<PAGE>
As filed with the Securities and Exchange Commission on June 16, 1997
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------------
TERRA INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
-----------------
<TABLE>
<C> <S> <C>
2873 Maryland 52-1145429
(Primary Standard Industrial (State or other jurisdiction of (I.R.S. Employer
Classification Code Number) incorporation or organization) Identification No.)
</TABLE>
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
Senior 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)
------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================
Title of Each Class of Amount to be Proposed maximum Proposed maximum Amount of
Securities To Be Registered registered offering price per aggregate offering registration fee(2)
share(1) price(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, no par value 3,000,000 shares $12.625 $37,875,000 $11,478
=================================================================================================================
</TABLE>
(1) Estimated in accordance with Rule 457(c), solely for purposes of
calculating the registration fee.
(2) Calculated on the basis of 1/33rd of 1% of the proposed maximum aggregate
offering price.
-------------------
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
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 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, DATED JUNE 16, 1997
PROSPECTUS __________ , 1997
3,000,000
Terra Industries Inc.
[LOGO OF TERRA INDUSTRIES INC.]
Common Shares
______________________________
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 COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________________________
The 3,000,000 common shares, no par value (the "Common Shares"), covered by this
Prospectus may be offered and issued from time to time by Terra Industries Inc.
("Terra" or the "Company") in connection with future acquisitions of other
businesses, properties or securities in business combination transactions in
accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act of
1933, as amended (the "1933 Act"). This Prospectus may also be used, with the
Company's prior consent, by persons or entities who have received or will
receive such shares in connection with such acquisitions and who wish to offer
and sell such shares under circumstances requiring or making desirable its use
and by certain donees of such persons or entities. See "Securities Covered by
this Prospectus" herein, and see the inside back cover page hereof for the
identity of such individuals, if any.
The Common Shares are listed on the New York Stock Exchange and the Toronto
Stock Exchange under the symbol "TRA". On June 10, 1997 the last reported sale
price of the Common Shares as reported on the New York Stock Exchange Composite
Tape was $12.75 per share. See "Common Share Price Range and Dividends."
See "Investment Considerations" on page 7 for a discussion of certain factors
that should be considered by prospective investors in the Common Shares offered
hereby.
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell, or the
solicitation of an offer to buy, the Common Shares in any jurisdiction where, or
to any person to whom, it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information........................... 2
Summary......................................... 3
Investment Considerations....................... 7
The Company..................................... 10
Securities Covered by this Prospectus........... 11
Common Stock Price Range and Dividends.......... 12
Selected Financial Data......................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 14
Business........................................ 22
Management...................................... 32
Equity Security Ownership....................... 40
Certain Relationships and Related Transactions.. 41
Description of Capital Stock.................... 42
Description of Certain Indebtedness
and other Obligations.......................... 43
Experts......................................... 47
Legal Matters................................... 47
Index to Financial Statements................... F-1
</TABLE>
AVAILABLE INFORMATION
The Company has filed this Prospectus as part of a Registration Statement
on Form S-1 filed with the Securities and Exchange Commission (the "Commission")
pursuant to the 1933 Act, and the rules and regulations promulgated thereunder.
This Prospectus does not contain all the information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Shares, reference is made to the Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith is required to
file periodic reports and other information with the Commission. Reports, proxy
statements and other information filed by the Company as well as the
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 75 Park Place, New York, New York 10007 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission also maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
like the Company, that file electronically with the Commission (site address
http://www.sec.gov). In addition, reports, proxy statements and other
information may be inspected, with respect to the Company, at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005 and at the
offices of the Toronto Stock Exchange, Exchange Tower, 2 First Canadian Place,
Toronto, Ontario M5X1J2 Canada, upon which the common stock of the Company is
listed.
2
<PAGE>
SUMMARY
The following is a summary only and should be read in light of the more
detailed financial and other information included elsewhere in this Prospectus.
Except as otherwise indicated, all financial information is presented on the
basis of generally accepted accounting principles. References to the "Company"
or "Terra" shall mean Terra Industries Inc., including, where the context so
requires, its direct and indirect subsidiaries. Terms defined in this Summary
shall have the same meanings when used elsewhere in this Prospectus. Prospective
investors are urged to read this Prospectus in its entirety. See "Investment
Considerations" for a discussion of certain factors that should be considered by
prospective investors in the Common Shares offered hereby.
The Company
The Company is a leader in each of its three business segments: (i) the
distribution of crop production inputs and services, (ii) the manufacture of
nitrogen products and (iii) the manufacture of methanol. 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. The Company is also the third largest producer of anhydrous ammonia and
the largest producer of nitrogen solutions in the United States and Canada. In
addition, the Company is one of the largest U.S. manufacturers and marketers of
methanol. In 1996, the Company generated revenues and operating income of $2.3
billion and $295.2 million, respectively.
The Company's distribution network for fertilizer, crop protection products
and seed has grown over the last several years to 421 farm service centers and
about 780 affiliated dealer locations serving the United States and the eastern
region of Canada, as of May 30, 1997. This growth generally has been the result
of a healthy farm economy, acquisitions, additional facilities and aggressive
marketing. The Company's distribution network is supplied by both independent
sources and the Company's own production facilities, which presently include one
crop protection chemical dry flowable and liquid formulation plant and seven
other liquid chemical formulation facilities in addition to its nitrogen
production facilities. In 1996, distribution revenues and operating income
constituted approximately 67% and 9% of the Company's total revenues and
operating income, respectively.
Nitrogen fertilizer is a basic crop nutrient which is applied seasonally by
farmers to improve crop yield and quality. Nitrogen fertilizer is produced by
combining gaseous nitrogen with hydrogen to form anhydrous ammonia, the simplest
form of nitrogen fertilizer, which can be further processed or upgraded into
other fertilizer products such as urea and nitrogen solutions. The Company
presently owns five nitrogen fertilizer facilities with total annual gross
production capacity of 2.7 million tons of ammonia. In 1996, approximately 11%
of the Company's fertilizer production tonnage was supplied to its farm service
center locations for sale to growers, while the rest was sold to other
customers. The Company believes that it is among the lowest cost providers of
nitrogen fertilizer in the markets it serves, benefiting from favorable
transportation logistics and other operating synergies. The Company suffered a
major explosion in December 1994 at one of its nitrogen fertilizer facilities,
for which it was insured. The Company began producing ammonia again at the
facility in late December 1995, and the urea and nitrogen solution upgrading
facilities became operational in May 1996. In 1996, nitrogen products revenues
(including intercompany sales) and operating income constituted approximately
28% and 85% of the Company's total revenues and operating income, respectively.
Methanol is used primarily as a feedstock in the production of other
chemical products such as formaldehyde, acetic acid, adhesives and plastics.
Methanol is also used as a feedstock in the production of methyl tertiary butyl
ether ("MTBE"), an oxygenate and octane enhancer used as an additive in
reformulated gasoline to provide cleaner burning fuels. The Company's methanol
production capacity is approximately 320 million gallons per year, representing
approximately 13% of the total United States rated capacity. The Company's
methanol facility in Beaumont, Texas (the "Beaumont Facility") is the second
largest such facility in the U.S. In 1996, methanol revenues and operating
income constituted approximately 5% and 6% of the Company's total revenues and
operating income, respectively.
3
<PAGE>
The Company's long-term strategy for growth is to: (i) acquire and upgrade
production and distribution facilities, (ii) increase distribution volumes by
expanding sales from Company-operated locations and its affiliated dealer
network, (iii) change its product mix to include more profitable value-added
products and (iv) continue to build customer loyalty by providing value-added
services. As part of this strategy, in April 1993, the Company acquired a
fertilizer manufacturing facility and 32 farm service centers in Canada; in
December 1993, the Company acquired 12 farm service centers in Florida; in
September 1994, the Company acquired a minority interest in a 100 location
distributor of crop input and protection products in the mid-Atlantic region; in
October 1994, the Company acquired Agricultural Minerals and Chemicals Inc.
("AMCI") which provided the Company two fertilizer plants having 1.4 million
tons of annual gross production capacity of ammonia as well as the Beaumont
Facility; in July 1996, the Company completed a construction project at its
Courtright Facility enabling the upgrade of 65,000 tons of ammonia annually into
urea and UAN; and in May 1997, the Company acquired 18 farm service centers
which include grain operations and are located in or near southern Minnesota. In
addition, certain other distribution location acquisitions and manufacturing
upgrade projects have been completed during the past few years. The Company
will, at an appropriate price, consider a sale or joint venture involving its
methanol business.
Terra's common shares are traded on the NYSE and the Toronto Stock Exchange
under the symbol "TRA." As of May 30, 1997, Minorco, an international natural
resources company with operations in gold, base metals, industrial minerals,
paper and packaging and agribusiness ("Minorco"), owned through its wholly owned
subsidiaries 56.8% of Terra's outstanding common shares. As of May 30, 1997,
five of the Company's nine directors were also officers and/or directors of
Minorco or its affiliates.
4
<PAGE>
Company Structure
The following chart substantially represents the organization of the
Company and its principal subsidiaries as of the date hereof. Terra Capital
Holdings, Inc. ("Terra Holdings") and Terra Capital, Inc. ("Terra Capital") are
wholly owned subsidiaries of the Company. Terra International, Inc. ("Terra
International") owns three of the Company's five nitrogen fertilizer plants
through subsidiaries and also conducts the distribution segment of the Company's
business. Terra International (Canada) Inc. ("Terra Canada"), a wholly owned
subsidiary of Terra International, owns the Company's Canadian operations. Terra
International (Oklahoma) Inc. ("Terra Oklahoma"), a wholly owned subsidiary of
Terra International, owns the Company's combined nitrogen and methanol
manufacturing facility in Woodward, Oklahoma. Port Neal Corporation ("PNC"), a
wholly owned subsidiary of Port Neal Holdings Corp. ("PN Holdings"), owns the
Company's nitrogen manufacturing plant located in Iowa. Terra International owns
100% of the common stock of PN Holdings and an unrelated third party owns
preferred stock in PN Holdings representing a 25% voting interest. Terra
Nitrogen Corporation ("TNC") owns the general partner interest and certain
limited partner interests of Terra Nitrogen Company, L.P. ("TNCLP"), for a total
61% equity interest in TNCLP. Approximately 5% of TNCLP is owned by Terra
Capital and approximately 34% of TNCLP is publicly traded and owned by others in
the form of Common Units. See "Description of Certain Indebtedness and Other
Obligations--TNCLP Common Units." All of the operating assets of TNCLP, which
include two of the Company's five nitrogen fertilizer plants, are owned by Terra
Nitrogen, Limited Partnership ("TNLP"), in which TNC holds a 1% general partner
interest and TNCLP holds a 99% limited partner interest. The methanol business
of the Company is conducted principally through Beaumont Methanol, Limited
Partnership ("BMLP"). BMC Holdings, Inc. ("BMCH") is the sole limited partner of
BMLP and holds a 99% limited partner interest in BMLP. Terra Methanol
Corporation ("TMC") is the general partner of BMLP and holds a 1% general
partner interest in BMLP. Terra Capital Funding LLC ("TCF") is owned 99% by
Terra Capital and 1% by Terra Holdings. Terra Funding Corporation ("Funding"), a
wholly owned subsidiary of TCF, is a special purpose entity that purchases and
sells receivables. Terra Capital owns 100% of the capital stock of Terra
International, TNC, BMCH and TMC.
---------------
Terra
---------------
---------------
Terra Holdings
---------------
---------------
Terra Capital
---------------
----------------------------------------------------------------------------
- -------------- ------- -------- ------- ----------
Terra
International ------------------ TNC BMCH TMC TCF
- -------------- Public Unitholders
------------------ ------- -------- ------- ----------
- ------------ ------------ ------- -------- ----------
Terra Canada Unrelated TNCLP BMLP Funding
Third Party
- ------------ ------------ ------- -------- ----------
------------ -------
- -------------- PN Holdings TNLP
Terra Oklahoma ------------ -------
- -------------- ------------
PNC
------------
5
<PAGE>
Summary Financial Data
The following table presents (i) summary consolidated financial data for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 derived from the
Company's audited consolidated financial statements, except Summary Operating
Data and Other Data, and (ii) summary consolidated financial data for the three
months ended March 31, 1996 and 1997 derived from the Company's unaudited
consolidated financial statements for such period. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Selected Financial Data" and
the consolidated financial statements of the Company and related notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues................................. $1,082,191 $1,238,001 $1,665,947 $2,292,173 $2,316,486 $ 394,741 $ 433,710
Cost of sales.................................. 910,395 1,026,332 1,344,062 1,657,070 1,722,450 277,517 338,052
Selling, general and administrative expenses... 146,077 172,116 207,333 259,295 300,897 62,080 68,309
Operating income............................... 25,719 41,828 115,295 377,702 295,181 54,063 26,326
Net interest expense........................... (7,533) (9,683) (16,541) (51,086) (52,845) (9,234) (12,774)
Income from continuing operations
before income taxes........................... 18,186 32,145 89,945 279,382 197,851 31,660 6,642
Income tax provision........................... (7,757) (9,300) (33,700) (115,500) (63,900) (13,260) (2,740)
Income from continuing operations.............. 10,429 22,845 56,245 163,882 133,951 18,400 3,902
Per Common Share:
Income from continuing operations............. $ 0.15 $ 0.33 $ 0.77 $ 2.01 $ 1.72 $ 0.23 $ 0.05
Dividends..................................... -- $ 0.02 $ 0.08 $ 0.10 $ 0.15 $ 0.03 $ 0.04
Summary Operating Data:
Net fertilizer production (thousands of tons)
Ammonia....................................... 404.2 686.1 780.6 1,040.7 1,204.0 333.9 280.0
Urea.......................................... 126.7 222.6 297.9 560.0 641.5 142.8 166.0
Nitrogen solutions (UAN)...................... 759.8 987.3 1,295.2 2,614.7 3,120.5 738.7 853.0
Methanol production (millions of gallons)...... -- -- 81.2 298.9 311.7 84.3 79.6
Revenues by business segment (1)
Distribution.................................. $ 958,725 $1,019,438 $1,318,416 $1,495,166 $1,573,827 $ 222,913 $ 260,543
Nitrogen Products............................. 125,659 228,910 296,557 635,126 654,486 153,067 135,918
Methanol...................................... -- -- 70,274 194,565 132,533 28,896 42,998
Other Data:
Number of Distribution locations owned at
end of period................................. 299 347 355 382 393 389 403
Balance Sheet Data (at end of period):
Net working capital............................ $ 215,817 $ 231,287 $ 273,941 $ 307,873 $ 187,157 $ 285,519 $ 170,325
Net property, plant and equipment.............. 91,969 110,670 552,843 694,358 846,353 747,001 848,404
Total assets................................... 580,192 634,482 1,687,970 1,867,858 1,969,365 2,074,921 2,140,452
Minority interest.............................. -- -- 170,630 182,901 173,893 182,843 170,413
Long-term debt (including current maturities).. 133,679 121,384 558,256 411,573 407,312 410,246 405,976
Total stockholders' equity..................... 221,476 242,980 418,429 571,583 606,092 590,453 590,751
</TABLE>
- -----------
(1) Includes intercompany sales and excludes revenues not included in any of the
three business segments.
6
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully the following factors
in addition to the other information in this Prospectus.
Holding Company Structure and TNCLP
The Company's assets consist primarily of investments in its subsidiaries.
As a result, the Company's rights 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. In
addition, TNCLP's assets (including cash generated by its business) are subject
to the rights of the TNCLP partners under the terms of TNCLP's limited
partnership agreement.
TNCLP's limited partnership agreement requires the quarterly distribution
to the partners of TNCLP of all "Available Cash," which is generally defined to
mean all cash receipts from all sources, less the sum of all cash disbursements,
adjusted for changes in certain reserves established as TNC (as general partner
of TNCLP) determines to be necessary or appropriate in its reasonable discretion
to provide for the proper conduct of the business of TNCLP or TNLP (including
reserves for future capital expenditures) or to provide funds for distributions
with respect to any of the next four calendar quarters.
The nature of the businesses of the Company and TNCLP may give rise to
conflicts of interest between the two. Conflicts could arise, for example, with
respect to transactions involving purchases, sales and transportation of
fertilizer and natural gas and potential acquisitions of businesses or
properties.
Voting Control by Principal Stockholder
As of May 30, 1997, Minorco and its affiliates owned 56.8% of the
outstanding Common Shares of the Company. Since the Company became publicly-
owned in 1983, Minorco and its affiliates have owned a majority of the Company's
outstanding equity securities. As a result of its beneficial ownership of Common
Shares of the Company, Minorco and its affiliates are able to control the
election of the Company's directors and the management and policies of the
Company. As of May 30, 1997, five of the Company's nine directors are also
officers and/or directors of Minorco or its affiliates.
Dependence on Natural Gas; Industry Considerations
The principal raw material used to produce manufactured nitrogen products
and methanol is natural gas. Natural gas costs, including transportation and
forward pricing activities, comprised about 45% of the total costs and expenses
associated with the Company's Nitrogen Products segment in 1996. Natural gas
costs represented about 61% of the total costs and expenses associated with its
Methanol segment in 1996. A significant increase in the price of natural gas
that could not be recovered through an increase in nitrogen fertilizer or
methanol prices could have a material adverse effect on the Company's
profitability and cash flow. The Company's natural gas procurement policy is to
effectively fix or cap the price of between 40% and 80% of its natural gas
requirements for a one-year period and up to 50% of its natural gas requirements
for the subsequent two-year period through various supply contracts, financial
derivatives and other forward-pricing techniques. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors Affecting
Operating Results" and "Business--Raw Materials."
The Company's future operating results are also subject to other external
factors which are beyond the Company's control, including the number of planted
acres; the types of crops planted; the effects of general weather patterns on
the timing and duration of field work for crop planting and harvesting; the
supply of crop inputs; the relative balance of worldwide supply and demand for
nitrogen fertilizers and methanol; the U.S. and other governments' agricultural
policy; and market prices of methanol. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Cyclical Markets for Products
The markets for and profitability of the Company's products have been, and
are likely to continue to be, cyclical. Periods of high demand, high capacity
utilization and increasing operating margins tend to result in new plant
investment
7
<PAGE>
and increased production until supply exceeds demand, followed by periods of
declining prices and declining capacity utilization until the cycle is repeated.
In addition, markets for the Company's products are affected by general economic
conditions. The cyclicality of the Company's products or a downturn in the
economy could materially adversely affect the Company, including its ability to
service its debt obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Seasonality and Volatility
The agricultural products business is seasonal, based upon the planting,
growing and harvesting cycles. Inventories must be accumulated in the first few
months of the calendar year to be available for seasonal sales, requiring
significant storage capacity. Inventory accumulations are financed by suppliers
or short-term borrowings, which are retired with the proceeds of the sales of
such inventory. In times of lower demand, the Company can reduce purchases,
thereby decreasing inventory carrying costs. In the past, over half of the
Company's sales generally occurred during the second quarter of each year. This
seasonality also generally results in higher fertilizer prices during peak
periods, with prices typically reaching their highest point in the spring,
dropping in the summer, increasing in the fall (as depleted inventories are
restored) and through the spring.
The agricultural products business can also be volatile as a result of a
number of other factors, the most important of which, for U.S. markets, are
weather patterns and field conditions (particularly during periods of
traditionally high fertilizer consumption), quantities of fertilizers imported
to and exported from North America and current and projected grain inventories
and prices, which are heavily influenced by U.S. exports and world-wide grain
markets. U.S. governmental policies may directly or indirectly influence the
number of acres planted, the level of grain inventories, the mix of crops
planted and crop prices. The Federal Agriculture Improvement and Reform Act of
1996 put an end to acreage reduction and production control measures, allowing
farmers more flexibility in planting. Because of factors which are outside of
the Company's control, including the production capacity of competitors, there
can be no assurance that the relatively high nitrogen fertilizer price levels
recently achieved will continue. Nitrogen fertilizer is a global commodity and
its price can be volatile.
As with any commodity chemical, the price of methanol is volatile. During
1994, increased world demand for methanol combined with a large number of plant
shutdowns and maintenance turnarounds in the industry and the phase-in of U.S.
federally mandated standards for oxygenated gasoline resulted in a tight market
and uncharacteristically high prices. Demand for methanol also increased due to
increased demand for wood building products in the construction industry. In
1995, however, methanol prices returned to historically "normal" levels. Prices
have risen slightly in early 1997 due to certain production outages, delayed
startup of foreign plants and increased worldwide demand. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Competition
The market for the fertilizer, crop protection products and seed
distributed by the Company is highly competitive. In 1996, sales attributable to
the Company's farm service centers accounted for roughly 5% of total crop
production products sold in the U.S. Within the specific market areas served by
its farm service centers, however, the Company's share of the market was
substantially higher in most instances. The Company's competitors include
cooperatives, divisions of diversified agribusiness companies, regional
distributors and independent dealers, some of which have substantially greater
financial and other resources than the Company.
Nitrogen fertilizer is a global commodity, and customers, including end-
users, dealers and other fertilizer producers and distributors, base their
purchasing decisions principally on the delivered price and availability of the
product. The Company competes with a number of U.S. producers, and producers in
other countries, including state-owned and government-subsidized entities. Some
of the Company's principal competitors may have greater total resources and may
be less dependent on earnings from nitrogen fertilizer sales than the Company.
Some foreign competitors may have access to lower cost or government-subsidized
natural gas supplies. Furthermore, as a consequence of recent favorable market
conditions for nitrogen producers, additional nitrogen fertilizer production
capacity is expected within the next year.
8
<PAGE>
The methanol industry, like the fertilizer industry, is highly competitive,
and such competition is based largely on price, reliability and deliverability.
The relative cost and availability of natural gas and the efficiency of
production facilities are important competitive factors. Significant
determinants of a plant's competitive position are the natural gas acquisition
and transportation contracts that a plant negotiates with its major suppliers.
Domestic competitors for methanol include a number of large integrated
petrochemical producers, many of which are better capitalized than the Company.
In addition, the production and trade of methanol has become increasingly
global, and a number of foreign competitors produce methanol primarily for the
export market. See "Business--Competition."
Damage to Facilities; Natural Hazards
The operations of the Company may be subject to significant interruption if
one or more of its facilities were to experience a major accident or were
damaged by severe weather or other natural disaster. However, the Company
currently maintains, and expects that it will, to the extent economically
feasible, continue to maintain, insurance (including business interruption
insurance) in an amount which the Company believes is sufficient to allow the
Company to withstand major damage to any of its facilities.
The Company's nitrogen fertilizer plant in Iowa (the "Port Neal Facility")
was the site of a major explosion on December 13, 1994. An investigative
committee formed by the Company, which included independent experts, determined
that the principal cause of the explosion was a defect in the design of the
nitric acid sparger in the neutralizer vessel of the ammonium nitrate plant at
the Port Neal Facility. The Company has repaired the facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -Nitrogen Products - Plants."
Environmental Regulation
The Company's business activities are subject to stringent U.S. and foreign
environmental regulations. The Company is also involved in the manufacture,
handling, transportation, storage and disposal of materials that are or may be
classified as hazardous or toxic by applicable laws and regulations. If such
materials have been or are disposed of at sites that are targeted for
investigation and remediation by regulatory authorities, the Company or
subsidiaries thereof, as applicable, may be among those responsible under such
laws for all or part of the costs of such cleanup. The Company has been
designated as a potentially responsible party ("PRP") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), and analogous state laws with respect to a number of sites. Under
such laws, certain classes of persons, including generators of hazardous
substances, are subject to claims for response costs, regardless of fault or the
legality of original disposal. Such persons may be held jointly and severally
liable for such claims. In addition, there can be no assurance that existing
environmental regulations will not be revised or that new regulations will not
be adopted or become applicable so as to have a material adverse effect on the
Company's business or financial condition. See "Business--Environmental and
Other Regulatory Matters."
The Company endeavors to comply (and has incurred substantial costs in
connection with such compliance) in all material respects with applicable
environmental, safety and health regulations. The Company does not expect its
continued operation in compliance with such regulations to have a material
adverse effect on its results of operations, financial position, net cashflows,
or competitive position.
9
<PAGE>
THE COMPANY
The Company is a leader in each of its three business segments: (i) the
distribution of crop production inputs and services, (ii) the manufacture of
nitrogen products and (iii) the manufacture of methanol. 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. The Company is also the third largest producer of anhydrous ammonia and
the largest producer of nitrogen solutions in the United States and Canada. In
addition, the Company is one of the largest U.S. manufacturers and marketers of
methanol. In 1996, the Company generated revenues and operating income of $2.3
billion and $295.2 million, respectively.
The Company's distribution network for fertilizer, crop protection products
and seed has grown over the last several years to 421 farm service centers and
about 780 affiliated dealer locations serving the United States and the eastern
region of Canada, as of May 30, 1997. This growth generally has been the result
of a healthy farm economy, acquisitions, additional facilities and aggressive
marketing. The Company's distribution network is supplied by both independent
sources and the Company's own production facilities, which presently include one
crop protection chemical dry flowable and liquid formulation plant and seven
other liquid chemical formulation facilities in addition to its nitrogen
production facilities. In 1996, distribution revenues and operating income
constituted approximately 67% and 9% of the Company's total revenues and
operating income, respectively.
Nitrogen fertilizer is a basic crop nutrient which is applied seasonally by
farmers to improve crop yield and quality. Nitrogen fertilizer is produced by
combining gaseous nitrogen with hydrogen to form anhydrous ammonia, the simplest
form of nitrogen fertilizer, which can be further processed or upgraded into
other fertilizer products such as urea and nitrogen solutions. The Company
presently owns five nitrogen fertilizer facilities with total annual gross
production capacity of 2.7 million tons of ammonia. In 1996, approximately 11%
of the Company's fertilizer production tonnage was supplied to its farm service
center locations for sale to growers, while the rest was sold to other
customers. The Company believes that it is among the lowest cost providers of
nitrogen fertilizer in the markets it serves, benefiting from favorable
transportation logistics and other operating synergies. The Company suffered a
major explosion in December 1994 at the Port Neal Facility, for which it was
insured. The Company began producing ammonia again at the facility in late
December 1995, and the urea and nitrogen solution upgrading facilities became
operational in May 1996. In 1996, nitrogen products revenues (including
intercompany sales) and operating income constituted approximately 28% and 85%
of the Company's total revenues and operating income, respectively.
Methanol is used primarily as a feedstock in the production of other
chemical products such as formaldehyde, acetic acid, adhesives and plastics.
Methanol is also used as a feedstock in the production of MTBE, an oxygenate and
octane enhancer used as an additive in reformulated gasoline to provide cleaner
burning fuels. The Company's methanol production capacity is approximately 320
million gallons per year, representing approximately 13% of the total United
States rated capacity. The Beaumont Facility is the second largest such facility
in the U.S. In 1996, methanol revenues and operating income constituted
approximately 5% and 6% of the Company's total revenues and operating income,
respectively.
The Company's long-term strategy for growth is to: (i) acquire and upgrade
production and distribution facilities, (ii) increase distribution volumes by
expanding sales from Company-operated locations and its affiliated dealer
network, (iii) change its product mix to include more profitable value-added
products and (iv) continue to build customer loyalty by providing value-added
services. As part of this strategy, in April 1993, the Company acquired a
fertilizer manufacturing facility and 32 farm service centers in Canada; in
December 1993, the Company acquired 12 farm service centers in Florida; in
September 1994, the Company acquired a minority interest in a 100 location
distributor of crop input and protection products in the mid-Atlantic region; in
October 1994, the Company acquired AMCI, which provided the Company two
fertilizer plants and 1.4 million tons of annual gross production capacity of
ammonia as well as the Beaumont Facility; in July 1996, the Company completed a
construction project at its Courtright Facility enabling the upgrade of 65,000
tons of ammonia annually into urea and UAN; and in May 1997, the Company
acquired 18 farm service centers which include grain operations and are located
in or near southern Minnesota. In addition, certain other distribution location
acquisitions and manufacturing upgrade projects have been completed during the
past few years. The Company will, at an appropriate price, consider a sale or
joint venture involving its methanol business.
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.
10
<PAGE>
SECURITIES COVERED BY THIS PROSPECTUS
The 3,000,000 Common Shares covered by this Prospectus are available for
use in future acquisitions of other businesses, properties or securities in
business combination transactions, which may relate to businesses similar or
dissimilar to the Company's businesses. The consideration offered by the Company
in such acquisitions in addition to the Common Shares offered by this Prospectus
may include cash, debt or other securities (which may be convertible into Common
Shares covered by this Prospectus), or assumption by the Company of liabilities
of the business being acquired, or a combination thereof. It is contemplated
that the terms of each acquisition will be determined by negotiations between
the Company and the management or the owners of the businesses or properties to
be acquired or the owners of the securities (including newly issued securities)
to be acquired, with the Company taking into account the quality of management,
the past and potential earning power and growth of the businesses, properties or
securities to be acquired, and other relevant factors. It is anticipated that
Common Shares issued in acquisitions will be valued at a price reasonably
related to the market value of the Common Shares at the time the basic terms of
the acquisition are tentatively agreed upon or about the time or times of
delivery of the Common Shares.
With the consent of the Company, this Prospectus may also be used by the
persons or entities who have received or will receive from the Company Common
Shares covered by this Prospectus in connection with the acquisitions of the
businesses, properties or securities and who may wish to sell such stock under
circumstances requiring or making desirable use of this Prospectus and by
certain transferees of such persons or entities. The Company's consent to such
use may be conditioned upon such persons or entities agreeing not to offer more
than a specified number of shares following amendments to this Prospectus, which
the Company may agree to use its best efforts to prepare and file at certain
intervals. The Company may require that any such offering be effected in an
organized manner through securities dealers.
Sales by means of this Prospectus by persons other than the Company may be
made from time to time privately at prices to be individually negotiated with
the purchasers, or publicly through transactions on the NYSE (which may involve
crosses and block transactions), other exchanges or in the over-the-counter
market, at prices reasonably related to market prices at the time of sale or at
negotiated prices. Broker-dealers participating in such transactions may act as
agent or as principal and may receive commissions from the purchasers as well as
from the sellers. The Company may indemnify any broker-dealer participating in
such transactions against certain liabilities, including liabilities under the
1933 Act. Profits, commissions and discounts on sales by persons who may be
deemed to be underwriters within the meaning of the 1933 Act may be deemed
underwriting compensation under the 1933 Act.
Stockholders may also offer Common Shares issued in past and future
acquisitions or purchased from the Company by means of prospectuses under other
registration statements or pursuant to exemptions from the Registration
requirements of the 1933 Act, including sales which meet the requirements of
Rule 144 or 145(d) under the 1933 Act, and stockholders should seek the advice
of their own counsel with respect to the legal requirements for such sales.
See the inside back cover page of this prospectus for the identity of any
persons who have received stock in connection with acquisitions by the Company
and with respect to whom the Company has consented to the use of this prospectus
in connection with sales of such stock.
11
<PAGE>
COMMON STOCK PRICE RANGE AND DIVIDENDS
The Common Shares of the Company are listed on the NYSE under the symbol
"TRA." The following table sets forth, as quoted on the NYSE Composite Tape, the
high and low sale prices of the Common Shares, and also sets forth the cash
dividends declared per share during such periods:
<TABLE>
<CAPTION>
Market Price
------------------ Cash Dividends
High Low per Common Share
------- ------- ----------------
<S> <C> <C> <C>
1995:
First Quarter........................... $13.38 $ 9.75 $0.02
Second Quarter.......................... 12.38 9.75 0.02
Third Quarter........................... 14.88 12.00 0.03
Fourth Quarter.......................... 14.25 11.75 0.03
1996:
First Quarter........................... 14.25 11.00 0.03
Second Quarter.......................... 14.25 12.38 0.04
Third Quarter........................... 15.00 12.00 0.04
Fourth Quarter.......................... 15.00 13.63 0.04
1997:
First Quarter........................... 15.00 12.50 0.04
Second Quarter (through June 10, 1997).. 14.13 10.63 0.04
</TABLE>
See the cover page of this prospectus for a recent sale price of the Common
Shares as reported on the NYSE. As of May 30, 1997, there were 4,551 holders of
record of Common Shares.
While the Company intends to continue to pay regular cash dividends on its
Common Shares in the future, the decision to do so will be made quarterly by its
Board of Directors based upon the Company's earnings, financial position,
capital requirements and prospects and such other factors as the Board of
Directors deems relevant. The Company's ability to pay cash dividends will be
affected by the covenants and other terms of the financing agreements of the
Company and its subsidiaries, including the Credit Agreement and the indentures
under which the 10 1/2% Notes and the 10 3/4% Notes (each as defined in
"Description of Certain Indebtedness and Other Obligations") were issued. As a
holding company, the Company's ability to pay dividends will depend on its
receipt of funds from its subsidiaries which, in turn, will be affected by the
Credit Agreement and other obligations of such subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Certain Indebtedness and Other Obligations."
12
<PAGE>
SELECTED FINANCIAL DATA
The following table presents (i) selected consolidated historical financial
data for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 derived
from the Company's audited consolidated financial statements, except Summary
Operating Data and Other Data, and (ii) selected consolidated historical
financial data for the three months ended March 31, 1996 and 1997 derived from
the Company's unaudited consolidated financial statements for such periods. The
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company and related notes thereto and other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Income Statement Data:
Total revenues................. $1,082,191 $1,238,001 $1,665,947 $2,292,173 $2,316,486 $ 394,741 $ 433,710
Cost of sales.................. 910,395 1,026,332 1,344,062 1,657,070 1,722,450 277,517 338,052
Selling, general and
administrative expenses....... 146,077 172,116 207,333 259,295 300,897 62,080 68,309
Equity in (earnings)
losses of unconsolidated -- (2,275) (743) (1,894) (2,042) 1,081 1,023
affiliates................... ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations......... 25,719 41,828 115,295 377,702 295,181 54,063 26,326
Net interest expense........... (7,533) (9,683) (16,541) (51,086) (52,845) (9,234) (12,774)
Minority interest.............. -- -- (8,809) (47,234) (44,485) (13,169) (6,910)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations before
income taxes................. 18,186 32,145 89,945 279,382 197,851 31,660 6,642
Income tax provision........... (7,757) (9,300) (33,700) (115,500) (63,900) (13,260) (2,740)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations.................... $ 10,429 $ 22,845 $ 56,245 $ 163,882 $ 133,951 $ 18,400 $ 3,902
========== ========== ========== ========== ========== ========== ==========
Per Common Share:
Income from continuing
operations................. $ 0.15 $ 0.33 $ 0.77 $ 2.01 $ 1.72 $ 0.23 $ 0.05
Dividends................... -- $ 0.02 $ 0.08 $ 0.10 $ 0.15 $ 0.03 $ 0.04
Summary Operating Data:
Net fertilizer production
(thousands of tons)
Ammonia..................... 404.2 686.1 780.6 1,040.7 1,204.0 333.9 280.0
Urea........................ 126.7 222.6 297.9 560.0 641.5 142.8 166.0
Nitrogen solutions (UAN).... 759.8 987.3 1,295.2 2,614.7 3,120.5 738.7 853.0
Methanol Production
(millions of gallons)... -- -- 81.2 298.9 311.7 84.3 79.6
Revenues by business segment (1)
Distribution................ $ 958,725 $1,019,438 $1,318,416 $1,495,166 $1,573,827 $ 222,913 $ 260,543
Nitrogen Products........... 125,659 228,910 296,557 635,126 654,486 153,067 135,918
Methanol.................... -- -- 70,274 194,565 132,533 28,896 42,998
Other Data:
Number of Distribution
locations owned at end
of period.................... 299 347 355 382 393 389 403
Balance Sheet Data (at end
of period):
Net working capital............ $ 215,817 $ 231,287 $ 273,941 $ 307,873 $ 187,157 $ 285,519 $ 170,325
Net property, plant and
equipment..................... 91,969 110,670 552,843 694,358 846,353 747,001 848,404
Total assets................... 580,192 634,482 1,687,970 1,867,858 1,969,365 2,074,921 2,140,452
Minority interest.............. -- -- 170,630 182,901 173,893 182,843 170,413
Long-term debt (including
current maturities)........... 133,679 121,384 558,256 411,573 407,312 410,246 405,976
Total stockholders' equity..... 221,476 242,980 418,429 571,583 606,092 590,453 590,751
</TABLE>
(1) Includes intercompany sales and excludes revenues not included in any of the
three business segments.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Comparability and Overview
The Company's improved earnings in 1996 and 1995 compared to 1994 reflect
favorable market conditions, internal growth and acquisitions which have
increased manufacturing and distribution capabilities. The following
acquisitions are included in operating results:
On October 20, 1994, the Company acquired the stock of Agricultural
Minerals and Chemicals Inc. (AMCI), for $506 million in cash. Through the AMCI
acquisition and subsequent transactions, the Company, including its interest as
the general partner, has an approximate 66% ownership interest in ammonia
production and upgrading facilities located in Verdigris, Oklahoma and
Blytheville, Arkansas. The acquisition also included a wholly owned methanol
production facility located in Beaumont, Texas.
On September 15, 1994, the Company acquired an approximate 34% interest in
Royster-Clark, Inc. for $12 million in cash. Royster-Clark is a 104-location
distributor of crop production products in the mid-Atlantic region with annual
sales of approximately $200 million.
In addition, the Company continues to add distribution locations each year
through acquisition of numerous distributors in its marketing area.
Factors That Affect Operating Results
Factors that may affect the Company's future operating results include:
the relative balance of supply and demand for nitrogen fertilizers and methanol,
the number of planted acres - which is impacted by both worldwide demand and
governmental policies - 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 production products, the availability and cost of
natural gas, the effect of environmental legislation on demand for the Company's
products, the availability of financing sources to fund seasonal working capital
needs, and the potential for interruption to operations due to accident or
natural disaster.
Prices for nitrogen products are influenced by the world supply and demand
balance for ammonia and nitrogen-based products. Long-term demand is affected
by population growth and rising living standards that determine food
consumption. Supply is affected by worldwide capacity and the availability of
nitrogen product exports from major producing regions such as the former Soviet
Union, the Middle East and South America. Due to several years of favorable
economics in the industry, capacity additions in the form of new and expanded
production facilities have been undertaken. Consequently, new nitrogen
fertilizer suppliers are anticipated to come on-stream during the next few
years. If increasing demand is insufficient to absorb new supplies, profit
margins would be under pressure.
Methanol is used as a raw material in the production of formaldehyde,
methyl tertiary butyl ether (MTBE), acetic acid and numerous other chemical
derivatives. The price of methanol is highly influenced by the supply and demand
for each of these secondary markets, in particular MTBE, an oxygenate used in
reformulated gasoline and an octane enhancer used in non-reformulated gasoline.
Future demand for MTBE and methanol will depend on the degree to which Clean Air
Act Amendments are implemented and enforced, potential legislation and the
willingness of regulatory agencies to grant waivers.
Due to the higher quantities of crop production products 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. Passage of the 1996 Farm Bill (the
Federal Agriculture Improvement and Reform Act of 1996) eliminated annual
acreage set-asides and base acreage restrictions for most crops. Additionally,
eligible producers may enter into seven year market transition contracts. This
Farm Bill will provide farmers more freedom in making decisions regarding what
crops are planted. Worldwide grain stocks remain at low levels. Planted
acreage for corn is expected to increase in 1997 to nearly 82 million acres from
79.5 million acres in 1996. Planted cotton acreage for 1997 in the U.S. is
estimated to decline to 13.7 million acres from 14.7 million acres in 1996.
14
<PAGE>
Weather can have a significant effect on the Company's operations. Weather
conditions that delay or intermittently disrupt field work during the planting
and growing season may result in fewer than normal crop production products
being applied and/or shift plantings to crops with shorter growing seasons.
Similar conditions following harvest may delay or eliminate opportunities to
apply fertilizer in the fall. Weather can also have an adverse effect on crop
yields, which lowers the income of growers and could impair their ability to pay
for crop production products purchased from the Company and its dealer
customers. During 1996 planting conditions were unfavorable in many areas of
the U.S. causing a reduction in planted acres and use of certain crop production
products.
Reliable sources for supply of crop production products at competitive
prices are critical to the Distribution portion of the Company's business. The
Company's sources for fertilizer, crop protection products and seed are
typically manufacturers without the 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 1997, with some major supplier agreements extending into 1999.
The principal raw material used to produce manufactured nitrogen products
and methanol is natural gas. Natural gas costs, including transportation and
forward pricing activities, comprised about 45% of the total costs and expenses
associated with the Company's Nitrogen Products segment in 1996. Natural gas
costs represented about 61% of the total costs and expenses associated with its
Methanol segment in 1996. The Company's natural gas procurement policy is to
effectively fix or cap the price of approximately 40% to 80% of its natural gas
requirements for a one-year period and up to 50% of its natural gas requirements
for the subsequent two-year period through various supply contracts, financial
derivatives and other forward pricing techniques. The Company believes that
there is a sufficient supply to allow acceptable costs for the foreseeable
future and has entered into firm contracts to minimize the risk of interruption
or curtailment of natural gas supplies during the heating season.
The Company's Distribution business segment 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 during which products can be used by customers, the Company builds
inventories during the first quarter of the year 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 higher margins. For its current level of sales,
the Company requires lines of credit to fund inventory increases and to support
customer credit terms. The Company believes that its credit facilities are
adequate for expected sales levels in 1997 and for the next several years.
The Company's manufacturing operations may be subject to significant
interruption if one or more of its facilities were to experience a major
accident or were damaged by severe weather or other natural disaster. The
Company currently maintains insurance (including business interruption
insurance) and expects that it will continue to do so in an amount which it
believes is sufficient to allow the Company to withstand major damage to any of
its facilities. The Company's Port Neal facility experienced such a casualty on
December 13, 1994.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage risk in the
areas of (a) foreign currency fluctuations, (b) changes in natural gas supply
prices, (c) changes in interest rates and (d) the effect of methanol prices
relative to natural gas prices. See Note 13 to the Consolidated Financial
Statements for information on the use of derivative financial instruments.
Results of Operations
Quarter Ended March 31, 1997 Compared With Quarter Ended March 31, 1996
Consolidated Results. The Company reported net income of $3.9 million, or
$0.05 per share, on revenues of $433.7 million for the first quarter of 1997
compared with net income of $18.4 million, or $0.23 per share, on revenues of
$394.7 million in 1996. The decline in 1997 net income reflected significant
increases to natural gas costs and a slow start to the spring planting season.
15
<PAGE>
The Company classifies its operations into three business segments:
Distribution, Nitrogen Products and Methanol. The Distribution segment includes
sales of products purchased from manufacturers, including the Company, and
resold by the Company. Distribution revenues are derived primarily from grower
and dealer customers through sales of crop protection products, fertilizers,
seed and services. The Nitrogen Products segment represents only those
operations directly related to the wholesale sales of nitrogen products from the
Company's ammonia manufacturing and upgrading facilities. The Methanol segment
represents wholesale sales of methanol from the Company's two methanol
manufacturing facilities.
Total revenues and operating income (loss) for the three-month periods ended
March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Distribution $260,543 $222,913
Nitrogen Products 135,918 153,067
Methanol 42,998 28,896
Other - net of intercompany eliminations (5,749) (10,135)
- -----------------------------------------------------------------------------
$433,710 $394,741
=============================================================================
OPERATING INCOME (LOSS):
Distribution $(24,557) $(23,409)
Nitrogen Products 38,541 74,334
Methanol 13,158 4,029
Other expense - net (816) (891)
- -----------------------------------------------------------------------------
26,326 54,063
Interest expense -net (12,774) (9,234)
Minority interest (6,910) (13,169)
- -----------------------------------------------------------------------------
Total from operations $ 6,642 $ 31,660
=============================================================================
</TABLE>
Distribution. Distribution revenues for the 1997 first quarter increased
$37.6 million or 16.9% to $260.5 million compared with 1996 results. Expansion
of the distribution network from 389 locations to 403 locations in 1997
contributed $8.2 million to the revenue increase. Higher sales of crop
protection products primarily to dealer customers contributed $29.1 million to
1997 sales.
The operating loss for the Distribution segment was $24.6 million in 1997
compared with $23.4 million in 1996. This segment traditionally generates an
operating loss during the first quarter. New locations generated a first
quarter 1997 operating loss of $.5 million. Selling expense increases due to an
expanded sales force and additional equipment in anticipation of the 1997 spring
planting season exceeded gross profit increases by $.7 million.
Nitrogen Products. Nitrogen Products revenues were $135.9 million and
$153.1 million for the three months ended March 31, 1997 and 1996, respectively.
The decrease in 1997 revenues compared with 1996 was due to lower sales volumes
and prices. Ammonia and nitrogen solutions sales volumes declined 12% and 7%,
respectively, in the 1997 period compared with the prior year. Additionally,
nitrogen solutions and urea prices decreased, contributing to price declines of
$5.0 million. The decline in sales volumes and prices was attributable to cold,
wet weather and higher inventory levels at dealer locations.
Operating income for the Nitrogen Products segment was $38.5 million in the
first quarter of 1997 compared with $74.3 million for the first quarter of 1996.
The decline in operating income was due to significantly higher natural gas
costs and lower sales prices. Natural gas costs, which comprised almost 45% of
total 1996 annual costs and expenses, increased 68% due to the December 1996
spike in gas prices from cold weather which continued into the first quarter of
1997.
16
<PAGE>
Methanol. Methanol revenues increased $14.1 million during the first
quarter of 1997 in comparison with the same period in 1996. The increase was due
to higher methanol sales prices reflecting tight market conditions caused by
production outages, delayed startup of foreign plants and increased worldwide
demand.
Methanol operating income for the three months ended March 31, 1997 and
1996 was $13.2 million and $4.0 million, respectively. The increase in methanol
sales prices outpaced the 45% increase in the average cost of natural gas and
accounted for the increase in operating income. Natural gas costs comprised over
60% of the total 1996 annual cost and expense of methanol operations.
Other Operating Expense - Net. Other operating expense was $.8 million and
$.9 million for the first quarter of 1997 and 1996, respectively. Other
operating expense includes expenses not directly related to specific business
segments, including certain insurance coverage, corporate finance fees and other
costs.
Interest Expense - Net. Interest expense, net of interest income, was $12.8
million for the first quarter of 1997, compared with $9.2 million for the prior
year period. Net interest expense increased due to increased short-term
borrowings to fund current operations.
Income Taxes. Income taxes for the first quarter of 1997 were recorded at
an effective tax rate of 41%, comparable to the effective tax rate for the 1996
first quarter.
Minority Interest. Minority interest, representing primarily third party
unitholder interest in the earnings of Terra Nitrogen Company, L.P. (TNCLP), was
$6.9 million for the first quarter 1997 compared with $13.2 million in 1996.
Minority interest declined primarily due to lower earnings from TNCLP
operations.
Fiscal 1996 Compared with Fiscal 1995
Consolidated Results. The Company reported net income of $134.0 million, or
$1.72 per share, on revenues of $2.32 billion for 1996 compared with net income
of $159.5 million, or $1.96 per share, on revenues of $2.29 billion in 1995. The
1995 results included an extraordinary loss on early retirement of debt of $4.3
million, or $0.05 per share.
Total revenues and operating income for years ended December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Distribution $ 1,573,827 $ 1,495,166
Nitrogen Products 654,486 635,126
Methanol 132,533 194,565
Other - net of intercompany eliminations (44,360) (32,684)
- ------------------------------------------------------------------------
$ 2,316,486 $ 2,292,173
========================================================================
OPERATING INCOME:
Distribution $ 25,268 $ 41,207
Nitrogen Products 255,263 263,787
Methanol 18,520 77,138
Other expense - net (3,870) (4,430)
- ------------------------------------------------------------------------
295,181 377,702
Interest expense -net (52,845) (51,086)
Minority interest (44,485) (47,234)
- ------------------------------------------------------------------------
Total from operations $ 197,851 $ 279,382
========================================================================
</TABLE>
Distribution. Distribution revenues for the year ended December 31, 1996
increased 5.3% to $1.57 billion from the comparable 1995 period. New locations
in 1996 contributed $69.0 million to the increase in revenues. Same store
revenues did not significantly change in 1996 due to adverse weather conditions,
change in mix of crops, lower insect pressure and the economic condition of some
growers.
17
<PAGE>
Operating income for the Distribution segment amounted to $25.3 million for
1996 in comparison with $41.2 million for 1995. Provisions for doubtful accounts
increased $8.1 million in 1996 as a result of two consecutive years of drought
conditions across Southern markets. Growth of the Distribution network to 393
locations from 382 in 1995 increased gross profits by $12.7 million but also
increased selling expenses by $11.7 million. Expense increases resulting from an
expanded sales force and additional equipment at existing locations to meet
demands for services and products in the 1996 season exceeded increases to gross
profits by approximately $8 million.
Nitrogen Products. Nitrogen Products revenues increased $19.4 million to
$654.5 million for 1996 in comparison with 1995 due to greater sales volumes for
ammonia and nitrogen solutions partly offset by lower sales volumes for urea and
lower prices. Sales volumes increased as a result of the start-up of the Port
Neal manufacturing plant which began producing ammonia in December 1995 and
nitrogen solutions in May 1996.
Nitrogen Products 1996 operating income of $255.3 million was $8.5 million
less than 1995. Earnings attributable to the 1996 start-up of the Port Neal
plant approximated 1995 business interruption proceeds. Price declines of $20.7
million were partially offset by natural gas cost savings of $18.3 million for
1996 compared with 1995. The use of financial derivatives to forward price
natural gas costs more than offset an approximate 27% increase in the 1996 spot
market price of natural gas compared with 1995. Non-recurring costs of $4.2
million were incurred in 1996 as a result of staff reductions at the Courtright
manufacturing plant.
Methanol. Methanol revenues in 1996 and 1995 totaled $132.5 million and
$194.6 million, respectively. Revenues declined in 1996 as the result of
significantly lower selling prices. Prices fell almost one-third from $0.62 per
gallon in 1995 to $0.42 per gallon in 1996.
Methanol operating income for 1996 was $18.5 million while 1995 operating
income was $77.1 million. Lower selling prices reduced 1996 Methanol operating
income but were partially offset by lower natural gas costs. Natural gas costs
were lower as the use of financial derivatives to forward price a majority of
the natural gas requirements more than offset an approximate 27% increase in the
spot market price of natural gas for 1996 in comparison with 1995. The Company
expects methanol prices to continue within their "normal" historical range of
$0.30 to $0.60 per gallon.
Other Operating Expense - Net. Other operating expense was $3.9 million in
1996 compared with $4.4 million in 1995. Other expense includes expenses not
directly related to individual business segments, including certain insurance
coverages, corporate finance fees and other costs.
Interest Expense - Net. Net interest expense of $52.8 million in 1996
approximated 1995 amounts for the year ended December 31, 1996.
Minority Interest. Minority interest, representing primarily third party
unitholder interest in the earnings of Terra Nitrogen Company, L.P. (TNCLP),
totaled $44.5 million in 1996 compared with $47.2 million in 1995. Minority
interest declined due primarily to the purchase of Senior Preference Units
(SPUs) by the Company in the second and third quarters of 1995.
Income Taxes. Income tax expense was recorded at an effective rate of 32.3%
for the year ended December 31, 1996 compared with 41.3% in 1995. During 1996
the Company purchased tax benefits from a Canadian subsidiary of Minorco,
resulting in a deferred tax asset for the Company which reduced the effective
rate by 9.1%.
Fiscal 1995 Compared with Fiscal 1994
Consolidated Results. The Company reported net income of $159.5 million, or
$1.96 per share, on revenues of $2.29 billion in 1995 compared with net income
of $56.6 million, or $0.78 per share, on revenues of $1.67 billion in 1994.
Results for 1995 include a full year's effect of the AMCI acquisition which took
place on October 20, 1994. The effect of including a full year of operations of
the acquired business increased 1995 revenues by $433 million and net income by
$60 million. Other significant factors that contributed to a successful 1995
were continued growth in the Distribution segment despite a reduction in planted
acres, a 24% increase in nitrogen prices and natural gas costs which averaged
15% less than the prior year.
18
<PAGE>
Total revenues and operating income for the years ended December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
Pro Forma
1994
(in thousands) 1995 (unaudited - see below) 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Distribution $ 1,495,166 $ 1,318,416 $ 1,318,416
Nitrogen Products 635,126 539,152 296,557
Methanol 194,565 246,404 70,274
Other - net (32,684) (19,145) (19,300)
- --------------------------------------------------------------------------------
$ 2,292,173 $ 2,084,827 $ 1,665,947
================================================================================
OPERATING INCOME:
Distribution $ 41,207 $ 33,784 $ 33,784
Nitrogen Products 263,787 111,961 48,369
Methanol 77,138 129,888 42,679
Other expense - net (4,430) (9,466) (9,537)
- --------------------------------------------------------------------------------
377,702 266,167 115,295
Interest expense - net (51,086) (49,367) (16,541)
Minority interest (47,234) (34,916) (8,809)
- --------------------------------------------------------------------------------
Total from operations $ 279,382 $ 181,884 $ 89,945
================================================================================
</TABLE>
The unaudited, pro forma results of operations have been prepared to give
effect to the Company's (i) acquisition of AMCI, (ii) issuance of 9.7 million
Common Shares, and (iii) borrowing under a 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 is not necessarily indicative of the results
that actually would have been obtained if the transactions had occurred on
January 1, 1994.
Distribution. Distribution revenues were $1.50 billion in 1995 compared
with $1.32 billion in 1994, an increase of 13%. Higher volumes and the expansion
of the retail distribution network contributed to increased sales despite wet
weather during the spring planting season and a reduction in planted acres. Same
store sales increased by approximately 7%. About $100 million of the 1995 sales
growth consisted of increased retail chemical sales including sales of Terra's
own brand of Riverside products. Riverside product sales increased by $19
million. Distributed fertilizer sales increased $62 million. Seed and other
sales and services increased by $17 million.
Operating income for the Distribution business was $41.2 million in 1995
compared with $33.8 million in 1994. Overall gross profits increased by
approximately $50 million. Increased sales volumes added approximately $30
million in gross profits while higher margin grower and Riverside brand sales
accounted for the remainder. Selling, general and administrative expenses
increased $42.6 million. An estimated 60%, or $25 million, of the expense
increase relates to expansion of the Distribution business. The remaining
increase of $17 million includes increased marketing and promotional spending,
an increase in bad debt experience from 1994 and inflationary cost increases.
Nitrogen Products. Nitrogen Products revenues were $635 million in 1995
compared with $297 million in 1994. The increase reflects the inclusion in the
Company's Consolidated Financial Statements of a full year of results from the
Verdigris, Oklahoma and Blytheville, Arkansas ammonia plants acquired in October
1994. The acquired plants raised the Company's total production capacity from
1.3 million to 2.7 million gross tons of ammonia. Revenues also increased as a
result of an approximate 24% increase in prices.
Operating income for the Nitrogen Products business was $264 million in
1995 compared with $48 million in 1994. The increase reflects a full year of
results from the Verdigris, Oklahoma and Blytheville, Arkansas plants as well as
the effect of the approximate 24% increase in prices. Additionally, natural gas
costs decreased by approximately 15% compared with 1994 costs. The increase in
operating margin to 42% in 1995 from 16% in 1994 primarily reflects the change
in nitrogen prices and natural gas costs.
19
<PAGE>
Methanol. Methanol revenues were $195 million in 1995 compared with $70
million in 1994. The increase reflects the inclusion in the Company's
Consolidated Financial Statements of a full year of results from the Beaumont,
Texas methanol facility, which was acquired in October 1994, and a full year of
operation of the Company's Woodward, Oklahoma plant, whose capacity was
partially converted from ammonia to methanol production in April 1994. The
production capacities of the two plants are 280 million gallons per year and 40
million gallons per year, respectively.
Operating income totaled $77 million in 1995 compared with $43 million in
1994. Prices for methanol rose rapidly in the fourth quarter of 1994 and then
fell sharply in February, March and April of 1995. The reduction in operating
margin from 61% in 1994 to 40% in 1995 primarily reflects the decline in selling
prices. Gross profits were $82.6 million in 1995 compared with $44.8 million in
1994. Selling, general and administrative expenses were $5.5 million in 1995
compared with $2.1 million in 1994.
In October 1994, the Company entered into the Methanol Hedging Agreement.
Under the Methanol Hedging Agreement the Company is required to make payments
should the market price of methanol increase in relation to the cost of natural
gas for defined quantities of production. As a result of the unusually high
methanol prices at the end of 1994, $15.9 million was accrued as payable under
the Methanol Hedging Agreement. This accrual was reversed in 1995 as prices
declined to lower levels. The effect of the accrual and its subsequent reversal
was to decrease 1994 revenues and operating income by $15.9 million and increase
1995 revenues and operating income by a like amount.
Other Operating Expense - Net. Other operating expense was $4.4 million in
1995 compared with $9.5 million in 1994. Other operating expense consists of
corporate level expenses, including certain insurance coverages, corporate
finance fees and other costs.
Interest Expense - Net. Interest expense, net of interest income, totaled
$51.1 million in 1995 compared with $16.5 million in 1994. The increase was
principally the result of higher interest expense due to additional debt in
connection with the acquisition of AMCI.
Minority Interest. Minority interest, representing third party unitholder
interest in the earnings of TNCLP, increased to $47.2 million in 1995 compared
with $8.8 million in 1994. The increase was due to the inclusion of a full year
of operations of TNCLP in the Company's Consolidated Financial Statements and
the effect of higher nitrogen prices on TNCLP's results.
Income Taxes. Income tax provision was recorded at an effective rate of
41.3% for 1995 compared with 37.5% for 1994. The increased rate results
primarily from the amortization of goodwill from the AMCI acquisition which is
not deductible for tax purposes.
Liquidity and Capital Resources
The Company's primary uses of funds will be to fund its working capital
requirements, make payments on its indebtedness and other obligations, make
quarterly distributions to minority interests, disburse quarterly dividends on
common stock, and make capital expenditures and acquisitions. The principal
sources of funds will be cash flow from operations and borrowings under
available bank facilities. The Company believes that cash from operations and
available financing sources will be sufficient to meet anticipated cash
requirements.
Cash used for operations in the first three months of 1997 was $8.3
million. Working capital balances increased $38.7 million for the first three
months of 1997 due to the seasonal nature of the Company's operations. The
Company has available a $355 million revolving credit facility for domestic
working capital needs. As of March 31, 1997, $103.0 million was outstanding
under this facility.
Cash used for investing activities was $20.3 million in the first three
months of 1997, $15.4 million funded investments in plant and equipment. Cash
used for acquisitions ($5.7 million) represents amounts paid to acquire new
locations for the Company's distribution network.
The rebuild of the Port Neal manufacturing plant was substantially complete
in 1996. The Company began construction in the third quarter of 1996 on a $23
million nitric acid plant at Port Neal with the facility expected to be
20
<PAGE>
fully operational by the end of 1997. The Company expects 1997 capital
expenditures, exclusive of expenditures related to the Port Neal nitric acid
plant and the acquisition of retail distribution locations, to approximate $67
million consisting of efficiency improvements at manufacturing facilities, the
expansion of existing service centers and routine replacement of equipment.
As of March 31, 1997, the Company has received $203 million in insurance
payments in connection with the repair of its Port Neal Facility. The Company
presented documentation to the insurance carriers supporting expenditures in
excess of $350 million to rebuild the plant and to compensate for the property
damage and business interruption losses. The Company filed a complaint in April
1997 in federal court against its property insurance carriers alleging the
carriers have failed to act in a timely manner to handle the claim or to
acknowledge their obligations to pay the amounts owed. The complaint seeks,
among other things, monetary damages in excess of $150 million.
On April 30, 1996, the Board of Directors of the Company authorized the
repurchase of up to 8.5 million Common Shares on the open market and through
privately negotiated transactions over the ensuing fifteen months. As of May 31,
1997, the Company had repurchased 8.5 million shares for $114 million.
During the first three months of 1997, the Company and its subsidiaries
distributed $.61 per unit, or $3.2 million, to minority Senior Preference
Unitholders, paid a dividend rate of 7.50%, or $.5 million, to minority
preferred stock shareholders, and paid a dividend of $0.04 per Common Share
which totaled $3.0 million.
Pursuant to the provisions of the Terra Nitrogen Company, L.P. (TNCLP)
Agreement of Limited Partnership, the holders of all Senior Preference Units
(SPUs) had the right, through March 31, 1997, to convert their SPUs into Common
Units on a one-for-one basis. As of March 31, 1997, approximately 13.3 million
of the 13.6 million previously issued and outstanding SPUs converted to Common
Units. The 307,202 SPUs which did not convert to Common Units were redeemed by
TNCLP on May 27, 1997 for $22.105 per unit, which includes a $0.605 distribution
per unit for the first quarter of 1997.
On April 3, 1997 TNCLP announced a cash distribution of $.90 per Common
Unit to holders of record as of April 18, 1997, payable on April 30, 1997. This
distribution represents the balance of available cash for the fourth quarter of
1996.
On April 22, 1997, TNCLP announced a cash distribution for the quarter
ended March 31, 1997 of $1.02 per Common Unit to holders of record as of May 5,
1997, payable on May 27, 1997. The cash distribution for the first quarter
included $18.5 million from the elimination of the reserve amount required to
support four quarters of minimum quarterly distributions on the SPUs. Due to the
redemption of the SPUs on May 27, 1997, this reserve amount is no longer
required to be maintained.
Cash balances at March 31, 1997 were $44.6 million of which $5.4 million is
used to collateralize letters of credit supporting recorded liabilities.
21
<PAGE>
BUSINESS
General
The Company is a leader in each of its three business segments: (i) the
distribution of crop production products and services, (ii) the manufacture and
marketing of nitrogen products and (iii) the manufacture and marketing of
methanol. The Company owns and operates the largest independent farm service
center network in North America and is the second largest supplier of crop
production products in the United States. The Company is also one of the largest
producers of anhydrous ammonia and nitrogen solutions in the United States and
Canada. In addition, the Company is one of the largest U.S. manufacturers and
marketers of methanol.
The Company's distribution network serves the United States and the eastern
region of Canada and includes, as of May 30, 1997:
. 421 farm service centers and
. about 780 affiliated dealer locations.
The Company's production facilities are comprised of:
. five nitrogen fertilizer plants, which are located in Oklahoma (the
"Woodward Facility" and the "Verdigris Facility"), Iowa (the "Port
Neal Facility"), Ontario, Canada (the "Courtright Facility") and
Arkansas (the "Blytheville Facility");
. a methanol production plant, which is located in Texas (the
"Beaumont Facility") (the Woodward Facility also includes methanol
production capacity);
. a crop protection products formulation plant, which is located in
Arkansas (the "Blytheville Formulation Facility"); and
. seven additional liquid crop protection product formulation
facilities.
For certain financial information regarding the Company's industry segments
(Distribution, Nitrogen Products and Methanol), see Note 21 to the Company's
Consolidated Financial Statements included elsewhere herein.
Distribution
The Company's farm service center network is a distribution and marketing
system for a comprehensive line of fertilizers, crop protection products, seed
and services. The Company's customers are primarily farmers and dealers located
in the midwestern and southern regions of the United States, and the eastern
region of Canada.
Products. The Company markets a comprehensive line of crop protection
products (herbicides, insecticides, fungicides, adjuvants, plant growth
regulators, defoliants, desiccants and other products), fertilizer (nitrogen,
phosphates, potash and micronutrients) and seed.
Although most crop protection products marketed by the Company are
manufactured by unaffiliated suppliers, the Company also markets its own
Riverside(R) brand products. Riverside(R) products represented approximately 14%
of the Company's total crop protection product sales in 1996. As of December 31,
1996, the Riverside(R) line included approximately 170 products, of which 13
were added in 1996. The Riverside(R) line of products consists of herbicides,
insecticides, fungicides, adjuvants, seed treatments, plant growth regulators,
defoliants and desiccants. The majority of Riverside(R) products are formulated
or packaged in facilities owned by the Company. The Riverside(R) line includes
several formulations produced exclusively by the Company, but does not include
patented agricultural chemicals. Riverside(R) products generally provide higher
margins for the Company than products manufactured by unaffiliated suppliers.
The sale of such products, however, involves additional costs, including the
cost of maintaining inventory,
22
<PAGE>
disposing of excess inventory and potentially greater liability for product
defects. The Company possesses and processes the registrations required by the
EPA for Riverside(R) pesticide products.
The Company markets several major seed brands and, in its United States
marketing area, is one of the largest independent seed distributors. The Company
focuses marketing efforts on proprietary Terra brand corn hybrids, soybean,
wheat and cotton seed varieties, which generally provide higher margins. These
products represented approximately 15% of the Company's total seed sales in
1996. The Company also features dekalb brand seed in the Midwest.
Services. In addition to selling products used to grow crops, the Company's
farm service centers offer a wide variety of services to grower customers. These
services include soil and plant tissue analysis, crop production program
recommendations, custom blending of fertilizers, field application services,
field inspections for pest control and crop program performance follow-up. The
farm service centers utilize the Company's Ag Analytical Services laboratory in
Elida, Ohio to analyze nutrient levels in soil and plant tissue samples.
Analytical results are down-loaded to a mainframe computer located at the
company headquarters in Sioux City, Iowa. These results are readily accessible
to most farm center locations through computer terminal links to the mainframe.
The results of these tests are used by the Company's proprietary CropMaster(R)
program to provide specific, localized soil fertility recommendations for
specific crops on a field-by-field basis. Recommendations can be made for
practically all crops grown in the Company's markets. The program also provides
"least cost" nutrient blending formula recommendations, makes seed variety
recommendations based on hybrid characteristics and other factors important to
the individual grower, and maintains crop input records for grower customers.
Terra has made a strong commitment to its customers by taking an active
role in "precision agriculture". Precision agriculture relies on global
positioning satellites to identify site-specific locations in a field where soil
sampling shows that specific nutrients are needed. Variable rate applicators and
yield monitors apply crop inputs and record yields using the same satellite
data. The Company has invested in hardware, software and people to meet the
demand of its Precision in Agriculture(TM) program.
In connection with product sales to dealers, the Company provides
warehousing and delivery services. For selected dealer customers, the Company
offers a service package called MarketMaster(TM). The package includes
environmental and safety audits, business management and agronomic training
courses, access to the Company's Ag Analytical Services laboratory, use of
CropMaster(R) program and other services. The Company had 397 MarketMaster(TM)
dealer sites as of May 30, 1997.
Marketing and Distribution. The Company markets its products primarily to
agricultural customers, including both dealers and growers. For 1996,
approximately 73% of the Company's distribution revenues were attributable to
grower sales through farm service center locations and approximately 27% were
attributable to sales to dealers.
The Company also markets its products through its Professional Products(R)
group to non-farm customers, including turf growers, nurseries, golf courses,
parks, athletic facilities and utility companies. The Company offers these
customers herbicides, insecticides, fungicides, fertilizer, adjuvants, plant
growth regulators, seed and agronomic services. The Professional Products(R)
personnel generally utilize the Company's farm service centers, for delivery,
billing and other systems and services.
The Company's distribution operations are organized into Northern, Southern
and Western Divisions, which as of December 31, 1996 are divided into 12
separate geographical regions for management purposes. Field personnel receive
regular training through Terra University(R), a series of courses designed to
develop skills in agronomy, management, sales, environmental responsibility,
personal safety and crop inputs application. The field salespeople are supported
by the Ag Analytical Services laboratory, a staff of technical service
representatives and research stations where the efficacy of various crop
protection products and the performance of numerous seed varieties are tested.
Properties. The Company's farm service centers are located on a combination
of owned and leased properties and a majority of the buildings and other
improvements thereon are owned in fee. The leases have varying expiration dates
through the year 2007. The Company also leases or, in some cases, owns a number
of additional fertilizer storage facilities and various rolling stock equipment.
23
<PAGE>
Product Formulations. The Company's Blytheville Formulation Facility
formulates dry flowable ("DF") crop protection products and liquid crop
protection products in separate production processes at the same location. DF
formulations are dry, water-dispersible granules that are mixed with water
before application. Liquid formulations are water based or solvent based
products that are also mixed with water before application. As of December 31,
1996, the Blytheville Formulation Facility formulated five DF products and eight
liquid products. Approximately 30% of the plant's volume in 1996 was
attributable to the Company's own Riverside(R) brand product line. The
Blytheville Formulation Facility is owned in fee.
Nitrogen Products
Nitrogen is one of three primary nutrients essential for plant growth.
Nitrogen fertilizer products must be reapplied each year in areas of extensive
agricultural usage because of absorption by crops and leaching from the soil.
There are currently no substitutes for nitrogen fertilizer in the cultivation of
high-yield crops.
The Company is a major producer and distributor of nitrogen products,
principally fertilizers. The Company's principal nitrogen products are ammonia,
urea and urea ammonium nitrate solution ("UAN"). A significant portion of the
Company's ammonia production is upgraded into other nitrogen fertilizer products
such as urea and UAN.
Products. Although, to some extent, the various nitrogen fertilizer
products are interchangeable, each has its own distinct characteristics which
produce agronomic preferences among end users. Farmers decide which type of
nitrogen fertilizer to apply based on the crop planted, soil and weather
conditions, regional farming practices, relative nitrogen fertilizer prices and
the cost and availability of appropriate storage, handling and application
equipment.
Ammonia. Anhydrous ammonia is the simplest form of nitrogen fertilizer and
is the feedstock for the production of most other nitrogen fertilizers,
including urea and UAN. It is produced by natural gas reacting with steam and
air at high temperatures and pressures in the presence of catalysts. It has a
nitrogen content of 82% by weight and is generally the least expensive form of
fertilizer per pound of nitrogen. Ammonia has a distinctive odor and requires
refrigeration or pressurization for transportation and storage.
Urea. Urea is produced for both the feed and fertilizer market by
converting ammonia into liquid urea, which can be turned into a solid form. Urea
has a nitrogen content of 46% by weight, the highest level for any solid
nitrogen product. The Company produces both solid urea in the granulated form,
generally for the fertilizer market, and urea liquor for feed supplements.
UAN. The Company produces UAN at all five of its fertilizer manufacturing
facilities. The Verdigris Facility in Oklahoma is the largest UAN production
facility in North America. UAN is produced by combining liquid urea and liquid
ammonium nitrate in water. The nitrogen content of UAN is typically 28% to 32%
by weight. UAN is a liquid fertilizer and, unlike ammonia, is generally
odorless and does not need to be refrigerated or pressurized for transportation
or storage.
UAN may be applied separately or may be mixed with various crop protection
products, permitting the application of several materials simultaneously, thus
reducing energy and labor costs and accelerating field preparation for planting.
In addition, UAN may be applied from ordinary tanks and trucks and can be
sprayed or injected into the soil, or applied through irrigation systems,
throughout the growing season. UAN is relatively expensive to transport and
store because of its high water content. Due to its stable nature, UAN may be
used for no-till row crops where fertilizer is spread upon the surface but may
be subject to volatilization losses. The use of conservation tilling, which
reduces erosion, is increasing in the United States, and the Company believes
this trend, if continued, should increase UAN demand.
24
<PAGE>
The Company's sales mix of its three principal nitrogen products for the
years ended December 31, 1996, 1995 and 1994 (including TNLP on a pro forma
basis) was approximately (based on tons sold):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Ammonia 23% 25% 25%
Urea 13% 14% 16%
UAN 64% 61% 59%
</TABLE>
Plants. All the Company's plants are integrated facilities for the
production of ammonia, liquid urea and UAN. In addition, the Blytheville
Facility produces granular urea and the Courtright Facility produces solid
ammonium nitrate and granular urea. The following nitrogen fertilizer facilities
are operated by the Company:
<TABLE>
<CAPTION>
Gross Annual
Ammonia Production Year when Terra first Year facility
Capacity (tons) acquired interest built
--------------- ----------------- -----
<S> <C> <C> <C>
Port Neal Facility (Iowa) 345,000 1965 1967*
Woodward Facility (Oklahoma) 390,000** 1976 1978
Courtright Facility (Canada) 480,000 1993 1985
Verdigris Facility (Oklahoma) 1,050,000 1994
First ammonia and UAN plant 1975
Second ammonia plant 1977
Second UAN plant 1979
Bytheville Facility (Arkansas) 420,000 1994
Ammonia plant 1967
Urea plant 1975
---------
Total 2,685,000
</TABLE>
*This facility was substantially rebuilt in 1995 and 1996.
**Ammonia capacity depends, in part, on desired rate of methanol production
at this facility.
Each of the Company's five fertilizer manufacturing facilities is designed
to operate continuously, except for planned biennial shutdowns for maintenance
and installation of efficiency improvements. Capacity utilization (gross tons
produced divided by capacity tons at expected operating rates and on stream
factors) of the Company's fertilizer manufacturing facilities for each of the
years ended December 31, 1996, 1995 and 1994, in the aggregate, was
approximately 101%, 97% and 95%, respectively.
The Port Neal Facility was the site of a major explosion on December 13,
1994. An investigative committee formed by the Company, which included
independent experts, determined that the explosion was caused primarily by a
defect in the design of the nitric acid sparger in the neutralizer vessel of the
ammonium nitrate plant. The Company repaired the facility, with ammonia
production resuming in December 1995 and the urea and UAN upgrading facilities
production resuming in May 1996. Property damage and business interruption
insurance payments received thus far have been used to fund, in part, the plant
repair and to recover lost profits. Terra has invested additional funds for
other enhancements and improvements at the Port Neal Facility. Terra filed a
complaint in April 1997 in federal court against its property insurance carriers
alleging the carriers have failed to act in a timely manner to handle the claim
or to acknowledge their obligations to pay the amounts owed. The complaint
seeks, among other things, monetary damages in excess of $150 million.
25
<PAGE>
In August 1996, the Company announced a $23 million capital project to
increase nitric acid production which will increase annual UAN production to
810,000 tons from 490,000 tons at the Port Neal Facility. The project is
currently expected to be operational by the end of 1997.
The Company owns in fee the real estate on which the Port Neal Facility is
located and has a 75% ownership interest in the related improvements after
transferring the improvements in September 1995 to a subsidiary, Port Neal
Holdings, Inc., that was structured to finance and complete the reconstruction
of such facility through its wholly owned subsidiary, Port Neal Corporation.
Various agreements between the Company and certain subsidiaries were entered
into with Port Neal Holdings, Inc. and/or Port Neal Corporation in connection
with this series of transactions, including intercompany debt obligations and
lease arrangements.
The Woodward Facility is owned in fee.
The Courtright Facility's liquid urea and granulation capacities increased
as a result of a $32 million plant upgrade project substantially completed in
early 1996 and fully completed in July 1996. The project enables the upgrade of
up to 65,000 tons of ammonia annually into urea and UAN. The Company owns the
Courtright Facility in fee after exercising a $55 million purchase option under
its lease financing agreement in late 1996.
Located at the Verdigris Facility are two ammonia plants, two nitric acid
plants and two UAN plants and the Port Terminal. The plants are owned in fee by
TNLP, while the Port Terminal is leased from the Tulsa-Rogers County Port
Authority. The leasehold interest is scheduled to expire in April 1999, and
TNLP has the option to renew the lease for two additional, consecutive terms of
five years each.
The Blytheville Facility consists of an anhydrous ammonia plant, a granular
urea plant and a UAN plant. The UAN plant began production in late 1994. The
ammonia plant at the Blytheville Facility is leased from the City of Blytheville
at a nominal annual rental. The lease term is scheduled to expire in November
1999, and TNLP has the option to extend the lease for twelve successive terms of
five years each at the same rental rate. TNLP has the unconditional right to
purchase the plant for a nominal price at the end of the lease term (including
any renewal term). The urea plant is also leased from the City of Blytheville.
The lease is scheduled to expire in November 1999, and TNLP has the option to
renew the lease for four successive periods of five years each at a nominal
annual rental. TNLP also has an option to purchase the urea plant for a nominal
price.
Marketing and Distribution. The Company's principal customers for its
manufactured nitrogen products are independent dealers, national retail chains,
cooperatives and industrial customers. Industrial customers accounted for
approximately 12.5% of the Company's 1996 total tons of its manufactured
nitrogen products. In 1996, approximately 11% of the Company's fertilizer
production tonnage was supplied to its farm service center locations for sale to
growers, while the rest was sold to outside customers. In 1996, no outside
customer accounted for greater than 10% of total manufactured nitrogen
fertilizer revenues.
The Company's production facilities, combined with significant storage
capacity in about 60 locations, throughout the Midwestern U.S. and in other
major fertilizer consuming regions allow it to be a major supplier of nitrogen
fertilizers.
Methanol
The Company substantially increased its participation in the methanol
industry in October 1994 with the acquisition of the Beaumont Facility. The
Company has approximately 320 million gallons of annual methanol production
capacity, representing approximately 13% of the total United States rated
capacity in production at the end of 1996.
Product. Methanol is a liquid petrochemical made primarily from natural
gas. It is used as a feedstock in the production of other chemical products such
as formaldehyde, acetic acid and chemicals used in the building products
industry. Methanol is also used as a feedstock in the production of MTBE, an
oxygenate used as an additive in reformulated gasoline and an octane enhancer
used in non-reformulated gasoline. Reformulated gasoline has lower volatility
and is less aromatic than non-reformulated gasoline. The methanol manufacturing
process involves heating the natural gas feedstock, mixing it with steam and
passing it over a nickel-based catalyst, which breaks it down into carbon
monoxide, carbon dioxide and hydrogen. This reformed gas is then cooled,
compressed and passed over a
26
<PAGE>
copper-zinc based catalyst to produce crude methanol. Crude methanol consists
of approximately 80% methanol and 20% water. In order to convert it to high-
purity chemical grade methanol suitable for sale, the crude methanol is
distilled to remove the water and other impurities.
Plants. During the first half of 1994, the Company completed the capital
improvements necessary for optional production of methanol, offsetting up to
about 25% of the Woodward Facility's ammonia capacity. The design of the
Woodward Facility enabled this conversion to be accomplished for approximately
$16 million of capital spending, which the Company believes is approximately
half the capital cost required to convert most other ammonia plants to methanol
production. The Company has up to about 40 million gallons of annual methanol
capacity at the Woodward Facility and this facility produced 25 million, 36
million and 31 million gallons in each of 1994, 1995 and 1996, respectively.
This facility is owned by the Company in fee.
The Beaumont Facility is the second largest methanol production plant in
the United States, with approximately 280 million gallons of annual methanol
capacity. This facility produced 286 million, 263 million and 280 million
gallons in each of 1994, 1995 and 1996, respectively. The plant and processing
equipment at the Beaumont Facility are owned by BMLP, and the land is leased
from E.I. du Pont de Nemours and Company ("DuPont"), for a nominal annual rental
under a lease agreement which expires in 2090. Because the Beaumont Facility is
entirely contained in a complex owned and operated by DuPont (the "Beaumont
Complex"), BMLP depends on DuPont for access to the Beaumont Facility. BMLP also
relies on DuPont for access and certain essential services relating to the wharf
located at the Beaumont Complex through which most of the finished methanol
product is shipped to customers. BMLP also depends on DuPont for access to the
pipelines used to transport methanol and to obtain natural gas, as well as for
certain utilities and waste water treatment facilities and other essential
services.
Marketing and Distribution; Contracts. Methanol customers are primarily
large chemical or MTBE producers located in the United States; however, some
product is exported to, for example, Central and South America.
BMLP has a number of long-term methanol sales contracts, the most
significant of which is with DuPont. In 1996, BMLP sold approximately 62% of its
production under such contracts. At December 31, 1996, BMLP had contracted to
sell approximately 63% of its 1997 scheduled production at prices indexed to
published sources. Most of the these sales contracts (other than the DuPont
contract) cover fixed volumes and have terms of up to three years.
Under the DuPont contract, as amended, DuPont has agreed to purchase 108
million gallons of methanol through 1997 and 54 million gallons of methanol each
year thereafter until 2001 (representing 39% and 19%, respectively, of the
Beaumont Facility capacity). The price for the methanol delivered under the
DuPont contract is generally indexed to a published source. The DuPont contract
will continue in effect after the initial term unless terminated by either party
on two years' notice.
Under a methanol hedging agreement, BMLP received a $4 million lump sum
payment in exchange for agreeing to make payments based on the market prices of
methanol and natural gas for the periods October 20, 1994 to December 31, 1995,
calendar year 1996 and calendar year 1997. No payment was due for the initial
period or for calendar year 1996. BMLP will be required to make a payment under
the methanol hedging agreement if 1997 methanol prices are high relative to
natural gas prices as compared with historical price levels. Through the
Beaumont Facility and the Company's other methanol production capabilities, the
Company will benefit from such market price differences at any time it is
required to make payments under such agreement. As a result of making any such
payments, however, BMLP will not benefit fully from substantial increases in the
price of methanol during the remaining term of the methanol hedging agreement.
Credit
A substantial portion of the Company's sales to its grower and dealer
customers is made on credit terms customary in the industry. The Company also
maintains a grower financing program to provide secured, interest-bearing
financing to qualified grower customers for their operating and crop input
requirements on extended payment terms. The Company provided approximately $65
million in 1994, $88 million in 1995 and $66 million in 1996 in credit lines to
grower customers under this program. Although there is additional credit risk
associated with the grower finance program, it is mitigated through a well
defined application, screening and approval process.
27
<PAGE>
The Company's bad debt experience is affected by the financial condition of
its customers which, in turn, is affected by weather conditions, insect pressure
and other factors. Bad debt write offs were $2.8 million in 1994, $7.3 million
in 1995 and $17.9 million in 1996. This increase is due principally to two
years of drought conditions in the South and mid-South regions of the U.S. as
well as significantly less insect pressure than is typical.
Seasonality and Volatility
The agricultural crop production products business is seasonal, based upon
the planting, growing and harvesting cycles. Inventories must be accumulated 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 of crop inputs for the
distribution portion of its business, thereby decreasing inventory carrying
costs. In the past, over half of the Company's sales generally occurred during
the second quarter of each year. This seasonality also generally results in
higher fertilizer prices during peak periods, with prices typically reaching
their highest point in the spring, decreasing in the summer, increasing in the
fall (as depleted inventories are restored) through the spring.
The agricultural crop production products business can also be volatile as
a result of a number of other factors, the most important of which, for U.S.
markets, are weather patterns and field conditions (particularly during periods
of high fertilizer consumption), quantities of fertilizers imported to and
exported from North America and current and projected grain inventories and
prices, which are heavily influenced by U.S. exports and world-wide grain
markets. U.S. governmental policies may directly or indirectly influence the
number of acres planted, the level of grain inventories, the mix of crops
planted and crop prices. The U.S. farm bill passed in 1996 put an end to acreage
reduction and production control measures, allowing farmers more flexibility in
planting. Because of factors which are outside of the Company's control,
including the production capacity of competitors, there can be no assurance that
the relatively high nitrogen fertilizer price levels recently achieved will
continue.
As with any commodity chemical, the price of methanol can be volatile. The
industry has experienced cycles of oversupply, resulting in depressed prices and
idled capacity, followed by periods of shortage and rapidly rising prices.
Methanol prices since mid-1995 have remained near historically "normal" levels
after reaching uncharacteristically high levels in late 1994 and early 1995.
During 1994, several factors combined to create a tight market that dramatically
increased prices: increased world demand for methanol, a large number of plant
shutdowns and turnarounds in the industry and the phase-in of federally mandated
standards for reformulated gasoline. Future demand for methanol will depend in
part on the regulatory environment with respect to reformulated gasoline. Most
methanol sold in the U.S. is sold pursuant to long-term contracts based on
market index pricing and a fixed volume.
Raw Materials
The principal raw material used to produce nitrogen fertilizer and methanol
is natural gas. Natural gas costs, including transportation and forward pricing
activities, comprised about 45% of the total costs and expenses associated with
the Company's Nitrogen Products segment in 1996. Natural gas costs represented
about 61% of the total costs and expenses associated with its Methanol segment
in 1996. A significant increase in the price of natural gas that is not
recovered through an increase in nitrogen fertilizer or methanol prices could
have a material adverse effect on the Company's profitability and cash flow.
The Company's natural gas procurement policy is to effectively fix or cap
the price of between 40% and 80% of its natural gas requirements for the
upcoming one-year period and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques. Consequently, if natural gas prices were to
increase during this period, the Company may benefit from these forward pricing
techniques, but conversely, if natural gas prices were to fall, the Company may
incur costs above the spot market price as a result of such policies. The
settlement dates are scheduled to coincide with gas purchases during such future
periods. These contracts are based on a designated price, which is referenced to
market natural gas prices or appropriate NYMEX futures contract prices. The
Company believes that there is sufficient supply to allow acceptable costs for
the foreseeable future and has entered into firm supply contracts to minimize
the risk of interruption or curtailment of natural gas supplies.
28
<PAGE>
Reliable sources for supply of crop inputs at competitive prices are
critical to the distribution portion of the Company's business. The Company's
sources for fertilizer, agricultural chemicals and seed are typically
manufacturers of the products without an internal capability to distribute
products to the North American grower.
Transportation
The Company uses several modes of transportation to receive materials and
distribute products to customers and its own locations, including railroad cars,
common carrier trucks, barges, common carrier pipelines and Company-owned or
leased vehicles. The Company utilizes approximately 80 liquid, dry and
anhydrous ammonia fertilizer terminal storage facilities in numerous states and
in Ontario, Canada for both the Distribution and Nitrogen Products segments. The
Company also has varying amounts of warehouse space at each of its farm service
centers and has one methanol storage facility in Beaumont, Texas. For the
Beaumont Facility, the Company transports products primarily by marine transport
via the Neches River to the Intercoastal Canal and the Gulf of Mexico and via
pipeline to selected customers. Access to the wharf and the pipeline used at the
Beaumont Facility is provided through agreements with DuPont.
Through Terra Express, Inc. ("Terra Express"), a wholly owned truck
transportation subsidiary, the Company provides transportation services to its
own facilities and customers as a contract carrier. Terra Express uses
approximately 90 owner-operators and 14 Company drivers to deliver fertilizer,
crop protection products, seed, feed ingredients and other products to its own
facilities and customers. At its manufacturing facilities, Blytheville
Formulation Facility and liquid fertilizer storage locations, the Company
utilizes railcars as the major method of transportation. The Company leases
approximately 2,200 railcars and owns ten nitric acid railcars.
The Company transports purchased natural gas for the Woodward Facility and
the Verdigris 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 this widespread pipeline system, and has limited
access to supplies outside the state. The Beaumont Facility purchases natural
gas on a delivered basis via four intrastate pipelines. 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. The Company transports purchased natural gas for the
Blytheville Facility through a natural gas pipeline company under an agreement
that extends through September 1998. Purchased natural gas is transported to the
Port Neal Facility via an interstate pipeline operating as an open access
natural gas transporter. Under a Federal Energy Regulatory Commission order, the
Port Neal Facility maintains direct access to its interstate pipeline shipper;
however, the Company has retained its alternative connection to a local utility
service to preserve some flexibility.
Research and Development
The Company owns and operates a 70-acre research station near its Port Neal
Facility that is utilized for program development, product testing and
demonstration. Product testing and protocols encompass a wide range of
subjects, including: fertilization, weed control, insect control, disease
control, crop varieties and precision agriculture. Corn, soybeans and wheat are
the primary crops grown, with an area set aside for various turf experiments.
Trials are viewed by farmers, dealers, university extension personnel,
representatives from other product manufacturers, investors and Terra employees.
Terra conducts an on-going cotton breeding project in the southern U.S. and
has developed several varieties of cotton for grower usage. Experimental corn
hybrids and soybean varieties are observed in numerous U.S. locations to
identify and select Terra branded cotton, corn and soybean lines. Emphasis is
placed on high yielding cotton, corn and soybean lines which also exhibit
herbicide, insect and disease resistance. In addition, Terra technical services
representatives establish various evaluation projects with universities and
private research companies to examine the efficacy of specific Riverside(R)
branded crop protection products that are formulated and marketed by the
Company.
Competition
The market for the fertilizer, crop protection products and seed
distributed by the Company is highly competitive. In 1996, sales attributable to
the Company's farm service centers accounted for roughly 5% of total crop
production products sold in the U.S. Within the specific market areas served by
its farm service centers, however, the Company's share of the market was
substantially higher in most instances. The Company's competitors include
cooperatives, divisions of diversified agribusiness companies, regional
distributors and independent dealers, some of which have
29
<PAGE>
substantially greater financial and other resources than the Company. The
Company competes in its Distribution business primarily by providing a
comprehensive line of products and what the Company believes to be superior
services to growers and dealers, as well as on price.
Nitrogen fertilizer is a global commodity and the Company's customers
include end-users, dealers and other fertilizer producers. Customers base their
purchasing decisions principally on the delivered price and availability of the
product. The Company competes with a number of U.S. producers and producers in
other countries, including state-owned and government-subsidized entities. Some
of the Company's principal competitors may have greater total resources and may
be less dependent on earnings from nitrogen fertilizer sales than the Company.
Some foreign competitors may have access to lower cost or government-subsidized
natural gas supplies. Furthermore, as a consequence of recent favorable market
conditions for nitrogen producers, additional nitrogen fertilizer production
capacity is expected in the next few years. The Company believes that it
competes with other manufacturers of nitrogen fertilizer on delivery terms and
availability of products, as well as on price.
The methanol industry, like the fertilizer industry, is highly competitive
and such competition is based largely on price, reliability and deliverability
of this global commodity. The relative cost and availability of natural gas and
the efficiency of production facilities are important competitive factors.
Significant determinants of a methanol manufacturing plant's competitive
position are the natural gas acquisition and transportation contracts that a
plant negotiates with its major suppliers. Domestic competitors for methanol
include a number of large integrated petrochemical producers, many of which are
better capitalized than the Company.
Environmental and Other Regulatory Matters
The Company's operations are subject to various federal, state and local
environmental, safety and health laws and regulations, including laws relating
to air quality, hazardous and solid wastes and water quality. Terra Canada's
operations are subject to various federal and provincial regulations regarding
such matters, including the Canadian Environmental Protection Act administered
by Environment Canada, and the Ontario Environmental Protection Act administered
by the Ontario Ministry of the Environment. The Company is also involved in the
manufacture, handling, transportation, storage and disposal of materials that
are or may be classified as hazardous or toxic by federal, state, provincial or
other regulatory agencies. Precautions are taken to reduce the likelihood of
accidents involving these materials. If such materials have been or are
disposed of at sites that are targeted for investigation and remediation by
federal or state regulatory authorities, the Company may be responsible under
CERCLA or analogous state laws for all or part of the costs of such
investigation and remediation.
Terra International has been designated as a potentially responsible party
("PRP") under CERCLA and its state analogues with respect to various sites.
Under such laws, all PRPs may be held jointly and severally liable for the costs
of investigation and remediation of an environmentally damaged site regardless
of fault or legality of original disposal. After consideration of such factors
as the number and levels of financial responsibility of other PRPs, the
existence of contractual indemnities, the availability of defenses and the
speculative nature of the costs involved, the Company's management believes that
its liability with respect to these matters will not be material.
Certain state regulatory agencies have enacted requirements to provide
secondary containment for crop protection product storage facilities present at
the Company's farm service centers and terminals. It is expected that other
states will adopt similar requirements pursuant to federal mandate. The Company
has commenced construction of these facilities at its farm service centers and
terminals, and estimates that the future cost of complying with these
regulations at these locations in 1997 and beyond will be approximately $6
million.
With respect to the Verdigris Facility and Blytheville Facility, Freeport-
McMoRan Resource Partners, Limited Partnership ("FMRP") (a former owner and
operator of such facilities) retains liability for certain environmental
matters. With respect to the Beaumont Facility, DuPont retains responsibility
for certain environmental costs and liabilities stemming from conditions or
operations to the extent such conditions or operations existed or occurred prior
to the 1991 disposition by DuPont. The Company does not believe that such
environmental costs and liabilities, whether or not retained by FMRP or DuPont,
will have a material effect on the Company's results of operations, financial
position or net cash flows.
Insulation and other construction or building materials at certain Company
plants contain asbestos. Over 400 suits have been filed by contractors'
employees against DuPont based on exposure to asbestos-containing material at
the
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<PAGE>
complex in which the Beaumont Facility is located. At least nine of these are
directly related to the Beaumont Facility. An estimate of potential liability
associated with these suits is not available. DuPont retains responsibility for
all claims based on exposure to hazardous materials, including asbestos,
occurring prior to the 1991 disposition by DuPont. Although no suit relating to
asbestos exposure has been filed against the Company to date, the possibility
exists that liability could be incurred in the future for claims based on
exposure to asbestos-containing material after such acquisition.
The Company may be required to install additional air and water quality
control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors
and continuous emission monitors, at certain of its facilities in order to
maintain compliance with Clean Air Act and Clean Water Act requirements. These
equipment requirements are also typically applicable to competitors as well. The
Company estimates that the cost of complying with these requirements will total
$5 million to $10 million through 1998.
The Company endeavors to comply (and has incurred substantial costs in
connection with such compliance) in all material respects with applicable
environmental, safety and health regulations. Because environmental, safety and
health regulations are expected to continue to change and generally be more
restrictive than current requirements, the costs of complying with such
regulations will likely increase. The Company does not expect its compliance
with such regulations to have a material adverse effect on the Company's results
of operations, financial position or net cash flows.
Employees
The Company had 3,600 full-time employees at December 31, 1996, none of
whom were covered by a collective bargaining agreement. The Company also hires
temporary employees on a seasonal basis, and hired approximately 1,650 temporary
employees during the peak of its spring selling season in 1996.
Litigation
Various legal proceedings are pending against the Company and its
subsidiaries. Management of the Company considers that the aggregate liability
resulting from these proceedings will not be material to the Company.
31
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information with respect to the directors and
executive officers of the Company as of May 30, 1997.
<TABLE>
<CAPTION>
Name Age Position
---- --- ----------------------------------------------------------------
<S> <C> <C> <C>
William R. Loomis, Jr. 49 Chairman and Director
Burton M. Joyce 55 President, Chief Executive Officer and Director
Michael L. Bennett 43 Executive Vice President and Chief Operating Officer
John S. Burchfield 56 Vice President, Human Resources
Lawrence S. Hlobik 52 President of Terra Nitrogen Division and Senior Vice President
Francis G. Meyer 45 Senior Vice President and Chief Financial Officer
Paula C. Norton 51 Vice President, Corporate and Investor Relations
W. Mark Rosenbury 50 Vice President, Business Development and Strategic Planning
Monty R. Summa 44 President of Terra Distribution Division and Senior Vice President
Robert E. Thompson 45 Vice President, Controller
George H. Valentine 49 Senior Vice President, General Counsel and Corporate Secretary
Edward G. Beimfohr 64 Director
Carol L. Brookins 53 Director
Edward M. Carson 67 Director
David E. Fisher 54 Director
Anthony W. Lea 48 Director
John R. Norton III 68 Director
Henry R. Slack 47 Director
</TABLE>
William R. Loomis, Jr. has been Chairman since April 1996 and a director of
the Company since February 1996. Mr. Loomis has served as Managing Director of
Lazard Freres & Co. LLC since June 1995 and General Partner in the Banking Group
of Lazard Freres & Co. from 1984 to June 1995.
Burton M. Joyce has been a director of the Company since 1986. Mr. Joyce
has served as President and Chief Executive Officer since May 1991 and served as
Executive Vice President and Chief Operating Officer from February 1988 to May
1991.
Michael L. Bennett served as Executive Vice President and Chief Operating
Officer since February 1997. Mr. Bennett served as President of Terra
Distribution Division from November 1995 to February 1997 and Senior Vice
President of the Company from February 1995 to February 1997. He served as
Senior Vice President, Distribution of Terra International from October 1994 to
February 1997; Vice President, Northern Division from January 1992 to October
1994 and Vice President, Wholesale Fertilizer Division from January 1990 to
January 1992.
John S. Burchfield has served as Vice President, Human Resources of the
Company since March 1992. Mr. Burchfield served as Vice President, Human
Resources of AON Corporation from January 1989 to November 1991.
Lawrence S. Hlobik has served as President of Terra Nitrogen Division and
Senior Vice President of the Company since February 1996. Mr. Hlobik served as
Senior Vice President, Marketing of TNC from February 1995 to February 1996. He
was Vice President, Marketing of Arcadian Corporation from 1989 to February
1995.
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<PAGE>
Francis G. Meyer has served as Senior Vice President and Chief Financial
Officer of the Company since November 1995 and served as Vice President and
Chief Financial Officer of the Company from November 1993 to November 1995. Mr.
Meyer served as Controller from August 1991 to November 1993. He served as Vice
President, Controller of Terra International from June 1986 to August 1991.
Paula C. Norton has served as Vice President, Corporate and Investor
Relations of the Company since February 1995. Ms. Norton served as Director,
Corporate Relations from January 1993 to February 1995. She served as Director,
Corporate Communication of Universal Foods Corp. prior thereto.
W. Mark Rosenbury has served as Vice President, Business Development and
Strategic Planning of the Company since November 1995; served as President of
TNC from November 1994 to February 1996 and served as Executive Vice President
of the Company from November 1993 to November 1995. Mr. Rosenbury served as
Chief Operating Officer of the Company from November 1993 to November 1994. He
served as Vice President and Chief Financial Officer from August 1991 to
November 1993 and Vice President and Corporate Controller from January 1987 to
August 1991.
Monty R. Summa has served as President of Terra Distribution Division and
Senior Vice President of the Company since April 1997. He served as Senior Vice
President and General Manager of Crop Protection Chemicals for American Cyanamid
Corp. from prior to 1992 to April 1997.
Robert E. Thompson has served as Vice President, Controller of the Company
since November 1994. He served as Vice President, Finance and Controller of
Ameritech Custom Business Services from April 1993 to June 1994, Controller of
Ameritech Services, Inc. from October 1990 to April 1993 and Controller of
Ameritech Applied Technologies prior thereto.
George H. Valentine has served as Senior Vice President, General Counsel
and Corporate Secretary of the Company since November 1995 and served as Vice
President, General Counsel and Corporate Secretary of the Company from November
1993 to November 1995. Mr. Valentine served as Assistant General Counsel of
Household International, Inc. from February 1986 to November 1993.
Edward G. Beimfohr has been a director of the Company since 1994. Mr.
Beimfohr has been partner in the law firm of Lane & Mittendorf since prior to
1990.
Carol L. Brookins has been a director of the Company since 1993. Ms.
Brookins founded World Perspectives, Incorporated and has served as Chairman and
Chief Executive Officer thereof since 1980.
Edward M. Carson has been a director of the Company since 1983. Mr. Carson
has served as Chairman of the Board and Chief Executive Officer of First
Interstate Bancorp since June 1990 and served as President thereof from January
1985 to May 1990.
David E. Fisher has been a director of the Company since 1993. Mr. Fisher
has served as Finance Director of Minorco since January 1990.
Anthony W. Lea has been a director of the Company since 1994. Mr. Lea has
served as Executive Director and a member of the Executive Committee of Minorco
since prior to 1990 and served as Joint Managing Director thereof from January
1990 to December 1992.
John R. Norton III has been a director of the Company since 1993. Mr.
Norton has served as Chairman and Chief Executive Officer of J.R. Norton Company
since 1972. Between May 1985 and February 1986, Mr. Norton served as a U.S.
Deputy Secretary of Agriculture and was not an officer of J. R. Norton Company
during that period.
Henry R. Slack has been a director of the Company since 1983. Mr. Slack has
served as Chief Executive of Minorco since December 1992 and President thereof
since September 1985.
Several directors of the Company are are also directors of other companies
that are subject to the reporting requirements of the U.S. federal securities
laws. Mr. Carson is a director of Aztar Corporation, Castle & Cooke, Inc., and
Wells Fargo & Company; Mr. Joyce is a director of IPSCO Inc.; Mr. Lea is a
director of Engelhard Corporation;
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<PAGE>
Mr. Loomis is a director of Engelhard Corporation; Mr. Norton is a director of
Arizona Public Service Company, Aztar Corporation, Pinnacle West Capital
Corporation and Suncor, Inc.; and Mr. Slack is a director of Engelhard
Corporation.
Board of Directors and Committees
During the Company's last fiscal year, its Board of Directors held four
meetings. Each member attended at least 75% of the aggregate of all meetings of
the Board of Directors and committees of the Board of Directors of which he or
she was a member, except that Mr. Slack missed two of seven meetings.
The Board of Directors of the Company has an Audit Committee, an Executive
Committee and a Personnel Committee. The Board of Directors does not have a
nominating committee. The Audit Committee, which met three times in 1996, is
currently comprised of Ms. Brookins and Mr. Norton. The Audit Committee's
functions include reviewing the Company's procedures for reporting financial
information to the public, recommending annually to the Board of Directors a
firm of independent accountants to audit and review the Company's books and
records and approving the scope of such firm's audit, reviewing reports and
recommendations and fees of the Company's independent accountants, reviewing the
scope of all internal audits and reports and recommendations in connection
therewith and reviewing non-audit services provided by the Company's independent
accountants.
The Executive Committee, which did not meet last year, is currently
comprised of Messrs. Carson, Joyce, Loomis and Slack. The Executive Committee is
authorized to exercise, to the extent permitted by law, all the power and
authority of the Board of Directors in the management of the Company between
meetings of the Board.
The Personnel Committee, which met three times last year, is currently
comprised of Messrs. Beimfohr, Carson and Slack. Its functions include
administering certain employee benefit plans, recommending to the Board of
Directors the appointment of executive officers of the Company, establishing the
compensation to be paid to such individuals and establishing compensation
administration guidelines generally for the Company and its subsidiaries, and,
in consultation with management, establishing and administering significant
personnel policies of the Company.
The Board of Directors of the Company establishes from time to time Special
Committees of the Board, whose functions are specifically delegated at the time
of establishment. In addition, the Board of Directors and committees of the
Board of Directors take action by unanimous written consent in lieu of a meeting
from time to time.
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<PAGE>
Summary of Cash and Certain Other Compensation to Named Executive Officers
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of the Company's Chief Executive Officer, and each of the four other most
highly compensated executive officers of the Company (determined as of the end
of the last fiscal year), (hereafter referred to as the "named executive
officers"), for the fiscal years ended December 31, 1996, 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
==================================================================================================================================
Annual Compensation Long-Term Compensation
-------------------------------------
Awards Payouts
- ---------------------------------------------------------------------------------------------------------------------
Other Restricted All Other
Name and Annual Stock Award(s) LTIP Compensation
Principal Position Year Salary /1/ Bonus /2/ Compensation /3/ /4/ Options Payouts /5/
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Burton M. Joyce 1996 $543,115 $450,000 $3,764 $1,828,125 /6/ 60,000 -- $24,682
President and Chief 1995 485,257 375,000 3,413 -- -- 21,985
Executive Officer 1994 444,691 450,000 5,458 -- 250,000 -- 4,500
--
Michael L. Bennett 1996 207,039 108,600 1,943 365,625 /6/ 30,000 -- 9,022
Executive Vice President 1995 171,442 109,633 1,943 -- -- -- 7,714
and Chief Operating
Officer 1994 125,252 99,642 -- 252,000 /7/ -- -- 3,683
Lawrence S. Hlobik /8/ 1996 200,385 119,900 -- 558,750 /6/ 30,000 -- 8,807
Sr. Vice President and 1995 143,180 85,781 -- 191,250 /8/ -- -- 86,516
President, Nitrogen
Division 1994 -- -- -- -- -- -- --
Francis G. Meyer 1996 223,769 91,800 1,581 365,625 /6/ 30,000 -- 9,084
Sr. Vice President and 1995 186,330 94,172 1,664 -- -- -- 8,385
Chief Financial Officer 1994 164,372 157,956 1,943 252,000 /7/ -- -- 4,500
George H. Valentine 1996 195,654 99,300 1,943 292,500 /6/ 28,000 -- 7,986
Sr. Vice President, 1995 165,182 104,520 1,943 -- -- -- 7,459
General Counsel and
Corporate Secretary 1994 151,000 121,319 -- 210,000 /7/ -- -- 4,349
==================================================================================================================================
</TABLE>
/1/ "Salary" includes amounts deferred at the election of the named executive
officer under the Company's Employees' Savings and Investment Plan and
Supplemental Deferred Compensation Plan.
/2/ "Bonus" includes amounts awarded under the Company's Incentive Award
Program for Key Executives.
/3/ "Other Annual Compensation" includes tax reimbursements or "gross-ups"
provided to the named executive officers. While the named executive
officers enjoy certain other perquisites, such perquisites do not exceed
the lesser of $50,000 or 10% of such officer's salary and bonus.
/4/ The number of restricted Common Shares ("Restricted Shares") held, and the
value thereof (shown in parenthesis), at December 31, 1996 by each of the
named executive officers is: Burton M. Joyce: 125,000 ($1,843,750); Michael
L. Bennett: 37,000 ($545,750); Lawrence S. Hlobik: 55,000 ($811,250);
Francis G. Meyer: 37,000 ($545,750); and George H. Valentine: 30,000
($442,500). During the restricted period, a holder of Restricted Shares is
entitled to all benefits incidental to ownership of the Common Shares,
including voting the Common Shares and receiving such dividends as from
time to time may be declared by the Board of Directors of the Company.
/5/ "All Other Compensation" includes amounts contributed, allocated or accrued
for the named executive officers under the Company's Employees Savings and
Investment Plan and Supplemental Deferred Compensation Plan. In the case of
Mr. Hlobik, his reported amount under this column in 1995 also includes
taxable relocation compensation.
/6/ On November 12, 1996, the Personnel Committee of the Company's Board of
Directors approved the grant of 125,000, 25,000, 25,000, 25,000 and 20,000
Restricted Shares under the Company's 1992 Stock Incentive Plan
35
<PAGE>
to each of Messrs. Joyce, Bennett, Hlobik, Meyer and Valentine,
respectively. The closing per share price of the Common Shares on the New
York Stock Exchange ("NYSE") on the date of award was $14.625. The
restrictions lapse (i) if the executive remains employed by the Company
until November 12, 2005 or (ii) with respect to 25%, 25% and 50% of these
Restricted Shares if, prior to November 12, 2001, the 30 business day
average closing price of the Common Shares on the NYSE is at least $20.50,
$22.50 and $24.625 per share, respectively. The restrictions lapse earlier
in the event of a change in control. See "Employee Contracts and
Termination of Employment and Change in Control Arrangements".
Mr. Hlobik also received a grant of 15,000 Restricted Shares as approved by
the Personnel Committee on February 19, 1996. The closing per share price
of the Common Shares on the NYSE on the first trading day following the
date of award was $12.875. The restrictions lapse with respect to 50%, 25%
and 25% of these Restricted Shares if, prior to February 20, 2002, the 30
business day average closing price of the Common Shares on the NYSE is at
least $16.375, $18.25 and $20.00 per share, respectively. The restrictions
lapse earlier under certain circumstances involving a change in control.
See "Employee Contracts and Termination of Employment and Change in Control
Arrangements".
/7/ On November 2, 1994, the Personnel Committee of the Company's Board of
Directors approved the grant of 24,000, 24,000 and 20,000 Restricted Shares
to each of Messrs. Bennett, Meyer and Valentine, respectively. The closing
price of the Common Shares on the NYSE on the date of award was $10.50.
The restricted period terminated with respect to 50% of these Restricted
Shares on October 10, 1996 after satisfying certain stock performance
thresholds. The Restricted Shares vest with respect to an additional 25%
if, prior to February 28, 2001, the 30 business day average closing price
of the Common Shares on the NYSE is at least $15.875 per share and with
respect to the remaining 25% if, prior to February 28, 2001, the 30
business day average price is at least $17.625 per share. The restrictions
lapse earlier under certain circumstances involving a change in control.
See "Employee Contracts and Termination of Employment and Change in Control
Arrangements".
/8/ Mr. Hlobik joined the Company as Senior Vice President, Marketing of the
Nitrogen Division in February 1995 and was promoted to Senior Vice
President of the Company and President, Nitrogen Division in February 1996.
On February 16, 1995, the Personnel Committee approved the grant of 15,000
Restricted Shares to Mr. Hlobik. The closing price of the Common Shares on
the NYSE on the date of award was $12.75. The restrictions lapse with
respect to 50%, 25% and 25% of these Restricted Shares if, prior to June
16, 2001, the 30 business day average closing price of the Common Shares on
the NYSE is at least $16.25, $18.125 and $19.875 per share, respectively.
The restrictions lapse earlier under certain circumstances involving a
change in control. See "Employee Contracts and Termination of Employment
and Change in Control Arrangements".
36
<PAGE>
Stock Options
The following table contains information concerning the grant of options to
purchase the Company's Common Shares granted in 1996 under the Company's 1992
Stock Incentive Plan to the named executive officers. No stock appreciation
rights were granted under the Plan during fiscal year 1996.
<TABLE>
<CAPTION>
===================================================================================================================================
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term /2/
- -----------------------------------------------------------------------------------------------------------------------------------
% of Total Options
Number of Options Granted to Exercise or Base Expiration
Name Granted in 1996 /1/ Employees in 1996 Price Per Share Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Burton M. Joyce 60,000 11.2% $14.625 11/12/06 $551,855 $1,398,509
Michael L. Bennett 30,000 5.6 14.625 11/12/06 275,928 699,255
Lawrence S. Hlobik 30,000 5.6 14.625 11/12/06 275,928 699,255
Francis G. Meyer 30,000 5.6 14.625 11/12/06 275,928 699,255
George H. Valentine 28,000 5.2 14.625 11/12/06 257,532 652,638
===================================================================================================================================
</TABLE>
/1/ The Options vest in one-third increments on the business day following each
of the first, second and third anniversary of the date of grant. The
options are exercisable with respect to all of the Common Shares set forth
above following a change in control. See "Employment Contracts and
Termination of Employment and Change in Control Arrangements".
/2/ The amounts reflected in the table represent assumed rates of appreciation
only. Actual gains, if any, on stock option exercises by the named
executive officers depend on the future performance of the Company's Common
Shares and overall market conditions, as well as continued employment.
Option Exercises and Year-End Value Table
The following table provides information concerning the exercise of stock
options during 1996 and unexercised options to purchase the Company's Common
Shares granted under the 1983 Stock Option Plan and the 1987 and 1992 Stock
Incentive Plans of the Company.
Aggregated Option Exercises In Last Fiscal Year
And December 31, 1996 Option Values
<TABLE>
<CAPTION>
==================================================================================================================================
Number of shares Number of Unexercised Value of Unexercised
acquired on Value December 31, 1996 in-the-Money Options at Options at
Name exercise in 1996 Realized December 31, 1996 /1/
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Burton M Joyce -0- -0- 575,000 185,000 $4,655,000 $538,750
Michael L. Bennett -0- -0- -0- 30,000 -0- 3,750
Lawrence S. Hlobik -0- -0- -0- 30,000 -0- 3,750
Francis G. Meyer 16,000 $154,000 21,700 30,000 172,013 3,750
George H. Valentine -0- -0- -0- 28,000 -0- 3,500
=================================================================================================================================
</TABLE>
/1/ Based on the closing price on the New York Stock Exchange-Composite
Transaction of the Company's Common Shares on December 31, 1996 ($14.75).
37
<PAGE>
PENSION PLAN TABLES
The following table shows for employees retiring in 1996 the estimated
annual retirement benefit payable on a straight life annuity basis under the
Employee's Retirement Plan of the Company (the "Retirement Plan") and the
Company's Excess Benefit Plan (the "Excess Benefit Plan"), on a non-contributory
basis, which covers Burton M. Joyce and certain other employees of the Company,
at various levels of accrued service and compensation.
<TABLE>
<CAPTION>
=========================================================================
Years of Credited Service
- -------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $12,347 $ 24,695 $ 37,042 $ 49,390 $ 61,737 $ 74,084
250,000 21,097 42,195 63,292 84,390 105,487 126,584
500,000 42,972 85,945 128,917 171,890 214,862 257,834
750,000 64,847 129,695 194,542 259,390 324,237 389,084
1,000,000 86,722 173,445 260,167 346,890 433,612 520,334
=========================================================================
</TABLE>
"Compensation" under the Retirement Plan includes all salaries and wages
paid to a participant, including bonuses, overtime, commissions and amounts the
participant elects to defer under the Company's Employee's Savings and
Investment Plan. Covered earnings are limited by Section 401(a)(17) of the
Internal Revenue Code ("Code") to $150,000 in 1996. The above benefits are
subject to the limitations of Section 415 of the Code, which provided for a
maximum annual payment of approximately $120,000 in 1996. Under the Excess
Benefit Plan, however, the Company will supplement those benefits so that the
amount the participant will receive will be equal to the amount that would have
been received under the Retirement Plan but for such limitations.
"Compensation" under the Excess Benefit Plan also includes amounts deferred
under the Supplemental Deferred Compensation Plan. Eligible compensation for
Burton M. Joyce as of the end of the last calendar year is $918,115 and the
estimated years of service for Mr. Joyce is 10.
Certain executive officers of the Company and certain other employees of
the Company are entitled to the estimated annual retirement benefit under the
Retirement Plan and Excess Benefit Plan as set forth in the following table:
<TABLE>
<CAPTION>
==========================================================================
Years of Credited Service
- --------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $10,847 $ 21,695 $ 32,542 $ 43,390 $ 54,237 $ 65,084
250,000 18,597 37,195 55,792 74,390 92,987 111,584
500,000 37,972 75,945 113,917 151,890 189,862 227,834
750,000 57,347 114,695 172,042 229,390 286,737 344,084
1,000,000 76,722 153,445 230,167 306,890 383,612 460,334
==========================================================================
</TABLE>
Eligible compensation for the following named executive officers as of the
end of the last calendar year is: Michael L. Bennett: $316,672; Lawrence S.
Hlobik: $286,166; Francis G. Meyer: $317,941; and George H. Valentine: $300,174.
The estimated years of service for each such officer is as follows: Michael L.
Bennett: 23; Lawrence S. Hlobik: 2; Francis G. Meyer: 14 and George H.
Valentine: 3.
Eligible compensation for each of the named executive officers includes the
salary paid in 1996 to each of the named executive officers plus the bonus paid
in 1996 to such executive officers for service to the Company and its
subsidiaries in 1995. Amounts reported in the table entitled "Summary
Compensation Table" for 1996 include the salary paid to each of the named
executive officers in 1996 plus the bonus paid to such executive officers in
1997 for service to the Company and its subsidiaries in 1996.
38
<PAGE>
Employee Contracts and Termination of Employment and Change in Control
Arrangements
Stock awards granted after October 1996 to the named executive officers
automatically vest or become exercisable in the event of any of the following
changes in control of the Company: (i) any person or group of persons (other
than Minorco and its affiliates) acquires beneficial ownership of the
outstanding securities of the Company in an amount having, or convertible into
securities having, 25% or more of the ordinary voting power for the election of
directors of the Company, provided that this 25% beneficial ownership trigger
shall apply only when Minorco and its affiliates no longer own 50% or more of
the voting shares of the Company; (ii) during a period of not more than 24
months, a majority of the Board of Directors of the Company ceases to consist of
the existing membership or successors nominated by the existing membership or
their similar successors; (iii) all or substantially all of the individuals and
entities who were the beneficial owners of the Company's outstanding securities
entitled to vote do not own more than 60% of such securities in substantially
the same proportions following a shareholder approved reorganization, merger, or
consolidation; or (iv) shareholder approval of either (A) a complete liquidation
or dissolution of the Company or (B) a sale or other disposition of all or
substantially all of the assets of the Company, or a transaction having a
similar effect.
Stock awards granted prior to November 1996 automatically vest or become
exercisable beginning on the day that any such officer's employment with the
Company is terminated involuntarily or such officer's responsibilities or
compensation are substantially reduced, if such termination or reduction occurs
within twelve months of the date on which any person or group of persons acting
in concert (other than Minorco and its affiliates) acquires beneficial ownership
of the outstanding securities of the Company in an amount having, or convertible
into securities having, 50% or more of the ordinary voting power for the
election of directors of the Company.
Director Compensation
Each director who is not an officer or employee of the Company or of one of
its subsidiaries receives an annual retainer of $18,000 for services as a
director. In addition, such directors receive a fee of $1,000 for each Board
meeting attended and a fee of $800 for each Committee meeting attended (a
chairperson receives a fee of $2,000 for each Committee meeting attended in the
role of chairperson) and such directors are reimbursed for their expenses of
attending such meetings. Mr. Loomis, the Chairman of the Board of Directors,
receives an annual retainer of $100,000 for his services.
Compensation Committee Interlocks and Insider Participation
Mr. Slack, a director and member of the Personnel Committee of the Board of
Directors of the Company, is an executive officer and director of Minorco.
Reuben F. Richards, the former Chairman of the Board of Directors of the Company
who retired from the Company effective April 30, 1996, was a director of Minorco
during the past fiscal year. Mr. Richards was also on the compensation
committee of the board of directors of a subsidiary of Minorco during the past
fiscal year, while Mr. Joyce, an executive officer and director of the Company,
was an executive officer of the same Minorco subsidiary during the past year.
This Minorco subsidiary paid to or was billed by the Company a portion of the
salary, benefits, office services and related overhead paid to, or incurred on
behalf of, Mr. Richards. The Company and certain Minorco subsidiaries have
engaged in other transactions discussed more fully under the caption "Certain
Relationships and Related Transactions" below.
39
<PAGE>
EQUITY SECURITY OWNERSHIP
Principal Stockholders. The following table shows, based on information
reported to the Company by or on behalf of such persons, the ownership, as of
May 30, 1997, of the Company's securities by the only persons known to the
Company to be the beneficial owners of more than five percent of any class of
the Company's voting securities.
<TABLE>
<CAPTION>
=================================================================================================
Name and Address of Amount and nature of Percentage
beneficial owner Title of class beneficial ownership of class
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taurus International S.A. Common Shares 37,160,725 sole voting and 49.6%
9 rue Sainte Zithe investement power
L-2763 Luxembourg City
Grand Duchy of Luxembourg
- -------------------------------------------------------------------------------------------------
Taurus Investments S.A. Common Shares 5,400,000 sole voting and 7.2%
9 rue Sainte Zithe investement power
L-2763 Luxembourg City
Grand Duchy of Luxembourg
- -------------------------------------------------------------------------------------------------
Minorco Common Shares 42,560,725 sole voting power 56.8%
9 rue Sainte Zithe through its subsidiaties
L-2763 Luxembourg City Taurus International and
Grand Duchy of Luxembourg Taurus Investements
- -------------------------------------------------------------------------------------------------
Wellington Management Co. Common Shares 4,371,500 sole voting and 5.8%
P.O. Box 823 investement power /1/
Valley Forge, PA 19482
=================================================================================================
</TABLE>
/1/ Based on Schedule 13G filed in February 1997.
Each of Taurus International S.A. and Taurus Investments S.A. is a company
incorporated under the laws of Luxembourg as a societe anonyme and is wholly
owned by Minorco. Minorco is a company incorporated under the laws of
Luxembourg as a societe anonyme and is an international natural resources
company with operations in gold, base metals, industrial minerals, paper and
packaging and agribusiness. The capital stock of Minorco is owned in part as
follows: approximately 45.8%, directly or through subsidiaries, by Anglo
American Corporation of South Africa Limited ("Anglo American"), a publicly held
mining and finance company, and approximately 22.6%, directly or through
subsidiaries, by De Beers Centenary AG ("Centenary"), a publicly held Swiss
diamond mining and investment company. Approximately 38.5% of the capital stock
of Anglo American is owned, directly or through subsidiaries, by De Beers
Consolidated Mines Limited ("De Beers"), a publicly held diamond mining and
investment company. Approximately 29.4% of the capital stock of Centenary and
approximately 32.5% of the capital stock of De Beers is owned, directly or
through subsidiaries, by Anglo American. De Beers owns approximately 9.5% of
Centenary.
Mr. Nicholas F. Oppenheimer, Deputy Chairman and a director of Anglo
American, Centenary and De Beers and a director of Minorco, and Mr. Slack, a
director of the Company, Chief Executive, President and a director of Minorco
and a director of Anglo American, have indirect partial interests in
approximately 7% of the outstanding shares of Minorco and approximately 8% of
the outstanding shares of Anglo American. Messrs. Beimfohr, Fisher, Lea and
Loomis are also directors of Minorco. Mr. Fisher is also a director of Taurus
International and Taurus Investments. Mr. Lea is also a director of Anglo
American and Taurus Investments. Certain subsidiaries of Minorco have engaged
in certain transactions with the Company described under the caption "Certain
Relationships and Related Transactions" below.
40
<PAGE>
Directors and Officers. The following table shows the equity securities of
the Company and its subsidiaries that were beneficially owned by each of the
following individuals as of May 30, 1997: directors individually, the chief
executive officer (who is also a director), the four other most highly
compensated executive officers, and the directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Number of Common Shares
Name Beneficially Owned/1/
---- ---------------------
<S> <C>
E.G. Beimfohr............................................................... 5,000
M.L. Bennett............................................................... 68,704
C.L. Brookins................................................................. 300
E.M. Carson................................................................. 1,000
D.E. Fisher................................................................... 250
L.S. Hlobik................................................................ 56,010
B.M. Joyce................................................................ 794,665 /2/
A.W. Lea...................................................................... 250
W.R. Loomis, Jr............................................................ 25,000
F.G.Meyer................................................................. 102,268 /2/
J.R. Norton III............................................................. 1,017
H.R. Slack.................................................................... 250
G.H. Valentine............................................................. 68,416
Directors and all executive officers as a group (18 persons)............ 1,376,944 /2/
______________
</TABLE>
/1/ Each director or executive officer has sole voting and investment power
over the shares shown as beneficially owned. Each director, nominee and
executive officer individually beneficially owned less than one percent,
and the directors and executive officers as a group owned approximately 2%
of the total issued and outstanding Common Shares of the Company. The
number of Common Shares shown also reflect the ownership of certain
restricted Common Shares subject to certain performance related vesting
conditions as of May 30, 1997 and Common Shares under the Company's
Employees' Savings and Investment Plan as of December 31, 1996.
/2/ The number of Common Shares shown as beneficially owned by Messrs. Joyce
and Meyer and by all directors and executive officers as a group, include
550,000, 21,700, and 632,700 Common Shares, respectively, as to which such
person or group had the right to acquire beneficial ownership pursuant to
the exercise, on or before July 30, 1997, of employee stock options. No
other individual listed held any employee stock options that are
exercisable on or before July 30, 1997.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996, the Company and certain subsidiaries of Minorco engaged in
various transactions in the ordinary course of business incident to the conduct
of their respective operations. These subsidiaries of Minorco paid or were
billed in 1996 an aggregate of approximately $4.2 million in connection with
such transactions, including, among other things, (i) a portion of the salary,
benefits, office services and related overhead paid to, or incurred on behalf
of, Reuben F. Richards, the former Chairman of the Board of Directors of the
Company who retired from the Company effective April 30, 1996 and who served
Minorco and certain of its subsidiaries in various capacities, (ii) the purchase
or allocation of insurance and the provision of related risk management services
(approximately $3.4 million) and (iii) other miscellaneous charges. The terms
of each transaction are based on arms-length negotiations and are principally on
a cost-reimbursement or contractual basis or, in the case of insurance, by
reference to the cost to each company of purchasing separate policies.
41
<PAGE>
The Company purchased $32 million of tax benefits in 1996 from a Canadian
subsidiary of Minorco at a cost of $14 million. This transaction was approved by
an independent committee of the Board of Directors of the Company.
From time to time the Company utilizes one or more investment banking firms
to advise on potential transactions. Although Lazard Freres & Co. LLC has in the
last year provided certain advisory services to the Company in connection with a
possible joint venture or other transaction, Lazard Freres & Co. LLC will
receive compensation pursuant to the engagement only upon consummation of any
such transaction. William R. Loomis, Jr., the Chairman of the Board of Directors
of the Company, is a Managing Director of Lazard Freres & Co. LLC.
DESCRIPTION OF CAPITAL STOCK
General
The total number of shares of stock of all classes which the Company has
authority to issue is 133,500,000 shares of capital stock (without par value),
all of which are classified as Common Shares. A stockholder of the Company has
no preemptive rights to subscribe for additional shares of stock or other
securities of the Company except as may be granted by the Board of Directors.
Common Shares
A holder of Common Shares is entitled to one vote for each share held on
all matters submitted generally to a vote of stockholders and, subject to the
voting rights of the holders of preferred shares, if any, the exclusive voting
power for all purposes is vested in the holders of the Common Shares. Holders of
Common Shares do not have the right of cumulative voting in connection with the
election of directors. The Common Shares have no conversion rights and are not
subject to redemption.
Subject to the rights of the holders of preferred shares, if any, the
holders of Common Shares of the Company are entitled to receive, pro rata,
dividends when, as and if declared by the Board of Directors from funds legally
available therefor. In the event of any liquidation, dissolution or winding up
of the Company, after payment or providing for the payment of all liabilities
and amounts due the holders of preferred shares, if any, the holders of Common
Shares are entitled to share ratably in all the remaining assets.
The Transfer Agent for the Common Shares is First Chicago Trust Company of
New York in the United States and Montreal Trust Company in Canada.
Other Classes and Series of Stock
The Board of Directors may classify and reclassify any unissued shares of
capital stock into other classes and series, including one or more series of
preferred shares, by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares of stock. Such stock may rank senior to the Common
Shares in one or more respects.
Certain Provisions of Maryland Law
The Company is incorporated under the laws of the State of Maryland. The
following paragraphs summarize certain provisions of Maryland General
Corporation Law (the "MGCL") and the Company's Articles of Incorporation (the
"Charter") and By-Laws. The summary does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Company's Charter and By-Laws for complete information.
Business Combinations. The MGCL prohibits certain "business combinations"
(including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an "Interested Stockholder." An
Interested Stockholder is any person (a) who beneficially owns 10% or more of
the voting power of the corporation's shares or (b) an affiliate or associate of
the corporation who, at any time within the two-year period prior to the date in
question, was an Interested Stockholder or an affiliate or an associate thereof.
Such business combinations are prohibited for five years after the most recent
date on which the
42
<PAGE>
Interested Stockholder became an Interested Stockholder. Thereafter, any such
business combination must be recommended by the board of directors of such
corporation, and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by all holders of voting shares of the corporation,
and (b) 66 2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not Interested Stockholders or an affiliate or
associate of an Interested Stockholder, with whom the business combination is to
be effected, unless, among other things, the corporation's stockholders receive
a minimum price (as defined in the MGCL) for their shares and the consideration
is received in cash or the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. A Maryland corporation may adopt an amendment to its
charter electing not to be subject to the special voting requirements of the
foregoing legislation. Any such amendment must be approved by the affirmative
vote of at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast
by holders of outstanding shares of voting stock who are not Interested
Stockholders. The Company has not adopted such an amendment to its Charter.
These provisions of the MGCL also do not apply to certain corporations
(including the Company) which had an Interested Stockholder on May 31, 1983
unless a resolution is passed by the directors of such corporation electing to
have these provisions apply. The directors of the Company have not passed such a
resolution and, thus, such provisions of the MGCL do not currently apply to the
Company.
Control Share Acquisitions. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
Control shares are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by such a person, would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (a) 20% or more but less than 33 1/3%; (b) 33 1/3% or
more but less than a majority; or (c) a majority of all voting power. Control
shares do not include shares of stock an acquiring person is entitled to vote as
a result of having previously obtained stockholder approval. A control share
acquisition means, subject to certain exceptions, the acquisition of, ownership
of or the power to direct the exercise of voting power with respect to, control
shares.
A person who has made or proposed to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand therefor to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to voting
rights, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for "control shares" are approved at a stockholders'
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a "control share acquisition."
The control share acquisition statute does not apply to stock acquired by
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a
provision in the articles of incorporation or by-laws of the corporation. The
By-Laws of the Company contain an exception from the control share acquisition
statute for shares held by Minorco, any affiliate, associate or immediate
transferee of Minorco, or any associate or affiliate of such immediate
transferee of Minorco.
DESCRIPTION OF CERTAIN INDEBTEDNESS AND OTHER OBLIGATIONS
The following is a brief description of the basic terms of and instruments
governing certain indebtedness and other obligations of the Company and its
subsidiaries. Capitalized terms used in such instruments but not defined herein
have
43
<PAGE>
the meaning ascribed to them in such instruments. These summaries do not purport
to be complete and are subject to, and qualified in their entirety by reference
to, the instruments governing such indebtedness and other obligations.
10 1/2% Notes
The Company presently has outstanding $200 million in aggregate principal
amount of 10 1/2% Senior Notes due 2005 (the "10 1/2% Notes"). The 10 1/2% Notes
are issued under an Indenture dated as of June 22, 1995 (the "1995 Indenture")
between the Company and First Trust National Association, as trustee, and will
mature on June 15, 2005. The 10 1/2% Notes are senior, unsecured obligations of
the Company, ranking pari passu in right of payment with all other senior
indebtedness of the Company, including the 10 3/4% Notes (described below).
Because the Company is a holding company, all existing and future liabilities of
the Company's subsidiaries, including those under the Credit Agreement, are
effectively senior to the 10 1/2% Notes.
The 10 1/2% Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after June 15, 2000, initially at 105.250% of their
principal amount, plus accrued interest, declining to 100% of their principal
amount on June 15, 2002.
The 1995 Indenture provides that upon a Change of Control (as defined in
the 1995 Indenture) each holder may require the repurchase of its 10 1/2% Notes
in cash at a purchase price of 101% of the principal amount thereof, plus
accrued interest, pursuant to an offer to repurchase which must be mailed within
45 days after the Change of Control.
The 1995 Indenture contains certain covenants that limit various actions by
the Company and certain of its subsidiaries, including the incurrence of
indebtedness, the payment of dividends and other distributions on capital stock,
the purchase, redemption or retirement of capital stock or subordinated
indebtedness, the making of certain investments, the extent to which the Company
and its subsidiaries may agree to consensual restrictions on the ability of
subsidiaries to pay dividends and indebtedness owed to the Company and other
subsidiaries, the sale of subsidiary stock to third parties, transactions with
affiliates and shareholders, the incurrence of liens, the participation in sale-
leaseback transactions, sales of assets, mergers and amendments to the limited
partnership agreements of TNCLP and TNLP.
10 3/4% Notes
The Company presently has outstanding $158.8 million in aggregate principal
amount of 10 3/4% Senior Notes due 2003 (the "10 3/4% Notes"). The 10 3/4% Notes
are issued under an Indenture dated as of October 15, 1993 (the "1993
Indenture") between the Company (as successor by merger to AMCI) and Mellon
Bank, F.S.B. (as successor to Society National Bank), as trustee, and will
mature on September 30, 2003. The Company assumed the obligations under the
10 3/4% Notes and the 1993 Indenture as a result of the acquisition of AMCI by
the Company. The 10 3/4% Notes are senior, unsecured obligations of the Company,
ranking pari passu in right of payment with all other senior indebtedness of the
Company, including the 10 1/2% Notes. Because the Company is a holding company,
all existing and future liabilities of the Company's subsidiaries, including
those under the Credit Agreement, are effectively senior to the 10 3/4% Notes.
The 10 3/4% Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after September 30, 1998, initially at 105.375% of
their principal amount, plus accrued interest, declining to 100% of their
principal amount on September 30, 2000.
The 1993 Indenture provides that upon a Change of Control (as defined in
the 1993 Indenture) each holder may require the repurchase of its 10 3/4% Notes
in cash at a purchase price of 101% of the principal amount thereof, plus
accrued interest, pursuant to an offer to repurchase which must be mailed within
45 days after the Change of Control. The Company's acquisition of AMCI
constituted a Change of Control under the 1993 Indenture. The Company purchased
$16.2 million aggregate principal amount of 10 3/4% Notes in the related
repurchase offer made pursuant to the 1993 Indenture.
The 1993 Indenture contains certain covenants, which are substantially
similar to those in the 1995 Indenture, that limit various actions by the
Company and certain of its subsidiaries, including the incurrence of
indebtedness, the payment of dividends and other distributions on capital stock,
the purchase, redemption or retirement of capital stock
44
<PAGE>
or subordinated indebtedness, the making of certain investments, the extent to
which the Company and its subsidiaries may agree to consensual restrictions on
the ability of subsidiaries to pay dividends and indebtedness owed to the
Company and other subsidiaries, the sale of subsidiary stock to third parties,
transactions with affiliates and shareholders, the incurrence of liens, the
participation in sale-leaseback transactions, sales of assets, mergers and
amendments to the limited partnership agreements of TNCLP and TNLP.
Credit Agreement
Following is a description of the Amended and Restated Credit Agreement
dated as of December 14, 1995 (as amended from time to time, the "Credit
Agreement") among Terra Capital, TNLP, certain guarantors, the issuing banks and
the lenders named therein and Citibank, as agent.
General. The Credit Agreement provides for revolving credit facilities of
up to $355 million for domestic seasonal working capital needs and other
corporate purposes expiring December 31, 2000. The facilities decline to $335
million on December 31, 1997; $315 million on December 31, 1998; and $295
million on December 31, 1999. The Company is required to prepay advances in such
amounts as necessary so that the aggregate outstanding principal amount does not
exceed for a thirty day period $120 million in 1997, $90 million in 1998, $60
million in 1999 and $30 million in 2000. The primary obligor with respect to the
Credit Agreement is Terra Capital, with the exception of a $25 million revolving
credit facility portion (the "TNLP Facility"), for which TNLP is the primary
obligor. See "Summary--Company Structure."
Interest and Commitment Fees. Loans under the Credit Agreement bear
interest at one, three or six-month LIBOR, plus the Applicable Margin (as
defined in the Credit Agreement). The Applicable Margin on LIBOR advances was
0.75% on May 30, 1997 and such Applicable Margin is subject to adjustment up to
2% and down to 0.5% depending on the Company's consolidated ratio of debt to
cash flow. Loans bearing interest based on Citibank's Base Rate, plus an
Applicable Margin from 0.0% to 0.5% based on the Company's consolidated ratio of
debt to cash flow (0.25% on May 30, 1997) are also available under the Credit
Agreement. Commitment fees of 0.25% per annum as of May 30, 1997 (subject to
adjustment up to 0.5% and down to 0.2% depending on the Company's ratio of debt
to cash flow) are charged for unused facilities.
Prepayments. Prepayments are required in an amount equal to (a) 75% of the
net proceeds over $25 million per year of non-ordinary course asset sales (not
invested or committed to be invested in the business) and (b) 75% of the net
insurance and condemnation proceeds from casualty events (net of expenses, liens
and repair and replacement costs). The Company does not expect to apply any of
the insurance proceeds received as a result of the December 1994 explosion at
the Port Neal Facility to the prepayment of facilities.
Collateral. Loans under the Credit Agreement are currently guaranteed by
the Company, Terra Holdings, Terra Capital, TNC, BMLP, BMCH and TMC, and are
secured by pledges of the stock of Terra Capital, Terra International, TNC, TMC
and BMCH and the limited partner interests in BMLP and security interests in
substantially all of the personal property of BMCH, TMC and TNLP; provided that
the security interests in TNLP's assets currently secure only the TNLP Facility.
Covenants. The Credit Agreement contains covenants customary for
financings of this type including, without limitation: (a) a limitation on
annual capital expenditures and acquisitions of $150 million, subject to a one
year carryover of any unused amounts not to exceed an additional $100 million
(provided that the Company may apply an amount equal to the insurance proceeds
with respect to the explosion of the Port Neal Facility), (b) a prohibition on
optional redemptions and repurchases of subordinated indebtedness, and (c)
limitations on additional debt, liens, asset sales, investments, changes in
lines of business and transactions with affiliates.
The Credit Agreement also includes financial covenants requiring the
Company to meet and maintain certain financial tests. These include requirements
that the Company maintain, on a consolidated basis: (a) a ratio of earnings
before interest, taxes, amortization and depreciation to interest charges of
greater than 4.0 to 1, increasing to 4.50 to 1 in 1998, (b) a ratio of debt to
cash flow of not more than and 3.0 to 1 and (c) a minimum net worth of $375.0
million plus increases in capital stock and 50% of net income in fiscal year
1994 and thereafter.
45
<PAGE>
Events of Default and Other Matters. The Credit Agreement also contains
customary events of default, including, without limitation, those relating to
failure to pay amounts due, breach of a representation or warranty, failure to
perform covenants, bankruptcy or insolvency, litigation and unsatisfied
judgments, certain defaults under other debt agreements, and violations of the
Employee Retirement Income Security Act of 1974 (as amended, "ERISA") and
environmental laws. There will also be an event of default under the Credit
Agreement if Minorco ceases to own at least 20% of the outstanding voting stock
of the Company or Minorco ceases to hold a pluralty of capital stock of the
Company.
Under an agreement between the Company and Citibank, as agent for the
lenders under the Credit Agreement, if dividends and other payments with respect
to the capital stock of Terra Capital exceed the sum of Specified Payments plus
33% of net income for 1995 forward plus any unutilized Restricted Transaction
amounts, the lenders under the Credit Agreement may choose to terminate their
commitments to lend or cause the Company to repurchase their loans.
Terra Canada Revolving Credit Facility
Terra Canada has a $35 million (Canadian) revolving credit facility (as
amended, the "Canadian Revolving Facility") with the Bank of Nova Scotia to
provide for working capital needs and general corporate purposes. The Canadian
Revolving Facility expires May 20, 1998 and is renewable at the discretion of
the bank. Indebtedness under the Canadian Revolving Facility is guaranteed by
Terra International. Under this guarantee, Terra International is subject to
certain covenants and restrictions. U.S. dollar denominated loans under the
Canadian Revolving Facility bear interest at one, two, three or six-month LIBOR
plus 0.625%. Alternative interest rates based on the Canadian prime rate and the
greater of the annual base rate of the Bank of Canada or a federal funds rate
are also available. A facility fee of 0.125% per annum computed on the committed
limit of the Canadian Revolving Facility, whether used or unused, is also
payable.
The Canadian Revolving Facility contains covenants customary for financings
of this type including, but not limited to, (a) covenants by Terra Canada to
maintain a consolidated tangible net worth (shareholders' equity less the value
of all intangible assets on a consolidated basis) of U.S. $10 million and (b)
limitations on additional liens. The Canadian Revolving Facility contains
customary events of default, including, but not limited to, those related to
failure to pay amounts due, certain defaults under other debt agreements and
bankruptcy or insolvency. An event of default also occurs if Terra International
ceases (or if such has been announced or is pending) to own all of the
outstanding shares of capital stock of Terra Canada or if the Company ceases (or
if such has been announced or is pending) to own, directly or indirectly, all of
the issued and outstanding shares of capital stock of Terra International.
Other Obligations of the Company's Subsidiaries
The following briefly describes certain other indebtedness and obligations
of the Company's subsidiaries. See also the Company's financial statements and
the notes thereto included herein.
Terra Funding Corporation is a party to a receivables purchase agreement
dated as of August 20, 1996, expiring August 20, 1999, allowing for the sale of
an undivided interest in a designated revolving pool of accounts receivable up
to $150 million in proceeds. As of April 30, 1997, $122 million of proceeds had
been received.
Terra International has $8.6 million in Industrial Development Revenue
Bonds dated April 1, 1992 outstanding which bear interest at an average of 6.8%.
Annual payments on the bonds range from $240,000 in 1998 and increase to
$1,240,000 for the final payment in 2011. The bonds are secured by a first
mortgage on the Company's headquarters building in Sioux City, Iowa.
Terra International has $31.0 million unsecured notes outstanding as of
April 30, 1997 with various institutional investors. Such notes bear interest at
8.48% and 8.75% and mature between 1998 and 2005. Terra International is also a
party to various non-cancelable operating leases for agricultural equipment,
rail cars and office, production and storage facilities expiring on various
dates through 2001. In addition, it is a party to various letters of credit and
swap agreements and financial derivatives to manage exposure to interest rates
and natural gas prices.
As a result of a recent acquisition, the Company is a guarantor of
approximately $10 million of debt related to its feed business.
46
<PAGE>
Terra Canada has various foreign exchange forward and option contracts to
manage exposure to currency fluctuations. These agreements are entered as
designated hedges of fixed obligations and hedges of net foreign currency
transaction exposures.
TNCLP Common Units
TNC holds a 2% interest as general partner in TNCLP and TNLP on a combined
basis. TNCLP's limited partnership interests are represented by Common Units.
TNC owns about 60% of the outstanding Common Units, Terra Capital owns about 5%
of the Common Units and the balance of outstanding Common Units are publicly
held. All Available Cash is distributed quarterly to all unit holders pro rata
and to the general partner. TNC, as general partner, receives 2% of all
distributions of Available Cash and is entitled, as an incentive, to larger
percentage interests (up to 50%) to the extent that distributions exceed certain
threshold amounts for each quarterly distribution. TNCLP's limited partnership
agreement provides that if the Company or its affiliates were to acquire 75% or
more of any class of partnership units, TNCLP would have the right to call, or
to assign to the Company the right to acquire, all such class of units not held
by the Company and its affiliates at a price based on recent market prices.
PNH Preferred Stock
The Company owns 100% of the common stock of PNH (representing 75% of the
voting rights of PNH). Preferred stock of PNH held by unrelated third parties
represents 25% of the voting rights of PNH and accrues dividends at a floating
rate commensurate with market interest rates. PNH was structured to finance and
complete the construction of the Port Neal Facility through its wholly owned
subsidiary, PNC.
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company included in this Prospectus or incorporated by
reference in the Registration Statement, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports, which are included herein
or incorporated by reference in the Registration Statement (which reports
express an unqualified opinion and include an explanatory paragraph referring to
the Company's change in its method of accounting for major maintenance
turnarounds and post-employment benefits effective January 1, 1994), and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters regarding the issuance of the Common Shares have been
passed upon for the Company by George H. Valentine, Senior Vice President,
General Counsel and Corporate Secretary of the Company.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Terra Industries Inc. Consolidated Financial Statements:
Independent Auditor's Report........................................................ F-2
Consolidated Statements of Financial Position - March 31, 1997 (unaudited) and
December 31, 1996 and 1995.......................................................... F-3
Consolidated Statements of Income - Three Months Ended March 31, 1997 and 1996
(unaudited), Year Ended December 31, 1996, 1995 and 1994............................ F-4
Consolidated Statements of Cash Flows - Three Months Ended March 31, 1997 and 1996
(unaudited), Year Ended December 31, 1996, 1995 and 1994............................ F-5
Consolidated Statements of Changes in Stockholders' Equity - Three Months Ended
March 31, 1997 (unaudited), Year Ended December 31, 1996, 1995 and 1994............. F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Terra Industries Inc.
We have audited the accompanying consolidated statements of financial
position of Terra Industries Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, cash flows and changes
in stockholders' equity for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Terra Industries Inc. and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for major maintenance turnarounds and post-employment
benefits effective January 1, 1994.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 3, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Position
- --------------------------------------------------------------------------------------------------
At March 31, At December 31,
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
(unaudited)
Assets
Cash and short-term investments $ 44,585 $ 100,742 $ 138,707
Accounts receivable, less allowance for doubtful
accounts of $11,845, $11,391 and $10,626 207,364 81,606 178,738
Inventories 576,779 422,938 367,272
Other current assets 61,652 107,008 79,279
- --------------------------------------------------------------------------------------------------
Total current assets 890,380 712,294 763,996
- --------------------------------------------------------------------------------------------------
Equity and other investments 17,119 16,579 15,408
Property, plant and equipment, net 848,404 846,353 694,358
Excess of cost over net assets of acquired businesses 287,583 291,645 308,414
Deferred tax asset 15,189 15,311 ---
Partnership distribution reserve fund --- --- 18,480
Other assets 81,777 87,183 67,202
- --------------------------------------------------------------------------------------------------
Total assets $2,140,452 $1,969,365 $1,867,858
==================================================================================================
Liabilities
Debt due within one year $ 115,440 $ 118,937 $ 30,425
Accounts payable 314,200 198,273 203,400
Accrued and other liabilities 290,415 207,927 222,298
- --------------------------------------------------------------------------------------------------
Total current liabilities 720,055 525,137 456,123
- --------------------------------------------------------------------------------------------------
Long-term debt 403,501 404,707 407,162
Deferred income taxes 135,018 134,523 111,871
Other liabilities 120,714 125,013 138,218
Minority interest 170,413 173,893 182,901
Commitments and contingencies (Note 12)
- --------------------------------------------------------------------------------------------------
Total liabilities 1,549,701 1,363,273 1,296,275
- --------------------------------------------------------------------------------------------------
Stockholders' Equity
Capital stock
Common Shares, authorized 133,500 shares;
73,940, 75,010 and 81,173 shares outstanding 126,545 127,614 133,970
Paid-in capital 537,045 550,850 631,195
Cumulative translation adjustment (2,812) (1,430) (271)
Accumulated deficit (70,027) (70,942) (193,311)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 590,751 606,092 571,583
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,140,452 $1,969,365 $1,867,858
==================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
Consolidated Statements of Income
===============================================================================
<TABLE>
<CAPTION>
Three Months Ended March 31, Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per-share amounts) (unaudited)
Revenues
Net sales $423,683 $388,312 $2,264,509 $2,215,874 $1,633,499
Other income, net 10,027 6,429 51,977 76,299 32,448
- ---------------------------------------------------------------------------------------------------------------------------------
433,710 394,741 2,316,486 2,292,173 1,665,947
- ---------------------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales 338,052 277,517 1,722,450 1,657,070 1,344,062
Selling, general and
administrative expense 68,309 62,080 300,897 259,295 207,333
Equity in (earnings) losses
of unconsolidated affiliates 1,023 1,081 (2,042) (1,894) (743)
- ---------------------------------------------------------------------------------------------------------------------------------
407,384 340,678 2,021,305 1,914,471 1,550,652
- ---------------------------------------------------------------------------------------------------------------------------------
Income from operations 26,326 54,063 295,181 377,702 115,295
Interest income 710 2,331 7,102 13,811 5,541
Interest expense (13,484) (11,565) (59,947) (64,897) (22,082)
Minority interest (6,910) (13,169) (44,485) (47,234) (8,809)
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes,
extraordinary items and cumulative
effect of accounting changes 6,642 31,660 197,851 279,382 89,945
Income tax provision 2,740 13,260 63,900 115,500 33,700
- ---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items and
cumulative effect of accounting changes 3,902 18,400 133,951 163,882 56,245
Extraordinary loss on early retirement
of debt --- --- --- (4,338) (3,060)
Cumulative effect of accounting changes --- --- --- --- 3,376
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,902 $ 18,400 $ 133,951 $ 159,544 $ 56,561
=================================================================================================================================
Weighted average number of shares
outstanding 74,709 81,477 77,757 81,332 72,870
=================================================================================================================================
Income Per Share:
Income before extraordinary items $0.05 $0.23 $ 1.72 $ 2.01 $ 0.77
Extraordinary loss on early retirement
of debt --- --- --- (0.05) (0.04)
Cumulative effect of accounting changes --- --- --- --- 0.05
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $0.05 $0.23 $ 1.72 $ 1.96 $ 0.78
=================================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities (unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 3,902 $ 18,400 $ 133,951 $ 159,544 $ 56,561
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 22,621 17,102 83,210 66,075 27,218
Deferred income taxes 2,939 (1,178) 15,959 47,849 20,956
Cumulative effect of accounting changes --- --- --- --- (3,376)
Minority interest in earnings 6,910 13,169 44,485 47,234 8,809
Other non-cash items 1,375 1,333 (3,059) 2,544 10,923
Change in current assets and liabilities,
excluding working capital purchased:
Accounts receivable (125,295) (37,169) 100,359 (24,557) 19,615
Inventories (152,964) (177,433) (53,185) (30,466) (59,303)
Other current assets 45,912 (7,946) (42,849) 46 (13,056)
Accounts payable 115,927 70,397 (8,291) 22,950 60,478
Accrued and other liabilities 77,757 79,646 (27,952) 35,349 39,405
Unreimbursed Port Neal casualty --- (16,822) (26,498) (68,748) ---
Other (7,367) (3,646) (14,291) (14,699) 212
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Operating Activities (8,283) (44,147) 201,839 243,121 168,442
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Port Neal plant construction (381) (38,376) (86,323) (133,106) ---
Insurance proceeds from plant casualty --- --- 26,675 127,557 ---
Acquisitions, net of cash acquired (5,708) (4,910) (16,181) (22,326) (373,722)
Purchase of property, plant and equipment (15,058) (15,568) (99,326) (44,023) (31,213)
Purchase of minority interest - TNCLP --- --- --- (28,834) ---
Proceeds from asset sales --- --- 5,798 --- ---
Other 848 291 861 5,670 (1,448)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (20,299) (58,563) (168,496) (95,062) (406,383)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net short-term borrowings (3,367) 14,996 90,318 4,906 13,795
Proceeds from issuance of long-term debt --- --- 151 203,112 326,407
Principal payments on long-term debt (1,336) (1,327) (4,412) (349,134) (101,416)
Debt issuance costs --- --- --- (8,333) (13,581)
Stock (repurchase) issuance - net (14,871) 145 (91,131) 1,187 117,666
Distributions to minority interests (3,632) (13,227) (53,493) (36,750) (5,040)
Sale of minority interest in subsidiaries --- --- --- 24,950 ---
Dividends (2,987) (2,436) (11,582) (8,662) (5,837)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Financing Activities (26,193) (1,849) (70,149) (168,724) 331,994
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Effect on Cash and Short-Term
Investments (1,382) (39) (1,159) 988 (771)
- -----------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Short-Term
Investments (56,157) (104,598) (37,965) (19,677) 93,282
Cash and Short-Term Investments at Beginning of Year 100,742 138,707 138,707 158,384 65,102
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Short-Term Investments at End of Year $ 44,585 $ 34,109 $ 100,742 $ 138,707 $ 158,384
===================================================================================================================================
Interest Paid $ 58,706 $ 77,800 $ 16,500
===================================================================================================================================
Income Taxes Paid $ 80,340 $ 47,665 $ 22,600
===================================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------
Capital Stock Cumulative
------------------ Paid-In Translation Accumulated
(in thousands) Shares Amount Capital Adjustment Deficit Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 69,455 $122,257 $516,128 $ (488) $(394,917) $242,980
Conversion of debentures 731 731 5,176 --- --- 5,907
Exercise of stock options 847 847 3,819 --- --- 4,666
Issuance of Common Shares 9,700 9,700 103,300 --- --- 113,000
Translation adjustment --- --- --- (771) --- (771)
Stock Incentive Plan 232 235 1,688 --- --- 1,923
Dividends --- --- --- --- (5,837) (5,837)
Net income --- --- --- --- 56,561 56,561
- ----------------------------------------------------------------------------------------------------------------
December 31, 1994 80,965 133,770 630,111 (1,259) (344,193) 418,429
Exercise of stock options 192 192 1,073 --- --- 1,265
Translation adjustment --- --- --- 988 --- 988
Stock Incentive Plan 16 8 11 --- --- 19
Dividends --- --- --- --- (8,662) (8,662)
Net income --- --- --- --- 159,544 159,544
- ----------------------------------------------------------------------------------------------------------------
December 31, 1995 81,173 133,970 631,195 (271) (193,311) 571,583
Exercise of stock options, net 144 144 515 --- --- 659
Issuance of Common Shares 219 219 2,623 --- --- 2,842
Repurchase of Common Shares (6,827) (6,827) (84,963) --- --- (91,790)
Translation adjustment --- --- --- (1,159) --- (1,159)
Stock Incentive Plan 301 108 1,480 --- --- 1,588
Dividends --- --- --- --- (11,582) (11,582)
Net income --- --- --- --- 133,951 133,951
- ----------------------------------------------------------------------------------------------------------------
December 31, 1996 75,010 127,614 550,850 (1,430) (70,942) 606,092
Exercise of Stock Options 2 2 11 --- --- 13
Repurchase of Common Shares (1,071) (1,071) (13,816) --- --- (14,887)
Translation adjustment --- --- --- (1,382) --- (1,382)
Stock Incentive Plan (1) --- --- --- --- ---
Dividends --- --- --- --- (2,987) (2,987)
Net Income --- --- --- --- 3,902 3,902
- ----------------------------------------------------------------------------------------------------------------
March 31, 1997 (unaudited) 73,940 $126,545 $537,045 $(2,812) $ (70,027) $590,751
================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-6
<PAGE>
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. and all majority owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated.
Interim Financial Information:
The unaudited consolidated financial statements as of March 31, 1997 contain all
adjustments necessary to summarize fairly the financial position of the Company
and all majority-owned subsidiaries and the results of the Company's operations
for the three months ended March 31, 1997 and 1996. All such adjustments are of
a normal recurring nature. Because of the seasonal nature of the Company's
operations and effects of weather-related conditions in several of its marketing
areas, results of operations of any single reporting period should not be
considered as indicative of results for a full year.
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 Company 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 ranging from 15 to 20 years for
buildings and 3 to 18 years for plant and equipment. Maintenance and repair
costs are expensed as incurred.
Excess of costs over net assets of acquired business:
The Company amortizes costs in excess of fair value of net assets of businesses
acquired using the straight-line method over periods ranging from 15 to 18
years. Management periodically determines the recoverability of this asset
through an assessment of future operations.
Plant turnaround costs:
Costs related to the periodic scheduled major maintenance of continuous process
production facilities (plant turnarounds) are deferred and charged to product
costs on a straight-line basis during the period to the next scheduled
turnaround, generally two years.
Hedging transactions:
Realized gains and losses from hedging activities and premiums paid for option
contracts are deferred and recognized in the month to which the hedged
transactions relate.
Stock-based compensation:
The Company recognizes compensation costs for stock-based employee compensation
plans based on the difference, if any, between the quoted market price of the
stock and the amount an employee pays to acquire the stock.
F-7
<PAGE>
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 outstanding and the dilutive effect of the Company's outstanding
restricted shares and stock options. Fully diluted earnings per share is
considered to be the same as primary earnings per share, since the effect of
certain dilutive securities was not significant.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share."
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share. The impact on earnings per share computed using SFAS 128 is
immaterial, in comparison with net income per share disclosed in the
Consolidated Statements of Income. SFAS 128 is applicable for fiscal years
ending after December 15, 1997.
2. Acquisitions
On October 20, 1994, the Company acquired Agricultural Mineral and Chemicals
Inc. (AMCI) for $506 million in cash. AMCI, through its subsidiaries
manufactures nitrogen-based fertilizers and industrial use products and
methanol. The subsidiaries controlled by the Company as a result of the AMCI
acquisition include Terra Nitrogen Corporation (TNC), Beaumont Methanol, Limited
Partnership (BMLP) and Terra Nitrogen Company, L.P. (TNCLP). As a result of the
acquisition and subsequent open market purchases (see Note 11 - Long-Term Debt),
the Company and its subsidiaries have approximately a 66% ownership interest in
TNCLP, formerly Agricultural Minerals Company, L.P., which operates nitrogen
products manufacturing facilities in Verdigris, Oklahoma and Blytheville,
Arkansas through an operating partnership, Terra Nitrogen, Limited Partnership
(TNLP). Terra Methanol Corporation (TMC) is the general partner of BMLP which
operates a methanol production facility in Beaumont, Texas. The acquisition has
been accounted for using the purchase method of accounting.
To finance the acquisition of AMCI, the Company 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 Company, AMCI and AMCI's subsidiaries
aggregating $260 million of which $152 million in borrowings were outstanding.
As a result of the acquisition of AMCI, the Company also assumed AMCI's
obligations including its 10.75% Senior Notes due 2003 (see Note 11 - Long-Term
Debt).
On September 15, 1994, the Company acquired an approximate 34% interest in
Royster-Clark, Inc. for $12 million in cash. Royster-Clark is a 104-location
distributor of crop input and protection products in the mid-Atlantic region.
Operating results of the acquired businesses subsequent to the respective dates
of each acquisition are included in the Consolidated Statements of Income. The
following represents unaudited pro forma summary results of operations as if the
acquisition of AMCI had occurred at the beginning of 1994:
<TABLE>
<CAPTION>
(in thousands, except per-share data) Year ended December 31,
- -----------------------------------------------------------------------
<S> <C>
1994
- -----------------------------------------------------------------------
Revenues $ 2,084,827
Income before extraordinary items and
cumulative effect of accounting changes $ 110,370
Net income $ 110,680
Income per share before extraordinary items $ 1.37
Net income per share $ 1.37
=======================================================================
</TABLE>
F-8
<PAGE>
The pro forma operating results were adjusted to include depreciation of the
fair value of capital assets acquired based on estimated useful lives,
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 period, and is not intended to be a projection of future operating results
or trends.
3. Accounting Changes
Coincident with the 1994 acquisition of AMCI (see Note 2 - Acquisitions), the
Company changed its method of accounting for major maintenance turnarounds at
manufacturing facilities and recorded a $4.2 million credit, net of income taxes
of $2.7 million, as the cumulative effect at January 1, 1994 of the change in
accounting principle. Excluding the cumulative effect, this change increased net
income for 1994 by approximately $1.0 million, or $0.01 per share. Under the
new accounting principle the Company defers the cost of turnarounds when
incurred and charges the costs to production ratably over the period until the
next scheduled turnaround. Previously, estimated costs of turnarounds were
charged to product costs over the period preceding each scheduled major
maintenance, generally two years. The change was made to charge turnaround
costs to production over the period most clearly benefited by the turnaround.
In 1994, the Company adopted SFAS 112, "Employers' Accounting for Post-
Employment Benefits." This change required the Company to recognize future
liabilities of $0.8 million, net of income taxes of $0.5 million, for benefits
to disabled employees. Prior to the adoption of SFAS 112, the Company
recognized such expenses in the period the benefits were paid.
4. Accounts Receivable
On August 20, 1996, the Company, through Terra Funding Corporation (TFC), a
beneficially owned subsidiary of the Company and a limited purpose corporation,
entered into an agreement with a financial institution to sell an undivided
interest in its accounts receivable. Under the agreement, which expires August
20, 1999, the Company may sell without recourse an undivided interest in a
designated pool of its accounts receivable and receive up to $150 million in
proceeds. Undivided interests in new receivables may be sold as amounts are
collected on previously sold interests. As of March 31, 1997, the proceeds of
the uncollected balance of accounts receivable sold totaled $93 million. The
Company pays a monthly discount fee on the outstanding amount of the accounts
receivable sold which is included in interest expense in the Consolidated
Statements of Income. TFC is a separate legal entity whose creditors have
received security interests in its assets. Under a previous agreement which
expired during 1996, the Company sold an undivided interest in a designated pool
of its accounts receivable up to $50 million in proceeds.
5. Inventories
<TABLE>
<CAPTION>
Inventories consisted of the following:
March 31, 1997 December 31,
-------------- ----------------------
(in thousands) (unaudited) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 40,177 $ 39,782 $ 36,499
Finished goods 536,602 383,156 330,773
- ---------------------------------------------------------------------------
Total $ 576,779 $ 422,938 $ 367,272
===========================================================================
</TABLE>
F-9
<PAGE>
6. Other Current Assets
Other current assets consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31,
-------------- -------------------------
(in thousands) (unaudited) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax asset - current $ 12,241 $ 15,180 $ 23,768
Income taxes recoverable - federal --- 12,641 ---
Income taxes recoverable - foreign 7,593 10,884 ---
Partnership distribution reserve fund 18,480 18,480 ---
Insurance recoverable --- --- 29,808
Other current assets 23,338 49,823 25,703
- ------------------------------------------------------------------------------------------
Total $ 61,652 $ 107,008 $ 79,279
==========================================================================================
</TABLE>
7. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31,
--------------- ---------------------------
(in thousands) (unaudited) 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and buildings $ 127,578 $ 128,741 $ 105,715
Plant and equipment 887,797 886,150 556,206
Finance leases 3,526 3,526 4,716
Construction in progress 47,751 30,576 171,967
- ------------------------------------------------------------------------------------------------
1,066,652 1,048,993 838,604
Less accumulated depreciation
and amortization (218,248) (202,640) (144,246)
- ------------------------------------------------------------------------------------------------
Total $ 848,404 $ 846,353 $ 694,358
================================================================================================
</TABLE>
8. Port Neal Casualty
On December 13, 1994, the Company's Port Neal facility in Iowa was extensively
damaged as a result of an explosion. Insurance was in force to cover the
Company's property damage, business interruption and third party liability
claims. Estimated lost profits recoverable under the business interruption
policy were included in income. Insurance proceeds received under the Company's
property damage claim are being deferred pending final settlement of the claim.
The Company has invested additional funds for enhancements and improvements at
the Port Neal facility.
As of March 31, 1997, the Company has received $203 million in insurance
payments. The Company presented documentation to the insurance carriers
supporting expenditures in excess of $350 million to rebuild the plant and to
compensate for the property damage and business interruption losses. The
Company filed a complaint in April 1997 in federal court against its property
insurance carriers alleging the carriers have failed to act in a timely manner
to handle the claim or to acknowledge their obligations to pay the amounts owed.
The complaint seeks, among other things, monetary damages in excess of $150
million.
The Company expects to record a substantial non-recurring gain, representing the
difference between the property insurance settlement on the Port Neal facility
with the Company's insurers and the carrying value of the facility at the time
of the explosion. The amount of the gain will be dependent on the final
settlement reached with the Company's insurance carriers.
F-10
<PAGE>
9. Debt Due Within One Year
Debt due within one year consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31,
--------------- ----------------------------
(in thousands) (unaudited) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term borrowings $ 112,965 $ 116,332 $ 26,014
Current maturities of long-term debt 2,475 2,605 4,411
- ------------------------------------------------------------------------------------------------------
Total $ 115,440 $ 118,937 $ 30,425
======================================================================================================
Weighted average short-term borrowings $ 109,701 $ 53,483
======================================================================================================
Weighted average interest rate 7.6% 8.4%
======================================================================================================
</TABLE>
During 1996, the Company had a credit agreement to provide revolving credit
facilities of up to $375 million for domestic seasonal working capital needs and
other corporate purposes. At December 31, 1996, the revolving credit facilities
were reduced to $355 million. The Company also has a $25.6 million ($35 million
Cdn) revolving credit facility used to provide for working capital needs for its
Canadian operations. There was $110.0 million outstanding at December 31, 1996
under the domestic facility and $6.3 million outstanding under the Canadian
facility. Interest on borrowings under these lines is charged at current market
rates.
Under the credit agreement, the Company has agreed, among other things, to
maintain certain financial covenants including minimum net worth and interest
coverage ratios and maximum debt to cash flow ratios, and to adhere to certain
limitations on additional debt, capital expenditures, acquisitions, liens, asset
sales, investments, prepayment of subordinated indebtedness, changes in lines of
business and transactions with affiliates. The Company's domestic revolving
credit facilities expire December 31, 2000. A commitment fee is charged on the
unused portion of the facilities under the credit agreement, currently 1/4
percent adjustable based on the Company's most recent quarter debt to cash flow
ratio. The credit agreement is secured by the stock of certain principal
subsidiaries of the Company as well as the personal property of the former AMCI
subsidiaries.
Under the Canadian facility, the Company has agreed, among other things, to
maintain a certain level of net worth and restrict payments to the Company from
operating subsidiaries. The Canadian facility expires May 20, 1998 and is
renewable at the discretion of the bank. A commitment fee of 1/8 percent is
paid on the facility.
10. Accrued and Other Liabilities
Accrued and other liabilities consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31,
--------------- -------------------------
(in thousands) (unaudited) 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer deposits $ 180,900 $ 102,347 $ 101,851
Payroll and benefit costs 19,453 26,382 33,242
Income taxes - federal 4,920 --- 12,761
Income taxes - state 2,850 5,096 13,448
Other 82,292 74,102 60,996
- -------------------------------------------------------------------------------------
Total $ 290,415 $ 207,927 $ 222,298
=====================================================================================
</TABLE>
F-11
<PAGE>
11. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31,
-------------- ---------------------------------
(in thousands) (unaudited) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Senior Notes, 10.5%, due 2005 $ 200,000 $ 200,000 $ 200,000
Senior Notes, 10.75%, due 2003 158,755 158,755 158,755
Senior Notes, 8.48%, due 2005 30,000 30,000 30,000
Industrial Development Revenue Bonds
bearing interest at an average 6.81% with
increasing payments from 1997 to 2011 8,860 8,860 9,045
Notes, 8.75%, due 1997 to 1998 1,000 2,000 4,500
Other 7,361 7,697 9,273
- ----------------------------------------------------------------------------------------------------------------------
405,976 407,312 411,573
Less current maturities (2,475) (2,605) (4,411)
- ----------------------------------------------------------------------------------------------------------------------
Total $ 403,501 $ 404,707 $ 407,162
======================================================================================================================
</TABLE>
Scheduled principal payments for each of the five years 1997 through 2001 are
$2.6 million, $2.6 million, $3.5 million, $8.2 million and $5.4 million,
respectively.
In 1995, the Company issued $200 million unsecured 10.5% Senior Notes due in
full June 15, 2005. The 10.5% Senior Notes are redeemable at the option of the
Company, in whole or part, at any time on or after June 15, 2000, initially at
105.250% of their principal amount, plus accrued interest, declining to 102.625%
on or after June 15, 2001, and declining to 100% on or after June 15, 2002. The
10.5% Senior Notes Indenture contains certain restrictions, including the
issuance of additional debt, payment of dividends, issuance of capital stock,
certain transactions with affiliates, incurrence of liens, sale of assets, and
sale-leaseback transactions. Net proceeds of $28.8 million were used to acquire
974,900 of the outstanding Senior Preference Units (SPUs) of TNCLP. The
remaining net proceeds were used to repay bank term loans.
The 10.75% unsecured Senior Notes are redeemable at the option of the Company,
in whole or part, at any time on or after September 30, 1998, initially at
105.375% of their principal amount, plus accrued interest, declining to 102.688%
on or after September 30, 1999, and declining to 100% on or after September 30,
2000. The 10.75% Senior Notes Indenture contains restrictions similar to those
in the 10.5% Senior Notes Indenture.
The $30 million unsecured 8.48% Senior Notes require annual principal payments
commencing November 1, 1999 through May 1, 2005. The notes include covenants
similar to the revolving credit agreement described in Note 9 - Debt Due Within
One Year and a requirement for rental and interest obligations coverage. The
Company has executed interest rate swap agreements to convert one-half of the
8.48% unsecured Senior Notes to LIBOR-based floating rate instruments. The
interest rate agreements became effective on April 15, 1993 and terminate on
April 15, 2003.
The Industrial Development Revenue Bonds due in 2011 are secured by a letter of
credit guaranteed by the Company and, along with other long-term debt due in
2003, by the Company's headquarters building located in Sioux City, Iowa.
F-12
<PAGE>
12. Commitments and Contingencies
The Company 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 2010. Total minimum rental
payments are as follows:
<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------
<S> <C>
1997 $ 44,486
1998 28,737
1999 21,110
2000 9,292
2001 and thereafter 7,942
- -------------------------------------------------------------------------
Total $ 111,567
=========================================================================
</TABLE>
Total rental expense under all leases, including short-term cancelable operating
leases, was approximately $54.1 million, $46.8 million and $37.3 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
In April 1993, the Company entered into a lease financing agreement in
connection with the purchase of an ammonia manufacturing plant and related
upgrading facilities located near Sarnia, Ontario. The agreement included an
option to purchase the nitrogen plant which the Company exercised during 1996.
The Company 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 Company 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% or more of any company liable
for such benefits as of certain specified dates becomes liable for such benefits
if the company directly liable is unable to pay them. As a result, if the
purchaser becomes unable to pay its retiree medical obligations assumed pursuant
to the sale, the Company may have to pay such amount. The Company has estimated
the present value of contingent liabilities at approximately $9.8 million at
December 31, 1996.
The Company is involved in various legal actions and claims, including
environmental matters, arising from the normal course of business. It is the
opinion of management that the ultimate resolution of these matters will not
have a material adverse effect on the results of operations, financial position
or net cash flows of the Company.
13. Derivative Financial Instruments
The Company manages four categories of risk using derivative financial
instruments: (a) foreign currency fluctuations (b) changes in natural gas
supply prices (c) interest rate fluctuations and (d) the effect of fluctuations
in methanol prices relative to natural gas prices. Derivative financial
instruments have credit risk and market risk.
To manage credit risk, the Company only enters into derivative transactions with
counter-parties that are currently rated AA or better or equivalent as
recognized by a national rating agency. The Company will generally continue in
a derivative transaction if the counter-party's credit rating is downgraded to
A. Appropriate steps will be taken to minimize risks if the counter-party's
credit rating is downgraded below A. The Company will not enter into
transactions with counter-parties if the additional transaction will result in
credit exposure exceeding $20 million. For purposes of this policy, "credit
exposure" means the market value of derivatives transactions with that counter-
party. Additionally, the credit rating of counter-parties may be modified
through guarantees, letters of credit or other credit enhancement vehicles.
Market risk related to derivative financial instruments should be substantially
offset by changes in the valuation of the underlying items being hedged.
F-13
<PAGE>
Foreign Currency Fluctuations - The Company enters into foreign exchange forward
and option contracts to manage risk associated with foreign currency exchange
rate fluctuations. The contracts are designated as hedges of fixed obligations
and hedges of net foreign currency positions. Contract maturities are
consistent with the settlement dates of items being hedged. Foreign currency
hedges require cash settlement at termination. Gains and losses on these
contracts are deferred and included as a component of the related transaction.
A significant portion of the Company's Canadian production is sold in the U.S.,
or is based on U.S. prices, but many of the production costs are in Canadian
dollars. As a result, the Company's earnings will decline when the Canadian
dollar increases in value compared with the U.S. dollar. Consequently, the
Company buys Canadian dollars forward or uses derivatives to fix future exchange
rates over a twelve-month period to cover a portion of its estimated net
Canadian dollar requirements which include firm commitments to purchase natural
gas. As of December 31, 1996, the existing forward contracts represented
approximately 20% of anticipated net 1997 Canadian dollar requirements of
approximately $25 million (Cdn).
Natural Gas Prices - Natural gas supplies to meet production requirements at the
Company's production facilities are purchased at market prices. Natural gas
market prices, as with other commodities, are volatile and the Company
effectively fixes prices for a portion of its natural gas production
requirements and inventory through the use of futures contracts, swaps and
options. These contracts reference physical natural gas prices or appropriate
NYMEX futures contract prices. The contracts' physical prices are frequently
based on the Henry Hub Louisiana price. Natural gas supplies for the Company's
six production facilities are purchased from various suppliers for each plant
location which creates a location basis differential between the contract price
and the physical price of natural gas. Accordingly, the use of financial
derivatives may not exactly offset the change in the price of physical gas. The
contracts are traded in months forward and settlement dates are scheduled to
coincide with gas purchases during that future period.
A swap is a contract between the Company and a third party to exchange cash
based on a designated price. Option contracts give the holder the right to
either own or sell a futures or swap contract. The futures contracts require
maintenance of cash balances generally 10% to 20% of the contract value and
option contracts require initial premium payments ranging from 2% to 5% of
contract value.
The following summarizes open natural gas contracts at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Contract Unrealized Contract Unrealized
MMBtu Gain (Loss) MMBtu Gain
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Futures 2,530 $ (1,024) 6,840 $ 592
Swaps 177,315 41,958 167,040 13,475
Options 6,260 1,102 6,470 797
- --------------------------------------------------------------------------------
186,105 $ 42,036 180,350 $14,864
================================================================================
</TABLE>
Annual production requirements are approximately 134 million MMBtu. Contracts
were in place at December 31, 1996 to cover 65% of 1997 natural gas
requirements, 59% for 1998 and 23% for 1999.
Gains and losses on settlement of these contracts and premium payments on option
contracts are credited or charged to cost of sales in the month in which the
hedged transaction occurs. The risk and reward of outstanding natural gas
positions are directly related to increases or decreases in natural gas prices
in relation to the underlying NYMEX natural gas contract prices. Realized gains
on closed contracts and premium payments on option contracts of $18.1 million
and $4.7 million, respectively, relating to future periods have been deferred
and are included in other current assets as of December 31, 1996.
During 1996, natural gas hedging activities reduced the Company's natural gas
costs by approximately $74.3 million compared with spot prices. During 1995,
natural gas hedging activities produced cost increases of approximately $34.5
million compared with spot prices. During 1994, natural gas hedging increased
cost by approximately $15.5 million compared with spot prices.
F-14
<PAGE>
The Company has also entered into basis swaps. Such contracts require payments
to or from the Company for the amount, if any, that monthly published gas prices
from the source specified in the contract differ from prices of NYMEX natural
gas futures during a specified period. As of December 31, 1996 and 1995,
MMBtu's under such contracts totaled 16.0 million and 14.7 million,
respectively.
Interest Rate Fluctuations - The Company has limited the effect of interest rate
fluctuations for a portion of its floating rate obligations through the use of
interest rate collar agreements which are designated as hedges. The agreements
require payments to the Company for the amount, if any, that interest costs,
based on LIBOR, exceed 8.5% to 9.0% and require payments by the Company for the
amount that interest costs based on LIBOR fall below 5.65%. The interest rate
collar agreements, with a notional amount of $135 million (which declines over
the remaining two-year period), cover 54% of the variable interest rate
obligations at December 31, 1996. The unamortized cost of the collar agreements
is carried in other assets in the Consolidated Statement of Financial Position.
The Company paid $100,000 during the year and $39,000 was due at December 31,
1996 related to the agreements.
The Company has also entered into interest rate swap agreements to convert 50%
of its $30 million fixed-rate, long-term borrowings to variable rates through
April 15, 2003. The interest rate swap agreements are designated as hedges.
For 1996, the net interest rate effect of the swap arrangements totaled 1.7%
effectively reducing the interest rate on its $30 million of 8.48% Senior Notes
to 7.61%. For 1995, the net interest rate effect of the swap arrangements
totaled 1.8% effectively reducing the interest rate to 7.58%. At December 31,
1996, the notional amount of the swap agreement was approximately $15 million.
Methanol Prices - The Company entered into a methanol hedging agreement (the
Methanol Hedging Agreement) effective October 1994. Pursuant to the agreement,
the Company 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 amount due, if any, is dependent upon average
methanol and natural gas prices during each of the periods. Payments are due
five days after the end of each period. The quantities subject to the agreement
for each of these periods are 155.5 million, 140 million and 130 million
gallons, respectively. The Company's methanol production facilities have a
production capacity of 320 million gallons of methanol per year.
The $4 million received pursuant to the Methanol Hedging Agreement is being
recognized as income over the term of the agreement. No amounts have been paid
by the Company or are presently accrued under the terms of the agreement.
The following table presents the carrying amounts and estimated fair values of
the Company's derivative financial instruments at December 31, 1996 and 1995.
SFAS 107, "Disclosures about Fair Value of Financial Instruments," defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency $ --- $ --- $ --- $ 0.7
Natural gas 9.6 51.6 6.2 21.1
Interest rate 0.3 0.3 0.7 (1.9)
Methanol (1.3) --- (2.5) ---
================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of derivative financial instrument:
Foreign currency contracts: Estimated based on quotations received from a
quotation service and computations prepared by the Company.
F-15
<PAGE>
Natural gas futures, swaps and options: Estimated based on quoted market prices
from brokers, and computations prepared by the Company.
Interest rate collar agreements and interest rate swap agreements: Estimated
based on quotes from the market makers of these instruments.
Methanol Hedging Agreement: Estimated based on historical and forecasted
market prices for both methanol and natural gas prices and computations
prepared by the Company.
14. Financial Instruments and Concentrations of Credit Risk
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995. SFAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and short-term investments $ 100.7 $ 100.7 $ 138.7 $ 138.7
Receivables 81.6 81.6 178.7 178.7
Equity and other investments 16.6 18.6 15.4 17.7
Other assets 9.2 9.8 9.0 9.6
Financial Liabilities
Short-term borrowings (116.3) (116.3) (26.0) (26.0)
Long-term debt (407.3) (437.0) (411.6) (444.8)
========================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and receivables: The carrying amounts approximate fair value because of
the short maturity of those instruments.
Equity and other investments: Investments in untraded companies are valued on
the basis of management's estimates and, when available, comparisons with
similar companies whose shares are publicly traded.
Other assets: The amounts reported relate to notes receivable obtained from
sale of previous operating assets. The fair value is estimated based on current
interest rates and repayment terms of the individual notes.
Short-term borrowings: The carrying amounts approximate fair value because of
the short maturity of these issues.
Long-term debt: The fair value of the Company's long-term debt is estimated
based on the quoted market price of these or similar issues or by discounting
expected cash flows at the rates currently offered to the Company for debt of
the same remaining maturities.
Concentration of Credit Risk - The Company 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 in short duration corporate and government debt securities funds with
well capitalized, high quality financial institutions. By policy, the Company
limits the amount of credit exposure in any one type of investment instrument.
Financial Instruments - At December 31, 1996, the Company had letters of credit
outstanding totaling $21.5 million, guaranteeing various insurance and financing
activities. Short-term investments of $5.4 million and $8.9 million at December
31, 1996 and 1995, respectively, are restricted to collateralize certain letters
of credit.
F-16
<PAGE>
15. Stockholders' Equity
The Company allocates $1.00 per share upon the issuance of Common Shares to the
Common Share capital account.
At December 31, 1996, 1.9 million Common Shares were reserved for issuance upon
award of restricted shares and exercise of employee stock options.
The Company has authorized 16,500,000 Trust Shares for issuance. There was no
activity related to the Trust Shares from December 31, 1993 to December 31, 1996
and no Trust Shares were outstanding at December 31, 1996.
In September 1995, the Company transferred its Port Neal facility (including
improvements then in progress) and $1.3 million in cash to Port Neal Holdings
Corp. (PNH) and PNH issued $25 million of non-convertible preferred stock to
unrelated third parties. As a result, the Company owns 100% of the common stock
of PNH (representing 75% of the voting rights of PNH). PNH was structured to
finance and complete the construction of the Port Neal facility through its
wholly owned subsidiary, Port Neal Corporation (PNC). The preferred stock
represents 25% of the voting rights of PNH and accrues dividends at a floating
rate commensurate with market interest rates. The Company accounts for the
preferred stock as a minority interest. Various agreements between the Company
and certain subsidiaries were entered into with PNH and/or PNC including
intercompany debt obligations and lease arrangements.
16. Stock-Based Compensation
The Company accounts for its stock-based compensation under the provisions of
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," which utilizes the intrinsic value method. Compensation cost
related to stock-based compensation was $2.8 million and $1.0 million for the
years ended December 31, 1996 and 1995, respectively.
The Company'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. Awards to a maximum of 2.5 million Common Shares may be granted under
the 1992 Plan. There were no performance units outstanding at December 31, 1996.
Options generally may not be exercised prior to one year or more than ten years
from the date of grant. Stock options and restricted shares vest over specified
periods, or in some cases upon the attainment, prior to a termination date, of
pre-established market price objectives for the Company's Common Shares. The
restricted shares are entitled to normal voting rights and earn dividends as
declared during the performance periods. Compensation expenses are accrued on a
ratable basis through the service periods. At December 31, 1996, 479,000 Common
Shares were available for grant under the 1992 Plan.
A summary of the Company's stock-based compensation activity related to stock
options for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
(options in thousands)
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 1,350 $ 6.92 1,533 $ 6.79 2,145 $ 5.81
Granted 535 14.62 9 13.00 289 10.50
Expired/terminated 8 10.50 --- --- 54 8.10
Exercised 158 5.36 192 6.16 847 5.50
- ------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 1,719 $ 9.44 1,350 $ 6.92 1,533 $ 6.79
==================================================================================================================
</TABLE>
F-17
<PAGE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1996:
<TABLE>
<CAPTION>
(options in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3.00 $ 5.99 538 5.3 years $ 4.96 538 $ 4.96
6.00 8.99 267 2.5 6.81 267 6.81
9.00 11.99 370 4.8 10.29 230 10.16
12.00 14.99 544 9.9 14.60 --- ---
- ---------------------------------------------------------------------------------------------------------------------
Total 1,719 6.2 $ 9.44 1,035 $ 6.59
=====================================================================================================================
</TABLE>
There were 1,052,000 and 1,244,000 options exercisable at December 31, 1995 and
1994, respectively.
The weighted average fair value of options granted was $4.34 per option for
1996 and $5.08 per option for 1995. The fair value of options granted under the
1992 Plan was estimated at the date of grant using a binomial option pricing
model with the following assumptions:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.93% 6.45%
Dividend yield 1.00% 1.00%
Expected volatility 27.0% 27.0%
Expected life (years) 4.5 7.0
=====================================================================================================================
</TABLE>
There were 376,000 restricted shares granted during 1996 with a weighted average
fair value of $14.40 per share. There were 54,000 restricted shares granted
during 1995 with a weighted average fair value of $12.80 per share.
The effect on 1996 and 1995 net income and earnings per share of accounting for
stock-based compensation using the fair value method required by SFAS 123,
"Accounting for Stock-Based Compensation" is immaterial.
17. Retirement Plans
The Company 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 Company and its subsidiaries also
have certain non-qualified pension plans covering executives, which are
unfunded. The Company 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 were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current service cost $ 5,280 $ 4,120 $ 3,248
Interest on projected benefit obligation 6,098 4,746 3,971
Actual loss (return) on assets (6,591) (12,763) 361
Net amortization and other 1,203 8,080 (4,764)
- ---------------------------------------------------------------------------------------------------------------------
Pension expense $ 5,990 $ 4,183 $ 2,816
=====================================================================================================================
</TABLE>
Net periodic pension expense for 1994 includes components of expense for the
former AMCI plan for the period from acquisition through December 31, 1994.
F-18
<PAGE>
The following table reconciles the plans' funded status to amounts included in
the Consolidated Statements of Financial Position at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligations $(57,455) $(3,206) $(46,543) $(2,496)
Accumulated benefit obligations $(62,092) $(3,354) $(50,778) $(2,718)
Projected benefit obligations $(84,997) $(4,169) $(70,658) $(3,160)
Plan assets at fair value 71,596 --- 60,460 --
- ----------------------------------------------------------------------------------------------------------------------------------
Funded status (13,401) (4,169) (10,198) (3,160)
Unrecognized net experience loss (gain) 5,570 915 (2,737) 526
Unrecognized prior service cost 155 276 205 311
Unrecognized net
transition (asset) obligation (2,371) 466 1,744 372
Additional minimum liability --- (753) --- (767)
- ----------------------------------------------------------------------------------------------------------------------------------
Pension liability $(10,047) $(3,265) $(10,986) $(2,718)
==================================================================================================================================
</TABLE>
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, 1996 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.25% 8.5%
Long-term per annum compensation increase 5.0% 5.0% 5.0%
Long-term return on plan assets 9.5% 9.5% 9.5%
==================================================================================================================================
</TABLE>
The Company 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 up to 6% of the employees' pay
base. The cost of the Company's matching contribution to the savings plan
totaled $4.0 million in 1996, $3.7 million in 1995 and $1.9 million in 1994.
18. Post-Retirement Benefits
The Company also provides health care benefits for eligible retired employees of
one of its wholly owned subsidiaries. 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-19
<PAGE>
The following table indicates the components of the post-retirement medical
benefits obligation included in the Company's Consolidated Statements of
Financial Position at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement medical benefit obligation:
Retirees $ (2,554) $ (2,713)
Fully eligible active plan participants (2,099) (2,140)
Other active participants (4,583) (6,617)
- -------------------------------------------------------------------------------------------------------------
Funded status (9,236) (11,470)
Unrecognized net gain (3,367) (141)
Unrecognized prior service benefit (1,505) (1,784)
- -------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(14,108) $(13,395)
=============================================================================================================
</TABLE>
Net periodic post-retirement medical benefit cost consisted of the following
components:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $ 424 $ 521 $ 534
Interest cost on accumulated post-retirement
medical benefit obligation 638 730 624
Net amortization and other (260) (193) (127)
- --------------------------------------------------------------------------------------------------------------
Net periodic post-retirement medical benefit cost $ 802 $ 1,058 $ 1,031
==============================================================================================================
</TABLE>
The Company 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% in 1996, 7.25% in
1995, and 8.5% in 1994.
19. Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fertilizer service revenue $ 28,529 $ 25,132 $ 17,294
Service charge income 10,318 8,178 6,008
Other, including business interruption 13,130 42,989 9,146
- -------------------------------------------------------------------------------------------------------------
Total $ 51,977 $ 76,299 $ 32,448
=============================================================================================================
</TABLE>
20. Income Taxes
Components of the income tax provision (benefit) applicable to operations are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 28,853 $ 45,938 $ 9,925
Foreign 12,939 12,285 2,416
State 6,149 9,416 4,291
- -------------------------------------------------------------------------------------------------------------
47,941 67,639 16,632
- -------------------------------------------------------------------------------------------------------------
Deferred:
Federal 49,994 42,673 15,197
Foreign (34,876) 3,568 2,533
State 841 1,620 (662)
- -------------------------------------------------------------------------------------------------------------
15,959 47,861 17,068
- -------------------------------------------------------------------------------------------------------------
Total income tax provision $ 63,900 $115,500 $ 33,700
=============================================================================================================
</TABLE>
F-20
<PAGE>
The income tax provision differs from the federal statutory provision for the
following reasons:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations before taxes:
U.S. $ 138,318 $ 237,892 $ 75,842
Canada 59,533 41,490 14,103
- ------------------------------------------------------------------------------------------------------------------------------------
$ 197,851 $ 279,382 $ 89,945
====================================================================================================================================
Statutory income tax:
U.S. $ 48,411 $ 83,262 $ 26,545
Canada 22,801 15,891 5,359
- ------------------------------------------------------------------------------------------------------------------------------------
71,212 99,153 31,904
Purchased Canadian tax benefit (18,000) --- ---
Non-deductible expenses, primarily goodwill 6,312 6,020 650
State and local income taxes 6,069 8,345 2,545
Benefit of loss carryforwards (1,001) (1,183) (613)
Other (692) 3,165 (786)
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax provision $ 63,900 $ 115,500 $ 33,700
====================================================================================================================================
</TABLE>
Current deferred tax assets totaled $15.2 million and $23.8 million at December
31, 1996 and 1995, respectively, while deferred tax liabilities totaled $134.5
million and $111.9 million, respectively. Deferred tax assets, non-current
totaled $15.3 million and none at December 31, 1996 and 1995, respectively. The
tax effect of net operating loss (NOL) and tax credit carryforwards and
significant temporary differences between reported and taxable earnings that
gave rise to net deferred tax (liabilities) assets were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NOL, capital loss and tax credit carryforwards $ 6,306 $ 21,807
Discontinued business costs 7,461 7,832
Unfunded employee benefits 16,605 17,376
Accrued liabilities (12,517) (66)
Inventory valuation 3,799 3,157
Investments in partnership (28,569) (29,536)
Depreciation (88,369) (103,247)
Valuation allowance (9,142) (4,022)
Other 394 (1,403)
- ------------------------------------------------------------------------------------------------------------------------------------
$(104,032) $ (88,102)
====================================================================================================================================
</TABLE>
Remaining unutilized NOL carryforwards were approximately $0.7 million and $12.5
million at December 31, 1996 and 1995, respectively. NOL carryforwards that have
not been utilized expire in 2005. Alternative minimum tax (AMT) credits were
$3.0 million and $13.4 million at December 31, 1996 and 1995, respectively. AMT
credits have an indefinite life. The Company's capital loss carryforwards
totaled $8.6 and $11.5 million at December 31, 1996 and 1995, respectively.
Capital loss carryforwards that are not utilized will expire in 1997. A
valuation allowance is provided since the realization of tax benefits of capital
loss carryforwards is not assured.
During 1996, the Company, after receiving a favorable ruling from Revenue
Canada, refreshed its tax basis in plant and equipment at its Canadian
subsidiary by entering into a transaction with a Canadian subsidiary of Minorco,
resulting in a deferred tax asset for the Company. Minorco, through its
beneficial ownership of Common Shares, owned approximately 57% of the equity of
the Company at December 31, 1996. The ultimate realization of the deferred tax
asset will require future taxable income in Canada. The Company has assessed its
past earnings history and trends and has established a valuation allowance of
$6.1 million related to the transaction. The Company will continue to review
this valuation allowance and make adjustments as appropriate.
F-21
<PAGE>
Components of income tax provision (benefit) included in net income other than
from continuing operations are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ --- $ (2,392) $ (1,647)
State --- (107) (44)
- ------------------------------------------------------------------------------------------------------------------------------------
--- (2,499) (1,691)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal --- --- 1,816
State --- --- 331
- ------------------------------------------------------------------------------------------------------------------------------------
--- --- 2,147
- ------------------------------------------------------------------------------------------------------------------------------------
$ --- $ (2,499) $ 456
====================================================================================================================================
</TABLE>
Current tax benefits in 1995 and 1994 result from losses on early retirement or
refinancing of long-term debt. Deferred income taxes in 1994 were provided for
the net cumulative effect of changes in accounting principles.
21. Industry Segment Data
The Company operates in three principal industry segments - Distribution,
Nitrogen Products and Methanol. The Distribution segment sells crop inputs -
fertilizer, crop protection products, seed and services - through its farm
service center network. These inputs include both Terra's own brands and vendor
products from virtually all other agricultural chemical and seed suppliers.
Terra has the largest company-operated farm service center network in North
America. The Nitrogen Products business produces and distributes ammonia, urea,
nitrogen solutions, and urea feed which are used by farmers to provide crops
with nitrogen, an essential nutrient for plant growth and as a feed additive for
livestock. The Methanol business manufactures and distributes methanol, which is
principally used as a raw material in the production of a variety of chemical
derivatives and in the production of methyl tertiary butyl ether (MTBE), an
oxygenate and an octane enhancer for gasoline. Inter-segment sales have been
recorded at amounts approximating market. Segment revenues and costs for
Distribution, Nitrogen Products and Methanol include inter-segment transactions.
Included in Other are eliminations of inter-segment sales and unallocated
portions of the business. The following summarizes additional information about
the Company's industry segments:
<TABLE>
<CAPTION>
Nitrogen
(in thousands) Distribution Products Methanol Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Sales $ 1,573,827 $ 654,486 $ 132,533 $ (44,360) $ 2,316,486
Operating earnings 25,268 255,263 18,520 (3,870) 295,181
Identifiable assets 639,062 1,048,241 194,635 87,427 1,969,365
Depreciation and amortization 17,101 47,690 12,866 5,553 83,210
Capital expenditures 27,310 156,833 1,327 179 185,649
====================================================================================================================================
1995
Sales $ 1,495,166 $ 635,126 $ 194,565 $ (32,684) $ 2,292,173
Operating earnings 41,207 263,787 77,138 (4,430) 377,702
Identifiable assets 564,243 984,363 225,034 94,218 1,867,858
Depreciation and amortization 12,245 32,518 16,636 4,676 66,075
Capital expenditures 14,347 150,687 10,329 1,766 177,129
====================================================================================================================================
1994
Sales $ 1,318,416 $ 296,557 $ 70,274 $ (19,300) $ 1,665,947
Operating earnings 33,784 48,369 42,679 (9,537) 115,295
Identifiable assets 502,921 713,209 347,147 124,693 1,687,970
Depreciation and amortization 9,497 9,575 4,263 3,883 27,218
Capital expenditures 16,374 6,086 8,732 21 31,213
====================================================================================================================================
</TABLE>
F-22
<PAGE>
22. Agreements of Limited Partnership
In accordance with the Agreement of Limited Partnership of TNCLP, quarterly
distributions to Unitholders and TNC (the General Partner) are made in an amount
equal to 100% of its Available Cash, as defined, unless Available Cash is
required to fund a reserve amount. TNCLP must fund and maintain a reserve of
$18.5 million to support Minimum Quarterly Distributions, as defined, on the
Senior Preference Units (the Reserve Amount). Such Reserve Amount was fully
funded and included in other current assets at December 31, 1996.
During the period which commenced December 4, 1991, and ended on December 31,
1996 (the Preference Period), Senior Preference Units (SPUs) and Common Units
participated equally in distributions after each class of units received its
Minimum Quarterly Distribution, subject to the General Partner's right to
receive cash distributions.
The General Partner receives a combined minimum 2% of total cash distributions,
and as an incentive, the General Partner's participation increases if cash
distributions exceed specified target levels.
Pursuant to the provisions of the TNCLP Agreement of Limited Partnership, the
holders of all SPUs had the right, through March 31, 1997, to convert their SPUs
into Common Units on a one-for-one basis. As of March 31, 1997, approximately
13.3 million of the 13.6 million previously issued and outstanding SPUs
converted to Common Units. The Common Units began trading on the New York Stock
Exchange on April 1, 1997 under the symbol TNH. The 307,202 SPUs which did not
convert to Common Units were redeemed by TNCLP on May 27, 1997 for $22.105 per
unit, which includes a $0.605 distribution per unit for the first quarter of
1997.
On April 3, 1997 TNCLP announced a cash distribution of $.90 per Common Unit to
holders of record as of April 18, 1997, payable on April 30, 1997. This
distribution represents the balance of available cash for the fourth quarter of
1996.
On April 22, 1997, TNCLP announced a cash distribution for the quarter ended
March 31, 1997 of $1.02 per Common Unit to holders of record as of May 5, 1997,
payable on May 27, 1997. The cash distribution for the first quarter included
$18.5 million from the elimination of the reserve amount required to support
four quarters of minimum quarterly distributions on the SPUs. Due to the
redemption of the SPUs on May 27, 1997, this reserve amount is no longer
required to be maintained.
F-23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The registrant estimates that expenses in connection with the offering described
in this Registration Statement will be as follows:
Securities and Exchange Commission registration fee.............. $11,478
Printing expenses................................................ 12,000
Accountants' fees and expenses................................... 11,000
Legal fees and expenses.......................................... 7,500
New York Stock Exchange and Toronto Stock Exchange listing fee... 18,525
Miscellaneous.................................................... 4,497
-------
Total....................................................... $65,000
=======
Item 14. Indemnification of Directors and Officers
As permitted by the Maryland General Corporation Law ("MGCL"), Article
SEVENTH, Paragraph (8) of the Registrant's Charter provides for indemnification
of directors and officers of the Registrant as follows:
The Corporation shall indemnify (a) its directors to the full extend
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; (b) its officers to the same extent it shall indemnify its
directors; and (c) 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 Corporation to
indemnify other employees and agents consistent with law.
The MGCL permits a corporation to indemnify its directors and officers,
among others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other
capacities, unless it is established that (a) the act or omission of the
directors or officer was material to the matter giving rise to such proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the action or omission was unlawful. The Registrant also maintains
directors and officers liability insurance.
The MGCL permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except to the extent that
(i) the person actually received an improper benefit or profit in money,
property or services or (ii) a judgment or other final adjudication is entered
in a proceeding based on a finding that the person's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the proceeding. The Registrant's Charter contains a
provision providing for elimination of the liability of its directors or
officers to the Registrant or its stockholders for money damages to the fullest
extent permitted by Maryland law.
Item 15. Recent Sales of Unregistered Securities.
On March 7, 1996, the Registrant acquired the stock of Anderson Oil & Ag
Service, Inc. ("Anderson") in exchange for 218,550 shares of the Registrant's
common stock, no par value per share, issued to the sole stockholder of
Anderson, representing approximately $2.8 million in market value upon issuance.
On May 16, 1997, the Registrant acquired the stock of Huntting Elevator
Company ("Huntting") in exchange for, among other things, 1,498,985 shares of
the Registrant's common stock, no par value per share, issued to stockholders of
Huntting, representing approximately $19.4 million in market value upon
issuance.
These transactions were exempt from registration by virtue of Rule 506
and/or Section 4(2) under the Securities Act of 1933, since no public offering
had been involved.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1.1 Articles of Restatement of Terra Industries filed with the State of
Maryland on September 11, 1990, filed as Exhibit 3.1 to Terra
Industries' Form 10-K for the year ended December 31, 1990, is
incorporated herein by reference.
3.1.2 Articles of Amendment of Terra Industries filed with the State of
Maryland on May 6, 1992, filed as Exhibit 3.1.2 to Terra Industries'
Form 10-K for the year ended December 31, 1992, is incorporated herein
by reference.
3.1.3 Articles Supplementary of Terra Industries filed with the State of
Maryland on October 13, 1994, filed as Exhibit 4.1.3 to Terra
Industries' Form 8-K/A dated November 3, 1994, is incorporated herein
by reference.
3.2 By-Laws of Terra Industries, as amended through August 7, 1991, filed
as Exhibit 3 to Terra Industries' Form 8-K dated September 30, 1991, is
incorporated herein by reference.
4.1 Indenture dated as of October 15, 1993 among Terra Industries (as
successor by merger to Agricultural Minerals and Chemicals Inc.) and
Society National Bank, including form of Senior Note, filed as Exhibit
99.2 to Terra Industries' Registration Statement on Form S-3, as
amended, (File No. 33-52493), is incorporated herein by reference.
4.2 Indenture, dated as of June 22, 1995 between the Company and First
Trust National Association, as trustee, including form of Exchange
Note, filed as Exhibit 4.1 to Terra Industries' Registration Statement
on Form S-4, as amended (File No. 33-60853), is incorporated herein by
reference.
4.3 Amended and Restated Credit Agreement dated as of December 14, 1995
(the "1995 Credit Agreement") among Terra Industries Inc., Terra
Capital, Inc., Terra Nitrogen, Limited Partnership, Certain Guarantors,
Certain Lenders, Certain Issuing Banks and Citibank, N.A. without
exhibits or schedules, filed as Exhibit 4.3 to Terra Industries' Form
10-K for the year ended December 31, 1995, is incorporated herein by
reference.
4.4 Consent and Amendment No. 1 dated as of June 4, 1996 to the 1995 Credit
Agreement filed as Exhibit 4.4 to Terra Industries' Form 10-Q for the
quarter ended September 30, 1996, is incorporated herein by reference.
4.5 Consent and Amendment No. 2 dated as of July 31, 1996 to the 1995
Credit Agreement filed as Exhibit 4.5 to Terra Industries' Form 10-Q
for the quarter ended September 30, 1996, is incorporated herein by
reference.
4.6 Consent, Waiver and Amendment No. 3 dated as of November 22, 1996 to
the 1995 Credit Agreement filed as Exhibit 4.6 to Terra Industries'
Form 10-K for the year ended December 31, 1996, is incorporated herein
by reference.
4.7 Amendment No. 4 dated as of March 13, 1997 to the 1995 Credit Agreement
filed as Exhibit 4.7 to Terra Industries' Form 10-Q for the quarter
ended March 31, 1997, is incorporated herein by reference
Other instruments defining the rights of holders of long-term debt of
Terra Industries and its subsidiaries are not being filed because the
total amount of securities authorized under any such instrument does
not exceed 10 percent of the total assets of Terra Industries and its
subsidiaries on a consolidated basis. Terra Industries agrees to
furnish a copy of any such instrument to the Securities and Exchange
Commission upon request.
5 Opinion of George H. Valentine, Esq.
10.1.1 Resolution adopted by the Personnel Committee of the Board of Directors
of Terra Industries with respect to supplemental retirement benefits
for certain senior executive officers of Terra Industries, filed as
Exhibit 10.4.2 to Terra Industries' Form 10-Q for the fiscal quarter
ended March 31, 1991, is incorporated herein by reference.
10.1.2 1992 Stock Incentive Plan of Terra Industries filed as Exhibit 10.1.6
to Terra Industries' Form 10-K for the year ended December 31, 1992, is
incorporated herein by reference.
II-2
<PAGE>
10.1.3 Form of Restricted Stock Agreement of Terra Industries under its 1992
Stock Incentive Plan filed as Exhibit 10.1.7 to Terra Industries' Form
10-K for the year ended December 31, 1992, is incorporated herein by
reference.
10.1.4 Form of Incentive Stock Option Agreement of Terra Industries under its
1992 Stock Incentive Plan, filed as Exhibit 10.1.8 to Terra Industries'
Form 10-K for the year ended December 31, 1992, is incorporated herein
by reference.
10.1.5 Form of Nonqualified Stock Incentive Agreement of Terra Industries
under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.9 to Terra
Industries' Form 10-K for the year ended December 31, 1992, is
incorporated herein by reference.
10.1.6 Terra Industries Inc. Supplemental Deferred Compensation Plan effective
as of December 20, 1993 filed as Exhibit 10.1.9 to Terra Industries'
Form 10-K for the year ended December 31, 1993, is incorporated herein
by reference.
10.1.7 Amendment No. 1 to the Terra Industries Inc. Supplemental Deferred
Compensation Plan, filed as Exhibit 10.1.15 to Terra Industries' Form
10-Q for the quarter ended September 30, 1995, is incorporated herein
by reference.
10.1.8 Excess Benefit Plan of Terra Industries, as amended effective as of
January 1, 1992, filed as Exhibit 10.1.13 to Terra Industries' Form 10-
K for the year ended December 31, 1992, is incorporated herein by
reference.
10.1.9 1996 Incentive Award Program for Officers and Key Executives of Terra
Industries, filed as Exhibit 10.1.12 to Terra Industries' Form 10-K for
the year ended December 31, 1995, is incorporated herein by reference.
10.1.10 1997 Incentive Award Program for Officers and Key Executives of Terra
Industries, filed as Exhibit 10.1.10 to Terra Industries' Form 10-K for
the year ended December 31, 1996, is incorporated herein by reference.
10.1.11 Revised Form of Performance Share Award of Terra Industries under its
1992 Stock Incentive Plan filed as Exhibit 10.1.11 to Terra Industries'
Form 10-K for the year ended December 31, 1996, is incorporated herein
by reference.
10.1.12 Revised Form of Incentive Stock Option Agreement of Terra Industries
under its 1992 Stock Incentive Plan filed as Exhibit 10.1.12 to Terra
Industries' Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
10.1.13 Revised Form of Nonqualified Stock Option Agreement of Terra Industries
under its 1992 Stock Incentive Plan filed as Exhibit 10.1.13 to Terra
Industries' Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
10.1.14 1997 Stock Incentive Plan of Terra Industries filed as Exhibit 10.1.14
to Terra Industries' Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
10.2 Asset Sale and Purchase Agreement among Inspiration Consolidated Copper
Company and Cyprus Miami Mining Corporation and Cyprus Christmas Mine
Corporation dated as of June 30, 1988, filed as Exhibit 10.19 to Terra
Industries' Form 10-K for the year ended December 31, 1988, is
incorporated herein by reference.
10.3.1 Stock Purchase Agreement, dated as of June 14, 1991, among Minorco,
Kirkdale Investments Limited, Terra Industries and Hudson Holdings
Corporation, filed as Exhibit 2 to Terra Industries' Form 8-K dated
June 14, 1991, is incorporated herein by reference.
10.3.2 Amended and Restated Stock Purchase Agreement, dated as of July 31,
1991, among Minorco, Kirkdale Investments Limited, Terra Industries and
Hudson Holdings Corporation, filed as Exhibit 1 to Terra Industries
Form 8-K dated July 31, 1991, is incorporated herein by reference.
10.3.3 Option Agreement, dated as of June 14, 1991, among Kirkdale Investments
Limited and Terra Industries, filed as Exhibit 3 to Terra Industries'
Form 8-K dated June 14, 1991, is incorporated herein by reference.
II-3
<PAGE>
10.3.4 Amendment to Stock Option Agreement, dated July 31, 1991, among
Minorco, Kirkdale Investments Limited and Terra Industries, filed as
Exhibit 2 to Terra Industries' Form 8-K dated July 31, 1991, is
incorporated herein by reference.
10.4 Asset and Share Purchase Agreement, dated as of April 8, 1993, by and
between Terra International, Inc., Terra International (Canada) Inc.
and ICI Canada Inc., filed as Exhibit A to Terra Industries' Form 8-K
dated April 8, 1993, is incorporated herein by reference.
10.5 Asset Purchase Agreement, dated as of December 30, 1993, by and between
Terra International, Inc., The Upjohn Company and Asgrow Florida
Company, filed as Exhibit A to Terra Industries' Form 8-K dated
December 31, 1993, is incorporated herein by reference.
10.6 Merger Agreement dated as of August 8, 1994 among Terra Industries
Inc., AMCI Acquisition Corp. and Agricultural Minerals and Chemicals
Inc. without exhibits or schedules, filed as Exhibit 2 to Terra
Industries' Registration Statement on Form S-3, as amended, (File No.
33-52493), is incorporated herein by reference.
10.7 Methanol Hedging Agreement among BMLP (as successor by merger to
Beaumont Methanol Corporation) and The Morgan Stanley Leveraged Equity
Fund II, L.P. as Counterparty, form of which filed as Exhibit 99.1 to
Terra Industries' Registration Statement on Form S-3, as amended, (File
No. 33-52493), is incorporated herein by reference.
10.8 Agreement of Limited Partnership of TNCLP (formerly known as
Agricultural Minerals Company, L.P.) dated as of December 4, 1991,
filed as Exhibit 99.3 to Terra Industries' Registration Statement on
Form S-3, as amended, (File No. 33-52493), is incorporated herein by
reference.
10.9 Agreement of Limited Partnership of TNLP (formerly known as
Agricultural Minerals, Limited Partnership) dated as of December 4,
1991, filed as Exhibit 99.4 to Terra Industries' Registration Statement
on Form S-3, as amended, (File No. 33-52493), is incorporated herein by
reference.
10.10 General and Administrative Services Agreement Regarding Services by
Terra Industries Inc., filed as Exhibit 10.11 to Terra Industries Inc.
Form 10-Q for the quarter ended March 31, 1995, is incorporated herein
by reference.
10.11 General and Administrative Services Agreement Regarding Services by
Terra Nitrogen Corporation, filed as Exhibit 10.12 to Terra Industries
Inc. Form 10-Q for the quarter ended March 31, 1995, is incorporated
herein by reference.
10.12 Receivables Purchase Agreement dated as of August 20, 1996 among Terra
Funding Corporation, Terra Capital, Inc., Certain Financial
Institutions and Bank of America National Trust and Savings Association
filed as Exhibit 10.12 to the Terra Industries' Form 10-Q for the
quarter ended September 30, 1996, is incorporated herein by reference.
10.13 Purchase and Sale Agreement dated as of August 20, 1996 among Terra
International, Inc., Terra Nitrogen, Limited Partnership, Beaumont
Methanol, Limited Partnership, Terra Funding Corporation and Terra
Capital, Inc., filed as Exhibit 10.13 to the Terra Industries'
Form 10-Q for the quarter ended September 30, 1996, is incorporated
herein by reference.
21 Subsidiaries of Terra Industries, filed as Exhibit 21 to Terra
Industries' Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of George H. Valentine, Esq. (included in Exhibit 5)
24 Powers of Attorney.
II-4
<PAGE>
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report on Financial Statement Schedules II-7
Schedule I Condensed Financial Information of Registrant II-8
Schedule II Valuation and Qualifying Accounts:
Years Ended December 31, 1996, 1995 and 1994 II-13
</TABLE>
All other financial statement schedules have been omitted because they are
not applicable or the required information is not significant or is shown in the
consolidated financial statements or the notes thereto.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the Registration Statement;
and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions 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 Securities Act of 1933, as amended, 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 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 whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, as amended, 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 of 1933, as amended, shall
be deemed to be part of this Registration Statement as of the time it was
declared effective.
II-5
<PAGE>
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, 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.
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT ON
-------------------------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
To the Board of Directors and Stockholders of Terra Industries Inc.:
We have audited the consolidated financial statements of Terra Industries
Inc. as of December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 3, 1997; such financial statements and report are included in this
Registration Statement. Our audits also included the Financial Statement
Schedules of Terra Industries Inc. listed in Part II, Item 16 of this
Registration Statement. These Financial Statement Schedules are the
responsibility of the management of Terra Industries Inc. Our responsibility is
to express an opinion based on our audits. In our opinion, such Financial
Statement Schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 3, 1997
II-7
<PAGE>
SCHEDULE I
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) December 31,
- --------------------------------------------------------------------------------
1996 1995
--------------------------
<S> <C> <C>
Assets
Cash and short-term investments $ 6,307 $ 10,700
Accounts receivable, net 761 1,721
Deferred tax asset - current 2,020 23,768
Other current assets 12,733 82
-------------------------------------------------------------------------------
Total current assets 21,821 36,271
Investment in and advances to subsidiaries 1,055,909 1,021,406
Other assets 13,872 14,073
-------------------------------------------------------------------------------
Total assets $1,091,602 $1,071,750
================================================================================
Liabilities
Income taxes payable $ 5,096 $ 15,897
Accrued and other liabilities 6,631 14,865
-------------------------------------------------------------------------------
Total current liabilities 11,727 30,762
Long-term debt 358,755 358,755
Deferred income taxes 108,377 105,437
Other liabilities 5,221 4,942
-------------------------------------------------------------------------------
Total liabilities 484,080 499,896
- --------------------------------------------------------------------------------
Stockholders' Equity
Capital stock 127,614 133,970
Paid-in capital 550,850 631,195
Accumulated deficit (70,942) (193,311)
-------------------------------------------------------------------------------
Total stockholders' equity 607,522 571,854
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,091,602 $1,071,750
================================================================================
</TABLE>
See accompanying Notes to the Condensed Financial Statements.
II-8
<PAGE>
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per-share amounts) For the Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Income
Equity in earnings of subsidiaries $ 160,204 $ 186,048 $ 64,065
Interest and other income 123 1,367 (49)
-------------------------------------------------------------------------------
Total income 160,327 187,415 64,016
- --------------------------------------------------------------------------------
Expenses
Selling, general and administrative expense 2,544 3,328 3,788
Interest expense 38,725 29,183 6,382
Income tax benefit (14,893) (8,978) (5,329)
-------------------------------------------------------------------------------
Total expenses 26,376 23,533 4,841
- --------------------------------------------------------------------------------
Income before extraordinary items 133,951 163,882 59,175
Extraordinary loss on early retirement of debt --- (4,338) (2,614)
- --------------------------------------------------------------------------------
Net income 133,951 159,544 56,561
Cash dividends paid to common stockholders (11,582) (8,662) (5,837)
Accumulated deficit - beginning of year (193,311) (344,193) (394,917)
- --------------------------------------------------------------------------------
Accumulated deficit - end of year $ (70,942) $(193,311) $(344,193)
================================================================================
Income (loss) per common share:
Income before extraordinary items $ 1.72 $ 2.01 $ 0.81
Extraordinary loss on early retirement of debt --- (0.05) (0.03)
-------------------------------------------------------------------------------
Net income $ 1.72 $ 1.96 $ 0.78
================================================================================
</TABLE>
See accompanying Notes to the Condensed Financial Statements.
II-9
<PAGE>
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) For the Year Ended December 31,
- ---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 133,951 $ 159,544 $ 56,561
Adjustments to reconcile net income to
net cash used by operations:
Equity in earnings of subsidiaries (160,204) (186,048) (64,065)
Loss on early retirement of debt --- 4,338 2,614
Deferred income taxes 24,689 44,293 15,291
Other non-cash items 1,588 672 48
Change in working capital components (30,726) 16,071 (9,538)
Other 480 785 344
-------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (30,222) 39,655 1,255
- ---------------------------------------------------------------------------------------
Investing Activities
Proceeds from asset sales and
discontinued operations --- 5,832 541
Capital contributions to subsidiaries --- --- (113,000)
Proceeds from investments --- --- 500
-------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities --- 5,832 (111,959)
- ---------------------------------------------------------------------------------------
Financing Activities
Net short-term debt decrease --- --- (82,395)
Net long-term debt increase --- 200,000 ---
Loss on early retirement of debt --- --- (2,533)
Debt issuance costs --- (3,666) (2,873)
Issuance of common shares --- --- 113,000
Dividends (11,582) (8,662) (5,837)
Stock (repurchase) issuance - net (91,131) 1,187 4,666
Advances from (to) subsidiaries - net 128,542 (234,157) 72,938
-------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities 25,829 (45,298) 96,966
- ---------------------------------------------------------------------------------------
Increase (Decrease) in Cash (4,393) 189 (13,738)
Cash and Investments at Beginning of Year 10,700 10,511 24,249
- ---------------------------------------------------------------------------------------
Cash and Investments at End of Year $ 6,307 $ 10,700 $ 10,511
=======================================================================================
Interest Paid $ 39,639 $ 27,521 $ 6,285
=======================================================================================
Taxes Paid $ 58,809 $ 21,651 $ 16,065
=======================================================================================
</TABLE>
See accompanying Notes to the Condensed Financial Statements.
II-10
<PAGE>
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. Basis of Presentation
The Condensed Financial Statements include the Registrant only and reflect the
equity method of accounting for its beneficially owned subsidiaries, Terra
Capital, Inc., Terra International, Inc., Terra Nitrogen Corporation, Beaumont
Methanol Limited Partnership and Terra Funding Corporation. Net income in 1995
and 1994 was reduced by $4.3 million and $2.6 million, or $0.05 and $0.03 per
share, respectively, due to the write-off of deferred financing fees in
connection with the early retirement of debt.
2. Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Senior Notes, 10.5%, due 2005 $200,000 $200,000
Senior Notes, 10.75%, due 2003 158,755 158,755
- -------------------------------------------------------------------------------
358,755 358,755
Less current maturities --- ---
- -------------------------------------------------------------------------------
Total $358,755 $358,755
===============================================================================
</TABLE>
In 1995, the Registrant issued $200 million unsecured 10.5% Senior Notes due in
full June 15, 2005. The 10.5% Senior Notes are redeemable at the option of the
Registrant, in whole or part, at any time on or after June 15, 2000, initially
at 105.250% of their principal amount, plus accrued interest, declining to
102.625% on or after June 15, 2001, and declining to 100% on or after June 15,
2002. The 10.5% Senior Notes Indenture contains certain restrictions, including
the issuance of additional debt, payment of dividends, issuance of capital
stock, certain transactions with affiliates, incurrence of liens, sale of
assets, and sale-leaseback transactions. Net proceeds of $28.8 million were used
to acquire 974,900 of the outstanding Senior Preference Units (SPUs) of TNCLP.
The remaining net proceeds were used to repay bank term loans.
The 10.75% unsecured Senior Notes are redeemable at the option of the
Registrant, in whole or part, at any time on or after September 30, 1998,
initially at 105.375% of their principal amount, plus accrued interest,
declining to 102.688% on or after September 30, 1999, and declining to 100% on
or after September 30, 2000. The 10.75% Senior Notes Indenture contains
restrictions similar to those in the 10.5% Senior Notes Indenture.
3. Commitments and Contingencies
The Registrant is committed to a non-cancelable office lease expiring in 1998.
Total minimum rental payments are: 1997, $3.3 million and 1998, $1.7 million.
These amounts are not reduced by sublease rentals, which in 1996 were $2.0
million.
The Registrant 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 Registrant against its
obligations under certain employee benefit plans. Due to the Coal Industry
Retiree Health Benefit Act of 1992, certain retiree medical benefits of union
coal miners have become statutorily mandated, and all companies owning 50
percent or more of any company liable for such benefits as of certain specified
dates becomes liable for such benefits if the company directly liable is unable
to pay them. As a result, if the purchaser becomes unable to pay its retiree
medical obligations assumed pursuant to the sale, the Registrant may have to pay
such amount. The Registrant has estimated that the present value of liabilities
for which it retains contingent responsibility approximates $9.8 million at
December 31, 1996.
II-11
<PAGE>
The Registrant had letters of credit outstanding totaling $5.4 million at
December 31, 1996 and $8.9 million at December 31, 1995, guaranteeing various
insurance and financing activities. Short-term investments of $5.4 million at
December 31, 1996 and $8.9 million at December 31, 1995 are restricted to
collateralize certain of the letters of credit.
4. Income Taxes
The Registrant files a consolidated U.S. federal tax return. Beginning in 1995,
the Registrant adopted tax sharing agreements, under which all domestic
operating subsidiaries provide for and remit income taxes to the Registrant
equal to their pretax accounting income, adjusted for permanent differences
between pretax accounting income and taxable income. The tax sharing agreements
allocate the benefits of operating losses and temporary differences between
financial reporting and tax basis income to the Registrant.
II-12
<PAGE>
SCHEDULE II
TERRA INDUSTRIES INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995, and 1994
---------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Additions Less
Balance at Charged to Write-offs, Balance
Beginning Costs and Net of at End
Description of Period Expenses Recoveries of Period
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996:
- -----------------------------
Allowance for Doubtful Accounts $10,626 $15,428 $(14,663) $11,391
Year Ended December 31, 1995:
- -----------------------------
Allowance for Doubtful Accounts $ 8,224 $ 7,798 $ (5,396) $10,626
Year Ended December 31, 1994:
- -----------------------------
Allowance for Doubtful Accounts $ 5,788 $ 2,231 $ 205 $ 8,224
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Sioux City, State of Iowa, on June
16, 1997.
TERRA INDUSTRIES INC.
By: /s/ GEORGE H. VALENTINE
-----------------------
GEORGE H. VALENTINE
Its: Senior Vice President, General Counsel
and Corporate Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
- ----------------------- --------------------------------
<S> <C>
William R. Loomis, Jr.* Chairman of the Board
Chief Executive Officer, President
and Director (Principal
Burton M. Joyce* Executive Officer)
Senior Vice President and Chief
Financial Officer (Principal
Francis G. Meyer* Financial Officer)
Vice President, Controller
Robert E. Thompson* (Principal Accounting Officer)
Edward G. Beimfohr* Director
Carol L. Brookins* Director
Edward M. Carson* Director
David E. Fisher* Director
Basil T.A. Hone* Director
Anthony W. Lea* Director
John R. Norton III* Director
Henry R. Slack* Director
</TABLE>
Dated: June 16, 1997
/s/ George H. Valentine
-----------------------------
George H. Valentine
*Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION> Sequentially
------------
Exhibit Numbered
- ------- ------------
Number Description Page
------ ----------------------------------------------------------------- ----
<S> <C> <C>
5 Opinion of George H. Valentine, Esq.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of George H. Valentine, Esq. (included in Exhibit 5)
24 Powers of Attorney.
</TABLE>
<PAGE>
Exhibit 5
[On Terra Industries Inc. Letterhead]
June 16, 1997
Terra Industries Inc.
600 Fourth Street
P.O. Box 6000
Sioux City, IA 51102-6000
Re: Registration Statement on Form S-1
Relating to 3,000,000 Shares of Common Stock, No Par Value
----------------------------------------------------------
Ladies and Gentlemen:
In my capacity as General Counsel of Terra Industries Inc., a Maryland
corporation (the "Company"), I have represented the Company in connection with
the above referenced registration statement on Form S-1 (the "Registration
Statement"), filed under the Securities Act of 1933, as amended (the "Act"), for
the purpose of registering under the Act 3,000,000 shares of common stock of the
Company, no par value, which the Company may offer from time to time in
connection with acquisitions. In this connection, I have examined originals, or
copies certified or otherwise identified to my satisfaction of such documents,
corporate and other records, certificates and other papers as I have deemed it
necessary to examine for the purpose of this opinion.
Based on such examination, it is my opinion that such of the 3,000,000 shares of
common stock as are issued from time to time as contemplated by the Registration
Statement will have been duly and validly authorized and will, upon issuance and
delivery of such shares against receipt by the Company of the agreed
consideration therefor, constitute legally issued, fully paid and non-assessable
shares of the Company, provided (a) the number of authorized and unissued shares
of common stock of the Company continues to be adequate for each such issue; and
(b) each such issue is duly authorized by the board of directors of the Company,
or a duly authorized committee thereof, for a consideration determined by said
board of directors or committee to be adequate.
<PAGE>
Terra Industries Inc.
June 16, 1997
Page 2
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to me under the heading "Legal Matters" in the
Prospectus included in the Registration Statement. In giving this consent, I do
not admit that I am within the category of persons whose consent is required by
Section 7 of the Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ GEORGE H. VALENTINE
George H. Valentine
Senior Vice President, General Counsel
and Corporate Secretary
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Terra Industries Inc. on
Form S-1 of our report dated February 3, 1997 (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to the
Company's change in its method of accounting for major maintenance turnarounds
and post-employment benefits effective January 1, 1994), appearing in the
Prospectus, which is part of this Registration Statement and of our report dated
February 3, 1997 relating to the financial statement schedules appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
June 12, 1997
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Burton M. Joyce, Francis G. Meyer and George H.
Valentine and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities (including his or
her capacity as a director and/or officer of Terra Industries Inc.), to sign a
registration statement on Form S-1 in connection with the company's registration
of common shares for use in acquisitions and any or all amendments (including
post-effective amendments) to such registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this power of
attorney has been signed on the date or dates indicated, by the following
persons in the capacities indicated:
Signature Title Date(s)
- --------------------------- ------------------------------- ------------
/s/ William R. Loomis, Jr. Chairman of the Board June 3, 1997
- ---------------------------
William R. Loomis, Jr.
/s/ Burton M. Joyce Chief Executive Officer,
- --------------------------- President and Director June 4, 1997
Burton M. Joyce (Principal Executive Officer)
/s/ Francis G. Meyer Senior Vice President and
- --------------------------- Chief Financial Officer June 9, 1997
Francis G. Meyer (Principal Financial Officer)
/s/ Robert E. Thompson Vice President, Controller June 2, 1997
- --------------------------- (Principal Accounting Officer)
Robert E. Thompson
/s/ Edward G. Beimfohr Director June 5, 1997
- ---------------------------
Edward G. Beimfohr
/s/ Carol L. Brookins Director June 4, 1997
- ---------------------------
Carol L. Brookins
<PAGE>
/s/ Edward M. Carson
- --------------------------- Director June 9, 1997
Edward M. Carson
/s/ David E. Fisher
- --------------------------- Director June 4, 1997
David E. Fisher
/s/ Anthony W. Lea
- --------------------------- Director June 4, 1997
Anthony W. Lea
/s/ John R. Norton III
- --------------------------- Director June 9, 1997
John R. Norton III
/s/ Henry R. Slack
- --------------------------- Director June 4, 1997
Henry R. Slack
