<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1145429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TERRA CENTRE
P.O. BOX 6000
600 FOURTH STREET
SIOUX CITY, IOWA 51102-6000
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (712) 277-1340
------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 1995, the following shares of the registrant's stock
were outstanding:
Common Shares, without par value 81,017,652 shares
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Cash and short-term investments $ 133,145 $ 158,384 $ 34,520
Accounts receivable, less allowance for
doubtful accounts of $9,739, $8,224 and $7,663 213,881 157,026 176,390
Inventories 538,094 332,952 389,649
Deferred tax asset -- current 49,641 43,992 30,088
Other current assets 53,566 31,069 12,945
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 988,327 723,423 643,592
- -----------------------------------------------------------------------------------------------
Equity and other investments 12,764 14,181 1,057
Property, plant and equipment, net 569,348 552,843 116,583
Deferred tax asset -- non-current --- --- 22,595
Excess of cost over net assets of acquired businesses 320,908 320,559 14,970
Partnership distribution reserve fund 18,480 18,480 ---
Net assets of discontinued operations --- --- 3,722
Other assets 54,600 58,484 14,985
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $1,964,427 $1,687,970 $ 817,504
===============================================================================================
LIABILITIES
Debt due within one year $ 76,009 $ 67,658 $ 79,396
Accounts payable 301,039 181,050 251,280
Accrued and other liabilities 295,316 200,774 162,298
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 672,364 449,482 492,974
- -----------------------------------------------------------------------------------------------
Long-term debt 512,820 511,706 45,981
Deferred income taxes 93,656 84,246 442
Other liabilities 53,316 53,477 34,497
Minority interest 182,183 170,630 ---
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,514,339 1,269,541 573,894
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 81,018, 80,965 and 70,327 shares 133,800 133,770 123,320
Paid-in capital 630,241 630,111 523,064
Cumulative translation adjustment (1,093) (1,259) (942)
Accumulated deficit (312,860) (344,193) (401,832)
- -----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 450,088 418,429 243,610
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,964,427 $1,687,970 $ 817,504
===============================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 2
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
REVENUES
Net sales $434,121 $255,264
Other income, net 9,219 4,240
- -------------------------------------------------------------------------
443,340 259,504
- -------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 304,281 223,153
Selling, general and administrative expense 56,045 43,583
Equity in loss of unconsolidated affiliates 1,197 554
Interest income (2,666) (856)
Interest expense 14,007 2,935
Minority interest 16,593 ---
- -------------------------------------------------------------------------
389,457 269,369
- -------------------------------------------------------------------------
Income (loss) from operations before income taxes 53,883 (9,865)
Income tax provision (benefit) 20,930 (3,580)
- -------------------------------------------------------------------------
Income (loss) before extraordinary item 32,953 (6,285)
Extraordinary loss on early retirement of debt --- (2,614)
Cumulative effect of accounting changes --- 3,376
- -------------------------------------------------------------------------
NET INCOME (LOSS) $ 32,953 $ (5,523)
=========================================================================
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 0.41 $ (0.09)
Extraordinary loss on early retirement of debt --- (0.04)
Cumulative effect of accounting changes --- 0.05
- -------------------------------------------------------------------------
NET INCOME (LOSS) $ 0.41 $ (0.08)
=========================================================================
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING 81,215 69,961
=========================================================================
CASH DIVIDENDS DECLARED PER SHARE $ 0.02 $ 0.02
=========================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 3
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Cumulative
Common Paid-In Translation Accumulated
Shares Capital Adjustment Deficit Total
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Balance at December 31, 1993 $122,257 $516,128 $ (488) $(394,917) $242,980
Stock Incentive Plan 332 1,760 --- --- 2,092
Conversion of Convertible
Debentures 731 5,176 --- --- 5,907
Translation Adjustment --- --- (454) --- (454)
Dividends --- --- --- (1,392) (1,392)
Net loss --- --- --- (5,523) (5,523)
- ---------------------------------------------------------------------------------------
Balance at March 31, 1994 $123,320 $523,064 $ (942) $(401,832) $243,610
=======================================================================================
Cumulative
Common Paid-In Translation Accumulated
Shares Capital Adjustment Deficit Total
- ---------------------------------------------------------------------------------------
Balance at December 31, 1994 $133,770 $630,111 $(1,259) $(344,193) $418,429
Stock Incentive Plan 30 130 --- --- 160
Translation Adjustment --- --- 166 --- 166
Dividends --- --- --- (1,620) (1,620)
Net income --- --- --- 32,953 32,953
- ---------------------------------------------------------------------------------------
Balance at March 31, 1995 $133,800 $630,241 $(1,093) $(312,860) $450,088
=======================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 4
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1995 1994
- ---------------------------------------------------------- ---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 32,953 $ (5,523)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,174 4,456
Income taxes 3,761 (2,759)
Cumulative effect of accounting changes --- (3,376)
Minority interest in earnings 16,593 ---
Other non-cash items (4,060) 3,765
Changes in current assets and liabilities,
excluding working capital purchased/sold:
Accounts receivable (59,703) (53,478)
Inventories (201,662) (143,609)
Other current assets (4,489) (955)
Accounts payable 119,989 151,361
Accrued and other liabilities 83,071 42,870
Other (2,744) (489)
- ---------------------------------------------------------- --------- ---------
Net cash used in operating activities (117) (7,737)
- ---------------------------------------------------------- --------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (10,340) (11,306)
Purchase of property, plant and equipment (14,007) (10,463)
Discontinued operations (478) (988)
Proceeds from investments 246 573
- ---------------------------------------------------------- --------- ---------
Net cash used in investing activities (24,579) (22,184)
- ---------------------------------------------------------- --------- ---------
FINANCING ACTIVITIES
Net short-term borrowings 7,199 69,758
Principal payments on long-term debt (1,403) (67,171)
Debt issuance costs --- (2,533)
Stock issuance/repurchase - net 155 1,131
Distribution to minority interests (5,040) ---
Dividends (1,620) (1,392)
- ---------------------------------------------------------- --------- ---------
Net cash used in financing activities (709) (207)
- ---------------------------------------------------------- --------- ---------
Foreign exchange effect on cash and short-term investments 166 (454)
- ----------------------------------------------------------
Decrease in cash and short-term investments (25,239) (30,582)
Cash and short-term investments at beginning of period 158,384 65,102
- ---------------------------------------------------------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 133,145 $ 34,520
========================================================== ========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 5
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto contain all adjustments necessary to summarize fairly the financial
position of Terra Industries Inc. and all majority-owned subsidiaries (the
"Corporation") and the results of the Corporation's operations for the
periods presented. Because of the seasonal nature of the Corporation's
operations and effects of weather-related conditions in several of its
marketing areas, earnings of any single reporting period should not be
considered as indicative of results for a full year. These statements
should be read in conjunction with the Corporation's 1994 Annual Report to
Stockholders.
2. Per-share data are based on the weighted average number of Common Shares
that would become outstanding after allowing for the exercise of outstanding
stock options.
3. Inventories consisted of the following:
March 31, December 31, March 31,
(in thousands) 1995 1994 1994
------------------------------- -------- -------- --------
Raw materials $ 44,855 $ 38,988 $ 21,952
Finished goods 493,239 293,964 367,697
------------------------------- -------- -------- --------
Total $538,094 $332,952 $389,649
=============================== ======== ======== ========
4. The Corporation and certain of its subsidiaries are involved in various
legal actions and claims, including environmental matters, arising during
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 results of
operations, financial position or cash flows of the Corporation.
5. On October 20, 1994, the Corporation acquired Agricultural Minerals and
Chemicals Inc. ("AMCI") for $400 million plus an estimated working capital
adjustment of $100 million. The Consolidated Statements of Operations
include the operating results of AMCI subsequent to the acquisition. AMCI,
through its subsidiaries manufactured nitrogen-based fertilizers and
industrial use products, and methanol. The subsidiaries controlled by the
Corporation as a result of the AMCI acquisition include Terra Nitrogen
Corporation ("TNC") and Beaumont Methanol, Limited Partnership ("BMLP").
TNC has a 60.2 percent ownership interest in Terra Nitrogen Company, L.P.
("TNCLP"), formerly Agricultural Minerals Company, L.P., which operates
nitrogen products manufacturing facilities in Verdigris, Oklahoma and
Blytheville, Arkansas through an investment in an operating partnership,
Terra Nitrogen, Limited Partnership ("TNLP"), formerly Agricultural
Minerals, Limited Partnership. BMLP operates a methanol production facility
in Beaumont, Texas. The excess of purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over 18 years
which is estimated to be the average remaining useful life of the
manufacturing plants acquired.
To finance the acquisition of AMCI, the Corporation issued 9.7 million
Common Shares for aggregate net proceeds of approximately $113 million,
entered into credit arrangements to issue $310 million of long-term debt,
and refinanced certain bank debt and credit lines of the Corporation, AMCI
and AMCI's subsidiaries aggregating $260 million of which $152 million in
borrowings were outstanding. The Corporation used $40 million of the new
debt issue to refinance short-term bank debt. The credit agreement provides
for a $175 million revolving line of credit for use by Terra International,
Inc. and BMLP and a $50 million revolving line of credit for TNLP. As a
result of the acquisition of AMCI, the Corporation also assumed AMCI's
6
<PAGE>
obligations under its $175 million in aggregate principal of 10.75% Senior
Notes due 2003 (the "Senior Notes").
The following table represents unaudited pro forma summary results of
operations as if the acquisition of AMCI had occurred at the beginning of
1994:
Three Months Ended
(in thousands, except per-share data) March 31, 1994
------------------------------------- ------------------
Revenues $356,088
Loss before extraordinary item $ (2,469)
Net loss $ (1,707)
Net loss per share $ (0.02)
------------------------------------- ------------------
The pro forma operating results were adjusted to include depreciation of the
fair value of capital assets acquired based on estimated useful lives at the
acquisition date, amortization of intangibles, reduction of incentive
compensation expense for plans terminated at acquisition, interest expense
on the acquisition borrowings, the issuance of common stock 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 periods, and is not intended to be a projection of future
operating results or trends.
On September 15, 1994, the Corporation acquired a 34% interest in Royster-
Clark, Inc. for $12 million in cash. Royster-Clark is a 100 location
distributor of crop input and protection products in the mid-Atlantic
region. The Corporation accounts for its investment under the equity method
and its share of Royster-Clark's results of operations are included in
equity in earnings of unconsolidated affiliates.
6. BMLP entered into a methanol hedging agreement (the Methanol Hedging
Agreement) effective October 1994. Pursuant to the agreement, BMLP received
$4 million in cash and agreed to make payments to the extent that average
methanol prices exceed the sum of $0.65 per gallon plus 0.113 times the
average spot price index, in cents per MMBtu for natural gas during the
periods October 20, 1994 to December 31, 1995, calendar year 1996, and
calendar year 1997. The quantities subject to the agreement for each of
these periods are 155.5 million, 140 million and 130 million gallons,
respectively. BMLP's methanol production facility has a production capacity
of 280 million gallons of methanol per year. Payments are due five days
after the end of each period.
The $4 million received pursuant to the Methanol Hedging Agreement is being
recognized as income over the term of the agreement. Accruals for payments
are recorded as a reduction of revenue. As of March 31, 1995, $31.3 million
has been recorded as payable under the Methanol Hedging Agreement based on
average prices, for the period October 20, 1994 through March 31, 1995. The
actual amount that will be paid is dependent upon average methanol and
natural gas prices during each of the periods. The fair value of the
agreement, representing the amount that BMLP would expect to pay at
March 31, 1995 to liquidate the agreement for its remaining term, is
approximately $5 million based on a management estimate.
7. The Corporation's natural gas procurement policy is to fix or cap the price
of approximately 40-80% of its natural gas requirements for a 12-month
period through various forward pricing techniques. Depending on market
conditions, the Corporation may also fix or cap the price of natural gas for
longer periods of time. The Corporation has entered into forward pricing
positions for the purchase of natural gas amounting to
7
<PAGE>
approximately 65% of natural gas volumes for the remainder of 1995, 42% for
1996 and 22% for 1997. As a result of its policies, the Corporation has
limited the potential adverse financial impact of natural gas price
increases during the forward pricing period, but conversely, if natural gas
prices were to fall, the Corporation will incur higher costs. Unrealized
losses from forward pricing positions totaled $10 million as of March 31,
1995.
8. During March 1994, the Corporation redeemed $72.1 million of 8.5%
Convertible Subordinated Debentures due 2012 at the required redemption
price of 103.4% of par value. During the 20-day notice period, holders of
$5.9 million chose to convert their debentures into Common Stock of the
Corporation at the conversion price of $8.083 per Common Share. The
Corporation issued 730,768 Common Shares and paid cash for fractional
shares. The Corporation funded the redemption from available cash balances
and short-term credit lines.
9. During March 1994, the Corporation entered into an agreement to sell its
receivables. Under this agreement, which expires March 31, 1996, the
Corporation may sell an undivided interest in a designated pool of its
accounts receivable and receive up to $50 million in proceeds. Undivided
interests in new receivables may be sold as collections reduce previously
sold interests. The undivided interests are sold at a discount that is
included in selling, general and administrative expenses in the Consolidated
Statement of Operations. As of March 31, 1995, $50.0 million in proceeds
had been received under this agreement.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED MARCH 31, 1995, COMPARED WITH
QUARTER ENDED MARCH 31, 1994
CONSOLIDATED RESULTS
The Corporation reported income of $33 million, or $0.41 per share, on revenues
of $443.3 million for the first quarter of 1995 compared with a loss before
extraordinary items of $6.3 million or $0.09 per share on revenues of $259.5
million in 1994. The 1995 results include the operations formerly owned by
Agricultural Minerals and Chemicals Inc. ("AMCI"), which was acquired by the
Corporation on October 20, 1994. The AMCI acquisition added approximately $144
million to net revenue and $25 million to operating income during the first
quarter 1995. Excluding the impact of the acquisition, revenues increased $40
million, or 15%, over the comparable period in 1994 and operating income
increased $14.2 million, primarily the result of improved selling prices for
nitrogen products caused by tight supplies.
The Corporation operates in three business segments: Distribution, Nitrogen
Products and Methanol. The Distribution segment includes sales of products
purchased from manufacturers, including the Corporation, and resold by the
Corporation. Distribution revenues are derived primarily from grower and dealer
customers through sales of chemicals, fertilizers, seed and related services.
The Nitrogen Products segment represents only those operations directly related
to the wholesale sales of nitrogen products produced at the Corporation's
ammonia manufacturing and upgrading facilities. The Methanol segment represents
wholesale sales of methanol produced at the Corporation's two methanol
manufacturing facilities.
Total revenues and operating income (loss) for the three-month periods ended
March 31, 1995 and 1994 were as follows:
Pro Forma
(in thousands) 1995 1994 1994
- -------------------------------------------- --------- --------- ---------
[S] [C] [C] [C]
REVENUES:
Distribution $238,454 $206,478 $206,478
Nitrogen Products 147,188 114,670 54,156
Methanol 65,874 36,096 ---
Other - net (8,176) (1,156) (1,130)
- -------------------------------------------- -------- -------- --------
$443,340 $356,088 $259,504
======== ======== ========
OPERATING INCOME (LOSS):
Distribution $(14,635) $(12,899) $(12,899)
Nitrogen Products 57,384 20,751 6,988
Methanol 39,608 8,611 ---
Other expense - net (540) (1,916) (1,875)
- -------------------------------------------- -------- -------- --------
81,817 14,547 (7,786)
Interest expense - net (11,341) (12,700) (2,079)
Minority interest (16,593) (5,726) ---
- -------------------------------------------- -------- -------- --------
Total from operations $ 53,883 $ (3,879) $ (9,865)
============================================ ======== ======== ========
9
<PAGE>
The pro forma results of operations have been prepared to give effect to the
Corporation's (i) acquisition of AMCI, (ii) issuance of 9.7 million Common
Shares, and (iii) borrowing under a new credit agreement entered into in
connection with the acquisition, assuming that all such transactions had
occurred on January 1, 1994. The pro forma financial data is presented for
informational purposes only and are not necessarily indicative of the results
that actually would have been obtained if the transactions had occurred on
January 1, 1994. In addition, the pro forma results are not intended to be a
projection of future operating results or trends.
DISTRIBUTION
Distribution revenues of $238.5 million during the 1995 first quarter, increased
$32 million, or 15%, over 1994 results. Approximately $10 million of the growth
relates to a 7.6% increase in chemical sales resulting principally from sales to
new dealer affiliates and expansion into new locations. Growth in the
Corporation's own brand of Riverside chemical products accounted for $5 million
of the increase. Distributed fertilizer sales increased $8.5 million and seed
and other sales and services increased $13.5 million as a result of expansion of
the distribution network.
The operating loss for the Distribution business was $14.6 million in 1995
compared with $12.9 million in 1994. Higher volumes added $5.9 million to
operating income which was more than offset by a $7.6 million increase in
selling and general and administrative expenses. The increased expenses
included an increase in compensation costs of $2.8 million due to additional
personnel resulting from expansion activities and normal wage increases. In
addition, equipment leasing, facilities costs, and operating and maintenance
expenses increased $2.5 million. The Distribution segment's operations are
seasonal, coincident with crop plantings, which generally results in an
operating loss for the first calendar quarter.
NITROGEN PRODUCTS
Nitrogen Products revenues increased 172% to $147.2 million in 1995 from $54.2
million in 1994. The acquisition of AMCI included a 60.2% partnership interest
in two ammonia production facilities located in Blytheville, Arkansas and
Verdigris, Oklahoma. The Blytheville and Verdigris plants contributed $89.8
million to first quarter revenue growth. Excluding the impact of the
acquisition, revenues increased $3.2 million or 5.9%. Nitrogen Products
revenues for 1995 were reduced $1.7 million by the conversion of 30% of the
capacity of the Woodward, Oklahoma plant from ammonia to methanol production and
reduced approximately $10 million due to the loss of production at the Port Neal
nitrogen manufacturing plant as a result of the December 1994 explosion. The
plant is expected to be fully operational in the first half of 1996.
Operating income for the Nitrogen Products business was $57.4 million in the
first quarter of 1995 compared with $7 million in the 1994 first quarter. The
acquisition of AMCI contributed $37.3 million to the increase in operating
income. Excluding the acquisition, operating earnings increased $13.1 million
due to price increases of $12.4 million and lower natural gas costs of $4.2
million, offset by higher manufacturing costs for salaries and wages and
maintenance expenses.
METHANOL
In April 1994, about 30% of the production capacity of the Woodward, Oklahoma
plant was converted from the production of ammonia to methanol. Additionally,
through the acquisition of AMCI in October 1994, the Corporation acquired a
methanol production facility in Beaumont, Texas. The Corporation had no
methanol operations in the first quarter of 1994.
Methanol revenues were $65.9 million and operating income for the Methanol
business was $39.6 million in the first three months of 1995. The market price
for methanol increased significantly in the second half of 1994
10
<PAGE>
as a result of sharply higher production of MTBE, an oxygen and octane enhancer
used in reformulated gasoline. During the first quarter of 1995, methanol prices
have decreased substantially from the unprecedented high levels reached in late-
1994. Average realized prices, including the effect of the methanol hedge
agreement (see Note 6 to the Consolidated Financial Statements), were $0.98 in
the first quarter of 1995 as compared to $1.14 in the fourth quarter of 1994.
The Corporation sold 67.2 million gallons of methanol during the 1995 first
quarter; the acquired Beaumont facility produced 57.8 million gallons of the
total methanol sales during the period. On April 17, 1995, a scheduled
maintenance turnaround was begun at the Beaumont facility. It is expected that
the turnaround will be completed and the facility returned to production mid-
May.
OTHER OPERATING EXPENSE - NET
Other operating expense was $0.5 million in the 1995 first quarter compared with
$1.9 million in the comparable 1994 period. Other operating expense includes
expenses not directly related to individual business segments, including certain
insurance coverages, corporate finance fees and other costs. The decrease in
1995 is primarily the result of lower costs for general administrative functions
including reduced incentive compensation expense.
INTEREST EXPENSE - NET
Interest expense, net of interest income, totaled $11.3 million in 1995 compared
with $2.1 million in 1994. The increase is principally the result of higher
interest expense due to the assumption of $175 million of long-term debt and the
issuance of $270 million of additional debt, both in connection with the
acquisition of AMCI.
INCOME TAXES
First quarter 1995 income tax expense was recorded at an effective rate of 38.8%
as compared with 36.3% in the first quarter of 1994. The increased rate is the
result of goodwill amortization which is not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Corporation's primary uses for cash are to fund its working capital needs,
make payments on its indebtedness and other obligations, make both quarterly
distributions on the acquired nitrogen business' Senior Preference Units and
quarterly dividends to stockholders and make capital expenditures. Its
principal sources of funds are cash flow from operations and borrowings. The
Corporation believes that cash from operations and available financing sources
will be sufficient to meet anticipated cash requirements for seasonal operating
needs, capital expenditures and expansion strategies.
On March 27, 1995 the Corporation announced its offer to purchase the Senior
Preference Units representing a 39.8% partnership interest in the Corporation's
acquired nitrogen business for $30 per unit, or approximately $230 million. To
fund the proposed acquisition, the Corporation would incur additional long-term
debt and use available cash. The partnership's cash distribution for the
quarter ended March 31, 1995 was deferred pending further discussion between the
Corporation and the Special Committee of the Board of Terra Nitrogen Corporation
formed to evaluate the Corporation's offer.
Cash generated from operations in the 1995 first quarter was break-even due to
seasonal increases in inventory. Cash and short-term investments decreased
$25.2 million principally to fund investments in plant and equipment and the
expansion of the Corporation's distribution network.
11
<PAGE>
Cash used for acquisitions includes a $6.1 million payment as a final valuation
for working capital balances purchased in connection with the Corporation's
acquisition of AMCI and $4.2 million paid to acquire new locations for the
Corporation's distribution network.
The Corporation expects 1995 capital expenditures to approximate $60 million
consisting of the expansion of service centers; routine replacement of
equipment; and efficiency improvements at manufacturing facilities including
approximately $20 million for expansion and design improvements at the
Corporation's Port Neal facility.
During the quarter, the Corporation distributed $0.66 per unit, or $5 million,
to minority unitholders in the acquired nitrogen business and paid the
Corporation's quarterly dividend of $0.02 per share which totaled $1.6 million.
Cash generated from operations during 1995 is expected to be adequate to meet
normal business requirements and pay down debt. Cash balances at March 31, 1995
were $133.1 million of which $9.6 million is used to collateralize letters of
credit supporting recorded liabilities.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1995 Annual Meeting of stockholders was held on May 2, 1995, in
Sioux City, Iowa. At the meeting, a total of 75,341,184 votes were cast by
stockholders. There were no broker nonvotes.
The following directors were elected to hold office until the next
Annual Meeting or until their successors are duly elected and qualified, and
received the votes set forth opposite their respective name:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- ---- ---------
<S> <C> <C>
Edward G. Beimfohr 74,145,389 1,195,795
Carol L. Brookins 74,121,615 1,219,569
Edward M. Carson 72,419,235 2,921,949
David E. Fisher 73,644,278 1,696,906
Basil T. A. Hone 73,661,531 1,679,653
Burton M. Joyce 73,657,718 1,683,466
Anthony W. Lea 73,645,570 1,695,614
John R. Norton III 74,148,770 1,192,414
Reuben F. Richards 73,660,655 1,680,529
Henry R. Slack 73,643,875 1,697,309
</TABLE>
In addition, the stockholders ratified the selection by the
Corporation's Board of Directors of Deloitte & Touche LLP as independent
accountants for the Corporation for 1995. The number of votes cast for such
proposal was 74,907,289, the number against was 243,887 and the number of
abstentions was 190,008.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
10.11 General and Administrative Services Agreement Regarding
Services by Terra Industries Inc.
10.12 General and Administrative Services Agreement Regarding
Services by Terra Nitrogen Corporation.
(B) REPORTS ON FORM 8-K
Current Report on Form 8-K dated March 29, 1995 reporting proposal
to acquire senior preference units of Terra Nitrogen Company, L.P.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: May 10, 1995 /s/ Francis G. Meyer
--------------------------------------------
Francis G. Meyer
Vice President and Chief Financial Officer
and a duly authorized signatory
14
<PAGE>
EXHIBIT 10.11
GENERAL AND ADMINISTRATIVE
SERVICES AGREEMENT REGARDING
SERVICES BY TERRA INDUSTRIES INC.
---------------------------------
THIS GENERAL AND ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement") is
entered into effective as of January 1, 1995 (the "Effective Date") by and
between TERRA INDUSTRIES INC., a Delaware corporation ("Terra"), and TERRA
NITROGEN CORPORATION, a Delaware corporation (the "General Partner").
R E C I T A L S
- - - - - - - -
WHEREAS, in October 1994, Terra acquired the General Partner, which owns
(i) a 1.0101% general partner interest in Terra Nitrogen Company, L.P., a
Delaware limited partnership (the "Partnership") and a 1% general partner
interest in Terra Nitrogen, Limited Partnership, a Delaware limited partnership,
all of the limited partner interests of which are held by the Partnership (such
partnership and the Partnership herein referred to as the "Partnerships"), and
(ii) limited partner units representing an approximate 59.2% limited partner
interest in the Partnership;
WHEREAS, Senior Preference Units representing an aggregate 39.8% limited
partner interest in the Partnership are publicly traded on the New York Stock
Exchange;
WHEREAS, the General Partner requires certain general and administrative
services in order to conduct the business of the Partnerships;
WHEREAS, Terra and/or one of its affiliates is able to provide certain of
such services to the General Partner;
WHEREAS, Terra and the General Partner desire by their execution of this
Agreement to evidence their understanding concerning the providing of certain
services by Terra to the General Partner; and
WHEREAS, capitalized terms used herein but not defined shall have the
meanings given them in the Agreement of Limited Partnership of the Partnership
dated as of December 4, 1991 (the "Partnership Agreement"), as such agreement is
in effect on the Effective Date to which reference is hereby made for all
purposes of this Agreement.
THEREFORE, in consideration of the premises and the covenants, conditions,
and agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Term. Subject to the terms hereof, the term of this Agreement shall
be from the Effective Date and extending for a period of one (1) year.
Thereafter, the term shall be automatically extended for successive periods of
one (1) year each, unless terminated by either party at the end of such one year
period upon at least ninety (90) days' prior written notice to the other.
<PAGE>
2. Services. During the term hereof, in exchange for the payment
described herein, Terra agrees to provide to the General Partner and, as
directed by the General Partner, either of the Partnerships, certain general and
administrative services (the "Services") in accordance with the terms of this
Agreement. At Terra's election, it may cause one or more of its Affiliates or
third-party contractors (foreign or domestic) to provide the Services called for
by this Agreement; provided, however, that Terra shall remain responsible for
the provision of the Services in accordance with this Agreement. The Services
provided hereunder shall be those listed on Exhibit A attached hereto.
3. Quality of Service. The parties agree that the Services described in
Exhibit A attached hereto shall be of the same general quality which Terra
provides to itself or to other Affiliates of Terra. If the General Partner
decides to use a Service listed on Exhibit A that has been caused by Terra to be
provided by a third party provider ("Outsourced") which is not an Affiliate of
Terra, the parties hereto agree that such Service will be of a quality provided
for in the agreement between Terra and the third-party provider. Terra alone
may determine whether or not to Outsource a Service. In general, Terra will use
the same standards it would use for itself or its other Affiliates in
determining whether or not to Outsource a Service.
4. Payment. The General Partner, in consideration for the performance of
the Services by or on behalf of Terra, agrees to reimburse Terra for (i) all
reasonable and documented direct expenses actually incurred by Terra or its
Affiliates relating to the Services provided hereunder to the General Partner
and the Partnerships ("Direct Charges"), and (ii) a proportionate amount of all
necessary and appropriate general, administrative, overhead and other indirect
costs and expenses relating to the Services provided by Terra or its Affiliates
to the General Partner or the Partnerships hereunder in each case pursuant to
the expense allocation guidelines set out in Exhibit A attached hereto
("Indirect Charges", and together with Direct Charges, "Charges"). If the
compensation for the Services does not include sales, use, excise, value added
or similar taxes, and if any such taxes are imposed on the Services, the General
Partner shall pay or reimburse Terra for any such taxes.
5. Invoicing.
(i) Terra shall invoice, or cause its Affiliates to invoice, the
General Partner quarterly or at such other times as the parties hereto may
agree from time to time for all Direct Charges and Indirect Charges with
respect to the preceding period and any adjustments that may be necessary
to correct prior invoices. All invoices shall reflect in reasonable detail
a description of the Services performed during the preceding period and
documentation available to Terra backing up invoiced charges and shall be
due and payable promptly after receipt of the invoice. The General Partner
shall have the right to audit the records relating to invoices from time to
time during normal business hours. In the event of default in payment by
the General Partner, upon thirty (30) days' written notice to the General
Partner, sent by certified mail to the address specified below, Terra may
terminate this Agreement as to those
2
<PAGE>
Services which relate to the unpaid portion of the invoice if it has not
received payment within such thirty (30) days; provided however, in the
event of a dispute as to the propriety of invoiced amounts, the General
Partner shall pay all undisputed amounts on each invoice, but shall be
entitled to withhold payment of any amount in dispute and shall notify
Terra promptly after receipt of the invoice of the disputed amount and the
reasons each such charge is disputed by the General Partner. Terra shall
promptly provide the General Partner with records relating to the disputed
amount in order to enable the parties to resolve the dispute. So long as
the parties are attempting in good faith to resolve the dispute, Terra
shall not be entitled to terminate the Services related to and by reason of
the disputed charge.
(ii) Any statement or payment not disputed in writing by either party
within one year of the date of such statement or payment shall be
considered final and no longer subject to adjustment. The General Partner
shall not be obligated to pay for any Direct Charges or Indirect Charges
for which statements for payment are submitted more than one year after the
termination of this Agreement.
6. Role as General Partner. The General Partner acknowledges that the
Services shall be provided only with respect to its role as general partner of
the Partnerships. The General Partner shall not request performance of any
Services for the benefit of any entity other than for itself on behalf of the
Partnerships. The General Partner represents and agrees that it will use the
Services only in accordance with all applicable federal, state and local laws
and regulations, and in accordance with the reasonable conditions, rules,
regulations and specifications which may be set forth in any manuals, materials,
documents or instructions furnished from time to time by Terra to the General
Partner. Terra reserves the right to take all actions, including termination of
any particular Services, that Terra reasonably believes to be necessary to
assure compliance with applicable laws and regulations. Terra will notify the
General Partner of the reasons for any such termination of Services.
7. Limited Warranty; Limitation of Liability. Terra represents that it
will provide or cause the Services to be provided to the General Partner with
reasonable diligence. EXCEPT AS SET FORTH IN THE IMMEDIATELY PRECEDING SENTENCE,
TERRA MAKES NO (AND HEREBY DISCLAIMS AND NEGATES ANY AND ALL) REPRESENTATIONS
AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES RENDERED TO OR
PRODUCTS OBTAINED FOR THE GENERAL PARTNER. FURTHERMORE, THE GENERAL PARTNER MAY
NOT RELY UPON ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE
WARRANTIES FOR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE MADE TO THE
GENERAL PARTNER OR ITS AFFILIATES BY ANY PARTY (INCLUDING AN AFFILIATE OF TERRA)
PERFORMING SERVICES ON BEHALF OF TERRA OR ITS AFFILIATES HEREUNDER, UNLESS SUCH
PARTY MAKES AN EXPRESS WRITTEN WARRANTY TO THE GENERAL PARTNER.
3
<PAGE>
IT IS EXPRESSLY UNDERSTOOD BY THE GENERAL PARTNER AND THE GENERAL PARTNER
AGREES THAT TERRA AND ITS AFFILIATES SHALL HAVE NO LIABILITY FOR THE FAILURE OF
THIRD-PARTY PROVIDERS TO PERFORM ANY SERVICES HEREUNDER AND FURTHER THAT TERRA
AND ITS AFFILIATES SHALL HAVE NO LIABILITY WHATSOEVER FOR THE SERVICES PROVIDED
BY SUCH THIRD-PARTY PROVIDERS UNLESS SUCH SERVICES ARE PROVIDED IN A MANNER
WHICH WOULD EVIDENCE GROSS NEGLIGENCE ON THE PART OF TERRA OR ITS AFFILIATES OR
INTENTIONAL MISCONDUCT. THE GENERAL PARTNER AGREES THAT THE REMUNERATION TO BE
PAID TO TERRA HEREUNDER FOR THE SERVICES TO BE PERFORMED REFLECT THIS LIMITATION
OF LIABILITY AND DISCLAIMER OF WARRANTIES. IN NO EVENT SHALL TERRA BE LIABLE TO
THE GENERAL PARTNER OR ANY OTHER PERSON OR ENTITY FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES RESULTING FROM ANY ERROR IN THE PERFORMANCE OF SERVICES OR
FROM THE BREACH OF THIS AGREEMENT, REGARDLESS OF THE FAULT OF TERRA OR WHETHER
WHOLLY, CONCURRENTLY, PARTIALLY, OR SOLELY NEGLIGENT.
8. Force Majeure. This Agreement shall not be terminated as a result of
any failure of a party to perform any of its obligations hereunder if such
failure is due to circumstances beyond its control (an "Event of Force
Majeure"), including, but not limited to, any requisition by any government
authority, act of war, strike, boycott, lockout, picketing, riot, sabotage,
civil commotion, insurrection, epidemic, disease, act of God, fire, flood,
accident, explosion, earthquake, storm, failure of public utilities or common
carriers, mechanical failure, embargo, or prohibition imposed by any
governmental body or agency having authority over the party, provided that at
such time as an Event of Force Majeure no longer exists, the respective
obligations of the parties hereto shall be reinstated and this Agreement shall
continue in full force and effect. The party affected by an Event of Force
Majeure shall give prompt notice thereof to the other party hereto and each
party shall use good faith efforts to minimize the duration and consequences of,
and to eliminate, any such Event of Force Majeure.
9. Severability. In the event any portion of this Agreement shall be
found by a court of competent jurisdiction to be unenforceable, that portion of
the Agreement will be null and void and the remainder of the Agreement will be
binding on the parties as if the unenforceable provisions had never been
contained herein.
10. Assignment. Except for the ability of Terra to cause one or more of
the Services to be performed by one of its affiliates or a third-party provider,
no party shall have the right to assign its rights or obligations under this
Agreement without the consent of the other party.
11. Relationship of the Parties. In all matters relating to this
Agreement, each party hereto shall be solely responsible for the acts of its
employees, and employees of one party shall not be considered employees of the
other party. Except as otherwise provided herein, no party shall any right,
power or authority to create any obligation, express or implied, on behalf of
any other
4
<PAGE>
party. Nothing in this Agreement is intended to create or constitute a joint
venture or partnership between the parties hereto or persons referred to herein.
12. Entire Agreement. This Agreement constitutes the entire agreement of
the parties relating to the performance of the Services. All prior or
contemporaneous written or oral agreements are merged herein.
13. Choice of Law. This Agreement shall be subject to and governed by the
laws of the State of Iowa, excluding any conflicts-of-law rule or principle that
might refer the construction or interpretation of this Agreement to the laws of
another state.
14. Confidentiality. The General Partner shall keep and hold, and shall
cause its officers, employees and other agents to keep and hold, in strictest
confidence, all confidential and/or proprietary information respecting, or in
any way related to, Terra and/or the business, operations, financial results and
affairs of Terra, whenever and however learned unless such confidential and/or
proprietary information (i) becomes generally available to the public, provided
this occurs by means other than the breach of this section, (ii) was available
on a non-confidential basis to the General Partner prior to its disclosure by
Terra or its representatives or (iii) becomes available to the General Partner
on a non-confidential basis from a source other than Terra or its
representatives, provided that such source is not a party to a confidentiality
agreement concerning such information. The provisions of this Section 14 shall
survive any expiration or earlier termination of this Agreement.
15. Amendment or Modification. This Agreement may be amended or modified
from time to time only by a written amendment signed by the parties hereto.
16. Notices. Any notice, request, instruction, correspondence or other
document to be given hereunder by either party to the other (herein collectively
called "Notice") shall be in writing and delivered personally or mailed, postage
prepaid, or by telegram or telecopier, as follows:
If to Terra: Terra Industries Inc.
Terra Centre
600 Fourth Street
P.O. Box 6000
Sioux City, Iowa 51102-6000
Attention: General Counsel
Telecopier: (712) 279-8719
If to the General Partner: Terra Nitrogen Corporation
5100 East Skelly Drive
Suite 800
Tulsa, Oklahoma 74135
Attention: President
Telecopier: (918) 664-3654
5
<PAGE>
Notice given by personal delivery or mail shall be effective upon actual
receipt by the person to whom addressed. Notice given by telegram or telecopier
shall be effective upon actual receipt if received during the recipient's normal
business hours, or at the beginning of the recipient's next business day after
receipt if not received during the recipient's normal business hours. Any party
may change any address to which Notice is to be given to it by giving Notice as
provided above of such change of address.
17. Further Assurances. In connection with this Agreement and all
transactions contemplated by this Agreement, each party signatory hereto agrees
to execute and deliver such additional documents and instruments as may be
required for Terra to provide the Services hereunder and to perform such other
additional acts as may be necessary or appropriate to effectuate, carry out and
perform all of the terms, provisions, and conditions of this Agreement.
18. No Third-Party Beneficiary. The provisions of this Agreement are
enforceable solely by the parties to this Agreement, and no Person shall have
the right, separate and apart from Terra and the General Partner, to enforce any
provision of this Agreement or to compel any party to this Agreement to comply
with the terms of this Agreement.
19. Mediation. Terra and the General Partner agree to negotiate in good
faith in an effort to resolve any dispute related to this Agreement that may
arise between the parties. If the dispute cannot be resolved promptly by
negotiation, then either party may give the other party written notice that the
dispute should be submitted to mediation. Promptly thereafter, a mutually
acceptable mediator shall be chosen by the parties, who shall share the cost of
mediation services equally. If the dispute has not been resolved by mediation
within ninety (90) days after the date of written notice requesting mediation,
then either party may initiate litigation and pursue any and all remedies at law
or at equity to which such party is entitled.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed on their behalf by their duly authorized officers.
TERRA INDUSTRIES INC.
By:/S/ Robert E. Thompson
----------------------------------------------
Name: Robert E. Thompson
Title: Vice President, Controller
TERRA NITROGEN CORPORATION
By: /S/ David F. Anderson
--------------------------
Name: David F. Anderson
Title: Vice President and Controller
7
<PAGE>
EXHIBIT A
TERRA INDUSTRIES INC.
EXPENSE ALLOCATION
GENERAL
- -------
Terra Industries Inc. incurs general and administrative expenses on behalf of
the Corporation and its business units - Terra Nitrogen, Limited Partnership
("TNLP"), Beaumont Methanol, Limited Partnership ("BMLP") and Terra
International, Inc. ("TI"). This policy defines the manner in which expenses
are assigned and charged to each business unit.
ALLOCATION OVERVIEW
- -------------------
Expenses incurred that are specifically identifiable are charged directly to the
business unit. Expenses that are not specifically identifiable, but can be
related to a specific cost causative factor (headcount, usage, number of
transaction, etc.), are allocated using such causative factor depending on the
nature of the expense. Other expenses with no apparent cost causative factor
are allocated using a 3-factor formula (see definition below).
ALLOCATION FORMULA
- ------------------
The 3-factor formula uses employee headcount, gross sales dollars and assets,
whereby each factor receives equal weighting in calculating the allocation
percentage for the various entities. A sample Allocation Formula is presented
here for illustration purposes:
<TABLE>
<CAPTION>
Co. X Co. Y Co. Z Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Headcount 100 200 200 500
% to total 20% 40% 40% 100%
Sales dollars in millions $6 $3 $3 $12
% to total 50% 25% 25% 100%
Assets in millions $4 $5 $11 $20
% to total 20% 25% 55% 100%
Allocation factor
(sum of %'s divided by 3) 30% 30% 40%
</TABLE>
For definition purposes, "assets" includes the net book value of property, plant
and equipment.
<PAGE>
SPECIFIC ALLOCATIONS
- --------------------
The following is a brief description of the allocation approach used for
specific types of expenses.
. Distribution Support Costs - The cost of a number of support functions
which strictly support Terra's Distribution business are directly assigned
to the Distribution business. These include the following:
-- Fertilizer Supply
-- Capital Support Administration
-- Physical Distribution Department
-- Crop Protection Purchasing
-- Loss Control
-- A/R Securitization
-- Retail Credit
. Training & Development - General training programs that are
designed and conducted for all employees are assigned based on headcount.
. Human Resources - The cost of the Human Resources department is assigned
based on headcount to the extent that human resource functions support each
business unit.
. Corporate Credit - The cost of the Credit General Manager is assigned based
on accounts receivable.
. Internal Audit - The cost of internal audit work is assigned based on the
actual cost of specific audit work performed at each business unit.
. Regulatory Affairs - The cost of environmental affairs is assigned based on
the value of the fixed assets which generally give rise to the
environmental issues addressed.
. Risk Management & Insurance - All insurance is paid and allocated
by Terra Industries as follows:
-- Workman's compensation is allocated based on payrolls.
-- Property, general liability and excess liability are
allocated based on net property, plant and equipment values.
-- Auto liability insurance is based on the number of vehicles.
-- Administrative costs are allocated based on the allocation of
insurance costs.
. Aircraft - Aircraft costs are assigned based on actual usage and average
actual hourly costs.
. Information Systems - Costs are assigned based on the number of
transactions processed for each business unit.
. All other - All other costs are allocated based on the use of the 3-factor
formula previously described. Examples of these costs include the Executive
Department, Financial Reporting, Law Department and Investor Relations.
<PAGE>
TERRA INDUSTRIES INC.
CORPORATE DEPARTMENTS
1995 ALLOCATION FACTORS
<TABLE>
<S> <C>
Fertilizer Supply Allocated Directly to Distribution
Capital Support Admin Allocated Directly to Distribution
Physical Distribution Department Allocated Directly to Distribution
Crop Protection Purchasing Allocated Directly to Distribution
Loss Control Allocated Directly to Distribution
A/R Securitization Allocated Directly to Distribution
Retail Credit Allocated Directly to Distribution
Marketing Allocated Directly to Distribution
Training & Development Allocated Based on Headcount
Human Resources Allocated Based on Headcount
Corporate Credit Allocated Based on Accounts Receivable
Internal Audit Allocated Based on Visits
Regulatory Affairs Allocated Based on Value of Fixed Assets
Risk Management Allocated Based on Use
Aircraft - King Air (B200/N887T) Allocated Based on Use
Aircraft - King Air (B200/N448T) Allocated Based on Use
Information Systems Allocated Based on Transactions Processed
Executive Department, Investor General Allocation*
Relations, Financial Reporting, Law
Department and all other Corporate
costs
</TABLE>
* General allocations based on a three-factor formula weighted equally for
headcount, book value of assets and sales.
<PAGE>
EXHIBIT 10.12
GENERAL AND ADMINISTRATIVE
SERVICES AGREEMENT REGARDING
SERVICES BY TERRA NITROGEN CORPORATION
--------------------------------------
THIS GENERAL AND ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement") is
entered into effective as of January 1, 1995 (the "Effective Date") by and
between TERRA INDUSTRIES INC., a Delaware corporation ("Terra"), and TERRA
NITROGEN CORPORATION, a Delaware corporation (the "General Partner").
R E C I T A L S
- - - - - - - -
WHEREAS, in October 1994, Terra acquired the General Partner, which owns
(i) a 1.0101% general partner interest in Terra Nitrogen Company, L.P., a
Delaware limited partnership (the "Partnership") and a 1% general partner
interest in Terra Nitrogen, Limited Partnership, a Delaware limited partnership,
all of the limited partner interests of which are held by the Partnership (such
partnership and the Partnership herein referred to as the "Partnerships"), and
(ii) limited partner units representing an approximate 59.2% limited partner
interest in the Partnership;
WHEREAS, Senior Preference Units representing an aggregate 39.8% limited
partner interest in the Partnership are publicly traded on the New York Stock
Exchange;
WHEREAS, the business of the Partnership is similar to that of other
subsidiaries of Terra, and Terra desires that the General Partner provide
certain general and administrative services to Terra and certain of Terra's
affiliates;
WHEREAS, the General Partner is able to provide certain of such services to
Terra and its affiliates; and
WHEREAS, Terra and the General Partner desire by their execution of this
Agreement to evidence their understanding concerning the providing of certain
services by the General Partner to Terra and its affiliates; and
WHEREAS, capitalized terms used herein but not defined shall have the
meanings given them in the Agreement of Limited Partnership of the Partnership
dated as of December 4, 1991 (the "Partnership Agreement"), as such agreement is
in effect on the Effective Date to which reference is hereby made for all
purposes of this Agreement.
THEREFORE, in consideration of the premises and the covenants, conditions,
and agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Term. Subject to the terms hereof, the term of this Agreement shall
be from the Effective Date and extending for a period of one (1) year.
Thereafter, the term shall be
<PAGE>
automatically extended for successive periods of one (1) year each, unless
terminated by either party at the end of such one year period upon at least
ninety (90) days' prior written notice to the other.
2. Services. During the term hereof, in exchange for the payment
described herein, the General Partner agrees to provide to Terra and, as
directed by Terra, any of its Affiliates, certain general and administrative
services (the "Services") in accordance with the terms of this Agreement. If
necessary and appropriate, the General Partner may cause third-party contractors
to provide the Services called for by this Agreement; provided, however, that
the General Partners shall remain responsible for the provision of the Services
in accordance with this Agreement. The Services provided hereunder shall be
those listed on Exhibit A attached hereto.
3. Quality of Service. The parties agree that the Services described in
Exhibit A attached hereto shall be of the same general quality which the General
Partner provides to the Partnerships. If Terra decides to use a Service listed
on Exhibit A that has been caused by the General Partner to be provided by a
third party provider ("Outsourced") which is not an Affiliate of Terra, the
parties hereto agree that such Service will be of a quality provided for in the
agreement between the General Partner and the third-party provider. The General
Partner alone may determine whether or not to Outsource a Service. In general,
the General Partner will use the same standards it would use for itself or its
other Affiliates in determining whether or not to Outsource a Service.
4. Payment. Terra, in consideration for the performance of the Services
by the General Partner, agrees to reimburse the General Partner for (i) all
reasonable and documented direct expenses actually incurred by the General
Partner relating to the Services provided by the General Partner hereunder to
Terra and its Affiliates ("Direct Charges"), and (ii) a proportionate amount of
all necessary and appropriate general, administrative, overhead and other
indirect costs and expenses relating to the Services provided by the General
Partner to Terra and its Affiliates hereunder in each case pursuant to the
expense allocation guidelines set out in Exhibit A attached hereto ("Indirect
Charges," and together with Direct Charges, "Charges"). If the compensation for
the Services does not include sales, use, excise, value added or similar taxes,
and if any such taxes are imposed on the Services, Terra shall pay or reimburse
the General Partner for any such taxes.
5. Invoicing.
(i) The General Partner shall invoice Terra quarterly or at such other
times as the parties hereto may agree from time to time for all Direct
Charges and Indirect Charges with respect to the preceding period and any
adjustments that may be necessary to correct prior invoices. All invoices
shall reflect in reasonable detail a description of the Services performed
during the preceding period and documentation available to the General
Partner backing up invoiced charges and shall be due and payable promptly
after receipt of the invoice. Terra shall have the right to audit the
records relating to invoices from time to time during normal business
hours. In the event of default in payment by Terra, upon thirty (30) days'
written notice to Terra, sent by certified mail to the address specified
below, the
2
<PAGE>
General Partner may terminate this Agreement as to those Services which
relate to the unpaid portion of the invoice if it has not received payment
within such thirty (30) days; provided however, in the event of a dispute
as to the propriety of invoiced amounts, Terra shall pay all undisputed
amounts on each invoice, but shall be entitled to withhold payment of any
amount in dispute and shall notify the General Partner promptly after
receipt of the invoice of the disputed amount and the reasons each such
charge is disputed by Terra. The General Partner shall promptly provide
Terra with records relating to the disputed amount so as to enable the
parties to resolve the dispute. So long as the parties are attempting in
good faith to resolve the dispute, the General Partner shall not be
entitled to terminate the Services related to and by reason of the disputed
charge.
(ii) Any statement or payment not disputed in writing by either party
within one year of the date of such statement or payment shall be
considered final and no longer subject to adjustment. Terra shall not be
obligated to pay for any Direct Charges or Indirect Charges for which
statements for payment are submitted more than one year after the
termination of this Agreement.
6. Role of Terra. Terra shall not request performance of any Services
for the benefit of any entity other than for itself or for its Affiliates.
Terra represents and agrees that it will use the Services only in accordance
with all applicable federal, state and local laws and regulations, and in
accordance with the reasonable conditions, rules, regulations and specifications
which may be set forth in any manuals, materials, documents or instructions
furnished from time to time by the General Partner to Terra. The General
Partner reserves the right to take all actions, including termination of any
particular Services, that the General Partner reasonably believes to be
necessary to assure compliance with applicable laws and regulations. The
General Partner will notify Terra of the reasons for any such termination of
Services.
7. Limited Warranty; Limitation of Liability. The General Partner
represents that it will provide the Services to Terra with reasonable diligence.
EXCEPT AS SET FORTH IN THE IMMEDIATELY PRECEDING SENTENCE, THE GENERAL PARTNER
MAKES NO (AND HEREBY DISCLAIMS AND NEGATES ANY AND ALL) REPRESENTATIONS AND
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES RENDERED TO OR
PRODUCTS OBTAINED FOR TERRA. FURTHERMORE, TERRA MAY NOT RELY UPON ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES FOR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE MADE TO THE GENERAL PARTNER
BY ANY PARTY PERFORMING SERVICES ON BEHALF OF THE GENERAL PARTNER HEREUNDER,
UNLESS SUCH PARTY MAKES AN EXPRESS WRITTEN WARRANTY TO TERRA. TERRA AGREES THAT
THE REMUNERATION TO BE PAID TO THE GENERAL PARTNER HEREUNDER FOR THE SERVICES TO
BE PERFORMED REFLECT THIS LIMITATION OF LIABILITY AND DISCLAIMER OF
3
<PAGE>
WARRANTIES. IN NO EVENT SHALL THE GENERAL PARTNER BE LIABLE TO TERRA OR ANY
OTHER PERSON OR ENTITY FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES
RESULTING FROM ANY ERROR IN THE PERFORMANCE OF SERVICES OR FROM THE BREACH OF
THIS AGREEMENT, REGARDLESS OF THE FAULT OF THE GENERAL PARTNER OR WHETHER
WHOLLY, CONCURRENTLY, PARTIALLY, OR SOLELY NEGLIGENT.
8. Force Majeure. This Agreement shall not be terminated as a result of
any failure of a party to perform any of its obligations hereunder if such
failure is due to circumstances beyond its control (an "Event of Force
Majeure"), including, but not limited to, any requisition by any government
authority, act of war, strike, boycott, lockout, picketing, riot, sabotage,
civil commotion, insurrection, epidemic, disease, act of God, fire, flood,
accident, explosion, earthquake, storm, failure of public utilities or common
carriers, mechanical failure, embargo, or prohibition imposed by any
governmental body or agency having authority over the party, provided that at
such time as an Event of Force Majeure no longer exists, the respective
obligations of the parties hereto shall be reinstated and this Agreement shall
continue in full force and effect. The party affected by an Event of Force
Majeure shall give prompt notice thereof to the other party hereto and each
party shall use good faith efforts to minimize the duration and consequences of,
and to eliminate, any such Event of Force Majeure.
9. Severability. In the event any portion of this Agreement shall be
found by a court of competent jurisdiction to be unenforceable, that portion of
the Agreement will be null and void and the remainder of the Agreement will be
binding on the parties as if the unenforceable provisions had never been
contained herein.
10. Relationship of the Parties. In all matters relating to this
Agreement, each party hereto shall be solely responsible for the acts of its
employees, and employees of one party shall not be considered employees of the
other party. Except as otherwise provided herein, no party shall have any
right, power or authority to create any obligation, express or implied, on
behalf of any other party. Nothing in this Agreement is intended to create or
constitute a joint venture or partnership between the parties hereto or persons
referred to herein.
11. Assignment. No party shall have the right to assign its rights or
obligations under this Agreement without the consent of the other party.
12. Confidentiality. Terra shall keep and hold, and shall cause its
officers, employees and other agents to keep and hold, in strictest confidence,
all confidential and/or proprietary information respecting, or in any way
related to, the General Partner and/or the business, operations, financial
results and affairs of the General Partner, whenever and however learned unless
such confidential and/or proprietary information (i) becomes generally available
to the public, provided this occurs by means other than the breach of this
section, (ii) was available on a non-confidential basis to Terra prior to its
disclosure by the General Partner, (iii) becomes available to
4
<PAGE>
Terra on a non-confidential basis from a source other than the General Partner,
provided that such source is not a party to a confidentiality agreement
concerning such information, or (iv) is required to be disclosed pursuant to law
or regulation. The provisions of this Section 12 shall survive any expiration
or earlier termination of this Agreement.
13. Entire Agreement. This Agreement constitutes the entire agreement of
the parties relating to the performance of the Services. All prior or
contemporaneous written or oral agreements are merged herein.
14. Choice of Law. This Agreement shall be subject to and governed by the
laws of the State of Oklahoma, excluding any conflicts-of-law rule or principle
that might refer the construction or interpretation of this Agreement to the
laws of another state.
15. Amendment or Modification. This Agreement may be amended or modified
from time to time only by a written amendment signed by the parties hereto.
16. Notices. Any notice, request, instruction, correspondence or other
document to be given hereunder by either party to the other (herein collectively
called "Notice") shall be in writing and delivered personally or mailed, postage
prepaid, or by telegram or telecopier, as follows:
If to Terra: Terra Industries Inc.
Terra Centre
600 Fourth Street
P.O. Box 6000
Sioux City, Iowa 51102-6000
Attention: General Counsel
Telecopier: (712) 279-8719
If to the General Partner: Terra Nitrogen Corporation
5100 East Skelly Drive
Suite 800
Tulsa, Oklahoma 74135
Attention: President
Telecopier: (918) 664-3654
Notice given by personal delivery or mail shall be effective upon actual
receipt by the person to whom addressed. Notice given by telegram or telecopier
shall be effective upon actual receipt if received during the recipient's normal
business hours, or at the beginning of the recipient's next business day after
receipt if not received during the recipient's normal business hours. Any party
may change any address to which Notice is to be given to it by giving Notice as
provided above of such change of address.
5
<PAGE>
17. Further Assurances. In connection with this Agreement and all
transactions contemplated by this Agreement, each party signatory hereto agrees
to execute and deliver such additional documents and instruments as may be
required for the General Partner to provide the Services hereunder and to
perform such other additional acts as may be necessary or appropriate to
effectuate, carry out and perform all of the terms, provisions, and conditions
of this Agreement.
18. No Third-Party Beneficiary. The provisions of this Agreement are
enforceable solely by the parties to this Agreement, and no Person shall have
the right, separate and apart from Terra and the General Partner, to enforce any
provision of this Agreement or to compel any party to this Agreement to comply
with the terms of this Agreement.
19. Mediation. Terra and the General Partner agree to negotiate in good
faith in an effort to resolve any dispute related to this Agreement that may
arise between the parties. If the dispute cannot be resolved promptly by
negotiation, then either party may give the other party written notice that the
dispute should be submitted to mediation. Promptly thereafter, a mutually
acceptable mediator shall be chosen by the parties, who shall share the cost of
mediation services equally. If the dispute has not been resolved by mediation
within ninety (90) days after the date of written notice requesting mediation,
then either party may initiate litigation and pursue any and all remedies at law
or at equity to which such party is entitled.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
singed on their behalf by their duly authorized officers.
TERRA INDUSTRIES INC.
By: /S/ Robert E. Thompson
---------------------------------
Name: Robert E. Thompson
Title: Vice President, Controller
TERRA NITROGEN CORPORATION
By: /S/ David F. Anderson
---------------------------------
Name: David F. Anderson
Title: Vice President and Controller
6
<PAGE>
EXHIBIT A
TERRA NITROGEN CORPORATION
EXPENSE ALLOCATION
GENERAL
- -------
Terra Nitrogen Corporation ("TNC") pays all selling, general and administrative
expenses for the Division, except for those expenses directly invoiced to and
paid by Beaumont Methanol, Limited Partnership ("BMLP") or Terra International,
Inc. ("TI") in Sioux City. In addition, Terra Industries Inc. charges allocated
overhead expenses to each entity within the Division (Terra Nitrogen Company,
L.P., "TNCLP", BMLP and TI). These charges are recorded directly on each
company's books with no further allocation by the Division.
ALLOCATION OVERVIEW
- -------------------
Expenses incurred that are specifically identifiable are charged directly to the
business unit. Expenses that are not specifically identifiable, but can be
related to a specific cost causative factor (headcount, usage, number of
transaction, etc.), are allocated using such causative factor depending on the
nature of the expense. Other expenses with no apparent cost causative factor
are allocated using a 3-factor formula (see definition below).
ALLOCATION FORMULA
- ------------------
The 3-factor formula uses employee headcount, sales volume and assets, whereby
each factor receives equal weighting in calculating the allocation percentage
for the various entities. A sample Allocation Formula is presented here for
illustration purposes:
<TABLE>
<CAPTION>
Co. X Co. Y Co. Z Total
------ ------ ------ -------
<S> <C> <C> <C> <C>
Headcount 100 200 200 500
% to total 20% 40% 40% 100%
Volumes (tons) 600 300 300 1,200
% to total 50% 25% 25% 100%
Assets in millions $4 $5 $11 $20
% to total 20% 25% 55% 100%
Allocation factor
(sum of %'s divided by 3) 30% 30% 40%
</TABLE>
For definition purposes in Terra Nitrogen Corporation's Allocation Formula,
"assets" includes the net book value of property, plant and equipment.
SPECIFIC ALLOCATIONS
- --------------------
The following is a brief description of the allocation approach used for
specific departments or individual types of expenses incurred by TNC.
<PAGE>
* Partnership support costs - The cost of support functions which strictly
support TNCLP business are directly assigned to TNCLP. These include:
-- Public reporting costs
-- K-1 preparation expenses
-- Audit fees
-- Director's fees and expenses
* Incentive compensation expense - Directly assigned to each business unit.
* Commission on feed sales - Directly assigned.
* Human Resources department - The cost of the Human Resources department is
assigned based on headcount to the extent that human resource functions
support each business unit.
* Methanol Marketing department - The cost of Methanol Marketing are allocated
based on methanol production volumes (tons).
* Fertilizer Marketing department - Fertilizer Marketing department costs are
allocated based on volumes (tons).
* Marketing Planning & Administrative department - Marketing Planning &
Administrative costs are allocated based on volumes.
* Computer Systems department - Computer department costs are allocated based
on usage.
* Supply and Distribution department - Supply and Distribution costs are
allocated based on freight costs.
* Depreciation and office rent expense - Allocated based on estimated usage.
* Insurance - All insurance for the Division is paid and administered by Terra
Industries. Property insurance for TI plants are charged directly to the
plants' production costs. Insurance costs relating to BMLP are charged by
Terra Industries directly to BMLP. Costs related to TNC and TNCLP are
initially charged to TNC by Terra Industries and allocated by TNC as follows:
(Note: the following insurance charges, except for property insurance, are
initially recorded on TNC's books as prepaid insurance and as the prepaid
balance amortizes, the amount of the expense is charged to TNCLP's plants or
TNC as discussed below. Property insurance is paid by TNCLP to TNC and the
prepaid balance is recorded on TNCLP's books.)
-- Directors & Officers' liability and fiduciary insurance are allocated to
TNCLP.
-- Workman's compensation is a component of payroll burden and is allocated
to TNCLP and TNC as a percentage of salaries.
-- Property, general liability and excess liability insurance are allocated
to TNCLP and are further allocated to the individual TNCLP plants based
on net property, plant and equipment values.
-- Auto liability insurance is allocated to TNCLP's plants and TNC based on
the number of vehicles.
<PAGE>
* Fertilizer commissions - Allocated based on volumes.
* All other costs - All other costs are allocated based on the use of the
3-factor formula previously described. Examples of these costs include
Executive, Controller and General Administrative Departments.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of financial position of Terra Industries Inc. as of
March 31, 1995 and the related consolidated statement of income for the three-
month period then ended.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 18,440
<SECURITIES> 114,705
<RECEIVABLES> 223,620
<ALLOWANCES> (9,739)
<INVENTORY> 538,094
<CURRENT-ASSETS> 988,327
<PP&E> 738,672
<DEPRECIATION> (169,324)
<TOTAL-ASSETS> 1,964,427
<CURRENT-LIABILITIES> 672,364
<BONDS> 512,820
0
0
<COMMON> 133,800
<OTHER-SE> 316,288
<TOTAL-LIABILITY-AND-EQUITY> 1,964,427
<SALES> 434,121
<TOTAL-REVENUES> 443,340
<CGS> 304,281
<TOTAL-COSTS> 352,862
<OTHER-EXPENSES> 25,254
<LOSS-PROVISION> 854
<INTEREST-EXPENSE> 14,007
<INCOME-PRETAX> 53,883
<INCOME-TAX> 20,930
<INCOME-CONTINUING> 32,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,953
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
</TABLE>
