 1992 by major operating category were as follows:
<TABLE>
<CAPTION>
REVENUES PRETAX INCOME
------------------------ --------------------
1993 1992 1993 1992
---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Distribution..................................... $1,019,438 $ 958,725 $ 16,903 $ 16,568
Manufactured Fertilizer.......................... 228,910 125,659 28,654 14,841
Other -- net of intercompany eliminations........ (10,347) (2,193) 3,523 (877)
-------- --------
Operating income............................... 49,080 30,532
Non-operating expenses and net interest
expense..................................... (16,935) (12,346)
---------- ---------- -------- --------
Total from continuing operations................. $1,238,001 $1,082,191 $ 32,145 $ 18,186
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
14
<PAGE> 16
Distribution
Distribution revenues of $1.02 billion in 1993 increased $60.7 million from
1992 sales or 6.3%. Approximately $17.7 million of the sales increase reflected
a 3% increase in chemical sales, while the acquisition of the Canadian business
added $20.1 million of the sales increase, or 2.1%. Distributed fertilizer sales
increased $18.3 million and seed revenues approximated 1992 levels. Revenue
increases in 1993 were less than expected due to weather conditions, especially
the flooding and wet conditions in the central United States, which reduced
planted acres and input application rates.
Operating income for the Distribution business was $16.9 million in 1993,
compared with $16.6 million in 1992. The acquisition of the Canadian business
added $4.0 million to Distribution operating income. Domestic operating income
included a $12.1 million increase in gross profits which was more than offset by
$15.8 million of higher direct selling expenses. The increase in gross profits
includes $5.4 million from higher sales volumes of chemicals as well as margin
improvements resulting primarily from the Company's increased distribution of
its Riverside(R) proprietary brand products. Gross profits increased $4.3
million due to higher sales volumes for distributed fertilizer; gross profits
related to sales of other products and services increased $2.4 million.
Increases in 1993 direct selling expenses from 1992 were primarily due to a $8.1
million increase in compensation costs, which related principally to normal wage
increases and additional personnel, and increased equipment leasing, operating
and maintenance expenses of $3.7 million related to the increased number of
locations and excessively wet field conditions. Advertising and promotional
expenditures increased $1.3 million from 1992.
Manufactured Fertilizer
Domestic Manufactured Fertilizer revenues increased 20% to $150.7 million
in 1993 from $125.7 million in 1992. In addition, the acquisition of the
Courtright Facility added $78.2 million of Manufactured Fertilizer sales.
Increased domestic fertilizer sales volumes added 15% to revenues and higher
selling prices for nitrogen fertilizer and feed products increased revenues by
5%. The additional sales volume and higher selling prices were principally the
result of increased demand for nitrogen solution fertilizers which were heavily
used in the shortened planting season.
Operating income for the Manufactured Fertilizer business in 1993 was $28.7
million, compared with $14.8 million in 1992. The Courtright Facility
contributed $9.5 million to the increase in 1993 operating income. Higher
domestic sales volumes contributed $4.0 million to earnings for 1993. Expanded
domestic ammonia production and 1992 maintenance turnarounds on both domestic
plants improved 1993 gas conversion efficiency which added $2.0 million to
operating income while excess 1992 turnaround costs of $3.0 million were not
repeated. Higher selling prices for domestic production increased earnings by
$6.6 million but were more than offset in 1993 by $11.3 million of cost
increases caused mainly by natural gas price increases.
Other Operating Income
Other operating income was $3.5 million in 1993, compared with a 1992 loss
of $.9 million, as the result of reversing $4.2 million of product liability
reserves expensed in 1989, reflecting the settlement of litigation with DuPont
over the fungicide Benlate.
Non-Operating Expenses and Net Interest Expense
Non-operating expenses, which include corporate and unallocated expenses
and interest expense, net of interest income, totaled $16.9 million in 1993,
compared with $12.3 million in 1992. Corporate and unallocated expenses
increased $4.6 million in 1993 from 1992 as a result of additional interest
expense due to the November 1992 issuance of $30.0 million of unsecured notes
and short-term bond trading losses.
15
<PAGE> 17
Income Taxes
For 1993, the income tax provision rate was lower than statutory rates due
to the utilization of previously unrecognized capital loss carryforwards. For
federal income tax reporting purposes, the Company has remaining NOLs of $55
million and tax credits of $1.7 million to offset taxable income and regular tax
liabilities, respectively.
RESULTS OF CONTINUING OPERATIONS 1992 COMPARED WITH 1991
Consolidated Results
Income from continuing operations was $10.4 million, or $0.15 per share,
for 1992 compared with $12.0 million, or $0.18 per share, for 1991. The 1992
income tax provision was $6.7 million higher than in 1991 primarily as the
result of the Company's change in accounting for income taxes. The Company
recorded 1992 income from continuing operations before income taxes of $18.2
million compared with $13.1 million in 1991. Total revenues were $1,082.2
million in 1992 compared with $1,022.6 million in 1991.
Total revenues and pretax income from continuing operations for the years
ended December 31, 1992 and 1991 by major operating category were as follows:
<TABLE>
<CAPTION>
REVENUES PRETAX INCOME
------------------------ --------------------
1992 1991 1992 1991
---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Distribution..................................... $ 958,725 $ 899,250 $ 16,568 $ 9,991
Manufactured Fertilizer.......................... 125,659 126,664 14,841 26,703
Other -- net of intercompany eliminations........ (2,193) (3,317) (877) (2,085)
-------- --------
Operating income............................ 30,532 34,609
Non-operating expenses and net interest
expense........................................ (12,346) (21,503)
---------- ---------- -------- --------
Total from continuing operations................. $1,082,191 $1,022,597 $ 18,186 $ 13,106
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
Distribution
Distribution revenues of $958.7 million in 1992 increased $59.4 million
from 1991 sales of $899.3 million. Chemical sales increased $64.7 million, or
11%, during 1992 principally as the result of increased sales volumes in the
market area that covers Mississippi, Arkansas, Tennessee, Louisiana and portions
of Missouri. Within this market area, demand for cotton insecticide showed the
largest increase. Retail fertilizer volumes increased $14.1 million, or 7%, in
1992 due to increased application rates and market share growth. Total
distributed fertilizer sales declined, however, due to the expiration of a
dealer supply agreement for phosphate fertilizers and a 4% reduction in selling
prices. Seed sales increased $4.6 million, or 10%, over 1991 levels.
Operating income for the Distribution business was $16.6 million in 1992,
compared with $10.0 million in 1991. The increase in 1992 operating income
reflected a $12.4 million increase in gross profits offset by a 5%, or $5.8
million, increase in direct selling expenses. The higher gross profits resulted
primarily from increased sales volumes as overall gross margins approximated
1991 levels. Increases in 1992 direct selling expenses from 1991 were primarily
due to a $4.7 million increase to compensation costs that reflected normal wage
increases, higher medical benefit costs and additional personnel. Expenses
compared with 1991 also increased by $1.0 million as the result of the
accounting change to recognize retiree medical costs over the employee's service
period.
Manufactured Fertilizer
Manufactured Fertilizer revenues totaled $125.7 million in 1992 compared
with $126.7 million in 1991. Selling prices for fertilizer and feed ingredients
manufactured by the Company declined by $2.3 million, or 2%, in 1992 due
primarily to a higher proportion of off-season sales of ammonia, when prices are
generally lower. The pricing reductions were partially offset by increased
ammonia volumes.
16
<PAGE> 18
Operating income for Manufactured Fertilizer operations declined $11.9
million to $14.8 million in 1992 from $26.7 million in 1991. Lower selling
prices combined with a 10% increase in natural gas costs reduced 1992 operating
income by $7.5 million. Natural gas costs increased significantly over 1991
levels during the last six months of 1992 as the result of lower industry-wide
inventories and increased regulatory tariffs. Manufacturing costs for 1992 were
also increased by $3.0 million for higher-than-anticipated costs of maintenance
turnarounds at both nitrogen production facilities. Manufacturing costs for 1991
were reduced $1.3 million by insurance proceeds.
Non-Operating Expenses and Net Interest Expense
Non-operating expenses, which include corporate and unallocated expenses
and interest expense, net of interest income, totaled $12.3 million in 1992
compared with $21.5 million in 1991. Corporate and unallocated expenses declined
to $4.8 million in 1992 from $8.9 million in 1991 primarily as the result of the
August 1991 closing of the Company's New York corporate office. Interest expense
was reduced from $14.4 million in 1991 to $10.6 million in 1992 due to lower
seasonal borrowings, the retirement of $31.4 million of Convertible Subordinated
Debentures during the last half of 1991, scheduled debt repayments and lower
interest rates. Interest income increased to $3.1 million in 1992 from $1.8
million in 1991 due to higher average cash balances as the result of 1991 asset
sales.
Liquidity and Capital Resources
During 1993, cash was provided primarily through operating activities and
the sale of assets associated with discontinued operations and was utilized for
two major acquisitions, the continued upgrading of production facilities,
funding of sales growth and repayment of debt.
Cash was used to fund increases in accounts receivable of $50.8 million and
inventory of $46.4 million, including $26.8 million in accounts receivable and
$30.1 million in inventory related to acquisitions. Higher fourth quarter 1993
sales than in 1992 caused the majority of the remaining increase in the accounts
receivable balance. The remaining increases in inventory resulted from
off-season purchases to obtain discounts, increased crop protection chemicals
stocked under the Company's Riverside label and higher fertilizer inventory in
anticipation of seasonal price increases.
Asset sales during 1993 generated $24.4 million, including $18.5 million
from the sale of the construction materials business and $5.9 million from the
sale of the remaining leasing business. Asset sales generated $23.1 million of
cash during 1992, which included $12.0 million from the sale of coal properties
and $10.0 million from the sale of a leasing subsidiary.
The 1993 Canadian acquisition was funded through an operating lease for the
production facilities and $19.9 million in cash. A $35 million Canadian dollar
revolving credit facility is available to provide for Terra Canada's working
capital needs. The Terra Asgrow (Florida) purchase was closed December 31, 1993
with $31.0 million paid from available cash. Payments for the Canadian and
Florida acquisitions included $20.5 million for non-current assets.
Purchases of property, plant and equipment totaled $21.6 million in 1993
compared with $17.6 million in 1992. Except for $6.9 million spent for a
methanol manufacturing plant at the Woodward, Oklahoma facility, the 1993
capital expenditures were for routine replacements of property, plant and
equipment and service center expansions. The Company expects 1994 capital
expenditures to approximate $27 million, of which $8 million relates to
completing the methanol manufacturing plant. The remaining $19 million of
capital expenditures will be used for routine replacements of property, plant
and equipment, expansion of service centers, and efficiency improvements at the
fertilizer production plants.
Repayment of long-term debt during 1993 and 1992 was limited to scheduled
repayments. Consolidated debt, including the portion due within one year, as a
percentage of total capital was 35% at December 31, 1993 and 38% as of December
31, 1992. During 1992, the Company issued $30 million of long-term debt through
a private placement to be used for general operating purposes.
17
<PAGE> 19
In July 1993, the Board of Directors authorized a share repurchase program
for up to two million Common Shares. During 1993, 106,900 Common Shares were
repurchased for $0.5 million. In the fourth quarter of 1993, the Board of
Directors declared and paid a $0.02 per share regular quarterly dividend.
The ratio of current assets to current liabilities at December 31, 1993 was
2.1, unchanged from December 31, 1992. The Company's current ratio will
generally decline through June as seasonal increases in inventories and
receivables are funded by increases in current liabilities.
Current financial resources are expected to be adequate to meet normal
requirements during 1994. Cash balances at December 31, 1993 were $65.1 million,
of which $13.0 million is used to collateralize letters of credit supporting
recorded liabilities. The Company has a $130 million revolving credit facility
to fund seasonal increases in inventories and receivables. The facility expires
December 31, 1995. Credit agreements outstanding at December 31, 1993 contain
certain restrictions, which are described in Notes 8 and 10 to the Consolidated
Financial Statements. In addition, these agreements restrict the transfer of
cash and other assets from certain operating subsidiaries to Terra Industries.
The Company plans to grow internally and through acquisitions. Management
believes the present working capital position combined with projected cash flows
and available borrowing capacity and other financing alternatives will be
sufficient to meet anticipated cash requirements for operating needs, capital
expenditures and expansion strategies.
18
<PAGE> 20
BUSINESS
GENERAL
The Company is a leading producer of fertilizer, and a leading marketer of
fertilizer, crop protection and seed products. The Company owns and operates the
largest farm service center network in North America and is the second largest
supplier of crop production inputs in the United States. In addition to
marketing and producing crop production products, the Company provides its
grower customers with a comprehensive selection of value-added services such as
soil and plant tissue analysis, crop production program recommendations, custom
blending of fertilizers, field application services, pest control-inspection,
crop performance follow-up and financing to selected growers.
The Company's distribution network is comprised of approximately:
- 350 farm service centers in North America;
- 58 fertilizer storage facilities; and
- 770 affiliated dealers serving growers in the 48 contiguous states.
The Company's production facilities are comprised of:
- 3 nitrogen fertilizer plants 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 Facility"); and
- 7 additional liquid chemical formulation facilities.
The Company's Canadian operations were acquired, effective March 31, 1993,
as a result of the acquisition by Terra Canada from ICI Canada Inc. ("ICI") of
ICI's interest in the Agromarts(R) and the Courtright Facility. Terra Canada's
farm service centers operate under the trademark "Agromart(R)," two of which are
wholly owned by Terra Canada. The others are operated by corporations in which
Terra Canada owns a 50% interest.
On December 31, 1993, the Company acquired from The Upjohn Company the
business and most of the assets of Asgrow, a leading distributor of fertilizer,
crop protection products and seed to the vegetable, citrus and ornamental
markets in Florida. These retail locations are initially being operated under
the name "Terra Asgrow Florida."
The Company is organized and conducts its operations through two primary
business units: Distribution and Manufactured Fertilizer.
DISTRIBUTION
The Company's Distribution business, which employed approximately 1,775
people as of December 31, 1993, manages a network of farm service centers and a
distribution system for crop protection products, fertilizer, seed and crop
production services. Through these operations, the Company markets a
comprehensive line of crop protection products (herbicides, insecticides,
fungicides, adjuvants, plant growth regulators, defoliants and desiccants),
fertilizer (nitrogen, phosphates, potash and micronutrients), seed and crop
production services to farmers and dealers primarily in the midwestern,
southern, southwestern and southeastern regions of the United States, and the
eastern region of Canada. Approximately 60% of the Distribution business'
revenues were attributable to retail sales to growers in 1993 while
approximately 40% were attributable to wholesale sales to dealers.
In addition to selling products required to grow crops, the Company's sales
representatives provide services to grower customers through the Company's
approximately 350 farm service center locations. These services include soil and
plant tissue analysis and crop production program recommendations, custom
blending of fertilizers, field application services for fertilizer and crop
protection products, and field inspections for pest control and crop program
performance follow-up.
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<PAGE> 21
The Company markets its products primarily to agricultural customers,
including both dealers and growers. In connection with its product sales, the
Company provides warehousing and delivery services and makes available to its
dealer customers many of the services and training courses utilized by Company-
operated locations in support of the sales programs.
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 Company's Professional Products personnel generally
work through existing Terra International farm service center locations using
established delivery systems and product lines.
The Company's Distribution operations are organized into the Northern and
Southern Divisions and 13 regions. Field personnel receive regular training
through Terra University(R), 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 a full-service soil and
plant tissue analysis 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.
The Company markets several major seed brands and, in its U.S. 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 and represented approximately 20%
of total seed sales in 1993. The Company also sells DEKALB brand seed under a
unique marketing and distribution agreement through the Company's Corn Belt
distribution network.
Although most agricultural chemicals marketed by the Company are
manufactured by unaffiliated suppliers, the Company also markets its own
Riverside(R) brand agricultural chemicals. The Company's Riverside(R) line
includes over 100 products, nine of which were added in 1993. The Riverside(R)
product line consists of herbicides, insecticides, fungicides, adjuvants, seed
treatments, plant growth regulators, defoliants and desiccants. The Company
possesses and processes the registrations required by the United States
Environmental Protection Agency (the "EPA") for its Riverside(R) pesticide
products. Riverside(R) products represented approximately 16% of total crop
protection product sales in 1993. The majority of Riverside(R) products are
formulated and packaged in facilities owned by the Company. The Riverside(R)
line includes several formulations produced exclusively by the Company, but does
not include proprietary agricultural chemicals. Riverside(R) products provide
higher gross margins than most products manufactured by unaffiliated suppliers,
but the sale of such products also involves additional indirect costs, including
the cost of maintaining and disposing of excess inventory and potentially
greater liability for product defects.
The Company offers its customers a complete production program, consisting
of fertilizer, seed and chemicals for major field crops. The Company's farm
service centers utilize its Ag Analytical Services lab in Elida, Ohio to analyze
nutrient levels of customer 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 via 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
marketing geography. 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.
For selected dealer customers, the Company offers a services package called
MarketMaster(TM) to enhance the Company's relationship with these key dealers
and increase sales. The package includes environmental and safety audits,
special training courses, access to the Company's Ag Analytical Services lab,
use of CropMaster(R) and other services. There were approximately 475
MarketMaster(TM) dealer sites at December 31, 1993, and additional dealer sites
are expected in 1994.
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<PAGE> 22
PRODUCT FORMULATIONS
The Company's Blytheville 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. 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 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(R) 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 Facility.
MANUFACTURED FERTILIZER
The Company's Manufactured Fertilizer business, which employed 521 people
as of December 31, 1993, produces, sells and delivers nitrogen fertilizers and
selected animal feed ingredients to wholesale agribusiness customers and
anhydrous ammonia products to industrial customers. Its principal customers are
large independent dealers, national retail chains, cooperatives and industrial
consumers. Its competitors are typically large national fertilizer distributors
or producers of nitrogen fertilizers. The Company is North America's fifth
largest producer of anhydrous ammonia (the basic raw material for nitrogen
fertilizers) and the fourth largest nitrogen solutions manufacturer. In 1993,
fertilizer and feed ingredients manufactured by the Company accounted for
approximately 38.0% of the Company's total sales.
The Company's nitrogen fertilizer manufacturing facilities, consisting of
the Woodward Facility, the Port Neal Facility and the Courtright Facility
(together, the "Manufacturing Facilities"), are integrated facilities for the
production of anhydrous ammonia, urea liquor and nitrogen fertilizer solutions.
In addition, the Port Neal and Courtright Facilities produce solid urea for both
the feed and fertilizer markets.
Each Manufacturing Facility is designed to operate continuously except for
planned biennial shutdowns for maintenance or installation of efficiency
improvements. The average utilization of the Port Neal, Woodward and Courtright
Facilities over the last three years was approximately 92%, 95%, and 91%,
respectively. Utilization for the Port Neal Facility during 1992 was adversely
affected by an extended shutdown for capital improvements and planned
maintenance, which took longer to complete than originally scheduled. As a
result of the capital improvements, annual anhydrous ammonia production capacity
increased by approximately 70,000 tons in 1993.
Approximately 90% of the Company's fertilizer production is sold to
independent dealers, national retail chains, cooperatives and industrial
consumers. The remaining 10% is sold through the Company's farm service centers
to retail customers.
During 1993, the Company began implementation of plans to co-produce
methanol and ammonia at its Woodward Facility. The total project is expected to
be completed in the first half of 1994 and will enable the Company to convert a
portion of that plant's ammonia production to up to 400 tons per day of
methanol, depending on the relative demand of ammonia and methanol. The project
cost is estimated to be $15 million.
The acquisition of the Courtright Facility added approximately 450,000 tons
of capacity to the Company's production of anhydrous ammonia, 130,000 tons of
urea liquor capacity, 140,000 tons of urea-ammonium nitrate (UAN) solutions
capacity and 115,000 tons of ammonium nitrate capacity. The Courtright
Facility's urea liquor 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 Company to replace 65,000
tons of annual industrial ammonia sales with higher value urea and nitrogen
solution sales. The project cost is estimated to be approximately $20 million
and is expected to be funded through lease financing.
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<PAGE> 23
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 expects to
finance about $50 million in 1994.
SUPPLY
Reliable sources for supply of crop inputs at competitive prices are
critical to the Company's Distribution business. The Company purchases products
from various chemical and fertilizer suppliers at prevailing market prices. The
Company has entered into purchase agreements with basic chemical and fertilizer
manufacturers to help ensure an adequate supply of products for its grower and
dealer customers through 1994. The Company also purchases various chemicals and
catalysts used in manufacturing and formulation. Availability of these materials
is currently considered adequate to meet production needs.
The principal raw material used by the Company in its nitrogen fertilizer
manufacturing operations at its Manufacturing Facilities is natural gas. Natural
gas costs comprised approximately 50% of the total costs and expenses associated
with the Company's Manufactured Fertilizer operations during 1993.
The Company currently purchases natural gas from various suppliers,
principally under 12-month gas supply contracts with a combination of fixed and
market price terms, and engages in the use of other forward pricing mechanisms
to protect against significant unexpected increases in the price of natural gas.
The Company has minimized the risk of interruption or curtailment of its natural
gas supply during the heating season of 1993-1994 by securing firm
transportation contracts for the majority of the natural gas requirements for
its Manufacturing Facilities. Approximately 40% of the Company's 1994 natural
gas requirements have been set by forward pricing mechanisms.
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. During 1993, the Company operated 35 liquid, 21 dry and two
anhydrous ammonia fertilizer terminal storage facilities strategically located
in 18 states and Ontario to help ensure efficient movement and seasonal product
availability. The Company also has varying amounts of warehouse space at each of
its farm service center locations.
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 units and twenty Company-owned units to deliver fertilizer, crop
protection products, seed, feed ingredients and other products for its customers
and the Company's own locations. At its Manufacturing Facilities, its
Blytheville 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 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.
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<PAGE> 24
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(R) product line
and for basic chemical products at its product development laboratory located in
Blytheville, Arkansas.
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.
DESCRIPTION OF LYONS
The LYONs are to be issued under an indenture to be dated as of
, 1994 (the "Indenture"), between the Company and NationsBank of
Texas, N.A., as trustee (the "Trustee"). A copy of the form of Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summaries of certain provisions of the LYONs and the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all the provisions of the LYONs and the
Indenture, including the definitions therein of certain terms which are not
otherwise defined in this Prospectus. Wherever particular provisions or defined
terms of the Indenture (or of the Form of LYON which is a part thereof) are
referred to, such provisions or defined terms are incorporated herein by
reference. References herein are to sections in the Indenture and paragraphs in
the Form of LYON. As used in this "Description of LYONs," the "Company" refers
to Terra Industries Inc. and does not include its subsidiaries.
GENERAL
The LYONs will be senior obligations of the Company limited to $210,000,000
aggregate principal amount at maturity ($241,500,000 aggregate principal amount
at maturity if the Underwriter's over-allotment option is exercised in full) and
will mature on , 2009. The principal amount at maturity of each
LYON is $1,000, and will be payable at the office of the Paying Agent, which
initially will be the Trustee, or an office or agency maintained by the Company
for such purpose, in the Borough of Manhattan, The City of New York. (Sections
2.03, 4.05 and Form of LYON, paragraph 3.) The Indenture contains no limitation
on the amount of additional indebtedness that may be incurred by the Company and
its subsidiaries or on the ability of the Company and its subsidiaries to enter
into agreements that restrict the ability of the respective subsidiaries to pay
cash dividends or make advances or other payments to the Company. See --
"Ranking and Holding Company Structure."
The LYONs are being offered at a substantial discount from their principal
amount at maturity. See "Certain United States Federal Tax Considerations --
U.S. Holders -- Original Issue Discount." There will be no periodic payments of
interest. The calculation of the accrual of OID (the difference between the
Issue Price and the principal amount at maturity of a LYON) in the period during
which a LYON remains outstanding will be on a semi-annual bond equivalent basis
using a 360-day year composed of twelve 30-day months; such accrual will
commence from the Issue Date of the LYONs. (Form of LYON, paragraph 1.)
Maturity, conversion, purchase by the Company at the option of a Holder, or
redemption of a LYON will cause OID and interest, if any, to cease to accrue on
such LYON, under the terms and subject to the conditions of the Indenture.
(Section 2.08.) The Company may not reissue a LYON that has matured or been
converted, purchased by the Company at the option of a Holder, redeemed or
otherwise canceled (except for registration of transfer, exchange or replacement
thereof). (Section 2.10.)
The LYONs will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity or an integral multiple
thereof. (Form of LYON, paragraph 10.) LYONs may be presented for conversion at
the office of the Conversion Agent and for exchange or registration of transfer
at
23
<PAGE> 25
the office of the Registrar, each of which will initially be the Trustee. See
"Book-Entry System." (Section 2.03.) The Company will not charge a service
charge for any registration of transfer or exchange of LYONs; however, the
Company may require payment by a Holder of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection therewith.
(Section 2.06.)
RANKING AND HOLDING COMPANY STRUCTURE
The LYONs will be senior indebtedness of the Company and will rank pari
passu with all other unsecured and unsubordinated indebtedness of the Company.
The Company is a holding Company and its assets consist primarily of investments
in its subsidiaries. As a result, the Company's rights, and the rights of its
creditors (including Holders of LYONs) to participate in the distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization
will be subject to the prior claims of such subsidiary's creditors (including
trade creditors), except to the extent that the Company is itself recognized as
a creditor of such subsidiary, in which case the claims of the Company would
still be subject to the claims of any secured creditor of such subsidiary and of
any holder of indebtedness of such subsidiary senior to that held by the
Company. As of December 31, 1993, the Company's subsidiaries had approximately
$282 million of total liabilities, including approximately $57 million of
indebtedness. There are no restrictions in the Indenture on the creation of
additional senior indebtedness (or any other indebtedness).
The Company's ability to service its indebtedness, including the LYONs, is
dependent primarily upon the earnings of its subsidiaries and the distribution
or other payment of such earnings to the Company. The debt agreements of the
subsidiaries contain certain covenants which restrict their ability to pay
dividends and make other advances to the Company. The Indenture contains no
limitation on the ability of the Company and its subsidiaries to enter into
agreements to limit these dividends, advances and other payments further.
CONVERSION RIGHTS
A Holder of a LYON may convert it at any time before the close of business
on , 2009; provided, however, that if a LYON is called for
redemption, the Holder may convert it at any time before the close of business
on the Redemption Date. Upon conversion, the Company may elect to deliver Common
Shares or an amount of cash determined as described below. A LYON in respect of
which a Holder has delivered a Purchase Notice or a Change in Control Purchase
Notice exercising the option of such Holder to require the Company to purchase
such LYON may be converted only if such notice is withdrawn in accordance with
the terms of the Indenture. (Form of LYON, paragraph 8.) A Holder may convert a
portion of such Holder's LYONs so long as such portion amounts to $1,000
principal amount at maturity or an integral multiple thereof. (Section 10.01 and
Form of LYON, paragraph 8.)
The initial Conversion Rate is Common Shares per LYON, subject to
adjustment upon the occurrence of certain events described below. (Form of LYON,
paragraph 8.) See "Common Shares Price Range and Dividends." A Holder entitled
to a fractional Common Share shall receive cash equal to the then current market
value of such fractional share based on the Sale Price on the Trading Day
immediately preceding the Conversion Date. (Section 10.03.)
On conversion of a LYON, a Holder will not receive any cash payment
representing accrued OID. The Company's delivery to the Holder of the fixed
number of Common Shares into which the LYON is convertible (together with the
cash payment, if any, in lieu of fractional shares), or if the Company so
elects, cash in lieu thereof, will be deemed to satisfy the Company's obligation
to pay the principal amount at maturity of the LYON including the accrued OID
attributable to the period from the Issue Date through the Conversion Date.
Thus, the accrued OID is deemed to be paid in full rather than canceled,
extinguished or forfeited. The Conversion Rate will not be adjusted at any time
during the term of the LYONs for such accrued OID. For a discussion of the tax
treatment of a Holder receiving Common Shares upon conversion, see "Certain
United States Federal Tax Considerations -- U.S. Holders -- Disposition,
Conversion or Purchase by the Company."
To convert a LYON into Common Shares, a Holder must (a) complete and
manually sign the conversion notice on the back of the LYON (or complete and
manually sign a facsimile thereof) and deliver
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<PAGE> 26
such notice to the Conversion Agent, or, if applicable, complete and deliver to
The Depository Trust Company ("DTC," which term includes any successor thereto)
the appropriate instruction form for conversion pursuant to DTC's book-entry
conversion program, (b) surrender the LYON to the Conversion Agent (which is not
necessary in the case of conversion pursuant to DTC's book-entry conversion
program), (c) if required, furnish appropriate endorsements and transfer
documents, and (d) if required, pay all transfer or similar taxes. Pursuant to
the Indenture, the date on which all of the foregoing requirements have been
satisfied is the Conversion Date. (Sections 10.02 and 10.04 and Form of LYON,
paragraph 8.)
In lieu of delivering Common Shares upon notice of conversion of any LYONs,
the Company may elect to pay the Holder surrendering such LYONs an amount in
cash per LYON equal to the Sale Price (as defined below) of a Common Share on
the Trading Day immediately preceding the Conversion Date multiplied by the
Conversion Rate in effect on such Trading Day, subject to adjustment upon the
occurrence of certain events described below; provided, that if such payment of
cash is not permitted pursuant to the provisions of the Indenture or otherwise,
the Company shall deliver Common Shares (and cash in lieu of any fractional
shares) as set forth below. A Holder may not withdraw his election to convert
LYONs if the Company elects to pay cash in lieu of delivering Common Shares.
Upon conversion of any LYONs, the Company shall inform the Holders through the
Conversion Agent of its election to deliver Common Shares and/or to pay cash in
lieu of delivery of such shares no later than two Business Days following the
Conversion Date. If the Company elects to deliver Common Shares, such shares
will be delivered through the Conversion Agent no later than the seventh
Business Day following the Conversion Date. If the Company elects to pay cash,
such cash payment will be made to the Holder surrendering such LYONs no later
than the fifth Business Day following such Conversion Date. (Section 10.02.)
The Company may not pay cash upon conversion of any LYONs (other than cash
in lieu of fractional shares) if there has occurred and is continuing an Event
of Default described under "Events of Default; Notice and Waiver" below (other
than a default in such payment on such LYONs). (Section 10.01.)
The "Sale Price" on any date means the closing per share sale price for the
Common Shares (or, if no closing sale price is reported, the average of the bid
and ask prices or, if more than one in either case the average of the average
bid and the average ask prices) on such date on the NYSE Composite Tape or, in
the event the Common Shares are not listed on the NYSE, such other national or
regional securities exchange upon which Common Shares are listed, as reported in
the composite transactions for the principal United States securities exchange
on which the Common Shares are traded or, if such Common Shares are not listed
on a United States national or regional securities exchange, as reported by
NASDAQ, or, if such Common Shares are not reported by NASDAQ, as determined by
the Company on such basis as it deems appropriate. (Section 1.01.)
ADJUSTMENT OF CONVERSION RATE
The Conversion Rate will be adjusted for (a) dividends or distributions on
Common Shares payable in Common Shares or other capital stock; (b) subdivisions,
combinations or certain reclassifications of Common Shares; (c) distributions to
all holders of Common Shares of certain rights, warrants or options to purchase
Common Shares for a period expiring within 60 days at less than the Sale Price
at the Time of Determination; and (d) distributions to all holders of Common
Shares of assets or debt securities of the Company or certain rights, warrants
or options to purchase securities of the Company (excluding distributions of
capital stock referred to in clauses (a) and (b) and any rights, warrants or
options referred to in clause (c) and cash dividends or other cash distributions
from current net earnings or retained earnings other than any Extraordinary Cash
Dividend). However, no adjustments need be made if Holders may participate in
the transaction on a basis and with notice that the Board of Directors
determines to be fair and reasonable or in certain other cases. In cases where
the fair market value of assets, debt securities or certain rights, warrants or
options to purchase securities of the Company applicable to one Common Share
distributed to shareholders exceeds the Average Sale Price of the Common Shares
as of the Time of Determination, or such Average Sale Price exceeds the fair
market value of such assets, debt securities or rights, warrants or options so
distributed by less than $1.00, rather than being entitled to an adjustment in
the Conversion Rate in accordance with clause (d) above, the Holder of a LYON
upon conversion thereof will be entitled to receive, in addition to the
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<PAGE> 27
Common Shares into which such LYON is convertible, the kind and amount of
assets, debt securities or rights, warrants or options comprising the
distribution that such Holder would have received if such Holder had converted
such LYON immediately prior to the record date for determining the shareholders
entitled to receive the distribution. The Company must cause notice of any
action requiring an adjustment of the Conversion Rate to be mailed to Holders of
LYONs and filed with the Trustee and the Conversion Agent at least 15 days
before the proposed record date for such dividend, distribution, subdivision,
combination or reclassification (unless no adjustment need be made because
Holders may participate in the transaction on a basis and with notice that the
Board of Directors determines to be fair and reasonable). The Indenture permits
the Company to increase the Conversion Rate from time to time and for any period
of time (provided that such period is not less than 20 business days). (Sections
10.06, 10.07, 10.08, 10.10, 10.12, 10.14, 10.17 and 10.19 and Form of LYON,
paragraph 8.)
If the Company is party to a consolidation, merger or binding share
exchange or a transfer of all or substantially all of its assets, the right to
convert a LYON into Common Shares may be changed into a right to convert it into
the kind and amount of securities, cash or other assets of the Company or
another person which the Holder would have received if the Holder had converted
such Holder's LYONs immediately before the effective date of the transaction.
The Company must cause notice of any proposed transaction adjustment of the
Conversion Rate to be mailed to Holders of LYONs and filed with the Trustee and
the Conversion Agent at least 15 days before the proposed effective date of such
consolidation, merger, binding share exchange or transfer or any liquidation or
dissolution of the Company. Failure to file or mail any such notice or any
notice or any defect in any such notice will not affect the validity of any such
transaction. (Sections 10.13 and 10.14.)
In the event of a taxable distribution to holders of Common Shares which
results in an adjustment of the Conversion Rate or in the event the Conversion
Rate is increased at the discretion of the Company, the Holders of the LYONs
may, in certain circumstances, be deemed to have received a distribution subject
to Federal income tax as a dividend. See "Certain United States Federal Tax
Considerations."
REDEMPTION OF LYONS AT THE OPTION OF THE COMPANY
No sinking fund is provided for the LYONs. Prior to , 1999,
the LYONs will not be redeemable at the option of the Company. On and after that
date, the LYONs are redeemable for cash at the option of the Company, in whole
or from time to time in part, at the Redemption Prices specified below.
(Sections 3.01 and 3.03 and Form of LYON, paragraph 5.) Not less than 30 days'
nor more than 60 days' notice of redemption shall be given by mail to Holders of
LYONs. (Section 3.03 and Form of LYON, paragraph 7.)
The table below shows Redemption Prices per $1,000 principal amount at
Stated Maturity of a LYON on , 1999, at each thereafter
prior to maturity and at maturity on , 2009, which prices reflect
the accrued OID calculated through each such date. The Redemption Price of a
LYON redeemed between such dates would include an additional amount reflecting
the additional OID accrued from
26
<PAGE> 28
and including the next preceding date in the table through the Redemption Date.
(Form of LYON, paragraph 5.)
<TABLE>
<CAPTION>
(1) (2) (3)
LYON ACCRUED REDEMPTION
ISSUE OID PRICE
REDEMPTION DATE PRICE AT % (1) + (2)
- ------------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
, 1999......................................... $ $ $
, 2000.........................................
, 2001.........................................
, 2002.........................................
, 2003.........................................
, 2004.........................................
, 2005.........................................
, 2006.........................................
, 2007.........................................
, 2008.........................................
At Stated Maturity........................................... 1,000.00
</TABLE>
If less than all of the outstanding LYONs are to be redeemed, the Trustee
shall select the LYONs to be redeemed in principal amounts at maturity of $1,000
or integral multiples thereof by lot, pro rata or by any other method the
Trustee considers fair and appropriate. If a portion of a Holder's LYONs is
selected for partial redemption and such Holder converts a portion of such
LYONs, such converted portion shall be deemed (so far as may be) to be the
portion selected for redemption. (Section 3.02.)
PURCHASE OF LYONS AT THE OPTION OF THE HOLDER
On , 1999, and , 2004, (each, a "Purchase
Date"), the Company will become obligated to purchase, at the option of the
Holder thereof, any outstanding LYON for which a written Purchase Notice has
been delivered by the Holder to the Paying Agent at any time from the opening of
business on the date that is 20 business days prior to such Purchase Date until
the close of business on the business day prior to such Purchase Date and for
which such Purchase Notice has not been withdrawn, subject to certain additional
conditions. The Purchase Price payable in respect of a LYON shall be equal to
the Issue Price plus accrued OID through the Purchase Date, with respect to each
Purchase Date. The Company, at its option, may elect to pay the Purchase Price
with respect to any particular Purchase Date in cash or Common Shares, or in any
combination thereof. (Section 3.08 and Form of LYON, paragraph 6.) For a
discussion of the tax treatment of a Holder receiving cash, Common Shares or any
combination thereof, see "Certain United States Federal Tax Considerations."
The Company will be required to give notice (the "Company Notice") on a
date not less than 20 business days prior to the Purchase Date to all Holders at
their addresses shown in the register of the Registrar (and to beneficial owners
as required by applicable law) stating, among other things, (a) whether the
Company will pay the Purchase Price of LYONs in cash or Common Shares or any
combination thereof (specifying the percentages of each); (b) if the Company
elects to pay in Common Shares, in whole or in part, the method of calculating
the Market Price of the Common Shares; and (c) the procedures that Holders must
follow to require the Company to purchase LYONs from such Holders. (Section
3.08.)
The Purchase Notice given by each Holder electing to require the Company to
purchase LYONs shall state (a) if applicable, the certificate numbers of the
LYONs to be delivered by such Holder for purchase by the Company; (b) the
portion of the principal amount at maturity of LYONs to be purchased, which
portion must be $1,000 or an integral multiple thereof; (c) that such LYONs are
to be purchased by the Company pursuant to the applicable provisions of the
LYONs and the Indenture; and (d) in the event the Company elects, pursuant to
the Company Notice, to pay the Purchase Price with respect to the applicable
Purchase Date in Common Shares, in whole or in part, but such Purchase Price is
ultimately to be paid to such Holder entirely in cash because any of the
conditions to payment of the Purchase Price (or portion thereof) in
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<PAGE> 29
Common Shares is not satisfied prior to the close of business on such Purchase
Date, as described below, whether such Holder elects (x) to withdraw such
Purchase Notice as to some or all of the LYONs to which it relates (stating the
principal amount at maturity and, if applicable, certificate numbers of the
LYONs as to which such withdrawal shall relate), or (y) to receive cash in
respect of the entire Purchase Price for all LYONs (or portion thereof) to which
such Purchase Notice relates. If the Holder fails to indicate, in the Purchase
Notice and in any written notice of withdrawal, such Holder's choice with
respect to the election described in clause (d) above, such Holder shall be
deemed to have elected to receive cash in respect to the entire Purchase Price
for all LYONs subject to such Purchase Notice in such circumstances. (Section
3.08.) For a discussion of the tax treatment of a Holder receiving cash instead
of Common Shares, see "Certain United States Federal Tax Considerations."
Any Purchase Notice may be withdrawn by the Holder by a written notice of
withdrawal delivered to the Paying Agent prior to the close of business on the
business day prior to the Purchase Date. The notice of withdrawal shall state
the principal amount at maturity and the certificate numbers of the LYONs as to
which the withdrawal notice relates and the principal amount at maturity, if
any, which remains subject to the Purchase Notice. (Section 3.10.)
The table below shows the Purchase Prices of a LYON as of the specified
Purchase Dates:
<TABLE>
<CAPTION>
PURCHASE DATE PURCHASE PRICE
----------------------------------------------------------------- --------------
<S> <C>
, 1999................................................ $
, 2004................................................
</TABLE>
If the Company elects to pay the Purchase Price, in whole or in part, in
Common Shares, the number of Common Shares to be delivered in respect of the
portion of the Purchase Price to be paid in Common Shares shall be equal to such
portion of the Purchase Price divided by the Market Price (as defined below) of
Common Shares. No fractional Common Shares will be delivered upon any purchase
by the Company of LYONs through the delivery of such Common Shares in payment,
in whole or in part, of the Purchase Price. Instead, the Company will pay cash
based on the Market Price for all fractional Common Shares. (Section 3.08.) See
"Certain United States Federal Tax Considerations."
The "Market Price" means the average of the Sale Prices of the Common
Shares for the five Trading Day period ending on (if the third business day
prior to the applicable Purchase Date is a Trading Day or, if not, then on the
last Trading Day prior to) the third business day prior to the related Purchase
Date, appropriately adjusted to take into account the occurrence, during the
period commencing on the first of such Trading Days during such five Trading Day
period and ending on such Purchase Date, of certain events that would result in
an adjustment of the Conversion Rate with respect to the Common Shares. Because
the Market Price of the Common Shares are determined prior to the applicable
Purchase Date, Holders of LYONs bear the market risk with respect to the value
of the Common Shares to be received from the date such Market Price is
determined to such Purchase Date. The Company may pay the Purchase Price (or any
portion thereof) in Common Shares only if the information necessary to calculate
the Market Price is published in The Wall Street Journal or another daily
newspaper of national circulation. (Section 3.08.)
Upon determination of the actual number of Common Shares to be issued for
each $1,000 principal amount at maturity of LYONs, the Company will publish such
determination in The Wall Street Journal or another daily newspaper of national
circulation. (Section 3.08.)
The Company's right to purchase LYONs, in whole or in part, with Common
Shares is conditioned upon to the satisfaction by the Company of various
conditions, including, among others: (i) the registration of the Common Shares
to be issued in respect of the Purchase Date under the Securities Act and the
Exchange Act, if required; and (ii) any necessary qualification or registration
under applicable state securities law or the availability of an exemption from
such qualification and registration. If such conditions are not satisfied with
respect to a Holder or Holders prior to the close of business on the Purchase
Date, the Company will pay the Purchase Price of the LYONs of such Holder or
Holders entirely in cash. (Section 3.08.) See "Certain United States Federal Tax
Considerations." The Company may not change the form of consideration (or
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<PAGE> 30
components or percentages of components thereof) to be paid once the Company has
given its Company Notice to Holders of LYONs except as described in the second
sentence of this paragraph. (Section 3.08.)
The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be applicable
and will file Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to purchase LYONs or any purchase by
the Company of LYONs at the option of Holders. (Section 3.13.)
Payment of the Purchase Price for a LYON for which a Purchase Notice has
been delivered and not validly withdrawn is conditioned upon delivery or
book-entry transfer of such LYON (together with necessary endorsements) to the
Paying Agent at any time (whether prior to, on or after the Purchase Date) after
delivery of such Purchase Notice. (Section 3.08.) See "Book-Entry System."
Payment of the Purchase Price for such LYON will be made promptly following the
later of the Purchase Date or the time of delivery or book-entry transfer of
such LYON. (Section 3.08.) If the Paying Agent holds, in accordance with the
terms of the Indenture, money or securities sufficient to pay the Purchase Price
of such LYON on the business day following a Purchase Date, then, on and after
such Purchase Date, such LYON will cease to be outstanding and OID on such LYON
will cease to accrue, whether or not such LYON is delivered to the Paying Agent,
and all other rights of the Holder shall terminate (other than the right to
receive the Purchase Price upon delivery of the LYON). (Section 2.08 and Form of
LYON, paragraph 6.)
The Company's ability to purchase LYONs with cash may be limited by the
terms of its then existing borrowing agreements. No LYONs may be purchased for
cash at the option of Holders if there has occurred (prior to, on, or after, as
the case may be, the giving, by the Holders of such LYONs, of the required
Purchase Notice) and is continuing an Event of Default with respect to the LYONs
described under "Events of Default; Notice and Waiver" below (other than a
default in the payment of the Purchase Price with respect to such LYONs).
(Section 3.10.)
CHANGE IN CONTROL PERMITS PURCHASE OF LYONS AT THE OPTION OF THE HOLDER
In the event of any Change in Control (as defined below) of the Company
occurring on or prior to , 1999, each Holder of LYONs will have
the right, at the Holder's option, subject to the terms and conditions of the
Indenture, to require the Company to purchase all or any portion (provided that
the principal amount at maturity must be $1,000 or an integral multiple thereof)
of the Holder's LYONs as of the date that is 35 business days after the
occurrence of such Change in Control (a "Change in Control Purchase Date") at a
cash price equal to the Issue Price plus accrued OID through the Change in
Control Purchase Date (the "Change in Control Purchase Price"). (Section 3.09
and Form of LYON, paragraph 6.) This obligation of the Company may not be waived
by the Company's Board of Directors or by the Trustee. If a Change in Control
occurs, there can be no assurance that the Company will have available funds
sufficient to pay the Change in Control Purchase Price for all of the LYONs that
might be delivered by Holders. One of the events constituting a Change in
Control under the Indenture is a consolidation or merger of the Company under
certain circumstances.
Within 15 business days after the occurrence of a Change in Control, the
Company is obligated to mail to the Trustee and to all Holders of LYONs at their
addresses shown in the register of the Registrar (and to beneficial owners as
required by applicable law) a notice regarding the Change in Control, which
notice shall state, among other things: (i) the events causing a Change in
Control and the date of such Change in Control, (ii) the last date on which the
purchase right may be exercised, (iii) the change in Control Purchase Date, (iv)
the Change in Control Purchase Price, (v) a brief description of the conversion
rights of the LYONs, (vi) the name and address of the Paying Agent and the
Conversion Agent, (vii) the Conversion Rate and any adjustments thereto, (viii)
that LYONs with respect to which a Change in Control Purchase Notice is given by
the Holder may be converted into Common Shares (or, in lieu thereof, cash if the
Company shall so elect) at any time on or prior to the close of business on the
Change of Control Purchase Date only if the Change in Control Purchase Notice is
withdrawn in accordance with the terms of the Indenture, (ix) the procedures
that Holders must follow to exercise these rights and (x) the procedures for
withdrawing a Change in Control Purchase Notice. Within 15 business days after
the occurrence of a Change in Control, the Company will
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<PAGE> 31
cause a copy of such notice to be published in The Wall Street Journal or
another daily newspaper of national circulation. (Section 3.09.)
To exercise this right, the Holder must deliver a written notice (a "Change
in Control Purchase Notice") to the Paying Agent (initially the Trustee) prior
to the close of business on the business day prior to the Change in Control
Purchase Date. The Change in Control Purchase Notice shall state (i) if
applicable, the certificate numbers of the LYONs to be delivered by the Holder
thereof for purchase by the Company; (ii) the portion of the principal amount at
maturity of LYONs to be purchased, which portion must be $1,000 or an integral
multiple thereof; and (iii) that such LYONs are to be purchased by the Company
pursuant to the applicable provisions of the LYONs. (Section 3.09 and Form of
LYON, paragraph 6.) See "Book-Entry System."
Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent prior to the close of
business on the business day prior to the Change in Control Purchase Date. The
notice of withdrawal shall state the principal amount at maturity and, if
applicable, the certificate numbers of the LYONs as to which the withdrawal
notice relates and the principal amount at maturity, if any, which remains
subject to a Change in Control Purchase Notice. (Section 3.10.) See "Book-Entry
System."
Payment of the Change in Control Purchase Price for a LYON for which a
Change in Control Purchase Notice has been delivered and not validly withdrawn
is conditioned upon delivery or book-entry transfer of such LYON (together with
necessary endorsements) to the Paying Agent at any time (whether prior to, or
after the Change in Control Purchase Date) after the delivery of such Change in
Control Purchase Notice. (Section 3.09.) See "Book-Entry System." Payment of the
Change in Control Purchase Price for such LYON will be made promptly following
the later of the Change in Control Purchase Date or the time of delivery of such
LYON. (Section 3.10.) If the Paying Agent holds, in accordance with the terms of
the Indenture, money sufficient to pay the Change in Control Purchase Price of
such LYON on the business day following the Change in Control Purchase Date,
then, immediately after such Change in Control Purchase Date, such LYON will
cease to be outstanding and OID on such LYON will cease to accrue, whether or
not such LYON is delivered to the Paying Agent, and all other rights of the
Holder shall terminate (other than the right to receive the Change in Control
Purchase Price upon delivery of the LYON). (Section 2.08 and Form of LYON,
paragraph 6.)
Under the Indenture, a "Change in Control" of the Company is deemed to have
occurred at such time as either of the following events shall occur (i) there
shall be consummated any consolidation or merger of the Company (a) in which the
Company is not the continuing or surviving corporation or (b) pursuant to which
the Common Shares would be converted into cash, securities or other property,
other than a consolidation or merger of the Company in which the holders of
Common Shares immediately prior to the consolidation or merger have, directly or
indirectly, at least a majority of the common equity of the continuing or
surviving corporation immediately after such consolidation or merger; or (ii)
there is a report filed by any person (other than Minorco and its Affiliates),
including its Affiliates and Associates, on Schedule 13D or 14D-1 (or any
successor schedule, form or report) pursuant to the Exchange Act, disclosing
that such person (for the purposes of Section 3.09 of the Indenture only, the
term "person" shall include a "person" within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act or any successor provision to either of the
foregoing) has become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of 50% or more of the voting power of the Common Shares then
outstanding; provided, however, that a person shall not be deemed beneficial
owner of, or to own beneficially, (A) any securities tendered pursuant to a
tender or exchange offer made by or on behalf of such person or any of such
person's Affiliates or Associates until such tendered securities are accepted
for purchase or exchange thereunder, or (B) any securities if such beneficial
ownership (1) arises solely as a result of a revocable proxy delivered in
response to a proxy or consent solicitation made pursuant to, and in accordance
with, the applicable rules and regulations under the Exchange Act, and (2) is
not also then reportable on Schedule 13D (or any successor schedule, form or
report) under the Exchange Act.
30
<PAGE> 32
The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be applicable
and will file Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to purchase LYONs at the option of
Holders upon a Change in Control. (Section 3.13.) The Change in Control purchase
feature of the LYONs may in certain circumstances make more difficult or
discourage a takeover of the Company and, thus, the removal of incumbent
management. The Change in Control purchase feature, however, is not the result
of management's knowledge of any specific effort to accumulate Common Shares or
to obtain control of the Company by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the Change in Control purchase feature is a
standard term contained in other LYONs offerings that have been marketed by the
Underwriter, and the terms of such feature result from negotiations between the
Company and the Underwriter.
The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change in Control with respect to the Change in Control purchase feature of the
LYONs, but that would increase the amount of indebtedness the Company has
outstanding at such time. No LYONs may be purchased at the option of Holders
upon a Change in Control of the Company if there has occurred (prior to, on or
after, as the case may be, the giving, by the Holders of such LYONs, of the
required Change in Control Purchase Notice) and is continuing an Event of
Default with respect to the LYONs described under "Events of Default; Notice and
Waiver" below (other than a default in the payment of the Change in Control
Purchase Price with respect to such LYONs). (Section 3.10.)
MERGERS AND SALES OF ASSETS BY THE COMPANY
The Indenture provides that the Company may not consolidate with or merge
with or into any other person or transfer (by lease, assignment, sale or
otherwise) substantially all of its properties or assets to another person,
unless, among other items, (i) the resulting, surviving or transferee person (if
other than the Company) is organized and existing under the laws of the United
States, any state thereof or the District of Columbia and such person assumes
all obligations of the Company under the LYONs and the Indenture, and (ii) the
Company or such successor person shall not immediately thereafter be in default
under the Indenture. Upon the assumption of the Company's obligations by such
person or group in such circumstances, subject to certain exceptions, the
Company shall be discharged from all obligations under the LYONs and the
Indenture. (Section 5.01.) Although such transactions are permitted under the
Indenture, certain of the foregoing transactions occurring on or prior to
, 1999 could constitute a Change in Control of the Company
permitting each Holder to require the Company to purchase the LYONs of such
Holder as described above. (Section 3.09.)
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that, if an Event of Default specified therein shall
have happened and be continuing, either the Trustee or the Holders of not less
than 25% in aggregate principal amount at maturity of the LYONs then outstanding
(which include any Holders of LYONs who are directors, officers or affiliates of
the Company) may declare the Issue Price of the LYONs plus the OID on the LYONs
accrued through the date of such declaration to be immediately due and payable.
In the case of certain events of bankruptcy or insolvency, the Issue Price of
the LYONs plus the OID accrued thereon through the date of occurrence of such
event shall automatically become and be immediately due and payable. (Section
6.02.) Under certain circumstances, the Holders of a majority in aggregate
principal amount at maturity of the outstanding LYONs may rescind any such
acceleration with respect to the LYONs and its consequences. (Section 6.02.)
Interest shall, to the extent permitted by law, accrue and be payable on demand
upon a default in the payment of the principal amount at maturity, Issue Price
plus accrued OID, or any Redemption Price, Purchase Price or Change in Control
Purchase Price with respect to any LYON and such interest shall be compounded
semiannually. The accrual of such interest on overdue amounts shall be in lieu
of, and not in addition to, the continued accrual of OID. (Form of LYON,
paragraph 1.) An Event of Default of the LYONs may also cause an event of
default under the terms of the Company's other outstanding debt, certain of
which may be pari passu or structurally senior to the LYONs. There can be no
assurance that the Company will have
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<PAGE> 33
sufficient funds or available financing to satisfy its obligation to repurchase
the LYONs or any other debt that may come due upon an Event of Default. The
Company presently would not have sufficient funds (without seeking alternative
sources of financing) to satisfy its obligations to repurchase the LYONs and any
other debt that may become due upon an Event of Default, if an Event of Default
were to occur contemporaneously with the sale of the LYONs offered hereby.
Under the Indenture, an Event of Default includes any of the following: (i)
default in payment of the principal amount at maturity, Issue Price plus accrued
OID, Redemption Price, Purchase Price or Change in Control Purchase Price with
respect to any LYON when such becomes due and payable (whether or not payment is
prohibited by the provisions of the Indenture); (ii) failure to deliver Common
Shares (or pay cash in lieu thereof) when such Common Shares are required to be
delivered following conversion of a LYON, (iii) failure by the Company to comply
with any of its other agreements in the LYONs or the Indenture upon receipt by
the Company of notice of such default by the Trustee or by Holders of not less
than 25% in aggregate principal amount at maturity of the LYONs then
outstanding, and the Company's failure to cure (or obtain a waiver of) such
default within 60 days after receipt by the Company of such notice; (iv) default
under any bond, debenture or other evidence of indebtedness for money borrowed
of the Company or any consolidated subsidiary having an aggregate outstanding
principal amount of in excess of $7.5 million, which default shall have occurred
at final maturity or which default resulted in such indebtedness being
accelerated, without such indebtedness being discharged or such acceleration
having been rescinded or annulled within 30 days after receipt of notice thereof
by the Company from the Trustee or by the Company and the Trustee from the
Holders of not less than 25% in aggregate principal amount at maturity of the
LYONs then outstanding or (v) certain events of bankruptcy or insolvency.
(Section 6.01.)
The Holders of a majority in aggregate principal amount at maturity of the
outstanding LYONs may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that such direction shall not be in
conflict with any law or the Indenture and subject to certain other limitations.
(Section 6.05.) Before proceeding to exercise any right or power under the
Indenture at the direction of such Holders, the Trustee shall be entitled to
receive from such Holders reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities which might be incurred by it in
complying with any such direction. (Section 7.01.) No Holder of any LYON will
have any right to pursue any remedy with respect to the Indenture or the LYONs,
unless (i) such Holder shall have previously given the Trustee written notice of
a continuing Event of Default; (ii) the Holders of at least 25% in aggregate
principal amount at maturity of the outstanding LYONs shall have made a written
request to the Trustee to pursue such remedy; (iii) such Holder or Holders have
offered to the Trustee reasonable security or indemnity satisfactory to the
Trustee; (iv) the Holders of a majority in aggregate principal amount at
maturity of the outstanding LYONs have not given the Trustee a direction
inconsistent with such request within 60 days after receipt of such request; and
(v) the Trustee shall have failed to comply with the request within such 60-day
period. (Section 6.06.)
Notwithstanding the foregoing, the right of any Holder (i) to receive
payment of the principal amount at maturity, Issue Price plus accrued OID,
Redemption Price, Purchase Price or Change in Control Purchase Price with
respect to any LYON and any interest in respect of a default in the payment of
any such amounts on such LYON, on or after the due date expressed in such LYON,
(ii) to convert LYONs (including, without limitation, the right to receive cash
in lieu of Common Shares upon conversion if the Company has elected to pay cash
with respect thereto) or (iii) to institute suit for the enforcement of any such
payments or conversion shall not be impaired or adversely affected without such
Holder's consent. (Section 6.07.) The Holders of at least a majority in
aggregate principal amount at maturity of the outstanding LYONs may waive an
existing default and its consequences, other than (x) any default by the Company
in any payment on the LYONs, (y) any default which constitutes a failure to
convert any LYON in accordance with its terms or (z) any default in respect of
certain covenants or provisions in the Indenture that may not be modified
without the consent of the Holder of each LYON as described in "Modification"
below. (Section 6.04.)
The Company will be required to furnish to the Trustee annually a statement
as to any default by the Company in the performance and observance of its
obligations under the Indenture. (Section 4.03.) The Trustee will be required to
give notice to Holders of the LYONs of any continuing default known to the
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<PAGE> 34
Trustee within 90 days after the occurrence thereof unless such default shall
have been cured or waived before the giving of such notice; provided, that the
Trustee may withhold such notice, as to any default other than a payment
default, or a default with respect to the Company's failure to provide Common
Shares (or pay cash in lieu thereof) upon conversion of a LYON, if it determines
in good faith that withholding the notice is in the interests of the Holders.
(Section 7.05.)
MODIFICATION
Without the consent of any Holder of LYONs, the Company and the Trustee may
amend the Indenture to (i) cure any ambiguity, defect or inconsistency, (ii)
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, (iii) provide for certificated LYONs in addition to
certificated LYONs, (iv) make any change that does not adversely affect the
rights of any Holder of LYONs, or (v) make any change to comply with the Trust
Indenture Act of 1939, or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust Indenture Act
of 1939. (Section 9.01.)
Modification and amendment of the Indenture or the LYONs may be effected by
the Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount at maturity of the LYONs then
outstanding. However, without the consent of each Holder affected thereby, no
amendment may, among other things: (i) reduce the principal amount at maturity,
Issue Price, Purchase Price, Change in Control Purchase Price or Redemption
Price with respect to any LYON, or extend the Stated Maturity of any LYON or
alter the manner or rate of accrual of OID or interest, or make any LYON payable
in money or securities other than that stated in the LYON; (ii) make any
reduction in the principal amount at maturity of LYONs whose Holders must
consent to an amendment or any waiver under the Indenture or modify the
Indenture provisions relating to such amendments or waivers; (iii) make any
change that adversely affects the right to convert any LYON or the right to
require the Company to purchase a LYON (including the right to receive cash in
lieu of Common Shares); or (iv) impair the right to institute suit for the
enforcement of any payment with respect to, or conversion of, the LYONs.
(Section 9.02.)
LIMITATIONS OF CLAIMS IN BANKRUPTCY
If a bankruptcy proceeding is commenced in respect of the Company, the
claim of the Holder of a LYON may be, under Title 11 of the United States Code,
limited to the Issue Price of the LYON plus that portion of the OID that has
accrued from the date of issue to the commencement of the proceeding. In
addition, the Holders of the LYONs will be effectively subordinated to the
indebtedness and other liabilities of the Company's subsidiaries. See
"Description of LYONs -- Holding Company Structure."
TAXATION OF LYONS
See "Certain United States Federal Tax Considerations" for a discussion of
certain Federal tax aspects that will apply to Holders of LYONs.
BOOK-ENTRY SYSTEM
The LYONs initially will be represented by one or more global securities
(the "Global Securities") deposited with DTC and registered in the name of a
nominee of DTC. Except as set forth below, the LYONs will be available for
purchase in denominations of $1,000, and integral multiples thereof, in
book-entry form only.
Upon the issuance of the Global Securities, the Depository for such Global
Securities or its nominee will credit on its book-entry registration and
transfer system the respective principal amounts of the LYONs represented by
such Global Security to the accounts of the persons that have accounts with such
Depository (the "Participants"). Such accounts shall be designated by the
Underwriter, dealers or agents with respect to such LYONs. Ownership of
beneficial interests in such Global Security will be shown on, and the transfer
of that ownership will be effected only through, records maintained by the
applicable Depository or its nominee
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<PAGE> 35
(with respect to interests of Participants) and records of Participants (with
respect to interests of persons who hold through Participants). The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. Such limits and such laws may impair the
ability to own, pledge or transfer beneficial interests in a Global Security.
Unless and until certificated LYONs are issued under the limited
circumstances described below, no beneficial owner of a LYON shall be entitled
to receive a definitive certificate representing a LYON. So long as the
Depository or its nominee is the registered owner of all of the Global
Securities, the Depository or such nominee as the case may be, will be
considered to be the sole owner or holder of the LYONs for all purposes of the
Indenture. Unless and until exchanged in whole or in part for the LYONs
represented thereby, the Global Securities may not be transferred except in
their entirety by the Depository to a nominee of the Depository or by a nominee
of such Depository to such Depository or another nominee of such Depository or
by the Depository or any nominee to a successor depository or any nominee of
such successor.
So long as the Global Securities represent the LYONs, payments of principal
will be made to the Depository or its nominee, as the registered owner of the
Global Securities. Payments to beneficial owners of the LYONs are expected to be
made through the Depository or its nominee, as described in this Prospectus.
None of the Company, the Trustee, any Paying Agent or the Registrar will have
any responsibility or liability for any aspect of the records relating to, or
payment made on account of, beneficial ownership interests in the Global
Security for the LYONs or for maintaining, supervising or reviewing any records
relating to such beneficial interests.
If the Depository is at any time unwilling, unable or ineligible to
continue as depository and a successor depository is not appointed by the
Company within 90 days, the Company will issue individual LYONs in definitive
form in exchange for the Global Securities representing the LYONs. In addition,
the Company may at any time and in its sole discretion determine not to have the
LYONs represented by Global Securities, and, in such event, will issue
individual LYONs in definitive form in exchange for the Global Securities. In
either instance, the Company will issue LYONs in definitive form equal in
aggregate principal amount to the Global Securities, in such names and in such
principal amounts as the Depository shall request. LYONs so issued in definitive
form will be issued in denominations of $1,000 and integral multiples thereof
and will be issued in registered form only, without coupons.
DTC has advised the Company and the Underwriter as follows: DTC is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities of its participants
and to facilitate the clearance and settlement of securities transactions among
its participants in such securities through electronic book-entry changes in
accounts of the participants including securities brokers and dealers (including
the Underwriter), banks, trust companies, clearing corporations and certain
other organizations, some of which (and/or their representatives) own DTC.
Access to DTC's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
DESCRIPTION OF CAPITAL STOCK
The following statements are subject to the detailed provisions of the
Company's Articles of Incorporation, do not purport to be complete, and are
qualified in their entirety by reference thereto.
The authorized capital stock of the Company consists of 114,375,000 Common
Shares, without par value, 69,454,773 of which were outstanding as of December
31, 1993, 19,125,000 Class A Shares, without par value, none of which are
currently outstanding, and 16,500,000 Trust Shares, $.0001 par value, none of
which are currently outstanding.
34
<PAGE> 36
COMMON SHARES
The holders of Common Shares are entitled to one vote for each share on all
matters voted upon by shareholders. The holders of Common Shares have no
preemptive or other rights to subscribe for additional securities of the
Company.
Each Common Share has the right to receive dividends when, as and if
declared by the Board of Directors out of assets legally available therefor,
provided, that no dividend may be declared with respect to the Common Shares
unless and until an identical dividend per share is declared with respect to the
Class A Shares. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Shares will be entitled to share with the holders
of the outstanding Class A Shares and Trust Shares according to the number of
Common Shares, Class A Shares and Trust Shares held by each such holder ratably
in the assets available for distribution after the payment of liabilities;
provided, however, that the holders of the outstanding Trust Shares shall only
be so entitled up to an amount equal to $.0001 per share for every share of
their holdings of Trust Shares.
RECLASSIFICATION OF SHARES
The Board of Directors of Terra Industries has the authority pursuant to
the Articles of Incorporation of Terra Industries to classify and reclassify,
without any further vote or action by the shareholders, any unissued stock of
any class by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualification, or
terms or conditions of redemption of the stock.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary is a general discussion of certain of the United
States federal tax considerations involved in the ownership, disposition and
conversion of LYONs. This summary does not consider all possible tax
consequences of the purchase, ownership or disposition of LYONs or Common Shares
and is not intended to reflect the individual tax position of any individual
Holder. It does not deal with Holders who: (i) acquired LYONs other than at
their original issuance for their original issue price, (ii) are involved in
special tax situations, such as the holding of LYONs or Common Shares as part of
a straddle with other investments or situations in which the functional currency
is not the U.S. dollar, or (iii) are subject to special treatment under the
federal income tax laws (such as dealers in securities, individual retirement
accounts and other tax-deferred accounts, life insurance companies and
tax-exempt organizations and, in the case of Non-U.S. Holders, certain
expatriates). This discussion is based on interpretations of the Internal
Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations
(including certain proposed Treasury Regulations) all as in effect as of the
date of this Prospectus and all of which are subject to change or different
interpretation by the Internal Revenue Service ("IRS") or the courts. Persons
considering the purchase of LYONs should consult their own tax advisors
regarding their particular circumstances and with respect to the effects of
state, local or non-United States tax laws to which they may be subject. For
purposes of this discussion, a U.S. Holder is an individual who is a citizen or
resident of the United States or a corporation that is organized under the laws
of the United States or any state thereof. A Non-U.S. Holder is a nonresident
alien individual as to the United States or a corporation organized outside the
United States, whose income, if any, arising from the ownership of LYONs or
Common Shares is not effectively connected with a U.S. trade or business carried
on by such individual or corporation.
The Company has been advised by its counsel, McDermott, Will & Emery, that
in its opinion the LYONs will be treated as indebtedness for federal income tax
purposes under existing law and the following discussion of tax consequences
assumes that the LYONs will be treated as indebtedness. However, the IRS is not
precluded from adopting a contrary position.
35
<PAGE> 37
U.S. HOLDERS
Original Issue Discount
The following summary is based in part upon the OID provisions of the Code
and certain Treasury Regulations issued thereunder. On February 2, 1994, new
comprehensive original issue discount regulations (the "New OID Regulations")
were finalized. Although the New OID Regulations technically apply only to debt
instruments issued on or after April 4, 1994, taxpayers may nevertheless rely
upon them with respect to the LYONs. The discussion below is based on the New
OID Regulations.
LYONs are being issued at a substantial discount from their Principal
Amount at Maturity. For federal income tax purposes, the difference between the
Issue Price (the initial offering price to the public at which a substantial
amount of the LYONs are to be sold) and the Principal Amount at Maturity of each
LYON constitutes OID. The LYONs will carry a substantial amount of OID. U.S.
Holders of the LYONs will be required to include OID in income periodically over
the term of the LYONs before receipt of the cash attributable to such income. A
holder of a LYON must include in gross income for federal income tax purposes
the sum of the daily portions of OID with respect to the LYON for each day
during the taxable year or portion of a taxable year on which such U.S. Holder
holds the LYON. The daily portion is determined by allocating to each day of the
accrual period a pro rata portion of an amount equal to the adjusted issue price
of the LYON at the beginning of the accrual period multiplied by the yield to
maturity of the LYON (determined by compounding at the close of each accrual
period and adjusted for the length of the accrual period). The accrual period
will be each six-month period (or shorter period from the date of original
issue) that ends on a day in the calendar year corresponding to the maturity
date of the LYON or the date six months before such maturity date. (Under the
New OID Regulations, it may be possible for a U.S. Holder to adopt one or more
shorter accrual periods.) The adjusted issue price of the LYON at the start of
any accrual period is the Issue Price of the LYON increased by the accrued OID
for each prior accrual period. Under these rules, U.S. Holders will have to
include in gross income increasingly greater amounts of OID in each successive
accrual period. A U.S. Holder's original tax basis for determining gain or loss
on the sale or other disposition of a LYON will be increased by any accrued OID
includable in such U.S. Holder's gross income.
Disposition, Conversion or Purchase by the Company
General. Any gain or loss realized upon a sale or other disposition of a
LYON (including a sale to or redemption by the Company that is paid in cash),
except as described below, will be capital gain or loss (which will be long-term
if a LYON is held for more than one year). The amount of any such gain or loss
will equal the difference between the sale or redemption proceeds and the U.S.
Holder's then tax basis in the LYON.
Conversion. A U.S. Holder's conversion of a LYON into Common Shares will
generally not be a taxable event (except with respect to cash received in lieu
of a fractional share). The U.S. Holder's obligation to include in gross income
the daily portions of OID with respect to a LYON will terminate on the date of
conversion. The U.S. Holder's basis in the Common Shares received on conversion
of a LYON will be the same as the U.S. Holder's basis in the LYON at the time of
conversion (exclusive of any tax basis allocable to a fractional share), and the
holding period for the Common Shares received on conversion (assuming each is
held as a capital asset) will include the holding period of the LYON converted,
except that the holding period of Common Shares allocable to accrued OID may
commence on the day following the date of conversion.
Tender of LYONs. If the U.S. Holder elects to exercise his option to tender
the LYONs to the Company on a Purchase Date or to the Company on a Change in
Control Purchase Date and the Company purchases the LYONs for cash only, such
purchase will be a taxable sale. The U.S. Holder would recognize gain or loss
upon the sale, measured by the difference between the amount of cash transferred
by the Company to the U.S. Holder in satisfaction of the Purchase Price or the
Change in Control Purchase Price and the U.S. Holder's tax basis in the tendered
LYON. Gain or loss recognized by the U.S. Holder will be capital gain or loss.
If the U.S. Holder elects to exercise his option to tender the LYONs to the
Company on a Purchase Date and the Company issues Common Shares in satisfaction
of all or part of the Purchase Price, the exchange of
36
<PAGE> 38
the LYON for Common Shares should qualify as a reorganization or an otherwise
nontaxable transaction for federal income tax purposes. If the Purchase Price is
paid solely in Common Shares, neither gain nor loss would be recognized by the
U.S. Holder, except as described below with respect to a fractional share. If
the Purchase Price is paid in a combination of Common Shares and cash (other
than cash received in lieu of a fractional share), gain (but not loss) realized
by the U.S. Holder would be recognized, but only to the extent such gain does
not exceed such cash. A U.S. Holder's tax basis in the Common Shares received in
the exchange will be the same as the U.S. Holder's tax basis in the LYON
tendered to the Company in exchange therefor (exclusive of any tax basis
allocable to a fractional share interest as described below), decreased by the
amount of cash (other than cash received in lieu of a fractional share), if any,
received in the exchange and increased by the amount of any gain recognized by
the U.S. Holder on the exchange (other than gain with respect to a fractional
share). The holding period for Common Shares received in the exchange will
include the holding period for the LYON tendered to the Company in exchange
therefor (assuming both are held as capital assets), except that the holding
period for Common Shares allocable to accrued OID may commence on the day
following the Purchase Date.
Under the present advance ruling policy of the IRS, cash received in lieu
of a fractional Common Share upon conversion or purchase of a LYON should be
treated as a payment in exchange for the fractional share interest in such
Common Shares. Accordingly, the receipt of cash in lieu of a fractional Common
Share should generally result in capital gain or loss (measured by the
difference between the cash received for the fractional share interest and the
U.S. Holder's tax basis in the fractional share interest).
Constructive Dividend
If at any time the Company makes a distribution of property to shareholders
that would be taxable to such shareholders as a dividend for federal income tax
purposes (for example, distributions of evidences of indebtedness or assets of
the Company, but generally not stock dividends or rights to subscribe for Common
Shares) and, pursuant to the anti-dilution provisions of the Indenture, the
Conversion Rate of the LYONs is increased, such increase may be deemed to be the
payment of a taxable dividend to U.S. Holders of LYONs. If the Conversion Rate
is increased at the discretion of the Company, such increase may be deemed to be
the payment of the taxable dividend to U.S. Holders of LYONs.
The Common Shares
Distributions, if any, paid on the Common Shares after an exchange, to the
extent made from current and accumulated earnings and profits of the Company, as
determined for federal income tax purposes, will be included in a U.S. Holder's
income as they are paid. Gain or loss realized on a sale or exchange of Common
Shares will equal the difference between the amount realized on such sale or
exchange and the Holder's adjusted tax basis in such shares. Such gain or loss
will generally be long-term capital gain or loss if the holding period for such
shares exceeds one year.
NON-U.S. HOLDERS
The following discussion is a summary of the principal United States
federal income and estate tax consequences resulting from the ownership of LYONs
or Common Shares by Non-U.S. Holders.
Withholding Tax on Payments of Principal and OID on LYONs
The payment of principal (including any OID included therein) of a LYON by
the Company or any paying agent of the Company to any Non-U.S. Holder or the
payment of OID upon conversion of a LYON will not be subject to withholding
United States federal income tax at source, provided that such Holder does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote and is not a controlled
foreign corporation that is related to the Company through stock ownership and
either (i) the beneficial owner of the LYON certifies to the Company or its
agent, under penalty of perjury, that it is not a U.S. Holder and provides its
name and address on United States Treasury Form W-8 (or a suitable substitute
form) or (ii) a securities clearing organization, bank or other financial
37
<PAGE> 39
institution that holds customers' securities in the ordinary course of its trade
or business (a "financial institution") and holds the LYON certifies under
penalty of perjury that such a Form W-8 (or suitable substitute form) has been
received from the beneficial owner by it or by a financial institution between
it and the beneficial owner and furnishes the payor with a copy thereof.
Gain on Disposition of LYONs and Common Shares
Provided that the Company is at no time a United States real property
holding corporation within the meaning of Section 897(c) of the Code (a
"USRPHC"), a Non-U.S. Holder will not be subject to United States federal income
tax on gain or income realized on the sale or exchange of a LYON, including,
subject to the preceding paragraph, the redemption, conversion or exchange of a
LYON for Common Shares, or the sale or exchange of Common Shares unless in the
case of an individual Non-U.S. Holder such Holder is present in the United
States for 183 days or more in the year of such sale, exchange or redemption and
either (a) has a "tax home" in the United States and the gain or income is not
attributable to an office or other fixed place of business maintained by such
Non-U.S. Holder outside of the United States, or (b) the gain from the
disposition is attributable to an office or other fixed place of business in the
United States. Even if the Company is determined to be a USRPHC, a Non-U.S.
Holder that is not present in the United States for 183 days or more or, even if
present in the United States for 183 days or more, that does not meet the
criteria set forth in clauses (a) or (b) in the preceding sentence will not be
subject to United States federal income tax on any such gain or income provided
that such Holder does not actually or constructively own more than five percent
of the Common Shares (including any Common Shares that may be received in
exchange for a LYON). Under present law the Company would not be a USRPHC so
long as during a specified five-year period the fair market value of its United
States real property interests is less than 50% of the sum of the fair market
value of its United States real property interests, interests in real property
located outside the United States and other of its assets that are used or held
for use in a trade or business. The Company believes that it is not presently a
USRPHC, but there can be no assurance that it will not become a USRPHC in the
future.
U.S. Federal Estate Tax
A LYON held by an individual who at the time of death is not a citizen or
resident of the United States (as specially defined for United States federal
estate tax purposes) will not be subject to United States federal estate tax if
the individual does not actually or constructively own 10 percent or more of the
total combined voting power of all classes of stock of the Company entitled to
vote and, at the time of the individual's death, if payments with respect to
such LYON would not have been effectively connected with the conduct by such
individual of a trade or business in the United States.
The Common Shares
Dividends, if any, paid on the Common Shares after an exchange to a
Non-U.S. Holder generally will be subject to withholding of U.S. federal income
tax at a 30 percent rate, subject to reduction for Non-U.S. Holders eligible for
the benefits of certain income tax treaties. Common Shares held by an individual
who at the time of death is not a citizen or resident of the United States (as
specially defined for United States federal estate tax purposes) will be subject
to United States federal estate tax, subject to reduction of such estate tax if
the individual is eligible for the benefits of an estate tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments on the LYONs made by the Company or any paying agent of the
Company, and payments of dividends on the Common Shares, to certain
non-corporate Holders of the LYONs or Common Shares generally will be subject to
information reporting and possibly to "backup withholding" at a rate of 31
percent. Information reporting and backup withholding will not apply, however,
to payments made on a LYON if the certification described in clause (i) under
"Non-U.S. Holders -- Withholding Tax on Payments of Principal and OID on LYONs"
above is received, provided in each case that the payor does not have actual
knowledge that the Holder is a U.S. Holder, or to payments made on the Common
Shares if such payments are subject to
38
<PAGE> 40
the 30% (or reduced treaty rate) withholding tax described above under "Non-U.S.
Holders -- the Common Shares."
Payment of proceeds from the sale of a LYON or Common Shares to or through
the United States office of a broker is subject to information reporting and
backup withholding unless the Holder or beneficial owner certifies as to its
non-United States status or otherwise establishes an exemption from information
reporting and backup withholding. Payment outside the United States of the
proceeds of the sale of a LYON or Common Shares to or through a foreign office
of a "broker" (as defined in applicable U.S. Treasury Department regulations)
will not be subject to information reporting or backup withholding, except that
if the broker is a U.S. person, a controlled foreign corporation for United
States tax purposes or a foreign person 50 percent or more of whose gross income
is from a United States trade or business, information reporting will apply to
such payment unless the broker has documentary evidence in its records that the
beneficial owner is not a U.S. Holder and certain other conditions are met, or
the beneficial owner otherwise establishes an exemption.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of the Purchase Agreement, to
purchase $210,000,000 aggregate principal amount at maturity of the LYONs from
the Company. The Purchase Agreement provides that the Underwriter will be
obligated to purchase all of the LYONs offered hereby, if any are purchased. The
Underwriter has advised the Company that it proposes to offer the LYONs directly
to the public at the offering price set forth on the front cover page of this
Prospectus. After the initial public offering, the offering price may be
changed. The LYONs are offered subject to receipt and acceptance by the
Underwriter and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted the Underwriter an option for 30 days after the
date of this Prospectus to purchase up to an additional $31,500,000 aggregate
principal amount at maturity of LYONs to cover over-allotments, if any, at the
initial public offering price less the underwriting discount, plus accrued OID,
if any, accrued from the Issue Date, computed on a semi-annual bond equivalent
basis.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriter may be required to make in respect thereof.
The Underwriter has previously marketed (and anticipates continuing to
market) securities of issuers under the trademark "LYONs." The LYONs offered by
the Company hereby contain certain terms and provisions which are different from
such other previously marketed LYONs, the terms and provisions of which also
vary. See "Description of LYONs."
The Company and Minorco have agreed with the Underwriter that, without the
Underwriter's prior written consent, for a period of 120 days following the sale
by the Company of the LYONs offered hereby, they will not directly or
indirectly, sell, offer to sell, contract to sell, transfer or otherwise dispose
of, directly or indirectly, any Common Shares, any securities convertible into
or exchangeable for Common Shares or any rights to purchase or acquire Common
Shares.
The Underwriter has, from time to time, performed various investment
banking and brokerage services for the Company for which it has received
customary fees.
LEGAL MATTERS
The validity of the LYONs and certain other legal matters relating to the
offering will be passed upon for the Company by McDermott, Will & Emery,
Chicago, Illinois. Certain legal matters relating to the offering will be passed
upon for the Underwriter by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. McDermott,
Will & Emery and Fried, Frank, Harris, Shriver & Jacobson will rely upon the
opinion of Piper & Marbury, Baltimore, Maryland, as to certain matters of
Maryland law.
39
<PAGE> 41
EXPERTS
The Consolidated Financial Statements and schedules of the Company as of
December 31, 1993 and 1992, and for each of the years then ended, included
elsewhere herein and incorporated by reference in this Prospectus and in the
Registration Statement in which this Prospectus is included have been audited by
Deloitte & Touche, independent certified public accountants, as indicated in
their reports thereon, which appear elsewhere herein and incorporated by
reference herein. The financial statements and schedules audited by Deloitte &
Touche have been included herein in reliance on their reports given 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 or incorporated
by reference in this Prospectus and in the Registration Statement in which this
Prospectus is included have been audited by Price Waterhouse, 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 have been included herein in reliance on their reports given
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3, of which this Prospectus constitutes a part (together with any amendments
thereto, the "Registration Statement"), under the Securities Act with respect to
the LYONs offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission and to which reference is hereby
made for further information with respect to the Company and the LYONs offered
hereby. Statements made in this Prospectus concerning the contents of any
documents referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, its Current Report on Form 8-K dated April 8, 1993 (as amended by Form
8 dated June 9, 1993), its Current Reports on Form 8-K and Form 8-K/A-1 dated
December 31, 1993, and all other reports filed pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
made hereby are incorporated herein by reference.
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 an amendment or supplement hereto which also 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.
40
<PAGE> 42
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................ F-2
Consolidated Statements of Financial Position as of December 31, 1993
and 1992.............................................................. F-3
Consolidated Statements of Income for the years ended December 31, 1993,
1992 and 1991......................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1993, 1992 and 1991................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE> 43
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
Omaha, Nebraska
February 1, 1994
F-2
<PAGE> 44
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1993 1992
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and short-term investments...................................... $ 65,102 $ 121,789
Accounts receivable, less allowance for doubtful accounts of $5,788
and $6,427......................................................... 122,774 71,995
Inventories.......................................................... 244,995 198,621
Deferred tax asset -- current........................................ 26,011 22,660
Other current assets................................................. 10,586 7,611
--------- ---------
Total current assets............................................ 469,468 422,676
--------- ---------
Equity and other investments......................................... 2,218 480
Property, plant and equipment, net................................... 110,670 91,969
Deferred tax asset -- non-current.................................... 24,742 23,599
Net assets of discontinued operations................................ 3,488 32,369
Other assets......................................................... 23,896 9,099
--------- ---------
Total assets.................................................... $ 634,482 $ 580,192
--------- ---------
LIABILITIES
Debt due within one year............................................. $ 9,636 $ 12,508
Accounts payable..................................................... 99,886 86,941
Accrued and other liabilities........................................ 128,659 107,410
--------- ---------
Total current liabilities....................................... 238,181 206,859
--------- ---------
Long-term debt....................................................... 119,061 121,171
Deferred income taxes................................................ 451 --
Other liabilities.................................................... 33,809 30,686
Commitments and contingencies (Note 11).............................. -- --
--------- ---------
Total liabilities............................................... 391,502 358,716
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 114,375 shares; 69,455 and 65,346 shares
outstanding 1993 and 1992, respectively......................... 122,257 83,931
Trust Shares, authorized 16,500 shares; none and 4,010 shares
outstanding 1993 and 1992, respectively......................... -- 22,312
Paid-in capital...................................................... 516,128 531,609
Cumulative translation adjustment.................................... (488) --
Accumulated deficit.................................................. (394,917) (416,376)
--------- ---------
Total stockholders' equity...................................... 242,980 221,476
--------- ---------
Total liabilities and stockholders' equity...................... $ 634,482 $ 580,192
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE> 45
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales.............................................. $1,212,510 $1,062,045 $1,003,766
Other income, net...................................... 25,491 20,146 18,831
---------- ---------- ----------
1,238,001 1,082,191 1,022,597
---------- ---------- ----------
COST AND EXPENSES
Cost of sales.......................................... 1,021,187 904,246 849,684
Depreciation and amortization.......................... 15,470 14,994 14,399
Selling, general and administrative expense............ 161,791 137,232 132,845
Equity in unconsolidated affiliates.................... (2,275) -- --
Interest income........................................ (3,261) (3,084) (1,789)
Interest expense....................................... 12,944 10,617 14,352
---------- ---------- ----------
1,205,856 1,064,005 1,009,491
---------- ---------- ----------
Income from continuing operations before income
taxes............................................... 32,145 18,186 13,106
Income tax provision................................... 9,300 7,757 1,073
---------- ---------- ----------
Income from continuing operations...................... 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........................ 22,845 8,764 (156,775)
Extraordinary gain on early retirement of debt......... -- -- 5,115
Cumulative effect of accounting changes................ -- 22,265 --
---------- ---------- ----------
NET INCOME (LOSS)........................................ $ 22,845 $ 31,029 $ (151,660)
---------- ---------- ----------
Weighted average number of shares outstanding............ 69,064 69,103 67,103
---------- ---------- ----------
---------- ---------- ----------
EARNINGS (LOSS) PER SHARE:
Continuing operations.................................. $ 0.33 $ 0.15 $ 0.18
Discontinued operations................................ -- (0.02) (2.51)
---------- ---------- ----------
Income (loss) before extraordinary items............... 0.33 0.13 (2.33)
Extraordinary gain on early retirement of debt......... -- -- 0.07
Cumulative effect of accounting changes................ -- 0.32 --
---------- ---------- ----------
Net Earnings (Loss)...................................... $ 0.33 $ 0.45 $ (2.26)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE> 46
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $ 22,845 $ 31,029 $(151,660)
Adjustments to reconcile income from continuing operations to
net cash (used in) provided by operating activities:
Depreciation and amortization.............................. 15,470 14,994 14,399
Income taxes............................................... 5,500 6,313 (345)
Cumulative effect of accounting changes.................... -- (22,265) --
Loss from discontinued operations.......................... -- 1,665 168,808
Gain on early retirement of debt........................... -- -- (5,115)
Unfunded retiree medical costs............................. 723 1,161 --
Equity in unconsolidated affiliates........................ (2,275) -- --
Other non-cash items....................................... 713 -- --
Change in current assets and liabilities, excluding working
capital purchased/sold:
Accounts receivable........................................ (24,540) (1,764) (30,847)
Inventories................................................ (6,718) (32,136) (30,452)
Other current assets....................................... (2,893) (875) 917
Accounts payable........................................... (9,945) (2,071) 12,693
Accrued and other liabilities.............................. 2,452 38 20,048
Other...................................................... (2,354) 684 (4,891)
-------- -------- ---------
NET CASH USED IN OPERATING ACTIVITIES........................ (1,022) (3,227) (6,445)
-------- -------- ---------
INVESTING ACTIVITIES
Proceeds from asset sales.................................. 24,391 23,065 124,983
Discontinued operations.................................... 5,630 (5,504) (42,755)
Purchase of property, plant and equipment.................. (21,620) (17,620) (12,728)
Acquisitions............................................... (58,260) -- --
Dividends of unconsolidated affiliates..................... 537 -- --
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.......... (49,322) (59) 69,500
-------- -------- ---------
FINANCING ACTIVITIES
Net short-term borrowings.................................. 7,313 -- --
Retirement of convertible debentures....................... -- -- (14,430)
Proceeds from issuance of long-term debt................... 250 30,000 --
Principal payments on long-term debt....................... (12,545) (5,842) (5,832)
Dividends.................................................. (1,386) -- --
Stock issuance/repurchase -- net........................... 513 -- --
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.......... (5,855) 24,158 (20,262)
-------- -------- ---------
Foreign Exchange Effect on Cash and Short-Term Investments... (488) -- --
-------- -------- ---------
(DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS....... (56,687) 20,872 42,793
-------- -------- ---------
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR......... 121,789 100,917 58,124
-------- -------- ---------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR............... $ 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-5
<PAGE> 47
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON CLASS A TRUST PAID-IN TRANSLATION ACCUMULATED
SHARES SHARES SHARES CAPITAL ADJUSTMENT DEFICIT TOTAL
-------- -------- -------- -------- ----------- ----------- ---------
(IN THOUSANDS)
<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
-------- -------- -------- -------- ----------- ----------- ---------
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-6
<PAGE> 48
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.
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.
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
F-7
<PAGE> 49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 31,
--------------------------
1993 1992
---------- ------------
(IN THOUSANDS, EXCEPT
PER-SHARE DATA)
<S> <C> <C>
Revenues................................................ $1,351,000 $1,282,800
Income before extraordinary items and cumulative effect
of accounting changes................................. 25,500 14,300
Net income.............................................. 25,500 36,600
Net income per share.................................... 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
F-8
<PAGE> 50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $ 22,983 $ 14,770
Finished goods......................................... 222,012 183,851
Total............................................. $244,995 $198,621
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following at December
31:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings..................................... $ 66,343 $ 59,589
Plant and equipment.................................... 179,095 152,766
--------- ---------
245,438 212,355
Less accumulated depreciation and amortization......... (134,768) (120,386)
--------- ---------
Total............................................. $ 110,670 $ 91,969
--------- ---------
--------- ---------
</TABLE>
8. DEBT DUE WITHIN ONE YEAR
Debt due within one year consisted of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings.................................... $ 7,313 $ --
Current maturities of long-term debt..................... 2,323 12,508
-------- --------
Total............................................... $ 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. 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.
F-10
<PAGE> 52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Customer deposits........................................ $ 50,714 $ 41,714
Payroll and benefit costs................................ 17,072 15,167
Income taxes............................................. 17,025 9,551
Other.................................................... 43,848 40,978
-------- --------
Total............................................. $128,659 $107,410
-------- --------
-------- --------
</TABLE>
10. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
8.5% Convertible Subordinated Debentures, due 2012...................... $ 72,057 $ 72,057
Unsecured Senior Notes, 8.48%, due 2005................................. 30,000 30,000
Industrial Development Revenue Bonds bearing interest at an average
6.78% with increasing payments from 1994 to 2011...................... 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....................... 8,500 10,500
Bank Note, floating rate repaid January, 1993........................... -- 5,258
Other................................................................... 1,472 1,379
-------- --------
121,384 133,679
Less current maturities................................................. (2,323) (12,508)
-------- --------
Total............................................................ $119,061 $121,171
-------- --------
-------- --------
Estimated Fair Value.................................................... $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.
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. 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.
F-11
<PAGE> 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-12
<PAGE> 54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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-13
<PAGE> 55
NOTES TO THE 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......................... 1,02 -- (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 options may be granted under the 1983 and 1987 Plan.
Awards to a maximum of 2.5 million Common Shares may be
F-14
<PAGE> 56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 UNDER PRICE RANGE
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-15
<PAGE> 57
NOTES TO THE 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 ACCUMULATED PLANS WITH ACCUMULATED
ASSETS IN EXCESS BENEFITS IN ASSETS IN EXCESS BENEFITS IN
OF ACCUMULATED EXCESS OF 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-16
<PAGE> 58
NOTES TO THE 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>
F-17
<PAGE> 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-18
<PAGE> 60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-19
<PAGE> 61
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE LYONS IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation by Reference............ 2
Prospectus Summary.................... 3
Investment Considerations............. 7
The Company........................... 9
Use of Proceeds....................... 9
Common Shares Price Range and
Dividends........................... 10
Capitalization........................ 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Business.............................. 19
Description of LYONs.................. 23
Book-Entry System..................... 33
Description of Capital Stock.......... 34
Certain United States Federal Tax
Considerations...................... 35
Underwriting.......................... 39
Legal Matters......................... 39
Experts............................... 40
Additional Information................ 40
Incorporation of Certain Documents by
Reference........................... 40
Index to Financial Information........ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$210,000,000
[LOGO]
LIQUID YIELD OPTION(TM) NOTES
DUE 2009
(ZERO COUPON-SENIOR)
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
, 1994
TM Trademark of Merrill Lynch & Co., Inc.
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate (except for the Securities and
Exchange Commission Registration Fee and NYSE Fee) of all expenses, other than
the underwriting discount, payable by the Company in connection with the
issuance and sale of securities being registered.
<TABLE>
<S> <C>
SEC Registration Fee................................................ $43,786
NYSE Filing Fee..................................................... 13,198
NASD Filing Fee..................................................... *
Trustee Fees........................................................ *
Printing Costs...................................................... *
Engraving Costs..................................................... *
Accounting Fees and Expenses........................................ *
Legal Fees and Expenses (not including Blue Sky).................... *
Blue Sky Fees and Expenses.......................................... *
Miscellaneous....................................................... *
-------
Total........................................................ $ *
-------
-------
</TABLE>
- -------------------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Maryland General Corporate Law provides the following with respect to the
indemnification of directors, officers, employees and agents:
(a) Any director made a party to any proceeding in its capacity as a
director, may be indemnified by registrant against certain liabilities unless it
is established that: (i) The act or omission of the director was material to
such proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; or (ii) the director actually received an improper
benefit or (iii) in the case of criminal proceedings the director had reasonable
cause to believe that the act or omission was unlawful.
(b) A director who performs his duties in accordance with the standard of
care required of directors by Maryland law has no liability by reason of being
or having been director of a corporation.
(c) The Articles of Incorporation of the registrant may expand or limit the
liability of its directors and officers to the corporation or its Stockholders
for money damages except in circumstances where it is proved that such person
received an improper benefit or such person actions, or failure to act, was the
result of active or deliberate dishonesty.
The indemnification provided by Maryland General Corporate Law and the
registrant's By-Laws is not exclusive of any other rights to which a director or
officer of the registrant may be entitled. The registrant also carries
directors' and officers' liability insurance.
The Articles of Incorporation of registrant provide the following with
respect to indemnification of officers and directors; (a) the Company shall
indemnify (i) its directors to the fullest extent provided by the general laws
of the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures provided by such laws; (ii) its officers to the
same extent as it shall indemnify its directors; and (iii) its officers who are
not directors to such further extent as shall be authorized by the Board of
Directors and be consistent with law.
The foregoing shall not limit the authority of the Company to indemnify
other employees and agents consistent with law.
II-1
<PAGE> 63
The proposed form of Purchase Agreement for the LYONs will contain
provisions under which the Underwriter agree to indemnify the directors and
officers of the registrant against certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1) Form of Purchase Agreement*
4) Form of Indenture**
5) Opinion re Legality*
8) Opinion re Tax Matters (included in Exhibit 5)*
12) Statement re Computation of Ratio of Earnings to Fixed Charges**
23.1) Consent of Deloitte & Touche
23.2) Consent of Price Waterhouse
23.3) Consent of KPMG Peat Marwick Thorne
23.4) Consent of McDermott, Will & Emery (included in Exhibit 5)*
23.5) Consent of Piper & Marbury*
24) Powers of Attorney**
25) Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of
1939 of NationsBank of Texas, N.A.**
</TABLE>
- -------------------------
* To be supplied by Amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions described under Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sioux City, State of Iowa, on March 9,
1994.
TERRA INDUSTRIES INC.
By: /S/ GEORGE H. VALENTINE
George H. Valentine
Title: Vice President, General
Counsel
and Corporate Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------ --------------
<S> <C> <C>
* Chairman of the Board March 9, 1994
Reuben F. Richards
* Chief Executive Officer, President March 9, 1994
Burton M. Joyce and Director (Principal Executive
Officer)
* Vice President, Chief Financial March 9, 1994
Francis G. Meyer Officer (Principal Financial Officer
and
Principal Accounting Officer)
* Director March 9, 1994
Carol L. Brookins
* Director March 9, 1994
Edward M. Carson
* Director March 9, 1994
David E. Fisher
* Director March 9, 1994
Basil T.A. Hone
* Director March 9, 1994
John R. Norton III
* Director March 9, 1994
Henry R. Slack
*By: /S/ GEORGE H. VALENTINE
George H. Valentine
Attorney-in-Fact
</TABLE>
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------------ ----------------------------------------------------------------------- --------
<C> <S> <C>
(1) Form of Purchase Agreement*............................................
4) Form of Indenture**....................................................
5) Opinion re Legality*...................................................
8) Opinion re Tax Matters (included in Exhibit 5)*........................
12) Statement re Computation of Ratios Of Earnings to Fixed Charges**......
23.1) Consent of Deloitte & Touche...........................................
23.2) Consent of Price Waterhouse............................................
23.3) Consent of KPMG Peat Marwick Thorne....................................
23.4) Consent of McDermott, Will & Emery (included in Exhibit 5)*............
23.5) Consent of Piper & Marbury*............................................
24) Powers of Attorney**...................................................
25) Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of NationsBank of Texas, N.A.**..................
</TABLE>
- -------------------------
* To be supplied by Amendment
** Previously filed
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 33-52493 of Terra Industries Inc. on Form S-3 of our
reports dated February 1, 1994, appearing in and incorporated by reference in
the Annual Report on Form 10-K of Terra Industries Inc. for the year ended
December 31, 1993, and our report dated February 26, 1994 on our audit of the
financial statements of Asgrow Florida Company ( a wholly-owned subsidiary of
the Upjohn Company) as of and for the year ended December 31, 1993, which
report is included in Terra Industries Inc.'s current report on Form 8-K/A-1,
dated December 31, 1993. We also consent to the use of our report dated
February 1, 1994, appearing in the Prospectus, which is part of this
Registration Statement and to the reference to us under the heading "Experts"
in such Prospectus.
Deloitte & Touche
Omaha, Nebraska
March 8, 1994
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 1 to the Registration Statement on Form
S-3 of our report dated February 13, 1992 appearing on page S-3 of Terra
Industries Inc. Annual Report on Form 10-K for the year ended December 31,
1993. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
Price Waterhouse
New York, New York
March 8, 1994
<PAGE> 1
KPMG PEAT MARWICK THORNE EX 23.3
Chartered Accountants
Suite: 1400, 130 Dufferin Avenue
P.O. Box 2305
London, Ontario N6A sF3
Telephone (518) 672-4890
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of Terra Industries Inc. of our report dated May 17, 1993
on our audits of the financial statements of ICI Nitrogen Products a business
unit of ICI Canada Inc. as of December 31, 1992 and 1991, and for each of
the two years in the period ended December 31, 1992, which report is included
in Terra Industries Inc. Amendent No. 1 to Form 8-K, dated June 9, 1993.
/s/ KPMG Peat Marwick Thorne
Chartered Accountants
London, Canada
March 7, 1994
